Annual Financial Report

AIM and Media Release 

22 September 2015

BASE RESOURCES LIMITED                                             
Annual Financial Report – year ended 30 June 2015

Base Resources Limited (ASX & AIM: BSE) (“Base”) is pleased to provide the following extracts from the company’s Annual Financial Report for the year ended 30 June 2015.

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 http://www.asx.com.au/ and on the company’s website:  http://www.baseresources.com.au/.

Highlights from Base’s annual financial results for the year ended 30 June 2015 are as follows:

• First full year of production delivers strong operating results:
  • Revenue of $145.5 million ($29.1 million in FY2014)
  • Average revenue per tonne of ilmenite, rutile and zircon sold of $309 (US$256)
  • Operating costs per tonne of ilmenite, rutile and zircon produced of $124 (US$103 per tonne)
  • Average cost per tonne of ilmenite, rutile and zircon sold of $155 (US$130 per tonne).
  • Kwale Operations EBITDA⁽ⁱ⁾ of $62.6 million ($7.1 million in FY2014) and Group EBITDA of $54.8 million ($0.5 million loss in FY2014).
• Net loss of $16.0 million or 2.85 cents per share (loss of $14.1 million or 2.50 cents per share in FY2014).
• Cash flow from operations of $38.2 million (outflows of $3.6 million in FY2014).
• Closing unrestricted cash of $40.9 million and restricted cash of $6.5 million at 30 June 2015 ($20.9 million unrestricted cash and $5.4 million restricted cash at 30 June 2014).
• Base continues to progress the refinancing of the Kwale Project Debt Facility with the objective of securing a repayment profile more appropriate to the prevailing product price environment, and to ensure a robust financial footing from which to grow the business. Confirmations of credit approval have been received from the majority of lenders, with remaining lender’s credit approval processes still in progress.  Completion of the refinancing is subject to the agreement of final terms and execution of documentation.
• Under the terms of the existing Kwale Project Debt Facility, “Project Completion” was required to be achieved by 30 September 2015. This has now been extended by the Lenders to the earlier of completion of the refinancing or 31 December 2015.
• All operational requirements for achieving Project Completion were successfully passed in June 2015, including physical and economic tests conducted over a continuous 90 day test period.

⁽ⁱ⁾ Note:  Base’s 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 Base Group and have not been audited.

1.            Review of Operations

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

Kwale Operations is based on a mine life of 11 years, and features a high grade ore body with a high value mineral assemblage, comprised of the Central Dune and South Dune deposits.  In October 2013, mining commenced at the higher-grade Central Dune deposit. The mining operations at Kwale are based on a conventional dozer trap mining unit (DMU), using Caterpillar D11T dozers to feed the DMU. The DMU is a cost effective method of mining, which is particularly well suited to the type of ore at Kwale.

In the year under review, mining rates have been sustained at the targeted design rates for this phase of the operation. Mining activity continued in the high grade regions of the Central Dune, closest to the processing plant, with ore grades averaging 8.6% heavy mineral (HM) for the year. Mining activities will remain focussed on the Central Dune deposit for the first seven years of the operation, before transitioning to the South Dune for the remainder of the mine life.

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

After consistently achieving design availability and throughput rates in the WCP, the focus shifted to debottlenecking the WCP. The resultant enhancements have enabled higher throughput to be sustained, producing a marked increase in HMC production in the second half of the year, with 412,447 tonnes of the annual HMC production of 751,285 tonnes achieved in this period. HMC production capability now exceeds design, allowing for the building of a HMC inventory to mitigate risk and optimise production.

Summary Physical Data	2015	2014
Ore mined (tonnes)	9,146,102	4,532,154
HM%	8.61%	7.01%
Heavy mineral concentrate produced (tonnes)	752,063	296,750
Heavy mineral concentrate consumed (tonnes)	658,816	273,378
Production (tonnes)
Ilmenite	427,655	165,352
Rutile	71,537	24,216
Zircon	22,416	4,486
Sales (tonnes)
Ilmenite	373,046	138,829
Rutile	76,801	14,005
Zircon	21,287	2,704

During the year, 658,816 tonnes of HMC was fed into the MSP to produce 427,655 tonnes of ilmenite, 71,537 tonnes of rutile and 22,416 tonnes of zircon.  With the consistent achievement of design availabilities in the MSP, the focus has been firmly on driving product recovery and throughput increases in the past year.  During the June quarter, an average MSP feed rate of 82tph was achieved, exceeding design levels of 80tph, and is expected to improve into the 2016 financial year, from further modifications underway.

Rutile production was ahead of planned ramp-up and approaching the design target of 80,000 tonnes per annum by year end. Rutile production for the June quarter was 19,499 tonnes, achieving average MSP recoveries of 96%, just short of the design target of 97%.  Of this rutile production, 429 tonnes was attributable to the implementation of a programme to retreat an accumulated rutile oversize reject stockpile, which will continue into the early part of the next financial year.  Further modest improvements in rutile recovery are anticipated from planned modifications to be progressively completed over the remainder of 2015 calendar year.

Ilmenite production continues at well above design capacity. With some altered ilmenite species that are not defined as “ilmenite” in the Resource being recovered to ilmenite production, ilmenite recoveries (or yields) of over 100% are now consistently being achieved.

Zircon production improved steadily throughout the year, in line with the planned ramp-up to design capacity, achieving average MSP recoveries of 62% in the last quarter.  Upgrades to the wet zircon pumping systems, planned for later in 2015, are intended to increase MSP zircon recoveries by providing greater flow control and flexibility.  Further improvements to primary magnet separation capacity and efficiencies are planned during the course of 2015, which, along with on-going optimisation work, is expected to further improve zircon recovery towards design levels of 78%.

Bulk loading at Base’s Likoni port facility continued to perform well, dispatching more than 430,000 tonnes during the year. Containerised shipments of rutile and zircon proceeded according to plan from the nearby Mombasa container port.

2.            Marketing & Sales

Base has a number of off-take agreements across each of its three product streams spanning between one and six years of production from Kwale. 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 Kwale, and contain firm minimum annual offtake volumes subject to annual production forecasts by Base. Pricing is derived from prevailing market values, based on agreed price indices or periodic price negotiations.

In the past year, Base exported more than 471,000 tonnes of product from Kwale, delivering into all of its offtake agreements as well as making a number of spot sales.

The Company appointed Wogen Pacific Ltd as its exclusive distributor for ilmenite in China at the start of 2015.  This has provided Base with options to store ilmenite in China for internal distribution and has further assisted service levels, communication and relationships with Chinese customers.  Importantly the local warehousing facility in China allows immediate delivery, and in smaller volumes than would otherwise be justified for shipping from Kenya. By adopting this strategy, Base is tapping into smaller scale customers not able to commit to large shipment volumes and also able to offer prospective large new customers sample size volumes for testing.  This has already paid dividends with two new offtake contracts of one and three year duration being secured with major Chinese customers in 2015.

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 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 in the titanium mineral’s industry.  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.

Large pigment stocks built through 2011 created a sharp correction in demand for pigment in 2012, with demand decreasing by around 15%.  While demand for pigment has grown firmly since 2012 at around 6% per annum, the inventory overhang has taken considerable time to work down and this, together with increasing pigment plant utilisation and production since 2013, has restricted opportunities for pigment price improvement.

Pigment demand in 2015 and 2016 is currently expected to grow at a more modest rate of approximately 3%.  Pricing outlook will depend on how producers manage their plant utilisation and inventory levels to suit the market conditions, and to what extent Chinese pigment producers maintain their trend of competing for market share outside of China.

Prices for ilmenite and rutile are expected to be largely dependent on developments within the pigment market.  Ilmenite prices stabilised in the latter half of 2014 with reports of price increase being achieved by Chinese domestic ilmenite producers.  However, increased pigment competition through late 2014 and into 2015 saw renewed pressure on ilmenite prices and is likely to see ilmenite prices remain at low levels through until at least the peak demand season in mid-2016.

Rutile prices have seen gradual erosion through the 2015 financial year and this pricing pressure is expected to also remain through until at least mid-2016.

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, zircon demand has maintained a steady and gradual recovery.  Major suppliers of zircon have managed their output to closely reflect market conditions which has resulted in overall zircon stocks being reduced in the supply chain, and zircon prices remaining relatively stable since late 2013.

Zircon prices remained flat throughout the 2015 financial year and this trend is expected to continue in the year ahead.  An uplift in zircon prices would be dependent on firm economic growth in the major markets of China, USA and Europe, and on a controlled response from major zircon producers in managing their output.

4.            Review of Financial Performance

	2015			2014
	Kwale Operations	Other operations	Total	Kwale Operations	Other operations	Total
	$000s	$000s	$000s	$000s	$000s	$000s
Sales Revenue	145,501	-	145,501	29,115	-	29,115
Cost of goods sold excluding depreciation & amortisation:
Operating costs	(64,684)	-	(64,684)	(15,521)	-	(15,521)
Changes in inventories of concentrate and finished product	1,903	-	1,903	755	-	755
Royalties expense	(10,470)	-	(10,470)	(1,875)	-	(1,875)
Total cost of goods sold (i)	(73,251)	-	(73,251)	(16,641)	-	(16,641)
Corporate & external affairs	(3,473)	(7,359)	(10,832)	(2,636)	(6,070)	(8,706)
Community development	(3,945)	-	(3,945)	(2,298)	-	(2,298)
Selling & distribution costs	(1,415)	(976)	(2,391)	-	(738)	(738)
Other income / (expenses)	(805)	543	(262)	(448)	(813)	(1,261)
EBITDA (i)	62,612	(7,792)	54,820	7,092	(7,621)	(529)
Depreciation & amortisation	(36,771)	(4,703)	(41,474)	(7,862)	(1,170)	(9,032)
EBIT (i)	25,841	(12,495)	13,346	(770)	(8,791)	(9,561)
Net financing expenses	(26,825)	(2,480)	(29,305)	(4,397)	(18)	(4,415)
Income tax expense	(80)	-	(80)	(94)	-	(94)
NPAT (i)	(1,064)	(14,975)	(16,039)	(5,261)	(8,809)	(14,070)

⁽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 recorded a loss after tax of $16.0 million for the year ended 30 June 2015, compared with $14.1 million in 2014.  Due to the Kwale Operations commencing commercial production in April 2014, the operating results for the 2014 financial year include only three months of production and sales.  Like for like comparisons of operating results between the 2014 and 2015 financial years are not applicable and have therefore not been included in the discussion below.

Sales revenue was $145.5 million for 2015, achieving an average sale price of product sold (rutile, ilmenite and zircon) of A$309 per tonne (US$256 per tonne).  Total cost of goods sold was $73.3 million for 2015, at an average cost of $155 per tonne (US130 per tonne) of product sold.  Operating costs per tonne produced for 2015 was $124 per tonne (US$103 per tonne).

With an achieved revenue to cost of sales ratio of 2:1, Base is well positioned in the upper quarter of mineral sands industry producers.  With further production upside as rutile and zircon ramp-up to achieve their design production targets in 2016, this should see production costs per tonne drop and revenue per tonne increase as the proportion of high value products (rutile and zircon) increases in the sales mix.

The high value mineral assemblage and low cost of production of the Kwale Operations has delivered a Kwale Operations EBITDA of $62.6 million and a Group EBITDA of $54.8 million for 2015.

A net loss after tax of $1.1 million was recorded by Kwale Operations and $15.0 million for the Group.  Loss per share for the Group was 2.85 cents.

Cash flow from operations was $38.2 million for 2015, lower than Group EBITDA due to the increase in working capital requirements of $16.7 million, predominately driven by an increase in trade receivables of $14.9 million during the period, associated with increased sales volumes.

In November 2014, the Company rescheduled the Kwale Project Debt Facility, realigning the debt facility repayment schedule to reflect the commencement of sales from the Kwale Project to February 2014, from the original expectation of October 2013 at the time the facility was arranged in 2011.

As a result, all principal repayments and funding of the debt service reserve account were deferred by six months, with the first principal repayment deferred from December 2014 to June 2015. In addition, Base committed to contribute up to US$15 million in additional liquidity (“Liquidity Injection”) to the Kwale Project.

Base made the first principal repayment of US$11 million in respect of the debt facility in June 2015.

In December 2014, Base executed a US$20 million unsecured debt facility with one of its major shareholders, Taurus Funds Management, to provide the funds to satisfy the US$15 million Liquidity Injection required under the terms of the Kwale Project Debt Facility reschedule, and US$5 million in corporate funding. The facility was drawn down in two tranches during 2015.

Total debt at 30 June 2015 was $292.6 million (US$224 million) compared with $232.5 million (US$215 million) at 30 June 2014.  Aside from the movements discussed above, the increase in the Australian dollar denominated value of debt has been driven by the fluctuations in the US dollar exchange rates.

Base is currently in the process of seeking to refinance the Kwale Project Debt Facility, which would deliver a repayment profile more appropriate to the cash flow forecast of the Kwale Project.  Confirmations of credit approval have been received from the majority of lenders, with remaining lenders credit approval processes in progress.  Completion of the refinancing is subject to the agreement and execution of final terms and documentation.

In accordance with the proposed refinancing of the Kwale Project Debt Facility, all tranches of the refinanced facility are to be repaid over a five year period, with repayments likely to commence from December 2015.  The current repayment profile of the existing facility is expected to be replaced with lower initial repayments over the first two years. The Directors are confident the refinancing will be completed and that the lenders will collectively agree to acceptable terms.

5.            Consolidated Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 30 June 2015

		2015	2014
		$000s	$000s
Sales revenue		145,501	29,115
Cost of sales		(114,725)	(25,673)
Profit from operations		30,776	3,442
Corporate and external affairs		(10,832)	(8,706)
Community development costs		(3,945)	(2,298)
Selling and distribution costs		(2,391)	(738)
Other expenses		(262)	(1,261)
Profit / (loss) before financing income and income tax		13,346	(9,561)
Financing costs		(29,305)	(4,415)
Loss before income tax		(15,959)	(13,976)
Income tax expense		(80)	(94)
Net loss for the year		(16,039)	(14,070)
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Foreign currency translation differences – foreign operations		29,336	(2,031)
Total other comprehensive income / (loss) for the year		29,336	(2,031)
Total comprehensive income / (loss) for the year		13,297	(16,101)
Net (Loss) / earnings per share		Cents	Cents
Basic (loss) / earnings per share (cents per share)		(2.85)	(2.50)
Diluted (loss) / earnings per share (cents per share)		(2.85)	(2.50)

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 http://www.asx.com.au/ and on the company’s website:  http://www.baseresources.com.au/.

6.            Consolidated Statement of Financial Position as at 30 June 2015

	30 June 2015	30 June 2014
	$000s	$000s
Current assets
Cash and cash equivalents	40,906	20,945
Trade and other receivables	54,481	33,265
Inventories	31,584	20,049
Other current assets	5,853	3,007
Total current assets	132,824	77,266
Non-current assets
Capitalised exploration and evaluation	1,432	1,120
Property, plant and equipment	420,983	386,153
Inventories	-	1,106
Restricted cash	6,532	5,406
Total non-current assets	428,947	393,785
Total assets	561,771	471,051
Current liabilities
Trade and other payables	21,866	11,322
Borrowings	70,057	49,887
Provisions	1,239	1,180
Deferred revenue	2,159	-
Other liability	636	-
Total current liabilities	95,957	62,389
Non-current liabilities
Borrowings	211,812	177,667
Provisions	27,313	21,696
Deferred revenue	5,171	5,181
Other liability	-	1,106
Total non-current liabilities	244,296	205,650
Total liabilities	340,253	268,039
Net assets	221,518	203,012
Equity
Issued capital	214,131	213,669
Reserves	49,706	16,085
Accumulated losses	(42,319)	(26,742)
Total equity	221,518	203,012

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 http://www.asx.com.au/ and on the company’s website:  http://www.baseresources.com.au/.

7.            Consolidated Statement of Changes in Equity for the Year Ended 30 June 2015

	Issued capital	Accumulated losses	Share  based payment reserve	Foreign currency translation reserve	Total
	$000s	$000s	$000s	$000s	$000s
Balance at 1 July 2013	213,669	(12,672)	1,764	15,364	218,125
Loss for the year	-	(14,070)	-	-	(14,070)
Other comprehensive loss	-	-	-	(2,031)	(2,031)
Total comprehensive loss for the year	-	(14,070)	-	(2,031)	(16,101)
Transactions with owners, recognised directly in equity
Share based payments	-	-	988	-	988
Balance at 30 June 2014	213,669	(26,742)	2,752	13,333	203,012
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

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 http://www.asx.com.au/ and on the company’s website:  http://www.baseresources.com.au/.

8.            Consolidated Statement of Cash Flows for the Year Ended 30 June 2015

	2015	2014
	$000s	$000s
Cash flows from operating activities
Receipts from customers	132,443	22,442
Payments in the course of operations	(94,131)	(26,087)
Other	(98)	12
Net cash from / (used in) operating activities	38,214	(3,633)
Cash flows from investing activities
Interest receipts	271	355
Payments for exploration and evaluation	(96)	(199)
Purchase of property, plant and equipment	(9,129)	(5,137)
Proceeds on disposal of property, plant and equipment	2	-
Payments for mine development	-	(111,673)
Research and development incentive claim received	-	5,030
Security deposits	(113)	(348)
Net cash used in investing activities	(9,065)	(111,972)
Cash flows from financing activities
Proceeds from debt financing	26,126	48,654
Repayment of borrowings	(14,369)	-
Debt finance service costs and facility fees	(25,210)	(9,991)
Net cash (used in) / from financing activities	(13,453)	38,663
Net increase / (decrease) in cash held	15,696	(76,942)
Cash at beginning of year	20,945	98,123
Effect of exchange fluctuations on cash held	4,265	(236)
Cash at end of year	40,906	20,945

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 http://www.asx.com.au/ and on the company’s website:  http://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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Jonathan Williams
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