Nordic Mining ASA

OSE:NOM

Earnings Call Transcript 2019-Q2

[Ivar Sund Fossum, Chief Executive Officer]

All right. Then I think we start. Good morning, and welcome, everyone, to Nordic Mining's Q2 interim presentation. My name is Ivar Fossum. I'm together with the CFO, Birte Norheim; and Project Manager, Kenneth Angedal. We will take you through the presentation this morning. Please note to all of you on the web that you can post your questions also while I speak, and we'll go through and have the questions and discussions after our session that will last approximately 25 minutes. We have more or less a standard agenda today. We will focus mostly on the Engebø rutile and garnet project but also give an update on Keliber in Finland. And a little bit special today, I will leave the word later on to Kenneth, who will share his thoughts with you on how we envisage to actually build the Engebø project. So a little special session on that.Before we go to financials, I want to touch upon a little bit of the highlights. First of all, the approval of the detailed regulation plan for the whole of the Engebø project, which was carried out yesterday by the local municipality. Also, previously this month, our application for the operational license were issued for hearing, which will last until mid-September. Thirdly, we have during the last month see further optimization of the mine, sort of excavation scenarios from Engebø, giving us more ore. And I'll come back to that a little bit later in the presentation. And we are about to finalize all of RFQs going out to vendors in the market for their contract build packages. So also a few words about the market. Since 1.5 to 2 years ago, we saw a start of a firming trend for high-grade feedstock in the titanium space and also rutile. That continued from '18 towards '19. We saw an increase of approximately 20% during that year, leading prices at an area of around $1,100 per tonne, as we speak. And we recognize that guiding from larger producers are indicating a further increase of between 6% and 8%, which will lead the rutile price by year-end of approximately $1,200 per tonne. So still a sort of a firming and positive trend for the high-grade feedstocks, including rutile. On the garnet side, the difficult situation out of -- with supply out of India prevails and have been doing so for at least 2 years, and it seems to continue for a number of years going forward due to illegal mining, due to radioactive content of mineral sands, which actually sort of impacts garnet but also zircon and ilmenite. There have been more lower-quality garnet coming out of China, which has changed the sort of the market a little bit. And U.S. has imposed import tariffs of 25% for Chinese garnets coming into them through North America. So all of this creates kind of a dynamic in the garnet space, and I certainly wish we were in the market because it's in desperate need for a high-quality consistent producer like we will be from Engebø. Towards the feasibility study, we will continue our market intelligence. And into the study and into our analysis, we will, of course, bring more details into that space, and we will update you on that later on this fall.So with these few remarks as an opening, I'll leave the word to Birte, who will take us through the figures.

[Birte Norheim, Chief Financial Officer]

Thank you for that, Ivar. The operating loss for the quarter was NOK 20.7 million, and you may notice that, that is an increase compared to previous quarter. That relates to the high activity level ongoing on the DFS. During the quarter, there's been a number of quite labor-intensive processes ongoing, including preparation for procurement, engineering and similar that Kenneth will cover more in his part of the presentation. You may also note that NOK 0.4 million in gain on investment. That relates to currency effects on our holding in Keliber. We have applied the same basis for valuation in euros in this quarter as we did in the first quarter. That was based on the share issue price of EUR 49 per share on the share issue executed by Keliber in February. That provided for an implied value of Keliber of EUR 63 million, which is equivalent to EUR 12 million for our holding, which equates to NOK 113.5 million as per end of the quarter.On the balance sheet, there is not significant changes compared to previous quarter. You will recognize the NOK 113.5 million in the value in our investment in Keliber and also that our equity has increased to NOK 172 million following the share issue executed in May, partly offset by the loss for the period.On the financing plan, our remaining preconstruction capital requirement is approximately NOK 70 million. That is a reduction compared to our presentation in the first quarter, largely relating to the share issue that we executed in May. You may also have seen that this morning we issued a notice for an extraordinary general meeting, where we proposed for a rights issue of up to NOK 35 million, which is then directed towards our existing shareholders. And we also asked for an authorization to the Board of Directors to issue up to 20% of the share capital, which is aligned with the new rules for prospectuses. So obviously, the completion of the DFS will represent a major milestone for the company, and we expect that, that will improve the potential to execute the alternatives to fully complete the financing of our preconstruction need that we have and are continuing to be working on. That includes possible divestments, strategic investors including offtake partners and also equity issues.On the construction financing side, we have started the preparatory work. You may recall that we appointed Northcott as our debt adviser in January. And we also started with initial meetings with banks and guarantors in Norway and also in Europe. The negotiations with the banks will only commence following completion of the DFS, but we have still found it quite useful to meet with the banks and hear how they view the world and also to make sure that they are familiar with the project when we are approaching them for the negotiations following the DFS.I will also underline again that the offtake partners are -- intends to participate with a substantial portion of the debt and equity on the construction financing because I think that will form a solid starting point to fully finance the construction project.So I think that's it, Ivar.

[Ivar Sund Fossum, Chief Executive Officer]

Thank you, Birte, and we'll move on. I'll give a brief introduction to Engebø before we leave the floor to Kenneth. And let me just come back to a few of these highlights. The detailed regulation plan, which for us sort of underlines the political embracement of our plants, which we have been developing over the years, and it is a comprehensive detailing on how we want to utilize the site in many different ways, and I'd like to congratulate the local team at site. It's been a very comprehensive exercise, socializing with the advisers and the local municipality to bring the regulation plan at the level where it is. And it is -- to highlight a few things, it's actually about getting a smoother and better access to the open pit, replacing one road with a smaller tunnel so that we get a less visible access to the pit. It's also about establishing better infrastructure in terms of crossing roads by the process plant down at the site and also putting like power supply, water supply in the ground and finding optimal ways for access roads and the whole area as such. And finally, which is a bit new, is to allocate for the possibility of strategic structuring of ore, stockpiling part of the ore while we mine out the open pit.So also on the mine optimization, we have seen since PFS that there are room to both schedule the mining differently but also to gaining more ore out of the open pit within the limitations that we have in the regulation plan. So this optimization plan has been going on, and a lot of simulation work have been carried out, and we see that we can extend the mine life of the open pit with at least 5 years. And we will come back to even more details of that optimization in the DFS. We also see that we can reduce the waste rock. So these are positive indicators for the detailing of the open pit mining.We have finalized engineering for the DFS and also specified the equipment, so that is sort of the basis for going out in the market to ask for prices. And we are about to finance it, a bit delayed because of summer holidays and some of the vendors have asked for extension to give their bids. But generally, I would say that we recognize strong and good interest both from local lenders, from national lenders and also internationally.So a bit guiding on timing. We are extremely focused on putting together our DFS study. It's such an important report, which will back our project financing going forward. And as you can see from this graph, we are sort of approaching the final task in putting together a new financial analysis for the whole project starting with CapEx, new OpEx analysis and sort of optimizing the whole project from a market sort of building perspective rather than fairly rough estimates, which we had in the PFS study. And then when the DFS report is finalized, it will be a transition into activities, FEED towards construction, but also in parallel with talking more to banks, bringing their independent engineer on board and liaising with the lenders to get commitment on lending capital. That will take some months, we see that from other projects, before we can go out and put the equity on top. So that will bring us into the mid, at least, of 2020, and we'll guide more on the timing. We are now sort of in the discussion both with our strategic partners but also with other possible lenders on the timing of that exercise.So I leave the introduction there. And Kenneth, you can go on and share a little bit of thoughts on how we want to build the project, please.

[Kenneth Nakken Angedal, Project Manager of Engebø]

Thank you, Ivar. So Ivar has explained a little bit about what is ongoing from engineering, from procurement point of view. And the transition from the engineering in the DFS into FEED and construction is a critical item. I will focus on the construction at the moment and try to explain you where we see the picture right now. So from execution model point of view, as also stated in the PFS, we are seeing EPCM as a preferred option from execution model point of view. We will have a team, which is strongly involved in the project from day 1 in all phases and also with all disciplines. We will create a strong collaboration not only between Nordic Mining and the EPCM but also with the major contracts. This is important to make sure we have a partner focus instead of a client-supplier focus. This will help us to resolve the challenges that might occur in the construction. When we have been designing throughout the DFS, we have a high focus on efficient construction and also operation. We have significantly changed the process area, which I will come back to, by going with modular plant instead of a stick build at site. We have made sure that the process plant itself is designed for a high level of automation, and we are also doing systematic design through all the equipment and the functionality of the system to cater for digital solutions as part of the operation. This can be energy management, process, performance management and also environmental monitoring. So this is some of the background in what I will tell further on. If you look at the overall site plan that Ivar showed you earlier, we can already now see how the different contracts from a civil point of view and also from a supply point of view can be bundled. And this is how we will create the major contracts that will firm up the project organization. So we see right now there's a civil and earthwork potential to go all the way from the pit to the service area, down to the access road and also a county road and even preparing the process plant area as one big contract. We also see the need to have the modules built by one yard, to have consistent quality, safety and, of course, reliability on the transportation and delivery of the modules to site. In addition, there is several electrical and automation packages, which we see the benefit of potentially combining into one to make the interfaces more easy and to also reduce the time and engineering in relation to getting these packages together.When it comes to more specific equipment, we also see a potential to make sure that the comminution part of our process is from one vendor. This helps us with product quality and also the performance guarantees on the equipment that we will buy. So these are some of the things we see already now, and we are still working with consolidating more of these packages at the end of the DFS. If you go a little bit more detail from the overall layout, we will have our underground crushing chamber consisting of a primary crusher. We will have some important intermediate silos in between the primary crusher and the secondary crusher. This is to make sure we have the flexibility on the operation and to be able to process and produce 24/7 all year round. Our mining will consist from morning and evening, but these silos enables us to process and produce all year round.If you continue into the modules itself, we have now really used the latest technology to design these modules. They're in full 3D, and they will be handed over to the module yard so they can continue with the drawings they need to build the modules. These modules have also been designed for the construction, the efficient construction, transportation and even operational maintenance. So we've really had focused on the lifetime of the plant instead of in the short time -- short term to make sure we build it simple and easy, but we have the life-cycle cost in our mind. These modules are in different heights. They will be in different places of the plant, the highest one being around 36 meters. So these are substantial modules even though they are compact.If you go over to more details on the process side, the significant change is, as mentioned, that we do modules instead of stick build of the plant itself. This has enabled a very compact design, which gives us options within operational flexibility, and one example of that can be that we now have an options to have an emergency stockpile between comminution and process. So if we have maintenance or failures in the comminution side of our plant, we can still produce both rutile and garnet for several days.Another important point is that when we construct our construction schedule, which is supporting the 2-year construction of the project, we have really gone into the details. So we have all equipment, the lead times, and this is used to make sure that the 2 main items in our construction is prioritized: one is to move the county road; and the second, to have control of the modules. So the modules has a large tent of equipment. The module yard will build the modules and supply all bulk materials. Then we as a company will procure the detailed and specific equipment for these modules to support the flow sheet. What is then done is that we make sure through the design that we have the possibility to build the modules according to the requirements of installation on site. So what we really have catered for in the layout now is to be able to transport the modules from the quay to the site in right order. So one of the key elements for construction is to move the road and get access to the site. So that is kind of one of the crucial things that we need to cater for. So this makes then the importance of efficient design for construction, transport and operational importance.That was a brief introduction, and I will hand it back to Ivar now.

[Ivar Sund Fossum, Chief Executive Officer]

Thank you, Kenneth. And please note questions to our presentation, and we can answer questions later on. A brief update on Keliber in Finland. We have -- over the years, we have been speaking about the resources on Keliber many, many times, and they have consistently been drilling to get more resources and reserves. And this graph, I think, illustrates nicely sort of the area where they have their various open pit plants. But also you see the gray area in this map indicates sort of the prospective area. So it's a vast potential in Finland, which is completely flat, and I think it's underpinned by this bar graph down to the left that the resource base for Keliber is continuing upwards, as we speak, and which is, of course, very promising for Keliber as a long-term lithium hydroxide producer. A little bit about timing, they're still missing a few permits, but they are working on these permits, as we speak. They intend to move into construction modus by the end of this year by kicking off what they call early works. So that means preparatory work on some of the sites before actually going into full production modus. So an interesting development in Finland. And as you surely had noticed from media, the battery value chains and industry is really taking off. Norway is also engaged by having a lot of passenger boats as hybrids, more ferries on the west coast and even plans for making batteries also here in Norway. So it's a fascinating industry to watch, and we are very happy to be a significant owner of Keliber.So I leave it with that, and we open the floor and the net for questions. And Lars will sort of moderate us if there is anything coming in, and he will get a microphone as well.

[Lars Kristian Grøndahl, Senior Advisor]

Thank you. I suggest that we open for questions from here in Oslo around the table first if there are any. Yes, Morten?

[Morten Normann, Analyst of Materials]

Morten Normann, Carnegie. I think I asked the question before about the substantial portion of the construction financing. Is it more substantial now? Or is it basically the same portion as you mentioned last time?

[Ivar Sund Fossum, Chief Executive Officer]

No, it's basically the same portion, but it matures. I mean we continue our discussions. I think you meant your question related to the strategic partners. And of course, these discussions are moving forward in different dimensions and in parallel with regard to offtake but also related to financing and guarantees. So the portion remains the same.

[Morten Normann, Analyst of Materials]

And one question. You are saying that the new operating plan reduces the amount of waste rock and extends the open pit by a minimum of 5 years. How do you translate that into sort of sellable volumes for the open pit period?

[Ivar Sund Fossum, Chief Executive Officer]

Well, basically, the mine life of the open pit will increase with roughly 5 years, so all of that ore will be put into the process plant. It will be sequenced so that we will have rich ore in first and we will stockpile some of the intermediate ore. And we have the option also to overlap that with underground production later on. But that will be processed, and we will have a continuous feed of 1.5 million tonne of ore to the process plant. So I'm not sure whether that answered your question fully. It will not increase the output from the plant per annum, but it will prolong the production sequence from the open pit. That means that we delay the minor investments for the underground but will also prevail operations with a somewhat lower costs from the open pit.

[Lars Kristian Grøndahl, Senior Advisor]

Any other questions from participants here in Oslo? If not, we have received one question from the video audience, and that's from Andreas Bertheussen. I know him. He's an analyst at Kepler Cheuvreux, and he has 2 questions. Has the company decided to keep its stake in Keliber? Or is it is and near divestment to fund Engebø still an option?

[Ivar Sund Fossum, Chief Executive Officer]

That is still an option is the brief answer to that.

[Lars Kristian Grøndahl, Senior Advisor]

Next question from Andreas, has the banks you have discussions with provided any indication of how much time they will decide on funding the project after the DFS is complete?

[Ivar Sund Fossum, Chief Executive Officer]

They have not been specific on the timing. The preliminary guiding from advisers and I think also partly the banks is around 6 months.

[Lars Kristian Grøndahl, Senior Advisor]

Okay. We have received also a question from [indiscernible]. Congratulation on the progress of the Engebø project. Given the short time to construction financing and the relatively modest financing need of approximately NOK 30 million, why are you only seeking to secure half of this amount in this private placement?

[Ivar Sund Fossum, Chief Executive Officer]

Yes, that's a good question, and we had dwelled on that internally. And there are probably many detailed answer to that, and it's a combination of feedback from advisers, what we have seen in previous issuers, reflections from current substantial shareholders and so forth. But I think maybe, at least the way I see it, the most important reason is the fact that we will finalize the DFS, which is such a threshold in documenting the bankability of the Engebø project. And that's why we are focusing on that leg.

[Lars Kristian Grøndahl, Senior Advisor]

Okay. There are, at this stage, no further question from the external audience. Any additional around the table? Apparently not. So...

[Ivar Sund Fossum, Chief Executive Officer]

Yes. Thank you very much, everybody, for watching and to you here. And then we can go off-line, I think.