Nordic Mining ASA

OSE:NOM

Earnings Call Transcript 2019-Q1

[Ivar Sund Fossum, Chief Executive Officer]

Good morning, and welcome everybody to first quarter interim presentation in Nordic Mining. My name is Ivar Fossum, I'm the CEO; together with CFO, Birte Norheim. We will give you the presentation this morning. We will follow our standard agenda and sequence for the meeting. So after I have given a couple of introductory remarks, we'll go on and Birte will give you the financial highlights and tell about financing. And I will come back and tell you more about the status and give an update on the Engebø and the Keliber projects. The presentation will take approximately half an hour, and we will follow up with a Q&A session after the presentation has been finalized. So also to those of you following our webcast, please note that you can post questions via web, and we will read those here in the room after we have finalized our presentation.So let's move on. I want to give you a couple of highlights to start with. And first of all, the record profit, which stems from our investment in Keliber in Finland. I think this really emphasizes the value assessment of these mineral projects, which are now coming towards production. Then secondly, it's also a pleasure to confirm that we now have completed all the major test work at Engebø. That has been a lengthy and demanding exercise for us. We have seen the need to carry out extra test work for good reasons. We needed to confirm that we can produce quality products at good recoveries, good quality along the lifeline of the project. And we have seen during the fall last year and also this winter the need to carry out extra test work in that regard. That has caused some delay and some extra capital needs, which we will come back to. But we feel confident that now is the time to do this work rather than to have surprises later on. So having put all of this work behind us, the Engebø DFS are progressing into its final phase, and we will come back to that later in the presentation.We have also carried out 2 rounds of product testing for our garnet products, and I'll touch up on that and also I will give an outlook on the markets. I like to underscore that we feel very privileged that we now have 2 strategic assets that are approaching construction: over 100% projects in Norway, the Engebø rutile and Garnet; and our stake in the Finnish Keliber. They are high attractive mineral projects and are unique in each their way but also have something in common. They are both kind of pioneers in Europe. Engebø will be the first producer of industrial garnet, the second producer of rutile while Keliber will be the first producer of high-quality lithium hydroxide for the battery markets. And I like to also underscore location for both of them. They are both close to ocean waters, which is also a merit in general when it comes to mineral projects.For some of those who might not know us so well, I just want to highlight a couple of aspects with the Engebø deposit. It's a rare deposit, a combination of high grade rutile and ilmenite garnet. It's a huge ore body, outcropping at the top of a small deal. It's located next to deep waters and most of the ore deposit is above sea line. And all of these parameters are very positive when it comes to developing an ore body into a long-term industrial industry.So with those introductory remarks, I'll give the floor to Birte, who will take us through the financials.

[Birte Norheim, Chief Financial Officer]

Thank you for that, Ivar, and I'm quite pleased to be able to present the best results, the best quarterly results for Nordic Mining ever. And we do have an increase in the payroll cost, which is -- compared to last year, which is partly due to an increase in headcount as a matter of consequence of the activities in Engebø. And also partly because last year, part of the payroll cost was capitalized as part of the drilling program that was executed last year and was not repeated this year.That brings the operating loss to NOK 15 million for the quarter. However, the key item on the profit and loss statement is the gain on investments of NOK 98 million relating to a reclassification of Keliber from an associate to a financial asset. That is based on a fair value through profit and loss classification, which requires initial recognition to be based on a fair value. And the fair value we have based that NOK 98 million on is the latest subscription price in the equity issue.Also on the balance sheet, you will see that the key changes compared to prior quarter is related to Keliber. So as a financial asset, we have recognized NOK 113 million compared to NOK 21 million as an associate in the prior quarter. The profits in the quarter also strengthens the equity, which increases to NOK 167 million. The cash and cash equivalents amounts to NOK 35 million. There's still no interest-bearing debt on the balance sheet.As for the financing plan, as Ivar also mentioned, you will note that there is an increase in the capital requirement compared to what we communicated in October in relation to the equity issue. That is largely due to the extended test work undertaken on the DFS and also the pushback in the expected time of completion from mid-2019 to second half of 2019 as we communicated in February in relation to the Q4 presentation. But I think it is important to underline that the DFS do represent an important milestone in respect of derisking the Engebø project, and we also expect that, that will form a basis for the further financing of the project.So we are currently working on several options, and we're working to mature each of these. So we are in concrete dialogue with respect to divestment. And I'd like to point to the financial statements where the value generations that has taken place in Keliber as the project has been maturing has been crystallized. We're also working on strategic investors, including offtake partners' participation, and it's also possible to go to the market either through a private placement or a rights issue. The capital required from the DFS through the FEED phase towards construction is NOK 50 million. With respect to the construction financing, we have announced that we engaged Northcott as our financial adviser on the debt side, and we are now working on preparatory processes based on the PFS, which includes assessing the optimal financing mix, identifying source, most likely sources for financing, and we are now starting to schedule introductory meetings on this side of the summer with those potential sources. And with respect to construction financing, I think it's again important to underline that the offtake partners that we are engaged with intends to participate with substantial stakes in the construction financing.So I think that's it for the financing side. Ivar?

[Ivar Sund Fossum, Chief Executive Officer]

Thank you very much, Birte, and then we'll move on to the agenda and I will give you an update on where we are on the Engebø project. It's a range of various product development activities going forward and which have been completed and carried out during the last quarter, and I will touch upon most of these going through my presentation.First of all, coming back a little bit to the test work which we just sort of put behind us. It consists of 3 major testing program. First of all, the bulk program, which is the basis for the DFS as such. That program is being validated in a separate lab, which have been carried out to really quality assure, if you like, the program. And finally, we are doing an extensive variability program, which has just been finalized in order to really test that we are building a process plant that can handle the variations in the ore through the decades of operation. And as we speak, our team and the Hatch team are crunching the summary of all this test work, which will be reported and will be a core sort of input to the DFS report in the fall this year.So altogether, we have optimized the flow sheet, both with respect to rutile and garnet, and it sounds easy when we have a rich ore with a lot of both but it's not straightforward, and we feel the need to really be on the safe side of this work. In addition, we have -- some years back, we did some initial product testing on our garnet with very promising results, and that's the reason why Barton also engaged in Nordic Mining and the project. Now we have carried out 2 more product test this spring, also with the help from Barton with full-scale water jet equipment, and the results are very comfortable. The Engebø garnet performs in line with the top products in the market, and that's also sort of an important confirmation to us going forward with our work.We are also making a new set of rutile product samples, which will be investigated and analyzed by our offtake partners in Japan. So that is an important work also for this phase. Engineering is going on in a lot of areas, directions. We have a big group from Hatch sitting in Johannesburg and actually designing part of what you see on this picture, making 3D models of a lot of other process plant, all the service area, the open pits, the haul road and so forth. And they are also making complete sort of pipeline and instrumentation diagrams for the whole process itself. So it all comes together and makes the basis for a new CapEx and new OpEx estimates to fuel also new economic analysis for the DFS.In addition to what's going on in the project itself, we have carried out significant work on the infrastructure. So the engineering for the moving of the country road at the process site has been carried out. The supply of fresh water pipeline from the neighboring municipality into the Naustdal municipality have been carried out as well as engineering for making our own power grid at the process plant to be connected with a regional power grid to fuel the process plant with hydropower.And we are in a quite intense process of issuing a request for quotations to the market. And the feedback from the market will really give us sort of the hard facts in terms of what are the potential suppliers, what will be the pricing that we will need to see in a new CapEx for the plant. So previous studies have been on estimates. Now we are on real quotation level. So that's a major, major step forward. And we see that the project can be built both by local, regional, national and also a variety of international suppliers.The Norwegian law requires zoning plans in detail. That means that they need to see the shape and the height of buildings even though we have a zoning plan approved. So that is -- the detailed plan is now issued for hearing in the Naustdal municipality, and also the zoning plan for the supply pipeline of fresh water is issued for hearing in both the neighboring community or municipality and Naustdal. This is important work and as you can imagine also, kind of a lengthy process because of hearings and political resolutions, which are scheduled to happen before the summer vacation this year. The engineers in Hatch have been scrutinizing the site layout for the process plant, and there has been carried out a few modifications, which gives us more flexibility when it comes to the sequence of installation. We have also reduced some of the process area so that we have fewer modules and all sort of leading to a less footprint area-wise in the process plants.I want to say a few words about local stakeholder communication. We had a lengthy period carrying out permitting for the project where we had a fairly high activity level in communication and information as such at all levels. We are now reintensifying that work and sort of preparing ourself and the community to become a long-term cornerstone industry in the Naustdal municipality. So we are receiving visitors and having cooperation with local schools and universities, politicians, political parties but also participating in regional business fora and guiding also the local vendors to how they can sort of fit into the project, which will start sort of come into its construction phase. And along with the construction, we will also engage the local community in the environmental monitoring, both in the baseline studies and the long-term monitoring after we start production.So summing up a little bit timing-wise, we see there is still a lot of parallel activities going forward, and we have been dependent on finalizing the test work, which again can give us the feedback from the market and then sort of building up to a new economic analysis. And all of this is planned to be finalized in the fourth quarter of this year.Just a few words on our offtake partners and we are continuing these discussions both with regard to garnet and with regard to rutile to our Japanese consortium, and it's clear now that they will take the majority of our rutile production from Engebø. And we will discuss sort of a corporation both with regard to offtake and with regard to project financing with them in the months to come.Our cooperation with Barton has been a long-term and very positive one, and they have also become, as you see, a significant shareholder in Nordic Mining. And we think it's a very, very good basis to have 2 long-term partners which really see the strategic benefits in engaging in the Engebø deposits.Few words about the markets. It's still a deficit when it comes to new production of natural rutile. We also see hampering of synthetic slag and synthetic rutile because of problems with smelters and so forth. But the major picture is dominated by reductional output from the huge producer, primarily in Australia, but we also see tail off in some of the mines in Africa. And this tight sort of supply side also firms the pricing regime. And TZMI, the advisers on titanium feedstocks, are hiking again up the price from $1,092 to now around $1,100 going forward. And you see from the graph that the outlook is generally on the positive side when it comes to pricing of high-grade titanium feedstock.So in perspective again, looking at finalizing DFS fall this year, we will entering a crunching phase where a lot of activities will fall in place before we kick off construction. We will establish our own owners team in Naustdal. We will put together debt financing, equity financing and offtake agreements, which all have to sort of fit into each other to make a robust financing plan for the projects.So that was my words about Engebø. I'll give a few comments about Keliber, which have a very, very positive development. As you know, we have been a shareholder since 2008 and been developing Keliber to become now a very mature and soon ready to produce project in Finland. And it's interesting to see that their timing is quite fortunate that are now just in time to really sort of be a strategic supplier to all the battery manufacturers which are having specific plans to establish battery manufacturing in Europe. They will not cover by far that demand, but they will represent a local high-quality producer with excellent logistics to many of these battery manufacturers.They published their reviewed DFS in the first quarter of this year, and they have done some interesting shifts in their product configuration. First of all, changing from lithium carbonate to lithium hydroxide, which appears to be the preferred feedstock to modern batteries. And then secondly, also splitting the plant in 2, having a beneficiation plant in the forest where the deposits are and then a chemical plant at the coast. And this gives interesting benefits for Keliber and has resulted in very, very strong key economical parameters for their new DFS.Along with this work, Keliber has carried out exploration drilling exercises constantly. And as we see down to the right, they have increased their resource base constantly, and I'm confident that this exploration work will go on, more or less constantly, and certainly into the production phase of Keliber because it is a very huge and potential area for new resources around sort of the current mining areas of Keliber.And then finally, on the ownership side, you see that Finnish state has entered Keliber as a majority shareholder, which I think underscores again the national strategy to engage in this type of minerals in Finland. So that finalizes our presentation, and we'll go over to the Q&A. Just a final remark on the high-purity quartz. We are having a good dialogue with the landowners on the quartz. We haven't been able to fully meet the expectations at this level, but we will certainly follow and make sure that we should be able to continue our cooperation.So I'll leave it with that, and we open up for questions, both from the room and also from the net. Thank you.

[Hans Lund, Analyst]

Hans Lund, Clarksons Platou Securities. Just in terms of the additional capital need in order to get you to an FID of the Engebø project, you're saying that you have NOK 40 million in DFS costs and NOK 50 million in order to get you through the FID FEED or the FEED phase. How should you kind of think about those numbers relative to your cash position and your potential additional capital need?

[Ivar Sund Fossum, Chief Executive Officer]

Now there is no doubt that there will be need for more capital, and as Birte explained, we are sort of looking at many different options. And I should underline that we are, in terms of strategy, a bit shortsighted. I mean the DFS is a major milestone for us and can open up even more options also with regard to the remaining financing, both through the FEED phase and into the last work before we actually kick off construction where there are a lot of different financing needs. And these figures are not purely related to costs for DFS and cost for FEED. There are also work related to preparing for debt financing. There is a certain buildup of our own organization and certain amounts of contingency. So to sum up, the DFS is for us sort of the next very, very important milestone going forward.

[Hans Lund, Analyst]

The NOK 50 million related to the FEED, so does that include SG&A and just kind of get you through the year?

[Ivar Sund Fossum, Chief Executive Officer]

Yes, not only through the year. It takes us all the way up to start of construction.

[Hans Lund, Analyst]

Yes. And then just on Keliber, I mean given the recent interest in lithium assets around the world, we've seen a lot of transactions at -- done at the premium to where lithium owners have been trading. Are you seeing any increased interest in your stake in Keliber recently?

[Ivar Sund Fossum, Chief Executive Officer]

There is a general strong interest around lithium and particularly in Europe. And that is constantly increasing the way we read it. And we will sort of evaluate our stake in Keliber along with other possibilities in terms of financing.

[Hans Lund, Analyst]

And then the last one for me. Just in terms of the timing of the financing of Keliber, is that changed? Or is that something you look to do, was it late summer this year? Is that...

[Ivar Sund Fossum, Chief Executive Officer]

Keliber has engaged to 2 advisers with regard to equity of their construction financing, and that work is ongoing. They still have a target to start construction within this year. And looking at these 3 in combination, I think it's obvious that it's quite a bit of work going on with regard to financing of Keliber as such.

[Lars Kristian Grøndahl, Senior Advisor]

Okay. Are there any other questions from the audience here in Oslo? If not, there is one question from, for now, from the video audience. It's maybe a little bit similar to what Hans Lund asked. From [ Fred Eserlon ], question: According to the presentation, Nordic Mining needs NOK 40 million to complete the DFS. Does this amount include the current cash level?

[Ivar Sund Fossum, Chief Executive Officer]

It does. It will be an extra capital need. Half of it roughly directly as a consequence of extra work and delays of the DFS, and the other is contingency and finance work, which we are pulling towards us in order to prepare for construction finance.

[Lars Kristian Grøndahl, Senior Advisor]

Okay. There are no further questions received from the video audience. Are there any more questions in the room?

[Ivar Sund Fossum, Chief Executive Officer]

Thank you, Lars. And I think we'll say thank you very much to all of you which have followed. Thank you.