Unaudited interim results for the six months ended 30 June 2018
Bellzone Mining plc (AIM: BZM) announces its unaudited interim results for the six months ended 30 June 2018.
Bellzone’s principal assets are the iron ore and nickel laterite JORC-compliant resources and reserves at Kalia in The Republic of Guinea, West Africa. Total iron ore resources are 6.16bt and nickel ore resources 79.3mt.
Business Update
· In November 2017, Bellzone announced the signature of an agreement with the Guinean Government, the Addendum to the Kalia Mining Convention (L’Avenant n°1 à la Convention de Base) (“Addendum”), to update the 2010 Mining Convention for Kalia. In July 2018, after the end of the period under review, the Addendum was ratified by the National Assembly and subsequently by the Constitutional Court of The Republic of Guinea in August 2018 and finally promulgated into law by Presidential Decree on 31 August 2018, which is the Effective Date (“Date d’Entreé en Vigeur”) of the Addendum according to its terms.
· The Effective Date is the reference date for the Company’s Addendum undertakings, and the indicative timetable announced on 9 November 2017, which was based on the expectation of ratification by end-2017, must now be in accordance with the confirmed Effective Date.
· As announced on 1 May 2018, feasibility study work on the Kalia Ferronickel Project has been on-going. Extraction of up to a 250-tonne bulk sample for test smelting by Envirosteel at Mintek in South Africa was expected to be completed by end-May. Unfortunately some rainy season delay, coupled with additional XRF equipment re-calibration and lab-testing, as well as difficulty in obtaining sufficient numbers of suitable steel drums for transportation has meant that shipping may commence by end-October instead. Co-temporally, the Mintek prototype smelter has experienced initial test campaign issues which have resulted in some uncertainty as to when it will be available for Bellzone’s sample. The current expectation is that the bulk sample will be shipped by end-October and the smelter campaign should be completed by the end of January 2019, which is well in line with the Company’s Addendum undertakings.
· The active discussions with respect to the Company’s major assets announced on 11 June 2018 have remained positive, with strong interest in particular regard to Konta port. It is envisaged that any concrete agreement will require more time to reach and while there is a possibility to do so by end-2018, there is no certainty that any transaction will eventually be agreed.
· Finally, Bellzone continues to monitor developments in the iron ore market and will seek to update the 2013 BFS if market conditions strengthen further, such that financing can be obtained to commence iron ore production.
Sector Highlights
· Iron ore prices were volatile in 1Q18, rising from $74/t to $79/t (62% Fe CFR North China) before dropping back to $63/t but have since been relatively stable, moving in a range of $63-69/t and showing signs of stability with a positive trend. This is meaningfully above the 2013 BFS-assessed FOB Conakry all-in production cost of $34.39/t for 58% iron fines.
· Updating oil price assumptions in the 2013 BFS model results in a current expected all-in production cost of $31.65/t for Bellzone’s Kalia KP1 project (7mtpa of 58% Fe fines over a life of mine of 10 years, capable of extension by further JORC Reserve drilling).
· Main iron ore price drivers include:
o Global steel production grew by 7.5% year-on-year in July 2018 (World Steel Association). Global seaborne iron ore demand increased by 59mt from 1,485mt in 2016 to 1,544mt in 2017, an increase of 4.0%. These indicators of demand and supply demonstrate the ongoing strong compound annual growth in the world iron ore and steel market and whilst scrap recycling continues to develop in importance as a secondary source of iron units, the firm growth trend will mean strong demand for primary iron units, resulting in the need to develop new mines cost-competitive to deliver to North China ports in particular.
o The drive to reduce Chinese airborne pollution has resulted in continuance of the trend for a high price premium for 65% iron ore over 62% iron ore and ores of lower grade. This trend is expected to continue, eventually resulting in much greater demand for the +65% pellets and sinter feed capable of being delivered by magnetite mines, as high grade oxide (DSO) mines are exhausted over time. Kalia holds 4.72bt of high quality magnetite as well as 913mt of oxide iron ore. Kalia’s magnetite is known to be of mid- to low- Bond Work Index (the energy required to grind the magnetite to powder to prepare a suitable product) and to be capable of upgrade to 67-68% Fe in a 19mtpa 35-year life-of-mine scenario assessed in feasibility study work.
o New iron ore mines, in particular in Western Australia, are being developed to replace existing capacity that is at or near closure. Large new mines are not adding outright new capacity to global production.
o Of the largest current iron ore mines currently in development or ramp-up globally, Hancock Prospecting’s 55mtpa Roy Hill mine reached its name-plate production rate of 55mtpa in May 2018; and, in 1Q18, Vale’s 90mtpa S11D Carajas extension was half-way through its ramp-up, scheduled to reach capacity in 2019 or 2020 (although Vale’s overall production was down 4.9% year-on-year).
o BHP Billiton’s new 80mtpa South Flank mine is in the earliest stages of development, expecting to be in operation in 2021 – but will only replace the closing Yandi Mine production capacity (also 80mtpa), not increase BHP Billiton’s production. Other smaller-scale mine developments include the Eliwana Mine (30mtpa, operational from late 2020) approved by Fortescue Metals Group and Rio Tinto is expected to approve the Koodaideri Mine (70mtpa, operational from 2021 but ramping up to 35mtpa in the first decade of life) in the near future. Both of these mines will replace existing exhausted capacity.
· Market prospects for steel and steel alloy materials such as nickel have continued to strengthen, which has positive pricing effects on Bellzone’s potential ferronickel project, although there has been a short-term pull back in the LME nickel price as a result of trade war uncertainty brought about by US administration commentary on potential trade tariffs in the last quarter. There is, however, evidence that strong trade enquiries for future nickel production are continuing:
o World nickel production (contained metal, all forms) rose from 980,000t in 1H17 to 1,066,000t in 1H18, a rise of 8.8%.
o The stainless steel market, which uses approximately 73% of nickel production, is growing rapidly with wider usage in developing markets, particularly China, causing demand side strength in nickel. Global stainless steel production grew by 5.0% in 2017 vs 2016 and at an increased rate of 9.5% year-on-year in 1Q18; and
o Automotive manufacturers have reportedly moved to secure nickel production for EV batteries, in addition to seeking to secure cobalt supply and fund research to reduce the cobalt content of EV batteries, in doing so increasing the nickel content of the batteries. The global EV battery industry is currently moving from Lithium-ion NMC 1:1:1 batteries to next generation NMC 5:3:2 and NMC 6:2:2 with the eventual goal of achieving NMC 8:1:1 batteries where the importance of nickel in ratio to manganese and cobalt increases from 1 to 8. The nickel in the battery provides the high energy density and cannot easily be substituted.
· The results of the feasibility study work on the Kalia Ferronickel project undertaken to date, announced in August 2016, showed a conservative base case break-even nickel price of $10,617/t vs the current nickel price of $12,509/t (as at 27 September 2018) which is approximately 19% higher than the reference price quoted in the 2017 half-year financial results announcement.
Financing activities
Bellzone previously announced a US$4.0m loan facility with Hudson Global Group (“Hudson”) in December 2016. Bellzone drew down US$0.8m on this loan in June 2017 and as Bellzone has continued to maintain strict cost discipline in the year since then, running below budgeted costs as well as deriving rental income from assets not currently being utilised in Bellzone’s operations in Guinea, no further loan drawdowns have been necessary. The total amount of principal and interest due under the three loans from CS International (S) Pte Limited (“CS International”) and Hudson as at 30 June 2018 was US$20.6m.
To remove any potential short-term financing overhang, Bellzone agreed with CS International and Hudson, in March 2018, to extend loan maturity dates of all three outstanding loans to 31 December 2019.
On 25 May 2018, the Company stated in its final results announcement for the year ended 31 December 2017 that the Group cash flow forecasts indicated that additional funds would be required to meet its working capital requirements for the remainder of 2018 and that, if alternative forms of financing were not available, it would continue to be reliant on further funding from its majority shareholder, Hudson Global Group Limited (“Hudson”) primarily on the undrawn amount under the aforementioned loan facility.
On 12 July 2018, after the end of the period under review, Bellzone announced a placing of new shares with new investors of £1.0m (£0.935m net). The proceeds are being applied to 2018 budgeted expenditures, including costs related to the ferronickel feasibility study.
At the Annual General Meeting on 31 July 2018, the ordinary resolution to authorise the directors of the Company to allot relevant securities in respect of 1,500,000,000 ordinary shares was not passed. As such, the Company is currently entirely reliant on Hudson’s loan facility to continue normal operations beyond mid-November 2018.
The Company, ahead of publication of these interim results, had sought reassurance of Hudson’s financial support. However no assurance has been received at this time. Consequently the Company has determined it cannot rely on Hudson advancing further funds and is reviewing alternative financing options available to the board, including potential new equity investment (which would require Hudson consent to approve a resolution to issue further shares which is being sought) and the monetisation of its port asset.
Whilst the Company’s existing cash resources are forecast to last until December 2018, it will be necessary in the boards’ view to raise further funds by mid-November 2018 at the latest to maintain the Company’s status as a going concern. There can be no assurance that the Company will be successful in its efforts to raise such funds in which case it may be necessary to invoke an insolvency procedure. The Board will continue to monitor the position closely and the Company will provide an update in due course.
Income and Costs
During the period, the Company began to realise modest income of US$178,000 from the rental of operating assets held in Guinea but not being utilised in Bellzone’s current operations (net book value of assets rented out was de minimis), as well as the disposal of one non-essential asset. This had not been viable before the upturn in Guinea’s macro-economic wellbeing, in particular in the non-ferrous mining sector.
The Company’s overall operating costs decreased by 4% compared to 1H2017, largely resulting from continued operational efficiency in Guinea. In totality, the loss for the period was US$2.42m, which is slightly lower than 1H2017 (US$2.50m), due to operating cost savings and new asset rental income offsetting incremental accrued loan interest costs.
