African Minerals Limited : Interim Results

Interim Results for the six months ended 30 June 2011 :  (“African Minerals” “AML” or “the Company”) 1st Half Highlights.

• Capital of $475.6m invested in the project in the first 6 months of 2011
• Completion of $417.7m of Secured Loan Facility in February 2011
• $46m equity raised as a result of China Railway Materials Commercial Corporation (“CRM”) exercising follow-on rights
• Board strengthened by addition of Nina Shapiro and Bernard Pryor (from 12 July 2011) as independent non-executive directors
• Memorandum of Understanding signed with China Communications Construction Company Limited (“CCCC”) for port and rail elements of Phase II, with expansion to 45Mtpa

Project Update and Outlook

Commissioning and remedial activities in progress for Tonkolili Phase I project, which remains on course to deliver first ore on ship (“FOOS”) in Q4 2011

• Phase I project capacity expanded from 12Mtpa to 15Mtpa with 12Mt production target in 2012
• Signing of final agreements for $1.5Bn Shandong Iron and Steel Group investment (“Shandong”), with completion by 31 December 2011, principally subject to regulatory approvals
• c$90m equipment financing facility completed with The Standard Bank of South Africa Ltd (“Standard Bank”)
• Term sheet agreed and mandate executed with Standard Bank to provide $100m of subordinated stand-by facility, with 8Mt of off take over 3 years

Executive Chairman’s Review

In the first half of 2011 the Company continued to expand production capacity and infrastructure, raise further funds and de-risk our medium and long-term growth strategy. We remain on track to achieve our goal of bringing Phase I of the Tonkolili mine into production in the fourth quarter of 2011, which we will ramp up to an increased annual production capacity of 15Mtpa.

Good progress has been made on completion of the port and railway infrastructure and most major works are now complete. The port infrastructure is complete with commissioning under way, and we expect that the railway, following some remedial works, will be operational in the near future. We intend to send a first trial shipment of 40,000 tonnes of ore to Shandong in time to satisfy the closing timetable of their investment.

As announced in August, in order to successfully de-risk these projects prior to the start of the rainy season, the Company redeployed equipment from the mine to support these civil works. As a result the build-up of ore stockpiles was slower than originally anticipated and the Company now expects FY 2011 Direct Shipping Ore (“DSO”) sales of 1.2Mt compared to an original estimate of 2.5Mt.

During the construction of Phase I we have continued to de-bottleneck the integrated mine, plant, rail and port system to ensure that we can maximize production. As a result we have increased our planned export capacity to 15Mtpa from 12Mtpa. This expansion, against a largely fixed cost base, will enable us to mitigate cost escalation from increased fuel and other input costs and ensure production costs remain at or below $27.50 per tonne.

Following the achievement of first ore on ship, Phase I development is now expected to be fully commissioned in Q1 2012, with a capacity of 15Mtpa.

The Phase IB wet process plant will ramp up to full capacity by the end of Q2 2012 and the Company expects to mine, market and ship 12Mt of iron ore in 2012 and 15Mtpa from 2013.

As we look towards the commencement of commercial exports, our sales and marketing activity is advancing well. We have had significant interest from many parties for our Phase I direct shipping ore, over and above our existing agreements with CRM and Shandong, and those opportunities are currently being reviewed.

With Phase I now undergoing commissioning, we now look forward to implementing our next phase of expansion.

Expansion

To that end, we have signed agreements with SISG, for their acquisition of a 25% stake in our Tonkolili project for an injection, at the project level, of $1.5Bn and a discounted offtake agreement. That transaction remains subject principally to Chinese regulatory approval, but we anticipate being able to draw down all funds by year end. These funds will allow us to accelerate this next major growth phase of our business.

In May we signed a Memorandum of Understanding with CCCC – one of the major Chinese port and rail construction companies – to carry out the engineering studies required for the major infrastructure components of the expansion, most notably being the establishment of a new, globally significant deep water port facility at Tagrin Point, and the early establishment of a standard gauge, heavy haul railway from Tonkolili to Tagrin Point. Those studies, which now have a scope to support expanded production of 45Mtpa, are currently in progress.

Financials

In February, the Company successfully completed a Secured Loan Facility, raising $417.7m, which completed the original budget funding requirements to construct Phase I. In addition, following the completion of the $307m equity raising in November 2010, CRM confirmed they would exercise their pre-emption rights to maintain its 12.5% shareholding, investing a further $46m.

The cost to completion of our Phase I project escalated by $284m, as a result of a change in scope from 12Mtpa to 15Mtpa capacity ($132m, or just $44 per incremental tonne of capacity), and various other cost escalations ($152m), including costs incurred as a result of activities taken to reduce the impact of rain on the completion of our project.

Taking all of the above into account, on 18 August 2011 we announced that we expect to reach a minimum cash balance of $20m in Q1. Remedial work during commissioning is expected to incur a further $5m, reducing anticipated headroom to $15m.

While AML is confident that it will be able to operate within the expected headroom, the Board believes it was prudent to establish a standby facility to mitigate the potential effects of capital escalation, commissioning and market risks. Accordingly the Company has agreed a term sheet with Standard Bank for the provision of $100m subordinated standby facility.

As part of the subordinated standby facility, Standard Bank and AML will also enter into an off take contract to supply 8Mt of iron ore being 2Mt in the first year, and 3Mtpa in the second and third years, priced in line with Platt’s 58%Fe iron ore fines index CFR China.

Health & Safety

In the first half of the year, Contractors and Employees of AML managed to achieve a Lost Time Injury Frequency Rate (LTIFR) of 2.06 injuries per million man hours worked. This compares favourably to our achievement of 2.625 during the full year 2010, and we will continue to strive to maintain this downward trend. However, in the first half of the year a sub-contractor lost his life as a result of an earthmoving incident, and another in a motor vehicle accident. Sadly, in August, another motor vehicle accident resulted in the deaths of three people employed by one of our subcontractors. We extend our heartfelt condolences to the families that suffered tragic loss.

Corporate Governance

African Minerals strongly believes that there is a direct relationship between good corporate governance and the creation of value for shareholders. Furthermore, with equity partners in China, institutional supporters around the world, and the scrutiny afforded by the draw down of the debt facility, the Company is committed to continual improvement in oversight and transparency.

During the first half of the year we significantly strengthened our Board of Directors with the addition of Nina Shapiro as Independent Non-Executive Director (‘NED’), and in early July Bernie Pryor joined the Board also as an Independent NED, as Mark Ashurst left the Board. This strengthening and adjustment of the Board will continue with an aim to having a majority of independent directors on the Board in due course.

As we develop and expand our operations we are cognisant of our responsibility to operate in a manner which is sustainable in the long-term, and are committed to ensuring that our operations have a net positive benefit for the people of Sierra Leone. We aim to operate to global best practice standards in health and safety, community relations and environmental protection. AML has committed itself to aligning operations and strategies towards the ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption set out in the UN Global Compact, and the UK Anti-Bribery Act.

We look forward to the remainder of the year, and to making 2011 a transformational year in which African Minerals will become a globally significant producer to the benefit of all of our stakeholders. As Phase I of our project nears commencement of commercial exports, on behalf of the Board, I offer my heartfelt thanks to all of our staff, our contractors, and the Government and People of Sierra Leone.

Frank Timis

Executive Chairman

29 September 2011

 

Operations review

We have made significant progress during the period on delivering the key drivers of our project which remain: the development of our multigenerational Tonkolili project; working in partnership with our local communities; enhancing governance standards; our people; and the maintenance of a robust financial position.

The Tonkolili Project

We remain on track to deliver first ore from Tonkolili onto ship in Q4 2011, just 12 months after commencement of major earthworks, and just 15 months after the receipt of the mining licence for Tonkolili.

However, during commissioning it has become necessary to perform remedial work on a 350m section of the formation and rail around 13km from the mine, which had slumped. This slump was caused by a change in drainage as a result of the railway, which forced water into a previously unidentified acquifer. The resultant flow weakened the foundation of the rail and formation. Remedial work will involve excavating the slumped area, creating an appropriate drainage, and rebuilding the formation and rail. The remedial work is expected to be completed during October, and will cost an estimated $5m.

Following a review of the operational capacity of the various elements of the Phase I project by SRK (UK) Ltd, AML now believes that the current Tonkolili mining plan will support a production rate of 15Mtpa, up from 12Mtpa. The Phase IB wet process plant, currently under construction, will support a sustained production level of 15Mtpa, whilst the rail and port infrastructure can support a capacity of 16.2Mtpa. As a result, guidance for the quantity of ore to be exported in 2012 has been increased from 10Mt to 12Mt. Full capacity of 15 Mtpa will be achieved by the end of Q2 2012 once the Phase IB wet process facility is commissioned early in the new year.

Community

We continue to work closely with local communities to manage community needs and to ensure communities are fully apprised of our plans and held four Early Works Chiefdom Committee meetings in local Chiefdoms (Makari Gbanti, Buya Romende, Marampa and Maforki) during the period. In addition crop compensation payments of $81,497 were made to 4 Chiefdoms (Buya Romende, Makari Gbanti, Kalansoghia and Kafe Simira) to compensate for crops damaged by our activities.

We continued to support local enterprise and awarded a contract to produce 80 security uniforms to a local business group. In addition, in line with our policies on community resettlement, we held several meetings with the affected community at Maparay in advance of the relocation and resettlement processes beginning and successfully relocated Farangbaya village. In addition, during the Period AML awarded 1912 scholarship awards totalling $127,000 across all 10 local chiefdoms.

The company paid $10m in advance taxes in early 2011 in order to assist in the country’s infrastructure development programme. We continue to work closely with the Government of Sierra Leone and, in order to foster mutual understanding and transparency have initiated a secondment programme with the Ministry of Finance under which we are hosting their staff in our London office.

The Sierra Leone Environmental Protection Agency (‘SLEPA’) also completed a full audit of our operations in the period, including site visits. SLEPA has expressed their satisfaction with AML’s adherence to the Environmental Management Plan (‘EMP’).

People

We continued to strengthen our management team and welcomed Peet Kotze to the company in June as VP Mining. Peet brings with him 30 years of mining and processing experience at the highest operational level, principally gained at Sishen Mine – currently the largest in Africa. Peet was promoted to Chief Operating Officer from 1st September.

As at the end of June 2011 AML and its contractors employed 6,208 people, 4,771 (77%) of whom were Sierra Leoneans.

Financial Review

Financial

In February 2011 the Company successfully completed a Secured Loan Facility for $417.7m and raised a further $46.3m in January 2011as a result of CRM exercising their pre-emption rights following the $307m equity placing in November 2010. These fundraisings gave the company the confidence to state that the project was then fully funded as to the original budget into Phase I production.

The project capital, from January 2010 to completion of the current Phase I plan, has increased by $284m from the originally announced $1.1Bn. Of this escalation, $132m is directly attributable to the change of scope in the capacity of the project from 12Mtpa to 15Mtpa. This gives a marginal capital intensity of $44 per tonne of annual production capacity.

The balance of $152m over-run represents an escalation of 14% against the original budget and is principally due to the increased cost of de-risking the railway construction, additional earthmoving requirement for a portion of the new rail, marine engineering costs, fuel price escalation, demobilisation and additional costs associated with logistics.

The previous guidance on headroom was that the Company would achieve a minimum cash balance of $71m, concurrent with First Ore On Ship. As a result of the capital expenditure increase, and a slower ramp up in production and other forecast updates, together with the additional remedial activity, we are now forecasting a minimum cash balance of $15m in January 2012, concurrent with project completion, which included equipment financing, but not the standby facility.

AML has signed an equipment financing facility with Standard Bank for the provision of circa $90m of equipment finance credit facility. The principal terms of the dollar denominated facility are a term of 5 years from drawdown, with quarterly repayment; secured on assets up to $100m, specifically carved out of the existing Secured Loan Facility for the purpose of equipment financing; . The effective interest rate of this facility, including all commitment and arrangement fees, is under 10%.

The Company has also agreed a term sheet, and mandated Standard Bank to arrange and underwrite a $100m subordinated stand by facility.

The facility, as currently drafted, will remain available until 30 June 2012, and will be subordinated to the current Secured Loan Facility. It is repayable in 5 equal quarterly instalments beginning 30 September 2012. There are no penalties for early repayment.

The effective interest rate of this facility, including all commitment and arrangement fees, is under 11% and the cost reduces by a further 1% post completion.

The loan, as is customary for a facility of this nature, is subject to finalisation of certain aspects including completion of relevant technical, credit and legal due diligence and receipt of relevant approvals. As part of the subordinated loan facility, Standard Bank and AML will also enter into an offtake contract to supply 8Mt of iron ore being 2Mt in the first year, and 3Mtpa in the second and third years, priced in line with Platt’s 58%Fe iron ore fines index CFR China.

Indicative terms for both the subordinated facility and the offtake contract have been agreed and the documentation and due diligence process is underway.

Financial result

The Group generated an operating loss for the period of $26.5m, which principally consisted of employee costs and travel of $24.1m, including share based payments of $12.5m.

We generated a taxation credit of $8.9m relating to recognition of deferred tax assets on qualifying capital expenditure in Sierra Leone that are in excess of deferred tax liabilities.

The other comprehensive loss of $5.2m resulted from fair value reductions in the Group’s listed investments, the main component of which was in respect of Cape Lambert Resources ($5.1m).

Total comprehensive loss for the period amounted to $22.6m.

Balance sheet

Exploration and evaluation assets increased by $5.1m since December 2010 to $203.2m, resulting from continued feasibility and exploration work on the Tonkolili project as the project ramps up towards commercial production in Q4 2011.

Assets under construction and property, plant and equipment increased by $470.5m since December 2010 to $739.6m, resulting from expenditure on the Tonkolili mine, the construction and reconstruction of the new and existing rail and the reconstruction and upgrade of the Pepel port facility.

The net deferred tax asset has increased by $9.0m since December 2010 to $17.2m and is primarily in respect of tax allowances on qualifying assets in Sierra Leone. This asset has been recognized as the business predicts that profits will be available from future periods to utilize these losses.

In January 2011 $46.3m was raised through an equity placing as a result of CRM exercising their pre-emption rights in relation to the equity placing undertaken in November 2010. In addition the group closed a secured non-revolving credit facility for an amount of $417.7m.

At the end of June 2011 cash and cash equivalents amounted to $342.6m (December 2010: $372.4m).

Prior period adjustments

A number of prior period adjustments have been identified as a result of errors, changes in policy or a review by management as to the most appropriate method of accounting given the current activities of the Group, all these adjustments were fully disclosed in the financial statements for the year ended 31 December 2010. The adjustments recorded relate to the June 2010 effect. In summary the adjustments show an increase in the total comprehensive loss for the period to June 2010 of $1.9m and a total adjustment to equity holders as at June 2010 of $2.8m.

In PDF format full report:  Interim_results_30.09.11

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