Nordic Mining ASA

OSE:NOM

Earnings Call Transcript 2023-Q2

[Ivar Fossum, executive]

Good morning, everyone. It's a pleasure to welcome you to this second quarter interim presentation here with Nordic Mining. We are standing at the construction sites here at Engebø Rutile and Garnet project at the West Coast of Norway. My name is Ivar Fossum. I'm the CEO of Nordic together with Managing Director of Engebø Rutile and Garnet, Kenneth Angedal; and CFO, Christian Gjerde. We will give you the presentation this morning. As usual, the webcast will be posted on our website. Also, the complete presentation is included in the press release published this morning.

So let's start. We have a fairly standard agenda this morning after my brief introduction. Kenneth will tell you more about the status of the project before Christian gives an update on financials. Please also note that you can post your questions during our presentation, and we will have a Q&A session after we have finalized our presentation. There will also be some videos towards the end of the session. So don't hang up after the Q&A session, and you will see more of the Engebø surroundings after we have finalized. So let's move into the highlights for the second quarter. Around me, there are several construction activities. There are heavy dumpers, excavators, mechanical installation, tunneling work, a lot of heavy craning operations. So naturally, we are concerned with safety. And we're pleased to see that our focus has also resulted in no lost time injuries for the second quarter. And we hope and our target is that, that will last throughout the project. So that focus remains on top of our priority. But there are other issues related to ESG and safety also in the second quarter. We published our transparency report by the end of June, a complete document, which you should look at our web page. And we also got our waste management plan for Engebø approved by Norwegian authorities towards the end of June. Kenneth will come back and give you a broad and proper introduction to where we are at the project later on. But I'm pleased to see that construction are according to plan and that we have carried several heavy groundwork operations, which reduces risk for the construction of the project as a whole. So we'll be back to that in a second. The world is in uncertain stage in many ways. Fortunately, we have a niche and a luxury commodity producing rutile and garnet combined, so although the markets in total are a little bit hesitant, we see that rutile demand is well supported by the TiO2 Metal segment as well as the Welding segment. But regarding pigment, which is a GDP-driven product, it's a softer market we see both in Europe and North America. We'll come back with more comments on that one later on. During second quarter, we stepped up activity at Engebø. So we spent almost NOK 370 million during the quarter, and that trend will certainly continue throughout the third quarter as well. There are plenty of new activities to be engaged on during the third quarter. Also, we listed our USD 100 million bond on the Nordic ABM exchange during second quarter, and we completed a [ repair ] issue towards existing shareholders. Finally, and that has been a long waiting period, I should say, the Norwegian government launched their new mineral strategy during June, just before vacation period this year. It's a mineral strategy, which follows to a large degree, the pillars of the EU's Critical Raw Material Act. But the Norwegian government are focusing on 5 distinctive points. First, that the process of permitting shall go faster than now, and we can certainly subscribe to that in Nordic. They want to secure that the mineral industry is also an integral part of the circular economy, improving sustainability in the value chain as a whole, but also to mobilize and inspire private capital to engage in Norwegian mineral assets. As well, they have responded positively to the inquiry from EU and other nations with regard to increased international partnership and cooperation. So our expectation is, of course, that this strategy will evolve and result in more specific action plans as well as maybe also budget allocations from the Norwegian government. So we think it's a good step forward in bringing more awareness to Norwegian citizens and politicians with regard to the importance of minerals, and we think it will be a good base to increase the sector here in Norway, both for players, but certainly also for investors. Finally, we are pleased to confirm that Norwegian state will support Nordic in the appeal case. After 2 losses, there is still an appeal case from AMR that will be heard in the Supreme Court later on this year. The Norwegian state will take a full supporting part roll in those hearings.

A few words about the future. As you know, Nordic has been an early initiator of seabed mineral exploration, curious and forward leaning to what that could hold in terms of mineral resources. We have reviewed seabed minerals, along with land-based opportunities during the last year. And our consideration is that the lead time to establish viable and commercial and sustainable production from seabed mineral resources is excessive compared to what we consider being promising opportunities onshore. So we have decided in the company to look for future and closer opportunities onshore and pause our engagement on seabed minerals. That does not mean that we put it aside. We might step into it later on. There are certain interesting resources at the seabed, but again, the lead time to bring value to our shareholders, we think that is excessive compared to land-based opportunities. So with those words, I will leave the word to continue to Kenneth Angedal, who will tell you more specifically about Engebø, where we are today. Please, Kenneth.

[Kenneth Angedal, executive]

Thank you, Ivar. A little more in-depth on health and safety. We have, in total, project to date, 94 low potential incident registered in our system. This means potential incidents that has not led into further accidents, but we believe that we are doing a great job in awareness and nonconformance reporting to minimize and to keep our LTIs at zero. We have had reported in the previous quarter working heights, but that investigation is now concluded with several actions for us to follow up towards ourselves and our contractors. We did have a minor accident during the summer in a construction pit with no and minor material damage where some rocks flew out of the construction pit down at sea level and hit our workshop at our process plant. This debris was all within our bond -- safety boundaries, so no risk for damages or health loss at present. This is considered our low potential incident in our statistics.

We have maintained roughly 70 workers at site during the quarter with some reduction during summer holiday and we see now a transition where our EPCs are reduction in EPC 1 and increase in EPC 2. So over the next coming months in Q3, we'll also see an increase on-site presence by our EPC 3 and 4. So the numbers will rise slightly in the next quarter in our expectations. So we are at a large change in our projects. During the summer and in July, we released our press release that we finalized a large part of our infrastructure. This means our crusher chamber has been finalized. Our vertical drilling is finalized, and our major road going up to the mountain has been opened up for use. Our process area is ready for construction of the factory, the process plant, which means that we are changing our focus in the project.

We are also doing a significant update of our environmental baseline. We have started this spring and see no changes on the basis of our [ EIA ] done previously in the project. But we believe that it's important for us to be able to document the status both on land and in sea before we start our operations. So a little bit more details. Our underground infrastructure is completed and the civil foundation inside the underground infrastructure is to start within a short time. We have built a large underground crushing chamber for our primary crushing -- crushers and our vertical shaft up to the top of the mountain, which enables us a very low energy usage in the first step of our process. Our owners site team will also increase drastically in the coming months because we are ramping up to meet the changes in our production at site where we now will start building 3 main process plant buildings, which is our key to deliver high-quality products to the market. Another thing we just finalized is that we have fully enclosed our admin building and workshop at our process plant site, which is a major achievement within this quarter. As a preparation for starting up the mechanical installation and building our process plant, we are now currently ongoing significant construction of civils, which means concrete foundations for our buildings. We are building a high -- our process plant buildings are high up to 30 meters and require significant and good foundations for this to be safe and sound in all environmental aspects. As part of what we do, we also communicate with our local stakeholders, and we have recently during May, had a larger conference in the region with large audiences up to 250 people joined where we focused on meeting the question from our stakeholders and actually also opening up for questions from the audience answered on the stage. We also had people from the local and the Norwegian [indiscernible and regional government in the Vestland country to participate and present talking about the importance of the minerals in Norway. A little more details on our progress. As mentioned, our main highlights is that we are now going from construction of infrastructure to focus on production and construction of our process plants. We have a significant increase in engineering progress and construction of EPC 1 and 2 and are expecting to start up preparation work and mechanical installations in end of third quarter. We still remain being on budget and production of start-up in Q4 next year. One of the most important thing for us is to be ready for operation. And we have managed now to almost complete our management team for the operation of Engebø Rutile and Garnet. We are missing the mining manager, which are estimated to onboard during Q3. Our [ final ] manager started first of August, and we have HR coming in first of September. So we are maintaining our plan of ramping up, as you could see in the lower left trend there. We are roughly 20 people in our operational team by September this year. We are also bringing in some technical experts now to join and onboard to support with building up our systematic approach to our operation. In the coming months, we'll also open up 5 to 10 new positions that are estimated to onboard during January '24. In regards to our main technology packages, all or most of them are actually in fabrication with the mill plant to come to site here in November this year already. So the main and big technology packages are on the way. And as previously announced, signed up for the crushing and comminution with Metso and with mineral separation with Mineral Technologies. Then I will leave the word back to Ivar.

[Ivar Fossum, executive]

Thank you, Kenneth. A few comments and words about the market for rutile, titanium feedstock, the high-level view is that the Building and Metal segments are strong. Metal segments, particularly driven by geopolitics, and the Western world focus on aerospace and also defense, I should say. While the pigment market are more subdued due to the GDP dampening. In China, we see a split in the pigment market between sort of the new technology plants, which are chloride-based and the old technology plants, which are sulfate-based where you see that there is a stronger demand for the modern technology plant in China. In Europe and North America, the pigment market is somewhat softened. However, rutile being a smaller portion of the market. Prices remained stable for rutile so far and even exceeds what we have assumed previously in our models. On the garnet market, the overall view is that the market is steady. We saw a weaker start in North America, but again, it has picked up during the second quarter, while in Europe it is slightly softer following the reduction in outlook for industry although we see somewhat shift from the waterjet cutting segment towards the blasting segment being slightly stronger. So we don't see any big movements on the pricing and it remains to be seen where the world is moving towards the rest of the year. So with that, I'll leave the word to Christian Gjerde, who will give an update on the finance.

[Christian Gjerde, executive]

Thank you, Ivar, and good morning to everyone. So I will then give you a brief status on the financials before we move to Q&A. As Ivar mentioned, the second quarter has been a quarter with a lot of activities. It's the first full quarter after our financing of the Engebø project in March this year and later related to that, the financial investment decision. In the quarter, we have capitalized close to NOK 370 million in mine under construction, which is a significant ramp-up from around NOK 140 million in the first quarter of this year, reflecting the increased activities since fully funded. Mine under construction, the consolidated carrying amount as of this quarter or the second quarter is close to NOK 800 million. So that is what has been invested since the start of construction work at Engebø in April of last year. At quarter end, we had NOK 687 million in cash and cash equivalents, of which NOK 566 million sitting at Engebø Rutile and Garnet. That, together with the NOK 50 million that we are expecting to go down quite soon under the royalty facility and the NOK 1.1 billion corresponding to $100 million sitting on the bond escrow, will fully fund the Engebø project up to start of production. And as per our projections today, including an untouched project reserve of $30 million. Borrowing costs has been fully capitalized after satisfaction of the financing conditions in March of last year. So the interest rates on the bond capitalized in line under construction with the residual financial items going into P&L, summing up to NOK 2.7 million gain for the quarter with the main impacts being a net foreign exchange gain on the bond, interest income, cash at hand and a slight or a smaller cost on transactions of NOK 1.2 million. So for the full financials for the quarter, both for Nordic Mining consolidated and for Engebø Rutile and Garnet, you can find those in our press releases. So with that, I will invite Ivar and Kenneth back to the stage for Q&A.

[Unknown Executive]

Thank you for this presentation. We so far have only a few questions. And the first one is on the construction, quite specific question. Will you be on track to finish the construction of the mine on time, Ivar or Kenneth?

[Ivar Fossum, executive]

Short answer is yes.

[Unknown Executive]

Question about the finance. When do you expect to draw on the royalty financing and bond, et cetera?

[Christian Gjerde, executive]

The royalty financing is expected to be drawn down late this quarter, early next quarter and the bond later this year, early next year.

[Unknown Executive]

There is one question about the rutile price. What was that per tonne in second quarter this year?

[Ivar Fossum, executive]

We see pricing slightly above 1,400 -- around USD 1,450 per tonne of rutile in the second quarter. But depending on contracts, we have seen also contracts with consistently higher prices up to USD 1,700 per tonne. So there has been some changes, and it's depending on the contracts for the bigger suppliers.

[Unknown Executive]

Those were the last questions. So it must have been crystal clear, there is coming one there, which risk does management consider as the most likely to affect the construction going forward?

[Ivar Fossum, executive]

Would you like to start or.

[Kenneth Angedal, executive]

I can start. I think there are several risks that we are managing as part of the project today. A sizable project like this, there are many risks that we follow on a continuous basis and mitigate when we close into activation of those risks in terms of what we construct. So I think in many ways, our main consideration now are to finalize the detail engineering and embarking on starting the construction of the process plant and the factory and to maintain good progress and productivity of those construction and installation of our mechanical packages.

[Unknown Executive]

How long will Christian Gjerde remain in the position as Chief Financial Officer and when can investors expect news on new hire?

[Ivar Fossum, executive]

I can comment on that. Christian will continue for another month or so, and we are moving forward on the process to get the replacement on the CFO.

[Unknown Executive]

Are you expecting any cost increases compared to the budget for the construction?

[Kenneth Angedal, executive]

That's for me, I guess. We don't see any significant change in the cost for the project compared to what we have estimated in the budget with our contingencies. So we are well within our expected cost to completion of the project.

[Unknown Executive]

Could you please elaborate on whether you or your suppliers have the inflation risk in the construction contracts?

[Kenneth Angedal, executive]

In the EPC contracts, that we have with the big roughly 70% of our budget, the inflation is within the EPC contracts.

[Unknown Executive]

Is it normal to capitalize interest expenses on the bond? Will you continue to do so once the first drawdown is made. Christian?

[Christian Gjerde, executive]

Yes. For accounting purposes, you are obligated to capitalize borrowing costs related to construction of projects. So we started that from satisfying the financing conditions on the 8th of March, and it will continue to be capitalized throughout the project execution.

[Unknown Executive]

Ivar, from 1 to 10, what is the political risk for this project at this time.

[Ivar Fossum, executive]

We don't see any major political risk at all. Rather, the opposite, we see a positive momentum from the political situation, a broad alignment among the bigger parties in Norway that the mineral sector in Norway should be expanded and grow in the years to come.

[Unknown Executive]

The mine is a large project where you would expect to change orders what have the size amount of [indiscernible] been so far, and please compare it to the expenditure so far?

[Kenneth Angedal, executive]

In relation to changes, we are doing a finalization of detailed engineering at the moment, and we see some changes, but are all accounted for in our expectation and still well within our cost to completion within our budgets.

[Unknown Executive]

If the project reserves remain untouched, how will this money be allocated used immediate reduction of debt?

[Christian Gjerde, executive]

So the project reserve is structured so that if unused, as we expect today, the funds can be released to Engebø Rutile and Garnet as additional working capital or as additional funds to fast track a refinancing of the bond or it can be repatriated back to Nordic Mining as a parent, but then we have an obligation to offer to bond investors to buy back the bond.

[Unknown Executive]

There's a question regarding the royalty agreement with Orion. Given its initial size of $50 million and royalties of 11% of gross revenues. The cost of capital is exceedingly high. Aside from the opportunity to have the royalty payments through repurchasing half of the initial investment. Is there any way for Nordic Mining to cancel the royalty agreement.

[Christian Gjerde, executive]

The cost of capital of the royalty post tax is very competitive compared to other alternative capital sources. We are paying 11% gross pretax to Orion. The total cost of capital is around 9%, which is competitive long term for a mining project. We do have the opportunity to buy back half of the royalty but there is no mechanism allowing us to terminate that contract.

[Unknown Executive]

Do you have customers and contracts for the products in early stages? When do you think of being profitable?

[Ivar Fossum, executive]

I can start with the first part of the question. We are covered on sales for the first 5 years for the total production on both rutile and garnet to international and high-class customers, I should say.

[Unknown Executive]

They want some more answers to the inflation issue. Do the suppliers have the risk or not?

[Kenneth Angedal, executive]

The main EPC contractors has inflation embedded into their contract, which means that the risk is on their side.

[Unknown Executive]

Just to confirm, do you expect to have to raise any additional capital.

[Christian Gjerde, executive]

As stated with the capital that we have available, the cash on Engebø Rutile and Garnet account, the $50 million from the royalty and the $100 million equivalent sitting on the bond escrow, we are fully funded up to production, including a $30 million reserve as per our current estimates.

[Unknown Executive]

So questions about [ AMR ]. What are the digital and economic risk related to the appeal hearing in the Supreme Court.

[Ivar Fossum, executive]

We consider that to be close to zero following 2 losses in the foregoing cases from AMR. And again, we're happy to see that the Norwegian states are fully aligned with our view and will join us in the hearings.

[Unknown Executive]

I do not believe that there are any other questions. So we had some videos that you want to show, Ivar.

[Ivar Fossum, executive]

They will follow you after you say goodbye. So I think we say goodbye. Thank you all for listening and following.