WESTMORELAND COAL 8K Entry into a Material Definitive Agreement | WLBAQ 23 Jan 14

Exhibit 99.4

HISTORICAL FINANCIAL INFORMATION OF PMRL AND CVRI

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Interim condensed combined consolidated statement of financial position

(Unaudited)


Canadian $ thousands, as at		Note		September 30, 2013		December 31, 2012
ASSETS
Current assets
Cash and cash equivalents				$	794	$	7,804
Short-term investments					5,984		—
Trade accounts receivable					51,701		68,721
Loans receivable					3,552		3,846
Other assets			5		1,188		814
Finance lease receivables			6		16,626		24,995
Inventories			7		132,382		141,716
Prepaid expenses					8,368		3,521
Due from related parties			8		—		242
Income taxes recoverable					1,612		3,365

					222,207		255,024
Non-current assets
Loans receivable					15,123		16,000
Other assets			5		16,659		16,660
Finance lease receivables			6		162,207		187,286
Property, plant and equipment			9		457,819		451,536
Intangible assets			10		610,552		629,444
Deferred income taxes					—		3,687

					1,262,360		1,304,613

				$	1,484,567	$	1,559,637
	��
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Trade accounts payable and accrued charges				$	78,071	$	73,089
Other liabilities			12		48,802		48,614
Environmental rehabilitation obligations			13		21,081		31,728
Due to related parties			8		22,118		364

					170,072		153,795
Non-current liabilities
Loans and borrowings			11		4,978		42,955
Other liabilities			12		114,065		165,223
Environmental rehabilitation obligations			13		141,732		142,978
Related party loans			8		732,094		732,094
Deferred income taxes					145,752		148,419

					1,138,621		1,231,669

					1,308,693		1,385,464
Shareholder’s equity
Shareholder’s equity					175,874		174,173

				$	1,484,567	$	1,559,637

The accompanying notes are an integral part of these interim condensed combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Interim condensed combined consolidated statement of (loss) earnings and comprehensive (loss) income

(Unaudited)


			For the 3 months ended						For the 9 months ended
Canadian $ thousands,	Note		September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Revenue		15	$	174,768		$	236,970		$	570,679		$	732,501
Cost of sales		16		169,559			228,527			541,178			674,903

Gross profit				5,209			8,443			29,501			57,598

Administrative expenses				6,526			1,181			15,321			9,891
Gain on contract termination		4		—			—			(33,868	)		—

Operating (loss) profit				(1,317	)		7,262			48,048			47,707

Financing income		17		(3,315	)		(5,650	)		(10,719	)		(14,537	)
Financing expense		17		19,096			20,844			59,566			58,964

Net finance expense				15,781			15,194			48,847			44,427

(Loss) earnings before tax				(17,098	)		(7,932	)		(799	)		3,280
Income tax (recovery) expense		14		(4,138	)		(1,867	)		87			1,770

Net (loss) earnings			$	(12,960	)	$	(6,065	)	$	(886	)	$	1,510

Other comprehensive income
Items that will not be subsequently reclassified to profit or loss;
Actuarial gains on pension plans, net of tax				84			1,747			2,587			2,144

Total comprehensive (loss) income			$	(12,876	)	$	(4,318	)	$	1,701		$	3,654

The accompanying notes are an integral part of these interim condensed combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Interim condensed combined consolidated statement of changes in shareholder’s equity

(Unaudited)


Canadian $ thousands	Common shares		Contributed surplus		Accumulated deficit			Accumulated other comprehensive loss			Total
Balance as at January 1, 2012	$	657,120	$	2,028	$	(504,922	)	$	(20,812	)	$	133,414
Net earnings		—		—		1,510			—			1,510
Actuarial gain on defined benefit obligations		—		—		—			2,144			2,144
Share issuance		51,340		—		—			—			51,340

Balance as at September 30, 2012		708,460		2,028		(503,412	)		(18,668	)		188,408
Net loss		—		—		(6,749	)		—			(6,749	)
Actuarial loss on defined benefit obligations		—		—		—			(7,486	)		(7,486	)

Balance as at December 31, 2012		708,460		2,028		(510,161	)		(26,154	)		174,173
Net loss		—		—		(886	)		—			(886	)
Actuarial gain on defined benefit obligations		—		—		—			2,587			2,587
Reclassification of actuarial losses on settlement of pension obligation		—		—		(22,842	)		22,842			—

Balance as at September 30, 2013	$	708,460	$	2,028	$	(533,889	)	$	(725	)	$	175,874

The accompanying notes are an integral part of these interim condensed combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Interim condensed combined consolidated statement of cash flow

(Unaudited)


			For the 3 months ended						For the 9 months ended
Canadian $ thousands,	Note		September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Operating activities
Net (loss) earnings				(12,960	)		(6,056	)		(886	)		1,510
Add (deduct)
Depreciation and amortization				27,267			37,031			80,754			90,151
Environmental rehabilitation obligations accretion		13		684			494			1,908			1,731
Environmental rehabilitation obligations change in estimate		13		(1,533	)		(887	)		(9,861	)		(2,668	)
Stock based compensation expense				23			81			147			27
Inventory impairment				464			—			1,283			6,866
Gain on Highvale pension		4		—			—			(39,326	)		—
Loss on Highvale intangible assets		4		—			—			5,458			—
Current income tax recovery				—			(2,399	)		(341	)		(4,790	)
Deferred income tax (recovery) expense				(4,138	)		532			428			6,560
Unrealized foreign exchange (gain) loss				(935	)		804			1,158			990
Gain on financial instruments				—			(523	)		—			(744	)
Gain on disposal of property, plant and equipment				(246	)		(111	)		(230	)		(1,313	)
Loss on settlement of environmental rehabilitation obligations		13		1,702			776			3,948			3,369
Employee benefits recovery				(87	)		(3,216	)		(688	)		(3,505	)
Environmental rehabilitation obligations settled		13		(6,281	)		(5,210	)		(17,448	)		(19,567	)
Financing expense				2,555			2,830			7,612			7,528
Financing expense, related parties				15,488			15,531			46,213			46,308
Financing income				(3,314	)		(5,651	)		(10,719	)		(14,538	)
Other items				1,128			460			6,557			1,521

				19,817			34,486			75,967			119,436
Net change in non-cash working capital		18		15,615			(1,583	)		21,188			(63,307	)
Interest received				3,339			8,130			10,880			14,102
Interest paid, related parties				(8,200	)		(12,089	)		(24,336	)		(44,378	)
Interest paid				(2,603	)		(1,956	)		(7,655	)		(7,578	)
Income tax (paid) recovered				1,335			(885	)		2,109			(6,750	)

Cash provided by operating activities				29,303			26,103			78,153			11,525

Investing activities
Property, plant and equipment expenditures				(6,643	)		(16,180	)		(33,251	)		(42,431	)
Purchase of short-term investments				(20,000	)		(84,799	)		(5,984	)		(111,799	)
Redemption of short-term investments				18,006			81,808			—			108,808
Net proceeds from sale of property, plant and equipment				246			472			4,958			2,393
Increase in loans receivable				(616	)		(840	)		(1,769	)		(2,121	)
Repayments of loans receivable				947			923			2,940			2,825

Cash used in investing activities				(8,060	)		(18,616	)		(33,106	)		(42,325	)

Financing activities
Proceeds from related party loan				—			—						325,000
Issuance of common shares				—			—			—			51,340
Repayment of subordinated note				—			—			—			(359,000	)
Repayments of loans and borrowings				(10,005	)		(6,504	)		(37,977	)		(4,262	)
Payment of financing fees on loans and borrowings				—			(419	)		—			(2,714	)
Repayment of intercorporate loan				—			(108	)		—			(108	)
Increase in finance lease receivables				(665	)		(3,044	)		(6,288	)		(5,677	)
Repayment of finance lease receivables				4,670			6,083			39,736			18,312
Repayments of other equipment financing arrangements				(591	)		(710	)		(1,939	)		(2,771	)
Repayment of finance lease obligations				(10,872	)		(10,867	)		(45,589	)		(32,778	)

Cash used in financing activities				(17,463	)		(15,569	)		(52,057	)		(12,658	)

Change in cash and cash equivalents				3,780			(8,082	)		(7,010	)		(43,458	)
Cash and cash equivalents, beginning of period				(2,986	)		27,707			7,804			63,083

Cash and cash equivalents, end of period			$	794		$	19,625		$	794		$	19,625

The accompanying notes are an integral part of these interim condensed combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

NOTES TO THE INTERIM CONDENSED COMBINED CONSOLIDATED

FINANCIAL STATEMENTS

For the 3 month and 9 month periods ended September 30, 2013

(Unaudited)

1. NATURE OF OPERATIONS AND CORPORATE INFORMATION

Prairie Mines & Royalty Ltd. (“PMRL”) is Canada’s largest coal producer, operating seven surface mines in Alberta and Saskatchewan, and is a wholly owned subsidiary of Sherritt International Corporation (“Sherritt”). PMRL supplies domestic utilities with thermal coal for electricity generation and has abundant, high-quality and strategically located reserves in Canada that are suited to providing customers with a stable, low-cost, long-term fuel supply. PMRL owns and operates the Paintearth, Sheerness, Genesee (50% interest), Poplar River, Boundary Dam and Bienfait mines, and operates the Highvale mine under contract.

On January 10, 2013, PMRL and its Highvale mine contract customer agreed to transfer operations to the customer who owns the mine and terminate the mining contract. On January 17, 2013 the customer assumed responsibility for direct mining activities and a transition process was completed July 9, 2013.

PMRL directly owns a 50% joint venture interest in the Bienfait Activated Carbon Joint Venture, which produces activated carbon for the removal of mercury from flue gas, and sells char to the barbeque briquette industry from the Bienfait Char facility. PMRL also holds a portfolio of mineral rights located in Alberta and Saskatchewan from which it earns royalties on the production of coal, potash and other minerals.

Coal Valley Resources Inc. (“CVRI”) is an incorporated company established under the laws of the Province of Alberta on May 10, 2006. CVRI is a wholly owned subsidiary of Sherritt. CVRI operates two surface mines at the Coal Valley and Obed Mountain mines where the majority of coal is exported overseas to Asian utility companies and commodity traders. CVRI’s sole product is bituminous coal which has a suitable calorific value to make its sale overseas economical. Obed Mountain’s operations were suspended in November 2012.

PMRL and CVRI (collectively the “Company”) are domiciled in Edmonton, Alberta, Canada and their registered office is 1600 Oxford Tower, 10235 – 101 Street, Edmonton, Alberta, T5J 3G1. The interim condensed combined consolidated financial statements were authorized for issue in accordance with a resolution, of the Directors of both PMRL and CVRI, on January 21, 2014.

2. BASIS OF PRESENTATION

The interim condensed combined consolidated financial statements of the Company are prepared in accordance with International Accounting Standard 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain information and footnote disclosures normally included in the annual combined consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the IASB, have been omitted or condensed.

The interim condensed combined consolidated financial statements are prepared on a going concern basis, under the historical cost convention, and are presented in Canadian dollars, which is the Company’s functional and presentation currency. All financial information is presented in Canadian dollars rounded to the nearest thousand except as otherwise noted.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim condensed combined consolidated financial statements have been prepared using the same accounting policies and methods of computation as the annual combined consolidated financial statements of the

Company as at and for the year ended December 31, 2012, with the exception of the impact of certain amendments to accounting standards or new interpretations issued by the IASB as noted below, which were applicable from January 1, 2013.

As disclosed in the December 31, 2012 annual combined consolidated financial statements, effective January 1, 2013, the Company adopted, as required, IFRS 10, “Consolidated Financial Statements” (“IFRS 10”), IFRS 11, “Joint Arrangements” (“IFRS 11”), IFRS 12, “Disclosure of Interests in Other Entities” (“IFRS 12”) as well as the amendments to IAS 28, “Investments in Associates and Joint Ventures” (“IAS 28”).

With respect to IFRS 10, 11, 12, and IAS 28, the Company performed a comprehensive review of its consolidation methodology as well as its interests in other entities and determined that the adoption of the standards above did not result in a change in the consolidation status of its subsidiaries and investees and that there has been no impact on the recognized assets, liabilities and comprehensive income of the Company with the application of these standards. The new significant accounting policies are as follows:

Effective January 1, 2013, the Company adopted, as required, IFRS 13, “Fair Value Measurement” (“IFRS 13”) and applied the standard prospectively as required by the transitional provisions. The standard provides a consistent definition of fair value and introduces consistent requirements for disclosures related to fair value measurement. There has been no change to the Company’s methodology for determining the fair value for its financial assets and liabilities and, as such, the adoption of IFRS 13 did not result in any measurement adjustments as at January 1, 2013.

Effective January 1, 2013, the Company applied the amendment to IAS 1, “Presentation of Financial Statements” (“IAS 1”), as amended in June 2011. The amendment requires items within OCI to be grouped into two categories: (1) items that will not be subsequently reclassified to profit or loss or (2) items that may be subsequently reclassified to profit or loss when specific conditions are met. The application of the amendment to IAS 1 did not result in any adjustments to other comprehensive income or comprehensive income.

Effective January 1, 2013, the Company complied with the amended disclosure requirements, regarding offsetting financial assets and financial liabilities, found in IFRS 7, “Financial Instruments: Disclosures” issued in December 2011. The application of the amendment had no impact on the Company’s condensed combined consolidated financial statements.

Effective January 1, 2013, the Company adopted, as required, IFRIC 20, “Stripping costs in the production phase of a surface mine.” The standard requires stripping costs incurred during the production phase of a surface mine to be capitalized as part of an asset, if certain criteria are met, and depreciated on a units of production basis unless another method is more appropriate. The adoption of this standard had no impact on the Company’s condensed combined consolidated financial statements

Accordingly, these interim condensed combined consolidated financial statements should be read in conjunction with the combined consolidated financial statements for the year ended December 31, 2012.

Principles of consolidation

These condensed combined consolidated financial statements include the financial position, results of operations and cash flows of the Company, its subsidiaries, and its share of assets, liabilities, revenues and expenses related to its interests in joint operations. Intercompany balances, transactions, income and expenses, profits and losses, including unrealized gains and losses relating to subsidiaries and joint operations have been eliminated on consolidation.

Subsidiaries

Subsidiaries are entities over which the Company has control. Control is defined as when the Company is exposed or has rights to the variable returns from the subsidiary and has the ability to affect those returns though

its power over the subsidiary. Power is defined as existing rights that give the Company the ability to direct the relevant activities of the subsidiary. Subsidiaries are fully consolidated from the date control is transferred to the Company and are de-consolidated from the date control ceases.

Joint arrangements

A joint arrangement is an arrangement whereby two or more parties are subject to joint control. Joint control is considered to be when all parties to the joint arrangement are required to reach unanimous consent over decisions about relevant business activities pertaining to the contractual arrangement.

There are two types of joint arrangements:

Joint ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control and whereby each party has rights to the net assets of the arrangement. Interests in joint ventures are recognized as an investment and accounted for using the equity method of accounting. The Company is not party to any joint ventures.

Joint operations

A joint operation is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control and whereby each party has rights to the assets and obligations for liabilities relating to the arrangement. Interests in joint operations are accounted for by recognizing the Company’s share of assets, liabilities, revenues, and expenses. The Bienfait Activated Carbon Joint Venture is classified as a joint operation.

Associate

An associate is an entity over which the Company has significant influence but does not have the power to participate in the operating and financial policies of the entity. The Company does not have any investments in associates.

4. GAIN ON CONTRACT TERMINATION

On January 10, 2013, the Company and its Highvale mine contract customer agreed to transfer operations to the customer who owns the mine and terminate the mining contract. On January 17, 2013, the customer assumed responsibility for direct mining activities with a transition process which was completed over the following six months.

As part of the transition agreement, the customer assumed all of the Company’s assets and liabilities associated with operating the Highvale mine. The Company earned $4,153 in net earnings from the customer during the first nine months of fiscal 2013 as operations were transferred during the notice period. For the nine month period ended September 31, 2012 the mining contract contributed $6,581 to the Company’s earnings. The Company also received $13,418 in cash from the customer upon transfer of mobile equipment at net book value following payment of the associated finance lease obligation. No accounting gain or loss resulted from this net tangible asset transfer.

Amounts included in the condensed combined consolidated statement of financial position relating to the Highvale mine are as follows:


Canadian $ thousands, as at	September 31 2013		December 31, 2012
Accounts receivable	$	—	$	3,466
Finance lease receivables		—		25,870
Intangible assets		—		17,316

Total assets		—		46,652

Trade accounts payable and accrued charges		—		1,030
Finance lease liabilities		—		13,951
Other non-financial liabilities		—		40,346

Total liabilities		—		55,327

Total net assets	$	—	$	8,675

As a result of this event, a non-cash write-off of $5,458 (Note 10) was recognized in January 2013 related to the Highvale mining contract and customer relationship intangible assets. Additionally, in January 2013 a $39,326 non-cash gain was recognized upon transfer of the hourly employee defined benefit pension liability to the customer. Measurement of this gain was based on the actuarial valuation of the plan at the time of transfer. As a result of the above, management recorded a net gain on the transfer of operations of $33,868.

5. OTHER ASSETS


Canadian $ thousands, as at	September 30, 2013			December 31, 2012
Deferred reclamation recoveries	$	7,804		$	9,007
Deferred financing charges		1,792			2,361
Long-term tax receivable		626			626
Pension recoveries		6,770			5,344
Other		855			136

		17,847			17,474
Current portion of other assets		(1,188	)		(814	)

	$	16,659		$	16,660

6. FINANCE LEASE RECEIVABLES


Canadian $ thousands, as at	September 30, 2013						December 31, 2012
Canadian $ thousands, as at	Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments
Less than one year	$	28,666	$	12,040	$	16,626	$	32,480	$	7,485	$	24,995
Between one and five years		101,679		35,436		66,243		104,458		21,980		82,478
More than five years		117,245		21,281		95,964		122,085		17,277		104,808

	$	247,590	$	68,757	$	178,833	$	259,023	$	46,742	$	212,281

7. INVENTORIES


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Uncovered coal	$	9,445	$	8,282
Finished product		64,498		76,878

		73,943		85,160
Spare parts and operating materials		58,439		56,556

	$	132,382	$	141,716

For the three and nine month periods ended September 30, 2013, the cost of inventories recognized as an expense and included in cost of sales was $156,795 and $489,282, respectively ($164,721 and $488,750 for the three and nine month periods ended September 30, 2012, respectively). Depreciation and amortization included in inventories at September 30, 2013 totaled $6,470 (December 31, 2012—$6,264).

8. RELATED PARTY TRANSACTIONS

Related party loans


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Subordinated note^(a)	$	377,094	$	377,094
Promissory note^(b)		325,000		325,000
Loan payable^(c)		30,000		30,000

	$	732,094	$	732,094

^a)	Relates to the Sherritt subordinated note from PMRL bearing interest at an annual rate of interest of 8.15%. The note is unsecured and due on June 27, 2026.

^b)	Relates to a promissory note payable to Sherritt from CVRI bearing interest at an annual rate of interest of 9.00%. The note is unsecured and due on March 30, 2022.

^c)	Relates to a loan payable to Sherritt from CVRI bearing interest at an annual rate of interest of 6.00%. The loan is unsecured and is due on June 30, 2017.

Loan interest expense


	For the 3 months ended				For the 9 months ended
Canadian $ thousands,	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Sherritt^(a)	$	7,747	$	7,725	$	22,987	$	34,919
Sherritt^(b)		7,372		7,353		21,877		9,990
Sherritt^(c)		454		456		1,349	$	1,397

^a)	Relates to interest expense paid on the subordinated note described above.

^b)	Relates to accrued interest on promissory note described above.

^c)	Relates to interest expense paid on the loan payable described above.

Management and administrative services


Canadian $ thousands,	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Sherritt and other related parties	$	332	$	807	$	1,456	$	2,510

termination under certain conditions. Pursuant to the MSAs, Sherritt agrees to provide or arrange for provision of management, administrative and support services, including the reimbursement of third-party expenditures incurred related to these services, to the Company, at amounts which are determined and agreed to by the related parties. As part of the same MSAs, the Company charges other related parties in the Sherritt group for provision of management, administrative and support services, including the reimbursement of third-party expenditures incurred related to these services, at cost. These transactions are in the normal course of operations.

As described in Note 19, the Company holds a 50% direct interest in the Bienfait Activated Carbon Joint Venture from which it earns operating service fees. For the three and nine month periods ending September 30, 2013, operator service fees were $1,761 and $5,458, respectively, ($1,487 and $4,880 for the three and nine month periods ending September 30, 2012, respectively).

Due from related parties


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Sherritt and other related parties^(a)	$	—	$	242

^a)	Relates to payments made or received on behalf of entities owned by Sherritt for the provision of shared services described within this note. The amounts are non-interest bearing, due on demand and unsecured.

Due to related parties


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Sherritt and other related parties^(a)	$	241	$	364
Sherritt^(b)		21,877		—

	$	22,118	$	364

^a)	Relates to payments made or received on behalf of entities owned by Sherritt for the provision of shared services described within this note. The amounts are non-interest bearing, due on demand and unsecured.

^b)	Relates to accrued interest on promissory note described above.

9. PROPERTY, PLANT AND EQUIPMENT


Canadian $ thousands	September 30, 2013
Canadian $ thousands	Mining properties			Plant, equipment and land			Total
Cost
Balance, beginning of the period	$	518,795		$	874,351		$	1,393,146
Additions		14,856			56,787			71,643
Capitalized closure costs		12,590			(3,231	)		9,359
Disposals		(89	)		(14,405	)		(14,494	)

Balance, end of the period		546,152			913,502			1,459,654

Depreciation and impairment losses
Balance, beginning of the period		425,901			515,709			941,610
Additions		20,963			48,736			69,699
Disposals		(89	)		(9,385	)		(9,474	)

Balance, end of the period		446,775			555,060			1,001,835

Net book value	$	99,377		$	358,442		$	457,819


Canadian $ thousands	December 31, 2012
Canadian $ thousands	Mining properties			Plant, equipment and land			Total
Cost
Balance, beginning of the year	$	459,765		$	802,545		$	1,262,310
Additions		19,430			96,263			115,693
Capitalized closure costs		41,949			(147	)		41,802
Disposals		(2,349	)		(24,310	)		(26,659	)

Balance, end of the year		518,795			874,351			1,393,146

Depreciation and impairment losses
Balance, beginning of the year		375,076			483,176			858,252
Additions		53,023			55,577			108,600
Disposals		(2,198	)		(23,044	)		(25,242	)

Balance, end of the year		425,901			515,709			941,610

Net book value	$	92,894		$	358,642		$	451,536

Assets under finance lease included in above


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Mobile mining equipment	$	148,452	$	142,842

10. INTANGIBLE ASSETS


Canadian $ thousands	September 30, 2013
Canadian $ thousands	Royalty agreements		Mining contracts			Total
Cost
Balance, beginning of the period	$	479,000	$	236,000		$	715,000
Impairment		—		(7,000	)		(7,000	)

Balance, end of the period		479,000		229,000			708,000

Amortization and impairment losses
Balance, beginning of the period		50,843		34,713			85,556
Amortization for the period		8,171		5,263			13,434
Impairment		—		(1,542	)		(1,542	)

Balance, end of the period		59,014		38,434			97,448

Net book value	$	419,986	$	190,566		$	610,552

Remaining amortization period
Weighted-average number of years, as at September 30, 2013		39.2		32.2


Canadian $ thousands	December 31, 2012
Canadian $ thousands	Royalty agreements		Mining contracts		Total
Cost
Balance, beginning of the year	$	479,000	$	236,000	$	715,000

Balance, end of the year		479,000		236,000		715,000

Amortization and impairment losses
Balance, beginning of the year		39,946		27,101		67,047
Amortization for the year		10,897		7,612		18,509

Balance, end of the year		50,843		34,713		85,556

Net book value	$	428,157	$	201,287	$	629,444

Remaining amortization period
Weighted-average number of years, as at December 31, 2012		39.9		32.9

On January 17, 2013, the Company recorded a non-cash impairment related to mining contract intangible assets at the Highvale mine after the mining contract was transferred back to the customer (Note 4).

11. LOANS AND BORROWINGS


Canadian $ thousands, as at	September 30, 2013		December 31, 2012
Credit facility agreement	$	4,978	$	42,955
Current portion		—		—

	$	4,978	$	42,955

12. OTHER LIABILITIES


Canadian $ thousands, as at	September 30, 2013			December 31, 2012
Finance lease obligations	$	146,448		$	155,069
Other equipment financing arrangements		5,817			7,719
Stock-based compensation		1,470			1,837
Pension liability		6,625			48,581
Deferred revenue		2,507			631

		162,867			213,837
Current portion of other liabilities		(48,802	)		(48,614	)

	$	114,065		$	165,223

Finance lease obligations


Canadian $ thousands,	September 30, 2013						December 31, 2012
	Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments
Less than one year	$	49,908	$	5,971	$	43,937	$	51,805	$	7,052	$	44,753
Between one and five years		109,419		6,908		102,511		119,653		9,337		110,316

	$	159,327	$	12,879	$	146,448	$	171,458	$	16,389	$	155,069

Other equipment financing arrangements


	September 30, 2013		December 31, 2012
Canadian $ thousands, as at	Present value of minimum lease payments		Present value of minimum lease payments
Less than one year	$	1,709	$	2,363
Between one and five years		4,108		5,356

	$	5,817	$	7,719

Pension liability

PMRL sponsors defined benefit and defined contribution pension arrangements covering substantially all employees. The following tables summarize the significant actuarial assumptions used to calculate the pension expense and obligations under the defined benefit pension plans:


	September 30, 2013			December 31, 2012
	September 30, 2013			December 31, 2012
Plan assets
Expected long-term rate of return on plan assets		6.25	%		6.25	%
Accrued benefit obligation
Discount rate on pension obligations		4.00	%		4.00	%
Average remaining service period of active employees		5-14 years			5-14 years
Benefit costs
Inflation rate		2.50	%		2.50	%
Discount rate on benefit costs		4.60	%		4.60	%
Rate of compensation increases		3.50	%		3.50	%

Approximate asset allocations, by asset category, of the Company’s defined benefit pension plans were as follows:


	September 30, 2013			December 31, 2012
	September 30, 2013			December 31, 2012
Equity securities		63	%		58	%
Debt securities		35	%		41	%
Cash		2	%		1	%

		100	%		100	%

Actuarial reports and updates are prepared by independent actuaries for funding and accounting purposes. Net pension plan expense relating to defined contribution plans, included in cost of sales in the condensed combined consolidated statement of (loss) earnings and comprehensive (loss) income was as follows:

For the 3 months ended

For the 9 months ended

Canadian $ thousands,

September 30,
2013

September 30,
2012

September 30,
2013

September 30,
2012

Defined contribution plan current service cost

2,536

2,584

8,032

8,430

Net pension plan expense relating to defined benefit plans was as follows:


	For the 3 months ended				For the 9 months ended
Canadian $ thousands,	September 30, 2013		September 30, 2012		September 30, 2013			September 30, 2012
Current service cost	$	290	$	1,492	$	1,132		$	4,478
Administrative cost		7		41		21			41
Net interest expense		86		468		333			1,542
Settlement gain		—		—		(39,326	)		—

Total defined benefit plan expense (income)	$	383	$	2,001	$	(37,840	)	$	6,061

Amounts recognized in the condensed combined consolidated statement of financial position are as follows:


Canadian $ thousands	September 30, 2013			December 31, 2012
Accrued benefit obligations
Balance, beginning of period	$	152,607		$	134,849
Current service costs		2,317			5,919
Benefits paid		(2,451	)		(7,370	)
Interest cost		1,476			6,306
Actuarial losses		—			12,903
Acquisitions, settlements and curtailments		(111,647	)		—

Balance, end of period		42,302			152,607

Plan assets
Fair value, beginning of period		104,026			89,653
Employer contributions		2,588			12,946
Benefits paid		(2,451	)		(7,370	)
Interest on assets		1,143			4,310
Administrative cost		(21	)		(58	)
Actuarial gain		2,713			4,545
Acquisitions, settlements and curtailments		(72,321	)		—

Fair value, end of period		35,677			104,026

Net accrued pension liability	$	6,625		$	48,581

Total cash payments for the 3 month and 9 month periods ended September 30, 2013 in respect of the Company’s defined benefit and defined contribution pension plans, consisting of cash payments made by the Company directly to employees, their beneficiaries or estates, payments to the plans, and payments to a third-party service provider on behalf of the employees were $3,214 and $10,807, respectively, (for the 3 and 9 month periods ended September 30, 2012, $6,767 and $14,558 respectively).

13. PROVISIONS

Environmental rehabilitation obligations

The following is a reconciliation of the environmental rehabilitation provision:


Canadian $ thousands	September 30, 2013			December 31, 2012
Balance, beginning of the period	$	174,706		$	154,377
Additions		10,113			41,802
Change in estimates		(10,414	)		(2,616	)
Settled during the period		(13,500	)		(21,157	)
Accretion		1,908			2,300

Balance, end of the period		162,813			174,706
Current portion		(21,081	)		(31,728	)

	$	141,732		$	142,978

Contingencies

On June 4, 2013 CVRI received a favorable ruling in the first phase of an arbitration process for a contract dispute with a port operator. CVRI will now proceed to the final phase of arbitration where a settlement amount will be determined. At September 30, 2013 management could not reasonably estimate the financial impact of this settlement.

14. INCOME TAXES


	For the 3 months ended						For the 9 months ended
Canadian $ thousands,	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Current income tax recovery
Current period	$	—		$	(2,399	)	$	(341	)	$	(4,790	)

Deferred income tax (recovery) expense
Origination and reversal of temporary differences		(4,070	)		532			582			5,889
(Recognition) non-recognition of tax assets (not) previously recognized		(68	)		—			(154	)		177
Other items		—			—			—			494

Deferred income tax (recovery) expense		(4,138	)		532			428			6,560

Income tax (recovery) expense	$	(4,138	)	$	(1,867	)	$	87		$	1,770

15. SEGMENTED INFORMATION


	2013
Canadian $ thousands, for the 3 months ended September 30	Prairie Mining			Mountain Mining			Royalties			Total
Revenue	$	91,137		$	72,485		$	11,146		$	174,768
Cost of sales		88,866			77,865			2,828			169,559

Gross profit (loss)		2,271			(5,380	)		8,318			5,209
Administrative expenses		4,631			1,738			157			6,526

Operating (loss) profit		(2,360	)		(7,118	)		8,161			(1,317	)

Financing income		(3,145	)		(161	)		(9	)		(3,315	)
Financing expense		9,153			9,943			—			19,096

Net finance expense (income)		6,008			9,782			(9	)		15,781

(Loss) earnings before tax		(8,368	)		(16,900	)		8,170			(17,098	)
Income tax (recovery) expense		(1,937	)		(4,262	)		2,061			(4,138	)

Net (loss) earnings for the period	$	(6,431	)	$	(12,638	)	$	6,109		$	(12,960	)

Supplemental information
Depreciation and amortization	$	14,490		$	10,053		$	2,724		$	27,267
Property, plant and equipment expenditures		3,355			3,288			—			6,643

Canadian $ thousands, as at September 30, 2013
Non-current assets		613,020			229,352			419,988			1,262,360
Total assets	$	779,425		$	281,386		$	423,756		$	1,484,567


	2012
Canadian $ thousands, for the 3 months ended September 30	Prairie Mining			Mountain Mining			Royalties			Total
Revenue	$	140,287		$	83,570		$	13,113		$	236,970
Cost of sales		132,074			93,429			3,024			228,527

Gross profit (loss)		8,213			(9,859	)		10,089			8,443
Administrative (recovery) expenses		(608	)		1,689			100			1,181

Operating profit (loss)		8,821			(11,548	)		9,989			7,262

Financing income		(5,641	)		—			(9	)		(5,650	)
Financing expense		18,064			2,780			—			20,844

Net finance expense (income)		12,423			2,780			(9	)		15,194

(Loss) earnings before tax		(3,602	)		(14,328	)		9,998			(7,932	)
Income tax expense (recovery)		1,038			(5,430	)		2,525			(1,867	)

Net (loss) earnings for the period	$	(4,640	)	$	(8,898	)	$	7,473		$	(6,065	)

Supplemental information
Depreciation and amortization	$	12,238		$	22,069		$	2,724		$	37,031
Property, plant and equipment expenditures		11,539			4,641			—			16,180

Canadian $ thousands, as at December 31, 2012
Non-current assets		466,896			210,197			627,520			1,304,613
Total assets	$	622,598		$	304,384		$	632,655		$	1,559,637


	2013
Canadian $ thousands, for the 9 months ended September 30	Prairie Mining			Mountain Mining			Royalties			Total
Revenue	$	302,936		$	229,974		$	37,769		$	570,679
Cost of sales		276,063			255,920			9,195			541,178

Gross profit (loss)		26,873			(25,946	)		28,574			29,501
Administrative expenses		9,241			5,680			400			15,321
Gain on contract termination		(33,868	)		—			—			(33,868	)

Operating profit (loss)		51,500			(31,626	)		28,174			48,048

Financing income		(10,694	)		—			(25	)		(10,719	)
Financing expense		29,904			29,662			—			59,566

Net finance expense (income)		19,210			29,662			(25	)		48,847

(Loss) earnings before tax		32,290			(61,288	)		28,199			(799	)
Income tax (recovery) expense		8,613			(15,641	)		7,115			87

Net (loss) earnings for the period	$	23,677		$	(45,647	)	$	21,084		$	(886	)

Supplemental information
Depreciation and amortization	$	42,530		$	30,053		$	8,171		$	80,754

Property, plant and equipment expenditures		15,256			17,356			—			32,612

Canadian $ thousands, as at September 30, 2013
Non-current assets		613,020			229,352			419,988			1,262,360
Total assets	$	779,425		$	281,386		$	423,756		$	1,484,567


	2012
Canadian $ thousands, for the 9 months ended September 30	Prairie Mining			Mountain Mining			Royalties			Total
Revenue	$	417,627		$	274,218		$	40,656		$	732,501
Cost of sales		385,066			280,139			9,698			674,903

Gross profit (loss)		32,561			(5,921	)		30,958			57,598
Administrative expenses		4,774			4,917			200			9,891

Operating profit (loss)		27,787			(10,838	)		30,758			47,707

Financing income		(14,511	)		—			(26	)		(14,537	)
Financing expense		42,253			16,711						58,964

Net finance expense (income)		27,742			16,711			(26	)		44,427

Earnings (loss) before tax		45			(27,549	)		30,784			3,280
Income tax expense (recovery)		856			(6,860	)		7,774			1,770

Net earnings (loss) for the period	$	(811	)	$	(20,689	)	$	23,010		$	1,510

Supplemental information
Depreciation and amortization	$	36,858		$	45,122		$	8,171		$	90,151

Property, plant and equipment expenditures		18,360			24,071			—			42,431

Canadian $ thousands, as at December 31, 2012
Non-current assets		466,896			210,197			627,520			1,304,613
Total assets	$	622,598		$	304,384		$	632,655		$	1,559,637

Geographic segments

The Company earns revenue from several geographic regions as follows:


	For the 3 months ended				For the 9 months ended
Canadian $ thousands	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Canada	$	100,686	$	149,322	$	332,374	$	447,181
Asia		37,690		80,501		161,526		168,992
United States		5,270		5,796		17,512		12,323
Other foreign countries		31,122		1,351		59,267		104,005

	$	174,768	$	236,970	$	570,679	$	732,501

Significant customers

The Company earns the majority of its coal and royalty revenue from a small number of customers in each segment as follows:


	For the 3 months ended				For the 9 months ended
Canadian $ thousands	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Prairie Mining segment
Revenue	$	95,763	$	134,388	$	300,120	$	406,921
Number of major customers		3		4		3		4

Mountain Mining segment
Revenue	$	58,706	$	56,123	$	117,998	$	170,011
Number of major customers		4		3		2		2

16. COST OF SALES

Cost of sales includes the following select information:


	For the 3 months ended						For the 9 months ended
Canadian $ thousands	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Employee costs	$	49,325		$	64,900		$	152,559		$	202,847
Depreciation and amortization on assets		27,080			36,861			80,273			88,904

Loss on environmental rehabilitation obligations		(1,702	)		(776	)		(3,948	)		(3,369	)

17. NET FINANCE EXPENSE


	For the 3 months ended						For the 9 months ended
Canadian $ thousands	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Interest income on loans and finance lease receivables	$	(3,286	)	$	(5,576	)	$	(10,629	)	$	(14,364	)
Interest income on cash and cash equivalents		(29	)		(74	)		(90	)		(173	)

Total financing income		(3,315	)		(5,650	)		(10,719	)		(14,537	)

Interest expense on Sherritt promissory note		7,372			7,353			21,877			9,990
Interest expense on subordinated note		7,747			7,725			22,987			34,919
Interest expense on finance lease obligations and other equipment financing arrangements		1,953			2,041			5,903			6,127
Interest expense on Sherritt loan payable		455			456			1,349			1,397
Accretion expense on environmental rehabilitation obligations		685			494			1,908			1,731
Interest expense on loans and borrowings		1,093			1,650			3,845			3,448
Other finance charges		170			16			721			138
Foreign exchange (gain) loss		(379	)		1,109			976			1,214
Total financing expense		19,096			20,844			59,566			58,964

Net finance expense	$	15,781		$	15,194		$	48,847		$	44,427

18. NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS


	For the 3 months ended						For the 9 months ended
Canadian $ thousands	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Trade accounts receivable	$	27,708		$	6,971		$	16,896		$	(1,967	)
Inventories		615			(4,338	)		8,456			(29,912	)
Prepaid expenses		(5,128	)		(1,185	)		(7,217	)		(4,113	)
Trade accounts payable and accrued charges		(7,719	)		(3,530	)		2,995			(10,565	)
Due to (from) related parties		139			499			58			(16,750	)

	$	15,615		$	(1,583	)	$	21,188		$	(63,307	)

19. INTEREST IN JOINT VENTURE

PMRL has a contractual arrangement with another company for the production and sale of activated carbon to coal fired utility plants in Canada and the United States. PMRL acts as operator for the plant facilities and the other party conducts marketing activities.

PMRL accounts for its 50% interest in the joint operation by recording its share of the joint operation’s assets, liabilities, revenues and expenses. The following is a summary of PMRL’s interest in the joint operation which has a December 31 reporting date:


Canadian $ thousands	September 30, 2013			December 31, 2012
Current assets	$	3,573		$	5,276
Non-current assets		33,165			34,241
Current liabilities		(750	)		(1,494	)
Non-current liabilities		(679	)		(812	)

Net assets	$	35,309		$	37,211


	For the 3 months ended				For the 9 months ended
Canadian $ thousands	September 30, 2013		September 30, 2012		September 30, 2013		September 30, 2012
Revenue	$	2,775	$	4,511	$	8,961	$	12,181
Expenses		2,566		2,530		6,934		7,331

Net earnings	$	209	$	1,981	$	2,027	$	4,850

20. FINANCIAL RISK AND CAPITAL RISK MANAGEMENT

Risk management policies and hedging activities

The Company is sensitive to changes in commodity prices, foreign-exchange and interest rates. The Company’s Management Committee has overall responsibility for the establishment and oversight of the Company’s risk management framework. Although the Company has the ability to address its price-related exposures through the use of options, futures and forward contacts, it does not generally enter into such arrangements.

Credit risk

The Company’s sale of coal, activated carbon and char exposes it to the risk of non-payment by customers. The Company manages this risk by monitoring the credit worthiness of its customers, covering some exposure through receivables insurance, documentary credit and seeking pre-payment or other forms of payment security from customers with an unacceptable level of credit risk. Although the Company seeks to manage its credit risk exposure, there can be no assurance that it will be successful in eliminating all potential material adverse impacts of such risks.

Liquidity risk

Liquidity risk arises from financial obligations of the Company and in the management of its assets, liabilities and capital structure. The Company manages this risk by regularly evaluating its liquid financial resources to fund current and long-term obligations and to meet its capital commitments in a cost-effective manner. The main factors that affect liquidity include realized sales prices, production levels, cash production costs, working capital requirements, capital-expenditure requirements, scheduled repayments of loans and borrowings, credit capacity and debt and equity capital market conditions. The Company’s liquidity requirements are met through a variety of sources, including cash and cash equivalents, cash generated from operations, existing credit facilities, leases, and debt and equity capital markets.

Based on management’s assessment of its financial position and liquidity at September 30, 2013, the Company will be able to satisfy its current and long-term obligations as they come due.

Financial obligation maturity analysis

The Company’s significant contractual commitments, obligations, and interest and principal repayments on its financial liabilities are as follows:


Canadian $ thousands, as at September 30, 2013	Total		Falling due within 1 year		Falling due between 1-2 years		Falling due between 2-3 years		Falling due between 3-4 years		Falling due between 4-5 years		Falling due more than 5 years
Loans and borrowings	$	5,422	$	137	$	137	$	137	$	5,011	$	—	$	—
Trade accounts payable and accrued charges		78,071		78,071		—		—		—		—		—
Finance lease obligations		159,327		49,908		40,011		32,913		30,551		5,944
Pension obligations		17,526		2,624		2,655		2,688		2,368		1,409		5,782
Other equipment financing		6,281		1,882		1,947		1,306		824		322		—
Operating leases		14,428		4,586		1,173		941		909		909		5,910
Environmental rehabilitation obligations⁽¹⁾		203,793		22,578		23,571		23,571		17,600		17,600		98,873
Due to related parties		241		241		—		—		—		—		—
Related party loans		1,363,839		61,783		61,783		61,783		90,844		59,983		1,027,663

Total	$	1,848,928	$	221,810	$	131,277	$	123,339	$	148,107	$	86,167	$	1,138,228

⁽¹⁾	Environmental rehabilitation obligations are undiscounted.

Market risk

Market risk is the potential for financial loss from adverse changes in underlying market factors, including interest rates and foreign-exchange rates.

Foreign-exchange risk

The Company is exposed to foreign exchange fluctuations on its United States dollar denominated thermal export coal sales and certain finance lease obligations. Fluctuations in the CDN/US exchange rate could materially affect the Company’s net earnings. The Company does not currently use derivative instruments to mitigate these currency risks. Based on revenue denominated in U.S. dollars, a strengthening or weakening of $0.01 in the Canadian dollar to the US dollar, with all other variables held constant, would have a $2,299 unfavorable or favorable impact, respectively, on net earnings. A change in foreign exchange on United States dollar denominated finance lease obligation payments would not materially increase borrowing costs.

Interest rate risk

The Company is exposed to interest rate risk based on its outstanding loans and borrowings and short-term and other investments. A change in interest rates could increase borrowing costs and investment income. Fluctuations in interest rates would not materially affect the Company’s net earnings.

Capital risk management

The Company’s objectives, when managing capital, are to maintain financial liquidity in order to preserve its ability to satisfy financial obligations as they come due and deploy capital to maintain and grow the business.

The Company’s financial strategy is designed to maintain a flexible capital structure consistent with the objectives stated above and to respond to business growth opportunities and changes in economic conditions. In order to maintain or adjust its capital structure, the Company may issue new common shares, repay outstanding debt, issue new debt, refinance existing debt with different characteristics, acquire or dispose of assets, or adjust the amount of cash and short-term investment balances.

The Company is subject to two financial covenants on the credit facility based on the combined financial position of PMRL and CVRI as follows: EBITDA-to-interest expense ratio of not less than 4:1 and total debt-to-EBITDA ratio of no more than 3:1. The Company monitors these covenants on a quarterly basis and is in compliance with them as at and for the period ended September 30, 2013. The Company is also subject to minimum capital requirements as part of its environmental reclamation bonding program with the Alberta provincial government. Other than these two restrictions, the Company is not subject to any other externally imposed capital requirements.

In the definition of capital, which has not changed from the prior year, the Company includes shareholder’s equity, current and non-current loans and borrowings, related party loans and undrawn credit facilities.


Canadian $ thousands	September 30, 2013		December 31, 2012
Shareholder’s equity	$	175,874	$	174,173
Loans and borrowings		4,978		42,955
Undrawn senior credit facility agreement		345,022		307,045
Related party loans		732,094		732,094
Undrawn CAT Finance credit facility agreement		26,708		55,505

	$	1,284,676	$	1,311,772

21. FINANCIAL INSTRUMENTS

Financial instrument hierarchy

Financial instruments at fair value through profit or loss have been ranked using a three-level hierarchy that reflects the significance of the inputs used in determining fair value. The following table identifies the hierarchy levels and values:


Canadian $ thousands, as at	Hierarchy level		2013 September 30		2012 December 31
Held-for-trading, measured at fair value
Cash equivalents		1	$	—	$	5,991
Short-term investments		1		5,984		—

The followings assets have been ranked Level 1 since their market value is readily observable:

Short-term investments

These are liquid Canadian Government treasury bills having original maturity dates of greater than three months and less than one year.

Fair values

As at September 30, 2013, the carrying amounts of cash and cash equivalents, short-term investments, trade accounts receivable, current portion of loans receivable, current portion of other assets, current portion of finance lease receivables, current portion of other liabilities, trade accounts payable and accrued charges are at fair value or approximate fair value due to their immediate or short terms to maturity.

The fair values of non-current loans and borrowings and other liabilities approximate their carrying amount. The fair value of a financial instrument on initial recognition is normally the transaction price, the fair value of the consideration given ore received. The fair values of non-current loans receivable and finance lease receivables are estimated based on discounted cash flows. Due to the use of judgment and uncertainties in the determination of the estimated fair values, these values should not be interpreted as being realizable in the immediate term.

22. SUBSEQUENT EVENTS

On October 31, 2013 a breach of an onsite water containment pond occurred at the Obed Mountain mine. The release consisted of process water, containing water mixed with naturally occurring materials, mainly clay, mud, shale and coal fines. Management is actively monitoring the site and affected downstream area to assess the full extent of environmental damage that has been caused from this incident and will determine an appropriate environmental rehabilitation obligation to record once all pertinent information is known. As part of the divestiture described below, Sherritt will indemnify Westmoreland Coal Company for all costs associated with this incident.

Sherritt announced its divestiture of the coal business for total consideration of $946 million. A group led by Altius Minerals Corp. will acquire Sherritt’s entire royalty portfolio and its interest in coal development assets for cash consideration of $481 million, subject to closing adjustments. Westmoreland Coal Company will acquire Sherritt’s operating coal assets for total consideration of $465 million, comprised of $312 million in cash and the assumption of finance leases presently valued at approximately $153 million, subject to closing adjustments.


		Deloitte LLP
		2000 Manulife Place
		10180 - 101 Street
		Edmonton AB T5J 4E4
		Canada

		Tel: 780-421-3611
Independent Auditor’s Report		Fax: 780-421-3782
		www.deloitte.ca

To the Directors of

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

We have audited the accompanying combined consolidated financial statements of Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc. and their subsidiaries, which comprise the combined consolidated statements of financial position as at December 31, 2012, December 31, 2011 and January 1, 2011, and the related combined consolidated statements of (loss) earnings and comprehensive (loss) earnings, changes in shareholder’s equity and cash flow for the years ended December 31, 2012 and December 31, 2011, and the related notes to the combined consolidated financial statements.

Management’s Responsibility for the Combined Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these combined consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these combined consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the combined consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the combined consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the combined consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the combined consolidated financial position of Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc. and their subsidiaries as at December 31, 2012, December 31, 2011 and January 1, 2011, and the

combined consolidated financial performance and the combined consolidated cash flows for the years ended December 31, 2012 and December 31, 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

LOGO

Chartered Accountants

Edmonton, Canada

January 9, 2014

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Combined consolidated statements of financial position


Canadian $ thousands, as at	Note		December 31, 2012		December 31, 2011		January 1, 2011
					Note 14		Note 14
ASSETS
Current assets
Cash and cash equivalents			$	7,804	$	63,083	$	26,609
Short -term investments				—		—		18,951
Trade accounts receivable				68,721		69,136		65,614
Loans receivable		6		3,846		2,000		4,697
Other assets		7		814		196		196
Finance lease receivables		8		24,995		22,990		20,446
Inventories		9		141,716		110,098		98,072
Prepaid expenses				3,521		4,016		3,272
Due from related parties		10		242		289		680
Income taxes recoverable				3,365		—		—

				255,024		271,808		238,537

Non-current assets
Loans receivable		6		16,000		18,901		14,581
Other assets		7		16,660		15,932		14,476
Finance lease receivables		8		187,286		201,264		200,774
Property, plant and equipment		11		451,536		404,058		365,314
Intangible assets		12		629,444		647,953		666,238
Deferred income taxes		16		3,687		—		—

				1,304,613		1,288,108		1,261,383

			$	1,559,637	$	1,559,916	$	1,499,920

LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
Loans and borrowings		13	$	—	$	54,215	$	27,781
Trade accounts payable and accrued charges				73,089		86,063		79,050
Income taxes payable				—		9,769		—
Other liabilities		14		48,614		47,707		38,221
Environmental rehabilitation obligations		15		31,728		31,876		25,545
Due to related parties		10		364		20,615		24,398

				153,795		250,245		194,995

Non-current liabilities
Loans and borrowings		13		42,955		—		77,111
Other liabilities		14		165,223		148,324		97,713
Environmental rehabilitation obligations		15		142,978		122,501		110,902
Related party loans		10		732,094		766,202		766,202
Deferred income taxes		16		148,419		139,230		141,593

				1,231,669		1,176,257		1,193,521

				1,385,464		1,426,502		1,388,516
Shareholder’s equity
Shareholder’s equity				174,173		133,414		111,404

			$	1,559,637	$	1,559,916	$	1,499,920

The accompanying notes are an integral part of these combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Combined consolidated statements of (loss) earnings and comprehensive (loss) income


Canadian $ thousands, for the year ended	Note		December 31, 2012			December 31, 2011
Revenue		18	$	974,379		$	1,049,544
Cost of sales		19		904,092			919,339

Gross profit				70,287			130,205
Administrative expenses				14,595			16,176

Operating profit				55,692			114,029

Financing income		20		(18,793	)		(18,859	)
Financing expense		20		78,001			77,898

Net finance expense				59,208			59,039

(Loss) earnings before tax				(3,516	)		54,990
Income tax expense		16		1,723			13,976

Net (loss) earnings			$	(5,239	)	$	41,014

Other comprehensive loss
Items that will not be subsequently reclassified to profit or loss;
Actuarial losses on pension plans net of tax of $1,853 (2011 - $6,570)				(5,342	)		(19,004	)

Total comprehensive (loss) income)			$	(10,581	)	$	22,010

The accompanying notes are an integral part of these combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Combined consolidated statements of changes in shareholder’s equity


Canadian $ thousands	Common shares		Contributed surplus		Accumulated deficit			Accumulated other comprehensive loss			Total
	Note 17				Note 14			Note 14			Note 14
Balance as at January 1, 2011	$	657,120	$	2,028	$	(545,936	)	$	(1,808	)	$	111,404
Net earnings		—		—		41,014			—			41,014
Pension adjustments		—		—		—			(19,004	)		(19,004	)

Balance as at December 31, 2011		657,120		2,028		(504,922	)		(20,812	)		133,414
Net loss		—		—		(5,239	)		—			(5,239	)
Pension adjustments		—		—		—			(5,342	)		(5,342	)
Share issuance		51,340		—		—			—			51,340

Balance as at December 31, 2012	$	708,460	$	2,028	$	(510,161	)	$	(26,154	)	$	174,173

The accompanying notes are an integral part of these combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

Combined consolidated statements of cash flow


Canadian $ thousands, for the year ended	Note		December 31, 2012			December 31, 2011
Operating activities
Net (loss) earnings			$	(5,239	)	$	41,014
Add (deduct)
Depreciation and amortization				125,363			109,516
Environmental rehabilitation obligations accretion		15		2,300			3,046
Environmental rehabilitation obligations change in estimate		15		(2,616	)		(7,342	)
Stock based compensation expense				250			158
Inventories impairment loss		9		6,866			—
Current income tax (recovery) expense				(5,632	)		9,769
Deferred income tax expense				7,355			4,207
Unrealized foreign exchange loss				174			—
Loss on financial instruments				—			115
Gain on disposal of property, plant and equipment				(2,317	)		(1,436	)
Loss on settlement of environmental rehabilitation obligations		15		3,321			5,219
Employee benefits recovery				(5,064	)		(3,207	)
Environmental rehabilitation obligations settled		15		(24,478	)		(24,230	)
Financing expense				11,174			9,654
Financing expense, related parties				61,837			61,918
Financing income				(18,793	)		(18,974	)
Other items				2,271			87

				156,772			189,514
Net change in non-cash working capital items		21		(61,035	)		(22,450	)

				95,737			167,064
Interest received				18,928			19,267
Interest paid, related parties				(69,902	)		(54,897	)
Interest paid				(11,215	)		(9,577	)
Income tax (paid) recovered				(7,500	)		2,414

Cash provided by operating activities				26,048			124,271

Investing activities
Property, plant and equipment expenditures				(58,149	)		(22,770	)
Purchase of short-term investments				(111,799	)		(140,841	)
Redemption of short-term investments				111,799			159,792
Net proceeds from sale of property, plant and equipment				2,989			2,890
Net proceeds from sale of financial instruments				—			2,705
Increase in loans receivable				(2,724	)		(1,739	)
Repayments of loans receivable				3,779			3,757

Cash (used in) provided by investing activities				(54,105	)		3,794

Financing activities
Proceeds from related party promissory note				325,000			—
Issuance of common shares				51,340			—
Repayment of related party subordinated note				(359,000	)		—
Repayments of loans and borrowings				(11,260	)		(50,824	)
Payment of financing fees on loans and borrowings				(2,714	)		—
Repayment of related party loan payable				(108	)		—
Increase in finance lease receivables				(6,885	)		(22,986	)
Repayment of finance lease receivables				25,254			23,135
Repayments of other equipment financing arrangements				(3,488	)		(4,173	)
Repayment of finance lease obligations				(45,361	)		(36,743	)

Cash used in financing activities				(27,222	)		(91,591	)

Change in cash and cash equivalents				(55,279	)		36,474
Cash and cash equivalents, beginning of year				63,083			26,609

Cash and cash equivalents, end of year			$	7,804		$	63,083

The accompanying notes are an integral part of these combined consolidated financial statements.

Prairie Mines & Royalty Ltd. and Coal Valley Resources Inc.

NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2012 and December 31, 2011

1. NATURE OF OPERATIONS AND CORPORATE INFORMATION

PMRL and CVRI (collectively the “Company”) are domiciled in Edmonton, Alberta, Canada and their registered office is 1600 Oxford Tower, 10235 – 101 Street, Edmonton, Alberta, T5J 3G1. The combined consolidated financial statements were authorized for issue in accordance with a Director’s resolution on January 9, 2014.

2. BASIS OF PRESENTATION

These combined consolidated financial statements have been prepared to reflect the combined consolidated operations of PMRL and CVRI for the common owner of PMRL and CVRI. All significant intercompany balances and transactions have been eliminated in these combined consolidated financial statements.

The combined consolidated financial statements of the Company were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

The combined consolidated financial statements were prepared on a going concern basis, under the historical cost convention except for certain financial assets which are presented at fair value in Canadian dollars, which is the Company’s functional currency. All financial information is presented in Canadian dollars rounded to the nearest thousands, except as otherwise noted.

The significant accounting policies described in Note 3 were consistently applied to all the periods presented unless otherwise noted.

The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the combined consolidated financial statements are described in Note 4.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

These combined consolidated financial statements include the financial position, results of operations and cash flow of the PMRL and CVRI, their subsidiaries and PMRL’s proportionate interest in the Bienfait Activated Carbon Joint Venture (the “Venture”). All significant intercompany balances and transactions have been eliminated in these combined consolidated financial statements.

Relationship to PMRL

Principal Activity

Geographic location

% Economic interest

Basis of accounting

2012

2011

Bienfait Activated Carbon Joint Venture

Jointly-controlled operation

Joint Venture

Saskatchewan, Canada

Proportionate consolidation

Poplar River Coal Mining Partnership

Subsidiary

Holding Company

Saskatchewan, Canada

100

Full consolidation

Prairie Coal Ltd.

Inactive subsidiary

Holding Company

Alberta, Canada

100

Full consolidation

Willowvan Mining Ltd.

Inactive subsidiary

Holding Company

Alberta, Canada

100

Full consolidation

3718492 Canada Inc.

Inactive subsidiary

Holding Company

Alberta, Canada

100

Full consolidation

PM Finance Inc.

Subsidiary

Holding Company

Alberta, Canada

100

Full consolidation

Relationship to CVRI

Principal Activity

Geographic location

% Economic interest

Basis of accounting

2012

2011

1673943 Alberta Ltd.

Subsidiary

Holding Company

Alberta, Canada

100

Not applicable

Full consolidation

CV Finance Inc.

Subsidiary

Holding Company

Alberta, Canada

100

Full consolidation

Subsidiaries

Subsidiaries are entities over which the Company has control where control is defined as the power to govern financial and operating policies to obtain benefits from its activities. Control is presumed to exist where the Company has a shareholding of more than one half of the voting rights in its subsidiary. The potential impacts of voting rights that are exercisable are considered when assessing whether control exists. Subsidiaries are fully consolidated from the date control is transferred to the Company and are de-consolidated from the date control ceases.

Interests in Joint Ventures

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the sharing of control under contractual agreement, such that significant operating and financing decisions require the unanimous consent of the parties sharing control. PMRL’s interest in the Venture is a jointly-controlled operation. A jointly-controlled operation is a contractual arrangement with other participants to engage in joint activities without establishing a separate entity. Each venturer uses its own assets, incurs its own expenses and liabilities and funds its own participation in the operation.

These combined consolidated financial statements include PMRL’s share of the assets in such ajointly-controlled operation, together with the liabilities, revenue and expenses arising jointly or otherwise from them.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and on deposit in banks as well as all liquid short-term securities with original maturities of three months or less. As at December 31, 2012, cash and cash equivalents consisted of $5,991 in Canadian Government treasury bills (2011 – nil) and $1,813 (2011 – $63,083) of cash on hand and cash on deposit in banks.

Basis of segmented disclosure

The Company’s reportable segments are business units that offer distinct products and services.

•

The Prairie Mining segment, which consists of 5 owned surface mines, sells sub-bituminous and lignite coal to domestic utility customers for electricity generation. PMRL also leases equipment to certain customers and operates a contract mine and a 50% owned mine and operates a char and activated carbon plant.

•

The Mountain Mining segment, which consists of 2 owned surface mines, sells bituminous coal overseas to Asian utility companies and commodity traders.

•

The Royalties segment holds a portfolio of sub-surface mineral rights to coal and potash reserves and resources from which royalty revenue is earned.

When determining its reportable segments, the Company considers qualitative factors, such as the nature of the operations which are considered to be significant by the Chief Operating Decision Maker (senior management). The Company also considers quantitative thresholds when determining operating segments, such as if revenue, earnings (loss) or assets of the operating segment are greater than 10% of the total combined consolidated revenue, net earnings (loss), or assets of all the reportable segments, respectively. The reportable segments’ financial results are reviewed by senior management.

Revenue recognition

Revenue from the sale of goods and services is recognized when the Company has transferred to the buyer the significant risks and rewards of ownership of the goods, the Company retains neither continuing managerial involvement nor effective control over the goods sold, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Prairie Mines & Royalty Ltd.

In PMRL, these criteria are generally met for coal sales to utility customers when the coal is delivered to the generating station; for coal and char sales to other customers, this occurs when the coal and char is loaded for transportation at the mine; for activated carbon sales, this generally occurs when the product is delivered to the customer’s specified facilities.

The agreements at the contract mine and the 50% owned mine include management and other fees and reimbursement of direct operating costs. PMRL is the principal in these agreements and records revenues and expenses on a gross basis. Management and other fees are recorded as revenue when the contractual conditions for reimbursement are met, the amount of revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to PMRL, and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Finance lease income is recorded in financing income, and realized over the term of the lease, which is the useful life of the leased equipment based on a constant periodic rate of return determined at the inception of the arrangement on PMRL’s net investment in the finance lease.

Interest revenue is recognized using the effective interest method. Royalty revenue is recognized when the underlying commodity is extracted.

Coal Valley Resources Inc.

In CVRI, these criteria are generally met for export sales when the coal has been loaded onto marine vessels at the port. For domestic coal sales to utility customers, revenue recognition occurs when the coal is loaded for transportation on rail cars at the mine.

Foreign currency translation

These combined consolidated financial statements are presented in Canadian dollars, the Company’s functional and presentation currency.

Translation of transactions and balances

Transactions denominated in foreign currencies are translated at rates of exchange at the time of such transactions as follows:

•

Monetary assets and liabilities are translated at current rates of exchange with the resulting gains or losses recognized within net financing income (expense) in the combined consolidated statements of comprehensive income (loss);

•

Non-monetary items are translated at historical exchange rates; and

•

Revenue and expense items are translated at the average rates of exchange, except depreciation and amortization which are translated at the rates of exchange applicable to the related assets, with any gains or losses recognized within net financing income (expense) in the combined consolidated statements of comprehensive income (loss).

Property, plant and equipment

Property, plant and equipment, is recorded at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Also included in the cost of property, plant and equipment are borrowing costs on qualifying capital projects. These are incurred while construction is in progress and before the commencement of commercial production. Once construction of an asset is substantially complete and is ready for its intended use, the costs are depreciated.

Plant, equipment and land

Plant, equipment and land include land, assets under construction, equipment and processing and other manufacturing facilities.

The Company recognizes major spare parts as capital spares in plant and equipment when the item’s unit cost is significant and is expected to be used for a period greater than one year once attached to the equipment it relates to. The Company does not depreciate capital spares until they are put into use. Capital spares that can only be used in connection with a specific piece of equipment are considered critical spares. Critical spares are depreciated using the straight-line method over their estimated useful life once purchased. Major inspections and overhauls that are required for plant and equipment are only capitalized if the expected benefit to be received from completing such work exceeds one year.

Plant and equipment are depreciated using the straight-line method over their estimated useful lives once they are available for use. Equipment may consist of components having different useful lives for which depreciation is separately recorded. Costs are componentized to the extent they meet certain recognition criteria. When a component is replaced, the carrying amount of the replaced component is derecognized with any gain or loss on proceeds included in net earnings.

Environmental rehabilitation obligation assets relate to the rehabilitation obligations of permanent structures and are amortized over the life of the related long-lived asset.

Repairs and maintenance costs related to plant and equipment are expensed as incurred.

The useful lives of the Company’s plant and equipment are as follows:


Plant and buildings		5 – 40 years
Machinery and equipment		3 – years
Equipment under capital lease		3 – 7 years
Environmental rehabilitation obligation assets		1 month – 40 years

Mining properties

Mining properties include acquisition costs and development costs related to mines in production, properties under development, and properties held for future development. Ongoing pre-development costs relating to properties held for future development are expensed as incurred, including property carrying costs, drilling and other exploration costs. Once a project is determined to be commercially viable, development costs are capitalized. Acquisition costs for properties to be held for future development are capitalized. Development costs incurred to access reserves at producing properties and properties under development are capitalized and amortized on a unit-of-production basis over the life of such reserves. Reserves are measured based on proven and probable reserves.

De-recognition

An item of property, plant and equipment is derecognized either upon disposal or when no future economic benefit is expected to be realized from it. Any resulting gain or loss is calculated as the difference between disposal proceeds less its carrying amount and is included in net earnings during the period the item is de-recognized.

Capitalization of borrowing costs

Borrowing costs on funds directly attributed to the financing of the acquisition, construction or production of a qualifying asset and are capitalized until such time as substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. A qualifying asset is one that takes a substantial period of time to prepare for its intended use. Where surplus funds out of money borrowed specifically to finance a project are invested to earn interest income, the income generated is also capitalized to reduce the total capitalized borrowing costs.

Where the funds used to finance a project form part of general borrowings, interest is capitalized based on the weighted-average interest rate applicable to the general borrowings outstanding during the period of construction.

Leases

Leases of property, plant and equipment are classified as finance leases when the Company retains substantially all the risks and rewards of ownership. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.

PMRL as a lessor

The finance lease receivables are measured at the present value of the future lease payments at the inception of the arrangement. Lease payments received are comprised of a repayment of principal and finance income. Finance income is recognized based on the interest rate implicit in the finance lease. PMRL recognizes finance income over a period of between 3 and 27 years, which reflects a constant periodic return on the lessor’s net investment in the finance lease. Initial direct costs are included in the initial measurement of the finance lease receivable and reduce the amount of income recognized over the lease term.

PMRL and CVRI as a lessee

Finance leases are capitalized at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding lease obligations, net of finance charges, are recorded as interest bearing liabilities. Each lease payment is allocated between the liability and financing expense when paid.

Operating lease payments (net of any amortization of incentives) are expensed as incurred. Incentives received from the lessor to enter into an operating lease are capitalized and depreciated over the life of the lease.

Determining whether an arrangement contains a lease

The Company determines whether a lease exists at the inception of an arrangement. A lease exists when one party is effectively granted control of a specific asset over the term of the arrangement.

At inception or upon reassessment of arrangements containing leases, the Company separates payments and other consideration required related to lease payments from those related to other goods or services using relative fair value or other estimation techniques.

Overburden removal costs

The costs of removing overburden to access mineral reserves, referred to as stripping costs, are accounted for as variable production costs to be included in the cost of inventory, unless overburden removal creates value beyond providing access to the underlying reserve, in which case these costs are capitalized and depreciated using the units-of-production basis to cost of sales over the life of the related mineral reserves.

Intangible assets

Intangible assets acquired as part of a business combination are recognized separately from goodwill if the asset is separable or arises from contractual or legal rights. Intangible assets are also recognized when acquired individually or with a group of other assets. Intangible assets are initially recorded at their estimated fair value. Intangible assets with a finite life are amortized over their useful economic lives on a straight-line or units-of-production basis, as appropriate. The amortization expense is included in cost of sales unless otherwise noted. Intangible assets that are not yet ready for use are not amortized until available for use. They are reviewed for impairment at least annually. The Company has no identifiable intangible assets for which the expected useful life is indefinite.

Exploration and evaluation

Exploration and evaluation (“E&E”) expenditures generally include the costs of licenses, technical services and studies, seismic studies, exploration drilling and testing, and directly attributable overhead and administration expenses including remuneration of operating personnel and supervisory management. These costs do not include general prospecting or evaluation costs incurred prior to having obtained the rights to explore an area, which are expensed as they are incurred.

E&E expenditures related to coal and mineral deposits are recognized in cost of sales as incurred until it is established that the mineral property has development potential, which generally occurs once the mineral deposit is classified as a proven and probable reserve.

Amortization

The following intangible assets are amortized on a straight-line basis over the following estimated useful lives:


Royalty agreements		42 – 53 years
Mining contracts		over life of mine

Impairment of non-financial assets

The Company assesses the carrying amount of non-financial assets including property, plant and equipment and intangible assets at each reporting date to determine whether there is any indication of impairment in accordance with International Accounting Standard (“IAS”) 36 “Impairment of Assets” (“IAS 36”). Internal factors, such as budgets and forecasts, as well as external factors, such as expected future prices, costs and other market factors are also monitored to determine if indications of impairment exist.

An impairment loss is the amount equal to the excess of the carrying amount over the recoverable amount. The recoverable amount is the higher of value in use (being the net present value of expected pre-tax future cash flows of the relevant asset) and fair value less costs to sell the asset(s). The best evidence of fair value is a quoted price in an active market or a binding sale agreement for the same or similar asset(s). Where neither exists, fair value is based on the best information available to estimate the amount the Company could obtain from the sale of the asset(s) in an arm’s length transaction. This is often accomplished by using a discounted cash flow technique.

Impairment is assessed at the cash-generating unit (“CGU”) level. A CGU is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or group of assets. The assets of the corporate head office are allocated on a reasonable and consistent basis to CGUs or groups of CGUs. The carrying amounts of assets of the corporate head office that have not been allocated to a CGU are compared to their recoverable amounts to determine if there is any impairment loss.

If, after the Company has previously recognized an impairment loss, circumstances indicate that the fair value of the impaired asset is greater than the carrying amount, the Company reverses the impairment loss by the amount the revised fair value exceeds its carrying amount, to a maximum of the previous impairment loss. In no case shall the revised carrying amount exceed the original carrying amount, after depreciation or amortization, that would have been determined if no impairment loss had been recognized. An impairment loss or a reversal of an impairment loss is recognized in cost of sales, or administrative expense, depending on the nature of the asset.

Impairment of financial assets

At each reporting date the Company assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. Financial assets include trade accounts receivable, loans receivable, finance lease receivables and amounts due from related parties. A financial asset or a group of financial assets is impaired if there is objective evidence that the estimated future cash flows of the financial asset or the group of financial assets have been negatively impacted. Evidence of impairment may include indications that debtors are experiencing financial difficulty, default or delinquency in interest or principal payments, or other observable data which indicates that there is a measurable decrease in the estimated future cash flows.

Impairment of loans receivable, finance lease receivables and investments

If an impairment loss has occurred, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest rate. If a financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account, and the loss is recognized in financing expense. Interest income continues to be accrued on the reduced carrying amount using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Company.

If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or reduced by adjusting the allowance account. If the impairment is later recovered, the recovery is credited to financing income.

Provisions

In general, provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where appropriate, the future cash flow estimates are adjusted to reflect risks specific to the obligation. Where the Company expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is presented in cost of sales or administrative expenses, depending on the nature of the provision. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money. Where discounting is used, the increase in the provision due to the passage of time is recognized as financing expense. A contingent liability is disclosed where the existence of an obligation will only be confirmed by future events or where the amount of the obligation cannot be measured with reasonable reliability. Contingent assets are not recognized, but are disclosed where an inflow of economic benefits is probable.

Environmental rehabilitation

Provisions for environment rehabilitation include decommissioning and restoration costs when the Company has an obligation to dismantle and remove infrastructure and residual materials as well as to restore the disturbed area. Estimated decommissioning and restoration costs are provided for in the accounting period when the obligation arising from the disturbance occurs, whether this occurs during mine development or during the production phase, based on the net present value of estimated future costs. The provision for environmental rehabilitation is reviewed and adjusted each period to reflect developments which could include changes in closure dates, legislation, the discount rate or estimated future costs.

The amount recognized as a liability for environmental rehabilitation is calculated as the present value of the estimated future costs determined in accordance with local conditions and requirements. An amount corresponding to the provision is capitalized as part of property, plant and equipment and is depreciated over the life of the corresponding asset. The impact of accretion, or unwinding of the discount rate applied in establishing the net present value of the provision, is recognized in financing expense. The applicable discount rate is a pre-tax rate that reflects the current market assessment of the time value of money which is determined based on government bond interest rates and inflation rates.

Changes to estimated future costs are recognized in the combined consolidated statements of financial position by either increasing or decreasing the rehabilitation liability and rehabilitation asset if the initial estimate was originally recognized as part of an asset measured in accordance with IAS 16, “Property, Plant and Equipment”. Any reduction in the rehabilitation liability and therefore any deduction from the rehabilitation asset may not exceed the carrying amount of that asset. If it does, any excess over the carrying amount is recorded in cost of sales.

If the change in estimate results in an increase in the rehabilitation provision and therefore an addition to the carrying amount of the asset, the entity is required to consider whether the new carrying amount is recoverable, and if this is an indication of impairment of the asset as a whole. If indication of impairment of the asset as a whole exists, the Company tests for impairment in accordance with IAS 36. If the revised mine assets net of rehabilitation provisions exceeds the recoverable amount that portion of the increase is charged directly to cost of sales. For closed sites, changes to estimated costs are recognized immediately in cost of sales. Also, rehabilitation obligations that arise as a result of the production phase of a mine are expensed as incurred.

Where rehabilitation is conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated cost of outstanding rehabilitation work at each statement of financial position date and any increase in overall cost is expensed.

Income taxes

The income tax expense or benefit for the reporting period consists of two components: current and deferred taxes.

The current income tax payable or recoverable is calculated using the tax rates and legislation that have been enacted or substantively enacted at each reporting date in each of the jurisdictions and includes any adjustments for taxes payable or recoverable in respect of prior periods.

Current tax assets and liabilities are offset when the Company has a legally enforceable right to offset the recognized amounts and intends, either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Deferred tax assets and liabilities are determined using the statement of financial position liability method based on temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. In calculating the deferred tax assets and liabilities, the tax rates used are those that have been enacted or substantively enacted at each reporting date in each of the jurisdictions and that are expected to apply when the assets are recovered or the liabilities are settled. Deferred income tax assets and liabilities are presented as non-current.

Deferred tax liabilities are recognized on all taxable temporary differences, and deferred tax assets are recognized on all deductible temporary differences with the exception of the following items:

•

Temporary differences associated with investments in subsidiaries, associates and interests in joint ventures where the Company is are able to control the timing of the reversal of temporary differences and such reversals are not probable in the foreseeable future;

•

Temporary differences that arise on the initial recognition of assets and liabilities in a transaction that is not a business combination and has no impact on either accounting profit or taxable profit; and

•

Deferred tax assets are only recognized to the extent that it is probable that sufficient taxable profits exist in future periods against which the deductible temporary differences can be utilized.

The probability that sufficient taxable profits exist in future periods against which the deferred tax assets can be utilized is reassessed at each reporting date. The amount of deferred tax assets recognized is adjusted accordingly.

Deferred tax assets and liabilities are offset when the Company has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred income tax assets and deferred income tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Current and deferred taxes that relate to items recognized directly to equity are also recognized in equity. All other taxes are recognized in income tax expense in the combined consolidated statements of comprehensive income (loss).

Employee benefits

Employee benefits, primarily relating to the pension plans, are presented in these combined consolidated financial statements in accordance with IAS 19, “Employee Benefits”, as amended in June 2011 (“IAS 19R”). The Company has both defined benefit and defined contribution plans.

A defined contribution plan is a post-employment benefit plan under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in cost of sales and administrative expenses in the combined consolidated statements of comprehensive income (loss) in the periods during which services are rendered by employees.

Certain employees are covered under defined benefit pension plans, which provide pensions based on length of service and final average earnings. The asset or liability recognized in the combined consolidated statements of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the reporting date, less the fair value of plan assets, together with adjustments for unrecognized past service costs. When the calculation results in a benefit to the Company, the recognized asset is limited to the total of any unrecognized past service costs and the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities.

The defined benefit pension liability and expense are measured actuarially using the projected benefit method. Obligations for contributions to defined benefit pension plans are recognized as an employee benefit expense in cost of sales and administrative expenses in the combined consolidated statements of comprehensive income (loss) in the periods during which services are rendered by employees. Defined benefit pension costs are based on management’s best estimate of expected plan investment performance, discount rate, salary escalation and retirement age of employees. The discount rate used to determine the accrued benefit obligation is based on market interest rates, as at the measurement date, for high-quality debt instruments with cash flows that match the timing and amount of expected benefit payments. Plan assets are valued at fair value for the purpose of calculating the expected return on plan assets. Net interest on plan assets is calculated using the discount rate used to measure the defined benefit obligations and is recognized as an employee benefit expense in cost of sales and administrative expenses in the combined consolidated statements of comprehensive income (loss).

Past service costs are recognized immediately at the earlier of recognizing termination benefits, restructuring charges, or when a plan amendment or curtailment occurs. Actuarial gains and losses are recognized immediately through other comprehensive income (loss).

The Company adopted IAS 19R effective January 1, 2011 and applied the standard retrospectively in accordance with the transitional provisions. Accordingly, the opening combined consolidated statement of financial position of the earliest comparative period (January 1, 2011) has been restated.

The amendments require the recognition of changes in defined benefit pension obligations and plan assets when they occur, eliminating the ‘corridor approach’ previously permitted and accelerating the recognition of past service costs. In order for the net defined benefit liability or asset to reflect the full value of the plan deficit or surplus, all actuarial gains and losses are recognized immediately through other comprehensive income. In addition, the Company replaced interest costs on the defined benefit obligation and the expected return on plan assets with a net interest cost based on the net defined benefit asset or liability measured by applying the same discount rate used to measure the defined benefit obligation at the beginning of the annual period. Interest expense and interest income on net post-employment benefit liabilities and assets continue to be recognized in net earnings.

IAS 19R also requires termination benefits to be recognized at the earlier of when the entity can no longer withdraw an offer of termination benefits or recognizes any restructuring costs. This requirement had no impact on the Company’s combined consolidated financial statements.

Refer to Note 14 for disclosure regarding the impact of the adoption of IAS 19R on the Company’s combined consolidated financial statements.

Financial instruments

Management determines the classification of financial assets and financial liabilities at initial recognition and, except in very limited circumstances, the classification is not changed subsequent to initial recognition. The classification depends on the purpose for which the financial instruments were acquired, their characteristics and/or management’s intent. Transaction costs with respect to instruments not classified as fair value through profit and loss are recognized as an adjustment to the cost of the underlying instruments and amortized using the effective interest method.

The Company’s financial instruments were classified in the following categories:

Financial assets

Financial assets at fair value through profit and loss—Held-for-trading:

•

Cash equivalents; short-term investments.

Loans and receivables, measured at amortized cost:

•

Cash on hand and balances on deposit in banks; loans receivable; trade accounts receivable; long-term receivables (included in other assets); due from related parties.

Financial liabilities

Other financial liabilities, measured at amortized cost:

•

Trade accounts payable and accrued charges; loans and borrowings; other equipment financing arrangements (included in other liabilities); due to related parties; related party loans.

Financial assets at fair value through profit or loss

An instrument is classified as fair value through profit or loss if it is held-for-trading or is designated as such upon initial recognition. A financial asset is classified as held-for-trading if acquired principally for the purpose of selling in the short-term or if so designated by management. Financial instruments included in this category are initially recognized at fair value and transaction costs are immediately recorded in net earnings along with gains and losses arising from changes in fair value.

Trade accounts receivable

Trade accounts receivable are initially recognized at fair value including direct and incremental transaction costs and are subsequently measured at amortized cost reduced for any impairment losses. A provision for impairment of trade accounts receivable is established when there is objective evidence that an amount will not be collectible or, in the case of long-term receivables, if there is evidence that the amount will not be collectible in accordance with payment terms.

Trade accounts payable and accrued charges

Trade accounts payable and accrued charges are initially recognized at fair value including direct and incremental transaction costs and are subsequently measured at amortized cost using the effective interest method.

Loans and borrowings

Loans and borrowings include short-term loans and long-term loans. These liabilities are initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using the effective interest method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recorded in financing expense or financing income in the combined consolidated statement of comprehensive income (loss) over the period of the borrowings using the effective interest method.

Loans and borrowings are classified as a current liability unless the Company has an unconditional right to defer settlement for at least 12 months after the combined consolidated statement of financial position date.

Other financial assets and liabilities

Other financial assets include primarily loans receivable. Other financial liabilities include primarily the related party subordinated note. Other financial assets are initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using the effective interest method. Other financial liabilities are initially recognized at fair value net of transaction costs and are subsequently measured at amortized cost using the effective interest method.

Derivative instruments

Derivative instruments, including embedded derivatives, are recorded at fair value unless exempted from derivative treatment as normal purchase and sale. All changes in their fair value are recorded in net earnings.

De-recognition of financial assets and liabilities

A financial asset is derecognized when its contractual rights to the cash flows that compose the financial asset expire or substantially all the risks and rewards of the asset are transferred. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Gains and losses on de-recognition are recognized within financing income and financing expense respectively.

Financial instrument measurement hierarchy

All financial instruments are required to be measured at fair value on initial recognition. For those financial assets or liabilities measured at fair value at each reporting date, financial instruments and liquidity risk disclosures require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. These levels are defined below:

Level 1: determined by reference to quoted prices in active markets for identical assets and liabilities;

Level 2: valuations using inputs other than the quoted prices for which all significant inputs are based on observable market data, either directly or indirectly; and

Level 3: valuations using inputs that are not based on observable market data.

The Company’s financial assets subject to the measurement hierarchy are described in Note 24. The Company has no financial liabilities subject to the measurement hierarchy.

Inventories

Raw materials, materials in process and finished products are valued at the lower of average production cost and net realizable value, with cost determined on a moving weighted-average basis. Spare parts and operating materials within inventory are valued at the lower of average cost and net realizable value, and recognized in cost of sales when used.

Uncovered coal and finished products are valued at the lower of average production cost and net realizable value, with cost determined on a standard cost basis under which the Company applies a standard inventory rate per tonne to its ending inventory. The standard cost is set annually based on budgeted costs for the annual period and includes labour, repairs and maintenance, fixed and variable operating costs, as well as an allocation of capital expenditures. The Company compares the standard cost to actual production costs on a quarterly basis. In the event there is a discrepancy; the Company investigates to determine the factors causing the variance, and adjusts appropriately if the differences are caused by other than temporary fluctuations.

The cost of inventory includes all costs related to bringing the inventory to its current condition, including mining and processing costs, labour costs, supplies, direct and allocated indirect operating overhead and depreciation expense, where applicable, including allocation of fixed and variable costs.

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENT

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of the assets, liabilities, revenue and expenses reported each period. Each of these estimates varies with respect to the level of judgment involved and the potential impact on the Company’s reported financial results. Estimates are deemed critical when the Company’s financial condition, change in financial condition or results of operations would be materially impacted by a different estimate or a change in estimate from period to period. By their nature, these estimates are subject to measurement uncertainty, and changes in these estimates may affect the combined consolidated financial statements of future periods.

Environmental rehabilitation provisions

The Company’s operations are subject to environmental regulations in the provinces of Alberta and Saskatchewan, Canada. Many factors such as future changes to environmental laws and regulations, life of mine estimates, the cost and time it will take to rehabilitate the property and discount rates, all affect the carrying amount of environmental rehabilitation provisions. As a result, the actual cost of environmental rehabilitation could be higher than the amounts the Company has estimated.

The environmental rehabilitation provision is assessed quarterly and measured by discounting the expected cash flows. The applicable discount rate is a pre-tax rate that reflects the current market assessment of the time value of money which is determined based on government bond interest rates and inflation rates. The actual rate depends on a number of factors, including the timing of rehabilitation activities that can extend decades into the future and the location of the property.

Reserves

Reserves are estimates of the amount of product that can be economically and legally extracted from the Company’s mining properties. Reserve estimates are an integral component in the determination of the commercial viability of a site. In calculating reserves, estimates and assumptions are required about a range of geological, technical, and economic factors, including quantities, grades, production techniques, production decline rates, recovery rates, production costs, commodity demand, commodity prices and exchange rates. In

addition, future changes in regulatory environments, including government levies or changes in the Company’s rights to exploit the resource imposed over the producing life of the reserves may also significantly impact estimates.

Thermal coal and potash estimates are based on information compiled by or under supervision of a qualified person as defined under National Instrument 43-101, Standards of Disclosure for Mineral Projects within Canada.

Property, plant and equipment

Property, plant and equipment is one of the largest components of the Company’s assets and as such the capitalization of costs, the determination of estimated recoverable amounts and the depreciation of these assets have a significant impact on the Company’s financial results.

Certain assets are depreciated using a units-of-production basis which involves the estimation of recoverable reserves in determining the depreciation rates of the specific assets. Each item’s life, which is assessed annually, is assessed for both its physical life limitations and economically recoverable reserves of the property at which the asset is located.

For those assets depreciated on a straight-line basis, management estimates the useful life of the assets and their components, which in certain cases, may be based on an estimate of the producing life of the property. These assessments require the use of estimates and assumptions including market conditions at the end of the assets useful life, costs of decommissioning the asset and the amount of recoverable reserves.

Asset useful lives and residual values are re-evaluated at each reporting date.

For assets under construction, management assesses the stage of each construction project to determine when a project is commercially viable. The criteria used to assess commercial viability are dependent upon the nature of each construction project and include factors such as the asset purpose, complexity of a project and its location, the level of capital expenditure compared to the construction cost estimates; completion of a reasonable period of testing of the mine plant and equipment; ability to produce the commodity in saleable form (within specifications); and ability to sustain ongoing production of the commodity.

Asset impairment

The Company assesses the carrying amount of non-financial assets including property, plant and equipment and intangible assets subject to depreciation and amortization at each reporting date to determine whether there are any indicators that the carrying amount of the assets may be impaired.

For purposes of determining fair value, management assesses the recoverable amount of the asset using the net present value of expected future cash flows. Projections of future cash flows are based on factors relevant to the asset and could include estimated recoverable production, commodity or contracted prices, foreign-exchange rates, production levels, cash costs of production, capital and reclamation costs. Projections inherently require assumptions and judgments to be made about each of the factors affecting future cash flows. Changes in any of these assumptions or judgments could result in a significant difference between the carrying amount and fair value of these assets. Where necessary, management engages qualified third-party professionals to assist in the determination of fair values.

Overburden removal costs

Overburden removal costs are capitalized and depreciated over the useful lives when the overburden removal activity can be shown to create value beyond providing access to the underlying reserve. In many cases, this determination is a matter of judgment.

Exploration and evaluation

Management must make estimates and assumptions when determining when to transfer E&E expenditures from intangible asset to property, plant and equipment, which is normally at the time when commercial viability is achieved. Assessing commercial viability requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether an economically viable operation can be established. Any such estimates and assumptions may change as new information becomes available. If after having capitalized the expenditure, a decision is made that recovery of the expenditure is unlikely, the amount capitalized is recognized in cost of sales in the combined consolidated statements of comprehensive income (loss).

Income taxes

PMRL operates in two Canadian provinces while CVRI operates in one Canadian province, and consequently, their income is subject to various rates and rules of taxation. As a result, their effective tax rate may vary significantly from the Canadian statutory tax rate depending upon the profitability of operations in these different provinces.

The Company calculates deferred income taxes based upon temporary differences between the assets and liabilities that are reported in its combined consolidated financial statements and their tax bases as determined under applicable tax legislation. The Company records deferred income tax assets when it determines that it is probable that such assets will be realized. The future realization of deferred tax assets can be affected by many factors, including: current and future economic conditions, net realizable sale prices, production rates and production costs and can either be increased or decreased where, in the view of management, such change is warranted.

In determining whether it is probable that a deferred tax asset will be realized, management reviews the timing of expected reversals of taxable temporary differences, the estimates of future taxable income and prudent and feasible tax planning that could be implemented. Significant judgment may be involved in determining the timing of expected reversals of temporary differences.

Arrangements containing a lease

The Company determined that certain property, plant and equipment are subject to finance lease arrangements. The Company applies judgment in interpreting these arrangements such as determining which asset(s) are specified in an arrangement; determining whether a right to use a specified asset has been conveyed; and if relative fair value, or another estimation technique, to separate lease payments from payments for other goods or services should be used. The Company also uses judgment in applying accounting guidance to determine whether these leases are operating or finance leases.

5. RECENT ACCOUNTING PRONOUCEMENTS

IFRS 7—Financial instruments: disclosures

IFRS 7, “Financial instruments: disclosure” (“IFRS 7”) was amended by the IASB in December 2011. The amendment contains new disclosure requirements for financial assets and financial liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. These new disclosure requirements will enable users of the financial statements to better compare financial statements prepared in accordance with IFRS and US GAAP. IFRS 7 is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IFRS 9—Financial instruments

IFRS 9, “Financial instruments” (“IFRS 9”) was issued by the IASB in November 2009 and will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 replaces the multiple rules

in IAS 39 with a single approach to determine whether a financial asset is measured at amortized cost or fair value and a new mixed measurement model for debt instruments having only two categories: amortized cost and fair value. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets.

This standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. In December 2011, the IASB issued amendments to IFRS 9 that defer the mandatory effective date to annual periods beginning on or after January 1, 2015. The amendments also provide relief from the requirement to restate comparative financial statements for the effect of applying IFRS 9 which was originally limited to companies that chose to apply IFRS 9 prior to 2012. Alternatively, additional transition disclosures will be required to help investors understand the effect that the initial application of IFRS 9 has on the classification and measurement of financial instruments. The Company is currently evaluating the impact of this standard and amendments on its combined consolidated financial statements.

IFRS 10—Consolidated financial statements

IFRS 10, “Consolidated financial statements” (“IFRS 10”) was issued by the IASB in May 2011 and will replace SIC 12, “Consolidation – Special purpose entities” and parts of IAS 27, “Consolidated and separate financial statements”. Under the existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. This standard (i) requires an entity that controls one or more other entities to present consolidated financial statements; (ii) defines the principle of control and establishes control as the basis for consolidation; (iii) sets out how to apply the principle of control to identify whether an investor controls an investee and therefore must consolidate the investee; and (iv) sets out the accounting requirements for the preparation of consolidated financial statements. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IFRS 11—Joint arrangements

IFRS 11, “Joint arrangements” (“IFRS 11”) was issued by the IASB in May 2011 and will supersede IAS 31, “Interest in joint ventures” and SIC 13, “Jointly controlled entities—non-monetary contributions by ventures”. IFRS 11 will require joint arrangements to be classified as either joint operations or joint ventures. The structure of the joint arrangement will no longer be the most significant factor when classifying the joint arrangement as either a joint operation or a joint venture. The standard removes the option to account for joint ventures using proportionate consolidation and requires equity accounting. Venturers will transition the accounting for joint ventures from the proportionate consolidation method to the equity method by aggregating the carrying values of the proportionately consolidated assets and liabilities into a single line item on their financial statements. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IFRS 12—Disclosure of interests in other entities

IFRS 12, “Disclosure of interests in other entities” (“IFRS 12”) was issued by the IASB in May 2011. IFRS 12 requires enhanced disclosure of information about involvement with consolidated and unconsolidated entities, including structured entities commonly referred to as special purpose vehicles or variable interest entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IFRS 13—Fair value measurement

IFRS 13, “Fair value measurement” (“IFRS 13”) was issued by the IASB in May 2011. This standard clarifies the definition of fair value, requires disclosures for fair value measurement, and sets out a single

framework for measuring fair value. IFRS 13 provides guidance on fair value in a single standard, replacing the existing guidance on measuring and disclosing fair value which is dispersed among several standards. IFRS 13 is effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IAS 1—Presentation of financial statements

An amendment to IAS 1, “Presentation of financial statements” (“IAS 1”) was issued by the IASB in June 2011. The amendment requires separate presentation for items of other comprehensive income that would be reclassified to profit or loss in the future if certain conditions are met, from those that would never be reclassified to profit or loss. The effective date is for annual periods beginning on or after July 1, 2012. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

IAS 27—Separate financial statements

IAS 27, “Separate financial statements” (“IAS 27”) was re-issued by the IASB in May 2011 to only prescribe the accounting and disclosure requirements for investments in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The consolidation guidance will now be included in IFRS 10. The amendments to IAS 27 are effective for annual periods beginning on or after January 1, 2013. The Company has determined that this standard is not applicable to its combined consolidated financial statements.

IAS 28—Investments in associates and joint ventures

IAS 28, “Investments in associates and joint ventures” (“IAS 28”) was re-issued by the IASB in May 2011. IAS 28 continues to prescribe the accounting for investments in associates but is now the only source of guidance describing the application of the equity method. The amended IAS 28 will be applied by all entities that have an ownership interest with joint control of, or significant influence over, an investee. The amendments to IAS 28 are effective for annual periods beginning on or after January 1, 2013. The adoption of this standard will not have a significant impact on the the Company’s combined consolidated financial statements.

IAS 32—Financial instruments: presentation

IAS 32, “Financial instruments: presentation” (“IAS 32”) was amended by the IASB in December 2011. The amendment clarifies that an entity has a legally enforceable right to offset financial assets and financial liabilities if that right is not contingent on a future event and it is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014. The Company is currently evaluating the impact of the amendments on its combined consolidated financial statements.

IFRIC 20—Stripping costs in the production phase of a surface mine

IFRIC 20, “Stripping costs in the production phase of a surface mine” (“IFRIC 20”) was issued by the IASB in October 2011. IFRIC 20 is effective for annual periods beginning on or after January 1, 2013. The standard requires stripping costs incurred during the production phase of a surface mine to be capitalized as part of an asset, if certain criteria are met, and depreciated on a units of production basis unless another method is more appropriate. The adoption of this standard will not have a significant impact on the Company’s combined consolidated financial statements.

6. LOANS RECEIVABLE


Canadian $ thousands,	December 31, 2012			December 31, 2011			January 1, 2011
Loans receivable	$	19,846		$	20,901		$	19,278
Current portion		(3,846	)		(2,000	)		(4,697	)

	$	16,000		$	18,901		$	14,581

Loans receivable relate to reimbursable costs from a domestic customer for de-recognized assets at a 50% owned mine. Loan payments consist of blended monthly payments of principal and interest amortized over the assets useful lives which range from 2013 to 2029. The interest rate inherent in the loan varies annually and for the year ended December 31, 2012 was 8.27% (2011—8.64%).

7. OTHER ASSETS


Canadian $ thousands,	December 31, 2012			December 31, 2011			January 1, 2011
Deferred reclamation recoveries^(a)	$	9,007		$	9,018		$	6,263
Deferred financing charges^(b)		2,361			—			—
Long-term tax receivable^(c)		626			626			1,337
Pension recoveries^(d)		5,344			5,344			3,842
Master asset vehicle notes^(e)		—			—			2,820
Other		136			1,140			410

		17,474			16,128			14,672
Current portion		(814	)		(196	)		(196	)

	$	16,660		$	15,932		$	14,476

^(a)	Deferred reclamation recoveries relate to a recovery of environmental rehabilitation costs from a domestic customer at two mine sites.

^(b)	Deferred financing charges relate the credit facility described in Note 13.

^(c)	Long-term tax receivable relates to a Canadian large corporation tax refund.

^(d)	Pension recoveries relate to a recovery from a domestic customer of employer contributions to a defined benefit plan at a 50% owned mine.

^(e)	Master Asset Vehicle (“MAV”) notes consist primarily of A1, A2, B, C, Class 15, tracking and non-tracking notes that were received in exchange for asset backed commercial paper in 2009. See Note 24.

8. FINANCE LEASE RECEIVABLES


Canadian $ thousands,	December 31, 2012						December 31, 2011						January 1, 2011
Canadian $ thousands,	Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments
Less than one year	$	32,480	$	7,485	$	24,995	$	38,336	$	15,346	$	22,990	$	36,059	$	15,613	$	20,446
Between one and five years		104,458		21,980		82,478		125,173		47,213		77,960		122,596		48,128		74,468
More than five years		122,085		17,277		104,808		156,914		33,610		123,304		159,497		33,191		126,306

	$	259,023	$	46,742	$	212,281	$	320,423	$	96,169	$	224,254	$	318,152	$	96,932	$	221,220

Finance lease receivables relate to arrangements that contain leases. Lease payments consist of blended monthly payments of principal and interest. The interest rates implicit in the leases range from 5.38% to 8.27% for the year ended December 31, 2012 (2011—4.45% to 8.64%). The Company has both fixed and variable rate leasing arrangements.

9. INVENTORIES


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Uncovered coal	$	8,282	$	8,514	$	7,718
Finished product		76,878		48,718		43,973

		85,160		57,232		51,691
Spare parts and operating materials		56,556		52,866		46,381

	$	141,716	$	110,098	$	98,072

For the year ended December 31, 2012, the cost of inventories recognized as an expense and included in cost of sales was $655,026 (2011—$685,510). Depreciation and amortization included in inventories at December 31, 2012 totaled $6,264 (December 31, 2011—$4,518; January 1, 2011—$5,412). For the year ended December 31, 2012, the Company recorded a lower-of-cost-and-net-realizable-value impairment for clean coal inventory at Obed Mountain mine of $6,866 (2011—nil), which is included in cost of sales.

10. RELATED PARTY TRANSACTIONS

Related party loans


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Subordinated note^(a)	$	377,094	$	736,094	$	736,094
Promissory note^(b)		325,000		—		—
Loan payable^(c)		30,000		30,108		30,108

	$	732,094	$	766,202	$	766,202

^a)	Relates to the Sherritt subordinated note to PMRL bearing interest at an annual rate of interest of 8.15%. The note is unsecured and due on June 27, 2026.

^b)	Relates to a promissory note payable to Sherritt from CVRI bearing interest at an annual rate of interest of 9.00%. The note is unsecured and due on March 30, 2022.

^c)	Relates to a loan payable to Sherritt from CVRI bearing an annual rate of interest of 6.00%. The loan is unsecured and is due on June 30, 2017.

Loan interest expense


Canadian $ thousands, for the year ended December 31	2012		2011
Sherritt^(a)	$	42,644	$	59,992
Sherritt^(b)		17,342		—
Sherritt^(c)	$	1,851	$	1,926

^a)	Relates to interest expense paid on the subordinated note described above.

^b)	Relates to interest on promissory note described above.

^c)	Relates to interest expense paid on the loan payable described above.

Management and administrative services


Canadian $ thousands, for the year ended December 31	2012		2011
Sherritt and other related parties	$	20,130	$	14,276

The Company, Sherritt and other related parties in the Sherritt group are involved in management and administrative services agreements (“MSAs”) effective June 1, 2006 for a period of ten years, subject to early termination under certain conditions. Pursuant to the MSAs, Sherritt agrees to provide or arrange for provision of management, administrative and support services, including the reimbursement of third-party expenditures incurred related to these services, to the Company, at amounts which are determined and agreed to by the related parties. As part of the same MSAs, the Company charges other related parties in the Sherritt group for provision of management, administrative and support services, including the reimbursement of third-party expenditures incurred related to these services, at cost. These transactions are in the normal course of operations.

As described in Note 22, PMRL holds a 50% direct interest in the Bienfait Activated Carbon Joint Venture from which it earns operator service fees. For the year ended December 31, 2012 operator service fees were $6,825 (2011—$5,654).

Due from related parties


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Sherritt and other related parties^(a)	$	242	$	289	$	680

^a)	Relates to payments made or received on behalf of entities owned by Sherritt for the provision of shared services described within this note. The amounts are non-interest bearing, due on demand and unsecured.

Due to related parties


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Sherritt and other related parties^(a)	$	364	$	20,615	$	24,398

^a)	Relates to payments made or received on behalf of entities owned by Sherritt for the provision of shared services described within this note. The amounts are non-interest bearing, due on demand and unsecured.

Key Management Personnel

The executive management and Board of Directors of Sherritt are considered to be the key management personnel of the Company having the authority and responsibility for planning, directing and controlling the activities of the Company. The key management personnel are not employees of the Company, rather these services are provided to the Company in accordance with the MSAs between Sherritt and the Company, the cost of which is included in the total management and administrative services as described above and totaled $13,460 (2011—$9,998) for the year ended December 31, 2012.

11. PROPERTY, PLANT AND EQUIPMENT


	2012
Canadian $ thousands,	Mining properties			Plant, equipment and land			Total
Cost
Balance, beginning of the year	$	459,765		$	802,545		$	1,262,310
Additions		19,430			96,263			115,693
Capitalized closure costs		41,949			(147	)		41,802
Disposals		(2,349	)		(24,310	)		(26,659	)

Balance, end of the year		518,795			874,351			1,393,146

Depreciation and impairment losses
Balance, beginning of the year		375,076			483,176			858,252
Additions		53,023			55,577			108,600
Disposals		(2,198	)		(23,044	)		(25,242	)

Balance, end of the year		425,901			515,709			941,610

Net book value	$	92,894		$	358,642		$	451,536


	2011
Canadian $ thousands,	Mining properties			Plant, equipment and land			Total
Cost
Balance, beginning of the year	$	410,099		$	752,799		$	1,162,898
Additions		12,027			78,018			90,045
Capitalized closure costs		37,475			3,762			41,237
Disposals		(147	)		(31,550	)		(31,697	)
Transfers and movements		311			(484	)		(173	)

Balance, end of the year		459,765			802,545			1,262,310

Depreciation and impairment losses
Balance, beginning of the year		327,269			470,315			797,584
Additions		47,928			42,453			90,381
Disposals		(147	)		(29,557	)		(29,704	)
Transfers and movements		26			(35	)		(9	)

Balance, end of the year		375,076			483,176			858,252

Net book value	$	84,689		$	319,369		$	404,058

Assets under finance lease included in above


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Mobile mining equipment	$	142,842	$	115,548	$	68,592

12. INTANGIBLE ASSETS


	2012
Canadian $ thousands,	Royalty agreements		Mining contracts		Total
Cost
Balance, beginning of the year	$	479,000	$	236,000	$	715,000

Balance, end of the year		479,000		236,000		715,000

Amortization and impairment losses
Balance, beginning of the year		39,946		27,101		67,047
Amortization for the year		10,897		7,612		18,509

Balance, end of the year		50,843		34,713		85,556

Net book value	$	428,157	$	201,287	$	629,444

Remaining amortization period
Weighted-average number of years, as at December 31, 2012		39.9		32.9


	2011
Canadian $ thousands,	Royalty agreements		Mining contracts		Total
Cost
Balance, beginning of the year	$	479,000	$	236,000	$	715,000

Balance, end of the year		479,000		236,000		715,000

Amortization and impairment losses
Balance, beginning of the year		29,051		19,710		48,761
Amortization for the year		10,895		7,391		18,286

Balance, end of the year		39,946		27,101		67,047

Net book value	$	439,054	$	208,899	$	647,953

Remaining amortization period
Weighted-average number of years, as at December 31, 2011		40.9		33.7

13. LOANS AND BORROWINGS


Canadian $ thousands,	December 31, 2012		December 31, 2011			January 1, 2011
3 year non-revolving term loan (fully repaid in May, 2012)	$	—	$	11,258		$	24,039
Credit facility agreement		42,955		42,957			80,853

		42,955		54,215			104,892
Current portion		—		(54,215	)		(27,781	)

	$	42,955	$	—		$	77,111

On June 26, 2012 PMRL and CVRI entered into a combined revolving credit facility as joint borrowers with a syndicate of Canadian banks. The credit facility consists of two components: a $350 million revolving credit facility (the “Revolver”) and a $175 million letter of credit facility (the “LC Facility”). The Revolver is for general corporate purposes with funding available through Canadian or U.S. dollars. The LC Facility is available through Canadian, U.S., Euro or other currencies. There are no set terms of repayment until the agreement expires on June 26, 2016. The interest rates payable on advances under the facility are based on lending rates plus applicable margin varying on PMRL’s and CVRI’s combined ratio of total debt to earnings before interest, taxes, depreciation and amortization. This rate as at December 31, 2012 was 2.75%. The interest rates payable on the LC Facility are two thirds the banker’s acceptances stamping fee equivalent, plus the same varying margin discussed above. This rate as at December 31, 2012 was 1.83%. The credit facility is secured by common shares of PMRL and CVRI.

As part of the credit facility described above, the Company recorded $2,714 (2011—nil) of deferred financing fees which are presented as other assets in these combined consolidated financial statements. They are amortized using the effective interest method over the term of the credit agreement.

14. OTHER LIABILITIES


Canadian $ thousands,	December 31, 2012			December 31, 2011			January 1, 2011
Finance lease obligations	$	155,069		$	139,476		$	104,089
Other equipment financing arrangements		7,719			8,792			11,534
Stock-based compensation		1,837			1,902			386
Pension liability		48,581			45,196			19,925
Deferred revenue		631			665			—

		213,837			196,031			135,934
Current portion		(48,614	)		(47,707	)		(38,221	)

	$	165,223		$	148,324		$	97,713

Finance lease obligations


Canadian $ thousands,	December 31, 2012						December 31, 2011						January 1, 2011
Canadian $ thousands,	Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments		Future minimum lease payments		Interest		Present value of minimum lease payments
Less than one year	$	51,805	$	7,052	$	44,753	$	49,371	$	6,549	$	42,822	$	37,964	$	3,770	$	34,194
Between one and five years		119,653		9,337		110,316		105,823		9,169		96,654		77,104		7,209		69,895

	$	171,458	$	16,389	$	155,069	$	155,194	$	15,718	$	139,476	$	115,068	$	10,979	$	104,089

Finance lease obligations of $155,069 bear interest at rates ranging from 0.90% to 7.70% (December, 31 2011—0.90% to 7.70%; January 1, 2011—0.90% to 7.70%) having a weighted-average interest rate of 5.46% (December 31, 2011—5.55%; January 1, 2011—5.68%). These finance lease obligations mature between 2013 and 2018 and are repayable by blended monthly payments of interest and principal.

Other equipment financing arrangements


Canadian $ thousands,	December 31, 2012		December 31, 2011		January 1, 2011
Canadian $ thousands,	Present value of minimum lease payments		Present value of minimum lease payments		Present value of minimum lease payments
Less than one year	$	2,363	$	3,256	$	4,027
Between one and five years		5,356		5,536		7,507

	$	7,719	$	8,792	$	11,534

Other equipment financing arrangements of $7,719 bear interest at rates ranging from 5.30% to 6.31% (December 31, 2011—5.31% to 9.85%; January 1, 2011—5.31% to 9.85%) having a weighted-average interest rate of 6.14% (December 31, 2011—6.68%; January 1, 2011—6.44%). These other equipment financing arrangements mature between 2013 and 2018 and are repayable by blended monthly payments of interest and principal.

Pension liability

The Company adopted, as required, IAS 19, “Employee Benefits”, as amended in June 2011 (“IAS 19R”). The Company applied the standard retrospectively in accordance with the transitional provisions. The opening combined consolidated statement of financial position of the earliest comparative period presented (January 1, 2011) was restated.

IAS 19R requires termination benefits to be recognized at the earlier of when the entity can no longer withdraw an offer of termination benefits or recognizes any restructuring costs. This requirement had no impact on the Company’s combined consolidated financial statements.

The effect on the combined consolidated statements of financial position of IAS 19R, as at January 1, 2011 and December 31, 2011, was as follows:


As at January 1, 2011	Net defined benefit liability		Deferred income taxes		Other assets		Accumulated deficit			Accumulated other comprehensive income (loss)			Shareholder’s equity
Balance as previously reported	$	17,293	$	141,281	$	10,830	$	(548,642	)	$	—		$	110,506
Effect of adoption of IAS 19R		2,632		312		3,842		2,706			(1,808	)		898

Restated balance	$	19,925	$	141,593	$	14,672	$	(545,936	)	$	(1,808	)	$	111,404


As at December 31, 2011	Net defined benefit liability		Deferred income taxes			Other assets		Accumulated deficit			Accumulated other comprehensive income (loss)			Shareholder’s equity
Balance as previously reported	$	14,120	$	145,840		$	10,784	$	(506,612	)	$	—		$	152,536
Effect of adoption of IAS 19R		31,076		(6,610	)		5,344		1,690			(20,812	)		(19,122	)

Restated balance	$	45,196	$	139,230		$	16,128	$	(504,922	)	$	(20,812	)	$	133,414

The effect on the combined consolidated statements of (loss) earnings and comprehensive (loss) income was as follows:


Canadian $ thousands, for the year ended December 31,	2012			2011
Increase in administrative expense	$	(1,254	)	$	(1,367	)
Decrease in income tax expense		323			352

Decrease in net earnings		(931	)		(1,015	)

Increase in defined benefit liability		(8,321	)		(27,536	)
Increase in other assets		1,126			1,962
Decrease in deferred income tax liability		1,853			6,570

Decrease in other comprehensive income		(5,342	)		(19,004	)

Decrease in total comprehensive income	$	(6,273	)	$	(20,019	)


As at December 31	2012			2011
Plan assets
Expected long-term rate of return on plan assets		6.25	%		6.25	%

Accrued benefit obligation
Discount rate on pension obligations		4.00	%		4.60	%
Average remaining service period of active employees		5-14 years			6-14 years

Benefit costs
Inflation rate		2.50	%		2.50	%
Discount rate on benefit costs		4.60	%		5.60	%
Rate of compensation increases		3.50	%		3.50	%

Approximate asset allocations, by asset category, of PMRL’s defined benefit pension plans were as follows:


As at December 31	2012			2011
Equity securities		58	%		57	%
Debt securities		41	%		42	%
Cash		1	%		1	%

		100	%		100	%

Actuarial reports and updates are prepared by independent actuaries for funding and accounting purposes. Net pension plan expense relating to defined contribution plans, included in cost of sales in the combined consolidated statements of (loss) earnings and comprehensive (loss) income, was as follows:


Canadian $ thousands, for the year ended December 31	2012		2011
Defined contribution plan current service cost	$	11,002	$	10,151

Net pension plan expense relating to defined benefit plans was as follows:


Canadian $ thousands, for the year ended December 31	2012			2011
Current service cost	$	5,919		$	4,182
Interest cost		6,306			6,110
Expected return on plan assets		(5,779	)		(5,543	)
Other adjustments		1,455			(534	)

Total defined benefit plan expense	$	7,901		$	4,215

During the year, nil (2011—$799) of pension surplus from a defined benefit plan was used to offset contributions to a defined contribution plan. Both defined benefit and contribution plans are part of the same collective bargaining agreement and such transfers are allowable under provincial pension legislation.

Amounts recognized in the combined consolidated statements of financial position are as follows:


Canadian $ thousands, as at December 31	2012			2011
Accrued benefit obligations
Balance, beginning of year	$	134,849		$	107,112
Current service costs		5,919			4,182
Benefits paid		(7,370	)		(4,393	)
Interest cost		6,306			6,110
Actuarial losses		12,903			21,838

Balance, end of year		152,607			134,849


Plan assets
Fair value, beginning of year		89,653			87,187
Employers’ contributions		12,946			7,677
Benefits paid		(7,370	)		(4,647	)
Interest on assets		4,310			5,194
Administrative cost		(58	)		(59	)
Actuarial gain (loss)		4,545			(5,699	)

Fair value, end of year		104,026			89,653

Net accrued pension liability	$	48,581		$	45,196

Total cash payments for the year ended December 31, 2012 in respect of the Company’s defined benefit and defined contribution pension plans consisting of cash payments made by the Company directly to employees, their beneficiaries or estates, payments to the plans, and payments to a third-party service provider on behalf of the employees were $19,720 (2011—$13,751).

15. PROVISIONS

Environmental rehabilitation obligations

The following is a reconciliation of the environmental rehabilitation provision:


Canadian $ thousands, for the year ended December 31	2012			2011
Balance, beginning of the year	$	154,377		$	136,447
Additions		41,802			41,237
Change in estimates		(2,616	)		(7,342	)
Settled during the year		(21,157	)		(19,011	)
Accretion		2,300			3,046

Balance, end of the year		174,706			154,377
Current portion		(31,728	)		(31,876	)

	$	142,978		$	122,501

Guarantees

In conjunction with the disposition of the metallurgical coal assets in 2003 (the “Fording Arrangement”), PMRL retained certain liabilities in respect of the metallurgical coal assets. These included:

(i)

Employment liabilities for former employees arising from operations prior to the transfer and severance obligations for other former employees not hired by the purchaser, for which no liability has been recorded.

(ii)

General indemnities were given for negligence and claims arising prior to the transfer. In addition, indemnities were provided to the purchaser and a joint venture partner in respect of a transfer of a portion of the metallurgical coal assets between entities controlled by PMRL immediately preceding the closing of the Fording Arrangement. The indemnities extend for an unlimited period of time. No amounts have been accrued with respect to these indemnities.

An environmental indemnity was included as part of the asset sales agreement when PMRL sold the Specialty Products division in September 2003. PMRL, as the vendor, has indemnified the purchaser of and from any and all damages, losses, obligations and liabilities which may be suffered or incurred as a result of any environmental contamination or condition that existed prior to the closing date of the sale. This indemnity exists regardless of whether the condition is known to the parties at the time of agreement or not. An environmental site assessment was completed prior to the sale to provide a base line of environmental conditions in order to provide some clarity and support for the indemnity. No significant environmental liabilities were identified in this site assessment. No amounts have been accrued with respect to these indemnities.

Contingencies

The Company is contingently liable by way of the letters of credit issued. The Company has issued $138,031 (December 31, 2011—$75,773; January 1, 2011—$64,257) in letters of credit providing reclamation security and an additional $18,806 (December 31, 2011—$15,520; January 1, 2011—$18,144) in other letters of credit.

One of PMRL’s defined benefit pension plans has an actuarially determined funding deficiency, at December 31, 2012, valued at $17,137 (December 31, 2011—$17,378; January 1, 2011—$6,360) which is being funded over 15 years, as required under the pension regulations. Under certain circumstances, the funding requirement for this pension plan may be accelerated and may be higher than the deficiency stated above. Funding payments paid by PMRL are reimbursable from the contractual counterparty in the coal supply agreement.

The Company has been subject to reassessments of income tax for past years. Certain amounts have been accrued for these assessments and are considered appropriate. The Company does not believe that unfavorable decisions in any pending procedure, or the threat of procedures related to any future assessment or any amount it might be required to pay will have a material impact on the financial condition of the Company.

16. INCOME TAXES

Income tax expense is comprised of the following:


Canadian $ thousands, for the year ended December 31	2012			2011
Current income tax (recovery) expense	$	(5,632	)	$	9,769

Deferred tax expense
Origination and reversal of temporary differences		5,463			5,234
Reduction in tax rate		2,630			(301	)
Recognition of tax assets not previously recognized		(738	)		(726	)

Deferred income tax expense		7,355			4,207

Income tax expense	$	1,723		$	13,976

The following table reconciles income taxes calculated at a combined consolidated Canadian federal/provincial income tax rate with the income tax expense in the combined consolidated financial statements:


Canadian $ thousands, for the year ended December 31	2012			2011
(Loss) Income before tax	$	(3,516	)	$	54,990

Income tax recovery at the combined basic rate of 25.71% (2011—27.26%)		(904	)		14,990
Increase (decrease) in taxes resulting from:
Non-deductible/ (non-taxable) losses and write-downs/ (income)		166			246
Increase (reduction) in deferred income tax rates		2,929			(550	)
Recognition of tax assets not previously recognized		(229	)		(726	)
Other items		(239	)		16

Income tax expense	$	1,723		$	13,976

Deferred tax assets (liabilities) relate to the following temporary differences and loss carry forwards:


Canadian $ thousands, for the year ended December 31, 2012	Opening balance			Recognized in net earnings			Recognized in other comprehensive income		Closing balance
Deferred tax assets
Tax loss carryforwards	$	57,887		$	(10,269	)	$	—	$	47,618
Environmental rehabilitation obligations		39,147			5,322			—		44,469
Finance lease obligations		35,627			4,248			—		39,875
Pension and other benefit plans and reserves		11,625			(950	)		1,853		12,528
Other items		349			14			—		363

Deferred tax assets		144,635			(1,635	)		1,853		144,853

Deferred tax liabilities
Property, plant and equipment		(216,753	)		(10,047	)		—		(226,800	)
Deferred financing costs		—			(23	)		—		(23	)
Other items		(9,849	)		454			—		(9,395	)
Finance lease receivables		(57,263	)		3,896			—		(53,367	)

Deferred tax liabilities		(283,865	)		(5,720	)		—		(289,585	)

Net deferred tax liabilities	$	(139,230	)	$	(7,355	)	$	1,853	$	(144,732	)


Canadian $ thousands, for the year ended December 31, 2011	Opening balance			Recognized in net earnings			Recognized in other comprehensive income			Closing balance
Deferred tax assets
Tax loss carryforwards	$	45,692		$	12,195		$	—		$	57,887
Environmental rehabilitation obligations		35,358			3,789			—			39,147
Finance lease obligations		27,144			8,483			—			35,627
Pension and other benefit plans and reserves		5,075			(407	)		6,957			11,625
MAV note impairment		304			(304	)		—			—
Other items		348			1			—			349

Deferred tax assets		113,921			23,757			6,957			144,635

Deferred tax liabilities
Property, plant and equipment		(183,506	)		(33,247	)		—		$	(216,753	)
Deferred financing costs		(40	)		40			—			—
Other items		(9,821	)		359			(387	)		(9,849	)
Finance lease receivables		(62,147	)		4,884			—			(57,263	)

Deferred tax liabilities		(255,514	)		(27,964	)		(387	)		(283,865	)

Net deferred tax liabilities	$	(141,593	)	$	(4,207	)	$	6,570		$	(139,230	)

Deferred income taxes are classified on the combined consolidated statements of financial position as follows:


Canadian $ thousands,	December 31, 2012			December 31, 2011			January 1, 2011
Deferred income tax assets	$	3,687		$	—		$	—
Deferred income tax liabilities		(148,419	)		(139,230	)		(141,593	)

	$	(144,732	)	$	(139,230	)	$	(141,593	)

As at December 31, 2012, the Company had non-capital losses of $176,809 that can be used to reduce future taxable income.

The non-capital losses expire as follows:


Expiration date
2025	$	31,451
2027		18,732
2028		36,579
2029		32,759
2030		47,788
2032		9,500

	$	176,809

17. COMMON SHARES

Prairie Mines & Royalty Ltd.

Authorized

PMRL is authorized to issue an unlimited number of common, special and extraordinary shares. Preferred shares rank senior to all other share classes with respect to the payment of dividends. Except in the case of voting where each common share is entitled to a single vote and payment of dividends, all share classes carry the same

rights, privileges and entitlements. Neither the common, special nor extraordinary shares can be designated, reclassified or changed without the approval of holders of the other share classes. In the event of termination or wind-up, all share classes would be entitled to receive PMRL’s remaining property in proportion to their share interests, after distribution of any unpaid cumulative dividends on preferred shares.

Issued

2012

2011

Canadian $ thousands, for the year ended December 31

Shares

Amount

Shares

Amount

Common shares, beginning of year

46,600,000

619,052

46,600,000

619,052

Issuance of common shares^(a)

2,567,000

51,340

—

Common shares, end of year

49,167,000

670,392

46,600,000

619,052

^a)	During the year ended December 31, 2012, PMRL issued 2,567,000 (2011—nil) common shares to Sherritt for proceeds of $51,340 (2011—nil).

Coal Valley Resources Inc.

Authorized

CVRI is authorized to issue an unlimited number of common shares. Each share represents an equal undivided beneficial interest in any earnings from CVRI and in its net assets in the event of termination or wind-up. All shares are of the same class with equal rights and privileges. Shares may be issues for consideration payable in installments with such units being held as security for unpaid installments.

Issued

2012

2011

Canadian $ thousands, for the year ended December 31

Shares

Amount

Shares

Amount

Common shares, beginning and end of year

38,067,746

38,068

38,067,746

38,068

18. SEGMENTED INFORMATION

The Company operates 7 owned mines, a contract mine, a 50% owned mine that produce coal, two processing plants that produce char and activated carbon and two inactive sites that are in various stages of reclamation. PMRL coal production is sold to domestic utility customers. CVRI coal production is sold to foreign utility customers and an international commodity trader. Char and activated carbon production is sold to customers in the United States. PMRL also holds a portfolio of coal and potash mineral rights from which it earns royalty revenue.

For purposes of these combined consolidated financial statements, the Company has three distinct business segments that qualify as reporting segments: Prairie Mining Operations, Mountain Mining Operations and Royalties. Prairie Mining Operations includes all results of PMRL, except Royalties. Mountain Operations includes all results of CVRI.


	2012
Canadian $ thousands, for the year ended December 31	Prairie Mining			Mountain Mining			Royalties			Total
Revenue	$	568,934		$	351,900		$	53,545		$	974,379
Cost of sales		519,596			364,099			20,397			904,092

Gross profit (loss)		49,338			(12,199	)		33,148			70,287
Administrative expenses		7,808			6,787			—			14,595

Operating profit (loss)		41,530			(18,986	)		33,148			55,692

Financing income		(18,757	)		(2	)		(34	)		(18,793	)
Financing expense		52,186			25,815			—			78,001

Net finance expense (income)		33,429			25,813			(34	)		59,208

(Loss) earnings before tax		8,101			(44,799	)		33,182			(3,516	)
Income tax expense (recovery)		(4,560	)		(11,210	)		17,493			1,723

Net (loss) earnings	$	12,661		$	(33,589	)	$	15,689		$	(5,239	)

Supplemental information
Depreciation and amortization	$	43,817		$	63,101		$	18,445		$	125,363
Property, plant and equipment expenditures		26,592			31,557			—			58,149

Canadian $ thousands, as at December 31, 2012
Non-current assets		466,896			210,197			627,520			1,304,613
Total assets	$	622,598		$	304,384		$	632,655		$	1,559,637


	2011
Canadian $ thousands, for the year ended December 31	Prairie Mining			Mountain Mining		Royalties			Total
Revenue	$	547,498		$	443,851	$	58,195		$	1,049,544
Cost of sales		506,244			393,947		19,148			919,339

Gross profit		41,254			49,904		39,047			130,205
Administrative expenses		11,028			5,148		—			16,176

Operating profit		30,226			44,756		39,047			114,029

Financing income		(18,823	)		—		(36	)		(18,859	)
Financing expense		68,560			9,338		—			77,898

Net finance expense (income)		49,737			9,338		(36	)		59,039

Earnings (loss) before tax		(19,511	)		35,418		39,083			54,990
Income tax expense (recovery)		6,628			9,622		(2,274	)		13,976

Net earnings (loss)	$	(26,139	)	$	25,796	$	41,357		$	41,014

Supplemental information
Depreciation and amortization	$	45,869		$	45,363	$	18,285		$	109,516

Property, plant and equipment expenditures		6,464			16,306		—			22,770

Canadian $ thousands, as at December 31, 2011
Non-current assets		459,410			182,723		645,975			1,288,108
Total assets	$	610,622		$	297,347	$	651,947		$	1,559,916

Geographic segments

The Company earns revenue from several geographic regions as follows:


Canadian $ thousands, for the year ended December 31	2012		2011
Canada	$	606,006	$	596,257
Asia		220,257		301,572
United States		24,133		21,269
Other foreign countries		123,983		130,446

	$	974,379	$	1,049,544

Significant customers

The Company earns the majority of its coal and royalty revenue from a small number of customers from each segment as follows:


Canadian $ thousands, for the year ended December 31	2012		2011
Prairie Mining segment
Revenue	$	559,304	$	553,746
Number of major customers		4		4

Mountain Mining segment
Revenue	$	218,715	$	310,166
Number of major customers		2		2

19. COST OF SALES

Cost of sales includes the following select information:


Canadian $ thousands, for the year ended December 31	2012		2011
Employee costs	$	273,103	$	259,827
Depreciation and amortization on property, plant and equipment and intangible assets		125,363		109,516
Loss on environmental rehabilitation obligations		3,321		5,219

20. NET FINANCE EXPENSE


Canadian $ thousands, for the year ended December 31	2012			2011
Interest income on loans and finance lease receivables	$	(17,323	)	$	(18,074	)
Interest income on short-term investments		(1,249	)		(678	)
Interest income on cash and cash equivalents		(221	)		(222	)
Net loss on investments		—			115

Total financing income		(18,793	)		(18,859	)

Interest expense on Sherritt promissory note		17,342			—
Interest expense on subordinated note		42,644			59,992
Interest expense on finance lease obligations and other equipment financing arrangements		8,175			7,168
Interest expense on Sherritt loan payable		1,851			1,926
Accretion expense on environmental rehabilitation obligations		2,300			3,046
Interest expense on loans and borrowings		2,999			2,486
Other finance charges		1,467			1,628
Foreign exchange loss		1,223			1,652

Total financing expense		78,001			77,898

Net finance expense	$	59,208		$	59,039

21. NET CHANGE IN NON-CASH WORKING CAPITAL ITEMS


Canadian $ thousands, for the year ended December 31	2012			2011
Trade accounts receivable	$	280		$	(5,518	)
Inventories		(36,738	)		(12,711	)
Prepaid expenses		495			(744	)
Due from related parties		47			391
Trade accounts payable and accrued charges		(7,838	)		1,841
Due to related parties		(17,281	)		(5,709	)

	$	(61,035	)	$	(22,450	)

22. INTEREST IN JOINT VENTURE

As described in Note 3, PMRL has a contractual arrangement with another company for the production and sale of activated carbon to coal fired utility plants in Canada and the United States. PMRL acts as operator for the plant facilities and the other venturer conducts marketing activities.

PMRL accounts for its 50% interest in the Venture using proportionate consolidation. The following is a summary of PMRL’s proportionate interest in the Venture which has a December 31 reporting date:


Canadian $ thousands,	December 31, 2012			December 31, 2011			January 1, 2011
Current assets	$	5,276		$	5,092		$	4,657
Non-current assets		34,241			35,159			36,140
Current liabilities		(1,494	)		(896	)		(2,644	)
Non-current liabilities		(812	)		(766	)		(580	)

Net assets	$	37,211		$	38,589		$	37,573


Canadian $ thousands, for the year ended December 31	2012			2011
Revenue	$	16,243		$	13,497
Expenses		10,064			9,291

Net earnings	$	6,179		$	4,206

23. FINANCIAL RISK AND CAPITAL RISK MANAGEMENT

Risk management policies and hedging activities

The Company is are sensitive to changes in commodity prices, foreign-exchange and interest rates. The Company’s Management Committee has overall responsibility for the establishment and oversight of the Company’s risk management framework. Although the Company has have the ability to address its price-related exposures through the use of options, futures and forward contacts, it does not generally enter into such arrangements.

Credit risk

Liquidity risk

Based on management’s assessment of its financial position and liquidity at December 31, 2012, management believes the Company will be able to satisfy its current and long-term obligations as they come due.

Financial obligation maturity analysis

The Company’s significant contractual commitments, obligations, and interest and principal repayments on its financial liabilities are as follows:


Canadian $ thousands, as at December 31, 2012	Total		Falling due within 1 year		Falling due between 1-2 years		Falling due between 2-3 years		Falling due between 3-4 years		Falling due between 4-5 years		Falling due more than 5 years
Loans and borrowings	$	47,187	$	1,203	$	1,203	$	1,203	$	43,578	$	—	$	—
Trade accounts payable and accrued charges		73,089		73,089		—		—		—		—		—
Finance lease obligations		171,458		51,805		39,584		34,222		30,211		15,636		—
Pension obligations		116,126		13,130		13,386		13,653		13,576		9,783		52,598
Other equipment financing		8,530		2,663		1,941		1,834		1,205		641		246
Operating leases		14,674		10,739		3,612		323		—		—		—
Environmental rehabilitation obligations⁽¹⁾		200,685		31,728		32,430		29,066		26,069		24,425		56,967
Due to related parties		364		364		—		—		—		—		—
Related party loans		1,425,622		61,783		61,783		61,783		61,783		90,844		1,087,646

Total	$	2,057,735	$	246,504	$	153,939	$	142,084	$	176,422	$	141,329	$	1,197,457

⁽¹⁾	Environmental rehabilitation obligations are undiscounted.

Market risk

Market risk is the potential for financial loss from adverse changes in underlying market factors, including interest rates and foreign-exchange rates.

Foreign-exchange risk

The Company is exposed to foreign exchange fluctuations on its United States dollar denominated thermal export coal sales and certain finance lease obligations. Fluctuations in the CDN/US exchange rate could materially affect the Company’s net earnings. The Company does not currently use derivative instruments to mitigate these currency risks. Based on revenue denominated in U.S. dollars, a strengthening or weakening of $0.01 in the Canadian dollar to the US dollar, with all other variables held constant, would have a $3,519 unfavorable or favorable impact, respectively, on net earnings. A change in foreign exchange on United States dollar denominated finance lease obligation payments would not materially increase borrowing costs.

Interest rate risk

Capital risk management

The Company is subject to two financial covenants on the credit facility based on the combined financial position of PMRL and CVRI as follows: EBITDA-to-interest expense ratio of not less than 4:1 and total debt-to-EBITDA ratio of no more than 3:1. The Company monitors these covenants on a quarterly basis and is in compliance with them as at and for the year ended December 31, 2012. The Company is also subject to minimum capital requirements as part of its environmental reclamation bonding program with the Alberta provincial government as described in Note 15. Other than these two restrictions, the Company is not subject to any other externally imposed capital requirements.

In the definition of capital, which has not changed from the prior year, the Company includes shareholders’ equity, current and non-current loans and borrowings, related party loans and undrawn credit facilities.


Canadian $ thousands, as at December 31	December 31, 2012		December 31, 2011		January 1, 2011
Shareholder’s equity	$	174,173	$	133,414	$	111,404
Loans and borrowings		42,955		54,215		104,892
Undrawn senior credit facility agreement		307,045		148,897		127,961
Related party loans		732,094		766,202		766,202
Undrawn CAT Finance credit facility agreement		55,505		40,829		60,680

	$	1,311,772	$	1,143,557	$	1,171,139

24. FINANCIAL INSTRUMENTS

Financial instrument hierarchy


Canadian $ thousands, as at	Hierarchy level		December 31, 2012		December 31, 2011		January 1, 2011
Held-for-trading, measured at fair value
Cash equivalents		1	$	5,991	$	—	$	1,995
Short-term investments		1		—		—		18,951
Master Asset Vehicle notes		3		—		—		2,820

The followings assets have been ranked Level 1 since their market value is readily observable:

Cash equivalents

These are liquid Canadian Government treasury bills having original maturity dates of three months or less.

Short-term investments

These are liquid Canadian Government treasury bills having original maturity dates greater than three months and less than one year.

Master Asset Vehicle (MAV) notes Level 3 reconciliation


Canadian $ thousands, for the year ended December 31	2012		2011
Balance, beginning of year	$	—	$	2,820
Total losses in net earnings		—		(115	)
Net proceeds from sale of notes		—		(2,705	)

Balance, end of year	$	—	$	—

In September 2011, the Fund sold the MAV notes for proceeds of $2,705.

25. SUBSEQUENT EVENTS

On January 10, 2013, the Company and its Highvale mine contract customer agreed to transfer operations to the customer who owns the mine and terminate the mining contract. On January 17, 2013 the customer assumed responsibility for direct mining activities with a transition process which was completed over the following six months.

For the year ended December 31, 2012 the mining contract contributed $6,460 to the Company’s net earnings. As part of the transition agreement, the customer assumed all of the Company’s assets and liabilities associated with operating the Highvale mine. The Company earned $3,994 in net earnings from the customer during the first six months of fiscal 2013 as operations were transferred during the notice period. The Company also received $13,418 in cash from the customer upon transfer of mobile equipment at net book value following payment of the associated finance lease obligation. No accounting gain or loss resulted from this net tangible asset transfer.

Amounts included in the combined consolidated statement of financial position relating to the Highvale mine are as follows:


Canadian $ thousands, as at December 31	2012		2011
Accounts receivable	$	3,466	$	5,309
Finance lease receivables		25,870		29,133
Intangible assets		17,316		17,677

Total assets		46,652		52,119

Trade accounts payable and accrued charges		1,030		1,092
Finance lease liabilities		13,951		20,025
Other non-financial liabiliites		8,780		11,991

Total liabilities		23,761		33,108

Total net assets	$	22,891	$	19,011

As a result of this event, a non-cash write-off of $5,458 was recognized in January 2013 related to the Highvale mining contract and customer relationship intangible assets. Additionally, in January 2013 a $39,326 non-cash gain was recognized upon transfer of the hourly employee defined benefit pension liability to the customer. Measurement of this gain was based on the actuarial valuation of the plan at the time of transfer. As a result of the above, management recorded a net gain on the transfer of operations of approximately $33,868.

On September 4, 2013, PMRL settled all outstanding objections and appeals with the Canada Revenue Agency for the 2002 to 2005 taxation years. The amount of the settlement was not materially different than the amount accrued in the combined consolidated financial statements as at December 31, 2012. On October 31, 2013 a breach of an onsite water containment pond occurred at the Obed Mountain mine. The release consisted of process water, containing water mixed with naturally occurring materials, mainly clay, mud, shale and coal fines. Management is actively monitoring the site and affected downstream area to assess the full extent of environmental damage that has been caused from this incident and will determine an appropriate environmental rehabilitation obligation to record once all pertinent information is known. As part of the divestiture described below, Sherritt will indemnify Westmoreland Coal Company for all costs associated with this incident.

WESTMORELAND COAL (WLBAQ) Inactive 8-KEntry into a Material Definitive Agreement