Interim Management Statement

Kenmare Resources plc ("Kenmare" or "the Company")

 

 

Chairman's Statement

 

Dear Shareholder,

 

In my last statement I mentioned that we had taken over mining operations at the Moma Titanium Minerals Mine from the contractor. I can now report that we have taken over the Mineral Separation Plant (MSP).  Control of this plant allows us to process Heavy Mineral Concentrate (HMC) into final products which are being stockpiled for shipment. 

 

The MSP is performing well and is already operating at a feed rate of 90 tonnes of HMC per hour.  This is three quarters of the design capacity.  It is very pleasing to have achieved this feed rate so quickly.  The ilmenite products are within specifications and are eagerly awaited by our customers.  The contractor still has some further work to do on the rutile and zircon circuits.  Hence, we are storing the feed for these circuits until they come on stream.  The product transfer barge is due to arrive at Moma in early November.

 

It was necessary to go through an initial period of mining with one dredge while the dredge pond was expanded to the size required to operate two dredges simultaneously.  This has been done and two dredges have now been deployed to mine the Moma orebody simultaneously with the commensurate increase in output from the mine.  The second dredge has been deployed earlier than originally planned.  This will accelerate the ramp up to full production and reduce the effect of the late delivery of the facilities by the contractor.  We intend to be operating at the rate of 800,000 tonnes of ilmenite product per annum before the end of 2007.

 

Pilot plant operation and process design for an expansion to 1.2 million tonnes per annum of ilmenite is underway in Australia.  A specific project team has been hired to implement the expansion and mine planning for the higher extraction rate is well underway.

 

The TiO2 feedstock market remains tight and demand for Kenmare's products remains strong. Prices for ilmenite are rising and almost all of our output has now been allocated.  In addition to the output from the present facility, most of the proposed output from our expansion to 1.2 million tonnes per annum of ilmenite production can now be earmarked to specific customers.

 

While Kenmare does not have to pay the ongoing costs of the contractor on site, and in addition has already levied very substantial delay damages on the contractor, the delay in revenues has nonetheless had an effect on our finances.  Kenmare has therefore established an additional US$22.0 million line of standby subordinated loan facility with two members of our lender group.  We believe that our funding arrangements more than cover the requirements of the project for existing production capacity.

 

For the six months ended 30 June 2007 we report a loss of US$0.1 million. This comprises an operating loss of US$1.7 million, resulting primarily from foreign exchange losses, net of finance income of US$1.6 million earned on deposits held. Non-current assets increased by US$40 million during the six months under review. US$12 million of this related to mineral exploration and project development work capitalised in deferred development expenditure, net of delay damages levied on the Moma Project contractor. US$28 million was capital expenditure on the construction of the project. The taking over of the mining operations in April resulted in the transfer of US$78 million from Construction In Progress to Property, Plant and Equipment. Capital commitments at 30 June 2007 amounted to US$41.2 million. The Company has access to sufficient sources of funding to cover these capital commitments. Additional amounts drawn plus interest capitalised during the period amounted to US$37.7 million.

 

Our staff on site have done a tremendous job in the short time since taking over the project from the contractor and I wish them well as they continue to ramp up production at Moma.  It is a very exciting time with both our initial production and that coming from our expansion being eagerly sought by the market.

 

Very regrettably, one of our site employees, a vibrant young man called Nelson Mutombene, died in a swimming accident in July.  I offer, on behalf of the Board, our deepest condolences to his family, friends and colleagues.

 

 

Charles Carvill

Chairman                                                                                                              

 

27 September 2007

 

 

Michael Carvill,

Managing Director       

                                     

Tel:         + 353 1 671 0411

Mob:      + 353 87 674 0110

 

Leesa Peters      

                                                                                   

Tel:         +44 (0) 207 429 6600

Mob:      + 44 (0) 781 215 9885

 

Jim Milton         

                                                                                   

Tel:         + 353 1 498 0300

Mob:      + 353 86 2558400

 

 

 

 

Interim Financial Information - Six months ended 30 June 2007

 

We have been instructed by the Company to review the financial information for the six months ended 30 June 2007 which comprises the Group Income Statement, the Group Balance Sheet, the Group Cash Flow Statement, Group Statement of Changes in Equity and related notes 1 to 11.  We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

 

This report is made solely to the Company in accordance with Bulletin 1999/4 'Review of Interim Financial Information' issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report or for the conclusions we have reached.

 

The interim report, including the financial information contained therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim report in accordance with the Listing Rules of the Irish Stock Exchange and of the UK Financial Services Authority which require that the accounting policies and presentation applied to the interim figures are consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed.

 

 

We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom and Ireland. A review consists principally of making enquiries of management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with International Standards on Auditing (UK and Ireland) and therefore provides a lower level of assurance than an audit. Accordingly, we do not express an audit opinion on the financial information.

 

On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2007.

 

 

Deloitte & Touche

Chartered Accountants

Deloitte & Touche House

Earlsfort Terrace

Dublin 2

27 September 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                        

 

 

 

 

 

                                                                                                                                         

The unaudited interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) by applying the accounting policies set out in the 2006 Annual Report and Accounts. These financial statements are not full financial statements and except where indicated are unaudited. Full consolidated financial statements to 31 December 2006, which received an unqualified audit report, have been filed with the Registrar of Companies. 

 

The interim financial statements have also been prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 2006, the European Communities (Companies: Group Accounts) Regulations, 1992 and the Listing Rules of the Irish and London Stock Exchanges.

 

The unaudited interim financial information in this statement has been reviewed by the auditors in respect of the six months ended 30 June 2007 only and their Report to the Directors is set out on page 3.     

 

The calculation of the loss and fully diluted loss per share is based on the loss after taxation of US$96,000 (2006 loss of US$3,452,000) and the weighted average number of shares in issue during 2007 of 687,557,987 (2006 : 673,986,570). The loss per share and the fully diluted loss per share are the same, as the effect of the outstanding share options is anti-dilutive.

 

      

 

Additions, net of delay damages accrued under the construction contract, include loan interest capitalised of US$11,564,000 (2006: US$8,524,000). Loan interest is net of deposit interest earned on the temporary deposit of loan balances.

 

The recovery of deferred development expenditure is dependent upon the successful development of the Moma Titanium Minerals Project, which in turn is dependent on the continued availability of adequate funding for the Project. The Directors are satisfied that deferred expenditure is worth not less than cost less any amounts written off, and based on the planned mine production levels, that the Moma Titanium Minerals Project will achieve positive cash flows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The construction contract with the contractor, a joint venture formed for this project, between the subsidiaries of Multiplex Ltd and Bateman B.V. was amended in December 2006 whereby provision was made for the handover of the Moma Titanium Project works in sections. On the 25 April 2007 section one of the construction contract, which includes the mining pond, dredges, Wet Concentrator Plant and related infrastructure, was taken over by Kenmare, and a taking-over certificate was issued.

 

Depreciation for the period from take over of section one to the 30 June 2007 of US$102,000 has been capitalised as part of Deferred Development Expenditure. Plant & Equipment is depreciated from commencement of production on a unit of production basis. Depreciation on the other assets is provided at rates calculated to write off the costs less estimated residual value of each asset on a straight line basis over its expected useful economic life of between three and twenty years.     

 

 

Construction in Progress represents expenditure under a construction contract for the engineering, procurement, building, commissioning and transfer of facilities at the Moma Project in Mozambique. This contract was entered into on 7 April 2004. The Contractor is a joint venture formed for this project, between the subsidiaries of Multiplex Ltd. and Bateman B.V. Multiplex is a large contracting group based in Australia with operations stretching around the globe and specialises in large complex construction projects. Bateman is an international engineering group with specific mineral sands experience and experience of working in Mozambique.

 

The recovery of Construction in Progress is dependent upon the successful development of the Moma Titanium Minerals Project, which in turn is dependent on the continued availability of adequate funding of the project. The Directors are satisfied that Construction in Progress is worth not less than cost less any amounts written off and based on the planned mine production levels, that the Moma Titanium Minerals Project will achieve positive cash flows.

 

 

 

 

 

 

 

                                                                                                                                                                             

The construction contract with the Multiplex-Bateman Joint Venture was amended in December 2006 whereby provision was made for the handover of the Moma Titanium Minerals Project works in sections and all changes to the original contract price were agreed.  Based on this contract amendment, the total amount payable to the contractor will be US$265 million, net of projected applicable delay penalties, of which US$41.2 million was outstanding at the period end.  The Company has access to sufficient sources of funding to cover these capital commitments.

 

 

The Contingency Reserve Account and Shareholder Funding Account on fixed term deposit are amounts held in support of conditions required for Senior and Subordinated Loans as shown in note 8. In connection with the additional Standby Subordinated Loans referred to in note 8, the Company deposited an additional US$3.4 million to the Contingency Reserve Account in August 2007.

 

 

 

Bank loans are secured by substantially all rights and assets of the Company and the Moma Titanium Minerals Project; security agreements over shares in the Company; and a Contingency Reserve and Shareholder Funding Account as shown in Note 7.

 

There are seven Senior Loan credit facilities available for financing the Moma Titanium Minerals Project.  The aggregate maximum amount of the Senior Loan credit facilities is US$185 million plus €15 million of which US$181,578,000 and €15,000,000 had been drawn at the period end, and US$3,422,000 was undrawn and available. The facilities incur commitment fees ranging from 0.25% to 0.75% on the undrawn available amounts.

 

Senior Loans are repayable in semi-annual installments commencing, in the case of six of the seven Senior Loan facilities, on the earlier of (a) the first February 1 or August 1 falling at least 6 months after the date of acceptance of the assets being constructed under the construction contract, and (b) 1 February 2008, and in the case of the seventh Senior Loan facility, 12 months thereafter. The maximum Senior Loan tenors range from 10 years to 12 years from 31 December 2006. Two of the Senior Loans bear interest at fixed rates, one bears interest at a rate which is floating for each drawdown but is fixed thereafter, and four bear interest at floating rates.

 

The Subordinated Loan credit facilities of €47.1 million plus US$10 million are fully drawn down. Subordinated Loans are repayable in 21 semi-annual installments commencing on 1 August 2009.    The final installments are due on 1 August 2019. The Subordinated Loans denominated in Euro bear interest at a fixed rate of 10% per annum, while the Subordinated Loans denominated in US Dollars bear interest at floating rates.

 

The two Standby Subordinated Loan credit facilities of €2.8 million and US$4 million are fully drawn down. Standby Subordinated Loans bear interest at fixed rates in respect of €2.8 million and US$1.5 million and at variable rates in respect of US$2.5 million.  Standby Subordinated Loans are repayable on the same terms as the Subordinated Loans and have an option to require that Kenmare Resources plc purchase the loans on agreed terms.

 

In August 2007, an Additional Standby Subordinated Loan credit facility of US$22 million was put in place. Additional Standby Subordinated Loans are repayable on the same terms as the Subordinated Loans and bear interest at variable rates.

 

Loan facilities arranged at fixed interest rates expose the Group to fair value interest rate risk. Loan facilities arranged at floating rates expose the Group to cashflow interest rate risk.

 

 

The Company has a share option scheme for certain Directors, employees and consultants. Options are exercisable at a price equal to the quoted market price of the Company's shares on the date of grant. The options generally vest over a three to five year period, in equal annual amounts. If options remain unexercised after a period of 7 years from the date of grant, the options expire. Option expiry period may be extended at the decision of the Board of Directors.

 

During the period the Group recognised a share-based payment expense of US$69,000.

 

 

As set out in detail in Note 27 of the 2006 Annual Report , Grafites de Ancuabe, S.A.R.L., a subsidiary company , has been excluded from consolidation in accordance with International Accounting Standard 27.

 

 

The financial statements were approved by the Board on 27 September 2007.