BASE RESOURCES LIMITED - Interim Financial Report - period ended 31 December 2018

AIM Release 

25 February 2019

BASE RESOURCES LIMITED
Interim Financial Report – period ended 31 December 2018

Base Resources Limited (ASX & AIM: BSE) (Base Resources or the Company) is pleased to provide the following extracts from the company’s Interim Financial Report for the six months ended 31 December 2018.

1.  Review of Operations

2.  Market Developments and Outlook

3.  Review of Financial Performance

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

5.  Consolidated Condensed Statement of Financial Position

6.  Consolidated Condensed Statement of Changes in Equity

7.  Consolidated Condensed Statement of Cash Flows

These extracts should be read with reference to the notes contained in the full version of the Interim Financial Report, a copy of which is available from the Company’s website:  www.baseresources.com.au. The Company has also released an Investor Presentation to accompany its Interim Financial Report, a PDF copy of which is available from the Company’s website:  www.baseresources.com.au. 

Highlights

Highlights from Base Resources’ interim financial results for the six-month period ended 31 December 2018 are as follows:

Operational Highlights for H1 FY19¹

• 66% increase in mined ore at Kwale Operations offsets lower ore grade;

• Steady production – 49,630 tonnes of rutile, 226,730 tonnes of ilmenite and 17,935 tonnes of zircon;

• Continued strengthening of rutile and zircon prices;

• 136km² Vanga prospecting licence issued, extending south west from the Company's existing Kwale Operation;

• Total Recordable Injury Frequency Rate of zero – no lost time due to injury since 2014; and

• US$2.0m invested in community and environmental programs including scholarships and livelihood enhancement.

Financial Highlights for H1 FY19

• Revenue increased 13% to US$102.2m;

• EBITDA increased 7% to US$57.5m;

• NPAT increased 4% to US$17.4m;

• Net debt free at 31 December 2018 – a reduction of US$34.2m during the period; and

• Revenue to cost of sales ratio of 2.7:1.

[Note 1:  All figures reported in United States dollars unless otherwise stated.] 

1. Review of Operations

Base Resources operates the Kwale Operation in Kenya, which commenced production in late 2013.  The Kwale Operation is located 50 kilometres south of Mombasa, the principal port facility for East Africa.

In order to counter declining grades, and to fully exploit the availability of mineral separation plant (MSP) capacity, the Company completed the Kwale Phase 2 mine optimisation project in second half of the 2018 financial year.  Following its successful implementation, mining volumes ramped up significantly, resulting in ore tonnes mined in the reporting period increasing by 66% over the comparative period.  Mined ore grade of 4.18% for the reporting period was lower than the comparative period (7.61%), as expected, as mining proceeded around the fringes of the Central Dune orebody.

Mining and Wet Concentrator Plant (WCP) Performance	Six months to Dec 2018	Six months to Dec 2017
Ore mined (tonnes)	9,828,180	5,906,079
Heavy mineral (HM) %	4.18%	7.61%
WCP Heavy mineral concentrate produced (tonnes)	348,015	435,305

Despite the increase in mining volume, production of heavy mineral concentrate (HMC) decreased by 20% to 348,015 tonnes due to the lower ore grade.  In order to maintain steady MSP throughput, an additional 32,203 tonnes of HMC was drawn from the HMC stockpile (comparative period: 54,008 tonnes added to HMC stockpile), which closed the reporting period with a balance of 45,709 tonnes.

MSP Performance	Six months to Dec 2018	Six months to Dec 2017
MSP feed (tonnes of heavy mineral concentrate)	385,944	381,297
MSP feed rate (tph)	90	91
MSP recovery % (i)
Ilmenite	102%	100%
Rutile	99%	100%
Zircon	76%	77%
Production (tonnes)
Ilmenite	226,730	238,585
Rutile	49,630	45,587
Zircon	17,935	18,705
Zircon low grade	-	1,425

⁽ⁱ⁾   The presence of altered ilmenite species that are not defined as either “rutile” or “ilmenite” in the Mineral Resource but are recovered in the production of both, results in calculated recoveries above 100% being achievable for both products

The MSP has continued to maintain high throughput rates with an average of 90tph achieved for the reporting period (comparative period: 91tph), whilst achieving availability of 97% (comparative period: 95%), which resulted in total MSP feed of 385,944 tonnes (comparative period: 381,297 tonnes).

Ilmenite production in the reporting period was lower at 226,730 tonnes (comparative period: 238,585 tonnes), due to lower contained ilmenite in the MSP feed, partly offset by the higher average ilmenite recoveries of 102% (100% in the comparative period).

Rutile production increased to 49,630 tonnes in the reporting period (comparative period: 45,587 tonnes) due to higher contained rutile in the MSP feed, with recoveries reasonably steady at 99%.

Zircon production decreased to 17,935 tonnes for the reporting period (comparative period: 18,705 tonnes) due to lower contained zircon in the MSP feed, with average zircon recoveries in line with the comparative periods 76%.

With no serious injuries occurring during the reporting period, Kwale Operations lost time injury (LTI) frequency rate remains at zero.  The Company’s employees and contractors have now worked 14.9 million man-hours LTI free, with the last LTI recorded in early 2014. Further, 5.3 million man-hours have been worked without a medical treatment injury.

Marketing and sales	Six months to Dec 2018	Six months to Dec 2017
Sales (tonnes)
Ilmenite	214,420	225,814
Rutile	47,588	37,971
Zircon	17,764	17,427
Zircon low grade	-	3,287

Across each of its three products, the Company maintains a balance of multi-year, annual and quarterly offtake agreements with long term customers as well as a small proportion of ongoing spot sales. These agreements, in place with some of the world’s largest consumers of titanium dioxide and zircon products, provide certainty for the Kwale Operation by securing minimum offtake quantities. Selling prices in these agreements are derived from prevailing market prices, based on agreed price indices or periodic price negotiations.

The Company continues its strong market presence in China, the world’s largest market for both ilmenite and zircon, with over 210,000 tonnes of ilmenite and over 13,000 tonnes of zircon products sold into the Chinese market during the reporting period.  The strength of the mineral sands market for all products has ensured that sales continue to closely match production, with minimal inventories being maintained.

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.

After more than two years of strong growth, the global TiO₂ pigment industry moderated through the reporting period.  Global economic uncertainties appear to have led to some pigment consumers reducing inventory levels which combined with the seasonally slow December quarter to dampen demand for pigment.  However, most major pigment producers, who had been holding lower than normal inventories, continued to operate at high production levels which fuelled solid demand for feedstocks including rutile and ilmenite.  Environmental inspections that had been restricting pigment production in China for the past two years dissipated through the reporting period, allowing most Chinese pigment producers to resume normal production rates.

Significant supply constraints on high grade feedstocks, combined with the ongoing firm demand, has resulted in continued price improvement for rutile. 

Chinese domestic ilmenite production has been stable to slightly down through the reporting period while production and exports from India and Vietnam have significantly diminished.  Indian government-imposed bans on mineral sands mining and exports are now in place in the two major ilmenite producing states – Tamil Nadu and Andhra Pradesh, with no indication of when mining in either state may resume.  Government- issued export quotas in Vietnam expired at the end of the 2018 calendar year – and new quotas have not yet been forthcoming. These ilmenite supply constraints are supporting ilmenite prices which have remained stable throughout the reporting period and into early 2019.

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.  Following a two-year period of strong growth, the economic uncertainties that have emerged in most key markets have tempered demand for zircon resulting in prices stabilising during the latter stages of the reporting period and into 2019.  However, ongoing constraints on global production are expected to support continued stable pricing for zircon. 

Kwale Operations Extensional Exploration

During the reporting period, the Company progressed the re-evaluation, including infill drilling, of the higher-grade areas of the North Dune, adjacent to the Kwale Operation’s Central Dune, motivated by an improved economic environment, refined resource definition methodology and insights from five years of operations on the Central Dune.  The drill program is now complete, with 573 holes for 20,598 metres drilled and a Mineral Resource estimate for the North Dune is expected during the June quarter of 2019.

The Company’s 136km² Vanga Prospecting Licence (PL/2015/0042), extending south west from the company’s Kwale Operation towards the Tanzanian border, was granted late in the reporting period.  Community engagement in the area is currently underway, with a drill program planned to commence in the March 2019 quarter, access and drill rig availability permitting.

Extensional exploration drilling in the North-East Sector (now called Kwale East) of the Kwale Operations remains suspended pending resolution of community access issues.

Toliara Project

During the reporting period, the Company continued to progress the pre-feasibility study for the Toliara Project in Madagascar, which is due for completion in March 2019. The pre-feasibility study (PFS) will build on the considerable body of work completed by previous owners of the Toliara Project and together form the foundations of an accelerated feasibility study program that aims to advance the project toward a decision to proceed to construction in early 2020.

During the reporting period, an update to the Ranobe deposit Mineral Resources estimate was completed to advance detailed mine planning and to refine the processing design criteria for the Toliara Project PFS.  The update is the result of additional drilling completed to date and revised geological interpretations following a comprehensive mineralogical re-definition of drill samples, which, together with a revision of cut-off grade from 3.0% to 1.5% HM, has increased the Ranobe Mineral Resources estimate to 1.3 billion tonnes at 5.1% HM².

[Note 2:  For further detailed information on the Ranobe Deposit Mineral Resources, refer to Base Resources’ market announcements of 23 January 2019 “Updated Ranobe Deposit Mineral Resources (corrected)” available at https://www.baseresources.com.au/investor-centre/asx-releases/.  Base Resources confirms that it is not aware of any new information or data that materially affects the information included in that market announcement and all material assumptions and technical parameters underpinning the estimates in that market announcement continue to apply and have not materially changed.]

3. Review of Financial Performance

Base Resources achieved a profit after tax of US$17.4 million for the six-month reporting period, a 4% increase compared with US$16.8 million in the comparative period, primarily due to higher sales revenues.  

	Six months to 31 December 2018				Six months to 31 December 2017
	Kwale Operations	Toliara Project	Other	Total	Kwale Operations	Other	Total
	US$000s	US$000s	US$000s	US$000s	US$000s	US$000s	US$000s
Sales Revenue	102,166	-	-	102,166	90,292	-	90,292
Cost of goods sold excluding depreciation & amortisation:
Operating costs	(31,968)	-	-	(31,968)	(27,647)	-	(27,647)
Inventory movement	2,557	-	-	2,557	4,923	-	4,923
Royalties expense	(7,119)	-	-	(7,119)	(6,229)	-	(6,229)
Total cost of goods sold (i)	(36,530)	-	-	(36,530)	(28,953)	-	(28,953)
Corporate & external affairs	(2,188)	(197)	(2,782)	(5,167)	(1,864)	(1,945)	(3,809)
Community development	(1,534)	-	-	(1,534)	(1,027)	-	(1,027)
Selling & distribution costs	(1,316)	-	-	(1,316)	(1,970)	-	(1,970)
Other income / (expenses)	443	-	(528)	(85)	(132)	(452)	(584)
EBITDA (i)	61,041	(197)	(3,310)	57,534	56,346	(2,397)	53,949
Depreciation & amortisation	(26,025)	-	(62)	(26,087)	(23,481)	(21)	(23,502)
EBIT (i)	35,016	(197)	(3,372)	31,447	32,865	(2,418)	30,447
Net financing expenses	(7,131)	-	(1,690)	(8,821)	(7,733)	(1,417)	(9,150)
Income tax expense	(5,209)	-	-	(5,209)	(4,497)	-	(4,497)
NPAT (i)	22,676	(197)	(5,062)	17,417	20,635	(3,835)	16,800

⁽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 increased 13% to US$102.2 million for the reporting period (comparative period: US$90.3 million), achieving an average price of product sold (rutile, ilmenite, zircon and zircon low grade) of US$365 per tonne (comparative period: US$317 per tonne), with averaged realised prices higher for rutile and zircon, offset by lower prices for ilmenite. Operating cost per tonne produced was 20% higher at US$109 per tonne for the reporting period (comparative period: US$91 per tonne), due to increased volumes mined following the implementation of the Kwale Phase 2 mine optimisation project. In addition, higher fuel costs and an increase in flocculant use on the lower grade ore have contributed to the increase in operating costs. Total cost of goods sold, excluding depreciation and amortisation, was US$36.5 million for the reporting period, 26% higher than the comparative period (US$29.0 million), at an average cost of US$131 per tonne of product sold (comparative period: US$102 per tonne), due to higher operating costs and higher royalties associated with increased sales revenue.

With a margin of US$234 per tonne sold for the reporting period, 9% higher than the comparative period (US$215 per tonne) and an achieved revenue to cash cost of sales ratio of 2.7 in the reporting period (comparative period: 2.8), the Company remains well positioned high in the upper quartile of mineral sands producers.

Improved commodity prices and a continued focus on cost management has delivered a Kwale Operations EBITDA for the reporting period of US$61.0 million, an 8% increase over the comparative period (US$56.3 million) and a Group EBITDA of US$57.5 million, a 7% increase over the comparative period (US$53.9 million).

The majority of Kwale Operation assets are depreciated on a straight-line basis over the remaining mine life. Since the implementation of the Kwale Phase 2 mine optimisation project in March 2018, mining rates have significantly increased to offset declining ore grades and thus the remaining mine life is correspondingly shorter. As a result, depreciation and amortisation has increased 11% in the reporting period to US$26.1 million (comparative period: US$23.5 million). Should the extensional exploration currently underway at Kwale Operations be successful, there is the potential to increase ore reserves and extend mine life, thereby reducing future annual depreciation and amortisation charges.

A 10% increase in net profit after tax of US$22.7 million was recorded by Kwale Operations (comparative period: US$20.6 million) and Group net profit after tax increased by 4% to US$17.4 million for (comparative period $16.8 million). Basic earnings per share for the Group was US1.52 cents per share (comparative period: US2.26 cents per share), lower as a result of additional shares issued in January 2018 to fund the acquisition of the Toliara Project.

Cash flow from operations was US$53.8 million for the reporting period (comparative period: US$57.3 million), slightly lower than Group EBITDA due to working capital movements. The operating cash flows were used to fund capital expenditure at Kwale Operations, Toliara Project progression, as well as debt servicing and repayment.

Total capital expenditure for the Group was US$14.0 million in the reporting period (comparative period: US$17.0 million) comprised of US$7.3 million at Kwale Operations (comparative period: US$17.0 million), primarily for the preparatory work for the transition of mining operations to the South Dune deposit, US$6.3 million on the progression of the Toliara Project and US$0.3 million for Corporate capital works.

In October 2018, the US$80.0 million outstanding balance of the Kwale Project Debt Facility was repaid from a combination of cash reserves and utilisation of the Revolving Credit Facility (RCF) following a concurrent increase in the RCF to US$75.0 million. Early retirement of the Kwale Project Debt Facility demonstrates the continued strong performance of Kwale Operations and, together with the increased RCF, provides the Group with additional funding flexibility and reduced debt servicing costs.

During the reporting period, the Group became net cash positive for the first time following a US$34.2 million reduction in net debt from US$33.2 million at 30 June 2018, to a net cash position of US$1.0 million at 31 December 2018. The Group’s cash positive position is comprised of cash reserves of US$49.1 million, with the RCF drawn to US$48.2 million. Future cash generation will now be available to contribute to the progression of the Toliara Project.

After Balance Date Events

Subsequent to period end, in January 2019, US$18.2 million of the RCF debt was repaid from existing cash reserves. The outstanding balance of the facility following this repayment was US$30.0 million.

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

		6 months to 31 December 2018	6 months to  31 December 2017(i)
	Note	US$000s	US$000s
Sales revenue		102,166	90,292
Cost of sales	2	(62,555)	(52,434)
Profit from operations		39,611	37,858
Corporate and external affairs		(5,229)	(3,830)
Community development costs		(1,534)	(1,027)
Selling and distribution costs		(1,316)	(1,970)
Other (expenses) / income		(85)	(584)
Profit before financing costs and income tax		31,447	30,447
Financing costs	3	(8,821)	(9,150)
Profit before income tax		22,626	21,297
Income tax expense		(5,209)	(4,497)
Net profit after tax for the period		17,417	16,800
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences - foreign operations		(1,644)	262
Total other comprehensive (loss) / income for the period		(1,644)	262
Total comprehensive income for the period		15,773	17,062
Net Earnings per share		Cents	Cents
Basic earnings per share (US cents per share)		1.52	2.26
Diluted earnings per share (US cents per share)		1.50	2.10

⁽ⁱ⁾   Restated from AUD to USD in accordance with change in presentation currency. Refer to “Note 1: Basis of preparation”.

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

5. Consolidated Condensed Statement of Financial Position

		31 December 2018	30 June 2018 (i)
	Note	US$000s	US$000s
Current assets
Cash and cash equivalents		49,126	29,686
Restricted cash		-	29,591
Trade and other receivables	4	40,484	38,726
Inventories	5	23,782	19,789
Other current assets		7,841	5,993
Total current assets		121,233	123,785
Non-current assets
Capitalised exploration and evaluation	6	103,962	97,115
Property, plant and equipment	7	219,666	240,509
Total non-current assets		323,628	337,624
Total assets		444,861	461,409
Current liabilities
Trade and other payables		29,965	27,865
Borrowings	8	32	53,266
Income tax payable		7,191	75
Deferred revenue		833	833
Other liabilities		8,653	8,564
Total current liabilities		46,674	90,603
Non-current liabilities
Borrowings	8	47,059	35,532
Provisions		24,479	22,458
Deferred tax liability	12	18,474	20,969
Deferred revenue		208	625
Other liabilities		10,000	10,000
Total non-current liabilities		100,220	89,584
Total liabilities		146,894	180,187
Net assets		297,967	281,222
Equity
Issued capital	10	306,512	305,277
Reserves		(19,990)	(16,384)
Retained earnings / (Accumulated losses)		11,445	(7,671)
Total equity		297,967	281,222

⁽ⁱ⁾   Restated, refer to Note 12.

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

6. Consolidated Condensed Statement of Changes in Equity

	Issued capital	Retained earnings / (Accumulated losses)	Share  based payment reserve	Foreign currency translation reserve	Treasury shares reserve	Total
	US$000s	US$000s	US$000s	US$000s	US$000s	US$000s
Balance at 1 July 2017 as previously reported(i)	231,079	(36,341)	5,250	(19,517)	-	180,471
Impact of prior year error (ii)	-	(5,863)	-	-	-	(5,863)
Restated balance at 1 July 2017	231,079	(42,204)	5,250	(19,517)	-	174,608
Profit for the period	-	16,800	-	-	-	16,800
Other comprehensive income	-	-	-	262	-	262
Total comprehensive income for the period	-	16,800	-	262	-	17,062
Transactions with owners, recognised directly in equity
Share based payments	529	559	(316)	-	-	772
Balance at 31 December 2017 (i)	231,608	(24,845)	4,934	(19,255)	-	192,442
Balance at 1 July 2018 as previously reported	305,277	(1,808)	5,806	(20,714)	(1,476)	287,085
Impact of prior year error (ii)	-	(5,863)	-	-	-	(5,863)
Restated balance at 1 July 2018	305,277	(7,671)	5,806	(20,714)	(1,476)	281,222
Profit for the period	-	17,417	-	-	-	17,417
Other comprehensive loss	-	-	-	(1,644)	-	(1,644)
Total comprehensive income for the period	-	17,417	-	(1,644)	-	15,773
Transactions with owners, recognised directly in equity
Share based payments	1,235	1,699	(3,438)	-	1,476	972
Balance at 31 December 2018	306,512	11,445	2,368	(22,358)	-	297,967

⁽ⁱ⁾   Restated from AUD to USD in accordance with change in presentation currency. Refer to “Note 1: Basis of preparation”.

⁽ⁱⁱ⁾    Restated, refer to Note 12.

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

7. Consolidated Condensed Statement of Cash Flows

		6 months to 31 December 2018	6 months to 31 December 2017 (i)
	Note	US$000s	US$000s
Cash flows from operating activities
Receipts from customers		103,379	99,954
Payments in the course of operations		(48,997)	(42,657)
Other		(588)	(42)
Net cash from operating activities		53,794	57,255
Cash flows from investing activities
Purchase of property, plant and equipment		(6,661)	(16,965)
Payments for exploration and evaluation		(7,321)	(132)
Other		406	390
Net cash used in investing activities		(13,576)	(16,707)
Cash flows from financing activities
Proceeds from borrowings		48,180	7,500
Repayment of borrowings		(92,473)	(40,324)
Transfers (to) / from restricted cash		29,591	(4,694)
Payment of debt service costs		(5,832)	(7,324)
Net cash used in financing activities		(20,534)	(44,842)
Net increase / (decrease) in cash held		19,684	(4,294)
Cash at beginning of period		29,686	28,278
Effect of exchange fluctuations on cash held		(244)	(158)
Cash at end of period		49,126	23,826

⁽ⁱ⁾   Restated from AUD to USDs in accordance with change in presentation currency. Refer to Note 1: Basis of preparation”.

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

ENDS.

For further information contact:

James Fuller, Manager - Communications and Investor Relations	UK Media Relations
Base Resources	Tavistock Communications
Tel: [phone]	Jos Simson and Barnaby Hayward
Mobile: [phone]	Tel: [phone]
Email: [e-mail]

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

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West Perth, Western Australia, 6005
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Phone: [phone]
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NOMINATED ADVISOR
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Andrew Thomson / Stephen Allen
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