28th Apr 2008 07:00
ZincOx Resources PLC28 April 2008 ZincOx Resources plc ("ZincOx", "the Company" or "the Group") Preliminary Results - Year Ended 31 December 2007 ZincOx Resources plc (AIM Ticker: ZOX), which applies innovative technology tothe production of low cost, high grade zinc, today announces its results for theyear ended 31 December 2007. Operational Highlights • £11.4 million profit or 23.33 pence per share • Jabali Mine fully financed, development underway • Over £20 million in cash reserves • Ohio Recycling Project development commenced Commenting today, Andrew Woollett, Executive Chairman, said: "It is satisfyingto record a threefold increase in profits following deferred payments from ourinterest in the Shaimerden Zinc mine in Kazakhstan. We have made considerable strides in our plans to extract high grade zinc fromthe hazardous waste produced when recycling galvanised steel. We expect workwill commence developing our Ohio Recycling Project in May 2008. To support the development of the Jabal Salab project in Yemen the Companyraised $120million through the first ever Yemen project bond and the firsttradable bonus instrument to be launched for a metal related transaction." For more information please contact: ZincOx Resources plc Conduit PRSimon Hall Leesa Peters/Charles Geller +44 (0) 1276 450100 +44 (0) 20 7429 6666+44 (0) 7711 191807 +44 (0) 781 [email protected] [email protected] Chairman's Statement I am delighted to announce a threefold increase in profits to £11.4 million(2006: £3.6 million) or 23.33 pence per share (2006: 8.61 pence per share) whichnow places us firmly among the most profitable companies on AIM. These profitswere due to the ongoing deferred payments due from the sale of the Shaimerdenmine, and these should continue to 2011 by which time our Jabali mine and firstrecycling projects should be in full production. The Shaimerden receipts together with funds already in our treasury allowed usto fully finance our equity contribution to the Jabali Mine development withoutrecourse to shareholders. The balance of the US$216 million development wascovered by our partners (48%) and the recent issuance of a novel and imaginativeproject bond which raised US$120 million. The project should be in productionbefore the end of next year. This rapid development timetable has only been possible due to our decisionearly last year to order long lead time items of equipment, such as the miningfleet, which is already in the country. We have adopted a similar strategy forthe development of our first recycling project, the Ohio Recycling Project, inthe USA. In order to do this, we raised £20 million by a placing of new shareswith new and existing institutional investors. These funds are being used toundertake advanced engineering, secure fabrication time with equipmentmanufacturers and to enable site work to commence in May 2008. We are now focusing on raising the balance of the development cost and if thisis completed as planned, the project should commence production before the endof next year. During the course of the year we confirmed the attractiveness of the RotaryHearth Furnace and Melter (RHF&M) strategy we conceived in 2006 and we areincreasingly convinced that this is a breakthrough in the way that zinc bearingsteel industry waste (EAFD) is treated, both economically, because it is energyefficient, and environmentally because it produces three saleable products andno waste. Considerable progress on the sourcing of dust around the world has been carriedout over the past three years and steel mills in the regions have welcomed our "no waste" approach. Indeed we are increasingly confident that this strategywill enable us to realize our ambition to become the largest zinc recyclingcompany in the world. In Turkey (Aliaga) we received the approval for ourEnvironmental Impact Assessment and in Thailand we entered into supply optioncontracts for 100,000 tonnes of EAFD per annum. The progress we have made withour recycling plans was recognised by our peers at the 2007 annual MiningJournal awards for Outstanding Achievement, at which ZincOx won the award forsustainable development. Over the past two years, costs across the industry have risen dramatically andincluding the working capital, contingency and a cost overrun facility, thetotal financing requirement for the Jabali mine amounted to US$216 million. TheJabali mine will be the first major mining development in Yemen and will be oneof the largest zinc mines in the Middle East. While mine developments aregenerally well suited to project finance, the particular circumstances at Jabalidid not fulfil some of the standard prerequisites for this type of finance. Thebond facility we put in place was specifically designed to attract specialistemerging market investors. We were able to find a formula that enhanced thereturns to the bond holders by gearing them into the zinc price without dilutionof our equity in the project. This is the first time such a bond has been used.Exotix, the specialist emerging market debt adviser, which arranged the bond,is keen to try to repeat a similar formula for the financing of our recyclingprojects located in other emerging markets such as Turkey and Thailand. Due to the very limited recourse of this structure we remain unconstrained at acorporate level and this gives us complete freedom when considering options forfinancing the Ohio project. Our recycling strategy provides for zinc bearing hazardous waste from the steelindustry to be converted into pig iron, slag and an intermediate product thatcan be processed into zinc either at our Big River Zinc refinery in the USA or,after some further treatment, by third party smelters. We believe we have asignificant lead on any potential competitors but in order to maintain this leadfor as long as possible we decided, over a year ago, to follow a strategy ofmultiple and integrated concurrent project developments at Ohio, Aliaga and BigRiver, for a total capital expenditure of over US$400 million. In order torealize these plans we sought a strong industrial strategic partner who couldhelp to fund the developments by taking a direct interest in the projects. Asstated in last year's annual report, Teck Cominco, one of our largestshareholders, had expressed an interest to be that partner. During the firsthalf of 2007, Teck Cominco carried out a detailed technical review thatconcluded very positively. Towards the end of the year, we were, therefore,surprised to learn that Teck Cominco wished to continue to follow the strategyas a shareholder in the Company but not as a project partner. They retain aseat on the board and membership of a joint technical committee. A review of our options for financing the three initial projects concluded thatthe period required to undertake due diligence by a new partner would be oversix months, without any guarantee that such partner would ultimately commit tothe projects. In order to have the greatest confidence in the rapiddevelopment of the first recycling project we have modified our strategy to thatof a staggered development plan. By this approach the RHF&M could be developedas stand alone projects producing an intermediate product that could be cheaplyupgraded into a concentrate attractive to third parties. Only when the RHF&Msare being developed for the production of sufficient intermediate product toallow Big River to operate at full capacity will its redevelopment beconsidered. I should point out, however, that by staggered I do not meansequential. That is to say, as soon as the first project is financed and itsdevelopment is underway we would seek to finance and develop the second project;I would expect this to be well before the first project is commissioned. While the strategic partner approach would have simplified financing, partnerswould almost certainly have required rights over future projects that would havesignificantly reduced our medium and long term value in such projects. We nowhave the freedom to obtain the best financing or partnership deal on futureprojects unencumbered by prior agreements. The continuing demand for commodities from major emerging countries led by Chinaseems to continue unabated. For as long as this is the case, the outlook for thezinc price is likely to remain strong. While some analysts are predicting afall in the price over the next couple of years due to a slight over supply ofmetal, the margins for error are large as the price is a function of the balanceof supply and demand and we believe the demand side estimate is little betterthan a guess. This is supported by the very wide variations in zinc priceforecasts. There seems, however, to be little let up in the rising cost ofproduction and that should insulate us from the very low prices we saw only fiveyears ago. Given that zinc's principal use is for galvanising steel products, Iam encouraged by the current very high demand for steel as this must imply ahigh demand for zinc. Furthermore we have seen a good deal of consolidation inthe ownership of zinc production in recent years and so perhaps we may expectsome long awaited industry discipline. Over the course of the year we have added significantly to our senior staff aswe gear up for the challenge of project development. In order to support ourtransition to a "producer" we are also in the process of strengthening our boardand we recently announced the appointment of Rod Beddows as a non-executivedirector. As a founder of Beddows and Co, one of the foremost steel strategyconsulting groups, Rod has immense industry experience and this will becomeincreasingly useful as we grow our steel waste recycling business. As a fast growing company, the staff have worked extraordinarily hard to keeppace with the rate of our development and I would like to thank all staff fortheir efforts over the last year and for those that I am sure they will equallywillingly give over the year to come. Andrew WoollettChairman25 April 2008 Review of Operations Zinc Recycling Ohio Recycling Plant - USA The first recycling project to be developed by the group is the Ohio RecyclingProject (ORP) together with the washing plant at Big River Zinc (BRZ) at a costcurrently estimated to be US$179 million, including working capital andcontingency which will generate estimated annual earnings of US$23.7 million(post tax, depreciation and interest payable) assuming a zinc price of US$2,200per tonne and a pig iron price of US$310 per tonne. ORP will comprise a rotary hearth furnace and a submerged arc electric melter.It is planned to treat 200,000 tonnes per year of electric arc furnace dust(EAFD) containing an average grade of about 24% zinc. The rotary hearth furnacewill produce a concentrate containing zinc and lead, together with iron in theform of direct reduced iron. The latter will be immediately transferred to themelter which will separate the pig iron and by-product slag. The EAFD will be supplied under the terms of a strategic alliance withEnvirosafe Services of Ohio Inc (ESOI). ESOI, the largest disposer of EAFD inlandfill in the United States, has a 15 year track record in the sourcing andtransportation of EAFD. In November 2007, a 7 hectare plant site was purchased at Delta, in FultonCounty, north-west Ohio and in March 2008 the last of the environmental andother permits were granted so that site work can commence in May 2008. Theproject has been awarded certain grants and tax incentives. In order that development will not be delayed, in January 2008 US$40 million wasraised for the development of the project. These funds are being used for theidentification and ordering of long lead time items of equipment, sitepreparation, installation of utilities and detailed engineering design to enablethe definition of process equipment tenders. The strategically located site is well positioned for rail and roadtransportation networks as well as having good access to power, water and gas.Application for various construction and operating permits is sufficientlyadvanced to enable construction to commence. ZincOx is working with a majorlocal engineering company to finalise the design and engineering of the plant. ORP is designed to produce annually 47,000 tonnes of zinc contained in a crudezinc oxide concentrate, 56,000 tonnes of pig iron and 48,000 tonnes of slag. Thezinc concentrate will be transported to Big River Zinc (BRZ) for furtherprocessing, the pig iron will be sold back to the steel mills from where theEAFD originated and the inert slag can be sold to the construction industry. Onthe above assumptions, the EBITDA of the project at full production will beUS$57.5 million per annum. The Group's interim strategy is to wash the Ohio and Aliaga concentrates at BRZto remove chlorine and fluorine and sell the washed product to existing zincrefineries. BRZ already has a fully permitted washing plant and with a smallcapital investment it could be operating within a short period of time. Thisstrategy has the advantage of generating early cash flow at a much reducedcapital investment than will be required to convert BRZ in order to produce zincmetal, which is the Company's long term plan. Aliaga Recycling Plant - Turkey As with ORP, the Aliaga Recycling Plant (ARP) will comprise a rotary hearthfurnace and a submerged arc melter. It is planned to treat 200,000 tonnes peryear of electric arc furnace dust (EAFD) containing an average grade of 24%zinc. The plant will produce a concentrate containing zinc and lead, togetherwith iron in the form of direct reduced iron which will be upgraded into pigiron in the melter. ZincOx has purchased 4.2 hectares of land in the Heavy Industrial Zone atAliaga, located 60 km north of Izmir on the western coast of Turkey. Turkey is alarge recycler of steel, producing well over 200,000 tonnes per year of EAFD.Within the Industrial Zone there are five steel mills which together produceover 100,000 tonnes per annum EAFD. Other EAFD will be brought to site fromother steel mills in Turkey. During the course of 2007 full environmentalapproval from the Turkish authorities was obtained for the proposed plant. TheIndustrial Zone is well located with respect to transportation by sea, road andrail. Gas and electricity are readily available. In November 2007 an additional plot was purchased adjacent to the initial plantsite. This site will be used as an enclosed stockpile and blending area and forEAFD storage prior to the completion of the main plant. ARP will be designed to produce annually 47,000 tonnes of zinc contained in acrude zinc oxide concentrate, 46,000 tonnes of pig iron and 44,000 tonnes ofslag. ZincOx plans that the zinc concentrate will be transported to BRZ forfurther processing, the pig iron will be sold back to the steel mills in Turkeyfrom where the EAFD originated and the inert slag can be sold to theconstruction industry. Other Recycling Plants - Far East During the course of the last year, ZincOx has advanced its plans to roll outits recycling of EAFD in the Far East. In Thailand, ZincOx is planning to construct a plant consisting of a rotaryhearth furnace and melter, similar in size and design to the plants at Ohio andAliaga. The plant will be a regional facility processing EAFD from Thailand andnearby countries. An option on land of five hectares has been purchased on a site at Chonburi, aheavy industrial area near the cities of Laem Chabang and Sriracha on the eastside of the Gulf of Thailand. The site is near three steel mills. Environmentalstudies have already been initiated. The EAFD supply option agreements have been entered into with seven steel millsand further supply contracts are expected before the end of 2008. The construction of another potential recycling plant in the Far East is underreview. Zinc Mining Jabali Zinc Mine - Yemen The exploitation and development rights to the Jabali zinc deposit are owned byJabal Salab Company (Yemen) Limited ("Jabal Salab"), in which ZincOx holds a 52%interest. The balance of 48% is held by Ansan Wikfs Investments Limited. TheJabali zinc oxide deposit is located 110 km north east of Sana'a, Yemen'scapital city. Major advances with the development of the deposit were achieved during thecourse of the year which culminated in a $216 million financing package forJabal Salab in February 2008. This included equity and financial securityguarantees from the shareholders and a $120 million loan facility provided by agroup of emerging market specialist hedge funds. The term of the loan facility is six years with an interest rate of 11.5% and athree year grace period on principal repayments. In addition, the facilitycarries an additional coupon linked to the zinc price ("the ZIPPO" or Zinc PriceRelated Payment Obligation) which is calculated at US$0.16 for each dollar thatthe average annual international zinc price is above US$1,300 per tonne on everytonne of zinc sold by Jabal Salab over a period of 12 years from close of thefinancing. The ZIPPO notes are tradable instruments and are believed to be thefirst such instruments to be launched for a metal related transaction and thefirst Yemen project bond. The Government of Yemen is extremely supportive of the Jabali project. It is thefirst large scale mining project to be developed in Yemen and the Governmentrecognises that mining is a way of diversifying away from its dependence on theoil sector. Jabal Salab has a 20-year Exploitation Agreement with the Ministryof Oil and Minerals that sets out all the terms and conditions for developmentof the deposit. The Contract has been approved by the Yemen parliament andratified as law by the President. The Company has fostered a close relationship with local communities andstakeholders' training programmes, employment and improved infrastructure,especially road and water, are benefits to the nearby communities that shouldprove to be sustainable well beyond the life of the mine. The Jabali deposit contains a mineable reserve of 8.7 million tonnes of ore atan average grade of 9.2% zinc. The deposit will be mined at the rate of 800,000tonnes per annum by open pit with a strip ratio of 2:1. Ore will be crushed andcalcined prior to milling and leaching using ammonia based solutions. Followingpurification, zinc carbonate will be precipitated and calcined for theproduction of 70,000 tonnes per annum of very high quality zinc oxide ( > 79%zinc). The zinc oxide will be bagged and shipped to customers in the rubber,paint and ceramics industries. Construction of the mine and associated facilities is scheduled to take 22months, such that production of a high quality zinc oxide should commence at theend of 2009. Removal of over burden to expose the deposit sufficiently for ore extraction isscheduled to commence in the third quarter of 2008. Caterpillar mining equipmenthas already been delivered to Yemen. A site camp sufficient for 300 people isunder construction. Shaimerden Zinc Mine - Kazakhstan ZincOx sold its interest in the Shaimerden zinc oxide deposit to Kazzinc, alarge local zinc producer owned by Glencore AG, in 2003 but retained an interestthrough on-going deferred payments based on a formula linked to the zinc price.The deferred payments which are based on the first 200,000 tonnes of zinccontained in ore that are mined from the deposit, are paid to ZincOx at the rateof $0.2375 per tonne for every dollar that the LME zinc price is above $800 pertonne. They are made regardless of whether or not the deposit is being mined,and based on a deemed minimum and maximum amounts of 40,000 and 60,000 tonnes ofcontained zinc in ore, respectively. Payments may be suspended if there is adiscrepancy between the contained zinc predicted by the geological model at thedate of sale and actual contained zinc mined, of greater than 25%. During 2007, mining in the open pit was severely hampered by greater thanexpected water inflows and reduced pit stability. Grade reconciliation was poorfor the second and third quarters and payments were suspended for these periods.However zinc mined in ore in the first and fourth quarters amounted to 58,558tonnes and in January 2008 ZincOx received an amount of $31.4 million Zinc Refining Big River Zinc Refinery - USA The Big River Zinc smelter is an electrolytic zinc refinery located about 3 kmsouth east of St Louis. BRZ commenced operation in 1929 and has over many yearsbeen expanded to become the second largest zinc smelter in the USA (100,000tonnes per annum). Due to the closure of the last of the local zinc mines, thesmelting operations were suspended at the end of 2005. In May 2006, BRZ was purchased by the Group for US$14 million. Ultimately, theGroup's plan is to use the plant for the production of zinc metal by installinga new leach and solvent extraction purification circuit but using the existingelectrowinning, melting and casting facilities. Initially, however the site willbe used to wash the impure concentrates produced by the recycling business toremove the chlorides and fluorides to enable the sale of zinc concentrates tothird parties. BRZ is currently on care and maintenance while ZincOx carries out design andengineering work for the treatment at BRZ of the zinc bearing concentrate to beproduced at the Ohio and Aliaga recycling plants. Bintulu Project, Sarawak, Malaysia The Group has a long term strategy to develop refining operations fromconcentrates produced by recycling. Electrical power is a very significantcomponent in the cost of zinc metal production. In order to achieve the lowestpossible cost of production, The Group is seeking locations where power isinexpensive. Given the progress of the recycling plans in the Far East, and the long leadtime required to develop a new greenfield zinc electro refinery, the Group isconsidering the Bintulu area in Sarawak, Malaysia. The Malaysian government has established a new industrial zone at Bintulu thatwill benefit from its proximity to an ambitious multiple phase hydro electricgeneration scheme. Companies in the industrial zone may enjoy low cost long termelectrical power contracts. In February 2008, ZincOx entered into a Memorandumof Understanding with the Bintulu Development Authority. Negotiations on thetimetable for the project and a framework power agreement are underway. ZincOx Resources Plc Consolidated Income Statement For the year ended 31 December 2007 2007 2006 £'000 £'000 Revenue - 169Cost of Sales - (525) Gross Loss - (356) Administrative Expenses (5,607) (5,169) Operating Loss (5,607) (5,525) Other gains and losses 20,016 9,604 Finance Income 1,085 748 Finance Costs (37) (3) Share of losses of Associate 25 45 Profit before Tax 15,482 4,869 Taxation (4,096) (1,233) Net Profit 11,386 3,636 Attributable to: Equity holders of the parent 11,460 3,683 Minority Interest (74) (47) 11,386 3,636 Basic earnings per Ordinary Share 23.33p 8.61p Diluted earnings per Ordinary Share 22.37p 8.36p ZincOx Resources plc Consolidated Statement of Total Recognised Income and Expense For the Year Ended 31 December 2007 Year ended Year Ended 31 December 2007 31 December 2006 £'000 £'000 Currency translation differences (162) (107) Profit for the financial year 11,386 3,636 Total recognised income for the year 11,224 3,529 ZincOx Resources Plc Consolidated Balance Sheet as at 31 December 2007 2007 2006 £'000 £'000ASSETS Non-Current Assets Intangible Assets 17,706 10,590 Property, plant and equipment 22,031 8,762 Investment in associate - 2 Other financial assets - 235 39,737 19,589CURRENT ASSETS Inventories 973 1,020 Trade and other receivables 18,449 9,823 Cash and cash equivalents 12,646 23,176 32,068 34,019 TOTAL ASSETS 71,805 53,608 LIABILITES Current Liabilities Banks loans and overdraft Trade and other payables (534) - Non-Current Liabilities (5,034) (3,175) Other long term liabilities (581) (1,698) TOTAL LIABILITES (6,149) (5,413) NET ASSETS 65,656 48,195 EQUITY Share capital 12,244 12,105 Share premium 37,422 37,245 Retained earnings 11,364 (1,001) Foreign currency reserve (162) (107) Equity attributable toequity holders of the parent 60,868 48,242 Minority Interest 4,788 (47) TOTAL EQUITY 65,656 48,195 ZincOx Resources Plc Consolidated Cash Flow Statement For the year ended 31 December 2007 2007 2006 £'000 £'000 15,482 4,869Profit before taxation Adjustments for: 920 433Depreciation (55) (107)Foreign exchange (loss) (1,085) (748)Interest received 37 3Interest expense 3 952Intangible assets written off 979 425Share based payments 4,099 (2,400)Increase/(Decrease) in trade and other payables (154) (446)(Increase) in trade and other receivables 47 229Decrease in inventories (4006) (1,220)Foreign tax at source (25) -Share of losses of Associate (16,013) (8,429)Other gains and losses Cash generated from operations 229 (6,439) Interest paid (37) (3) Net cash flow from operating activities 192 (6,442) Investing activities Purchase of intangible assets (7,293) (5,402) Purchases of property, plant and equipment (13,998) (2,097) Acquisition of subsidiary - (1,335) Interest received 1,085 748 Net cash used in investing activities (20,206) (8,086) Financing Activities Net proceeds from disposal of assets 8,634 218 Net proceeds from issue of ordinary shares 316 33,551 Net cash received from financing activities 8,950 33,769 Net (decrease) increase in cash and cash equivalents (11,064) 19,241 Cash and cash equivalents at start of year 23,176 3,935 Cash and cash equivalents at end of year 12,112 23,176 Notes: 1. Preparation of non-statutory accounts The financial information set out in this preliminary announcement does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. The consolidated balance sheet at 31 December 2007, the consolidated incomestatement, consolidated cash flow statement, statement of total recognised gainsand losses, and associated notes for the year then ended have been extractedfrom the Group's 2007 statutory financial statements upon which the auditors'opinion is unqualified. 2. Profit per Share The calculation of the earnings per share is based on the profit attributable toordinary shareholders of £11,386,000 (2006 £3,636,000) divided by the weightedaverage number of shares in issue during the year of 48,801,664 (2006:42,230,332). The calculation of the diluted earnings per share is based on the profitattributable to ordinary shareholders of £11,386,000 (2006: £3,636,000) dividedby the weighted average number of shares in issue as varied by the dilutiveeffect of the share options in issue during the year totalling 50,906,836 (2006:43,504,806). 3. Preliminary statement Copies of the Annual Report will be sent to shareholders shortly and will beavailable from the Company at Knightway House, Park Street, Bagshot, Surrey GU195AQ and Numis Securities Limited, but in the meantime the full financialstatements may be viewed on the Company's website www.zincox.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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