AFARAK GROUP PLC

The Board of Directors Report 2021 and the Annual Financial Statements 

1 January-31 December 2021

Domicile: Helsinki

Company number: 0618181-8

Contents

THE BOARD OF DIRECTORS REPORT

2021 in review

2021 was a rather successful turnaround year for Afarak in spite of the pandemic. We managed to produce positive results and to reduce our debt. Our Specialty Alloys segment performed well, when compared to previous years. We have sold the Ilitha mine while temporarily halting mining operations in all other South African mines.

Outlook

In the first 2 months of the year 2022, we saw further improving market prices and demand in the specialty segment, as well as rising raw material and energy prices. Thereafter, the Russian invasion in Ukraine has completely shaken up the commodities and energy markets altogether. While the market prices are picking up almost daily, the raw material, consumables, and energy cost follow. Some essential raw materials become scarce and more difficult to secure. Our customers in the stainless-steel industry are mostly suffering from these disruptions (especially the uncontrollable Nickel quotations). These special circumstances will most certainly lead to exceptionally positive returns for the company, in the short term. It is impossible to predict for how long this would continue. A swift return to more normal market conditions may thereafter lead to negative consequences in a longer term. Normally, we as management, have a visibility of one quarter. In this case, we have to  monitor the evolution very closely on a daily basis, in the optic to secure supplies and act in a responsible way during this crisis.

We are also planning on resuming some mining activities in South Africa shortly.

Our top priority remains the protection of our colleagues' health and the preservation of our assets. We have made serious progress on that side during 2021. Going forward, we will particularly focus on further reducing our CO2 footprint.

Growth strategy

We have been in full production in Germany since beginning of 2021 and, except for major geopolitical disruptions, we expect very full order books until the summer break at least. Our Magnesia project in Serbia is another asset with very big potential. We expect to start the ramping up of the production facilities during 2022.

Thank You

After several years of serious difficulties, we finally managed to stabilize the company. I cannot thank all colleagues across the organization enough for the tremendous job that each one has achieved. I also wish to extend my deepest thanks to our board members, who helped us with valuable advice and infallible support through these harsh times.

Guy Konsbruck

CEO

SAFETY, HEALTH AND SUSTAINABLE DEVELOPMENT

Sustainability

Afarak understands that sustainability is critical to any business and industry. We want to proceed in the right way at all levels of our business. Our sustainability initiatives are built around four main pillars that are integrated in our decision-making. 

Our employee's safety is our top priority. It comes before anything else and we do not make any shortcuts.  In this regard, we are constantly focusing on improving the health and well-being of our co-workers and care for the communities around our operation facilities. As a primary sector company, we feel committed to gradually minimising our ecological footprint. 

The communities that host our operations are important stakeholders and we are proud of the reputation that we have built in the years of our co-operation.

During 2021, the world continued to encounter very difficult times due to the spread of COVID-19 pandemic. Consequently Afarak has implemented measures to have the main part of the office based employees working from home. Thanks to all the precautions implemented in all Afarak Group units very limited amount of cases has been reported which did not materially impact the production.

Our commitment

Afarak vows to deliver its contribution to environmental and social sustainability through its production processes. We believe that our efforts will support several United Nations' resolutions on sustainability, such as decreasing poverty and hunger, but also increasing gender equality, education and access to clean water.

Our most significant impact on local host communities lies in providing direct and indirect employment. We support local communities in their needs related to education and infrastructure whilst supporting social causes.

Safety

Afarak strives to achieve what we call "Zero Harm Policy" at all levels of our operations and provides its employees and contractors a safe and healthy work environment.

Afarak holds regular Board committees dedicated to health and safety with the aim of integrating the Group operations to address the social, environmental, health and safety position of all stakeholders. The programme focusing on pro-active safety and environmental measurements continued in 2021 aiming to achieve "Zero Harm". 

During 2021, the Group's employees contributed approximately 1,444,455 working hours during which the company suffered 21 (30) accidents that caused loss of time. Lost Time Injury (LTI) is defined as any work-related injury or illness which prevents a person from doing any work the day after the accident. 

We are proud that no fatalities happened on our sites.

Going forward, management remains focused on further improving the safety performance at Afarak through various initiatives and investments.

Health

In 2021, Afarak continued to take several safety measures to mitigate the spread of the COVID-19 pandemic in order to protect people and minimise the effect on operations, while always keeping as top priority a safe and healthy working environment.

Thanks to these decisive and well-timed actions, very limited number of cases has been reported which did not materially impact the production. 

In our factories we continuously assess, monitor and control the risks of our workers.  

To help achieve this goal, we conduct routine health checks on all sites. These checks include drug and alcohol testing. We are also reviewing the role of organising shifts in the mines to minimise any fatigue-related injuries.

Afarak is and will remain committed to investing in the health of its workforce and local community.

Environment

We aim to demonstrate our environmental responsibility by minimising our environmental impact. Our environmental intervention rests on four main pillars.

Water management

We intend to minimise the waste our activity produces. Most of the waste our activity generates is tailings from mining. Tailings are usually a big concern for mining companies. However, through our beneficiation stages, Afarak is able to recycle and yield more chrome content from mined goods, thus reducing the amount of tailings too. The culture to minimize and recycle tailings is a constant focus in our Group. 

Land rehabilitation

We aim to manage our land responsibly throughout the lifecycle of our assets. 

To this end, we are working on projects to rehabilitate mines we currently work in. We recognise that our activities impact the grounds on which we work. By reestablishing land, managing its biodiversity and considering the needs of locals, we can reduce the level of our environmental impact. 

Air emissions 

Our activity carries an influence on air quality and CO2 emissions. Our dependence on electricity is also a source for CO2 emissions, which we would like to decrease by shifting toward alternative sources of energy.

Communities & human rights

We bring economic benefits to the countries we work in by employing people, buying goods and services, paying taxes and royalties, and investing in infrastructure and healthcare. We are firm believers that through our operations we deliver socio-economic benefits to our host communities.

We are committed to building and maintaining constructive, long-lasting relationships with our stakeholders, including our host communities. Speaking openly and transparently with all our stakeholders is vital for our future and maintaining good relationships with the host community. 

We uphold values of mutual respect, social cohesion and human rights within our staff, communities, and contractors. 

Finally, we take pride in creating social value through:

Employment

By providing direct and indirect employment, we believe that we are making a tangible contribution to our host communities. 

Community initiatives

We continue to support local communities with various assistance programs that are of a social and educational nature. 

Procurement

In our procurement, we work closely with local enterprises to support the local economy.

Looking ahead

Afarak will remain committed to upholding and raising the value of sustainability in its operations.  Health and safety remain a key priority for the Board and a review of safety policies & procedures is a constant focus. With the goal of improving safety at all plants.  Environmental investments are important to Afarak and initiatives will continue throughout 2022 to further minimise the impact of our operations on nature. Also, community investments will be maintained.  

THE FERROCHROME AND CHROME ORE MARKET

Afarak Group operates primarily in the chrome market.

Globally, most of the chrome ore is used in metallurgical applications. However, chrome ore is also used, though to a much lesser extent, in refractories, as foundry sands and as a chemical grade as shown below. Afarak produces ferrochrome which is the main type of chrome used in metallurgical applications, in turn mainly driven by the demand for stainless steel.  

Therefore, chrome ore and ferrochrome are very much correlated to the developments of the stainless-steel industry.

2021 Market overview

The production of  Low Carbon Ferrochrome in  2021 has been   slightly higher than the one in 2020, about 4%, reaching a total output of approximately 780kt . The year 2021  has seen COVID-19 continue to challenge the economies jointly with  factors like the increase of the raw materials, the energy ,  the setup of the  export tax from China and the introduction of one from Russia as well which  have also contributed to the overall increase of prices.

The stainless steel production during the first nine months of 2021 have increased of about 17% Y-o-Y  with very sharp increases, between 16% and 25%, USA, Europe and Asia, totalling 42,980 tons.

Market sentiment for 2022 

The price increase trend, triggered during 2021, will continue during 2022 mainly due to the geopolitical situation,  logistical constrains, lack of raw materials and materials , energy  and  inflation factors.

One of the main factors driving the  price and the availability of energy which can create huge increase in production costs on a worldwide basis.

Taking into consideration all these unstable variables we are of the believe that  these factors might continue to sustain a sharp price volatility also during 2022.

The strong demand for Stainless Steel and, as a consequence  for ferro-chrome, is expected to continue during   2022 but it will depend a lot on the impacts of the present geopolitical situation and other factors like the monetary policies and interests rates applied by the Central banks, a possible export tax on South African ore ,Stainless steel  industry consolidation, surging inflation , surge in energy prices are some of the main factors which will influence the prices and the availability of ferrochrome during 2022.

GROUP OPERATIONAL REVIEW

Operationally, 2021 presented higher sales and higher production for the Group which was mainly driven by the increase in demand.

Sales

The Group processing sales stood at 23,974 (2020: 34,256) tonnes. Sales of Speciality Alloys processed material increased by 37.9% due to higher demand. In the FerroAlloys segment, sale of processed material decreased significantly from a year earlier due to the demerge of Mogale business from Afarak Group.

Group mining

Group mining activity decreased by 44.3% to 102,970 (2020: 184,779) tonnes, when compared to a year earlier, with an increase in the Turkish mines which was offset by significantly lower mining activity in South African mines.

Annual mining levels in the Speciality Alloys segment increased by 4.5% to 76,591 (2020: 73,306) tonnes. In the FerroAlloys segment, the mines in South Africa recorded lower mining activity during 2021 of 76.3% to 26,379 (2020: 111,472) tonnes due to minimal mining activity at the South African mines.

Group processing

Group processing for 2021 decreased by 22.5% to 23,252 (2020: 29,997) tonnes. 

During 2021, processing levels in the Speciality Alloys segment increased by 41.7% to 23,252 (2020: 16,409) tonnes. The contraction in Group processing was due to the demerge of Mogale business from Afarak Group. 

Human resources

At the end of 2021, Afarak had 503 (621) employees. The average number of employees during the 2021 was 567 (747). 

GROUP FINANCIAL PERFORMANCE

2021 performance

Afarak started the year with difficult market conditions as market was still suffering from the negative effect of the COVID-19 pandemic. The development in market started turning around by the end of the second quarter which continued to end of year. 

The Group Revenue for the year was EUR 80.3 (2020: 59.8) million. Revenues in the Speciality Alloys segment increased by 46.2% and in the FerroAlloys revenue decreased significantly, mainly due to lower availability of saleable material.

In the Speciality Alloys segment, the stronger market conditions supported revenue growth which increased by 46.2%%, to EUR 77.8 (2020: 53.2) million. In the FerroAlloys segment, revenue continued to decrease in 2021 to EUR 1.8 (2020: 6.1) million, when compared to prior year, mainly due to lower availability of saleable material.

Operationally minimal production was carried out in South African mines during 2021, while the Speciality Alloys business registered an increase of 4.5% of mining activity and 41.7% increase in production of processed material when compared to prior year. 

The increased selling prices and the lower unabsorbed costs as a result of higher production during 2021 led to an increase in EBITDA for the year to EUR 6.8 (2020: -4.1) million despite higher raw material cost and higher cost of production. This was attributable to the positive performance of the Speciality Alloys segment as EBITDA improved significantly t EYR 9.2 (2020: 0.3) million, while the FerroAlloys segment EBITDA for the full year stood at EUR -0.9 (2020: -1.3) million. The full year EBITDA from unallocated items was EUR -2.3 (2020: -3.1) million.

Profitability was positively affected by a reversal gain on previously recognised impairment loss on Ilitha's mining assets, amounting to EUR 2.9 (2020: 0.0) million. Financial income and expenditure during the year were EUR -3.9 (2020: -4.3) million.

Balance Sheet, Cash Flow and Financing

The Group's total assets on 31 December 2021 stood at EUR 146.3 (2020: 142.6) (30 June 2021: 155.7) million and net assets totalled EUR 43.4 (2020: 29.8) (30 June 2021: 31.2) million. During the second half, the translation differences on conversion of foreign denominated subsidiaries was adjusted by EUR 2.2 million. The Group's cash and cash equivalents, as at 31 December 2021, totalled EUR 6.3 (2020: 1.1) million (30 June 2021: 2.9). Operating cash flow in the second half was positive, standing at EUR 13.1 (2020: -2.2) million. 

The equity ratio stood at 29.7% (2020: 25.3%) (30 June 2021: 20.0%). Afarak's gearing at the end of the year decreased to 74.2% (2020: 121.0%) (30 June 2021: 161.3%), due to lower interest-bearing debt of EUR 38.5 (2020: 49.3) (30 June 2021: 53.2) million. 

Investments, Acquisitions and Divestments

Capital expenditure for the full year of 2021 totalled EUR 0.9 (2020: 1.1) million. Capital Expenditure was mainly incurred to sustain Group operations.

During the first half of 2021, Afarak acquired a further 20% of the shares in Chromex Mining Company (Pty) Ltd, in exchange for total consideration of 7,088,608 shares in Afarak Group Plc. Afarak now holds 94% interest in the company. 

During May 2021, the Group concluded the sale of its Ilitha's plant, assets and mining right. On the Group's income statement an adjustment was made to the impairment recognised in 2020 and a reversal gain was recognised on the value of these assets. The assets related to Ilitha have been presented on the Group's statement of financial position as other receivables.

SEGMENTS REVIEW

SPECIALITY ALLOYS SEGMENT

2021 in Review

The Speciality Alloys Segment registered a very strong performance in 2021 compared to 2020, primarily reflecting to strong market conditions. The increase in Low Carbon ferrochrome prices and sales volumes resulted in higher revenue and higher Ferrochrome production to address higher demand. 

Production

Total production levels during 2021 increased by 11.2% to 99,844 (2020: 89,715) tonnes. 

The mining activity at both Turkish mines for the full year of 2021 increased by 4.5% during the year when compared to prior year.

The production of processed material increased by 41.7% following various to keep up with the increase in demand for Low Carbon FerroChrome. 

Sales

Sales volumes during 2021 were 37.9% higher than prior year. This was driven by the improved market conditions.

Financial performance

The Speciality Alloys segment registered a very strong performance during the year. Revenue for the full year increased by 46.2% to EUR 77.8 (2020: 53.2) million. The increase in revenue was due to higher sales prices and trading volumes of speciality material when compared to 2020. Production was higher than prior year, resulting in lower unabsorbed fixed overheads. Profit margins continued to improve despite higher cost of production with higher energy and raw material prices. EBITDA increased significantly to EUR 9.2 (2020: 0.3) million. 

Looking ahead

The price increase trend, triggered during 2021, will continue during 2022. A sharp rise already happened mainly due to the war in Ukraine and the related scarcity of raw materials and consumables, as well as the rise in energy cost.

Other factors, like logistical constrains due to Covid shut-downs in China and increase the pressure on prices.

It must however be clear to everyone that it is impossible to predict for how long this trend will continue.

All these factors are also leading to a huge increase in our production cost. Availability and cost of raw material may create issues on a longer term basis.

Taking into consideration all these unstable variables we believe that  these factors might continue to sustain a sharp price volatility throughout 2022.

FERROALLOYS SEGMENT

2021 in Review

Revenue decreased significantly in 2021 when compared to prior year, mainly due to lower availability of saleable material.

Production

Operationally, the segment registered a decrease in total production by 78.9% to 26,379 (2020: 125,060) tonnes.

Production within the FerroAlloys segment decreased significantly due to minimal mining activity at the South African mines.

Sales

The sales of processed material from the FerroAlloys segment declined significantly during the year when compared to prior year. This was mainly due to lower availability of saleable material and the discontinued operation of processed material during 2020.

Financial performance

Revenue decreased significantly in 2021 when compared to prior year, mainly due to lower availability of saleable material, lower sales prices and minimal activity in the South African mines. EBITDA for the full year stood at EUR -0.9 (2020: -1.3) million. Profitability was positively affected by a reversal gain on previously recognised impairment loss on Ilitha's mining assets, amounting to EUR 2.9 (2020: -21.5) million.

Looking ahead

Afarak is planning on resuming some mining activities in South Africa shortly.

RISK MANAGEMENT

Afarak's prudent approach to risk management is a crucial component of our continued success and is present in managing all aspects of our performance.

By understanding and managing risk, we provide greater certainty and confidence for our shareholders, employees, customers, suppliers and host communities. In fact, we believe that successful risk management can be a source of competitive advantage.

Our risks are viewed and managed on a Group-wide basis. As a truly global operation, managing diversity in our operations, portfolio of products, geographies, economies and currencies is a key characteristic of our risk management approach.

Risk management is one of the key responsibilities of the Board and its Audit and Health & Safety Committees.

2021 Developments

The Group restructured a short-term commercial debt into a longer-term arrangement and is also actively pursuing new funding opportunities via some divesting. 

Afarak's processing operations in Germany and South African mines are intensive users of energy, primarily electricity. Fuel and energy prices globally have been characterised by volatility and cost inflation. In South Africa the majority of the electricity supply, price and availability are controlled by one entity, Eskom. Increased electricity prices and/or reduced, or uncertain electricity supply, or allocation may negatively impact Afarak's current operations, which could have an impact on the Group's financial performance.

It is still unknown whether the COVID-19 epidemic would create any further damage that cannot be forecasted at this moment. Also recent geopolitical developments may impact the continuity of economic activities, on a global level. 

Management continued to work closely with the Units to provide continuous monitoring and oversight in accordance with the Group's risk management policy. Health & safety and the stated aim of 'Zero-Harm' will continue to be a central pillar of the Company's risk management strategy.

Principal risks

While a number of different risks may have an effect on the results and operations to various degrees, the following describes the key types of risks faced by Afarak in the normal course of business.

SHARE INFORMATION

Afarak Group Plc's shares are listed on NASDAQ Helsinki (AFAGR) and on the Main Market of the London Stock Exchange (AFRK). 

On 31 December 2021, the registered number of Afarak Group Plc shares was 252,041,814 (252,041,814) and the share capital was EUR 23,642,049.60 (23,642,049.60).

On 31 December 2021, the Company had 5,673,991 (13,162,599) own shares in treasury, which was equivalent to 2.25% (5.22%) of the issued shares. The total number of shares outstanding, excluding the treasury shares held by the Company on 31 December 2021, was 246,367,823 (238,879,215).

At the beginning of the period under review as at December 2020, the Company's share price was EUR 0.23 on NASDAQ Helsinki and GBP 0.20 on the London Stock Exchange. At the end of the review period as at December 2021, the share price was EUR 0.14 and GBP 0.20 respectively. During 2021, the Company's share price on NASDAQ Helsinki ranged from EUR 0.13 to 0.32 per share and the market capitalisation, as at 31 December 2020, was EUR 34.28 (1 January 2021: 56.96) million. For the same period on the London Stock Exchange, the share ranged from GBP 0.05 to 0.25 per share and the market capitalisation was GBP 50.41 (1 January 2021: 50.41) million, as at 31 December 2021.

On 23 March 2021, the company announced changes regarding Afarak Group Plc's treasury shares, where a total of 7,088,608 treasury shares has been transferred to subscribers. On 12 October 2021, the company announced changes regarding Afarak Group Plc's treasury shares, where a total of 400,000 shares were transferred to the CEO Guy Konsbruck, which form part of the remuneration package under the CEO agreement.

Flagging notifications

There were no flagging notifications during the year.

Trading information

Afarak Group Plc's shares are listed on the main market of the London Stock Exchange and on NASDAQ Helsinki. Afarak shares are traded on the London Stock Exchange under the trading code AFRK and on the NASDAQ Helsinki under code AFAGR. The ISIN code is FI0009800098 and the trading takes place in Pound Sterling (GBP) and in Euros (EUR).

Share performance and Trading

During the financial year 2021, the price of Afarak Group's share in London Stock Exchange varied between GBP 0.05 (2020: 0.05) and GBP 0.25 (2020: 0.75) and in NASDAQ Helsinki between EUR 0.13 (2020: 0.14) and EUR 0.32 (2020: 0.98). Afarak's share closed in London at the end of the financial year at GBP 0.20 (2020: 0.20) and Helsinki at EUR 0.14 (2020: 0.23). The closing price on 31 December gives the Company a market capitalisation of the entire capital stock 252,041,814 (2020: 252,041,814) shares of GBP 50.41 (2020: 50.41) million and EUR 34.28 (2020: 56.96) million.

A total of 2,198,719 (2020: 335,874) Afarak shares were traded in London and 34,249,103 (2020: 47,131,285) shares in Helsinki during the financial year, representing 0.9% (2020: 0.1%) of stock in London and 13.6% (2020: 18.7%) in Helsinki.

Shareholders

On 31 December 2021, the Company had a total of 6,556 shareholders (6,238 shareholders on 31 December 2020), of which seven were nominee-registered. The registered number of shares on 31 December 2021 was 252,041,814 (2020: 252,041,814).

LARGEST SHAREHOLDERS ON 31 DECEMBER 2021

Afarak Group Plc's Board members and Chief Executive Officer owned in total 1,950,000 (2020: 1,550,000) Afarak Group Plc shares on 31 December 2021, including shares owned either directly, through persons closely associated with them or through controlled companies. This corresponds to 0.8% (2020: 0.6%) of the total number of registered shares on 31 December 2021.

SHAREHOLDERS BY CATEGORY 31 DECEMBER 2021

SHAREHOLDERS BY SHAREHOLDER TYPE ON 31 DECEMBER 2021

RESOLUTIONS OF THE ANNUAL GENERAL MEETING

The Company's Annual General Meeting ("AGM') was held on 29 Jun 2021.  The AGM adopted the financial statements and the consolidated financial statements and discharged the members of the Board of Directors and the CEO from liability for the financial period 2020. 

The AGM resolved that no dividend would be paid for 2020. 

The AGM resolved that the Non-executive Board Members shall be paid EUR 3,000 per month and the Chairman of the board shall be paid an additional EUR 1,500 per month. Non-Executive Board Members who serve on the Board's Committees shall be paid additional EUR 1,500 per month for committee work. Those members of the Board of Directors that are executives of the Company are not entitled to receive any remuneration for Board membership. Board Members shall be compensated for travel and accommodation expenses as well as other costs directly related to Board and Committee work in accordance with the company's travel rules.

The AGM resolved that the Board of Directors would comprise of three (3) members: Dr  Jelena Manojlovic (UK citizen),  Mr  Thorstein Abrahamsen (Norwegian citizen) and Mr Guy Konsbruck (Luxembourg citizen) were re-elected as Board members.

The AGM resolved that the Company will pay the fee to the auditor against an invoice that is inspected by the Company and that election of the Auditor shall be decided on separate Extraordinal General Meeting held during 2021.

The AGM resolved to authorize the Board  of Directors to issue shares and stock options  and other special rights that entitle to shares in one or more tranches up  to a maximum of 50,000,000 new shares or shares  owned by the Company. This equates to approximately 19.8 % of the Company's currently registered shares.

The authorization  may be used  among other  things to raise additional finance and enabling corporate and business acquisitions or other arrangements and investments of business activity or for employee incentive and commitment schemes. By virtue of the  authorization,  the  Board of Directors can decide both on share issues against payment and on share issues without payment. The payment of the subscription  price can  also be  made with  consideration other than money. The authorization contains the right to decide on derogating from shareholders' pre-emptive  right to share subscriptions  provided that  the conditions set in the Finnish Companies' Act are fulfilled. The authorization replaces all previous authorizations and  is valid two (2) years from the decision of the Annual General Meeting. 

RESOLUTIONS OF THE EXTRAORDINARY GENERAL MEETING

Afarak Group Plc's Extraordinary General Meeting was held at the Company's headquarter in Helsinki on August 30, 2021 under special arrangements due to the COVID-19 pandemic.

The General Meeting elected, as per the proposal of the Board of Directors, Authorised Public Accountant Firm Tietotili Audit Oy as the Auditor of the Company. Tietotili Audit Oy has informed that the auditor with the main responsibility will be Authorised Public Accountant Urpo Salo.

2021 Annual General Meeting

Afarak's 2021 Annual General Meeting will be held  within the time stipulated in the Finnish Companies Act.

Distribution proposal

The Board of Directors will propose to the Annual General Meeting that based on the results of 2021 no distribution would be paid in 2022.

Information presented by reference

The Group's key financial figures, related party disclosures, information on share capital and option rights are presented in the notes to the consolidated financial statements. The share ownership of the parent company's Board members and Chief Executive Officer is presented in the notes to the parent company's financial statements.

The Corporate Governance Statement and the Remuneration Report are presented as separate reports in this Annual Report.

For the purposes of United Kingdom Listing Authority listing rules ("LR") 9.8.4C R, the information required to be disclosed by LR 9.8.4 R can be found in the following locations:

All the information cross-referenced above is hereby incorporated by reference into this Board of Directors report.

KEY FIGURES

FINANCIAL INDICATORS

SHARE-RELATED KEY INDICATORS

From the financial year 2020 and 2021 the company did not distribute capital redemption. In 2021 the Board of Directors proposes to the Annual General Meeting that no distribution would be paid from the financial year 2021.

FORMULAS FOR CALCULATION OF INDICATORS

Financial indicators

Return on equity     (Loss) / profit for the period / Total equity (average for the period) * 100

Return on capital employed      ((Loss) / profit before taxes + financing expenses) / (Total assets - Interest-free liabilities) average * 100

Equity ratio      Total equity / (Total assets - prepayments received) * 100

Gearing      (Interest-bearing debt - liquid funds) / Total equity * 100

EBITDA      Operating (loss) / profit + depreciation + amortisation + impairment losses

Operating (loss) / profit      Operating (loss) / profit is the net of revenue plus other operating income, plus gain/loss on finished goods inventory change, minus employee benefits expense, minus depreciation, amortisation and impairment and minus other operating expense. Foreign exchange gains or losses are included in operating profit when generated from ordinary activities. Exchange gains or losses related to financing activities are recognised as financial income or expense.

Share-related key indicators

Earnings per share, basic      (Loss) / profit attributable to owners of the parent company / Average number of shares during the period.

Earnings per share, diluted      (Loss) / profit attributable to owners of the parent company / Average number of shares during the period, diluted.

Equity per share     Equity attributable to owners of the parent / Average number of shares during the period.

Distribution per share     Distribution / Number of shares at the end of the period. In the attached table of share related key indicators, the dividend and capital redemptions are presented in that year's column on which results the pay-out are based; hence the actual payment takes place during next year.

Price to earnings     Share price at the end of the period / Earnings per share

Average share price     Total value of shares traded in currency / Number of shares traded during the period.

Market capitalisation     Number of shares * Share price at the end of the period.

EVENTS AFTER THE REPORTING PERIOD

On 04 January 2022, the Company published the financial calendar for 2022 

On 10 February 2022, the Company published information in relation to Afarak's website being down. 

On 10 February 2022, the company announced changes regarding Afarak Group Plc's treasury shares, where a total of 500,000 shares were transferred to the CEO Guy Konsbruck, which form part of the remuneration package under the CEO agreement.

On 30 March 2022, Afarak announced that on this day, the Supreme Administrative Court has rejected Afarak's application for permission to appeal. The Supreme Administrative Court therefore does not rule on the Afarak's appeal. Therefore, the penalty payment of EUR 1 450 000 imposed by FIN-FSA on 23 September 2019 to Afarak for failures relating to disclosure of inside information and maintenance of insider lists is lawful.

The company is very disappointed about this decision, as a few minor and technical dysfunctions were identified and fixed, before the first decision by FIN-FSA was issued. Also the amount of the fine is completely disproportionate and arbitrary compared to the actual infringement. Such a high fine for such a minor fact has never been issued, neither in Finland, nor abroad, and is actually destroying shareholder value. FIN-FSA never explained why they believe such an amount was appropriate.

Flagging notification after the reporting period

There were no flagging notifications after the reporting period.

CONSOLIDATED FINANCIAL STATEMENTS, IFRS

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONT.)

CONSOLIDATED STATEMENT OF CASH FLOWS

Discontinued operations' cash flows are described in more detail in the Note 8.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to owners of the parent

1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.1 COMPANY INFORMATION

Afarak Group is a public limited company in Finland. Afarak Group is a chrome mining and minerals producer focused on delivering sustainable growth with a speciality alloys business in southern Europe and a ferro alloys business in southern Africa. The Group's parent company is Afarak Group Plc (business ID: 0618181-8). The parent company is domiciled in Helsinki, Finland, and its registered address is Kaisaniemenkatu 4, 00100 Helsinki, Finland. Copies of the consolidated financial statements are available at Afarak Group Plc's head office or at the Company's website: www.afarak.com.

Afarak Group Plc is quoted on the NASDAQ Helsinki Oy (trading code: AFAGR) in the industrials group, in the small-cap category, and on the main market of the London Stock Exchange (AFRK).

For the purpose of reporting according to ESEF  regulations: Afarak Group Oyj operated with same name in previous year. Afarak Group plc is the ultimate parent of the Group and its principal place of business is Helsinki, Finland.  

1.2 ACCOUNTING PRINCIPLES

Basis of preparation

Afarak Group Plc's Board of Directors resolved on 31 March 2022 that these financial statements are to be published. According to the Finnish Companies Act, shareholders shall endorse the financial statements in the Annual General Meeting convening after the financial statements have been published.

Presentation of financial statements

The consolidated financial statements provide comparative information in respect of the previous period. In addition, the Group presents an additional statement of financial position at the beginning of the earliest period presented when there is: a retrospective application of an accounting policy; a retrospective restatement; or a reclassification of items in financial statements that has a material impact on the Group.

Principles of consolidation

The consolidated financial statements include the parent company Afarak Group Plc, its subsidiaries, joint ventures and associated companies. Subsidiaries refer to companies controlled by the Group. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The existence of potential voting rights has been taken into account in assessing the requirements for control in cases where the instruments entitling their holder to potential voting rights can be exercised at the time of assessment. Control refers to the right to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.

Acquired subsidiaries are consolidated from the time when the Group gained control, and divested subsidiaries until the time when control ceased. All intra-group transactions, receivables, debts, and unrealised profits, as well as internal distribution of profits, are eliminated when the consolidated financial statements are prepared. The distribution of profits between parent company owners and non-controlling owners is shown in the statement of comprehensive income, and the non-controlling interest of equity is shown as a separate item in the statement of financial position under shareholders' equity. 

Joint ventures are entities in which each venturer has an interest and there is a contractual arrangement establishing joint control over the economic activity of the entity. 

Associates are companies in which Afarak Group exercises significant influence. The Group exercises significant influence if it holds more than 20% of the target company's voting rights, or if the Group in other ways exercises significant influence but not control. Associates have been consolidated in the Group's financial statements using the equity method. If the Group's share of the associate's losses exceeds the carrying amount of the investment, the investment is recognised at zero value on the statement of financial position, and losses exceeding the carrying amount are not consolidated unless the Group has made a commitment to fulfil the associates' obligations. Investment in an associate includes the goodwill arising from its acquisition.

Translation of foreign currency items

Amounts indicating the profit or loss and financial position of Group entities are measured in the currency of each entity's main operating environment ('functional currency'). Figures in the consolidated financial statements are presented in euro, the functional and presentation currency of the Group's parent company, Afarak Group Plc.

Transactions in foreign currencies have been recorded at the functional currency using the exchange rate on the date of the transaction or mid reference rates of central banks. Monetary items denominated in foreign currencies have been translated into the functional currency using the exchange rates at the end of each reporting period. Exchange rate gains and losses are included in the revenue, operational costs or financial items, corresponding to their respective origin. Hedge accounting has not been applied.

In the Group accounts, foreign subsidiaries' income statements and statements of cash flows are converted into euro by using average exchange rates for the period, and the statement of financial position is converted by using the period-end exchange rate. The translation differences arising from this are recognised in other comprehensive income. Translation differences arising from the elimination of the acquisition cost and post-acquisition equity changes are also recognised in other comprehensive income. If and when the foreign subsidiary is partially or fully divested, these accrued translation differences will be taken into account in adjusting the sales gain or sales loss.

Goodwill, other assets and liabilities arising from acquisitions of subsidiaries are recognised in the Group accounts using the functional currency of each acquired subsidiary. The balances in that functional currency have then been translated into euro using the exchange rates prevailing at the end of the reporting period.

In accordance with IAS 21, any foreign exchange difference arising from Intra-group loans for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity's net investment in that foreign operation. This is recognised in the group's other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment.

Operating profit

IAS 1 Presentation of financial statements does not define the concept of operating profit. Afarak Group has defined it as follows: Operating profit is the net amount derived by adding to revenue other operating income, less materials and supplies, and expenses from work performed by the enterprise and capitalised, less costs from employee benefits, depreciation and impairment losses, and other expenses. Shares of associated companies' and joint venture companies' profit or loss are included in the operating profit to the extent to which they relate to the Group's core businesses. Exchange differences arising from operational transactions with third parties are included in operating profit; otherwise they are recorded under financial items.

All other items of the income statement are excluded from operating profit. 

IAS 1 amendment introduced the requirement for grouping of items presented in Other Comprehensive Income.  Items that are reclassified (or `recycled`) to profit or loss at a future point in time will be presented separately from items which will never be reclassified.  The amendment affected the presentation of Other Comprehensive Income.

Revenue recognition

The Group applies IFRS 15 Revenue from Contracts with customers standard. Income from the sale of goods is recognised once the control of goods have been transferred to the buyer. Control is transferred either over time or at a point in time. The transfer of control depends on, terms of delivery (Incoterms) and some of which have transfer of risk to the customer before material is delivered to the final customer. The freight in conjunction with these delivery terms may be regarded as a separate performance obligation, however as they are limited in number, the Group does not consider the freight as being separate from the sale. 

The most often used terms are FCA, CIF or FOB, under which the revenue is recognised when the goods are assigned to the buyer's carrier or loaded on board the vessel nominated by the buyer. 

Generally, the Group receives short-term advances or cash against documents (CAD) from its customers. The payment terms are usually up to 60 days from end of month or after consignment report for customers with consignment agreement. The transaction price is based on official publications with premiums or discounts, while spot business is done based on negotiations. Performance obligations are satisfied at delivery of the goods and revenue is recognised based on the incoterms transfer of risk.

As typical in the business, preliminary invoices are issued for the mineral concentrates at the time of delivery. Final invoices are issued when quantity, mineral content and pricing have been defined for the delivery lot.

Income not generated by the Group's main businesses is accounted for as other operating income. The expenses incurred from disposals of non-current assets or a disposal group of assets are deducted from the gain on disposal.   

Pension liabilities

Pension arrangements in Afarak Group are classified as defined contribution plans or defined benefit plans (Germany and Turkey). Payments for defined contribution plans are recognised as expenses for the relevant period. The present value of obligation for the defined benefit plans has been estimated applying the Projected Unit Credit Method and recognised as a non-current liability on the statement of financial position.  The actuarial gains and losses are recognised in other comprehensive income when they occur and the net defined benefit liability or asset are presented in full on the statement of financial position. 

Share-based payments

Option rights are measured at fair value at the time they were granted and recorded as expenses on a straight-line basis during the vesting period. The expenses at the time the options were granted are determined according to the Group's estimate of the number of options expected to vest at the end of the vesting period. Fair value is determined on the basis of an applicable option pricing model (e.g. Black-Scholes). The effects of non-market-based terms and conditions are not included in the fair value of the option; instead, they are taken into account in the estimated number of options expected to vest at the end of the vesting period. The Group updates the estimated final number of options at the end of each reporting period. Changes in the estimates are recorded in the statement of comprehensive income. When the option rights are exercised, the cash payments received from the subscriptions adjusted with potential transaction costs are recorded under paid-up unrestricted equity reserve.

The Group from time to time directs free issues of shares to the members of the Board of Directors or key executives, as approved by the AGM. The compensation is settled in shares and is accordingly recognised as share-based payment in the Group's financial statements. The fair value of the granted shares is determined based on the market price of the Afarak Group share at the grant date. The total fair value is therefore the amount of granted shares multiplied by the share market price at grant date. The cost is recognised as expense in personnel costs over the vesting periods and credited to equity (retained earnings). 

Broad Based Black Economic Empowerment (BBBEE) transactions

The purpose of South African Broad Based Black Economic Empowerment (BBBEE) regulation is to enable previously disadvantaged people meaningfully to participate in the South African economy. The Group is committed to making a positive contribution towards the objectives of BBBEE. Where the Group disposes of a portion of a South African based subsidiary or operation to a BBBEE company at a discount to fair value, the transaction is considered to be a share-based payment (in line with the principle contained in South Africa interpretation AC 503 Accounting for Broad Based Black Economic Empowerment (BBBEE) Transactions). The discount provided or value given is calculated in accordance with IFRS 2 and recognised as an expense. Where the BBBEE transaction includes service conditions, the expense is recognised over the vesting period. Otherwise the expense is recognised immediately on the grant date.

Lease agreements (the Group as the lessee)

Leases of tangible assets where the Group possesses a material portion of the risks and benefits of ownership are classified as financial leases. An asset acquired through a financial lease agreement is recognised at the fair value of the leased object at the beginning of the lease period, or at a lower current value of minimum lease. An asset obtained through a finance lease is depreciated over the useful life of the asset or the lease term, whichever is shorter. The leases payable are divided into financial expenses and loan repayment during the lease term so that the interest rate for the remaining loan is roughly the same each financial year. Leasing obligations are included in interest-bearing liabilities. Lease agreements in which the risks and benefits typical of ownership remain with the lessor are recognised in the statement of financial position as a right-of-use asset and a corresponding lease liability at the date at which the lease asset is available for the use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is recognised in the income statement over the lease period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Impairment

At the end of each reporting period, the Group makes an assessment of whether there are any indications of asset impairment. If such indications exist, the recoverable amount of the asset is estimated. In addition, goodwill is assessed annually for its recoverable amount regardless of whether there are any signs of impairment. Impairment is examined at the cash-generating unit level; in other words, the lowest level of entity that is primarily independent of other entities and whose cash flows can be separated from other cash flows. Impairment related to associates and other assets are tested on a company/asset basis.

The recoverable amount is the fair value of an asset less divestment costs, or the higher value in use. Value in use means the present value of estimated future cash flows expected to arise from the asset or cash-generating unit. Value in use is forecast on the basis of circumstances and expectations at the time of testing. The discount rate takes into account the time value of money as well as the special risks involved for each asset, different industry-specific capital structures in different lines of business, and the investors' return expectations for similar investments. An impairment loss is recorded when the carrying amount of an asset is greater than its recoverable amount. If the impairment loss is allocable to a cash-flow-generating unit, it is allocated first to reduce the goodwill of the unit and subsequently to reduce other assets of the unit. An impairment loss is reversed if a change has occurred in circumstances and the recoverable amount of the asset has changed since the impairment loss was recognised. An impairment loss recognised for goodwill is not reversed in any circumstances.

Goodwill is tested for impairment annually at year end; for the 2021 financial year, testing took place on 30 June 2021 for the Speciality Alloys business and the South African minerals processing business and on 31 December 2021 for all cash generating units. Impairment testing and the methods used are discussed in more detail in section 1.5 in the 'Notes to the consolidated financial statements'.

Financial income and expense

Interest income and expense is recognised using the effective interest method, and dividends are recognised when the right to dividends is established. Unrealised changes in value of items measured at fair value are recognised in the statement of comprehensive income. These items relate to currency forward contracts. Exchange rate gains or losses that arise from intercompany loans that are considered as part of the net investment in the foreign entity are included, net of any deferred tax effects, in the translation reserve within the equity. These exchange differences are recognised in other comprehensive income while accumulated exchange differences are presented in the translation reserves in the equity.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset forming part of the cost of that asset, are capitalised if it is likely that they will provide future economic benefit and can be measured in a reliable manner. Other borrowing costs are recognised as an expense in the period in which they are incurred. 

Income taxes

Tax expenses in the statement of comprehensive income consist of the tax based on taxable income for the year and deferred taxes. Taxes based on taxable income for the year are calculated using the applicable tax rates. Taxes are adjusted with any taxes arising from previous years. Maltese companies' income taxes are recognised and paid applying the nominal income tax rate which is 35%. Six sevenths of this tax is refunded when the company pays a dividend. Consequently the effective tax rate is 5%. The tax refund is recognised when the dividend is declared. Taxes arising from items recognised directly in equity are presented as income tax relating to other comprehensive income.

Deferred taxes have been calculated for all temporary differences between the carrying amount and taxable amount. Deferred taxes have been calculated using the tax rates set at the end of the reporting period. Deferred tax assets arising from taxable losses carried forward have been recognised up to the amount for which there is likely to be taxable income in the future, and against which the temporary difference can be used.

Tangible assets

Tangible assets have been measured at historical cost less accumulated depreciation and impairment losses. The initial cost of an asset comprises its purchase price, costs directly attributable to bringing the asset into operation and the initial estimate of the rehabilitation and decommissioning obligation. Heavy production machinery often contains components with different useful lives, and therefore the component approach is applied. Material component replacements and repairs are capitalised. The repair and maintenance of lighter machinery and other intangible items are recognised as an expense when incurred. 

Interest expenses are capitalised as part of the tangible asset's value if and when the Group acquires or constructs assets that satisfy the required terms and conditions. 

Assets are depreciated over their useful lives using the straight-line method, except for the mineral resources and ore reserves which are depreciated based on estimated or reported consumption. Land areas are not depreciated. The estimated useful lives of assets are as follows:

Buildings               15-50 years

Machinery and equipment          3-15 years

Other tangible assets          5-10 years

Mines and mineral assets          Units-of-production method

The residual value of assets and their useful life are reviewed in connection with each financial statement and, if necessary, they will be adjusted to reflect the changes that have occurred in the expected financial benefit. The sales gains or losses arising from the decommissioning or divestment of tangible assets are included in other operating income or expenses.

Mines and mineral assets

Measurement of mineral resources and ore reserves in business combinations

Mineral resources and ore reserves acquired in business combinations are recognised as separate assets. In the recognition and measurement of mineral resources and ore reserves the Group utilises available third party reports of the quantities, mineral content, estimated production costs and exploitation potential of the resource. The probability of the ore reserve is also an essential factor. In the mining and minerals business, the probability is commonly described by classifying a mineral resource into categories such as 'proven', 'probable', 'inferred' and 'hypothetical'. There are also generally accepted standards for the classification of mineral resources in the business, such as the standards of the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves ('SAMREC'). The measurement of ore reserves is based on estimated market prices, estimated production costs and quantities. In the Group's statement of financial position, mineral resources and ore reserves are presented as tangible assets. Rehabilitation liabilities related to mines are included in their cost of acquisition, and corresponding provision is recognised on the statement of financial position. 

Exploration and evaluation expenses of mineral resources

Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential mineral reserves and resources when new potential ore reserves are sought, for example by exploratory drilling. Exploration and evaluation expenditure is carried forward as an asset if the Group expects such costs to be recouped in full through the successful development of the area of interest; or alternatively by its sale; or if exploration and evaluation activities in the area of interest have not yet reached a stage which permits the reasonable assessment of the existence of economically recoverable reserves and active and significant operations in relation to the area are either continuing or planned for the future. Exploration and evaluation expenditure includes material and other direct costs incurred, for instance, by exploratory drilling and surveys. Overheads are included in the exploration and evaluation asset to the degree to which they can be associated with finding and evaluating a specific mineral resource. Exploration and evaluation assets are measured at cost and are transferred to mine development assets when utilisation of the mine begins. The asset is then depreciated using the units-of-production method. Assets are written off when it is determined that the costs will not lead to economic benefits or expensed when incurred if the outcome is uncertain. 

Exploration and evaluation assets are assessed for impairment if and when facts and circumstances suggest that the carrying amount exceeds its recoverable amount. In particular, the impairment tests are carried out if the period for which the Group has right to explore the specific area expires or will expire in the near future and future exploration and evaluation activities are not planned for the area.

Exploration and evaluation assets acquired in conjunction with business combinations are accounted for at fair value in accordance with the principles of IFRS 3.

Mine establishment costs

Mine establishment costs are capitalised as part of the mine's acquisition cost and depreciated using the units-of-production method when the production of the mine begins. The costs arising from changes in mining plan after the production has begun are expensed as incurred.

Impairment

The value of mineral resources and ore reserves acquired in business combinations is tested for impairment if there are indications of deterioration in the long-term ability to utilise the asset economically. In the test the cash flows generated by the asset are assessed based on most recent information on the technical and economic utilisation of the asset.

Goodwill and intangible assets identified at acquisition

Goodwill represents the portion of acquisition cost that exceeds the Group's share of the fair value at the time of acquisition of the net assets of the acquired company. Instead of regular amortisation, goodwill is tested annually for potential impairment. For this purpose, goodwill has been allocated to cash-generating units or, in the case of an associated company, is included in the acquisition cost of the associate in question. Goodwill is measured at original acquisition cost less impairment losses. Changes in purchase considerations, for example due to earn-out arrangements, relating to acquisitions carried out before 2010 have been recognised against goodwill in accordance with the earlier IFRS 3.  

The net assets of an entity acquired in a business combination are measured at fair value at the date of acquisition. In connection with business combinations, the Group also identifies intangible assets that are not necessarily recorded on the statement of financial position of the acquired entity. These assets include, for instance, customer relationships, trademarks and technology. The assets are recognised at fair value and amortised over their useful lives on a straight-line basis. The amortisation periods for these intangible assets are as follows:

Customer relationships: 2-5 years depending on contractual circumstances

Technology: 5-15 years

Trademarks: 1 year

Research and development costs

Research costs are always recognised as expenses. Mine development costs are capitalised as part of mining assets and depreciated on a unit of production basis. The development costs, which primarily relate to the development of existing products, are expensed as incurred. 

Other intangible assets

Other intangible assets are initially recognised on the statement of financial position at cost when the costs can be reliably determined and it is probable that the expected financial benefits of those assets will be reaped by the Group. Other intangible assets mainly relate to IT software utilised in support of the Group's business operations and they are amortised over 3-5 years on a straight-line basis.

Inventories

Inventories are measured at acquisition cost or a lower probable net realisable value. Acquisition costs are determined using the average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour expenses, other direct expenses, and an appropriate share of fixed and variable production overheads based on the normal capacity of the production facilities. In open pit mining operations, the removal costs of overburden and waste material (stripping costs) are included in the cost of inventory. The net realisable value is the estimated selling price that is obtainable, less the estimated costs incurred in completing the product and the selling expenses.

Financial assets

Initial recognition and measurement

Financial assets are classified, at initial recognition, and subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss in accordance with IFRS 9: Financial Instruments.

The classification of financial assets at initial recognition depends on the financial asset's contractual cash flow characteristics and the Group's business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. See note 13, in section 1.8. Notes to the Statement Of Financial Position, for tabular presentation of financial instruments.

Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS  15: Revenue from Contracts with Customers.

In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are 'solely payments of principal and interest (SPPI)' on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.

The Group's business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.

Subsequent measurement

For purposes of subsequent measurement, financial assets are classified in four categories: 1.Financial assets at amortised cost (debt instruments);

2. Financial assets at fair value through OCI with recycling of cumulative gains and losses (debt instruments);

3. Financial assets designated at fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments); and

4. Financial assets at fair value through profit or loss.

There have been no transfers of financial assets between fair value categories during the financial period. Afarak has not changed its recognition or fair valuation methods during the financial period.

1. Financial assets at amortised cost (debt instruments)

This category financial assets are measured at amortised cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

For debt instruments at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in the statement of profit or loss and computed in the same manner as for financial assets measured at amortised cost.

The remaining fair value changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss.

The Group held loans receivable and trade receivables which were classified as being financial assets at amortised cost.

2. Financial assets at fair value through OCI (debt instruments)

This category of debt instruments are measured at fair value through OCI if both of the following conditions are met:

• The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

For debt instruments at fair value through OCI, interest income, foreign exchange revaluation  and impairment losses or reversals are recognised in the statement of profit or loss and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI.

Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss.

The Group did not hold any debt instruments classified as being financial assets at fair value through OCI.

3. Financial assets designated at fair value through OCI (equity instruments)

Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification  is determined on an instrument-by-instrument basis.

Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI. Equity instruments designated at fair value through OCI are not subject to impairment assessment.

The Group elected to classify irrevocably its non-listed equity investments under this category.

4. Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term.

Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss.

The Group did not hold any debt instruments classified as being financial assets at fair value through profit or loss.

Derecognition

A financial asset is primarily derecognised when:

• The rights to receive cash flows from the asset have expired; or

• The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a 'pass-through' arrangement; and either (a) the Group has transferred substantially all the  risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership.

When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects  the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Impairment of financial assets

Further disclosures relating to impairment of financial assets are also provided in the following notes:

• Disclosures for significant assumptions

• Debt instruments at fair value through OCI

• Trade receivables, including contract assets

The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For trade receivables and should the Group have any contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

For debt instruments at fair value through OCI, the Group applies the low credit risk simplification. At every reporting date, the Group evaluates whether the debt instrument is considered to have low credit risk using all reasonable and supportable information that is available without undue cost or effort. In making that evaluation, the Group reassesses the internal credit rating of the debt instrument. In addition, the Group considers that there has been a significant increase in credit risk when contractual payments are more than 30 days past due.

The Group considers a financial asset in default when contractual payments are 120 days past due. However, in certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

Derivative financial instruments and hedge accounting

When necessary, the Group utilises derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risks and interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives are recognised on the income statement. The Group did not have currency hedged at year end.

Treasury shares

Own equity instruments, which are reacquired (treasury shares), are recognised at cost and deducted from the paid-up unrestricted equity reserve. No gain or loss is recognised on the purchase, sale, issue or cancellation of the Group's own equity instruments. 

Financial liabilities

Liabilities are classified as current and non-current, and include both interest-bearing and interest-free liabilities. Interest-bearing liabilities are liabilities that either include a contractual interest component, or are discounted to reflect the fair value of the liability. In the earlier financial years discounted non-current liabilities have included acquisition-related deferred conditional and unconditional liabilities. Certain conditional liabilities have included an earn-out component that needed to be met to make the liability unconditional and fix the amount of the future payment. Acquisition-related conditional purchase considerations that were payable in the Company's shares were presented as interest-free liabilities. 

Initial recognition and measurement

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

The company's financial liabilities include trade and other payables and loans and borrowings including bank overdrafts.

Subsequent measurement

The measurement of financial liabilities depends on their classification, as described below:

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term.

Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied. The company has not designated any financial liability as at fair value through profit or loss.

Loans and borrowings

This is the category most relevant to the company. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses  are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process.

Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss.

This category generally applies to interest-bearing loans and borrowings. For more information, refer  to note 13, in 1.8 Notes to the Consolidated Statement of Financial Position.

Derecognition

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive), as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

The provision for rehabilitation and decommissioning costs has arisen on operating mines and minerals' processing facilities. These costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the rehabilitation and decommissioning liability. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs of or in the discount rate applied to the rehabilitation obligation are added or deducted from the profit or loss or, respectively, decommissioning obligation adjusted to the carrying value of the asset dismantled. 

Non-current assets held for sale and discontinued operations

The standard IFRS 5 requires that an entity must classify a non-current asset or a disposal group as assets held for sale if the amount equivalent to its carrying amount is accumulated primarily from the sale of the item rather than from its continued use. In this case, the asset or disposal group must be available for immediate sale in its present condition under general and standard terms for the sale of such assets, and the sale must be highly probable.

Discontinued operation is a component of the entity with operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity, that is either held for sale or already disposed of; and

• represents a major line of business or geographical area of operations,

• is part of a single-coordinated plan to dispose of a separate major line of business or geographical area of operations, or

• is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control.

Accounting policies requiring management discretion and key uncertainty factors for estimates

Preparation of the financial statements requires management to make estimates, assumptions and forecasts regarding the future. Future developments may deviate significantly from the assumptions made if changes occur in the business environment and/or business operations. In addition, management is required to use its discretion in the application of the financial statements' preparation principles. 

The scope of the financial statements

The consolidated financial statements include the parent company Afarak Group Plc, its subsidiaries, joint ventures and associated companies. Subsidiaries refer to companies in which the Group has control. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The assessment of whether control is exercised requires management discretion. 

Allocation of the cost of a business combination

In accordance with IFRS 3, the acquisition cost of an acquired company is allocated to the assets of the acquired company. The management has to use estimates when determining the fair value of identifiable assets and liabilities. Determining a value for intangible assets, such as trademarks and customer relationships, requires estimation and discretion because in most cases, no market value can be assigned to these assets. Determining fair value for tangible assets requires particular judgment as well, since there are seldom active markets for them where the fair value could be obtained. In these cases, the management has to select an appropriate method for determining the value and must estimate future cash flows.

Impairment testing

Goodwill is tested annually for impairment, and assessments of whether there are indications of any other asset impairment are made at end of reporting period, and more often if needed. The recoverable amounts of cash-generating units have been determined by means of calculations based on value in use. Preparation of these calculations requires the use of estimates to predict future developments. 

The forecasts used in the testing are based on the budgets and projections of the operative units, which strive to identify any expansion investments and rearrangements. To prepare the estimates, efforts have been made to collect background information from the operative business area management as well as from different sources describing general market activity. The risk associated with the estimates is taken into account in the discount rate used. The definition of components of discount rates applied in impairment testing requires discretion, such as estimating the asset or business related risk premiums and average capital structure for each business segment. 

Tangible and intangible assets

Afarak Group management is required to use its discretion when determining the useful lives of various tangible and intangible assets, which affects the amount of depreciation and thereby the carrying amount of the assets concerned. The capitalising of mine development assets and exploration and evaluation expenditure, in particular, requires the use of discretion. Similarly, management is required to use its discretion in determining the useful lives of intangible assets identified in accordance with IFRS 3, and in determining the amortisation period. This affects the financial result for the period through depreciation and change in deferred taxes.

Measurement of mineral resources and ore reserves

In the Group's mining operations, estimates have to be applied in recognising mineral resources acquired in business combinations as assets. In the recognition and measurement of mineral resources and ore reserves, the Group utilises available third party analyses of the quantities, mineral content, estimated production costs and exploitation potential of the resource. The probability of the ore reserve is also a key consideration. In the mining and minerals business, the probability is commonly described by classifying a mineral resource into categories such as 'proven', 'probable', 'inferred' and 'hypothetical'. The measurement of ore reserves is based on estimated market prices, estimated production costs and on the probability classification of the mineral resource and quantities. Therefore, the Group's management has to use its discretion in applying recognition and measurement principles for mineral resources. 

Rehabilitation provisions

The Group assesses the rehabilitation liabilities associated with its mines and production facilities annually. The amount of provision reflects the management's best estimate of the rehabilitation costs. In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to rehabilitate the area and remove or cover the contaminated soil from the site, the expected timing of those costs, and whether the obligations stem from past activity. These uncertainties may cause the actual costs to differ from the provision which has been made.

Standards and interpretations effective and adopted in the current year

The Group applied, for the first time, certain amendments to the standards, which are effective for annual periods beginning on or after 1 January 2021. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective.

Several other amendments apply for the first time in 2021. However, they do not impact the annual consolidated financial statements of the Group or the interim condensed consolidated financial statements of the Group and, hence, have not been disclosed.

The nature and the effect of these changes are disclosed below. Although the new standards and amendments applied for the first time in 2021, they did not have a material impact on the annual consolidated financial statements of the Group. Other than the changes described below, the accounting policies adopted are consistent with those of the previous financial year.

In 2021, the Group has adopted the following amended standards issued by the IASB. 

adopted the following amended standards issued by the IASB. 

- Interest Rate Benchmark Reform - Phase 2 - Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16.

 The amendment provides temporary reliefs related to financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative nearly risk-free rate (RFR).

The above changes did not have an impact on the 2021 consolidated financial statements and they are not expected to have any impact in the 2022 consolidated financial statements.

Standards and interpretations not yet effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group's financial statements that the Group reasonably expects will have an impact on its disclosures, financial position or performance when applied at a future date, are disclosed below. The Group intends to adopt these standards when they become effective. Of the other standards and interpretations that are issued, but not yet effective, as these are not expected to impact the Group, they have not been listed.

- Amendments to IAS 1: Classification of Liabilities as Current or Non-current. The amendments to IAS 1 to specify the requirements for classifying liabilities as current or non-current.               

- Amendments to IAS 16: Property, Plant and Equipment: Proceeds before Intended Use. Under the amendment, proceeds from selling items before the related item of PPE is available for use should be recognized in profit or loss, together with the costs of producing those items.                    

- Amendments to IAS 37: Onerous Contracts - Costs of Fulfilling a Contract. Under the amendment, when assessing whether a contract is onerous or loss-making, an entity needs to include both the direct costs as well as incremental costs and an allocation of costs directly related to contract activities.                

- Amendments to IFRS 9:  Fees in the '10 per cent' test for derecognition of financial liabilities  The amendment to IFRS 9 clarifies the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from the terms of the original financial liability to determine whether to derecognise the existing financial liability.                              

- Amendments to IFRS 3: Reference to the Conceptual Framework. The amendments are intended to replace a reference to the Framework for the Preparation and Presentation of Financial Statements, issued in 1989, to an updated version issued in 2018 without significantly changing its requirements.                     

- Additionally IFRS 17 Insurance contracts and amendments to IFRS 1 and IAS 41 have been issued but they will not have an impact on Afarak Group financial statements.                              

The new and amended standards that become effective of 1 January 2022 or later are not expected to have an impact on Afarak Group Oyj consolidated financial statements.

1.3 GOING CONCERN

Price and market have finally recovered which helped the Specialty Alloys segment performance return to profits. As long as no major  disruptions occur ,  due to the Russian invasion of Ukraine, both stainless steel and special steel producers will continue to fill up their order books. LC FeCr prices have increased by around 20% when comparing the average prices in H1 2021 with H2 2021. These prices continued to increase in the first months of 2022 and our order books are filling up quickly. 

The unprofitable operations in South Africa have been discontinued, and our mining activity is still reduced. 

The Group restructured a short-term commercial debt into a longer-term arrangement. 

The company is actively pursuing new funding opportunities via some divesting opportunities. All in all, the management and board are positive about the future of Afarak. 

It is still unknown whether the COVID-19 epidemic would create any further damage that cannot be forecasted at this moment. Also recent geopolitical developments may impact the continuity of economic activities, on a global level.

1.4 BUSINESS COMBINATIONS AND ACQUISTION OF NON-CONTROLLING INTERESTS

1.4.1 Financial Year 2021

During the first half of 2021, Afarak acquired a further 20% of the shares in Chromex Mining Company (Pty) Ltd, in exchange for total consideration of 7,088,608 shares in Afarak Group Plc. Afarak now holds 94% interest in the company.  

1.4.2 Financial Year 2020

Afarak did not carry out any acquisitions during the financial year 2020. 

1.5 IMPAIRMENT TESTING

General principles of impairment testing

Afarak Group has carried out impairment testing on goodwill and other assets as of 31 December 2021. The following cash generating units were defined for the impairment testing:

• Speciality Alloys business (Türk Maadin Sirketi and Elektrowerk Weisweiler) with a vertically integrated mining-beneficiation-smelting-sales operation in the specialty grade ferrochrome business; 

• South African mining business (Mecklenburg, Valkpoort and Zeerust);

The Group assesses at the end of each reporting period whether there is any indication that assets may be impaired. If any such indication exists, the recoverable amount of these assets is estimated. Moreover, the recoverable amount of any goodwill and unfinished investment projects will be estimated annually, irrespective of whether there is an indication of impairment. The South African mining business did not have any goodwill at the end of the financial year 2021.

During 2021, there were no indication of impairment at both the Speciality Alloys business and the South African mining business.

The Vlakpoort mine and Zeerust mine were not tested for impairment as there were no indication of impairment.

Changes in goodwill during 2021

During the financial year 2021, the total goodwill of the Group decreased by EUR 3.9 million to a total of EUR 46.0 million. The decrease was attributable to an exchange rate movement of EUR 3.9 million related to Goodwill. 

In 2014, the synergy goodwill identified in the Mogale acquisition, related to Afarak Trading acting as a global sales entity for the whole Group, was initially allocated to Speciality Alloys segment. Afarak Trading contribution is divided to both segments to reflect the nature of serving the whole Group. It is allocated to both segments based on their relative revenue, reflecting the volume of Afarak Trading related benefits enjoyed by the CGU. The changes are described below:

The changes in goodwill during 2020 are presented below:

Goodwill as a ratio of the Group's equity on 31 December 2021 and 31 December 2020 was as follows:

Impairment on long term assets

In 2021, there were no impairment write down on other long term assets.

Methodology applied in impairment testing

For the cash generating units that were tested, the test was carried out by calculating their value in use. Value in use has been calculated by discounting estimated future net cash flows based on the conditions and assumptions prevailing at the time of the testing. Future cash flows for the Speciality Alloys minerals processing have been projected for a five-year period, after which a growth rate equaling projected long-term inflation has been applied (Speciality Alloys: 2%). For the terminal year after the five-year estimation period, the essential assumptions (e.g. revenue, variable costs and fixed costs) have been based at the estimation period's previous year's figures. Future cash flows for the South African mining business have been projected for the life of mine with a 6.0% growth rate equaling projected long-term inflation has been applied.

The weighted average cost of capital (WACC) has been calculated separately for each cash generating unit and assets being tested, taking into account each business's typical capital structures, investors' average required rate of return for similar investments and company size and operational location related factors, as well as risk-free interest rates and margins for debt financing. The Group has used publicly available information on the peer group companies' capital structure, risk premium and other factors. The market interest rates reflect the rates applicable on 31 December 2021.

The information used in the 31 December 2021 impairment testing is based on business units' management future forecasts, on general third-party industry expert or analyst reports where available, and to the extent possible on the current business and asset base excluding any non-committed expansion plans. Forecasted sales volumes and profitability are based on the management's view on future development while also taking past performance into account. Price forecasts are based on forecasted prices for all cash generating units, but South African mining business USD-based price forecast was adjusted for assumed Rand devaluation. The management's approach in preparing cash flow forecasts has not changed significantly from the previous impairment testing.