BSE Base Resources Limited

AIM and Media Release 

22 February 2021

BASE RESOURCES LIMITED
Financial result and disciplined capital management drives half-year dividend

Base Resources Limited (ASX & AIM: BSE) (Base Resources or the Company) is pleased to provide the operational and financial highlights from the Company’s half-year results for the six-month period ended 31 December 2020 (half-year or reporting period), which include announcement of a half-year dividend of AUD 3 cents per share, unfranked, and the following extracts from the Half-Year Financial Report for the Company and its controlled entities (Group) for the same period.

1. Review of Operations
2. Market Developments and Outlook
3. Kwale Operations Extensional Opportunities
4. Toliara Project
5. Review of Financial Performance
6. After Balance Date Events
7. Consolidated Condensed Statement of Profit or Loss and Other Comprehensive Income
8. Consolidated Condensed Statement of Financial Position
9. Consolidated Condensed Statement of Changes in Equity
10. Consolidated Condensed Statement of Cash Flows

The extracts from the Half-Year Financial Report should be read in conjunction with the notes contained in the full version of that report, a copy of which is available from the Company’s website:  www.baseresources.com.au.  The full version of the Half-Year Financial Report also contains the auditor’s independence declaration, the directors’ declaration and the auditor’s review report. 

The Company has also released a presentation to accompany its Half-Year Financial Report.  The presentation contains, among other things, further details about the Company’s half-year results and details about the Company’s expected capital expenditure and settlements for the six-month period ending 30 June 2021.  A copy of the presentation is available from the Company’s website:  www.baseresources.com.au.

All references to currency ($ or US$) is United States Dollars, unless otherwise stated.

Highlights

Kwale Operations maintained operational continuity in the period, adapting successfully for the ongoing COVID-19 challenge, and is on track to achieve FY21 production guidance.  Firm demand from pigment producers supported ongoing price improvement for ilmenite during the half-year.  While zircon and rutile prices moderated in the reporting period, there are positive signs of a price recovery in early 2021. 

The Toliara Project progressed with practical completion of lender technical due diligence and submission by the Company’s wholly owned subsidiary, Base Toliara SARL, of a Large Mining Investment Law application, which, if approved, will provide fiscal and legal stability.  Discussions with the Government of Madagascar on fiscal terms re-commenced in the period and are ongoing.

Financial highlights for H1 FY21

• Revenue of US$72.8 million, .
• EBITDA of US$33.9 million.
• Net loss after tax of US$6.3 million, impacted by Kenyan dividend withholding tax of US$4.5 million incurred on repatriation of surplus cash from operations to the Company.
• Debt reduced by US$50.0 million as COVID-19 uncertainties subside, with the remaining US$25.0 million scheduled for repayment in March 2021.
• Payment of the Company’s maiden dividend in October of AUD 3.5 cents per share totalling US$29.8 million.
• Free cashflow of US$18.3 million (Operating cashflows of US$31.1 million less investing cashflows of US$12.8 million).
• Net cash position of US$74.6 million as at 31 December 2020.

Half-year dividend of AUD 3 cents per share determined

The Company’s capital management policy is that cash not required to meet the Company’s near-term growth and development requirements, or to maintain requisite balance sheet strength in light of prevailing circumstances, could be expected to be returned to shareholders.  With net cash of US$74.6 million at the end of the period and the timing of the Toliara Project final investment decision (FID) still uncertain, the Board has determined a half-year dividend of AUD 3 cents per share, unfranked, which will be paid wholly from Conduit Foreign Income.  This will bring total dividends to AUD 6.5 cents per share in 12 months.  The record date for the half-year dividend is 15 March 2021 and the payment date is 31 March 2021.

Operational highlights for H1 FY21

• A COVID-19 response that continues to be effective in maintaining the health and wellbeing of employees, whilst delivering operational performance.
• Production of 33,684 tonnes of rutile, 144,363 tonnes of ilmenite and 12,677 tonnes of zircon from Kwale Operations.
• Continued strengthening of demand for ilmenite with current prices the highest ever achieved by the Company.
• Kwale Operations mine life extension opportunities progressed, with the North Dune pre-feasibility study due for release early in the June quarter and exploration drilling commencing in the North Vanga region.
• Lost Time Injury Frequency Rate of zero across the group, with there being no lost time due to injury since 2014.
• US$1.8 million invested in community and environmental programs, with an additional US$1.0 million contribution to support vulnerable communities in Kenya and Madagascar in navigating the impacts of the COVID-19 pandemic.

Managing Director of Base Resources, Tim Carstens, said:

“Kwale Operations performance has been consistently strong throughout the half year and is on schedule to meet our FY21 production guidance.  Outcomes for the remainder of FY21 are expected to be stronger again with firm market demand supporting price increases for all our products.  Progress towards Kwale mine life extension remains a priority with the North Dune pre-feasibility study nearing completion and the recent resumption of our near-mine exploration program.”

“On-the-ground activity at the Toliara Project remains suspended as we engage with the Government of Madagascar in relation to the fiscal terms applicable to the project.  This, together with international travel restrictions and broader COVID-19 measures and impacts both in Madagascar and globally, has led to the final investment decision to proceed with development of the Toliara Project being delayed.  Once fiscal terms are agreed and the suspension is lifted, there will be approximately 11 months’ work to complete prior to FID.”

“At a Group level, we are delighted to be once again delivering meaningful returns to shareholders via dividends whilst remaining committed to the sensible progression of the Toliara Project, and the value generation opportunity this represents for shareholders, as uncertainty resolves.”

Investor and shareholder webcast

Base Resources’ Managing Director, Tim Carstens, Chief Financial Officer, Kevin Balloch and General Manager - Marketing, Stephen Hay, will host an investor and shareholder webcast today to discuss Base Resources’ FY21 half year results with shareholders and investors.  They will also be available to answer questions following a presentation of the Company’s results.

Details for the webcast are below.  Participants will be able to ask questions via the messaging function on the webcast platform or via the teleconference line.  Participants using the teleconference line will need to pre-register their details using the teleconference registration URL provided below.  Upon registering, participants will receive an email with their unique PIN and dial in details so that they can join the call on the day without needing to speak with an operator.

Conference call

• Date: Monday, 22 February 2021
• Time: 5.00pm AWST / 9.00am GMT
• Webcast URL: https://edge.media-server.com/mmc/p/b4aedq7m
• Teleconference registration URL: https://s1.c-conf.com/diamondpass/10012568-p82r45.html

Extracts from Half-Year Financial Report

1.    Review of Operations

Base Resources operates the 100% owned Kwale Operations in Kenya, which commenced production in late 2013.  Kwale Operations is located 50 kilometres south of Mombasa, the principal port facility for East Africa.  Mining operations continued according to plan on the South Dune orebody with approximately 8.5 million tonnes mined, lower than the comparative period due to lower face heights requiring more frequent relocation of mining units and a planned eight-day stoppage in July to move the mining collection hopper further south.

*ore grade estimated pending a measurement review process.

Due to the reduced ore mined and lower ore grade, production of heavy mineral concentrate (HMC) decreased by 19% to 246,039 tonnes.  HMC stocks closed the reporting period at 13,596 tonnes (16,450 tonnes as at 30 June 2020).

As a consequence of MSP operations being constrained by available HMC, plant utilisation and feed rates were lower in the reporting period.  As a result, production of all products was lower than the comparative period.

There were no workplace lost time injuries (LTI) during the reporting period and, as a result, the lost time injury frequency rate remained at zero.  Base Resources’ employees and contractors have now worked more than 22.9 million man-hours LTI free as at 31 December 2020, with the last LTI recorded in early 2014.  No medical treatment injuries were recorded during the reporting period.  With one medical treatment injury recorded in the past 12 months, Base Resources’ total recordable injury frequency rate is 0.25 per million hours worked.

Across each of its three main products, Base Resources maintains a balance of multi-year offtake agreements with long term customers providing for the sale of a fixed or minimum annual quantity of product over the relevant agreement’s term.  A small proportion of Base Resources’ product sales also occur pursuant to quarterly, multi-sale offtake agreements and ongoing single sale agreements.  These agreements, in place with some of the world’s largest consumers of titanium dioxide feedstocks and zircon products, provide certainty for the Kwale Operations by securing minimum offtake quantities.  Sales prices in these agreements are derived from prevailing market prices, based on agreed price indices or periodic price negotiations.

Ilmenite, and the majority of rutile, is sold in bulk, with typical shipment sizes of 50-54kt for ilmenite and 10-12kt for rutile, which frequently results in sales volumes of these products being out of step with production volumes, which was the case in the reporting period.  Zircon is sold in smaller parcels and, in the absence of any market constraints, sales generally align with production volume.  Bulk shipments of both ilmenite and rutile took place in early 2021.  

2.    Market Developments and Outlook

Titanium Dioxide

Ilmenite and rutile are primarily used as feedstock for the production of titanium dioxide (TiO₂) pigment, with a small percentage also used in the production of titanium metal and fluxes for welding rods and wire.  TiO₂ is the most widely used white pigment because of its non-toxicity, brightness and very high refractive index.  It is an essential component of consumer products such as paint, plastics and paper.  Pigment demand is therefore the major driver of ilmenite and rutile pricing.

Major western pigment producers typically use high grade TiO₂ feedstocks (which includes rutile) while Chinese pigment producers typically rely on sulphate ilmenite as their main feedstock.

Inventories of TiO₂ pigment between western pigment producers and their customers built up through the latter part of the 2020 financial year as demand for pigment was significantly impacted by the economic effects of COVID-19-related shutdowns in many regions.  This resulted in western pigment producers winding back their production rates through the early part of the reporting period – reducing demand for high-grade TiO₂ feedstock and leading to a build-up in feedstocks inventories.   

Pigment demand rebounded strongly across all end use sectors in most regions throughout the reporting period as economies emerged from lockdowns.  Western pigment plants began ramping up their output through the later part of the reporting period to keep pace with the growing pigment demand which, in turn, resulted in the absorption of high grade TiO₂ feedstock inventories and an improvement in demand for feedstock.

The reduced demand for rutile through the early part of the reporting period resulted in modest price reductions, however, as inventories were run down and demand for rutile lifted, prices stabilised.  Demand for rutile continued to improve through the early part of calendar year 2021 and prices are again on an upward trend.

With only a brief COVID-19-related production interruption in early 2020, Chinese pigment producers operated at maximum capacity throughout 2020.  The rebound of the Chinese economy resulted in domestic pigment demand returning to normal levels by mid-2020.  This, combined with a focus on increased exports, allowed Chinese pigment inventory levels to return to normal early in the reporting period.  The ongoing strength of the Chinese economy together with a recovery in other major markets resulted in very strong demand for sulphate ilmenite throughout the reporting period.  Combined with ongoing ilmenite production constraints in India and Vietnam and reduced ilmenite output from other major producers, the ilmenite market tightened through the reporting period and prices increased significantly. 

Tightening of the ilmenite market is continuing in the early part of calendar year 2021 and further prices gains have been secured for upcoming bulk ilmenite shipments.          

Zircon

Zircon has a range of end-uses, the predominant of which is in the production of ceramic tiles, accounting for more than 50% of global zircon consumption.  Milled zircon enables ceramic tile manufacturers to achieve brilliant opacity, whiteness and brightness in their products.  Zircon’s unique properties include heat and wear resistance, stability, opacity, hardness and strength, making it sought after for other applications such as refractories, foundries and specialty chemicals.

Demand growth for zircon is closely linked to growth in global construction and increasing urbanisation in the developing world. 

Prior to the COVID-19 pandemic, in early 2020, the zircon market was already subdued.  Sentiment in China, which represents over 50% of global zircon demand, was poor owing to trade disputes with the US and a sluggish ceramics sector.  The pandemic resulted in a further impact to demand and zircon prices came under increased pressure.  As China emerged from lockdown demand for zircon began a gradual recovery.  However, economies in many other major zircon markets were then subject to lockdowns – further impacting overall global demand. 

As all major markets emerged from lockdown, demand for zircon began to improve.  By the middle of the reporting period, European ceramics plants and millers were operating at capacity levels and inventories of zircon in the supply chain were being rapidly absorbed.  The Chinese zircon market continued to improve through the reporting period, but at a slower pace than the other major zircon markets.  On the back of the improving demand and management of supply of zircon by major producers, prices stabilised through the latter part of the reporting period and into the early part of calendar year 2021.

3.    Kwale Operations Extensional Opportunities

Mining tenure arrangements continued to progress with the Kenyan Ministry of Petroleum and Mining as a precursor to an anticipated updated Ore Reserves estimate to incorporate additional Mineral Resources defined within the Kwale Prospecting Licence, but outside the current footprint of the Kwale Special Mining Lease No. 23 (SML23).¹ 

The pre-feasibility study for mining the North Dune Mineral Resources continues on schedule for completion in the second half of the 2021 financial year.²

After reaching agreement with local land owners, auger drilling of a section of the northern Vanga Prospecting Licence commenced and will continue during the 2021 financial year.  Completion of the remaining drilling program in the North-East Sector remains on hold pending community access being secured.   

Prospecting licence applications lodged in the 2020 financial year for an area in the Kuranze region of Kwale county, approximately 70 km west of Kwale Operations, as well as an area south of Lamu, are progressing through the granting process.  A government moratorium placed on the issuance of prospecting licences in November 2019 has affected the progress of all licence applications, albeit assessment of applications has recently recommenced which is seen as a precursor to the lifting of the moratorium.

[Notes:

(1):  For further information about the Kwale South Mineral Resources and Ore Reserves, refer to Base Resources’ market announcement on 27 July 2020 “Updated Kwale South Dune Mineral Resources and Ore Reserves estimate”, which is available at https://baseresources.com.au/investors/announcements/. 

(2):  For further information about the Kwale North Mineral Resources, refer to Base Resources’ announcement on 19 February 2021 “Updated Kwale North Dune and maiden Bumamani Mineral Resources estimates”, which is available at https://baseresources.com.au/investors/announcments/.]

4.    Toliara Project

In November 2019, the Government of Madagascar required Base Resources to suspend on-the-ground activity on the Toliara Project while discussions on fiscal terms applying to the project were progressed³.  Activity remains suspended as Base Resources continues to engage the Government in relation to the country’s Large Mining Investment Law (LGIM) regime, fiscal terms applicable to the Toliara Project and the lifting of the on-the-ground suspension, with encouraging progress made during the reporting period.

As previously announced, due to the suspension of on-the-ground activities, international travel restrictions and broader COVID-19 measures and impacts, both in Madagascar and globally, the final investment decision (FID) to proceed with the development of the Toliara Project has been delayed.  Once fiscal terms are agreed and the suspension is lifted, there will be approximately 11 months’ work to complete prior to FID.  This work includes finalising financing, completing the land acquisition process and concluding major construction contracts.  The resumption of international travel will also be required to complete a significant portion of this work.

[Note (3):  Refer to Base Resources’ market announcement “Toliara Project – Government of Madagascar statement” released on 7 November 2019 for further information, which is available at https://baseresources.com.au/investors/announcements/.]

5.    Review of Financial Performance

Base Resources achieved a loss after tax of US$6.3 million for the six-month reporting period, a decrease compared with a profit of US$9.1 million in the comparative period, primarily due to lower sales revenues.  

(i) Base Resources’ financial results are reported under International Financial Reporting Standards (IFRS). These Financial Statements include certain non-IFRS measures including EBITDA, EBIT and NPAT. These measures are presented to enable understanding of the underlying performance of the Group and have not been audited/reviewed.

Sales revenue decreased to US$72.8 million for the reporting period (comparative period: US$83.5 million) due to lower sales volumes, however, the average price of product sold increased to US$435 per tonne (comparative period: US$399 per tonne), with higher ilmenite prices only partially offset by lower prices for rutile and zircon.

Total operating costs of US$33.4 million for the reporting period were 1% lower than the comparative period, however due to a 12% reduction in production of finished goods, the operating costs per tonne produced was 12% higher at US$174 per tonne (comparative period:  US$155 per tonne).

Unit cost of goods sold is influenced by both the underlying operating costs and product sales mix.  Operating costs are allocated to each product based on revenue contribution, which sees the higher value rutile and zircon products attracting a higher cost per tonne than the lower value ilmenite.  Therefore, the greater the sales volume of rutile and zircon relative to ilmenite in a period, the higher both unit revenue per tonne and unit cost of goods sold will be. 

Ilmenite, and the majority of rutile, is sold in bulk, with typical shipment sizes of 50-54kt for ilmenite and 10-12kt for rutile, which means any given half-year will usually contain either two or three bulk rutile and ilmenite sales.  Zircon is sold in smaller parcels and, in the absence of any market constraints, sales generally align with production volume.  Product sales mix will therefore vary depending on the number of bulk shipments of ilmenite and rutile in each period.

Cost of goods sold (operating costs, adjusted for stockpile movements, and royalties), was US$199 per tonne of product sold, 18% higher than the comparative period (US$169 per tonne) due to the higher unit operating costs.

With a margin of US$236 per tonne sold for the reporting period (comparative period: US$230 per tonne) and an achieved revenue to cost of sales ratio of 2.2 in the reporting period (comparative period: 2.4), Base Resources remains well positioned amongst mineral sands producers.

The reduced sales volume together with COVID-19 response costs have delivered a reduced Kwale Operations EBITDA for the reporting period of US$38.0 million (comparative period: US$46.5 million) and a Group EBITDA of US$33.9 million (comparative period: US$43.5 million).

The majority of Kwale Operations assets are depreciated on a straight-line basis over the remaining mine life.  Depreciation and amortisation increased 5% in the reporting period to US$29.5 million (comparative period: US$28.1 million) due to capital expenditure incurred at Kwale Operations being depreciated over the short remaining life of existing Ore Reserves. Mining tenure arrangements to expand SML23 are progressing with the Kenyan Ministry of Petroleum and Mining.  Should, as is expected, the expansion be granted, the South Dune Ore Reserves will extend mine life, thereby spreading future depreciation and amortisation charges over a longer period.

A net profit after tax of US$2.6 million was recorded by Kwale Operations in the reporting period (comparative period: US$12.7 million).  During the reporting period, the Group’s Kenyan subsidiary, Base Titanium Limited (Base Titanium), distributed US$30.0 million of surplus cash, via dividend, to the Group’s ultimate parent entity, Base Resources Limited.  The dividend distribution by Base Titanium incurred 15% Kenyan dividend withholding tax of US$4.5 million, which has been recorded as an income tax expense, thus contributing to a loss after tax of US$6.3 million for the Group (comparative period: profit of US$9.1 million).  Previously, surplus cash distributions from Base Titanium occurred by way of redemption of preference shares, however these were exhausted during the reporting period.  Basic loss per share for the reporting period was USD 0.54 cents per share (comparative period: earnings of USD 0.78 cents per share).

Cash flow from operations was US$31.1 million for the reporting period (comparative period: US$35.5 million), lower than Group EBITDA due to the payment of US$4.6 million in corporate income tax to the Kenya Revenue Authority during the reporting period.  Additionally, a US$12.7 million reduction in trade receivables during the reporting period was largely offset by US$9.5 million of costs incurred in producing increased stocks of finished goods (mainly rutile due to bulk shipment timing) and HMC.  Operating cashflows were used to fund capital expenditure at Kwale Operations, Toliara Project progression, as well as debt reduction and servicing.

Total capital expenditure for the Group was US$13.0 million in the reporting period (comparative period: US$20.0 million) comprised of US$5.1 million at Kwale Operations (comparative period: US$5.1 million), primarily for a co-disposal mixing plant to be used for land rehabilitation, US$7.5 million on the progression of the Toliara Project (comparative period: US$14.6 million) and US$0.4 million on Kenyan exploration activities (comparative period: US$0.3 million).

In September 2020, the Group made a payment of US$50.0 million to reduce the outstanding Revolving Credit Facility (RCF) to US$25.0 million.  With a net cash position of US$74.6 million at 31 December 2020, consisting of cash reserves of US$99.6 million and the drawn RCF balance of US$25.0 million, the Group is in a robust financial position.

Consistent with Base Resources’ strategy, the Group seeks to provide returns to shareholders through both long-term growth in the Base Resources share price and appropriate cash distributions.  Cash not required to meet the Group’s near-term growth and development requirements, or to maintain requisite balance sheet strength in light of prevailing circumstances could be expected to be returned to shareholders.

Applying this strategy, the Board determined to pay a half-year dividend of AUD 3 cents per share, unfranked with a record date of 15 March 2021 and payment date of 31 March 2021.  This follows the maiden dividend of AUD 3.5 cents per share paid to shareholders in October 2020, resulting in a cash payment of US$29.8 million in the reporting period.

6.    After Balance Date Events

Since the end of the reporting period, the Board determined to pay a half-year dividend of AUD 3 cents per share, unfranked, with a record date of 15 March 2021 and payment date of 31 March 2021.  The financial impact of the dividend, estimated to be US$27.5 million (based on the prevailing AUD:USD exchange rate), has not been recognised in the Consolidated Half-Year Financial Statements for the reporting period.

There have been no other significant events since the reporting period.

7.    Consolidated Condensed Statement of Profit or Loss and Other Comprehensive Income

The notes contained in the full version of the Half-Year Financial Report form part of these consolidated financial statements, a copy of which is available from the Company’s website: www.baseresources.com.au.

8.    Consolidated Condensed Statement of Financial Position

The notes contained in the full version of the Half-Year Financial Report form part of these consolidated financial statements, a copy of which is available from the Company’s website: www.baseresources.com.au.

9.    Consolidated Condensed Statement of Changes in Equity

The notes contained in the full version of the Half-Year Financial Report form part of these consolidated financial statements, a copy of which is available from the Company’s website: www.baseresources.com.au.

10.       Consolidated Condensed Statement of Cash Flows

The notes contained in the full version of the Half-Year Financial Report form part of these consolidated financial statements, a copy of which is available from the Company’s website: www.baseresources.com.au.

Forward looking statements

Certain statements in or in connection with this announcement contain or comprise forward looking statements.  Such statements may include, but are not limited to, statements with regard to capital cost, capacity, future production and grades, sales projections and financial performance and may be (but are not necessarily) identified by the use of phrases such as “will”, “expect”, “anticipate”, “believe” and “envisage”.  By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future and may be outside Base Resources’ control.  Accordingly, results could differ materially from those set out in the forward-looking statements as a result of, among other factors, changes in economic and market conditions, success of business and operating initiatives, changes in the regulatory environment and other government actions, fluctuations in product prices and exchange rates and business and operational risk management.  Subject to any continuing obligations under applicable law or relevant stock exchange listing rules, Base Resources undertakes no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after today's date or to reflect the occurrence of unanticipated events.

ENDS.

For further information contact:

About Base Resources

Base Resources is an Australian based, African focused, mineral sands producer and developer with a track record of project delivery and operational performance.  The Company operates the established Kwale Operations in Kenya and is developing the Toliara Project in Madagascar.  Base Resources is an ASX and AIM listed company.  Further details about Base Resources are available at www.baseresources.com.au

PRINCIPAL & REGISTERED OFFICE
Level 1, 50 Kings Park Road
West Perth, Western Australia, 6005
Email:  info@baseresources.com.au
Phone: +61 (0)8 9413 7400
Fax: +61 (0)8 9322 8912

NOMINATED ADVISOR
RFC Ambrian Limited
Stephen Allen
Phone: +61 (0)8 9480 2500

BROKER
Berenberg
Matthew Armitt / Detlir Elezi
Phone: +44 20 3207 7800