Orsu Metals Corporation: Annual Results for the Year Ended 31 December 2008 and 2007 (Unaudited)
Fri Apr 24, 1:17 PM
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LONDON, UNITED KINGDOM--(Marketwire - April 24, 2009) - Orsu Metals Corporation ("Orsu", or the "Company", or "the Group") (TSX: OSU.TO)(AIM: OSU), the London-based base and precious metal mining, development and exploration company today reports its unaudited results for the period ended 31 December 2008. All amounts are reported in United States Dollars unless otherwise indicated. Canadian Dollars are referred to herein as CAD$.
HIGHLIGHTS
- Plant commissioning completed.
- First gold sales and cash generated from the Varvarinskoye Project.
- First copper-gold concentrate produced.
- March 2008 - EMC announced that The Supreme Court of Appeal of South Africa issued judgment in favour of EMC in relation to its action to recover South African Rand 28.3 million advanced to a former contractor and expropriated by ABSA Bank Limited of South Africa.
- May 2008 - EMC announced an increase in the mineral resources at Varvarinskoye.
- June 2008 - EMC and Lero jointly announced the issuing of a Statement of Claim in the Ontario Superior Court of Justice against EMC and two of its officers.
- June 2008 - EMC completed the acquisition of Lero.
- July 2008 - EMC announced changes to its Board of Directors.
- July 2008 - EMC changed its name to Orsu Metals Corporation.
- July 2008 - Orsu completed first sale of copper-gold concentrate from Varvarinskoye.
- September 2008 - Orsu announced plans to procure a secondary low cost screener and crusher at the Varvarinskoye plant.
- September 2008 - Orsu announced being served with the Statement of Claim.
- October 2008 - Orsu announced it had successfully repatriated South African Rand 28.3 million , $3.65 million, of previously embargoed funds in South Africa pursuant to a legal application made by the liquidator of MDM Ferroman (Pty) Limited.
- December 2008 - Orsu announced an update regarding the Statement of Claim (that it had been effectively replaced by a new claim similar in nature, by a new plaintiff and had on that day been served on the Company).
- December 2008 - Orsu announced it signed a joint venture agreement with Gold Fields Orogen Holdings BVI Limited ("Gold Fields"), a wholly owned subsidiary of Gold Fields Limited for the further exploration and development of the Talas licence area, north west Kyrgyzstan.
POST YEAR END HIGHLIGHTS
- January 2009 - Orsu announced updated mineral reserve and mineral resource estimates for Varvarinskoye.
- January 2009 - Orsu announced the existing lending syndicate, comprised of Investec Bank Limited, Nedbank Limited and Natixis Bank had conditionally approved the extension of the deadline for the Company's principal debt payment of $16.65 million to 31 March 2009.
- February 2009 - Orsu announced all necessary approvals have been received from Export Credit Insurance Corporation, South Africa ("ECIC") for the extension of the deadline for the Company's principal debt payment to 31 March 2009.
- March 2009 - Orsu announced the completion and SEDAR filing of a revised mine plan, including mineral reserve and mineral resource estimates, entitled "Varvarinskoye Cu/Au Open Pit Mine - Kazakhstan Mine Planning Study".
- April 2009 - Orsu announced that it had not yet reached an agreement on the restructuring of the loan repayments and hedging obligations, due by Joint Stock Company Varvarinskoye ("JSCV") under its loan and hedging facilities. Discussions are ongoing with the various Lenders.
MANAGEMENT'S DISCUSSION AND ANALYSIS
A full Management's Discussion and Analysis of the results for the period ended 31 December 2008 ("MD&A") and Financial Statements ("Financials") and Annual Information Form for the Company's financial year ended 31 December 2008 will soon be available on the Company's profile on SEDAR ( www.sedar.com) or on the Company's website ( www.orsumetals.com). These can also be obtained on application to the Company. The following information has been extracted from the MD&A and the Financials.
FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008
Overview
For the year ended December 31, 2008, the Company incurred a net loss of $322.6 million (compared to a loss of $77.6 million in 2007).
The Company recognized revenues of $27.1 million, a net gain on derivative instruments of $3.1million and an income tax recovery of $42.6 million. These were offset by cost of sales of $51.6 million, administration & employment termination costs of $20.5 million, exploration expenditure of $4.1 million, foreign exchange losses of $2.5 million and other charges of $3.6.
Finally, during the quarter the company booked impairment charges for its mineral properties of $119.6 million and Varvarinskoye assets of $189.0 million.
Revenues
For the six months to December 31, 2008 the Company invoiced sales of $38.7 million less future metal price settlement adjustments of (negative) $10.1 million and a further deduction for refining and treatment charges of $1.5 million, resulting in reported revenues for the year of $27.1 million.
For the six months to December 31, 2008, the Company sold 29,530 oz of gold (gold dore and contained gold in concentrate) for a total sales value of $22.7 million at an average realised price of $771 per oz. Total copper sales were $16 million less a negative settlement adjustment of $10.1 million and refining and treatment charge of $1.5 million, resulting in recorded copper revenues for the year of $4.4 million.
As a by product of the copper concentrate production process, a small amount of silver was produced which generated sales totalling $71,000. The Company recognises silver revenue as a by-product credit and records this revenue as an offset against operating expenses.
Cost of sales
The operational costs for the year were $51.6 million. This included operating expenses of $35.4 million (made up of mining costs of $15.1 million, plant costs of $14.8 million site costs of $1.2 million and net work in progress expensed of $4.3 million), accretion charges of $0.5 million, selling and distribution costs of $3.5 million; depreciation and amortization of $12.2 million. Included within the net work in progress expense is an recoverable inventory valuation write down (due to declining metal prices during the period) of $5.1 million.
Other (Expenses) Income
- Derivative instruments
At December 31, 2008 the Company's derivative financial instruments were comprised solely of gold forward sales contracts.
During the year ended December 31, 2008 the Company settled derivative contracts resulting in realized derivative losses of $20.5 million. No gold hedge contracts were due for settlement during 2007.
In line with reduced spot and forward price of gold during the fourth quarter, the unrealized mark to market revaluation of the Company's forward gold hedge contracts reduced from $140.6 million as at December, 2007 to $117 million as at December 31, 2008, resulting in an unrealized derivative gain of $23.6 million for the year.. Gold spot prices per ounce were $865 at December 31, 2008, $884.50 at September 30, 2008 and $836.50 at December 31, 2007.
The Company had 372,468 ounces of forward gold sales remaining at a price of $574.25 per ounce as at December 31, 2008. The mark to market revaluation of the Company's derivative instruments as at December 31, 2008 gave rise to unrealized derivative gain for year of $23.6million (2007 - loss of $70.9 million).
All derivative financial instruments are classified as held for trading and are measured at fair value.
- Impairment charges
During the year the Company revised the Varvarinskoye mineral reserves and mineral resource estimates (refer to the "Mineral Reserve and Mineral Resource Update" section of the Operational Review).
At December 31, 2008, and based on a number of factors, including the significant decline in the Company's share price and the revisions to the expected Varvarinskoye mine cash flows, management determined that impairment indicators did exist, and completed an impairment assessment for its mineral property interests and the Company's only operating asset, the Varvarinskoye gold-copper mine in northern Kazakhstan, resulting in a charge of $119.6 million for its mineral properties and $189.0 million for its Varvarinskoye assets. (Refer to section "Asset Impairments" for further information).
- Administration charges
Administration costs for the full year period include termination and redundancy costs of $4.3 million relating primarily to changes in senior management in connection with the business combination, head office costs and salaries of $6.3 million and provisions for tax penalties for Varvarinskoye of $3.0 million. Legal and professional costs relating to the Lero acquisition of $3.0million, are included as part of the Lero purchase consideration (not included within the Statement of Operations). Administration costs year on year have risen generally as a reflection of the enlarged group's activities following the Lero acquisition and following then commencement of full production during 2008.
- Interest expense and income
The Company successfully repatriated South African Rand 28.2 million in contractor advances (relating to MDM) along with accrued interest of South African Rand 12.7 million on October 22 2008 at an exchange rate of South African Rand to the US($) of 11.21, $3.65 million.. As a result the Company earned interest income of $1.1 million.
The Company earned a further $0.4 million of interest income on surplus cash balances during the year.
The interest expense of $6.0 million for the year was primarily due to amortisation charges of deferred finance costs relating to the loan facilities for the six months to December 31, 2008 of $3.8 million. A further $1.8 million relates to interest paid on the Varvarinskoye debt facility and $0.3 million other debt interest charges.
- Foreign exchanges (losses)/ gains
The foreign exchange loss of $2.5 million was primarily due to the repatriation of South African Rand 28.2 million in contractor advances (relating to MDM) on October 22 2008 at an exchange rate of South African Rand to the US($) of 11.21, $3.65 million as mentioned above. The advances had been previously been recorded by Company at an exchange rate of South African Rand to US ($) 6.75. As a result the Company recorded a foreign exchange loss of $1.7 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2008 the Company's main source of liquidity was unrestricted cash of $7.8 million (2007 $25.2 million).
The Company measures its consolidated working capital as comprising free cash, inventory, and accounts receivable, other assets and prepayments, less accounts payable and accrued liabilities, current portion of the principal on long term debt and the current portion of derivative liabilities.
At December 31, 2008, the Company's consolidated working capital was a deficit of $60.0 million compared with a working capital deficit of $20.8 million at December 31 2007, representing an increase in the deficit of $39.2 million. The movement during this period comprised a decrease in unrestricted cash of $17.5 million, increase in inventories $2.7 million, reduction in accounts receivable and prepayments $0.5 million, an increase in VAT recoverable of $12.6 million, an increase in accounts payable $10.3 million and an increase in the current portion on the principle long term debt of $21.3 million. Whilst cash balances increased year on year due to the commencement of concentrate sales, the Lero loan (pre acquisition) of $25 million and the cash balances of $37 million acquired as part of the Lero acquisition, this was more than off-set by the impact of falling realized copper prices on concentrate sale proceeds during the second half of the year, the operating costs during the prolonged ramp up period (commercial production was only achieved during quarter three), the $20.5 million cash settlement of gold forward contracts, the Lero acquisition transaction costs and Varvarinskoye capital expenditure of $21.3 million. Inventory balances increased due to increased mining resulting in higher ore stockpile levels, the commencement of concentrate production during the year and the associated end of year finished goods inventory and higher stocks of materials and supplies. The accounts payable balance increase reflects in part the recorded estimated liability of $7.1 million payable to Trafigura for future metal price settlements. The increase in the current portion of long-term debt arose due to the classification of the entire Varvarinskoye debt facility liability as current, reflecting the Lenders' ability at December 31, 2008 to demand immediate repayment of all amounts owing.
At September 30, 2008, the Company's consolidated working capital was a deficit of $21.1 million, representing a decrease between quarter four and quarter three of $38.9 million. The main movements between the two quarters were a decrease in cash of $10 million, an increase in VAT recoverable of $12.6 million, an increase in the current portion of long-term debt of $23.1 million.
For the reasons stated in the Going Concern section of the MD&A the Company's working capital as at December 31, 2008 was insufficient to meet its debt, accounts payable and derivative obligations at December 31 2008 and falling due in the first quarter of 2009.The Company's working capital for the remainder of the year will be significantly affected by, amongst other things, metal prices, the frequency of product deliveries, production levels and any amendments to the terms of the Varvarinskoye debt facility and hedge obligations arising from the ongoing discussions with the Lenders.
The ongoing debt and hedge obligation restructuring discussions with the Lenders and the potential impact upon the Company should these negotiations prove to be unsuccessful are described in the "Risks and Uncertainties" section of the MD&A.
GOING CONCERN
While the Company's financial statements have been prepared using Canadian GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations, the adverse conditions below cast significant doubt as to the Company's ability to meet its obligations as they become due and, accordingly, the appropriateness of using accounting principles applicable to going concern.
At December 31, 2008, the Company had a working capital deficit of $51.2 million, (December 31, 2007 - working capital deficit of $20.7 million), accumulated losses of $541541 million (December 31, 2007 - $218 million) and shareholders' deficiency of $109 million (2007 - shareholders' equity of $48 million).
Following a sharp deterioration in world copper metal prices and higher than expected operating costs at Varvarinskoye, in the fourth quarter of 2008 the Company reviewed its Varvarinskoye mineral reserve and mineral resource estimates and engaged an independent expert to update the mineral reserve estimates based upon a reinterpretation of the central pit geology. Compared with the previous December 2006 Varvarinskoye Technical Report, the remaining mine life from January 1, 2009 has been reduced from 14 years to 8 years with a significant reduction in estimated contained copper and gold metals. Coupled with management's current long-term copper and gold pricing forecasts, the Company's revised mineral reserve and mineral resource estimates for Varvarinskoye create significant doubt regarding the Company's ability to generate sufficient cash flows from its mining operations to meet its obligations under the Varvarinskoye project finance debt facility with the Lenders and the unmargined gold forward sales contracts entered into as a requirement of the debt facility.
The Company was unable to meet the first repayment tranche under the long-term debt facility of $16.65 million due on December 31, 2008, and payment of the first tranche remains outstanding. As at February 24, 2009, the Company was in breach of its permitted indebtedness covenant with respect to trade creditors, both in respect of amounts and terms ("Permitted Indebtedness"). This arose primarily due to temporary delays in shipping concentrate for sale. No waiver has been obtained from the Lenders for this breach. The Company is forecasting that, in the absence of additional waivers or modification of the debt terms, it will remain unable to meet its 2009 scheduled repayment obligations and will remain in breach of its repayment terms and its permitted indebtedness covenants. Failure to remedy such breaches and to comply with the debt repayment terms will entitle the Lenders to demand immediate repayment of all amounts owing.
At December 31, 2008, the Company had an outstanding future obligation to settle 372,478 ounces of unmargined forward gold sales contracts at a strike price of $574.25 per ounce, of which contracts for 80,326 ounces are due for settlement in 2009. This obligation has been valued on a mark to market basis at December 31, 2008 at $117 million. The practice of the Company has been to settle the gold forward contracts as they fell due on the settlement date. Up to December 31, 2008, the Company had settled contract amounts totalling $20.5 million as they fell due. Subsequent to the year-end, the Company was unable to meet its gold forward contract settlement obligations of: $2,538,000 due on January 30, 2009, $2,675,750 due on February 27, 2009 and $2,471,000 due on March 31, 2009. Under the cross default terms of the debt facility, a default on payments as they fall due under the gold forward contract obligations entitles the Lenders to demand immediate repayment of all amounts owing under the term debt facility and entitles the hedging counter parties to terminate any open derivative positions.
The Company is currently negotiating with the Lenders to try to restructure the debt facility and gold forward contract obligation terms in such a manner and time period that would allow the Company to meet its obligations as they fall due, including funding of any required future capital expenditures. In the Company's view, the settlement of its future gold forward contract obligations and long-term debt repayments is uncertain until such time as metal prices, and in particular copper prices, have recovered,, Varvarinskoye operating costs have been reduced,, Varvarinskoye is operating at maximum capacity and the outcome of current refinancing discussions with the Lenders have been concluded. In connection with the breaches of its permitted indebtedness covenants, while the Company is taking all possible steps to avoid disruption to essential supplies, management believes that it is unlikely that normal supplier payments and outstanding balances can be restored unless refinancing discussions are concluded on terms favourable to the Company, and unless an additional working capital facility is granted by the Lenders as part of the refinancing. Management considers that if any restructuring or modifications are to be successful, they must include the following as a minimum: the extension of the debt repayment period, an increase in the debt facility of a minimum of $10 million for working capital purposes and the conversion of short-term gold forward contract obligations into scheduled debt repayments. No conclusion from the Company's current discussions with the Lenders has been reached. To date, the Lenders have not taken, nor indicated that they intend to take, any action in respect of the defaults noted above, due to the ongoing discussions with the Company regarding the renegotiation of the debt facility and forward contract obligations. However, while the Company has been successful in the past in the past in renegotiating its debt facility and modifying its debt repayment and forward contract obligation terms, there can be no assurance that it will be successful in the future.
As a separate restructuring alternative, management is also investigating the possibility of disposing of Varvarinskoye property and related debt and hedging obligations. Whilst the Company remains in discussion with potential buyers, such discussions are at a preliminary stage and no formalized terms have been agreed. There is no assurance that the Company will be successful in any efforts to restructure its current interest in the Varvarinskoye project.
The Company's financial statements do not reflect adjustments to the carrying value of assets and liabilities, the reported revenues and expenses and balance sheet classifications used that would be necessary if the going concern assumption were not appropriate. Such adjustments could be material.
COMMITMENTS
The following table summarises the commitments of the Company as at December 31, 2008:
Less than Beyond
Total 1 year 1-2 years 2-3 years 3 years
$ $ $ $ $
Current portion of long term
debt 53,751 53,751 - - -
Accounts payable and accrued
liabilities 24,440 24,440 - - -
Asset Retirement obligations 13,357 - - - 13,357
Derivative obligation 116,994 24,221 24,770 23,798 44,205
The Company's capital commitments as at December 31, 2008 were a total of Pounds Sterling 1.7 million payable during 2009 only.
RELATED PARTY TRANSACTIONS
During the year ended December 31, 2008 and 2007, the Company was party to the following transactions involving related parties, all of which have been recorded at the exchange amount:
Dragon Management International Services Limited ("DIS") charged the Company a total of $295,628 (2007 - $603,000) in respect of the provision of office facilities, general office overheads and re-charged costs incurred on behalf of the Company. A former Chairman and director of the Company, beneficially owns DIS.
Endeavour Financial Corp ("EFC") charged the Company a total of $3,814,973 (2007 - $144,000) in respect of the provision of consulting services and related expenses of which $2,422,391 has been recognised in the Lero acquisition purchase consideration. A former Chairman and director of the Company, is a shareholder of EFC. In addition, on April 17, 2008, EFC made a bridging loan of $5 million to the Company for working capital purposes, which was then subsequently repaid to EFC on May 14 2008. An arrangement fee of $150,000, and a total of 254,479 shares were issued to EFC as part of the fee for providing the bridging loan. EFC were also issued 500,000 purchase warrants, at an exercise price of CAD$1.20, for advisory work on the Varvarinskoye debt renegotiation in May 2008.
During the period ended December 31, 2008 Lero was charged $820,530 (nil 2007) for rent and service charges from Oriel PLC a company related through a common director (whom resigned September 19 2008).
Mining Assets Corp ("MAC") charged the Company a total of $132,780 (2007 - $67,000) in respect of the provision of the consulting services and related expenses of a director of a company, who provides services to the Company on an ad-hoc basis. The director of the Company, beneficially owns MAC.
As at December 31, 2008, a total of $325,177 (2007 - $151,000) for related parties has been included in accounts payable.
The Company entered into a related party transaction, not in the normal course of business, with Oriel Resources Corp, related through a director in common. During the year, it received furniture and office equipment with a book value of $573,000 in exchange for making Oriel's lease payments from June to December 2008 of $100,000 in the period and assuming a dilapidation liability.
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