Chromex Mining: FY08 results overview
Chromex Mining plc, the AIM listed dedicated chrome mining company
focused in South Africa, is pleased to announce its results for the
year ended 30 September 2008.
Overview
* Cash generative chrome producer operating in the world's primary
chrome area, the Bushveld complex in South Africa
* Healthy cash position with 2 million in the bank and 2 million
debt facility in place
* Low-cost flexible business model of outsourcing operations
delivering healthy margins
* Acquired and commenced production at Stellite open cast chrome
mine – first sale completed September 2008
* Signed agreement to sell a minimum of 10,000 tonnes per month of
metallurgical grade concentrates on a 'take or pay' basis to
Metalmin Metals and Minerals Ltd ('Metalmin')
* Doubled SAMREC resource estimate at Stellite to 31.9 million
tonnes of chromite – increasing total chrome resources under
control to circa 41 million tonnes
* Commenced construction of a new processing facility at Stellite
designed to process circa 40,000 tonnes per month of run-of-mine
('ROM') ore, completion is expected during Q2 2009
* Granted positive amendment to Stellite Mining Right to include
Platinum Group Elements ('PGEs') and gold – their extraction in
conjunction with chromite has the potential to increase revenues
substantially going forward
* Mecklenburg – expect to develop the mine following legal
settlement
* Strengthened Board and management team as part of a strategy to
advance chrome projects in South Africa
* Ideally placed to take advantage of the upturn in the markets as
demand for chrome products begins to increase
Chromex CEO Russell Lamming said, "I joined the board at a very
exciting time as Chromex established its position as a long-term
producer of chrome in South Africa. With circa 41 million tonnes of
chrome resources under its control, cash generative production in
place, a strong cash position and a low-cost flexible business model
generating healthy margins, I believe we have a resilient investment
case.
"In terms of the chrome market, whilst demand has slowed in the last
few months, I believe that the outlook remains robust in the medium
to long term. The Chinese market, the main buyer of chrome, has been
under pressure, however we believe that it will recover sooner than
the rest of the world. I am therefore confident that Chromex is well
placed to take advantage of its position as a leading chrome
producer."
Chairman's Statement
It gives me great pleasure to report on your Company's progress as it
continues to consolidate its position as a long term chrome producer
in South Africa.
During the period under review your Company built its portfolio of
chrome producing assets via the acquisition of the Stellite Project
('Stellite'), entered a cash generative stage through production and
first sales of chrome from Stellite in September 2008 and
strengthened its Board and management team.
Post year end, we have doubled our SAMREC resource estimate to 31.9
million tonnes of chromite at Stellite, increasing the total chrome
resources controlled by Chromex to in excess of 40 million tonnes.
We have also commenced construction of a new processing facility at
Stellite designed to process circa 40,000 tonnes per month of ROM
ore, after securing a loan facility of 2 million in January 2009.
The Company has a healthy cash position of 2 million, which I
believe places Chromex in a strong position to weather the current
economic storm and take advantage of the upturn in demand for
beneficiated chrome products.
Stellite
Chromex's main focus over the last year has been the development of
Stellite, the 271 hectare project located on the Western Limb of the
Bushveld Complex in South Africa.
In April 2008, we concluded the acquisition of Mkhombi Stellite (Pty)
Ltd, which owned 51% of Ilitha Mining (Pty) Ltd ('Ilitha'), the
holder of the mineral rights at Stellite. The consideration was ZAR
34 million (approximately 2.4 million at the date of transaction),
of which ZAR 14 million was settled in cash and ZAR 20 million in
Chromex shares at 25p per share. Subsequently the Company purchased
the balance of 49% of Ilitha from Hernic Ferrochrome (Pty) Ltd for
cash of ZAR 45 million (approximately 3 million at the date of
transaction) and acquired the management contract for Stellite from
Mountain Minerals for 519,000, settled in Chromex shares at 25p per
share.
This series of transactions has resulted in a complex structure, but
the effect is that Chromex, with its BEE partner Umnotho weSizwe,
owns 100% of Ilitha with Chromex exclusively entitled to fees for the
management of the mine. Our intention is to simplify the Group's
structure during the current year to enable Ilitha to become a 100%
subsidiary of Chromex Mining (Pty) Ltd., the Group's operating
subsidiary in South Africa.
Having finalised the acquisition of Ilitha, we accelerated
development to bring Stellite into production and enter a cash
generative stage through the sale of chrome to third parties. This
was a relatively simple process as the chromite reefs outcrop at
surface. Mine production and development began with a first blast on
the MG1 chrome seam at Stellite at the end of July 2008. ROM ore was
crushed and screened enabling semi beneficiated products to be sold.
This was ready by mid September 2008 and the first sales were made in
the last week of September, achieving an operating profit in the
mine's first month of production.
At the time of the initial agreements the resource at Stellite was
estimated at 15 million tonnes, comprising the MG1, MG2, MG4 and LG6
chromite reefs. Following the acquisition we commissioned an
independent evaluation by mining consultants RSG Global/Coffey Mining
to enable a SAMREC compliant resource to be confirmed. This report
more than doubled the resource at Stellite to 31.9 million tonnes, as
well as moving it into the SAMREC compliant inferred mineral resource
category. Of this amount, 6.7 million tonnes are available for open
cast mining, defined as being to a depth of 40 metres.
Construction of the new processing facility has now commenced and is
expected to be completed during Q2 2009. To finance the development,
the Company secured a two year loan facility of ZAR 30 million (circa
2 million). While positive cash flow generated from our operations
is expected to provide for repayment of the loan, the lender has the
option, subject to South African Exchange Control approval, to apply
for Chromex shares at 22p per share up to the value of the loan
outstanding at the exchange rate prevailing at the time of
conversion. This right has enabled Chromex to negotiate an interest
rate materially below the average in South Africa. When the plant
is completed, Chromex will be in a position to produce chemical,
metallurgical and foundry grade sands.
In order to maintain operational flexibility, our strategy has been
to sub-contract our mining and processing activities at Stellite.
This has already proved its value, keeping operational overheads at a
minimum as sub-contracting has allowed us to adjust for variations in
demand and price which have occurred over the last few months.
Having proved the concept, we also intend to sub-contract the plant's
operations when it is complete.
Finally, and very importantly, Ilitha has been granted a positive
amendment to its Mining Right to include PGEs and gold. The
amendment opens the way for Chromex to extract PGEs and gold from the
Stellite plant tailings stream. PGEs, comprising platinum, palladium
and rhodium, are present in small concentrations in the chromite
reefs. While it would not be economic to mine at Stellite solely to
produce PGEs, their extraction in conjunction with chromite
potentially increases revenues substantially going forward, and in
particular revenues from the reefs with lower chromite content.
Mecklenburg
Development of the Company's original Mecklenburg project, located at
the Mecklenburg farm on the Eastern limb of the Bushveld complex in
the Limpopo Province of South Africa, has been deferred pending
settlement of the legal issues referred to below. Mecklenburg will
be an underground mine, producing high grade ore from the LG6 and
LG6A reefs, which outcrop at surface. Access to the mine will be
through a decline in the side of Serafa Hill, and development will be
on reef, using a hybrid trackless and conventional stoping method.
In respect of legal and regulatory issues, I previously informed
shareholders that there was a conflicting claim over the chrome
rights, but, on the basis of our expert legal advice, Chromex was
confident that its rights were wholly valid. The Department of
Minerals and Energy in South Africa ('DME') agreed with our
contentions, and duly converted our existing prospecting right into a
New Order Mining Right in July 2008. At the same time the DME
cancelled the competing prospecting right granted to Samancor Chrome
Limited ('Samancor'). After a delay of some months, Samancor applied
the Court to set this decision aside, citing the Minister of Mines,
the DME, and the regional Director of the DME in Limpopo Province in
their application and also Chromex Mining (Pty) Ltd., the holder of
the mining right. The timing of the Court's decision cannot be
predicted accurately.
Our previous legal advice has been reviewed once again by Routledge
Modise Eversheds, a commercial law firm in South Africa retained to
advise us on the case, which confirmed the previous opinions
obtained. In its submissions to the Courts in South Africa, Samancor
has not advanced any new evidence in support of its claim to mineral
rights. While the ambiguity is regretted, the Directors, on the
basis of our legal advice, remain confident of a satisfactory
outcome.
In view of the uncertainty in the chrome market, this dispute may
come to be seen as a positive for Chromex and the Mecklenburg
project. It has given us the opportunity to arrange the surface
right lease without time pressures, particularly important as the
Department of Land Affairs has been unable to give a definitive
opinion as to the owners of such rights. It also gives Chromex time
to revisit its mining plan to optimise production when the mine is
built.
Following settlement of the legal dispute, Chromex intends to raise
funds for mine construction and plant development, depending on
market conditions at that time.
Future Prospects
The final quarter of 2008 was particularly difficult for sales of
chrome, while end-users concentrated on the reduction of stock levels
as a reaction to the global financial crisis. Both prices and
volumes reduced substantially from the levels of last summer.
Nevertheless, Chromex has continued to sell chrome on a profitable
basis, albeit at a reduced level of production. Since 31 December
2008 there has been a marked increase in the level of enquiries for
our products.
Since 30 September 2008 we have maintained sales despite market
problems. We have sold semi-beneficiated product to Tata Group, the
Indian steel producer, for processing to ferrochrome at their smelter
at Richards Bay and to Metalmin, a leading international chrome
trading company. We have agreed in principal to sell a minimum of
10,000 tonnes per month of metallurgical grade concentrates on, a
'take or pay' basis, to Metalmin. However, it is important to note
that the Directors are not prepared to unduly deplete open cast
resources by sales at low prices. I believe the interests of
shareholders are better served by retaining resources in the ground
pending a price recovery. The Company's strong financial position
permits Chromex to make this decision.
Price reductions may prove beneficial to Chromex in some ways. The
Board expects new resources to become available at a more reasonable
price than was previously the case. To that end Chromex is
considering dual listing its shares in Johannesburg to allow South
African residents to hold them, thus facilitating the acquisition of
resources for shares rather than cash.
Overall the financial position of Chromex is strong. Except for the
plant construction loan described above, the Group has no debt. It
has more than 2 million in cash resources, sufficient to cover its
overhead costs for several years, and it expects to trade on a cash
positive basis even in the current recession. By sub-contracting its
mining and processing operations, Chromex has minimised its fixed
costs, and the Directors consider it to be ideally placed to take
advantage of the upturn in the markets. – Press Release |
