Private and Confidential Enclosure 3 ZCCM Investments Holdings Plc AUDIT COMMITTEE REPORT TO THE 73RD BOARD MEETING OF THURSDAY, 9 JUNE 2016 9 June 2016 Lusaka AUDIT COMMITTEE OF THE BOARD REPORT TO THE 73RD ZCCM-IH BOARD MEETING OF 9 JUNE 2016 The Audit Committee of the Board (AC) held its 48th Meeting on 26 May 2016. Present at the meeting were Ms S Mutemba (Chairperson), Mr C Mwananshiku, Mrs P C Kabamba, and Mr P Taussac, Dr P Kasolo. In attendance were, Mr. M Chipata, Ms W Mangambwa, Mr C Chabala, Mr S Mubano, Mr L Mbalashi and Mr C Mjumphi (Secretary). The following are highlights of the matters that were discussed at the meeting and resolutions made thereof: 1. DELIBERATIONS UNDER MATTERS ARISING 1.1 Konkola Copper Mines Plc (KCM) dues > With regard to ZCCM-IH pursuing its rights under the Settlement Agreement (SA) signed with KCM, Management reported that the Attorney General (AG) cleared the engagement of Clifford Chance (CC). CC wrote a Letter of Claim to KCM on 6 May 2016 demanding full settlement of amounts outstanding as at 20 May 2016 totalling US$ 105,224,277. By 20 May 2016 (14 days’ notice) failure to which Legal proceedings will be commenced. > With respect to the proposed conversion of $50 million of the amount due under the SA into preference shares, the AC was informed that this would be dealt with once CC provided guidance on the feasibility of the proposed conversion of shareholder loans into preference shares. CC provided guidance to the effect that the preference share option was disadvantageous in comparison to ZCCM-IH rights under the Settlement Agreement. It was therefore not in the best interest of ZCCM-IH to pursue the Preference share option. > The AC was informed that KCM proposed that an agreement with ZCCM-IH be signed in which KCM would be committed to pay approximately $2 million on a monthly basis from the proceeds of the Value Added Tax (VAT) refunds which GRZ owed. Furthermore, KCM proposed that if ZCCM-IH could help facilitate discussions on total VAT refunds (approximately $ 106 million) owed by GRZ, then ZCCM-IH would be paid 40% of these funds. The AC directed the ZCCM-IH Management to check with ZRA whether KCM had submitted the required documentation to facilitate payment of VAT refunds. > The AC observed that while KCM was making promises regarding a payment plan for funds owed to ZCCM-IH, it was not possible to ascertain the reliability of these promises as KCM had rarely kept its word. In this regard, it was necessary that ZCCM-IH avoids getting partial payment on funds owed without a signed guarantee. > The AC observed that the move to take legal action against KCM was commendable as it was the only alternative left for ZCCM-IH to exercise its rights under the SA. > Regarding any future discussions or engagements with KCM, the AC was informed that any such discussions would have to be done through CC the lawyers representing ZCCM-IH. > On the progress on the legal processes, the AC was informed that CC, had proposed a list of Barristers from which ZCCM-IH would choose to provide litigation services. ZCCM-IH was reviewing the cost structure to ensure that the attendant fees were fixed rather than variable and charged as an hourly rate. 1.2 Directors’ Half Yearly for the period ended 30 September 2015 > The AC was informed that the Board approved the Directors’ Half Yearly Summary for the period ended 30 September 2015. This was, however, not issued to the market as the Securities and Exchange Commission (SEC) refused to clear it. The SEC stated that the delayed audited Financial Statements for the year ended 31 March 2015 should first be issued. > Issuance of the Directors’ Half Yearly Summary awaited Lusaka Stock Exchange’s (LuSE) clearance. LuSE had asked for inclusion of the cash and cash equivalents and the cashflow statement as at 30 September 2015. Stockbrokers Zambia communicated that LuSE stated this is accordance with International Financial Reporting Standards (IFRS). 1.3 Engagement of consultant for the forensic audit of Kansanshi Mining Plc (Kansanshi) > The AC was informed that the engagement of a foreign based law firm/lawyer to undertake the forensic audit was approved by the Procurement Committee on 11 March 2016 and submitted to the ZPPA for a ‘no objection’ to direct bid Mr M Sullivan. > The Attorney General (AG) cleared the engaged of Mr Sullivan and his letter (the AG) was received on 12 May 2016. Mr Sullivan had since been contracted. The Legal and Risk and Internal Audit Directorates held a preliminary telephone discussion with Mr Sullivan on 23 May 2016 to agree on the instructions relating to ZCCM-IH following its rights. 1.4 Compliance Risk Management > The AC was informed that the draft responses to the compliance report with the National Pensions and Security Act were provided. 2. FINANCIAL RESULTS FOR THE QUARTER ENDED 31 MARCH 2016 2.1 The AC reviewed the Financial Results for the Quarter ended 31 March 2016. 2.2 Following review of the Financial Results for the quarter: > The AC was informed that both Lubambe Copper Mine Limited (Lubambe) and Chibuluma Mining Plc (Chibuluma) had stopped paying Management fees to ZCCM-IH owing to cashflow constraints. ZCCM-IH Management would engage these companies to reach an amicable agreement. > The AC was informed that the main drivers of the cash-outflows were payment made to NLC, Investrust Bank Plc (rights issue underwriting) and Micmar Enterprises for the purchase of the Trinity Park property. > The AC directed that the accounting treatment of the value of Trinity park as an investments (when approximately 1/3 of the premises would be occupied by ZCCM-IH) be verified against the relevant accounting standards. > Regarding the performance ratios, the AC observed that the Return on Shareholders’ funds was very low and any slight reduction would result in a negative return. It was reported that the return on shareholders’ funds was affected by the low dividend income from investee companies. The AC observed that the approach of waiting for dividends was no longer effective and as such, ZCCM-IH needed to find alternative and innovative ways of increasing shareholder value. > The AC directed that more information be provided on the drivers of the performance ratios reflective of the entire ZCCM-IH portfolio. > The AC directed that further information be provided on the variances reported in the quarterly report particular on Director Fees. 2.3 The AC adopted the Financial Results for Quarter Ended 31 March 2016 and now submits the results to the Board for Noting (these are incorporated in the IOR for the Quarter ended 31 March 2016 under Finance section of the report). 3. RISK AND INTERNAL AUDIT REPORT FOR QUARTER ENDED 31 MARCH 2016 3.1. The AC reviewed the RIA Report for the quarter ended 31 March 2016. > The AC enquired whether it was feasible to explore alternative sources of power for NLC’s operations given the challenges in the power supply experienced nationwide. It was reported that NLC had made an assessment of its power requirements and that this would cost approximately $ 1.5 million, however, the details of the type of the energy infrastructure required would have to be worked out. The AC observed that if NLC was able to generate excess power out of the proposed energy project, it would be able to sale the excess requirement to ZESCO and be able to generate funds to cushion its cashflow challenges. The AC reiterated that need for timeliness in exploring business opportunities as this would improve the Group’s performance. > Regarding the performance review of the 2012-16 ZCCM-IH Strategic Plan, the AC observed that there were a number of planned activities which were not undertaken which would have significantly benefited the Company. One example was the proposed support to small-scale miners which if pursued would have seen some growth in new mining projects. These would have had a positive impact on the Company’s performance. > The AC emphasized the need for regular reviews of the Strategic Plan as this would provide an impetus for improved performance on a regular basis. > The AC was informed that the 2016-2020 Strategic Plan had taken into account the need to be more specific when setting strategic objectives and subsequent periodic reviews. It was reported that the 2016-2020 Strategic Plan would be ready by the end of June 2016. > The AC enquired on the prospects of acquiring ZAMEFA. It was reported that the proposal was reviewed and was found to be over-priced. Furthermore, there were issues relating to assets location which made the proposal unattractive. > Regarding the proposal to invest in SCAW, the AC was informed that ZCCM-IH had started analyzing the proposal with a view to determining the attractiveness of the business, however, the efforts were halted by the IDC. The AC directed that ZCCM-IH should pursue this proposal as the company had positive prospects based on its past performance and would improve with a strong business turnaround plan. Further, as the company’s main product was the manufacture of millballs, there was need to analyze market demand and if viable, assure other players who may be interested in the setting up similar plants (Such as First Quantum Mining) that SCAW would manufacture the mill balls that would meet the market specifications. > On the Organisational Design Emerging Risks, the AC directed that the matter be presented to the Remuneration Committee of the Board for guidance. > On the Mines and Minerals Audit Report, the AC was informed that ZCCM-IH carried out an assessment of the potential prospects for all the mining licences and decided to keep only those in high prospect areas. > Regarding Compliance Audit, the AC was informed that Management would take necessary steps to ensure that the Company was compliant. The Risk and Internal Audit Report for quarter ended 31 March 2016 is attached as Appendix 3.1 and submitted to the Board for noting. 4. OTHER MATTERS: 4.1 Request for approval for Audit Fees in respect of Audit of ZCCM-IH Financial Statements: > The AC was informed that the IDC requested ZCCM-IH to prepare for the four months period from 1 September to 31 December 2015 as an input into the IDCs report. Following the request, KPMG was approached to determine the fees payable to undertake this audit. KPMG proposed a fee of K 278,940 exclusive of VAT. The audit would include ZCCM-IH’s subsidiaries and associates. > The AC was informed that KPMG had proposed a fee of K 671,060 exclusive of VAT for Statutory Audits. This fee was 3% above the 2015/16 Audit Fees. 4.2 Following the presentation of the request: > The AC observed that the fees of K 278,940 for a four month’s audit as requested by the IDC was excessive given that KPMG were already engaged to conduct statutory audit for ZCCM-IH for the financial year ended 31 March 2016. > In view of the observations above, the AC directed that Management should engage KPMG for a more realistic fee covering both audits i.e. statutory and one requested by the IDC. Further, the AC directed that detailed information on the scope of the audit be provided to Mr Mwananshiku for further guidance. > The AC thus declined to adopt the proposed audit fees. 5