African Minerals Ltd Operational and Financing Update (7006R)

TIDMAMI

RNS Number : 7006R

African Minerals Ltd

21 November 2012

21 November 2012

African Minerals Limited ("AML" or "the Company")

Operational and Financing Update

African Minerals Limited today provides an update on various operational and financial matters as the Company continues to ramp up production at the Tonkolili iron ore mine in Sierra Leone.

OPERATIONAL UPDATE

-- Production ramp up continuing satisfactorily, remaining on track to deliver a sustainable production rate of 20Mtpa during Q2 2013;

-- Shipping, which was temporarily suspended at the end of August due to elevated moisture levels, recommenced early in October with the inclusion of material from the newly commissioned Wet Process Plant ("WPP"); and

   --     2012 shipped production is expected to be at the lower end of previous guidance of 5-6Mt. 

FINANCIAL UPDATE

   --     Released $381m of restricted cash to fund capital expenditure for H2 2012; 

-- Arranged for $150m from existing project level funds to be released to fund working capital requirements;

   --     Obtained a waiver from its lenders for historic breaches of certain debt covenants; 
   --     In advanced discussions to establish a new equipment financing facility of circa $90m; 

-- Seeking to convert the existing $100m Standby Facility to a $100-150m revolving credit facility; and

-- Even with the above funding arrangements being successfully completed for the full amount before the end of 2012, financial headroom remains limited. However, if the expected level of sales is not achieved during the ramp up, the Company will need to seek additional sources of funds.

CEO, Keith Calder, commented:

"I am pleased with the progress we have achieved to date at our integrated mine, rail and port project in Sierra Leone. Our processing plants continue to ramp up well, with no major issues identified to date, and I am confident that we remain on track to meet our near term target of shipping in excess of 5Mt this year, as well as achieving our longer term production rate target of 20Mtpa during Q2 2013.

"We have also made good progress in terms of securing necessary additional financing for the project, including, with the support of our partner SISG, the provision of $150m working capital from project funds, as well as the receipt of the appropriate historic covenant waivers from Standard Bank. As outlined in this update, the successful completion of the new equipment finance and revolving credit facilities are key to our near-term funding requirements, but we feel confident that these will be in place by the end of the year. Whilst our financial headroom remains tight and depends on us achieving the expected level of sales, I am confident that other sources of funding will be available if required to enable us to achieve full production, together with an operating team capable of delivering the Company's goals."

OPERATIONAL UPDATE

WPP ramp up update

The new WPP at Tonkolili continues to ramp up, with no major issues identified to date. The process facilities at Tonkolili are continuing to build up towards a sustainable combined production rate of 20 Mtpa during Q2 2013 as previously announced.

Rail Upgrade Programme

Welding of the 74km of rail that has been replaced and upgraded between Pepel Port and Lunsar has been completed, and ballasting is nearing completion, with tamping and de-stressing to be completed by year end. Train speeds over this new track section have increased from 5kph to 40kph, and when the outstanding work is completed it is expected that overall train speeds over the whole railway will be increased to 60kph. The flexibility that will be provided by the addition of a full rail loop at Pepel, which will further reduce cycle times and is expected to be completed during Q1 2013, will allow the full complement of ten train sets to run, supporting the 20 Mtpa target rate.

Delivery of rolling stock is progressing well, with now 816 wagons having been delivered and a further 120 in transit with the balance of 120 to be delivered in Q1 2013. 24 locos are now on site, with two currently awaiting dispatch before year end, and the balance of eight, bringing the complement up to 34, to be delivered during Q1 2013.

Shipping

As disclosed in our Interim Results announcement, moisture issues experienced during the wet season limited the volume of our All-in-32 shipments. Shipments were temporarily suspended due to elevated moisture levels at the end of August, however we are pleased to report that shipping recommenced as of 7 October 2012, shipping All-in-32 material blended with washed lump material, and washed lumps and fines cargoes. With the conversion of the 1D dry processing facilities to wet plants in Q1 2013 the production of All-in-32 will cease, removing this particular risk.

The Tonkolili facilities, and associated dedicated port and rail infrastructure, are in the midst of ramping up towards the target sustainable production rate of 20Mtpa, which is expected to be achieved during Q2 2013. While recognising the risk around this ramp up during the remainder of the year, we guide that 2012 exports will be at the lower end of our previous guidance of between 5-6Mt.

FINANCIAL UPDATE

Funding of additional $122m for expansion capital

At the time of the Interim Results announcement and post the balance sheet date of 30 June 2012, an additional $259m had been drawn from the Shandong subscription funds for capital expenditure associated with the completion of the Phase 1 project. As planned, we have now also drawn a second tranche of $122m from these funds towards completion of the forecast capital expenditure for our continued expansion to achieve a sustainable run rate of 20Mtpa in Q2 2013.

Provision of $150m working capital facility from project level funds

In our Interim Results announcement we stated that the Company was in advanced discussions with its banks regarding the provision of a working capital credit facility at the project level of up to $150m. The Company is pleased to announce that, although commercial terms sheets were offered by our existing relationship banks, with the support of Shandong Iron and Steel Group ("SISG"), we have agreed to fund this working capital requirement internally through the release of $150m from funds that were restricted to use for project capital expenditure (the "Drawdown Funds"). Of these Drawdown Funds, $75m is available for immediate drawdown and the remaining $75m will be available on issue of loading documents for the fourth vessel (starting from 1 November 2012) due to SISG under its pre-existing offtake agreement. The Company currently expects the fourth vessel destined for SISG will be loaded in mid-December. The Company has agreed with SISG that $150m of free cash flow from Phase 1 will be used to replace the Drawdown Funds. The Company's ability to service its ongoing obligations at the parent level is dependent on the up-streaming of funds from the project companies. Whilst the precise mechanics and timing of the replacement of the Drawdown Funds have yet to be agreed with SISG, the Company is confident that agreement will be reached with SISG and that up-streaming of funds will be available as required.

Related Party Transaction pursuant to AIM Rule 13

In exchange for the release of the Drawdown Funds, the Company has agreed with SISG that Letters of Credit will no longer be required as the payment mechanism for its iron ore shipments. In addition, the Company has agreed to provide SISG with extended credit terms such that SISG will pay for a shipment within 45 days after receipt of loading documents, instead of the current arrangement under which the Company would expect to cash Letters of Credit within 5-15 days of provision of loading documents. This arrangement applies to SISG's discounted iron ore offtake only, and not to any iron ore supplied under SISG's option to purchase additional ore.

On 21 November 2012 the Company and SISG entered into an amendment agreement to the original iron ore off-take agreement signed between the parties on 28 March 2012 (the "Off-take Amendment Agreement") to formalise the revised payment terms as set out above and to enable the release of the first $75m tranche of the Drawdown Funds. SISG is a related party within the meaning of the AIM Rules by virtue of its substantial shareholding in the project subsidiaries of the Company, and therefore entering into the Off-take Amendment Agreement constitutes a related party transaction pursuant to AIM Rule 13.

The directors of the Company (other than Mr Jurong Cui, being a SISG representative) consider, having consulted with Deutsche Bank, the Company's nominated adviser, that the terms of the Off-take Amendment Agreement are fair and reasonable insofar as its shareholders are concerned.

Standard Bank waiver for debt covenants breached on the $100m Standby Facility

As disclosed in our Interim Results announcement, the Group was negotiating a waiver from The Standard Bank of South Africa Limited ("Standard Bank") for debt covenants breached on the $100m Standby Facility in the period as well as those forecast to be breached in H2 2012. We are pleased to announce that Standard Bank has agreed to the necessary covenant waivers for previous breaches, and amendments to production covenants for the remainder of the year.

Provision of a new equipment financing facility from Standard Bank of circa $90m

The Company is in advanced discussions with Standard Bank to provide a new equipment financing facility of circa $90m, of which up to $48m is expected to be available for drawdown in 2012, and we have requested that the lenders under the existing equipment financing facility agree to apply the covenant terms from this new facility to the existing equipment financing facility. Documentation in respect of the new equipment financing facility and the amendments to the existing equipment financing facility is expected to be finalised and signed within the next few days, with drawdown expected to occur soon thereafter.

Additional working capital financing

As a result of the reduction in the shipping of iron ore in the wet season, the Company's revenues in the second half have been lower than expected and timing of cash flows during the current quarter have negatively impacted working capital. Thus, in addition to the above financing arrangements that were contemplated at the time of the Interim Results announcement, the Group has a current requirement for additional short term financing to fund working capital.

To this end, the Group is in discussions with Standard Bank to seek to convert the existing $100m Standby Facility to a $100-150m revolving credit facility before the end of 2012. The first $20m of the $100m Standby Facility has been repaid as scheduled on 30 September 2012 and, absent conversion to a revolving credit facility, a further $20m is scheduled to be repaid on 31 December 2012. Thus the conversion of the Standby Facility to a revolving credit facility would provide an additional $40-90m of liquidity to the Group.

Even with the above necessary funding arrangements being successfully completed for the full amount before the end of 2012, the Group has limited financial headroom. In the event that the operating companies are unable to achieve the expected level of sales during the ramp up, the Group will have to seek additional sources of funding over and above those outlined above. The Company is confident that other sources of funding will be available as required.

Contacts:

African Minerals Limited

[phone]

Mike Jones

FTI Consulting

[phone]

Billy Clegg / Ben Brewerton

Deutsche Bank

[phone]

Brent Nabbs

African Minerals is developing its Tonkolili iron ore project in Sierra Leone, with a JORC compliant resource of 12.8Bnt. The project, which currently has a 60+ year mine-life, is being developed in 3 phases. Phase I is expected to produce 20 million tonnes of iron ore per annum at full capacity.

Phase II now contemplates an expanded production facility at the mine to produce an additional 30Mtpa of 64% high grade hematite concentrate and the establishment of an expanded port facility at Tagrin Point.

African Minerals and its contractors currently employ approximately 11,000 people in Sierra Leone, 83% of who are Sierra Leonean nationals.

The Company has also developed significant port and rail infrastructure to support the operation of the project, via its subsidiary African Rail and Port Services (SL) Limited ("ARPS"), in which the Government of Sierra Leone ("GoSL") has a 10% free carried interest.

The Tonkolili project companies are currently owned 75% by AML, and 25% by Shandong Iron and Steel Group ("SISG"), except for ARPS, which is currently owned 75% by AML and 25% by SISG, with the GoSL having a 10% free carried interest.

www.african-minerals.com

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