Annual Financial Report – period ended 30 Jun...

AIM Release 

31 August 2016

BASE RESOURCES LIMITED
Annual Financial Report – period ended 30 June 2016

Base Resources Limited (ASX & AIM: BSE) (“Base” or the “Company”) is pleased to provide the following extracts from the company’s Annual Financial Report for the year ended 30 June 2016.

1.  Review of Operations.

2.  Marketing & Sales

3.  Market Outlook

4.  Review of Financial Performance.

5.  Consolidated Statement of Profit or Loss and Other Comprehensive Income.

6.  Consolidated Statement of Financial Position.

7.  Consolidated Statement of Changes in Equity.

8.  Consolidated Statement of Cash Flows.

These extracts should be read with reference to the notes contained in the full version of the Annual Financial Report, a copy of which is available from www.asx.com.au and on the Company’s website:  www.baseresources.com.au.

Highlights

Highlights from Base Resources’ annual financial results for the year ended 30 June 2016 are as follows:

$ million1	2016	2015	% Change
Kwale Operation Sales Revenue	169.0	145.5	16%
Kwale Operation EBITDA	68.0	62.3	9%
Group EBITDA	60.6	55.0	10%
Net loss for the year	(20.9)	(16.0)	-30%
Operating cash flow	78.6	38.2	106%
Free cash flow2	46.7	8.6	445%
Net debt (total borrowings less cash less debt service reserve account)	(192.1)	(241.0)	-20%

Notes:  1. All references to dollars or $ in this release is to Australian currency (unless otherwise specified). 2. Free cash flow is determined as cash flow before net proceeds from issue of shares, debt rescheduling costs, proceeds/repayments of borrowings and payments to the debt service reserve account.

• Sales volumes of 480,538 tonnes of ilmenite, 85,536 tonnes of rutile and 33,062 tonnes of zircon, representing the top end of the guidance range.
• Sales revenue was $169.0 million, achieving an average price of product sold (rutile, ilmenite and zircon) of $282 per tonne, or US$205 per tonne, (2015: $309 per tonne or US$256 per tonne).  Lower average sale prices reflect the challenging market conditions faced by mineral sands producers for much of the reporting period.
• Total cost of goods sold increased to $86.6 million (2015: $73.3 million) driven largely by the 27% increase in sales volume, at an average cost of $144 per tonne, or US$105 per tonne of product sold, (2015: $155 per tonne or US$130 per tonne).  The reduction in operating costs per tonne produced to $121 per tonne, or US$88 per tonne, (2015: $124 per tonne or US$103 per tonne) is reflective of a sharp focus on cost management.
• The Kwale Operation achieved a revenue to cost of sales ratio of 2:1, comfortably positioning it in the first quartile of mineral sands producers.
• Cash flow from operations was $78.6 million for 2016 (2015: $38.2 million), higher than Group EBITDA, predominately driven by a decrease in receivables of $10.9 million during the reporting period, associated with $10.3 million of Kenyan operational VAT refunds and timing of sales receipts. 
• Free cash flow of $46.7 million contributed to the overall reduction in net debt of $48.9 million.  Repayments of $31.7 million (US$23.5 million) were made against the Kwale Operation Debt Facility, reducing the outstanding balance to US$180.5 million.

1.            Review of Operations

Base Resources operates the 100% owned Kwale Operation in Kenya, which commenced production in late 2013.  The Kwale Operation is located 10 kilometres inland from the Kenyan coast and 50 kilometres south of Mombasa, the principal port facility for East Africa.

During the reporting period, mining activity continued in the high grade regions of the Central Dune, close to the processing plant, except for three months mining lower grade perimeter blocks.  The average ore grade mined was 8.3% heavy mineral (“HM”) for the year.  Mining activities will remain focused on the Central Dune deposit for the next four years of the operation, before transitioning to the South Dune for the remainder of the mine life.

The coming year will see the introduction of a second mining unit, a 400tph hydraulic mining unit (“HMU”).  Operating dual mining units will enable concurrent mining of high grade ore with the existing dozer-trap mining unit (“DMU”) and allow access to lower grade perimeter blocks more cost effectively utilising the HMU.  This is expected to produce a blended average ore grade lower than achieved this year and result in a higher mining volume to maintain heavy mineral concentrate (“HMC”) production.

The Kwale Operation is designed to process ore to recover three separate products – rutile, ilmenite and zircon.  Ore is received at the wet concentrator plant (“WCP”) from the mining units via a slurry pipeline.  The WCP removes slimes at a particle size less than 45?m, concentrates the valuable heavy minerals (rutile, ilmenite and zircon) and rejects most of the non-valuable, lighter gangue minerals.  The WCP incorporates a number of gravity separation steps using spiral concentrators.  The HMC, containing 90% heavy minerals, is then processed in the mineral separation plant (“MSP”). The MSP cleans and separates the rutile, ilmenite and zircon minerals and removes any remaining gangue.

Summary Physical Data	2016	2015
Ore mined (tonnes)	9,202,554	9,146,102
Heavy mineral (HM) %	8.31%	8.61%
WCP Heavy mineral concentrate production (tonnes)	734,431	752,063
MSP Heavy mineral concentrate consumption (tonnes)	709,443	658,816
Production (tonnes)
Ilmenite	455,870	427,655
Rutile	85,654	71,537
Zircon	31,389	22,416
Sales (tonnes)
Ilmenite	480,538	373,046
Rutile	85,536	76,801
Zircon	33,062	21,287

With the consistent achievement of design availabilities and throughputs in the WCP, and the high average grade of ore mined, HMC production of 734,431 tonnes was achieved in the reporting period.  HMC production exceeded MSP consumption, allowing the continued building of a HMC stockpile to mitigate risk and optimise future production.  At year end, the HMC stockpile was 139,364 tonnes.

During the reporting period, 709,443 tonnes of HMC was fed into the MSP to produce 455,870 tonnes of ilmenite, 85,654 tonnes of rutile and 31,389 tonnes of zircon.  The successful completion of a number of MSP upgrade projects, together with ongoing process optimisation, has yielded benefits in both throughput and downstream recoveries of rutile and zircon during the reporting period.  Having achieved design recovery levels for all products, ongoing MSP optimisation is expected to yield sustained increases in feed rates above 90tph in the 2017 financial year.

Ilmenite production continued at above design capacity due to the combination of increased MSP feed rates and high recoveries.  Following the installation of an additional MSP magnet stage in November 2015, ilmenite recovery reduced from a pre-upgrade average of 110% to an average of 102% for the remainder of the year, still exceeding design.  The additional magnet stage had the effect of removing rutile from ilmenite product and creating a high chrome stream, which is now rejected to enhance product quality.  Ilmenite production continues to benefit from the proportionally higher ilmenite content (but lower rutile content) of the high grade ore in the Central Dune, a feature of the Kwale deposit. 

Rutile production exceeded the 80,000 tonnes per annum design target for the first time in the reporting period, thanks to the higher MSP feed rates and ongoing optimisation of recoveries, aided by the MSP upgrade projects.  Average rutile recovery for the reporting period was 99%, surpassing design expectations.

With some altered ilmenite species, that are not defined as either ilmenite or rutile in the resource, being recovered in the production of both, calculated recoveries (or yields) of over 100% are achievable for both ilmenite and rutile.

Zircon production continued its steady improvement throughout the reporting period, in line with the planned ramp-up schedule, and ultimately exceeded the 30,000 tonne design target, driven by the combination of achieving design recovery (77.8%) and the increased MSP feed rate.  Zircon recoveries averaged 78% in the last quarter and reached as high as 80% in June.

2.            Marketing & Sales

Base Resources has a number of off-take agreements across each of its three product streams spanning between one and six years of production of the Kwale Operation.  The agreements are with some of the world’s largest consumers of titanium dioxide minerals and zircon products, including a cornerstone agreement with Chemours (formerly DuPont Titanium Technologies).

The agreements provide off-take security for the Kwale Operation, and contain firm minimum annual offtake volumes subject to annual Base Resources’ production forecasts.  Pricing is derived from prevailing market prices, based on agreed price indices or periodic price negotiations, with some agreements offering downside protection in the form of floor prices. 

In the reporting period, Base Resources sold almost 600,000 tonnes of product from the Kwale Operation, with shipments being made to a combination of customers with existing offtake agreements, regular customers buying on a spot basis and some new spot customers buying Base Resources’ products for the first time. 

The appointment of a Chinese distributor for ilmenite in early 2015 has assisted Base Resources in continuing to build its market presence in China – the world’s largest ilmenite market – through the 2016 financial year.  During the reporting period, Base Resources became the largest importer of ilmenite into China, having sold almost 450,000 tonnes in the 2016 financial year.  Solid relationships have been established with major Chinese ilmenite consumers who now comprise a mix of shorter term contracts (one to three-year duration) and regular spot customers.  Base Resources maintains a strong focus on servicing the Chinese market and continues to expand its customer base with further trial lots of ilmenite being evaluated by new customers.

Despite challenging market conditions for much of the reporting period, sales volumes increased significantly over the comparable period to match production growth.  A solid improvement in the global titanium dioxide pigment market through the first half of the 2016 calendar year led to a high level of demand for Base Resources ilmenite and rutile in the June 2016 quarter.  This has kept stocks at minimal levels and provided a solid base for price improvement during the 2017 financial year.

During the March quarter of 2016, Base Resources received a force majeure notice from an ilmenite customer and a volume reduction notice from a rutile customer.  In both cases the impact was to defer or cancel a significant portion of previously agreed sales volumes for the remainder of calendar 2016.  Alternative sales have been secured to fully cover the shortfall arising from these notices, aided by the strengthening demand for titanium dioxide feedstocks experienced towards the end of the reporting period.

Unlike the titanium dioxide feedstock markets, conditions for zircon remained subdued through the reporting period.  Despite the ongoing over-supplied market, Base Resources has had sustained solid demand for zircon from its small, but loyal, customer base.

3.            Market Outlook

Ilmenite and rutile are primarily used as feed stock for the production of titanium dioxide pigment, with a small percentage also used in the production of titanium metal and fluxes for welding rods and wire.  Pigment makes up over 90% of titanium minerals demand and is the main driver of pricing.  Titanium dioxide 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.

Global consumption of pigment has maintained a long term average growth rate closely correlated to global GDP, or approximately 3% per annum.  However, volatility in the global economy in recent years has created significant fluctuations in this growth rate, manifesting in big swings in inventory levels throughout the entire pigment supply chain.  A growing supply deficit, compared with demand, over the past year appears to have resulted in global pigment inventories falling below normal levels for the first time in several years.  Growth in pigment consumption, together with re-stocking activity, has resulted in pigment demand surging by more than 7% year-on-year, and substantial price improvements being reported in the first half of calendar year 2016.  This has percolated through the supply chain and translated into strengthening feedstock demand by the end of the reporting period.  As a consequence, feedstock levels have been drawn down at a more rapid pace than expected and tightness has emerged in feedstock markets for the first time since the Kwale Operation commenced production.   

The ilmenite feedstock market has become particularly constrained owing to the further constrictions in supply and growth in ilmenite-intensive Chinese sulphate pigment production that has occurred over the reporting period.  As a result, ilmenite prices are responding positively, allowing Base Resources to lock in substantial price increases for shipments in the September 2016 quarter.

Conditions for rutile also tightened by year end, although current supply and stocks appear adequate to meet demand in the immediate future.

Current analysis suggests that excess global inventories of titanium dioxide feedstocks, which have weighed heavily on prices over the past couple of years, should return to normal levels by the end of calendar year 2016.  In the absence of substantial new feedstock supply coming online, the titanium dioxide feedstock market is expected to begin a period of structural supply deficit, providing an opportunity for price growth in both ilmenite and rutile over the next few years.  

Zircon has a range of end-uses, the largest of which is ceramic tiles, which accounts 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. These properties mean it is also 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. After a sharp downturn in 2012, major zircon suppliers have attempted to match their supply to demand since 2013, keeping prices relatively stable until early 2016.  However, with demand remaining sluggish and supply growing from new sources, one major zircon supplier reduced prices by approximately US$100 per tonne in March 2016, forcing others to follow.  Despite attempts to subsequently increase pricing, subdued demand and excess inventories are expected to keep prices flat at current levels throughout the 2017 financial year. 

Any potential uplift in zircon prices remains dependent on firmer than expected economic growth in the major markets of China, USA and Europe, and on a more controlled response from major zircon producers in managing their production and stocks.

4.            Review of Financial Performance

	2016			2015
	Kwale Operation	Other operations	Total	Kwale Operation	Other operations	Total
	$000s	$000s	$000s	$000s	$000s	$000s
Sales Revenue	169,039	-	169,039	145,501	-	145,501
Cost of goods sold excluding depreciation & amortisation:
Operating costs	(69,647)	-	(69,647)	(64,684)	-	(64,684)
Changes in inventories of concentrate and finished product	(5,066)	-	(5,066)	1,903	-	1,903
Royalties expense	(11,845)	-	(11,845)	(10,470)	-	(10,470)
Total cost of goods sold (i)	(86,558)	-	(86,558)	(73,251)	-	(73,251)
Corporate & external affairs	(4,309)	(6,840)	(11,149)	(4,052)	(6,636)	(10,688)
Community development	(3,921)	-	(3,921)	(3,945)	-	(3,945)
Selling & distribution costs	(4,114)	-	(4,114)	(2,391)	-	(2,391)
Other income / (expenses)	(2,151)	(580)	(2,731)	488	(750)	(262)
EBITDA (i)	67,986	(7,420)	60,566	62,350	(7,386)	54,964
Depreciation & amortisation	(47,062)	(127)	(47,189)	(41,474)	(144)	(41,618)
EBIT (i)	20,924	(7,547)	13,377	20,876	(7,530)	13,346
Net financing expenses	(27,247)	(7,009)	(34,256)	(26,825)	(2,480)	(29,305)
Income tax expense	(40)	-	(40)	(80)	-	(80)
NPAT (i)	(6,363)	(14,556)	(20,919)	(6,029)	(10,010)	(16,039)

(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.

Base Resources recorded a loss after tax of $20.9 million for the year ended 30 June 2016, compared with $16.0 million in 2015.  Sales revenue was $169.0 million for 2016 (2015: $145.5 million), achieving an average price of product sold (rutile, ilmenite and zircon) of $282 per tonne or US$205 per tonne (2015: $309 per tonne or US$256 per tonne).  Total cost of goods sold was $86.6 million for 2016 (2015: $73.3 million), at an average cost of $144 per tonne (US$105 per tonne) of product sold (2015: $155 per tonne or US$130 per tonne).  Operating costs per tonne produced for 2016 was $121 per tonne or US$88 per tonne (2015: $124 per tonne or US$103 per tonne).

With an achieved revenue to cost of sales ratio of 2:1, the Kwale Operation is well positioned in the upper quarter of mineral sands producers. Having reached design recoveries for rutile and zircon in 2016, it is expected that, when combined with higher MSP throughput rates, production of these high value products will increase in 2017, further improving the revenue to cost ratio.

Despite lower commodity prices, increased production and sales volumes and a sharp focus on cost management has delivered a Kwale Operation EBITDA of $68.0 million (2015: $62.4 million) and a Group EBITDA of $60.6 million for 2016 (2015: $55.0 million).

A net loss after tax of $6.4 million (2015: $6.0 million) was recorded by the Kwale Operation and $20.9 million (2015: $16.0 million) for the Group.  Loss per share for the Group was 3.41 cents (2015: 2.85 cents).

Cash flow from operations was $78.6 million for 2016 (2015: $38.2 million), higher than Group EBITDA predominately driven by a decrease in receivables of $10.9 million during the reporting period, associated with $10.3 million of Kenyan operational VAT refunds and timing of sales receipts. 

In December 2015, the Kwale Project Debt Facility (“Debt Facility”) was rescheduled in order to establish a repayment profile more appropriate to the commodity price environment.  Under the terms of the reschedule,
US$14 million of the Debt Facility was paid down on execution, with a further US$9.5 million scheduled repayment made in June 2016, reducing the outstanding debt to US$180.5 million. Total debt outstanding, inclusive of the Taurus Debt Facility, at 30 June 2016 was $270.3 million (US$201 million) compared with $292.6 million (US$224 million) at 30 June 2015. 

5.            Consolidated Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 30 June 2016

		2016	2015
	Note	$000s	$000s
Sales revenue		169,039	145,501
Cost of sales	2	(133,620)	(114,725)
Profit from operations		35,419	30,776
Corporate and external affairs		(11,276)	(10,832)
Community development costs		(3,921)	(3,945)
Selling and distribution costs		(4,114)	(2,391)
Other expenses		(2,731)	(262)
Profit before financing income and income tax		13,377	13,346
Financing costs	3	(34,256)	(29,305)
Loss before income tax		(20,879)	(15,959)
Income tax expense	6	(40)	(80)
Net loss for the year		(20,919)	(16,039)
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences - foreign operations		5,336	29,336
Total other comprehensive income / (loss) for the year		5,336	29,336
Total comprehensive (loss) / income for the year		(15,583)	13,297
Net (Loss) / earnings per share		Cents	Cents
Basic (loss) / earnings per share (cents per share)	5	(3.41)	(2.85)
Diluted (loss) / earnings per share (cents per share)	5	(3.41)	(2.85)

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

6.            Consolidated Statement of Financial Position as at 30 June 2016

		30 June 2016	30 June 2015
	Note	$000s	$000s
Current assets
Cash and cash equivalents	7	36,295	40,906
Restricted cash	8	29,761	-
Trade and other receivables	9	43,544	54,481
Inventories	10	27,962	31,584
Other current assets		5,826	5,853
Total current assets		143,388	132,824
Non-current assets
Capitalised exploration and evaluation		1,487	1,432
Property, plant and equipment	11	390,304	420,983
Restricted cash	8	-	6,532
Total non-current assets		391,791	428,947
Total assets		535,179	561,771
Current liabilities
Trade and other payables	12	24,953	21,866
Borrowings	13	61,816	70,057
Provisions	14	1,173	1,239
Deferred revenue	15	1,123	3,248
Other liabilities		887	636
Total current liabilities		89,952	97,046
Non-current liabilities
Borrowings	13	196,291	211,812
Provisions	14	28,973	27,313
Deferred revenue	15	3,089	4,082
Total non-current liabilities		228,353	243,207
Total liabilities		318,305	340,253
Net assets		216,874	221,518
Equity
Issued capital	16	223,548	214,131
Reserves		54,780	49,706
Accumulated losses		(61,454)	(42,319)
Total equity		216,874	221,518

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

7.            Consolidated Statement of Changes in Equity for the Year Ended 30 June 2016

	Issued capital	Accumulated losses	Share  based payment reserve	Foreign currency translation reserve	Total
	$000s	$000s	$000s	$000s	$000s
Balance at 1 July 2014	213,669	(26,742)	2,752	13,333	203,012
Loss for the year	-	(16,039)	-	-	(16,039)
Other comprehensive income	-	-	-	29,336	29,336
Total comprehensive income for the year	-	(16,039)	-	29,336	13,297
Transactions with owners, recognised directly in equity
Share based payments	462	462	4,285	-	5,209
Balance at 30 June 2015	214,131	(42,319)	7,037	42,669	221,518
Balance at 1 July 2015	214,131	(42,319)	7,037	42,669	221,518
Loss for the year	-	(20,919)	-	-	(20,919)
Other comprehensive income	-	-	-	5,336	5,336
Total comprehensive income for the year	-	(20,919)	-	5,336	(15,583)
Transactions with owners, recognised directly in equity
Shares issued during the year, net of costs	9,417	-	-	-	9,417
Share based payments	-	1,784	(262)	-	1,522
Balance at 30 June 2016	223,548	(61,454)	6,775	48,005	216,874

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

8.            Consolidated Statement of Cash Flows for the Year Ended 30 June 2016

		2016	2015
	Note	$000s	$000s
Cash flows from operating activities
Receipts from customers		170,765	132,443
Payments in the course of operations		(92,061)	(94,131)
Other		(96)	(98)
Net cash from operating activities	17	78,608	38,214
Cash flows from investing activities
Purchase of property, plant and equipment		(4,884)	(9,129)
Other		(187)	64
Net cash used in investing activities		(5,071)	(9,065)
Cash flows from financing activities
Proceeds from issue of shares		10,100	-
Payment of share issue costs		(683)	-
Proceeds from debt financing		-	26,126
Repayment of borrowings		(31,680)	(14,369)
Net payments to restricted cash (debt service reserve account)		(23,230)	-
Payments for debt service costs and re-scheduling fees		(34,632)	(25,210)
Net cash used in financing activities		(80,125)	(13,453)
Net (decrease) / increase in cash held		(6,588)	15,696
Cash at beginning of year		40,906	20,945
Effect of exchange fluctuations on cash held		1,977	4,265
Cash at end of year	7	36,295	40,906

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

ENDS.

CORPORATE PROFILE

Directors
Keith Spence (Non-Executive Chairman)
Tim Carstens (Managing Director)
Colin Bwye (Executive Director)
Sam Willis (Non-Executive Director)
Michael Anderson (Non-Executive Director)
Michael Stirzaker (Non-Executive Director)
Malcolm Macpherson (Non-Executive Director)

Company Secretary
Chadwick Poletti

NOMINATED ADVISOR & BROKER
RFC Ambrian Limited
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Andrew Thomson / Stephen Allen
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As Broker:
Jonathan Williams
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