6th Sep 2005 07:03
Aricom PLC06 September 2005 Aricom plc Interim Results for the six month period ended 30 June 2005 Aricom On Track with Development of Olekma Mine and TiO2 Project London, 6 September 2005. Aricom plc ("Aricom" or the "Group"), the titaniumdioxide company with operations in Russia, today announces its financial resultsfor the six month period ended 30 June 2005. Highlights: • Definitive Feasibility Study on the development of the Kuranakh mine due for completion in the autumn. • Preparatory works and the establishment of a basic infrastructure at Olekma well advanced. • Additional exploration work and modelling on Zone 3 complete. • Continued exploration on Zone 1 indicates an ore body equivalently rich to Zone 3 but in a substantially more compact structure. • Economic contribution from gold expected. • Team of highly experienced European TiO2 technologists working exclusively with Aricom on finalising plans for the TiO2 processing plant. • Capital expenditure during the period was US$5.7m. • Group cash balances at period end were US$8.5m. Sir Malcolm Field, Chairman said: "We are delighted to report that we have made excellent progress implementingour strategic plans in the first half of 2005. Our primary focus has been on ourfirst project, the Olekma mine development. We are well advanced in meeting thetargets outlined at the time of our US$20m fundraising in March and remain ontrack for the delivery of mine production in 2007. With HVB now advising on theproject financing, we look forward to putting in place the final elements ofequity and debt financing for us to successfully complete this project. As regards our second project, the titanium dioxide processing plant, a team ofhighly experienced TiO2 technologists has joined us and is proving invaluable inhelping us assimilate the technology we require to deliver a strong andcompetitive operation. We are currently reviewing technology and site optionsand expect to reach a decision on both of these fronts in the latter half ofthis year. 2005 is proving another strong year for the markets of iron ore, ilmenite andTiO2 and given this backdrop and the continued positive outlook for thesematerials, we believe our investment towards providing additional low costcapacity to supply these markets has been well timed." Enquiries: Tom Swithenbank/ Sir Malcolm Field Aricom PLC 020 7201 8939Tom Randell/David Simonson Merlin 020 7653 6620 Chairman's and Chief Executive's Statement We are delighted to report that we have made excellent progress implementing ourstrategic plans in the first half of 2005. Our primary focus has been on ourfirst project, the Olekma mine development. We are well advanced in meeting thetargets outlined at the time of our US$20m fundraising (before expenses) inMarch: • A definitive feasibility study on the development of the Kuranakh mine is expected to be completed in the autumn. • Preparatory works are well under way at Olekma with the establishment of a basic industrial infrastructure onsite and the construction of the road and rail bed progressing rapidly. • Additional exploration work and modelling has been completed on Zone 3 and drilling and trenching on Zone 1 is proving very promising. • Further work on establishing the presence of gold continues to indicate an economic potential for its extraction as a by-product of the planned ilmenite and iron ore production. We have also made substantial progress with Aricom's second project, the TiO2processing plant. We now have a highly experienced team of European TiO2technologists working with Aricom on this project. As outlined in our latest Annual Report and Accounts for the year ended 31December 2004, it is intended to seek further equity and/or debt financing inthe near future to allow uninterrupted development of the mining operations into2006 and the further advancement of the TiO2 project. A mandate letter has beensigned with HVB appointing them as debt advisers with a view to a subsequentappointment as Mandated Lead Arrangers for a project financing of up to US$30m. Olekma Mine Development Since raising US$20m (before expenses) in March this year, the Company has madeexcellent progress in laying the foundations for the development of its Olekmamining operations. At the time of the fundraising, the management set key tasksfor 2005 and we are pleased to say that all these areas are being effectivelyaddressed: Complete a full feasibility study and seek permissions: The definitivefeasibility study by Vnipiprom Technologiya is proceeding according to scheduleand is expected to be delivered this autumn. Beneficiation technology has beenfinalised following industrial-scale tests over the summer. The feasibilitystudy forms the basis of the permissions process, which will commence once thestudy has been delivered. Commence preparatory works for the construction of the mining and beneficiationoperations at Olekma and Kuranakh: The focus this year has been on theinfrastructure around the settlement of Olekma, which is a service point for theBaikal Amur Magistral railway. A basic industrial infrastructure is beingdeveloped at Olekma, where ground has been prepared and a 1500m perimeter fenceinstalled. A fuel storage area is now in place and three hangars are beingerected to allow servicing of equipment and machinery through the winter monthsand to act as storage areas for equipment as it is delivered to site. Existingbuildings and flats in Olekma have been renovated, as well as new prefabricatedunits installed, to provide accommodation for the 120 workers now employed. Acanteen to feed the shift crews has been erected and services such as a medicalstation, a forge and a metal working station are in place. Further facilities,such as an oxygen station for welding, are expected to be completed over thenext few weeks. A storage area is currently being constructed alongside the mainBAM railway where a 32 tonne gantry crane, already onsite, will be used tooffload equipment and supplies delivered to Olekma. A suitable site for the beneficiation plant has been identified close to Olekmaand the foundations for the road and the railway have been laid for theapproximately 4kms between this site and the railhead. The intended route of the34km category IV road has already been identified and marked out in situ. Theroad is scheduled to follow a different route from the existing exploration roadto minimise distance and avoid more complex topography. The rock required forthis construction is currently being mined from a reconditioned quarry close toOlekma and further potential quarries have been identified along the intendedroute of the road. Communications facilities (telephone and internet) have been installed toservice the Olekma office from the fibre optic line running alongside the BAMrailway. Purchase initial mining and transport equipment: The key items of machinerypurchased or leased to date include 17 dump trucks, a refuelling truck, a32-tonne gantry crane, 2 road graders, 3 T-20 bulldozers with another 3 T-35s onorder, 3 excavators of which two are Caterpillar 330CL, 2 22-seater Uralpersonnel transporters, an all-terrain vehicle, 2 Kamaz 16-tonne truck cranes, 4mobile welding units, a concrete mixing station and an oxygen station, a Uralmobile repair workshop, a mobile compressor and a roadroller. Around half thesteel required for construction and the rails and sleepers for the railroad tothe beneficiation plant are being purchased second-hand at deep discounts tocurrent market prices. Carry out additional exploration work to upgrade Aricom's reserves andresources, in line with the conditions of the licence: Work on Zone 3 has nowbeen completed, including the in-fill drilling required to increase reserves toC1 categorisation. A block model for Zone 3 has been developed for Aricom byPeter Hambro Mining's in-house certified modelling service. As part of theongoing exploration programme, Regis, the exploration company used by Aricom,has been drilling and trenching throughout Zone 1 and is close to submitting itspreliminary report on reserves and resources. Initial indications are of an orezone equivalently rich to Zone 3 but in a much more compact structure. AverageTiO2 and iron contents could be marginally higher than those found in Zone 3. Gold and zircon: Further work on zircon does not suggest an economic resourcebut the results on gold are more promising. Following testing, the beneficiationtechnology to be used for iron ore and ilmenite concentration has already beenamended to ensure extraction of the highest concentrations of gold. The Companytherefore expects to receive an economic contribution from gold but, given thehigh costs of defining a gold resource, it has decided to avoid this exerciseand wait for the extent of this contribution to become clear once processingstarts in late 2007. Next steps: Following the delivery of the feasibility study it is intended toconclude negotiations with MCPHM, a contracting subsidiary of Peter HambroMining plc, on a fixed-price turnkey EPC contract for the development of theOlekma mine. PHM's experience of developing mining operations in the Amur Regionwill prove invaluable in assisting Aricom deliver a successful project atKuranakh. It is intended that the contract will be drawn up on standard marketterms with the input of the project financiers and will include performanceguarantees. TiO2 Processing Project Aricom has been making good progress towards defining the preferred approach tothe construction of its TiO2 plant. The key issues that remain to be finalisedconcern choice of technology and site. Technology: The Company is now considering two potential technology solutions.The first is the more traditional approach of the acquisition of a licence froman established Western technology provider. Following extended discussions, theCompany has received an indication from one of the major producers that an offerfor a sulphate route TiO2 licence will be made. The second approach involvesusing existing Chinese technology as a base and enhancing this to aWestern-equivalent standard. An attractive offer has been received from thepremier specialist Chinese TiO2 institute. A team of three highly experiencedformer Huntsman Tioxide TiO2 technologists, with over 90 years service in theindustry between them, has been working exclusively with Aricom on this project.The team has evaluated this proposal to define whether it is feasible to upgradethe technology offered to produce Western equivalent pigment. The result of itswork has shown that this option is feasible and indeed that the project couldbenefit from considerably reduced capital costs relative to the traditionalapproach. A decision on the preferred route will be taken once negotiations withthe traditional licence provider have been concluded. Site: Aricom has been carrying out an evaluation of proposed sites for its TiO2plant. The original site at Tynda remains available to the Company and analternative site with potentially strong cost-saving synergies with localindustry and an established infrastructure is also currently being reviewed. Weexpect to conclude this exercise over the next few months. Next Steps: Once technology and site decisions are made, Aricom will be in aposition to launch a definitive feasibility study on the TiO2 processing plant. Chemelt Aricom's TiO2 trading company, Chemelt, has shown encouraging growth in sales in2005, with an increase of 85% relative to the equivalent period last year. Thecompany's relationship with its main supplier, GAK Titan, remains strong andChemelt is now established as one of the producer's most important distributorsin Russia. The Chemelt sales team is also enthusiastic about the potential forSachtleben products, which it has recently added to its product range. Market Outlook TiO2: The TiO2 market continues to show strength in 2005 with prices continuingto increase following an exceptional 2004, when global TiO2 demand jumped by 8%on strong global economic growth. IBMA, the TiO2 consultancy, forecasts globaldemand growth in 2005 to reach 2.2%, with Asia expected to post the highestgrowth rate at 6.3%, driven largely by China. TiO2 prices gained 10-15% in 2004with a further 5-10% expected in 2005. Capacity rationalisation and strongdemand had boosted producers' average capacity utilisation rates to around 95%by the beginning of 2005. These utilisation rates are expected to tightenfurther given continued forecast strength of demand and little additionalcapacity announced to be coming on stream. A report by Fitch IBCA published inMay points to continued price growth until at least 2007, with a particularemphasis on the continuing strong demand from China. Iron ore: Strong demand led to the unprecedented 71.5% price increase for ironfines (higher still for pellets and CVRD lump) in early 2005, following an 18.6%rise the year before, yielding a doubling in iron prices over the last two yearperiod. Whilst prices are forecast to fall back from here, our current budgetassumptions for achievable iron ore prices of US$40 per tonne DAF China appearvery conservative in the current climate. Ilmenite: IBMA has commented that the strength of pigment sales prices in allregions has strengthened the resolve of feedstock suppliers to implement priceincreases across the range of feedstock types. Feedstock producers now appearconvinced that the pigment producers are able to absorb their price increases,which in 2005 have been of the order of a few percentage points above inflation.Notable are the larger price increases for high grade sulphatable andchlorinatable ilmenites which are in tight supply and are expected to remain sofor the next few years. Financing In February, it was announced that for an estimated capital expenditure of US$56million, Aricom expects to be able to develop a mining and beneficiationoperation to extract the resources available at Kuranakh. In the first half ofthe year, the company has spent US$5.7m on the mine project and expects spendingto accelerate through the second half of the year. Aricom has mandated HVB inrelation to the provision of up to US$30m project financing, which is expectedto be concluded early in 2006. Ahead of this, Aricom intends to approach themarket for a further round of financing to fund the ongoing development of themine. Outlook Given such a positive outlook for the markets in which we are working, we areconfident that Aricom's twin strategy of developing an ilmenite and iron oremining and beneficiation facility and the subsequent construction of a TiO2processing plant to serve the Chinese and Russian markets is based on a verysolid foundation. With the completion of the Olekma feasibility study expected in the autumn,Aricom will begin final negotiations with contractors and project financiers soas to remain on track for start of production at the mine, expected in thefourth quarter of 2007. We look forward to informing our shareholders and thewider market in more detail as to our intentions for financing and further plansfor the advancement of both the mining and the TiO2 projects over the comingmonths. Finance Director's Statement The financial highlights presented in these interim report and accounts coverthe six months to 30 June 2005. The comparatives are for the period to 30 June2004 (approximately 9 months) and the approximately 15 month period to 31December 2004. The longer comparative periods are due to the Company beingincorporated on 12 September 2003. The vast majority of expenditure was incurredon or after 31 December 2003 at which time the Company was admitted to AIM.Chemelt figures are only included from 1 January 2004 as the company wasacquired on 31 December 2003. During the six months to 30 June 2005, the Company successfully raised US$20m(US$18m net) through a placing of 38,250,000 ordinary shares at 28p per share. The Group made a loss of US$2.1m for the half year which equates to a loss perordinary share of US$0.02. The turnover and cost of sales figures represent thetrading in Chemelt which is a 100% owned subsidiary. Fixed assets have grown by US$5.7m during the six months, reflecting the goodprogress made on developing the Company's assets. Capital expenditure in thelast six months of 2004 was US$1.4m. The focus of the Company's capital expenditure during the 6 months to 30 June2005 was on the development of the mine at Kuranakh. This includes: • funding of the feasibility study • geological exploration work • purchase of capital goods • mobilisation costs • commencement of the construction of the road and the electricity line to service the mine. Following the successful placing in March, the Company fully repaid the loanfrom Peter Hambro Mining plc. The Group has entered into finance leases to fund the purchase of certainequipment in order to optimise the Group's cash position. At 30 June, the Company had cash balances of US$8.5m held in the main operatingcurrencies of the Group. Principal amounts owing under finance leases amountedto US$1.5m, of which US$1m was payable after more than one year. Turnover has increased at the Group's trading operation, Chemelt, by over 85% toUS$2.8m (2004: US$1.5m). Gross margins have also improved slightly from 6.8%, atthe same stage last year, to 7.1%. Net interest payable includes the adverse effect of the movement in the Sterling: US dollar exchange rate on that proportion of the Group's cash which is heldin Sterling to cover working capital requirements which are predominantly inthat currency. Debtors due within one year have increased marginally compared with 30 June 2004despite the 85% increase in turnover. Debtors due after one year reflects theVAT paid on fixed assets in Russia and which does not become reclaimable untilthe mining assets come into operation. Total shareholder funds were US$18.8m at the balance sheet date. Consolidated Profit and Loss Account(expressed in US $'000s) 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 Dec Notes $'000 $'000 $'000Turnover 2,762 1,485 3,199Cost of sales (2,567) (1,384) (3,003) Gross profit 195 101 196 Selling expenses (144) (115) (162)Administrative expenses (1,452) (962) (2,776)Other operating expenses (179) (936) (1,556) Operating loss (1,580) (1,912) (4,298) Net interest (payable)/receivable (504) (60) 27 Loss on ordinary activities before taxation (2,084) (1,972) (4,271) Taxation 3 - - (9) Loss on ordinary activities after taxation (2,084) (1,972) (4,280) Minority interest 186 - 26 Loss on ordinary activities after taxationand minority interest (1,898) (1,972) (4,254) 2005 2004 2004 Six months Period to Period to Notes to 30 June 30 June 31 DecBasic and diluted loss per ordinary share 6 ($0.02) ($0.03) ($0.06)Proforma basic loss per ordinary share 6 ($0.02) ($0.02) ($0.04) There are no recognised gains or losses other than those included in the profitand loss account. All turnover and the operating loss for the period/year arederived from continuing operations. Consolidated Balance Sheet(expressed in US $'000s) 2005 2004 2004 30 June 30 June 31 Dec Notes $'000 $'000 $'000Fixed assetsTangible assets 11,141 4,052 5,435 11,141 4,052 5,435Current assetsStock 308 256 572Debtors: due within one year 827 818 492Debtors: due after more than one year 909 - 297Cash at bank and in hand 8,454 2,782 1,157 10,498 3,856 2,518 Creditors, amounts falling due within one year (1,483) (860) (1,753) Net current assets 9,015 2,996 765 Total assets less current liabilities 20,156 7,048 6,200 Creditors, amounts falling due after one year (1,049) (1,940) (3,400)Net assets 19,107 5,108 2,800 Capital and reservesCalled up equity share capital 4 242 169 169Share premium 4 24,721 6,403 6,403Profit and loss account 4 (6,152) (1,972) (4,254) Equity shareholders' funds 18,811 4,600 2,318 Minority interests 296 508 482Total capital employed 19,107 5,108 2,800 These financial statements were approved by the Board of Directors on 5September 2005 and signed on its behalf by: T Swithenbank P HowesDirector Director The accompanying notes are an integral part of this balance sheet. Consolidated Statement of Cash Flow(expressed in US $'000s) 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 Dec Notes $'000 $'000 $'000Net cash outflow from operating activities 5a (2,440) (2,318) (3,915) Returns on investments and servicing of finance Interest received 122 50 67Interest paid (121) (137) (283)Net cash inflow/(outflow) from returns oninvestments and servicing of finance 1 (87) (216) Taxation paid - - - Capital expenditure and financial investment Purchase of tangible fixed assets (5,755) (1,079) (2,508) Acquisitions and disposalsPurchase of subsidiary undertakings - (2,617) (2,617)Cash acquired with subsidiaries - 24 24Net cash outflow on acquisitions and disposals - (2,593) (2,593) Cash outflow before financing (8,194) (6,077) (9,232) Financing(Decrease)/increase in short term borrowings (499) 320 197(Decrease)/increase in long term borrowings (3,400) 1,940 3,400Gross receipts from issuing ordinary and preference shares 20,492 7,827 7,827Preference shares redeemed - (88) (88)Share issue costs (2,101) (1,167) (1,167)Increase in finance leases 1,504 - - Net cash inflow from financing activities 15,996 8,832 10,169 Increase in cash at bank and in hand 5b 7,802 2,755 937 Notes to the Financial Information 1. Accounting policies and basis of preparationThe Company was incorporated on 12 September 2003 and on 31 December 2003obtained admission to the AIM market of the London Stock Exchange. The financialinformation presented is for the six months to 30 June 2005. The figurespresented for periods to 30 June 2004 and 31 December 2004 are for the periodsto those dates from 12 September 2003. These periods are approximately ninemonths and 15 months in length respectively. The financial information for the first six months of 2005 and for the periodsfrom 12 September 2003 to 30 June 2004 and from 12 September 2003 to 31 December2004, does not constitute statutory accounts within the meaning of section 240of the Companies Act 1985 and is presented on the basis of the accountingpolicies set out in the financial statements of Aricom plc for the period ended 31 December 2004. 2. Exchange ratesThe rates of exchange at the balance sheet dates were as follows: 30 June 30 June 31 Dec 2005 2004 2004Russian roubles: US$ 28.6721 29.0274 27.7487US$: Pound sterling 1.7930 1.8126 1.9160US$: Euro 1.2098 1.2179 1.3538 The representation of figures in US dollars should not be construed as meaningthat underlying amounts can or will be settled in dollars. 3. Tax on loss on ordinary actitivities 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 Dec $'000 $'000 $'000Current taxation - - 9Deferred taxation - - - - - 9 Factors affecting the tax charge for the periodLoss on ordinary activities before tax (2,084) (1,972) (4,271) Tax at 30% thereon (625) (592) (1,281)Expenditure for which no tax benefit isrecognised at 30% thereon 625 592 1,290Current tax charge for the period - - 9 No deferred tax asset has been recognised in respect of losses. The asset wouldbe recoverable if suitable taxable profits were to arise in future periods. 4. Group combined statement of reserves and reconciliation of movement inshareholders' funds Profit Share Share and loss Capital premium account Total $'000 $'000 $'000 $'000At 1 January 2005 169 6,403 (4,254) 2,318Loss for the period - - (1,898) (1,898)Issue of share capital 73 20,419 - 20,492Share issue costs incurred in the period - (2,101) - (2,101)At 30 June 2005 242 24,721 (6,152) 18,811 On 11 March 2005, the number of ordinary £0.001 shares in issue was increased bythe issue of 38,250,000 shares at a price of £0.28 per share. The total numberof ordinary shares in issue was thereby increased to 133, 368,684. 5. Notes to the cash flow statementa) Reconciliation of operating loss to net cash outflow from operatingactivities 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 Dec $'000 $'000 $'000Operating loss (1,580) (1,912) (4,298)Depreciation charges 49 11 21Write down of fixed assets - - 4Increase in debtors (947) (378) (349)(Decrease)/increase in creditors (226) 169 1,231Decrease/(increase) in stock 264 (208) (524)Net cash outflow from operating activities (2,440) (2,318) (3,915) b) Reconciliation of net cash flow to movement in debt 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 Dec $'000 $'000 $'000Increase in cash 7,802 2,755 937Decrease/(increase) in short term debt 499 (320) (197)Decrease/(increase)in long term debt 3,400 (1,940) (3,400)(Increase) in finance leases (1,504) - -Increase in net cash/(debt) resulting from cash flows 10,197 495 (2,660)Loans acquired with subsidiaries - (302) (302)Foreign exchange movements (505) 27 220Increase in net cash/(debt) for the period 9,692 220 (2,742)Net debt at beginning of period (2,742) - -Net cash/(debt) at end of period 6,950 220 (2,742) 6. Loss per ordinary sharea) Basic and diluted loss per ordinary share 2005 2004 2004 Six months Period to Period to to 30 June 30 June 31 DecLoss for the period ($'000) (1,898) (1,972) (4,254)Weighted average basic numberof ordinary shares ('000) 117,942 63,180 75,633Basic and diluted loss per ordinary share ($0.02) ($0.03) ($0.06) b) Proforma loss per ordinary share Loss for the period ($'000) (1,898) (1,972) (4,254)Proforma weighted average numberof ordinary shares ('000) 117,942 94,750 94,910Proforma loss per ordinary share ($0.02) ($0.02) ($0.04) Basic and diluted EPS are the same because the only outstanding share optionsare anti-dilutive as the Group has made a loss.The Group did not trade until its shares were admitted to trading on AIM on 31December 2003. The proforma weighted average has been calculated as if theperiods ending 30 June 2004 and 31 December 2004 began on 31 December 2003 andnot the date of the Company's formation. 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