1st Quarter Results

SouthernEra Releases First Quarter Results Shares Issued and Outstanding: 74,707,883 TSX: SUF AIM: SRE TORONTO, May 17 /CNW/ - The Board of SouthernEra Resources Limited ('SouthernEra') announced the following highlights from the first quarter of 2004: - Phase 1 drill program increased the Dwaalkop platinum group metals resource by 21 percent; - Messina repaid R63 million (approx. US$ 9.5 million) of outstanding project debt; - Rio Tinto sold its 9.2 percent interest in SouthernEra; - SouthernEra adopted a new shareholder rights plan; - A reorganisation plan to achieve separate platinum and diamond listings has been proposed; - Messina concluded a new two-year wage agreement with representative unions; and - Messina's unions have provided support for the implementation of continuous operations. The Board also announced that subsequent to the first quarter: - SouthernEra has been awarded two new diamond prospecting permits in South Africa; - Messina received Government's temporary authorisation for continuous operations; - Implementation of continuous operations at Messina has commenced; and - SouthernEra has concluded an agreement to increase its ownership in Messina to 91.5 percent. The Company realized a net loss for the three months to March 31 of $10 million (13 cents per share) compared to a net gain of $0.4 million (1 cent per share) in the first quarter of 2003. In the current quarter, the Company incurred an operating loss of $6.4 million on revenue of $9.9 million versus an operating loss of $1.1 million on revenue of $1.1 million in the comparable quarter of 2003. Cash used in operations for the quarter was $4.2 million (6 cents per share), compared to a use of $5.7 million (10 cents per share) in the first quarter of 2003. These results reflect the continued strength of South African Rand and Canadian Dollar, the currency in which the Company has its operations and cash assets. Operations Update Steady progress continued in the quarter with the development and production ramp up at Messina Platinum's Phase 1 Mine. Production during the quarter came from the 150, 200, 275 and 350-meter levels. Messina produced approximately 19,600 ounces of 3PGEs plus gold from 171,410 tonnes milled during the quarter. The average head grade for the quarter was 3.74 grams per tonne (3PGE's+Au) and the plant recoveries were 89.2 percent. Production during the quarter was below expectations as a consequence of a number of human resources-related factors, including: - The impact of a voluntary safety intervention initiative in January resulting in the temporary suspension of mining and development operations for approximately one week during the month; - Continuing labour inefficiencies as a result of the relative inexperience of the workforce; and - The impact of the restructuring of the employee compensation system in order to promote safety and productivity. The upper four levels of the mine, which are now open and manned, are designed to support production at a rate of 80,000 tonnes per month. It is apparent that safety, skills and productivity issues relating to the mine's workforce are posing a challenge to achieving this production rate in the time frame anticipated. Despite the slow progress, the mine's management remains confident that this production rate will be achieved and sustained in the current quarter. Over the past three-and-a-half years since production at the mine commenced, Messina's management team has sought continuous improvements as its knowledge of the ore body has improved. The materially lower levels of faulting of the reefs, compared to what was anticipated in the 2000 feasibility study, resulted in a decision to trial conventional long-hole stoping, which was done on the Merensky reef on the 275-meter level. Based on this experience, Messina is now implementing mechanised long-hole stoping on the lower levels of the mine. Compared to conventional down-dip stopping, which is the primary mining method on the four upper levels, mechanised long- hole stoping is a safer, more efficient and less costly mining method. Development to support the build-up to full production is progressing well on the new 370 and 390-meter levels. These levels have been designed to support mechanised long-hole stoping, which the mine is currently preparing to implement. The long-hole drilling and blasting on these new levels is expected to commence within the next month. As a consequence of the change over from labour-intensive conventional stoping to mechanized long-hole stoping it is anticipated that full production will now be achieved during the third quarter rather than at the end of June. Commenting, SouthernEra's President and CEO Patrick Evans said: 'We are proud of the exceptional progress Messina's operating team has achieved over the three-and-a-half years since development at Messina commenced. For a Company that had no platinum assets four years ago, we have built the Phase 1 mine in about half the time it normally takes to bring a mine of this size into production and Messina is already well past the halfway mark to full production'. Mr. Evans added: 'Despite the challenges associated with any new mining operation, we have constantly sought continuous improvements. In 2001 we elected to hire and train our own labour force rather than use outside contractors, which would have been less sustainable; in 2002 we expanded the mine's capacity; and in 2003 we prepared to implement mechanised long-hole stoping. These initiatives will ensure the optimal performance of this mine over its twenty-year life. The minor delays of a few months in achieving previously planned production targets are really immaterial in the context of the important benefits that will be derived from these innovative initiatives over the next decade and more. In addition, the lessons we are learning at the Phase 1 mine are contributing in important ways to the Phase 2 feasibility study and the Phase 3 pre-feasibility study.' In March, Messina successfully concluded a new two-year wage agreement with its two representative unions. As part of these agreements, both unions have committed their full support to the implementation of continuous operations (24 hours per day, 7 days per week). In April temporary authorisation for continuous operations was received from the Government. Messina's current work schedule of 24 days per month is now being replaced by a 30 days per month continuous operations schedule. Implementation of continuous operations commenced at the beginning of May and will be fully implemented by June. Mr. Evans commented: 'The implementation of continuous operations at Messina is a major step forward. The new work schedule is designed to maximise the return from the capital invested at the mine. Productivity will improve as the disruptions posed by the current 24 days per month schedule are eliminated.' In respect of the Greater Messina, the Phase 2 (Doornvlei and Dwaalkop sections) feasibility study remains on track for completion at the end of the current quarter. The Phase 3 (Zebediela Section) scoping study also remains on track for completion at the end of the second quarter. It is anticipated that a comprehensive update on the development of the Greater Messina Platinum Project will be provided at the end of the second quarter. The Company's Klipspringer Diamond Mine remains under care and maintenance following the temporary suspension of operations at the end of 2003 as a consequence of the strength of the South African Rand. At the Millennium Platinum, SouthernEra is continuing to explore all options to advance the project. It is expected that a further progress report will be provided at the end of June. During the past five months SouthernEra has continued its discussions with the Angolan government's diamond agency, ENDIAMA, to facilitate the incorporation of the Camafuca operating company. Following incorporation of the operating company it is expected that the mining license will be issued. During the quarter the second phase of drilling at the Koumba Gold Project was completed. Assaying of the drill cores is underway and results are expected by the end of May. Subsequent to the quarter, SouthernEra was awarded two diamond prospecting permits in South Africa. These permits cover two highly prospective projects. It is anticipated that drilling at these projects will commence shortly. Drilling is also underway at SouthernEra's diamond projects in Canadaand is expected to commence shortly at the Company's diamond projects in Australia and Gabon. Also subsequent to the quarter, the Company announced that it has concluded an agreement to acquire an additional 18.4 percent of the shares of Messina Limited. On conclusion of this transaction, which is subject to regulatory approval, SouthernEra's interest in Messina will increase to 91.5 percent. SouthernEra Resources is an independent producer of platinum group metals (PGMs) and diamonds. The Company also has an extensive PGM, gold and diamond exploration program. The common shares are listed on the Toronto Stock Exchange and the London Stock Exchange's AIM. The full, unaudited interim financial statements are available at www.southernera.com Consolidated balance sheets (in thousands of United States dollars) (unaudited) March 31, December 31, 2004 2003 ------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 45,025 $ 64,023 Accounts receivable 11,918 13,133 Inventories - supplies 1,656 1,197 ------------------------------------------------------------------------- 58,599 78,353 Property, plant and equipment 183,139 179,623 Development projects 13,773 13,616 Exploration projects 19,856 16,919 Future income taxes 3,369 3,403 ------------------------------------------------------------------------- $ 278,736 $ 291,914 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities $ 13,713 $ 12,866 Income taxes payable 12,629 11,862 Messina loans 14,918 16,064 ------------------------------------------------------------------------- 41,260 40,792 Messinaloans 51,576 55,944 Future income taxes 1,670 1,772 Environmental rehabilitation provision 2,042 1,998 ------------------------------------------------------------------------- 96,548 100,506 Non-controlling interests 15,701 17,315 Shareholders' equity: Common shares 230,828 230,740 Share purchase warrants 2,592 2,592 Contributed surplus 2,752 2,293 Deficit (80,169) (70,155) Cumulative translation adjustments 10,484 8,623 ------------------------------------------------------------------------- 166,487 174,093 ------------------------------------------------------------------------- $ 278,736 $ 291,914 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of, and should be read in conjunction with, these consolidated financial statements. Consolidated statements of operations (in thousands of United States dollars, except income (loss) per share amounts) (unaudited) FOR THE THREE MONTHS ENDED MARCH 31 2004 2003 ------------------------------------------------------------------------- Revenue $ 9,850 $ 1,086 Direct costs: Mining operations (12,294) (1,851) Amortization (3,979) (345) ------------------------------------------------------------------------- (16,273) (2,196) ------------------------------------------------------------------------- Loss from mining operations (6,423) (1,110) Interest expense (3,146) - General and administration expenses (1,521) (924) ------------------------------------------------------------------------- Loss before the undernoted (11,090) (2,034) Foreign exchange (loss) gain (1,819) 2,021 Interest income 473 280 ------------------------------------------------------------------------- (Loss) income before income taxes (12,436) 267 Income taxes: Future recovery 102 117 ------------------------------------------------------------------------- (Loss) income after income taxes (12,334) 384 Non-controlling interests 2,320 2 ------------------------------------------------------------------------- (Loss) income for the year $ (10,014) $ 386 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted (loss) income per common share $ (0.13) $ 0.01 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Consolidated statements of deficit, contributed surplus and cumulative translation adjustments (in thousands of United States dollars) (unaudited) FOR THE THREE MONTHS ENDED MARCH 31 2004 ------------------------------------------------------------------------- CUMULATIVE CONTRIBUTED TRANSLATION DEFICIT SURPLUS ADJUSTMENTS ------------------------------------------------------------------------- Beginning of period $ (70,155) $ 2,293 $ 8,623 Translation gains (losses) net for the period - - 1,861 Fair value of share options granted and vested - 459 - (Loss) income for the period (10,014) - - ------------------------------------------------------------------------- End of period $ (80,169) $ 2,752 $ 10,484 ------------------------------------------------------------------------- ------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED MARCH 31 2003 ------------------------------------------------------------------------- CUMULATIVE CONTRIBUTED TRANSLATION DEFICIT SURPLUS ADJUSTMENTS ------------------------------------------------------------------------- Beginning of period $ (57,869) $ 1,635 $ 206 Translation gains (losses) net for the period - - 1,799 Fair value of share options granted and vested - - - (Loss) income for the period 386 - - ------------------------------------------------------------------------- End of period $ (57,483) $ 1,635 $ 2,005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes form an integral part of, and should be read in conjunction with, these consolidated financial statements. Consolidated statements of cash flows (in thousands of United States dollars) (unauditied) FOR THE THREE MONTHS ENDED MARCH 31 2004 2003 ------------------------------------------------------------------------- (Loss) gain for the period $ (10,014) $ 386 Adjustments for non-cash items: Amortization 3,979 346 Accrued interest charged to earnings 3,146 - Fair value of granted and vested share options 460 - Future income taxes (102) (117) Foreign currency translation loss (gain) 1,819 (2,021) Gains on sale of fixed assets - (13) Non-controlling interest (2,320) 2 ------------------------------------------------------------------------- (3,032) (1,417) Change in non-cash working capital balances (1,231) (4,281) ------------------------------------------------------------------------- Cash used in operations (4,263) (5,698) ------------------------------------------------------------------------- Financing activities: Messina loans (8,337) 1,758 Issue of common shares for cash 98 43,707 ------------------------------------------------------------------------- Cash (used in) provided by financing activities (8,239) 45,465 ------------------------------------------------------------------------- Investing activities: Decrease (increase) in restricted cash - (735) Exploration and development projects (2,062) (1,484) Messina platinum project (1,733) (8,698) Proceeds from sale of property plant and equipment 74 - Purchase of property, plant and equipment (27) (424) ------------------------------------------------------------------------- Cash used in investing activities (3,748) (11,341) ------------------------------------------------------------------------- (Decrease) increase in cash (16,250) 28,426 Foreign exchange (loss) gain on cash held in foreign currency (2,748) 798 Cash and cash equivalents - beginning of period 64,023 2,870 ------------------------------------------------------------------------- Cash and cash equivalents - end of period $ 45,025 $ 32,094 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents comprise: Cash and bank balances $ 788 $ 694 Short-term investments 75,578 43,190 Less overdraft facility (31,341) (11,790) ------------------------------------------------------------------------- $ 45,025 $ 32,094 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information: Interest paid 4,207 20 ------------------------------------------------------------------------- The accompanying notes form an integral part of, and should be read in conjunction with, these consolidated financial statements. Notes to consolidated financial statements For the periods ended March 31, 2004 and 2003. (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, the financial position of the Company as at March 31, 2004 and the results of its operation and its cash flows for the three months periods ended March 31, 2004 and 2003. The unaudited interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and related notes included in the Company's annual report to shareholders for the year ended December 31, 2003. These unaudited interim consolidated financial statements do not include all requirements of Canadian generally accepted accounting principles for annual financial statements, but have been prepared using the same accounting policies as included in note 2 of the Company's annual financial statements for the year ended December 31, 2003, with the exception of the policies identified below. Asset Retirement Obligations Effective January 1, 2004, the Company adopted, retroactively, a new Canadian Accounting Standards Board standard on accounting for asset retirement obligations. The standard requires the recognition of a liability for obligations associated with the retirement of property, plant and equipment when the liability is incurred. The liability is recognized initially at fair value and the resulting amount is capitalized as part of the asset. Subsequent to the initial recognition, the Company recognizes accretion expense on the liability and adjusts the carrying amounts of the asset and the liability for changes in estimates of the amount or timing of underlying future cash flows. The impact of the adoption as at January 1, 2003, and December 31, 2003, was to increase property, plant and equipment and environmental rehabilitation provision by approximately $2 million. In the quarter ended March 31, 2004 there was no significant impact on earnings. Impairment of Long-Lived Assets Effective January 1, 2004, the Company adopted the CICA Handbook Section 3063, 'Impairment of Long-Lived Assets.' Application of the new standard does not include directly related interest and other carrying costs to be deducted in arriving at management's estimate of aggregate undiscounted cash flows in assessing whether to write down an asset. In addition, should a write-down be required the asset is written down to its fair value. There is no impact on the Company's results of operations and financial position as a result of adopting this new standard Hedging Relationships Effective January 1, 2004, the Company adopted the Accounting Standards Board's amendment to accounting guideline 13 (AcG 13) 'Hedging Relationships'. The guideline provides requirements for applying hedge accounting. There is no impact on the Company's results of operations and financial position as a result of adopting this new guideline. The Company will continue to monitor its financial instruments to determine the appropriateness of applying hedge accounting on applicable transactions. 2. PROPERTY, PLANT AND EQUIPMENT ACCUMULATED March 31, 2004 COST AMORTIZATION NET ------------------------------------------------------------------------- South Africa - Messina deferred mining assets $ 151,290 $ 5,184 $ 146,106 Messina property, plant and equipment 37,735 5,779 31,956 Klipspringer - building plant and equipment 12,401 7,465 4,936 Canada- fixtures and fittings 543 402 141 ------------------------------------------------------------------------- $ 201,969 $ 18,830 $ 183,139 ------------------------------------------------------------------------- ACCUMULATED December 31, 2003 COST AMORTIZATION NET ------------------------------------------------------------------------- South Africa - Messina deferred mining assets $ 145,442 $ 2,560 $ 142,882 Messina property, plant and equipment 36,347 4,972 31,375 Klipspringer - building plant and equipment 12,392 7,159 5,233 Canada- fixtures and fittings 523 390 133 ------------------------------------------------------------------------- $ 194,704 $ 15,081 $ 179,623 ------------------------------------------------------------------------- 3. MINING AND DEVELOPMENT PROJECTS March 31, December 31, 2004 2003 ------------------------------------------------------------------------- Camafuca project $ 13,773 $ 13,616 ------------------------------------------------------------------------- 4. EXPLORATION PROJECTS Accumulated Accumulated to March to December 31, 2004 31, 2003 ------------------------------------------------------------------------- Canada Yamba Lake - NWT $ 3,517 $ 3,346 Back Lake - NWT 917 897 Superior- Ontario 2,489 1,937 Other 658 684 ------------------------------------------------------------------------- 7,581 6,864 ------------------------------------------------------------------------- Foreign South Africa 6,220 4,475 Gabon 5,216 4,741 Australia 839 839 ------------------------------------------------------------------------- 12,275 10,055 ------------------------------------------------------------------------- $ 19,856 $ 16,919 ------------------------------------------------------------------------- 5. MESSINA LOANS March 31, December 31, 2004 2003 ------------------------------------------------------------------------- Senior Debt $ 65,023 $ 69,148 Loans from a South African public company - 1,302 Other 1,471 1,558 ------------------------------------------------------------------------- 66,494 72,008 Less current portion of loans (14,918) (16,064) ------------------------------------------------------------------------- $ 51,576 $ 55,944 ------------------------------------------------------------------------- Senior Debt The Senior Debt provided by a South African banking consortium ranks above all other debt in Messina. It is secured in favour of the banks by all the assets of Messina. Repayment of capital and/or interest to any other lender to Messina, whether a lender in terms of the loan arrangements noted above or for any other reason including any trade or other credit granted, may only be settled by Messina with the banks' consent while any amounts due to the banks, including interest, remain outstanding. While the Senior Debt is outstanding, Messina may not incur additional debt, acquire or dispose of assets or engage in activities outside the parameters of the establishment of the Messina Platinum Project, or deviate from the planned development of the project, without the consent of the banks. The original Senior Debt comprised two, South African Rand (R) denominated, tranches making up a total of R345 million ($54.3 million), Tranche A of R270 million ($42.5 million) and Tranche B of R75 million ($11.8 million). Both tranches were drawn upon simultaneously and, other than for interest determination, can be regarded as a single loan. Drawdown commenced on September 18, 2001, and monthly drawdowns continued until the final drawdown on September 30, 2002. Interest accrues on the loan and is capitalized to the loan balance outstanding. The repayment schedule includes an element of principal and interest in each repayment instalment with the first instalment made February 29, 2004 and with semi-annual payments thereafter until the final instalment on February 28, 2009. The interest rate in respect of Tranche A is fixed at 14.51% and in respect of Tranche B, fluctuates with the prime lending rate in the South African money market (13.5% at March 31, 2004). Due to the strengthening of the Rand over the last several quarters, the Company is considering alternative funding structures in the event that the Rand continues to strengthen. Loans from a South African public company The original balance of this loan of $3.6M was denominated in Rand and is unsecured and subordinate to the Senior Debt provided by the banking consortium. The loan bore interest at South African market-related rates (13.5% at March 31, 2004) and interest was payable monthly in arrears. Capital repayments commenced in January 2002 and, under renegotiated terms, were repayable in monthly instalments of not less than R2.5 million ($0.4 million) per month from February 2003 until March 2004. The banking consortium consented to this repayment schedule subject to continued satisfactory progress of the Messina Platinum Project and such financial support as might be necessary from SouthernEra. 6. (LOSS) EARNINGS PER SHARE Basic and diluted loss per share is calculated using the loss for the period of $10 million (2003 - profit of $0.4 million) with the weighted average number of common shares outstanding during the period of 74,639,845 shares (2003 - 56,395,726). The exercise of stock options and share purchase warrants could potentially dilute earnings per share in the future, but has not been reflected in diluted loss per share in the current period, because to do so would be anti-dilutive. The exercise of stock options would dilute earnings per share in the first quarter of 2003, however the effect of the potential dilution does not reduce earnings per share. 7. SEGMENTED INFORMATION The Company operates in the diamond and PGM industries. The operations of the Company are managed and grouped, by industry, on a geographic basis. The Company's reportable operating segments comprise the Messina Platinum Project in South Africa, the diamond mining and exploration activities at Klipspringer in South Africa, as well as in Angola, Gabonand Canada. The Canadian segment includes the head office and associated administration costs. SEGMENTED INFORMATION March 31 March 31 2004 2003 ------------------------------------------------------------------------- Revenue Messina $ 9,404 $ - Klipspringer 446 1,086 ------------------------------------------------------------------------- $ 9,850 $ 1,086 ------------------------------------------------------------------------- Interest income Canada $ 470 $ 259 Klipspringer 3 4 Messina - 17 ------------------------------------------------------------------------- $ 473 $ 280 ------------------------------------------------------------------------- Amortization Messina $ 3,661 $ - Klipspringer 306 341 Canada 12 4 ------------------------------------------------------------------------- $ 3,979 $ 345 ------------------------------------------------------------------------- Segment loss (income) Klipspringer $ 950 $ 2,142 Messina 8,608 10 Canada 861 (2,616) Other 2,017 197 ------------------------------------------------------------------------- Reported enterprise loss before income taxes $ 12,436 $ 267 ------------------------------------------------------------------------- Segment capital expenditure Messina $ 1,733 $ 9,029 Klipspringer 927 275 Angola 157 151 Canada 466 517 Gabon 433 60 Other 106 574 ------------------------------------------------------------------------- $ 3,822 $ 10,606 ------------------------------------------------------------------------- March 31 December 31 2004 2003 ------------------------------------------------------------------------- Identifiable assets Messina $ 163,548 $ 170,967 Klipspringer 6,448 6,903 Angola 13,363 13,616 Canada 89,572 93,811 Gabon 5,216 4,741 Other 589 1,533 ------------------------------------------------------------------------- Total reported enterprise assets $ 278,736 $ 291,571 ------------------------------------------------------------------------- 8. SUBSEQUENT EVENT On May 17, 2004, the Company announced that it has concluded an agreement to acquire an additional 18.4 percent of the shares of Messina Limited. On conclusion of this transaction, which is subject to regulatory approval, SouthernEra's interest in Messina will increase to 91.5 percent. For further information: SouthernEra Resources Limited, Mr. Patrick Evans, President and CEO, Telephone: (416) 359-9282, Fax: (416) 359-9141, E-mail: inbox(at)southernera.com (SUF. SRE)

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