Annual Report 2013

Directors’ Report

The Directors present their report and the audited financial statements for the year ended 31 December 2013.

Principal Activities

The principal activity of Kenmare Resources plc (“the Company”) and its subsidiary undertakings (together, “the Group” or “Kenmare”) is the operation and expansion of the Moma Titanium Minerals Mine (the “Mine” or “Project”) in Mozambique.

Business and Strategy Review and Future Developments

A Business and Strategy Review, including likely future developments of the Group, set out here forms part of the Directors’ Report and is incorporated by reference.

Finance Review and Risks and Uncertainties

A Finance Review, including a description of the principal risks and uncertainties facing the Group set out on this and this page forms part of the Directors’ Report and is incorporated by reference.

Risk Exposure

The exposure of the Group to price and credit risk is detailed in the trade and other receivables (Note 15), cash and cash equivalents (Note 16), bank loans (Note 21), and trade and other payables (Note 25). The exposure of the Group to liquidity risk and cash flow risk is detailed in capital and liquidity management (Note 26).

Key Performance Indicators

The Group’s key performance indicators are detailed here.

Statement of Results

During 2013, the Group sold 677,900 tonnes of ilmenite, zircon and rutile to customers at a sales value of US$161.5 million (2012: US$234.6 million). US$23.6 million of revenue relating to product produced during the ramp-up and commissioning of the expansion plant has been capitalised in property, plant and equipment (2012: nil). Cost of sales for the year was US$113.7 million (2012: US$134.5 million) resulting in a gross profit of US$24.1 million (2012: US$100.2 million). US$28.3 million (2012: nil) of operating costs relating to product produced during the ramp-up and commissioning of the expansion plant has been capitalised in property, plant and equipment (2012: nil).

Other operating costs were US$19.5 million (2012: US$19.7 million) comprising distribution costs for the year of US$11.0 million (2012: US$9.1 million) and freight costs of US$3.4 million (2012: US$3.2 million) respectively. Demurrage costs incurred as a result of delays in shipments during the year totalled US$0.4 million (2012: US$0.7 million). Administration costs were US$3.4 million (2012: US$6.6 million). Total share-based payments for 2013 amounted to US$0.8 million (2012: US$3.5 million) of which US$0.6 million (2012: US$0.7 million) relate to staff at the Mine and are included as a production cost of inventories. US$0.2 million (2012: US$0.4 million) relate to staff working on the expansion project and was capitalised in property, plant and equipment, and the balance of nil (2012: US$2.4 million) was expensed in the statement of comprehensive income. In October 2013, a fire occurred in the trommels section of WCP A. The costs of repair works and replacement parts amounted to US$1.3 million during 2013 (2012: nil).

There was a foreign exchange loss for the year of US$6.5 million (2012: US$0.6 million) mainly as a result of losses on the retranslation of the Euro denominated loans net of gains on the retranslation of cash deposits.

Loan interest and finance fees were US$40.5 million (2012: US$28.7 million) during the year. Deposit interest earned was US$0.3 million (2012: US$1.7 million). The resultant loss before tax for the year was US$42.1 million (2012: US$52.8 million profit).

As at the December 31, 2013 statement of financial position date, Kenmare Moma Mining (Mauritius) Limited had unused tax losses of nil (2012: US$12.2 million). The deferred tax asset was reduced by US$2.2 million in 2013 as it is anticipated that prior year losses carried forward will not be utilised. A deferred tax asset of US$0.1 million has been recognised as at December 31, 2013 available for offset against future profits. The tax charge for the year was US$2.0 million (2012: US$3.3 million) resulting in a loss after tax for the year of US$44.1 million (2012: US$49.5 million profit) which has been carried to retained earnings.

Additions to property, plant and equipment amounted to US$103.9 million (2012: US$191.9 million) consisting of US$75.0 million (2012: US$154.4 million) relating to the expansion works, US$5.4 million of operating costs net of revenue capitalised and US$10.2 million (2012: US$36.2 million) of sustaining capital. The mine closure asset has increased by US$13.3 million as a result of the change in the discount rate used in the calculation of the mine closure provision. The discount rate used in 2013 was 3% based on a 20 year US Treasury yield rate. This is a change in the discount rate from 9% used in 2012, which was the average effective borrowing rate for the Moma Titanium Minerals Mine. The reason for the change in discount rate is to exclude the risk of the Company and only include risk specific to the liability.

On 16 October 2013, 250,300,000 new ordinary shares were issued by way of a placing which raised US$101.9 million net of expenses. The proceeds of the equity raising was used in part to discharge near term payment obligations in respect of the expansion of the Mine and to repay US$20 million of the Company’s Absa corporate facility. The remainder of the proceeds is being used for working capital. Participants in the placing were also issued with warrants on the basis of one warrant to subscribe for one ordinary share in the Company for every five placing shares. In total 50,060,000 warrants were issued. The warrants, which are not listed or admitted to trading and which have limited transferability rights, have an exercise price of Stg£29.09p and an exercise period of five years, commencing thirteen months from the date of issue. 466,666 new ordinary shares were issued during 2013 as a result of share options exercised and resulted in US$0.04 million being credited to share capital and US$0.08 million credited to share premium.

In February 2013, the Company and Absa Bank Limited entered into an agreement establishing a corporate loan facility of US$40 million maturing in March 2014. This facility was fully drawn in June 2013. In November 2013, US$20 million of the loan was repaid from the proceeds of the equity issue in October 2013. In December 2013, the facility was amended to US$20 million and its maturity was extended to 31 March 2015.

In July 2013, an amendment agreement was signed with the Project Lenders which deferred senior loan principal (US$13 million) due on 1 August 2013 until 1 August 2014. A further deed of amendment was signed with the Project Lenders in February 2014 which restructured the project financing by removing the requirement to repay all deferred subordinated debt by 1 August 2015, and reschedules all deferred subordinated debt that is unpaid as of 31 July 2015, with 50% repaid in one instalment on 1 August 2019 and the other 50% paid in nine semi-annual instalments commencing on 1 August 2015 and ending on 1 August 2019.

The Group had total debt of US$355.2 million as at 31 December 2013 (2012: US$324.4 million). This was made up of project loans of US$335.8 million (2012: US$324.4 million) and the Absa corporate loan of US$19.4 million. During the year there were project loan interest and principal payments amounting to US$18.0 million (2012: US$32.9 million), interest accrued of US$28.0 million (2012: US$26.4 million), loan amendment fees of US$6.1 million (2012: nil) and foreign exchange movements of US$7.5 million (2012: US$3.8 million). This resulted in an overall increase in project debt of US$11.4 million (2012: US$2.7 million). The Absa corporate loan of US$40 million was fully drawn down in June 2013. During the year there were loan interest payments amounting to US$2.0 million, interest accrued of US$2.1 million and arrangement fees and other costs of US$1.7 million of which US$1.0 million was amortised during the year. As noted above, US$20 million was repaid in November from the proceeds of the equity placing. This resulted in an overall increase in Company debt of US$19.4 million.

Directors

The Directors who held office at 31 December 2013 were as follows:

J. Loasby (Chairman)

Non-Executive

 

*

+

S. Bianchi

Non-Executive

*

+

M. Carvill

Executive

 

 

 

T. Fitzpatrick

Executive

 

 

 

E. Headon

Non-Executive

*

+

T. Lowrie

Non-Executive

 

 

 

T. McCluskey

Executive

 

 

 

S. McTiernan

Non-Executive

*

+

G. Smith

Non-Executive

*

+

∆: Member of the Audit Committee chaired by Mr S. McTiernan.

+: Member of the Remuneration Committee chaired by Ms E. Headon.

*: Member of the Nomination Committee chaired by Mr J. Loasby.

In March 2013, Mr S. McTiernan and Mr G. Smith were appointed to the Board as Non-Executive Directors. They were elected to the Board by shareholders at the Annual General Meeting in May 2013. Mr I. Egan, Mr S. Farrell and Mr P. McAleer retired from the Board at the Annual General Meeting in May 2013 having served over nine years on the Board. In December 2013, Mr J. Deysel stepped down as an Executive Director and remains Chief Operating Officer.

The Articles of Association empower the Board to appoint Directors but also require Directors to retire and submit themselves for re-election at the first Annual General Meeting following their appointment. Under the Articles of Association, a third of the Board must retire annually but may offer themselves for re-election. However, in accordance with the provisions contained in the UK Corporate Governance Code, the Board has decided that all Directors should retire annually at the Annual General Meeting and offer themselves for re-election.

Directors are appointed and removed by the shareholders in General Meeting of the Company, and may be co-opted by the Board.

Directors’ and Secretary’s Shareholdings and Share Options

The interests of the Directors and Secretary of the Company, their spouses and minor children, in the ordinary share capital of the Company and details of the share options granted in accordance with the rules of the Share Option Scheme are detailed in the Directors’ Remuneration Report, set out here.

Share Option Scheme

It has been and, subject to the proposed changes in Directors’ remuneration described in the Directors’ Remuneration Report, it will continue to be the policy of the Company to award share options to certain Directors, employees and consultants. The Board makes awards at such time or times as it may determine, subject to the conditions of the Model Code on Directors’ Dealings. Any offer to grant options will specify the consideration payable on acceptance, the number of shares comprised in the option, the mode of acceptance together with the latest date for acceptance and for payment of the said consideration. Upon receipt by the Board of such acceptance and consideration, the option will be granted and the option certificate delivered. The options generally vest over a three year period, in equal annual amounts. Options awarded to Executive Directors since 2011 have performance criteria attaching to them. At 31 December 2013, there were options in issue that had been granted under the share option scheme dated 15 May 1987 to persons (other than Directors and the Secretary) to subscribe for a total of 36,148,296 million shares, exercisable at an average price of US$0.34 per share.

Going Concern

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Business and Strategy Review on this and this page. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Finance Review. In addition, Note 26 to the financial statements includes the Group’s policy for managing its capital.

Based on the Group’s forecasts and projections, the Directors believe that the Group has adequate resources for the foreseeable future and continue to adopt the going concern basis of accounting in preparing the annual financial statements.

Key assumptions upon which the forecast is based include a mine plan covering production using the Namalope and Nataka proved and probable reserves, forecast sales and a revised debt repayment profile for the project loans. Average annual production levels over the life of the mine for the purpose of the forecast are approximately 0.9 million tonnes of ilmenite plus co-products, zircon and rutile. The Company has a plan, not reflected in such forecast, to increase production of HMC both in the near term and as grades decline during the later years of the Mine life in order to keep the MSP at full design capacity of 1.2 million tonnes of ilmenite per annum plus co-products, zircon and rutile. Assumptions of product sales prices are based on contract prices as stipulated in marketing agreements with customers, or where contracts are based on market prices or production is not presently contracted, prices as forecast taking into account independent titanium mineral sands expertise and management expectations. Operating and capital replacement costs are based on approved budget costs for 2014 and escalated by 2% per annum thereafter.

Share Capital

As at 31 December 2013, Ordinary Shares accounted for 95% and Deferred Shares accounted for 5% of the total share capital.

The Ordinary Shares of €0.06 rank equally in all respects and carry no special rights. They carry voting and dividend rights. There are no restrictions on the transfer of the Company’s shares or voting rights. There are no restrictions on voting rights.

The Deferred Shares of €0.25 were created in 1991 by subdividing each existing Ordinary Share of IR25p into one Deferred Share of IR20p and one new Ordinary Share of IR5p. The Deferred Shares are non-voting, carry no dividend rights and the Company may purchase any or all of these shares at a price not exceeding €0.013 per share for all the deferred shares so purchased or may execute a transfer of such shares without making any payment to the holders.

Authority to Allot

The Directors have been given the authority by shareholders to allot shares up to an amount equal to the authorised but unissued share capital of the Company.

Purchase of Own Shares

The Company may purchase all or any of the Deferred Shares in issue in accordance with the Companies Acts and the Company’s Articles of Association.

Substantial Interests

As at 11 April 2014, the Company has been notified of the following shareholdings in excess of 3% of the issued ordinary shares of the Company:

No. of Ordinary Shares

% of Issued Share Capital

Prudential plc

482,175,350

19%

BlackRock Investment Management (UK) Limited

238,213,428

9%

JP Morgan Asset Management (UK) Ltd

167,406,945

6%

The Capital Group Companies Inc.

164,678,932

6%

Norges Bank (The Central Bank of Norway)

113,881,619

4%

 

 

Takeover Directive

In the event of a change in control, directly or indirectly, of Kenmare Moma Mining (Mauritius) Limited and Kenmare Moma Processing (Mauritius) Limited, subsidiary undertakings of the Company, the Project Lenders may require payment in full of debt obligations, in addition to certain prepayment fees, subject to conditions set out in the financing documents. Other than as described in the Directors’ Remuneration Report there are no agreements between the Company and its Directors or employees providing for pre-determined compensation for loss of office or employment that would occur in the event of a bid for the Company.

Books of Account

The Directors have employed appropriately qualified accounting personnel and have maintained appropriate accounting systems to ensure that proper books and accounting records are kept in accordance with Section 202 of the Companies Act, 1990. The books of account are kept at the Company’s office at Chatham House, Chatham Street, Dublin 2.

Powers of the Directors

Under the Articles of Association of the Company, the business of the Company is to be managed by the Directors who may exercise all the powers of the Company subject to the provisions of the Companies Acts, the Memorandum and Articles of Association of the Company and to any directions given by resolution of a General Meeting not being inconsistent with the Companies Acts and the Articles of Association. The Articles further provide that the Directors may make such arrangement as may be thought fit for the management of the Company’s affairs including the appointment of such attorneys as they may think fit with such powers, authorities and discretions (not to exceed those vested in or exercisable by the Directors under the Articles) and for such period and subject to such conditions as they may think fit.

Subsidiary Undertakings

The subsidiary undertakings of the Company at 31 December 2013 are outlined in Note 14 to the financial statements. Each of the subsidiary undertakings, Kenmare Moma Mining (Mauritius) Limited, Kenmare Moma Processing (Mauritius) Limited and Mozambique Minerals Limited operate branches in Mozambique.

Notice of Annual General Meeting and Special Business

Notice of the Annual General Meeting, together with details of special business to be considered at the meeting, is set out in a separate circular enclosed with the Annual Report and also available on the Company website www.kenmareresources.com.

Memorandum and Articles of Association

The Company’s Memorandum and Articles of Association set out the objects and powers of the Company and may be amended by shareholders at a General Meeting of the Company.

General Meetings and Shareholders Rights

Under the Articles of Association, the power to manage the business of the Company is generally delegated to the Directors. However, the shareholders retain the power to pass resolutions at a General Meeting of the Company which may give directions, not being inconsistent with the Companies Acts and the Articles of Association, to the Directors as to the management of the Company.

The Company must hold a General Meeting in each year as its Annual General Meeting in addition to any other meetings in that year. The Annual General Meeting will be held at such time and place as the Directors determine. All General Meetings, other than Annual General Meetings, are called Extraordinary General Meetings. The Directors may at any time call an Extraordinary General Meeting. Extraordinary General Meetings shall also be convened by the Directors on the requisition of members holding, at the date of the requisition, not less than 5% of the paid up capital carrying the right to vote at General Meetings.

No business may be transacted at any General Meeting unless a quorum is present at the time when the meeting proceeds to business. Three members present in person or by proxy and entitled to vote at such meeting constitutes a quorum.

The shareholders have the right to receive notice of a General Meeting. In the case of an Annual General Meeting or of a meeting for the passing of a Special Resolution, twenty-one clear days’ notice at the least, and in any other case fourteen clear days’ notice at the least, needs to be given in writing in the manner provided for in the Articles to all the members (other than those who, under the provisions of the Articles or the conditions of issue of the shares held by them, are not entitled to receive the notice) and to the Auditors for the time being of the Company.

The Shareholders also have the right to attend, speak, vote and ask questions at General Meetings. In accordance with Irish company law, the Company specifies record dates for general meetings, by which date shareholders must be registered in the Register of Members of the Company to be entitled to attend. Record dates are specified in the notes to the Notice of a General Meeting. Shareholders may exercise their right to vote some or all of their shares by appointing a proxy or proxies, by electronic means or in writing. The requirements for the receipt of valid proxy forms are set out in the notes to the Notice convening the meeting. A shareholder, or a group of shareholders, holding at least 3% of the issued share capital of the Company, has the right to put an item on the agenda of the AGM or to table a draft resolution for inclusion in the agenda of a General Meeting, subject to certain timing requirements presented by the Companies Act and any contrary provision of Irish company law.

All business that is transacted at an Extraordinary General Meeting is deemed special. All business that is transacted at an Annual General Meeting is also deemed special with the exception of declaring a dividend, considering the accounts, statement of financial positions and reports of the Directors and Auditors, electing Directors in the place of those retiring, re-appointing retiring Auditors and fixing the remuneration of the Auditors.

Voting at any General Meeting is by a show of hands unless a poll is properly demanded. On a show of hands, every member who is present in person or by proxy has one vote regardless of the number of shares they hold. On a poll, every member who is present in person or by proxy has one vote for each share they hold. A poll may be demanded by the Chairman of the meeting or by at least three members having the right to vote at the meeting or by a member or members representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting or by a member or members holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one tenth of the total sum paid up on all shares conferring that right.

Deadlines for Exercising Voting Rights

Voting rights at General Meetings of the Company are exercised when the Chairman puts the resolution at issue to the vote of the meeting. Where a person is appointed to vote for a shareholder as proxy, the instrument of appointment must be received by the Company not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the appointed proxy proposes to vote, or, in the case of a poll, not less than forty-eight hours before the time appointed for taking the poll.

Secondary Listing

Kenmare Resources plc has a premium listing of the Main Market of the London Stock Exchange and has a secondary listing on the Main Securities Market of the Irish Stock Exchange. For this reason the Company is not subject to the same on-going listing requirements as those which apply to an Irish company with a primary listing on the Irish Stock Exchange including that certain transactions require the approval of shareholders. The Company is subject to the Listing Rules of the UK Listing Authority.

Corporate Governance

The annual Corporate Governance Report forms part of the Directors’ Report and is incorporated by reference.

Political Donations

There were no political donations which require disclosure under the Electoral Act 1997 (as amended).

Branches

The Company established and maintains a branch in the United Kingdom. This was registered with the Companies House with registration number FC031738.

Environmental and Employee Matters

Information in relation to environmental and employee matters set forth on this page forms part of the Directors’ Report and is incorporated by reference.

Events since the year end

On 14 February 2014, the Company, Congolone Heavy Minerals Limited, Kenmare Moma Mining (Mauritius) Limited (Mozambique Branch) and Kenmare Moma Processing (Mauritius) Limited (Mozambique Branch) entered into a deed of amendment with Project Lenders. The key terms of the deed are detailed in Note 21.

Auditors

The Auditors, Deloitte & Touche, Chartered Accountants, continue in office in accordance with Section 160 (2) of the Companies Act 1963.

On behalf of the Board:

M. Carvill Director T. McCluskey Director

11 April 2014