Base Resources Ltd

ASX:BSE

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Base Resources March Quarter 2024 Quarterly Activity Update. [Operator Instructions] Finally, a reminder that this conference is being recorded.

I would now like to turn the conference over to Tim Carstens, Managing Director. Please go ahead.

[Timothy Carstens, executive]

Thank you very much, and thanks, everyone, for joining our quarterly update call. As usual, I'm joined today by Kevin Balloch, our CFO; and Steve Hay, our General Manager of Marketing.

So diving into the quarter, I guess, it'd be remiss of me not to mention the most important thing that's happened around the company for quite some time, albeit happening after the end of the quarter, and that is the announcement of the proposed combination with Energy Fuels, and I'll just do a brief recap on that in a minute. But obviously, that's the most significant development we've had.

Beyond that, the Kwale mining operations have been progressing -- or performing quite consistently. We successfully completed the relocation of 50% of our mining capacity from the South Dune down to Bumamani. That all went well. We've announced in this quarterly an upgrade, if you like, to our FY '24 production guidance to reflect sort of what we've seen over the last quarter or so. And we've released the production guidance through to the end of the Kwale operations mine life, which is December 2024. We've now got that full picture out in the market.

And the other development we'll talk more about is the engagement we've had with the government in Madagascar and the Toliara project fiscal terms. The discussions over the last quarter have been quite intense following the reelection of the President, and I'll give you a bit of color on that in a minute.

But firstly, looking at the Energy Fuels combination, so Energy Fuels have agreed to acquire 100% of the shares in Base by way of a scheme of arrangement. That's the mechanics of how it's happening. What we're really doing is bringing together two sets of complementary assets and expertise to create a global leader in the critical minerals sector with a focus on rare earth elements, uranium and heavy mineral sands production.

I guess, the focus of it really has been linking up the monazite supply from Toliara with the rare earth processing capacity and capability at Energy Fuels, White Mesa Mill in Utah. It's a pretty unique facility in Utah. And they've got expansion plans for that to take it up to being able to process somewhere well between 30,000 to potentially 50,000 or 60,000 tonnes a year of monazite and, in that context, putting your foot on supply is critical. So that kind of motivated it.

The other reason that this transaction made a lot of sense to them was that in pursuing monazite feed, a lot of monazite occurs in mineral sand deposits. And by acquiring Base, not only do you get the Toliara project, but you get the Base team with the experience in developing and operating heavy mineral sand assets, which then opens up the ability of the combined group to develop further supply sources of monazite, but with a set of other commodities sitting around it in uranium and then heavy mineral sands.

So in terms of the transaction, Base shareholders will receive 0.026 of an Energy Fuel share per share as well as a $0.065 special dividend payable by Base Resources on the basis of the share prices prior to the announcement that implied an offer price of a bit over $0.30 per share and a very significant premium of 188% to Base's last closing price.

So as a number of commentators have noted in -- it's almost an unprecedented premium for a transaction of this sort, but reflective of the quality of the asset and the sense of urgency that Energy Fuels have to put their foot on, on supply and the value that can be created from it.

Energy Fuels, its background is the largest producer of uranium in the United States. They've been operating their conventional uranium, vanadium mill in the United States at White Mesa Mill. It's been operating since the '80s. It's the only operating conventional uranium mill in the United States. And since '21, they've been successfully producing rare earth products from monazite feedstock and, as I said, are now looking to dramatically expand on that capability.

Certainly, from a Base shareholder perspective, a lot of benefits around this transaction, and the obvious one is the immediate and significant premium. The second is we're creating a combined group with a very strong platform for funding development of the Toliara project. The combined group will have a market cap of around USD 1.2 billion and significant trading liquidity. But it also, I guess, pitches very directly into the U.S. government critical minerals funding support narrative.

And if you look at what our options were as a go-it-alone for Base shareholders to develop Toliara one way or another, it was going to be significantly dilutive to current shareholders, either by way of a very large equity raise to fund the equity component of that project or we were going to need to sell down a very large proportion of the project to make that all work.

So when you run the numbers from a risk and return perspective, this is a much better pathway. It creates the opportunity for shareholders to cash exit given the significant liquidity of Energy Fuels or to retain exposure to a pretty unique diversified critical minerals business.

It's got clear strategic development pathway with the White Mesa production scale-up through a couple of phases to ultimately get into heavy separation at some point. This further downstream development possible and indeed being focused on beyond rare earth oxide production, trying to bring together a full mines to magnet solution for OEMs.

Then there's the monazite and HMS feedstock pipeline to be developed, Toliara obviously being a significant piece of that. But Energy Fuels also have a couple of other heavy mineral sand projects or 49% likely interest in the Donald joint venture -- or the Donald Mineral Sand Project in Victoria for us to focus on building out that monazite feedstock pipeline.

And then there's broader development opportunities across the rare mineral sands and uranium sectors. And having that diversity does provide the opportunity to act countercyclically in each of those -- or capture opportunities countercyclically in each of those areas or each of those sectors.

So from a timing point of view, obviously, as a scheme of arrangement, it's a pretty slow burn. We would see the sort of next major milestone being the scheme booklet being distributed to shareholders in late June, early July. Ahead of that, we've appointed the independent expert, PwC, and also appointed the independent technical specialist in AMC.

There are three key regulatory approvals that we're progressing as well. One is in Australia, we need further approval. And then obviously, federal court approval for the various steps along the way on the scheme implementation. And then in Kenya and Madagascar in both of those jurisdictions, rather oddly, we need to get competition authority and/or Competition Council approval for the transaction, slightly odd, given that Energy Fuels doesn't operate in either of those jurisdictions, but that's the way the legislation is fine with pursuing that.

On the other side of the scheme booklet being distributed, we're then on a pretty defined time line through to the shareholder meeting in late July, early August. And then the transaction implementation would happen in late August.

In terms of the shareholder vote, this transaction has obviously been recommended by our Board of Directors. It's also got the support of our two major shareholders who hold in excess of 51%, and they've signed voting intention statements in support. So that will be absent a superior proposal emerging. They will be voting in favor come that scheme meeting in late July, early August. So there'll be lots to update over the next 4 months, but we're pretty excited about where this is taking us.

Turning back to, I guess, the performance of the quarter around Kwale Operations, as I said, mining operation have moved from the South Dune, so we're now done there. We're in the process of finalizing rehabilitation. And we're now mining exclusively on the Bumamani and North Dune deposits.

Mining tonnes were a little lower this quarter at 3.7 million compared to 3.9 million, largely due to the wind down of South Dune as we depleted those oil reserves. And then there was a two-week period where we are relocating all of the mining operations to Bumamani, so that obviously impacted volumes.

We did see a noticeable pickup in oil grade, 2.4% compared to 2.2% last quarter. We found a high-grade strand in the North Dune that hadn't been in the resource model and managed to miss all of the drill holes. And we've also seen slightly higher grade ore in the Bumamani deposit, a pleasing little win there.

The MSP feed was lower. The MSP feed is kind of not the thing to look at, at the moment in many ways because we're operating the MSP on a campaign basis. We are constrained by how much HMC we can produce. The HMC was higher this quarter at 73,000 tonnes, above 67,000 tonnes for the last quarter, due to those grades and also with WCP recoveries.

But yes, so the MSP is operating on a campaign basis. So we'll see sort of swings and roundabouts on MSP feed. And the thing to watch is our HMC production.

Because of that lower MSP feed, production was a little lower. Rutile was down about 4%, ilmenite was down 14% and zircon was down about 3%. But again, that's a function of the MSP operating on a campaign basis.

From a cost perspective, costs were a little higher at $18.1 million, up from $17.2 million. We did see higher unit power costs. There's a rather dramatic strengthening of the Kenyan shilling against the U.S. dollar over the course of the quarter. It went from KES 157 at the start of the quarter to KES 132 at the end, so that did hit us in power cost. Our operating cost per tonne increased as well due to the higher overall cost, but also those lower production volumes.

Cost of goods sold increased, similar sorts of reasons, but average revenue per tonne was also a little higher, largely due to the sales mix in terms of more rutile and zircon and less ilmenite.

Revenue to cash cost ratio was at 1.7, down a little bit from last quarter at 1.9. It's worth just sort of remembering, in the earlier days of Toliara, Kwale and higher grades were up in the 3s. Toliara, pretty much for its life, will be up over 4. So that gives you some idea of context on just how strong a project Toliara is.

As I mentioned before, we've increased our production guidance. So rutile is now up at 38,000 to 42,000 tonnes for the year. Ilmenite, we've increased that to 145,000 to 160,000, and zircon's up a bit from 15,000 to 17,000 tonnes.

The 2025 guidance, so that takes us right through the end of the mine life in December. We'll see looking at rutile at 17,000 to 19,000 tonnes for that 6-month period, ilmenite at 55,000 to 63,000 tonnes and zircon at 5,500 to 7,000 tonnes. That's assuming a mining volume of 6.3 million tonnes at 1.9% HM. It's obviously the greatest tale out of it as we get towards the end of the ore body.

So as we get to the end of that ore body, we've got quite a comprehensive mine closure plan. It's progressing well. We've got a clearly understood pathway to closure, and we'll probably publish a bit more about that in a quarter or so.

In terms of extensional exploration in Kenya, we have got a couple of areas we're keen to have a look at. How that feeds into our decision-making around the final shape of Kwale closure is yet to be seen. It really depends on how much work we can get done over the next sort of 9 months.

We have seen a partial lifting of the moratorium on the issuance of licenses, and we've got a number of prospecting applications. There's eight that are in the system. Quite a number of them have now been approved by the Mineral Rights Board and awaiting the final step through the approval of the Ministry of Mines to get those issues. Working on that because if we are going to factor it into our thinking, we need to get on the ground quickly to do some reconnaissance work to really understand whether we've got any real potential there.

From a health and safety point of view, again, another stellar quarter. We had no LTIs, no recordable injuries. So we're continuing with our frequency rates of 0 per million hours worked across both of those metrics, which is a pretty remarkable performance, but one that we've kind of become used to expecting from our operations in Kenya.

So with that, I might turn it over to Steve to give his insights on the market.

[Stephen Hay, executive]

Thanks, Tim. Yes, look, so overall, it was a very stable quarter for us and our markets. Pricing outcomes actually were slightly better than we had originally expected for the quarter.

On rutile, the Western pigment producers have recently announced a very positive start to 2024. They've had some good sales volume growth in the March quarter. And so far, through the June quarter, sales are looking good as well. So as a result of that, the Western pigment producers are again ramping up their production rates, and that's fueling improved demand for rutile and the other high-grade feedstocks.

The excess inventory of those feedstocks that had built up in previous quarters is now clearly being run down. And the suspension of retail mining in Sierra Leone in March is likely to see rutile market conditions tighten significantly, as we move towards the middle of calendar year 2024.

On ilmenite, Chinese pigment exports have continued their strength, which is maintaining strong demand for ilmenite. The potential for new tariffs to be applied to Chinese pigment imports into Europe is helping fuel some stock build of Chinese pigment in Europe through the first half of calendar year 2024. And we expect the June quarter to remain firm through ilmenite, with the outlook beyond that, really, depending on the developments in the Chinese domestic economy and the ongoing export opportunities for Chinese pigment.

And then finally, on zircon, restocking of zircon in the major markets has supported an improvement in demand through the March quarter, and that has stabilized the market after a few quarters of price declines. The June quarter contracts that we've entered into now have been agreed at slightly better prices than we had for March quarter contracts. And beyond the June quarter, the zircon market really continues to depend on how well the economy is in the major markets of China and Europe perform. Thanks.

[Timothy Carstens, executive]

Thanks, Steve.

So turning to Toliara. So backtracking a little bit, so in early part of last year -- well, actually, if you go back one step further to 2022, with the COVID restrictions lifting in Madagascar, we were able to get back into country and really, really started the detailed negotiations with government at a Presidential level on Toliara fiscal terms back in the last quarter of 2022.

But relatively early in 2023, we've reached the point of sort of in principle agreement on what fiscal terms would look like based on, I guess, the underpinnings of what was then the mining curve.

Subsequent to that point, and before we were able to get it implemented, we had a couple of things that started to interfere with that and eventually put that on ice for a period. One was the approaching Presidential elections and the very significant risk of the project becoming overly politicized during that period and then becoming a problem for us to sort of manage our way through on the other side.

And the second was a revised mining code being pushed through and adopted late in the second half of last year, which basically doubled the royalties on mining mineral products to a level which was 4%, which was what we had agreed previously with the government earlier in the year as being what would apply to Toliara.

So we kind of needed to rebase our discussions with government -- with the benefit of that mining code. The Presidential elections went through in November. The incumbent, Rajoelina, was reelected. And then towards the end of December, his team reached back out to us to reinitiate discussions again.

The Minister of Mines was reappointed. And since then, we've had a lot of very public positive statements coming from the government about the importance of getting the mining industry going and specifically the Base Toliara. The Toliara project is one of the absolute priorities to get moving.

We've certainly experienced that sense of urgency in our engagement with the government. We've made very good progress. We're actually now working with the Minister on getting the various LGIM certification processes and the documentation required to lock down fiscal terms, getting that all moving.

And we're expecting that we will see some real public progress -- I guess, public announced progress following the legislative assembly elections that are coming up at the end of May, I think the 29th of May, if I recall. Once we get past that, we would expect to see this move ahead at a reasonable rate of knots given where we're at.

The new mining code, as I said, it does increase the royalties quite significantly from 2% to 4%, but that's entirely consistent with the 2% to 5%. But that's entirely consistent with what we'd assumed in the DFS2 assumptions, albeit the royalties are slightly higher. We did anticipate a 4%, and it's bumped up to 5%. But no, nothing in terms on that.

There is another step to go in the fiscal -- I guess, in the mining code. The code itself is one thing. They have a secondary document that needs to come forward. It's called the implementing decree. We in Australia would think of it as being the regulations that provide a lot of the detail around how the mining code will be implemented. That is in an advanced stage of draft with the Ministry of Mines, and we're expecting to see that come forward fairly shortly for consultation.

There has been some high-level consultation, but without the benefit of actually seeing the specifics. So we'll see what that looks like. It's needed in order to provide clarity around some aspects of the mining code that aren't clear. But in the absence of that implementing decree, we still have an approach through the use of an investment agreement, whereby we can clarify what we need to clarify to still be able to move forward without it.

So few moving parts, but the parts are all moving in generally the right direction. Once we get the suspension lifted or the fiscal terms agreed and then the consequent lifting of the suspension, we see about 11 months of work to get to an FID. And then there's a 27-month construction and operationalization period to get to the point of wave and goodbye to our first vessel. So likely to be, at some point, I guess, out at the very end of 2027.

At the end of the quarter, the 1st of March, we had a net cash position of USD 83 million in the group. No debt. We spent $2.5 million in the quarter on the Toliara project and $2.3 million last quarter. And most of -- or a significant proportion of that spend is in country or on advisory work on government engagement or indeed on the progression of the PFS work that we've been doing on rare earth processing.

Obviously, in the context of an Energy Fuels transaction, assuming we get to the point of that closing, which we would expect, you would expect to see that expenditure obviously being cut down.

So looking forward to next quarter. From the Energy Fuels transaction perspective, the next milestone will be that scheme booklet coming out to shareholders in late June, early July. Probably, you're going to see mixed product prices. We are seeing mixed product prices. As Steve mentioned, rutile, a bit lower; ilmenite, stable; and zircon, a little bit higher around [indiscernible].

We're hoping to see those Kenya exploration licenses approved or at least progressed, so that we can get on the ground and do some work. We're ready to go. It won't take us too long with a focused auger campaign to understand what it is we're looking at and whether there are opportunities that need to be factored into our thinking on how Kwale closes.

And then, as I've said, we're expecting pretty significant government engagement on the Toliara project immediately following the May elections. So I think June, July are going to be a pretty important period for Toliara.

So with that, we might turn it over to questions.

[Operator]

[Operator Instructions] There are no questions at this time. I would like to hand the call back over to Tim for closing remarks.

[Timothy Carstens, executive]

Well, thanks, everyone, for joining the call. If you do have any questions that you'd like to explore with us directly, please feel free to reach out to any member of the team. And we look forward to discussing what's a pretty exciting pathway forward for Base with you also.

[Operator]

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.