Annual Report 2013

Notes to the Financial Statements

for the year ended 31 December 2013

21. BANK LOANS

 

2013

2012

 

US$’000

US$’000

Senior Loans

94,617

106,891

Subordinated Loans

247,330

217,521

Total

341,947

324,412

Project Loan amendment fees

(6,166)

-

Total Project Loans

335,781

324,412

Corporate Loan

19,398

-

Total Bank Loans

355,179

324,412

 

 

 

The borrowings are repayable as follows:

 

 

Within one year

197,802

147,032

In the second year

58,435

39,993

In the third to fifth years inclusive

84,569

86,725

After five years

14,373

50,662

 

355,179

324,412

Less: amount due for settlement within 12 months

(197,802)

(147,032)

Amount due for settlement after 12 months

157,377

177,380

 

 

 

Project Loans

 

 

Balance at 1 January

324,412

327,108

Loan interest accrued

27,980

26,429

Loan interest paid

(5,564)

(7,014)

Loan repayment

(12,395)

(25,875)

Loan amendment fees

(6,629)

-

Loan amendment fees amortised

463

-

Foreign exchange movement

7,514

3,764

Balance at 31 December

335,781

324,412

 

 

 

Corporate Loan

 

 

Balance at 1 January

-

-

Loan drawdown

40,000

-

Loan interest accrued

2,041

-

Loan interest paid

(1,985)

-

Loan repayment

(20,000)

-

Loan arrangement fees

(1,711)

-

Loan arrangement fees amortised

1,053

-

Balance at 31 December

19,398

-

 

 

 

Project Loans

Project loans have been made to the Mozambique branches of Kenmare Moma Mining (Mauritius) Limited and Kenmare Moma Processing (Mauritius) Limited (the “Project Companies”). The Project Loans are secured by substantially all rights and assets of the Project Companies, and, amongst other things, the shares in and intercompany loans to the Project Companies.

Seven Senior Loan credit facilities were made available for financing the Moma Titanium Minerals Mine.  The aggregate maximum available amount of the Senior Loan credit facilities was US$185 million plus €15 million which were fully drawn in 2008. The Senior Loan tenors range from 1.5 years to 4.5 years from 31 December 2013. Three of the Senior Loans bear interest at fixed rates and four bear interest at variable rates.

The original Subordinated Loan credit facilities (made available under documentation entered into in June 2004) with original principal amounts of €47.1 million plus US$10 million (excluding capitalised interest) were fully drawn in 2005. The Subordinated Loans denominated in Euro bear interest at a fixed rate of 10% per annum, while the Subordinated Loans denominated in US Dollars bear interest at six month LIBOR plus 8% per annum.

The Standby Subordinated Loan credit facilities (made available under documentation entered into in June 2005) with original principal amounts of €2.8 million and US$4 million were fully drawn in 2007. Standby Subordinated Loans bear interest at fixed rates of 10% per annum in respect of €2.8 million and US$1.5 million and at six month LIBOR plus 8% per annum in respect of US$2.5 million.

The Additional Standby Subordinated Loan credit facilities of US$12 million and US$10 million (made available under documentation entered into in August 2007) were fully drawn in 2008. The Additional Standby Subordinated Loans bear interest at 6 month LIBOR plus 5%.

Amendments to Project Loans

Project Loan Amendment 14 February 2014

On 14 February 2014, the Company, Congolone Heavy Minerals Limited and the Project Companies entered into a deed of amendment with Project Lenders (the “February 2014 Amendment”). The key terms of the February 2014 Amendment are detailed below.

Completion

Under the prior terms of the Project Loans, the Company and Congolone Heavy Minerals Limited guaranteed the Project Loans during the period prior to Completion (achievement of both “Technical Completion” and “Non-Technical Completion”). Upon Completion, the Company’s and Congolone Heavy Mineral Limited’s guarantee of the Project Loans would terminate. Failure to achieve Completion by the Final Completion Date (subject to extension for force majeure) would constitute an event of default under the Project Loan agreements. Prior to 14 February 2014, the Final Completion Date was 28 February 2015.

On 5 September 2011, Technical Completion was achieved. Non-Technical Completion occurs upon the meeting certain financial, legal and permitting requirements, including filling of specified reserve accounts to the required levels as well as certification in respect of the Project Companies having sufficient funds available to repay deferred Subordinated Loan amounts on the next scheduled payment date.

As a result of the February 2014 Amendment:

  • The event of default relating to failure to achieve Completion by the Final Completion Date is removed. As a result, it will not be necessary to be able to repay all deferred Subordinated Loan obligations by the 1 August 2015 payment date;
  • It is no longer a condition to Completion that the Project Companies are in a position to repay all deferred Subordinated Loan obligations on the next payment date;
  • The achievement of Completion remains a condition to the Project Companies making restricted payments to the Group (and therefore a condition to distributions to shareholders by the Company to the extent funded by restricted payments from the Project Companies); and
  • The guarantee of the Project Loans by the Company and Congolone Heavy Minerals Limited will remain in place following Completion.

Subordinated Debt

Under the prior terms of the Project Loans, if cash is insufficient to pay interest and scheduled principal on the Subordinated Loans, no payment default occurs; instead, scheduled interest is capitalised and both capitalised interest and scheduled principal are deferred and become payable on the next semi-annual payment date, subject again to the availability of cash at such time. Included in loan amounts due within one year is US$143.3 million (2012: US$118.6 million) in relation to subordinated loans. As a result of the February 2014 Amendment:

Subordinated Loans that, as of 31 July 2015, are deferred and unpaid will be termed-out as follows:

  • 50% of the amount of such Subordinated Loans will be repaid in one instalment on 1 August 2019 (the “Deferred Bullet”).
  • The balance is to be amortised in nine equal semi-annual instalments ending on 1 August 2019.
  • Commencing 1 August 2015, the Project Companies will no longer be able to defer Subordinated Loan obligations (other than in respect of additional margin elements described below) in the manner described above, so that non-payment of scheduled interest and principal when due would result in a payment default;
  • No restricted payments (i.e. distributions to Group companies) may be made by the Project Companies until Subordinated Lenders receive US$50 million in payments;
  • The additional 1% margin on Subordinated Debt agreed under the Deed of Waiver and Amendment entered into in 2009 will continue to accrue after Completion; any such additional margin accrued shall not be payable prior to repayment of all Senior Debt; and
  • An additional 2% margin will accrue on the Deferred Bullet until such Deferred Bullet is repaid or prepaid; any such additional margin accrued shall not be payable prior to repayment of all Senior Debt.

Prepayment of Subordinated Debt

The terms of the Project Loans contain detailed provisions for the mandatory and voluntary prepayment of Senior Debt and Subordinated Debt. As a result of the February 2014 Amendment:

  • Mandatory prepayments of Subordinated Debt will be equal to 50% of cash available for distribution, as opposed to 25% of cash so available prior to the February 2014 Amendment;
  • Mandatory prepayments of Subordinated Debt will commence earlier than previously provided for (previously commencing upon final repayment of Senior Debt; as a result of the February 2014 Amendment, such mandatory prepayments will now commence on the first payment date after Completion on which no further mandatory prepayments of Senior Debt are to be made); and
  • The Project Companies will have an additional right of prepayment to enable the satisfaction of the additional condition to restricted payments (namely that Subordinated Lenders receive not less than US$50 million of payments prior to the making of such a payment).

Expansion Costs

As a result of certain amendments in December 2011, December 2012 and the July 2013 Amendment described below, the terms of the Project Loans had permitted the expansion to be partly funded from the internal operating cash flows of the Project Companies. As a result of the February 2014 Amendment, any remaining expansion-related costs generally cease to be able to be funded from Project Companies operating cash flows; instead, such costs are generally to be funded by the Company from group cash reserves.

Fees and Expenses

In connection with the February 2014 Amendment:

  • The Project Companies paid each Subordinated Lender a risk fee equal to 1% of the principal amount of Subordinated Debt outstanding as at 31 December 2013; and
  • Lenders were paid work fees totalling US$180,000, as well as legal fees and out-of pocket travel costs incurred by the Lenders in negotiating the amendment.

Project Loan Amendment 31 July 2013

On 31 July 2013, the Company and the Project Companies entered into a deed of amendment with Project Lenders (the “July 2013 Amendment”). Among other things, the July 2013 Amendment provided as follows:

  • A deferral by Senior Lenders of senior principal (US$13 million) due on 1 August 2013 until 1 August 2014; and an agreement that no interest or principal on Subordinated Loans would be paid prior to such date;
  • An extension of the Final Completion Date to 28 February 2015. As a result, the effective date on which deferred Subordinated Loan obligations needed to be repaid was extended from the 1 August 2014 payment date to the 1 August 2015 payment date. The extensions described in this bullet were superseded by the February 2014 Amendment;
  • An extension of the ability to apply Project operating cash flows to fund remaining expansion costs with the effect that up to US$58 million of available cash flows accruing after 30 June 2013 were able to be reserved in specified bank accounts until the earlier of the date on which the outstanding completion certificates are delivered and 31 December 2014; and such reserved cash together with the US$5.4 million balance in such accounts as at 30 June 2013 were able to be applied to expansion capital costs until the later of 31 December 2014 and the date on which the outstanding completion certificates are delivered; this was subject to certain limits on the amounts that may be so applied on or after 1 July 2013, including, other than in respect of certain specified costs, the amount that may be applied in respect of expansion costs shall not exceed US$40.4 million (including US$5.4 million already reserved as at 30 June 2013). The amendments described in this bullet were superseded by the February 2014 Amendment; and
  • In consideration of such amendments, payment to Lenders of a risk/deferral fee in quarterly instalments, in the case of Senior Lenders, to a total of 1.25%, and in the case of Subordinated Lenders, to a total of 2.25%, in each case of the principal amount outstanding as at 31 July 2013; as well as work fees totalling US$180,000, legal fees and out-of-pocket costs incurred by the Project Lenders in negotiating the amendment, and fees payable in connection with certain political risk and other guarantees and insurance policies applicable to the Senior Loans.

The Project Loan amendment fees adjust the carrying amount of the Project Loans and are to be amortised over the remaining term of the modified Project Loans.

Corporate Loans

On 28 February 2013, the Company and Absa entered into an agreement establishing a corporate loan facility of US$40 million maturing on 20 March 2014. This facility was fully drawn in June 2013. The arrangement fees and other costs of US$1.0 million associated with this loan have been expensed in other finance costs in the statement of comprehensive income during the year. In November 2013 US$20 million of the loan was repaid from the proceeds of the October 2013 equity raising as detailed in Note 17. On 16 December 2013 the Company and Absa entered into an amendment to the corporate facility whereby the facility was amended to US$20 million and maturity was extended to 31 March 2015. The amended corporate loan facility permits for amounts drawn under it to be repaid and redrawn prior to the maturity date. The corporate loan facility bears interest at 1 month LIBOR plus a margin of 9%; this margin increases to 12% in certain circumstances. Absa, a member of Barclays plc, is a lender to the Project Companies. The arrangement fees and other costs of US$0.7 million adjust the carrying amount of this loan and are to be amortised over the term of the loan.

Group borrowings interest, currency and liquidity risk

Loan facilities arranged at fixed interest rates expose the Group to fair value interest rate risk. Loan facilities arranged at variable rates expose the Group to cash flow interest rate risk. Variable rates are based on one and six month LIBOR. The average effective borrowing rate at year end was 8.8%. The interest rate profile of the Group’s loan balances at the year-end was as follows:

 

2013

2012

 

US$’000

US$’000

Fixed rate debt

226,736

214,513

Variable rate debt

128,443

109,899

Total debt

355,179

324,412

 

 

 

The fair value of the Group borrowings of US$332.1 million (2012: US$299.0 million) has been calculated by discounting the expected future cash flows at prevailing interest rates and by applying year-end exchange rates.

Under the assumption that all other variables remain constant and using the most relevant 6 month LIBOR rates a 1% change in the LIBOR rate will result in a US$1.3 million (2012: US$1.1 million) change in finance costs for the year.

The currency profile of loans at the year-end is as follows:

 

2013

2012

 

US$’000

US$’000

Euro

186,072

165,709

US Dollars

169,107

158,703

 

355,179

324,412

 

 

 

The Euro denominated loans expose the Group to currency fluctuations. These currency fluctuations are realised on payment of Euro denominated debt principal and interest. Under the assumption that all other variables remain constant, a 10% strengthening or weakening of Euro against the US Dollar would result in a US$1.9 million (2012: US$1.7 million) change in finance costs and a US$18.6 million (2012: US$16.6 million) change in foreign exchange gain or loss for the year.

The above sensitivity analyses are estimates of the impact of market risks assuming the specified change occurs. Actual results in the future may differ materially from these results due to developments in the global financial markets which may cause fluctuations in interest and exchange rates to vary from the assumptions made above and therefore should not be considered a projection of likely future events.

22. FINANCE LEASE

 

Minimum lease payments

Present value of

minimum lease payments

 

2013

US$’000

2012

US$’000

2013

US$’000

2012

US$’000

Amounts payable under finance lease

 

 

 

 

Within one year

560

560

350

286

In the second to fifth year

1,400

1,960

1,158

1,508

Less future finance charges

(452)

(726)

-

-

Present value of lease payments

1,508

1,794

1,508

1,794

Less amounts due for settlement within 12 months

 

 

(350)

(286)

Amounts due for settlement after 12 months

 

 

1,158

1,508

 

 

 

 

 

The Group has leased equipment for the receipt, storage and dispensing of diesel fuel under a finance lease. The lease term is ten years from the commencement date (2007) with an option to purchase the assets after one year from the commencement date of the lease. For the year ended 31 December 2013, the average effective borrowing rate was 9%. The lease is on a fixed repayment basis and the lease obligation is denominated in US Dollars. The fair value of the Group’s lease obligation is equal to its carrying amount.

23. PROVISIONS

GROUP & COMPANY

 

2013

2012

 

US$’000

US$’000

Mine closure provision

18,751

4,907

Mine rehabilitation provision

2,073

1,973

Legal provision

1,444

1,444

Executive Directors’ bonus provision

703

1,002

 

22,971

9,326

 

 

 

Current

548

276

Non-current

22,423

9,050

 

22,971

9,326

 

 

 

 

Mine

Mine

Legal

Executive

Total

 

Closure

Rehabilitation

Provision

Directors’

 

Provision

Provision

Bonus

 

Provision

 

US$’000

US$’000

US$’000

US$’000

US$’000

At 1 January 2012

4,502

1,737

1,444

-

7,683

Additional provision in the year

-

285

-

1,002

1,287

Provision released in the year

-

(49)

-

-

(49)

Unwinding of the discount

405

-

-

-

405

At 1 January 2013

4,907

1,973

1,444

1,002

9,326

Additional provision in the year

13,334

516

-

-

13,850

Provision released in the year

-

(416)

-

(299)

(715)

Unwinding of the discount

510

-

-

-

510

At 31 December 2013

18,751

2,073

1,444

703

22,971

 

 

 

 

 

 

The mine closure provision represents the Directors’ best estimate of the Group’s liability for close-down, dismantling and restoration of the mining and processing site. A corresponding amount equal to the provision is recognised as part of property, plant and equipment. The costs are estimated on the basis of a formal closure plan, are subject to regular review and are estimated based on the net present value of estimated future cost. Mine closure costs are a normal consequence of mining, and the majority of close-down and restoration expenditure is incurred at the end of the life of the mine. The unwinding of the discount is recognised as a finance cost and US$0.5 million (2012: US$0.4 million) has been recognised in the statement of comprehensive income for the year.

The main assumptions used in the calculation of the estimated future costs include:

  • a discount rate of 3% (2012: 9%) based on a 20-year US Treasury yield rate. This is a change in the discount rate used in the prior year, 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. The change in the discount rate increases the provision by US$13.3 million and the mine closure asset was increased by the same amount;
  • an inflation rate of 2% (2012: 2%);
  • an estimated life of mine; and
  • an estimated closure cost of US$20.4 million (2012: US$20.4 million) and an estimated post-closure monitoring provision of US$1.9 million (2012: US$1.9 million).

A significant factor in determining the mine closure provision is the discount rate. A 1% change in the discount rate results in a 22% change in the mine closure provision.

The mine rehabilitation provision represents the Directors’ best estimate of the Company’s liability for rehabilitating areas disturbed by mining activities. Rehabilitation costs are recognised based on the area disturbed and estimated cost of rehabilitation per hectare which is reviewed regularly against actual rehabilitation cost per hectare. Actual rehabilitation expenditure is incurred approximately twelve months after the area has been disturbed. During the year there was a release of US$0.4 million (2012: US$0.05 million) to reflect the actual mine rehabilitation costs being incurred.

On 17 November 2010, a High Court jury delivered a verdict of damages of €10 million in a defamation case taken by a former Company director. The Company has submitted an appeal to the Supreme Court with a view to setting aside both the verdict and the amount, with the intention of securing a retrial. The High Court granted a stay on the award subject to the payment of €0.5 million until the hearing of the Supreme Court appeal. The Company’s legal team strongly advise that the award will be set aside on appeal. The same former director has also served notice that he intends to pursue a number of non-defamation actions against the Company.  The Company has provided for the costs associated with the defamation case appeal and retrial and further actions taken by the former director. This provision will start to be utilised upon commencement of the appeal, when the associated costs are incurred.

An Annual Bonus Scheme was in place for the Executive Directors a feature of which was the payment of a bonus earned for target performance which is deferred for three years. The bonuses in respect of performance in 2010 and 2011 are payable US$0.5 million in 2014 and US$0.2 million in 2015 on the condition of continued employment with the Company.

24. OTHER FINANCIAL LIABILITY

GROUP

 

2013

2012

 

US$’000

US$’000

Warrants

5,851

-

 

 

 

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. In addition to ordinary shares, participants in the placing were issued 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 after the date of issue.

A financial liability of US$5.9 million (2012: nil) based on the fair value of the warrants at the statement of financial position date has been recorded as the cost of issuing the warrants with the equivalent value included in finance costs in the statement of comprehensive income.

The fair values were calculated using a Black-Scholes option pricing model. The inputs into the calculation were as follows:

2013

Year-end share price

Stg£0.208

Year-end Stg£/US$ exchange rate

0.61

Warrant exercise price

Stg£0.2909

Expected volatility

46%

Expected life (years)

6

Risk free rate

3.2%

Significant factors in determining the warrant fair value are the Company share price and the expected volatility. A 10% change in the Company share price results in a 19% change in the fair value of the warrants. A 10% change in the expected volatility rate results in an 11% change in the fair value of the warrants.

25. TRADE AND OTHER PAYABLES

Amounts payable within one year

 

GROUP

COMPANY

 

2013

2012

2013

2012

 

US$’000

US$’000

US$’000

US$’000

Trade payables

13,440

13,185

-

21

Accruals

35,075

39,610

1,101

406

 

48,515

52,795

1,101

427

 

 

 

 

 

Included in Group accruals at the year-end is an amount of US$0.6 million (2012: US$0.8 million) and in the Company US$0.2 million (2012: US$0.2 million) for payroll and social welfare taxes. Included in accruals is US$20.2 million (2012: US$27.9 million) relating to capital projects of which US$19.5 million is disputed by the Group.

Credit risk

The average credit period on the purchase of goods and services is 30 days from the date of the invoice. The Group has financial risk management policies in place to ensure that all payables are paid within the relevant credit periods.

Currency risk

The currency profile of trade and other payables at the year-end is as follows:

GROUP

2013

2012

 

US$’000

US$’000

South African Rand

17,350

32,941

US Dollars

15,188

15,329

Mozambican Metical

10,809

1,736

Euro

3,193

515

Australian Dollar

1,791

2,159

Sterling

184

115

 

48,515

52,795

 

 

 

COMPANY

2013

2012

 

US$’000

US$’000

Euro

919

388

Sterling

182

39

 

1,101

427