Rose (AIM: ROSE), the AIM quoted natural resources business, announces its final results for the year to 31 December 2016.
The Company also announces that its Annual General Meeting of shareholders (“AGM”) will be held at 9:30 am on 29 June 2017 at the offices of Allenby Capital Limited, 3 St. Helen’s Place, London EC3A 6AB.
A copy of the Company’s annual report and accounts, which include the notice of AGM, will be available on its website, www.rosepetroleum.com, shortly and will be sent to shareholders later today.
Chairman’s Statement
In the Company’s Interim Results statement for 2016, published in September 2016, it was outlined that the recent period has been one of restructuring, consolidation and transformation for the Group. This has been a continuing theme in the period since, and the Board has continued to adopt a strategy to ensure that the Group is positioned to create value from its existing assets while being flexible and agile to take advantage of opportunities that arise both before and after a recovery in the natural resources sector. Conserving existing cash resources has also been a key priority during the period.
There is no doubt that the prevailing market conditions of the last few years have provided the Board with an extremely challenging backdrop against which to operate, but the decisive action of the Board has sought to de-risk and safeguard the existing asset portfolio, reduced liabilities and operational overheads and enabled us to identify and chase some very convincing potential opportunities.
Despite the withdrawal from the Mancos acreage, and disposal of the Cisco Dome field, associated wells and associated infrastructure during the period, the Board fundamentally believes that the Group’s Oil and Gas (“O&G”) portfolio is of a scale and quality to deliver significant shareholder value. The Paradox assets were acquired due to their prospectivity, size, location and low breakeven price, and despite the downturn in the oil sector, the Board believes that they remain a highly desirable asset. In addition, by reducing the size of the Company’s acreage through the disposal of the Mancos acreage, the Board achieved the twin objective of both retaining the core part of the Group’s O&G portfolio and also significantly reducing costs and liabilities. We have kept the market regularly updated on our progress to secure the permit for the 3D seismic survey in the Paradox Basin and we remain on track to shoot the survey by the end of this year. This will be a major step in the process of unlocking value from the Paradox acreage and will hopefully be the precursor for the drilling of our first well in the Paradox Basin during 2018.
The Board has reviewed numerous potential opportunities in the natural resources sector since the downturn in the oil price, looking to create shareholder value ahead of the recovery in the sector, and I was delighted that we were able to secure an investment in the Company during the period to pursue some exciting prospects in Cuba. The overall economic and political changes taking place in Cuba present a striking opportunity, with direct foreign investment now being a priority, to realise the country’s anticipated growth. While there is no certainty that any transaction will complete, we have had, and continue to be in direct discussions with the relevant Government owned corporations in Cuba about potential transactions in both the Oil and Gas and building materials sectors.
Post period end the Company announced that it had entered into negotiations to dispose of its SDA Mill in Mexico. While there is no guarantee that the transaction will complete, should it do so, the Group will allocate the funds towards the total funds required for the 3D seismic shoot in the Paradox Basin. While the SDA Mill remains a viable standalone business for Rose, albeit with a low level of profitability, the Board believes that the current outlook for US energy is extremely encouraging, and therefore a strategic focus on the Paradox acreage is currently the optimal way to deliver short-term value to shareholders.
While the cost cutting across the Group to date has been radical and far-reaching, the Board has ensured that it has retained an operational capability sufficient to meet its commitments for the foreseeable future. As well as protecting the existing asset base and positioning the Group for short-term growth, the Board is also confident that the Company has the capacity to take advantage of potential acquisition opportunities, such as those that we are currently looking at in Cuba, which we believe will inevitably arise.
I am looking forward to the period ahead, and I would like to take this opportunity to thank our investors, advisers and employees for their continuing support during this transformational period. The Board is looking forward to updating you on progress throughout 2017, which promises to be an exciting period in the Company’s ongoing evolution.
PE Jeffcock
5 June 2017
REVIEW OF OPERATIONS
Oil & Gas Division
U.S.A.
During the strong oil price environment of 2014 and early 2015, the Group entered into agreements under which it was able to commence earning into a 75% working interest in approximately 263,000 gross acres in Utah. The area of focus of the acreage was on two unconventional oil and gas basins: the Uinta Basin, which targets the Mancos Shale at a maximum depth of approximately 3,200ft, and the Paradox Basin that targets the Paradox Clastics at a maximum depth of approximately 10,500ft.
Under the terms of the original agreement, the Group was to carry the seller of the acreage, Rockies Standard Oil Company LLC (“RSOC”), which was to retain a 25% working interest in the leasehold, for the first US$17 million expenditure on the projects: US$9.5 million in the Uinta Basin and US$7.5 million in the Paradox Basin. Under the terms of the agreement, the obligation is not contractually committed and therefore, no liability or contingent liability has been recognized in these financial statements.
During 2014, and subsequent to the acquisition of the Cisco Dome field, Ryder Scott Company LP (“Ryder Scott”) completed a reserve report on the Utah leasehold. Based on that reserve report, the Group’s Mean Un-Risked Recoverable Prospective Resources across its total acreage were estimated to be 1.8 billion barrels of oil (“BO”) and 6.45 trillion cubic feet of gas (“TCFG”). Of these total resources, it was estimated by Ryder Scott that the Paradox acreage contained over 1.1 billion BO (61% of the total BO resources estimated) and circa 2.2 TCFG (34% of the total gas resources estimated), whilst the Mancos acreage contained circa 710 million BO (39% of the total BO resources estimated) and circa 4,260 TCFG (66% of the total gas resources estimated).
In the report, Ryder Scott also gave an opinion on the chance of success in the Paradox and Mancos acreage and concluded that the chance of success within the Paradox leases was up to 56%, compared with 30% in the Mancos leases.
During the latter part of 2014 and during 2015, the Group concentrated its efforts on the Mancos due to the relative ease of drilling with its shallow depth, low drilling costs, and good infrastructure. The Board was hopeful that a demonstration of the prospectivity of the Mancos could be achieved in quick time and that a successful drilling campaign would provide the catalyst of cashflow that would enable the commencement of the Paradox activity. However, following the initial work programme at the Mancos, the Board concluded that the Paradox Basin presented a lower risk opportunity, with greater scale and a higher chance of success.
Revised agreement with RSOC
Having considered all of the above, the Board announced in April 2016 that it had entered into an agreement with RSOC to cease earning into the Mancos acreage and dispose of the Cisco Dome field, wells, pipelines, gas tap, gas plant, and all the associated equipment and liabilities to RSOC, with the intention of focusing solely on the Group’s Paradox acreage.
As part of the revised agreement with RSOC, the Group agreed to cover the cost of the existing plug and abandonment (“P&A”) liability of the four wells already scheduled for P&A with the authorities, which was calculated to be US$0.3 million and which was settled in the year. The Group also agreed to leave the existing operator bonds in place with the State of Utah and Bureau of Land Management (“BLM”), which are now refundable to RSOC rather than the Group.
RSOC, in turn, agreed to reduce the Group’s obligation to earn the 75% working interest in the Paradox acreage by US$2 million to US$5.5 million. Under the terms of the agreement, the obligation is not contractually committed and therefore no liability or contingent liability has been recognized in these financial statements.
The revised agreement with RSOC has significantly reduced operational costs including lease rental/minimum royalty payments associated to the Mancos leasehold. Further, and potentially more importantly, the Group will no longer be liable for the P&A liability of the fifty plus wells in the Cisco Dome field. This reduction of acreage has also enabled a reduction of headcount and a material reduction in operating costs in the O&G Denver office.
Paradox Basin acreage
By way of background, the Paradox Basin has been actively exploited by Fidelity Exploration and Production (“Fidelity”), mainly in the Cane Creek Formation, south southeast of the Group’s main group Paradox lease blocks. Fidelity has been the most active operator in the Paradox Basin over the past two years with average Q1 2015 production of 2,100 barrels of oil equivalent per day (“boepd”). In addition to Fidelity’s success, multiple wells in the area of the Group’s leases have produced oil and gas to surface from various formations, and it is a combination of all these factors that led the Board to the conclusion that it should focus on the Group’s Paradox Basin acreage.
Throughout the period under review, and since, the Group has been undertaking the process of securing the permit to enable it to shoot a 3D seismic survey over the Paradox acreage. Consistent with Fidelity, the strategy is to shoot the seismic lines that will assist in identifying drilling targets for the Group’s first wells in the Paradox.
Significant progress has been made in the process in recent months and on 7 March 2017, the Group announced that the 15-day public consultation period for its 3D seismic shoot permit had formally begun. Following the completion of this period, and based on comments received, the Group was informed by the Bureau of Land Management (“BLM”) that certain questions raised in the comments received should have been addressed by the BLM in the original Environmental Assessment Study (“EA”) that supports the permit application. As a result, the Group has now amended the shoot design to accommodate the points raised and resubmitted the documents to the BLM for review. Once this review is complete, the revised and updated EA will be published and made available for a further 15-day public consultation period. The BLM has assured Rose that the revised timing for granting of the permits will not impact the commencement of the proposed physical shoot in H2 2017.
The Company has also now begun the process of assembling its technical team for the seismic shoot and has engaged the services of two key individuals, Dave List and Todd Fockler. Dave and Todd are geophysicists and both previously worked for Fidelity Exploration and Production Company on their Paradox seismic shoots and subsequent drilling programmes. Dave and Todd bring with them substantial relevant expertise and will help the Group to ensure that the technical and operational aspects of the shoot are managed in the optimal way. Their extensive operational experience in the Basin will be of significant benefit to our programme going forward.
Mining Division
Gold and Silver Mining Operations, Mexico
Throughout most of 2016, the Group continued its milling operations through its wholly owned subsidiary, Minerales VANE S.A. de C.V., which owns the SDA Mill. All milling consisted of processing third-party ore (“toll milling”) while joint-venture production opportunities were evaluated. A total of approximately 20,300 tonnes of ore were processed during the year which covered the unit’s operating costs. A number of joint venture production opportunities were evaluated which resulted in two strong project candidates being pursued, however, factors outside the Company’s control meant that no transaction was completed.
In early 2017, Magellan Gold Corporation (OTCBB: MAGE) approached the Company with a view to acquiring the SDA Mill and, in March 2017, the two companies entered into a Memorandum of Understanding (“MOU”) in respect of a transaction. The transaction is presently in the due diligence phase.
Under the terms of the MOU, the Company has granted Magellan a 90-day option period, for a non-refundable US$0.05 million deposit, to purchase the SDA Mill subject to the satisfaction of a number of conditions. The MOU also provides Magellan with the option of extending this option period by a further 60 days in consideration of an additional US$0.1 million which would be credited against the final purchase price should the sale proceed. The total purchase price for the SDA Mill is US$1.5 million, payable as US$1.0 million in cash and US$0.5 million in restricted common stock (shares) in Magellan. On 1 June 2017, the Company announced that Magellan had exercised its option to extend the 90-day option period for a further 60 days and the non-refundable payment of US$0.1 million has been received.
Completion of the disposal of the SDA Mill is subject to a number of conditions, including, but not limited to, the Group and Magellan entering into a separate asset purchase agreement, the completion of satisfactory due diligence by Magellan and Rose, Magellan completing a financing to acquire the SDA Mill, and an audit by Magellan of the SDA Mill’s financial statements at Magellan’s cost. In addition, as the SDA Mill has contributed the majority of Rose’s revenue in the past 12 months, any sale would be subject to the approval of the shareholders of Rose at a general meeting of the Company. There can therefore be no assurance at this stage that the sale of the SDA Mill will be completed.
Base and precious metals exploration, Mexico
The Group’s single exploration project is the Tango copper/molybdenum porphyry and associated precious metals veins property located 70 kilometres east of Mazatlán in southern Sinaloa. Efforts to fund and organise the permitted drilling programme for 2017 are currently being re-evaluated due to the pending SDA Mill sale to Magellan Gold Corporation.
IVA recovery, Mexico
Throughout the period, the Group has been in the process of recovering approximately MX$17.9 million (c.US$1.0 million) of IVA (Mexican value added tax) and associated inflation adjustment payments owed to it from the Mexican tax authority, Servicio de Administración Tributaria (“SAT”). Post-period, SAT commenced refunding the Group’s IVA claim and approximately MX$9.2 million (c.US$0.5 million) has been received at the date of this report. The Company continues to seek the recovery of the remaining MX$8.8 million (c.US$0.5 million) owed to it by SAT.
Copper exploration, southwest U.S.A.
In April 2016, the Group announced that it had entered into an agreement with privately held Burdett Gold LLC, to conduct exploration drilling on the Ardmore copper project which consists of 18 unpatented mining claims located north of Tucson, Arizona. Burdett assumed control of the claims and is the operator of the project and has commenced exploration work.
Uranium exploration, U.S.A.
The bulk of the Group’s uranium assets are held in a joint venture with Anfield Resources Inc. (TSXV: ARY) covering property holdings in the breccia pipe district of northern Arizona. The Group also owns 100% of the North Wash project in Utah. The land holdings in Arizona consist of a number of drill-proven breccia pipes, some containing mineralization, and breccia pipe targets. The North Wash project in Utah contains a resource of uranium and vanadium. These holdings are being held on care and maintenance while management reviews its options to develop the projects further.
With respect to the political situation behind the land withdrawal in northern Arizona which negatively impacts all breccia-pipe holdings on federal lands, the election of President Trump provides optimism for a possible change in the status of those lands during his tenure.
In respect of the disposal of the Company’s 50% interest in the Wate breccia pipe deposit to Energy Fuels Resources Inc. (TSE:EFR) in 2015, the Company and EFR further revised the terms of the Purchase and Sale Agreement during the period under review. Under the revised agreement, EFR paid the Company US$50,000 in 2016 and a further US$450,000 is payable on the date on which the first Commercial Production from the Wate Project occurs.
Cuban Opportunities
In May 2016, the Group announced that it had raised gross proceeds of US$1.2 million (£0.8 million) from Earth Source Investment Inc, primarily to further develop opportunities that had arisen in Cuba and specifically around the processing and manufacturing of gypsum and associated building materials.
As announced on 4 July 2016 and in the period since, Rose, with the assistance of its technical team supported by Grenzebach BSH (GmbH) (“Grenzebach”), has been negotiating with Empressa Materiales de Construccion (“EMC”), the local state company, to construct the proposed gypsum processing and manufacturing facilities to supply the domestic and Caribbean market with various gypsum products including, but not limited to, gypsum wall and ceiling panels. Multiple models and plant facilities have been discussed involving various end products and production rates and Rose put forward its proposal on the agreed capacity and products at the end of the year, although the process is no longer exclusive to Rose. Having been through multiple versions of both capacity and end product requirements, which was an extremely challenging process, the Board of Rose would like to take this opportunity to thank Grenzebach for its continuing support. We are presently engaged in further discussions regarding the transaction and we will update the market when we have further clarity around the ongoing process.
As a result of the Group developing good relationships in Cuba, we have now also engaged with the Cuban national oil company, CUPET, and are in early stage discussions regarding oil & gas licences. We feel that the oil and energy sectors in Cuba offer excellent potential and hope to be able to progress our discussions.
FINANCIAL REVIEW
Income Statement
The Income Statement reports total revenue for the year ended 31 December 2016 of US$0.9 million (2015: US$4.3 million), arising from the Group’s precious mining and milling operations in Mexico. The decrease in revenues was primarily the result of having a near full year of production from the Mina Charay gold and silver project in 2015, which ceased in December 2015.
The Group reports a net loss after tax of US$0.2 million or 0.01 cents per share for the year ended 31 December 2016 (2015: net loss after tax US$9.1million or 0.45 cents per share). Due to the radical cost cutting programme, administrative costs for the year fell to US$2.3 million (2015: US$5.1m). The Group has made a share-based payment charge of US$0.3 million (2015: US$1.5 million).
The Group has made a provision for impairment of intangible exploration and evaluation assets of US$0.36 million (2015: US$3.7 million) during the year. The charge relates primarily to the Group’s uranium and copper assets in the U.S.A. and Mexico respectively.
Foreign exchange gains on the restatement of the Company’s loans to its subsidiaries were US$2.5 million (2015: US$0.4 million). This has had a significant impact on the results for the year and can be primarily attributed to the weakening of sterling since Brexit.
The income statement for the year includes a non-cash deferred tax credit of US$1.1m (2015: US$0.8 million).
Balance Sheet
Total investment in the Group’s intangible exploration and evaluation assets at 31 December 2016 was US$10.1 million (2015: US$10.2 million) primarily reflecting investment in the Utah O&G assets.
The carrying value of property, plant and equipment at 31 December 2016 was US$0.3million (2015: US$0.6 million) reflecting the continued depreciation of the ore processing mill.
Trade and other receivables of US$1.2 million (2015: US$1.5 million) includes US$0.8 million in respect of VAT and tax recoverable in Mexico.
Cash and cash equivalents at 31 December 2016 were US$1.3 million (2015: US$2.4 million). During the period, the Company raised gross proceeds of US$2.4 million through the placing of the Company’s Ordinary Shares.
Going Concern
The Directors have set out in note 3 to the financial statements their consideration of the future financing requirements of the Group and acknowledge that the circumstances represent a material uncertainty that may cast significant doubt upon the Group and Company’s ability to continue as a going concern which has resulted in the auditor including an emphasis of matter in their report. Nevertheless, having given consideration to the uncertainties, the Directors have a reasonable expectation that a sale of the SDA mill will be completed in due course, and the 3D seismic permit will be granted, which will allow the Group to raise sufficient funding to continue in operational existence for the foreseeable future. Despite challenging capital markets, the Company and Group have been successful historically in raising equity finance and consider that they have reasonable grounds for believing these past successes will continue. For these reasons, the Directors continue to adopt the going concern basis in preparing the consolidated financial statements.
This assessment has been carried out in the light of the guidance issued to the Directors by the Financial Reporting Council.
FUTURE DEVELOPMENTS
Your Board, management and dedicated teams continue to operate the Group’s existing O&G and mining assets and will continue to look to enhance the value from these. In addition, the Group continues to investigate and evaluate new opportunities to increase shareholder value.
We would like to thank all shareholders for their continued support.
For the complete set of final results (inc. all financials) please see the full RNS here.
