Annual Report 2013

Finance Review

Overview

Offtake of the Mine’s products during 2013 of 677,900 tonnes was largely in line with 2012 (680,800 tonnes), despite the generally weaker market conditions experienced during the past year. However average prices for the year decreased by 31% from US$345 per tonne in 2012 to US$238 per tonne in 2013.

Reported revenue for the year was US$137.9 million, after the capitalisation of US$23.6 million of revenue relating to product produced during the commissioning and ramp-up phase of the expansion plant. The expansion facilities, which first began operation in early July, continued to ramp-up production over the second half of the year up to the level of commercial scale production capacity which was achieved by year end. During this period the revenue generated from this production amounted to US$23.6 million and this revenue has been offset against the related production costs and capitalised in property, plant and equipment.

Operating costs decreased by 14% in 2013 after capitalisation of US$29.0 million of operating costs relating to product produced during the commissioning and ramp-up phase of the expansion plant, and the operating profit was US$4.7 million (2012: US$80.4 million). Investment in property, plant and equipment amounted to US$103.9 million, primarily in the Phase II expansion works. Bank loans at the end of 2013 amounted to US$355.2 million (2012: US$324.4 million), an increase of US$30.8 million during the year. This increase principally relates to an additional corporate facility put in place with Absa Bank Limited during the year (US$19.4 million at year-end), accrued interest on deferred loans and exchange movements. Cash balances at the year-end amounted to US$67.5 million (2012: US$46.1 million).

Kenmare generated earnings before interest, tax, depreciation and amortisation (EBITDA) of US$29.0 million in 2013 (2012: US$98.9 million).

 

Production and revenue +-

Production and shipments for the years ended 31 December 2013 and 2012 were as follows:

2013

2012

Tonnes

Tonnes

Heavy mineral concentrate production

1,137,200

772,300

Ilmenite production

720,100

574,400

Zircon production*

31,400

46,900

Rutile production

4,000

5,100

Total final products production

755,500

626,400

Total sales **

677,900

680,800

 

 

 

*Included in the zircon production are 10,300 tonnes (2012: 19,400 tonnes) of a secondary zircon product.

** 110,400 tonnes of 2013 sales relate to product generated from the expansion facilities.

Production of HMC increased by 47% compared with 2012 as a result of the completion and ramp-up of the new dredge and wet concentrator plant in a second mine pond as part of the expansion, and the more favourable mining conditions experienced by WCP A following completion of the transition onto the dunal plateau.

Kenmare increased production of ilmenite by 25% to 720,100 tonnes during 2013, up from 574,500 tonnes during 2012. However, production of zircon during the year was 31,400 tonnes compared with 46,900 tonnes in 2012. This was due to the downtime associated with integration of the expanded zircon and rutile circuits, which took longer than expected and consequently balancing and ramp up of these circuits were delayed. The ramp up was also hampered by periods of unstable power supply. During 2013, Kenmare shipped 677,900 tonnes of finished products, comprised of 642,700 tonnes of ilmenite, 32,200 tonnes of zircon (including 10,300 tonnes of secondary grade zircon) and 3,000 tonnes of rutile.

Revenue for 2013 was US$137.9 million (2012: US$234.6 million), a decrease of 41%. The reported figure for 2013 is after capitalisation of US$23.6 million of revenue generated from the expansion facilities. 677,900 tonnes (2012: 680,800 tonnes) of finished product were sold in 2013 and the blended price for all products sold decreased by 31% compared with 2012.

Operating costs +-

Cost of sales for the year amounted to US$113.7 million (2012: US$134.5 million), including depreciation and amortisation of US$24.3 million (2012: US$18.5 million) and excluding US$22.7 million of costs which were capitalised.

Other operating costs amounted to US$19.5 million (2012: US$19.7 million) comprised of: freight costs of US$3.4 million (2012: US$3.2 million), which are reimbursable by customers and factored into the sales price for product delivered to customers on a CIF (cost, insurance and freight) basis; US$0.4 million (2012: US$0.7 million) for demurrage as a result of delays in shipments; distribution costs of US$11.0 million (2012: US$9.1 million); and administration costs of US$3.4 million (2012: US$6.6 million), including a charge of nil (2012: US$2.4 million) for share-based payments. US$0.7 million of other operating costs were capitalised in 2013. 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.

US$29.0 million of operating costs during the ramp-up and commissioning of the expansion plant has been capitalised in property, plant and equipment. This is made up of US$5.6 million of costs for the six month period ended 30 June 2013, US$22.7 million cost of sales and US$0.7 million of other operating costs for the six month period ended 31 December 2013 relating to product for which revenues were capitalised.

Operating profit +-

The operating profit for the year amounted to US$4.7 million (2012: US$80.4 million). The decrease in operating profit resulted from lower revenues due principally to a decrease in product prices.

Finance costs, interest and exchange movements +-

Loan interest and finance fees were US$40.5 million (2012: US$28.7 million). In accordance with the terms of the project financing documents, US$5.6 million (2012: US$7.0 million) of senior loan interest was paid and US$22.4 million (2012: US$19.4 million) of subordinated loan interest was accrued and capitalised. US$2.0 million (2012: nil) of interest on the Absa corporate facility was paid during the year. The fair value of warrants issued as part of the share placing amounted to US$5.9 million (2012: nil). Other financing fees of US$3.9 million consist of US$1.1 million fees for the arrangement of the US$40 million Absa corporate facility in February and other fees of US$2.8 million.

At 31 December 2013, Group total debt was US$355.2 million (2012: US$324.4 million). The debt to equity ratio was 53% (2012: 54%). The weighted average interest rate on debt at year-end was 8.8% (2012: 8.7%).

Interest earned during 2013 amounted to US$0.3 million (2012: US$1.7 million). An exchange loss of US$6.5 million (2012: US$0.6 million) arose during the year, mainly due to retranslation of Euro-denominated loans. Euro-denominated loans at 31 December 2013 amounted to US$186.1 million (2012: US$165.7 million), 52% of total debt.

Deferred tax +-

During 2013, Kenmare Moma Mining (Mauritius) Limited made a loss for tax purposes. A deferred tax asset of US$0.1 million has been recognised for losses which are available for offset against future profits. Tax losses of US$12.2 million are forecast to expire in 2014. This resulted in a tax charge of US$2.0 million (2012: US$3.3 million) and resulted in loss after tax of US$44.1 million (2012: US$49.5 million profit) for the year.

Operating cash flow +-

Net cash flow generated from operations in 2013 was US$8.6 million (2012: US$104.1 million). Investing activities of US$82.7 million (2012: US$164.3 million) in the year represents additions to property, plant and equipment, primarily on capital costs for the Phase II expansion. In October 2013, 250.3 million shares were issued, generating net proceeds of US$101.9 million. The purpose of this equity raising was to discharge near term payment obligations in respect of the expansion of the Mine; to repay US$20 million of the Absa corporate facility and to provide the Company with working capital. The remainder of the proceeds is being used for working capital. Loan repayments during the year amounted to US$32.4 million (2012: US$25.9 million) made up of senior project loans US$12.4 million (2012: US$25.9 million) and the Absa corporate facility US$20 million (2012: nil). The increase on 2012 is largely a result of the repayment of US$20 million offset by the deferral of the August senior project loan principal repayment to 2014. There was an increase in cash and cash equivalents for the year of US$20.4 million (2012: US$34.8 million decrease).

Balance Sheet +-

Additions to property, plant and equipment during 2013 amounted to US$103.9 million (2012: US$191.9 million). US$75.0 million (2012: US$154.5 million) of capital expenditure related to Phase II expansion, US$10.2 million (2012: US$36.2 million) relates to sustaining and other capital projects. 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 the discount rate is to exclude the risk of the Company and only include risk specific to the liability.

Cash and cash equivalents at 31 December 2013 were US$67.6 million (2012: US$46.1 million). In October 2013, 250.3 million new ordinary shares were issued by way of a placing which raised US$101.9 million net of expenses. The primary purpose of this equity raising was to discharge near term payment obligations in respect of the expansion of the Mine and to repay US$20 million of the Absa corporate facility. The remainder of the proceeds are being used for working capital.

Total liabilities at 31 December 2013 amounted to US$434.0 million (2012: US$388.3 million), of which US$355.2 million (2012: US$324.4 million) relates to bank loans, details of which are set out below:

Loan balance

Maturity

US$ million

Project Loans

Senior Loans

AfDB

23.2

2018

Absa (ECIC)

29.9

2015

EAIF

2.8

2018

EIB

11.8

2018

FMO

10.0

2016

KfW IPEX-Bank (Hermes)

8.4

2015

KfW IPEX-Bank (MIGA)

8.5

2018

Total Senior Loans

94.6

 

Subordinated Loans

 

 

EIB

151.7

2019

EAIF

50.9

2019

FMO

44.7

2019

Total Subordinated Loans

247.3

 

Total

341.9

 

Project loan amendment fees

(6.1)

Amortised over life of loans

Total Project Loans

335.8

 

Absa corporate facility

20.0

2015

Absa corporate facility arrangement fees

(0.6)

Amortised over life of loan

Total Absa corporate facility

19.4

 

Total Group Loans

355.2

 

 

 

In February 2013, the Company and Absa Bank Limited entered into an agreement establishing a corporate 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 amount was amended to US$20 million and the 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 deed of amendment was signed with the Project Lenders in February 2014 which among other things removed the requirement to repay all deferred subordinated debt by 1 August 2015, and rescheduled all deferred subordinated debt that is unpaid as of 31 July 2015 so that 50% is repaid in one instalment on 1 August 2019 and the other 50% is repaid in nine equal semi-annual instalments commencing on 1 August 2015 and ending on 1 August 2019. The Project Loan amendment fees adjust the carrying amount of the Project Loans and are amortised over the remaining term of the modified Project Loans.

Accounting policies +-

The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) adopted by the European Union; therefore the Group financial statements comply with Article 4 of the IAS Regulation. The financial statements have been prepared in compliance with Irish Companies Acts 1963 to 2013. The Group’s significant accounting policies and details of the significant accounting judgements and critical accounting estimates are disclosed in the notes to the financial statements. The Group did not make any material changes to its accounting policies in the year ended 31 December 2013.

Events since year-end +-

On 14 February 2014, a deed of amendment was signed with the Project Lenders which among other things removed the requirement to repay all deferred subordinated debt by 1 August 2015, and rescheduled all deferred subordinated debt that is unpaid as of 31 July 2015 so that 50% is repaid in one instalment on 1 August 2019 and the other 50% is repaid in nine equal semi-annual instalments commencing on 1 August 2015 and ending on 1 August 2019 (see Note 21).

Financial outlook +-

The restructuring of the project debt in February 2014 was a significant milestone. The revised profile better aligns the terms of the project financing with the projected cash flows of the Mine and enhances the financial flexibility of the Group. The expansion project is now operating and management focus is to ensure the new facilities smoothly integrate with the original plant and to deliver increased production. Management will optimise efficiencies within operations with a view to achieving unit cost savings. We are also encouraged by improvements in the level of global economic activity, which should ultimately flow through to improved titanium minerals and zircon demand.