30 September 2014

 

African Minerals Limited

("African Minerals", "AML", or "the Company")

 

Financial Results for the Half Year ended 30 June 2014

 

African Minerals, the developer and operator of the Tonkolili iron ore mine in Sierra Leone, today announces its financial results for the six months ended 30 June 2014.

 

Operational Highlights H1 2014

 

·      Total production of 9.8Mt (H1 2013 : 6.2Mt) of Direct Shipping Ore ("DSO")

·      Total exports of 8.9Mt (H1 2013 : 5.5Mt) of DSO

·      Average freight rate of $23/t (H1 2013 : $18/t)

·      Average FOB received price of $49/t (dry) (H1 2013 : $77/t)

·      Average C1 cash costs of $39/t (H1 2013 : $43/t)

Financial Highlights H1 2014

 

·      EBITDA of $2.7m (H1 2013 : $100.0m)

·      Revenue of $399.2m (H1 2013 : $404.8m), operating loss $85.1m (H1 2013 : $18.3m)

·      Profit for the period $8.7m (H1 2013: loss $29.3m)

·      Group cash (at 30 June 2014) of $331.8m ($314.0m restricted)

·      Net debt (at 30 June 2014) of $458.8m ($473.3m at 31 December 2013)

Post Period

 

·      Establishment of de-sliming circuits, with the first currently being commissioned, which will remove production of All in 32 ("A32") and create all year round shippable products with lower moisture content, significantly enhancing the operating margin on DSO material

·      Commissioning of 1G plant completed, and ramp up currently underway which will take production capability up to 25Mtpa

·      Friable hematite production expected to commence by end 2015, ramping up to 11Mtpa of 63% Fe concentrate, displacing the same amount of DSO

·      Concentrator will be based on the conversion of the existing plant 1B which is expected to cost c$311m (+/-25%); Concentrate product expected to have a significantly increased margin versus the DSO that it replaces

·      Appointment of Alan Watling as CEO

·      Working capital and operational shortfalls funded from Project (Hong Kong) funds, with $142m already released, and a further $101m approved to be released in October

·      Management review of project economics concludes that the project is expected to be cash flow positive, even in the current depressed iron ore environment, by year end

·      The Company and Project continue to assess appropriate options to address the medium and long term funding requirements from a strong operational base

Production Guidance

·      Operations remain stable throughout Q3, despite wet season and Ebola outbreak

·      Q3 exports of 4.4Mt shipped with 25 vessels sailed, brings year to date total to 13.3Mt (Q1 4.6Mt in 26 ships;  Q2 4.3Mt in 25 ships)

·      Export guidance reiterated of 16-18Mtpa for full year 2014, with C1 cash costs in the range $34-36/t

·      Provision of new export guidance for 2015: 21-23Mt for the year, with C1 cash cost of under $30/t

·      Exit run rate for 2015 of 25Mtpa, with exit cash cost target of $25/t

 

Frank Timis, Executive Chairman, said:

 

We are pleased that the Tonkolili mine, plant, rail, port and marine project continues to perform well and in line with guidance. However, despite strong operating performance, the business has been slow to react to the fast moving challenging circumstances in the iron ore market. The financial gains of Q1 have been largely depleted in Q2, with continuing operational level losses putting significant strain on the balance sheet.

 

Traversing market and operational impacts will be a priority during the months ahead.  With our new 1G plant already in production and de-sliming circuits now in the process of being commissioned, we expect to reap the benefits shortly from higher production rates, lower operating costs, and better revenue capture.

 

We are also committed to executing the low capital cost friable hematite strategy as soon as possible which will provide another layer of strong operating margin, even above the base DSO production.

 

The devastating Ebola Virus Disease outbreak, which thankfully has not directly affected our people or our operations, remains a grave concern which we are monitoring closely.

 

The return of Alan Watling as CEO is a breath of fresh air at a pivotal juncture and his deep understanding of the current economic and health situation and in particular the specific needs of the Company gives myself and the Board great confidence. We are focussed on driving our project quickly up to the 25Mtpa operating level, targeting globally competitive cash costs of $25/t, and ensuring that the project is profitable - even in its DSO stage and at current five-year low iron ore prices.

 

We are absolutely focussed on ensuring the financial health and strength of both the operating companies and African Minerals Limited on a long term basis. We continue to evaluate all options available and have engaged Standard Chartered Bank and Jefferies as our advisers to help us with this process. This will inevitably require the support of all of our stakeholders, including our debt and convertible bond holders, who we acknowledge have provided significant help in allowing us to develop the Company to its current operating level. We will continue to update the market as we progress our plans in this regard.

 

 

 

Contacts:

 

African Minerals Limited

+44 20 3435 7600

Mike Jones

 

Tavistock Communications

+44 20 7920 3150

Jos Simson / Nuala Gallagher/ Mike Bartlett

 

Jefferies

+44 20 7029 8000

Nick Adams / Alex Collins

 

 

About African Minerals

 

African Minerals operates the Tonkolili Iron Ore Project (the "Project") in Sierra Leone, with a JORC compliant resource of 12.8 Bt. The multi-generational Project is being developed in a number of staged expansions. In 2013, African Minerals completed sales of 12.1 Mt to its customers. The current year sales guidance is for 16-18 Mt of exports.

 

Phase II expansion will see exports increase to 25 Mtpa, and will incorporate production of a high grade concentrate product. Concentrate production is expected to begin by the end of 2015 and will eventually displace current DSO production as concentrate volumes increase and the DSO resource depletes over time.

 

The Company has also developed significant port and rail infrastructure to support the operation of the Project, via its subsidiary African Rail and Port Services (SL) Limited ("ARPS"), in which the Government of Sierra Leone ("GoSL") has a 10% free carried interest.

 

The Project companies are currently owned 75% by AML, and 25% by Shandong Iron and Steel Group ("SISG"), except for ARPS, which is currently owned 75% by AML and 25% by SISG, with the GoSL having the right to a 10% free carried interest from AML.

 

www.african-minerals.com

 

 

Executive Chairman Comment

 

 

2012 was seen as the year of "delivery" for Tonkolili, with capital construction completed and the ramp up to the initial 20Mtpa run rate started in earnest. 2013, by contrast, was seen as the year to "de-risk" the Project, removing operational volatility and stabilising our production and costs.

Our previously communicated plans for the growth of the Company have, of course, been based on the growth of the Tonkolili Project in three stages: To stabilise the operation at the 20Mtpa run rate, with cash costs at $30/t; To expand our Direct Shipping Ore ("DSO") production to 25Mtpa with costs reducing further, and; To begin to move into the higher value friable hematite production phase of our ore body, maintaining export levels and further improving margins, while considering the appropriateness of further expansion.

The first part of that strategy was to end the current year at a 20Mtpa run rate of production, and to export 16-18Mt during the year.  H1 saw the project ship 8.90Mt of product in 51 Ocean Going Vessels ("OGVs") - a monthly average of 1.48Mt and 8.5 OGVs per month.

July saw us ship nine vessels, we shipped seven vessels in August and that production level has been remarkably stable even over the peak of the wet season, and in September we have again shipped nine vessels, thereby maintaining our export run rate and keeping production firmly on track within our guidance. In Q3 2014 we have shipped 4.4Mt, and our year to date exports are 13.3Mt.

The second part of the strategy is to continue to expand DSO exports to 25Mtpa, while further driving costs down and improving revenues. That part of the strategy is now well in hand, and will be discussed further by our CEO in the statement below.

The third part of our strategy will see our margin continue to expand as we enter into the friable hematite part of the ore body, and start to produce a high value concentrate.   The friable hematite concentrate component of our production profile will also enable the Company to consider exporting to exciting new markets in Japan, Korea and Europe, which would carry additional freight benefits too.

With full support from the Board, this three-part strategy will see Tonkolili established over the medium and long term as a high margin, low cost operation for decades to come, generating significant cash flow in all foreseeable iron ore price environments.

With a planned near term return to a cash flow positive underlying operation - even in the current depressed iron ore environment - the appropriate longer term funding requirements of the Project and Company are now a key focus.

Absent a substantial increase in the iron ore price, it is unlikely that the operating companies will be in a position to pay dividends to the Company and Shandong during 2015.  Accordingly, we have commenced a review to secure additional cash resources and to reduce expenditure throughout the Group.  Furthermore, we continue to evaluate opportunities regarding optimising our debt structure throughout the Group which includes re-profiling and refinancing of our current debt facilities at both Project and Company, consideration of minority sale at the asset level, and by other means, and in particular looking to address the level of interest payments on our PXF facility and to our convertible bond holders during 2015 and beyond. To that end, Standard Chartered Bank is leading a debt refinancing mandate at the operating company level, while Jefferies is leading a capital markets and restructuring mandate at African Minerals level.

The health and safety of our people remains of utmost importance to us all. I am pleased to report that the first half of the year continued to show a decline in lost time injuries. We acknowledge that they are still too high, and while we continue to improve them, we are also pleased that our efforts toward long term intervention in malaria prevention - still the biggest fatal disease in Sierra Leone - continues to bear fruit.

Ebola has, most regrettably, become a watchword in West Africa since the initial outbreak of the disease in Guinea, in February. The severity of the situation has mobilised the world to action, led by health institutions including the World Health Organisation, Médecins Sans Frontières, the International Red Cross, Centre for Disease Control and others. More recent interventions by the World Bank and by various sovereign states including the USA, United Kingdom and China also seek to bring the outbreak to a necessary conclusion. The news that vaccines will soon be more widely available brings comfort and hope, but precautions being put in place throughout the region will no doubt remain in place for some time to come. We pray for a swift resolution.

Throughout all of this, the Government of Sierra Leone has shown strong support, both to its people and its industrial institutions. We thank the Government and People of Sierra Leone for their resilience and fortitude.

Our operations continue to benefit from the support of our industrial partners, Shandong Iron and Steel Group and China Railway Materials Commercial Corporation. These entities are together responsible for purchasing 72% of our sales tonnage in H1 2014. Their support, and particularly that of Shandong, has allowed us to weather the storms of this historically low iron ore price environment.

We are resolutely focused on returning the project to operational profitability, and with that as a strong foundation, ensuring the balance sheet meets the needs of both the Project and the Company more appropriately. That process is likely to take several months, but I am delighted to welcome Alan Watling back to African Minerals as our CEO to oversee these challenging but exciting steps.

 

Chief Executive Officer comment

 

I am delighted to return to the Project and to the Company.

Tonkolili is an inherently high quality project, with the ability to become one of the lowest cost iron ore operations in the world. The exclusive use port and rail, minimal stripping ratio, minimal processing and proximity to the coast are but a few among a multitude of individual elements that any iron ore developer would be pleased to have in their projects. Over and above that, we have a deposit that will generate products of improving quality over time, which is a clear benefit at a time of a declining iron ore price.

The Project is performing well and in line with the best of our previous expectations, but the environment around us has changed. We need to react quickly to reduce costs, improve export volumes and improve revenue capture so that we can get back onto a sound financial footing as soon as possible.

The iron ore price has been weak through Q2 and Q3, which has seen realised prices drop considerably. The benchmark TSI 62% index has dropped from $135.38 per tonne at the start of the year, to a current low of $79.25, and is continuing to set new five year lows. The Platts 58% index, against which our product is priced, has dropped from $115.25 to $63.25 over the same time period. Historically the Platts 58% index has traded at around 88% of the TSI 62% price, and despite widening at times to a discount of up to 25% against the 62% price, the current Platts price reflects a 20% discount, and we expect the differential to tighten back to its historic level.

With record levels of iron ore stockpiles at Chinese ports and seasonally disappointing steel demand, I believe we must be prepared for weakness for some time yet, although consensus for the 62% index remains around $100/t for 2015 and 2016, reflecting an anticipated $20/t improvement in price in the medium term. 

To mitigate the weakness of prices and expectation that this will continue in the near term, the Group continues to focus on cost saving initiatives, actively manage working capital, and capturing more of the available revenue through enhanced product management.

As a result of this decline of over $50/t in the benchmark price since the start of the year, operational cash flow at the project level has deteriorated significantly. It will come as no surprise that since April the project has suffered net cash outflows.

The next few months are expected to deliver a substantial improvement in both costs and revenues, as follows:-

·     revised contract terms with several key suppliers are currently being implemented;

·     continued focus on increasing export volumes which will dilute fixed costs per tonne;

·     ramp up of the new +9Mtpa 1G processing plant,  allowing the Project to de-commission three smaller, more costly plants;

·     establishment of de-sliming circuits to service our 1B, 1D and, thereafter, 1G plants which will eradicate the All in 32 product and its associated discounts;

·     de-sliming circuits will also decrease moisture levels and freight rates, increase the number of dry tonnes sold, and significantly reduce our re-handling volumes currently associated with stockpiling and drying activities;

·     increasing the number of vessels that the Project charters itself and sells on a CFR basis, reducing equivalent freight rates as compared to FOB pricing;

·     negotiating improved sales terms, specifically incorporating a premium for our sought after low-silica product

We are confident that these strategies will be executed successfully and allow the Tonkolili project to return to positive cash flows from the end of the Year. However, in the interim we are preparing for continuing operating losses.

In support of these plans, and in line with the commitments made in August 2014, $142m has already been drawn down from the Project's Hong Kong funds (which totalled $284m at the end of June 2014), and has been used primarily for working capital purposes. The Board of the Project Companies has approved the draw down of a further $101m in October for further essential payments, including to fund the approved cost reduction initiatives, to finance working capital and to cover operating losses and debt repayments until the Project becomes cash flow positive. Shandong continues to be incredibly supportive of the Project and absolutely focussed, as am I, on ensuring the ongoing success of the Project.

I am very excited by the opportunities that we have to make an immediate impact on further improving the Project's economics. Building on the de-bottlenecking of the infrastructure that was achieved in the first half, the establishment of the 1G process facility will allow us to match production capability with export capability of 25Mtpa. The executive and operating teams have already enumerated significant cost savings, and we expect to be able to reduce cash costs to our $25/t target when exports achieve 25Mtpa run rate, expected in H2 2015. With planned reductions across our corporate costs, too, we expect our all-in cost to drop to circa $33/t, an improvement of around $15/t over the current situation.

The de-sliming plants will allow us to simplify our product mix at the same time as reducing moisture thus simplifying our wet season strategy. In 2015, with these systems fully operational across all of our three process plants, the wet season strategy should ensure our operating performance is no different to that of the dry season. Lower moisture levels and the eradication of A32 and blend products should drive an improvement in our revenue capture by up to $5/t in 2015. We also expect considerable benefit from our negotiations with our customers to suspend discounts and capture a low silica premium.

I am confident that with these measures in place, and a net improvement in margin of in excess of $20/t, the Project will comfortably operate with positive cash flow, even in the current depressed iron ore environment - and that is before the game-changing establishment of the concentrator phase of our operations, which we expect to commence production by year end 2015. The establishment of the first friable hematite concentrator will see 11Mtpa of DSO being replaced by the same tonnage of premium +63% clean concentrate, attracting over  $25/t (at current prices) more revenue than the DSO that it replaces, with only modest additional costs of around $10/t.  

Our product remains in strong demand, largely by virtue of its excellent blending characteristics as a result of its low silica content. The original sales contracts put in place in 2010 did not recognise this benefit and are instead somewhat discounted for high alumina. During this year, Platts started to publish its assessment of the value of various penalties and bonuses for various elements in iron ore products, and we now believe that our DSO product indeed justifies a premium.

The Board of the Project Companies has resolved that a revenue enhancement strategy should be pursued, such that all future shipments (after those for which ships are already confirmed) should be sold at a fair market price. To that end, supported by Shandong as the principal offtaker, we will be communicating with our customers not only to temporarily defer the current price influencing factors (including, but not limited to, discounts, agency fees, marketing fees, freight subsidies, etc), but also to require a premium for the low silica nature of our DSO product.

The Group continues to closely monitor the Ebola Virus Disease outbreak and has taken several steps to mitigate the effect of the disease within the workforce including movement restrictions, enhanced hygiene and food controls, access control, temperature monitoring, workforce and community education etc. as well as active support for the various emergency and government institutions. No cases have been suspected or confirmed at the Group's sites, and the Group continues to operate normally across the mine, plant, rail, port and marine operations.

One of the key concerns for our employees and contractors is that exit routes for expatriates become compromised - as evidenced by the withdrawal of all major international commercial airlines with the noted exception of Air Brussels - and as a result we have permanently chartered suitable aircraft to continue to manage staff-rostering, irrespective of commercial airline schedules, with utmost regard for safety.

I am confident that, with the continued support of all of our stakeholders, the Project will return to profitability in the near term, and that will create a firm foundation for an appropriate holistic refinancing of both the Project and the Company. 2014 remains on track to show a circa 50% improvement in exports over 2013. 2015 should see significant further growth, and I expect that we will be able to once more report a c30% improvement in exports year-on-year as we end 2015.  

 

African Minerals Limited
Interim Results
6 Months to June 30 2014

 

REVIEW OF THE BUSINESS

 

Operations Update

 

Safety

Lost Time Injuries at the Tonkolili project continued to trend down, with 10 in Q1 and seven in Q2, for a total of 17 lost time injuries in the first half of 2014. Medical treatment injuries also fell from 36 in Q1 to 29 in Q2 and the rolling All Injury Frequency Rate fell from 1.45 injuries per 200,000 man hours as at the end of 2013, to 1.27 at the end of H1 2014.

 

The Group remains focussed on the reduction of malaria infection rates. Malaria incidences continue to trend downwards; H1 2014 reported 292 incidences compared to 898 in H1 2013.

 

Production

H1 production continued the strong growth of the second half of 2013. DSO ore mined was 12.1Mt, 64% up from the same period last year. Other material mined, including for the first time 0.5Mt of waste, was 2.8Mt, up 122%. The earthmoving rate in H1 was 30Mtpa, with a total of 15.0Mt moved in the half year, an activity level 73% higher than H1 2013.

12.5Mt of ore was processed in H1 2014 (H1 2013 : 7.0Mt), creating 3.8Mt of lump (H1 2013: 1.7Mt), 3.5Mt of fines (H1 2013 : 2.3Mt), and 2.5Mt of A32 (H1 2013 : 2.3Mt) for a total of 9.8Mt (H1 2013 : 6.2Mt) to a total mass yield of 78%  (H1 2013 : 87%). This mass yield is expected to improve and remain over 80% with the addition of the de-sliming circuits during Q3.

In H1 2014 a total of 9.5Mt of product was railed from the mine to the port (H1 2013 : 5.4Mt) despite a number of planned closures for  maintenance and upgrading of the rail, including curve straightening, bridge strengthening, and the creation of additional lay-bys and loops.

The port loaded 9.1Mt of product onto the transhipping vessels (H1 2013 : 5.5Mt) and onto 52 ocean going vessels ("OGVs"). Due to timing of bills of lading, 8.9Mt in 51 OGVs have been recognised for revenue in H1 2014.

Exports

Of the material exported during the period, 1.1Mt was lump, 1.8Mt was fines, and 6.0Mt (67%) was A32 and lump blend, which carries an additional reprocessing charge for our customers. This proportion was down slightly from 69% recorded in H1 2013. In June 2014 only one OGV was loaded with A32 or blend material, representing just 12% of June's tonnage.  

  

		H1 2014	H1 2013	Var % / bps
MINING
Tonnes DSO Ore Mined	Mt	12.1	7.4	64%
Tonnes Other Material Mined	Mt	2.8	1.2	122%
Grade DSO Ore Mined	%	57.6	57.5	0.1
Total Mined	Mt	15.0	8.7	73%
PROCESSING
Tonnes DSO Ore Treated	Mt	12.5	7.0	78%
Grade DSO Ore Treated	%	57.7	57.6	0.1
Total DSO Produced	Mt	9.8	6.2	58%
End of Period Product Stockpile	Mt at mine	2.0	2.4	-19%
EXPORT
Total Exported (Wet)	Mt	8.9	5.5	61%
Lump	Mt	1.1	0.2
Fines	Mt	1.8	1.6
A32	Mt	5.4	2.4
Blend	Mt	0.6	1.4
Grade	%	57.7	58.1	-0.4
Moisture	%	10.3	11.0	-0.7
Total Exported (Dry)	Mt	8.0	4.9	62%
Number of Vessels	#	51	32	59%
End of Period Product Stockpile	Mt at port	0.6	0.0
CASH COST
C1 Cash Cost	$/t	39	43	-8%
REVENUES
Gross Revenue (Platts 58)	$/t	94	119	-21%
Freight Rate (wet)	$/t	23	18	27%
Provisional FOB (dry)	$/t	54	82	-34%
Achieved FOB (dry)	$/t	49	77	-35%
BALANCE SHEET
Group Cash	$m	332	502
Group Debt*	$m	823	832
Group Net Cash / (Debt)	$m	(491)	(330)

 

*Group debt reflects the nominal Group Debt. For full details refer to Note 13 of the accounts.

Financial Update

Sales

 

Demand for our products, be it fines, lump, blend or A32, remains strong. The low silica content of our ore makes it an attractive and sought after blending component.

The key elements of pricing are the spot price (Platts 58% IODEX), freight rate, standard (chemical and physical) product discounts, reprocessing discount (for A32 and lump blend)  and investor discounts to our partner, SISG, and timing adjustments.

·      Spot Price:  Our product is priced with reference to the Platts 58% IODEX index, which started January at a high of $115/t, falling to a low of $69/t in June. The average spot price in H1 was $94/t (H1 2013 : $119/t). Prices are quoted per dry tonne landed in northern China.  

·      Freight Rate: Shipping rates for our Cape Size OGVs ranged between $29/t and $18/t, averaging $23/t for H1 (H1 2013 : $18/t). Freight rates are quoted per wet metric tonne. The commencement of shipping on a CFR basis has demonstrated more than a $1/t saving in freight costs can be achieved going forward.

·      Standard product discounts: Standard discounts for grade, deleterious elements (mainly aluminium) and other specifications were approximately $9/t. The commissioning of de-sliming circuits could provide a small benefit in product discounts.

·      Reprocessing discount: The lump blend and A32 products, which made up 67% of all shipments in H1, carry an additional discount over standard lump and fine products of up to $5/t, depending on customer. De-sliming will mean that the mine will no longer produce A32 following fitting of these circuits to the new 1G plant.  Once all current stockpiles have been wound down, this discount will no longer be incurred.

·      Investor discount: During H1, the Project delivered 3.6Mt, or 40% of all tonnage exported, to SISG under their discounted offtake agreement, with only 2.9Mt remaining to be delivered during H2. With the FOB Sierra Leone Reference Price between $60/t - $80/t, the SISG investor discount is 7.5%, and when it is between $80/t - $100/t the discount is 10%. If the received price is below $60/t, the discount is zero.

·      Timing adjustments: Like many other iron ore exporters, the Tonkolili Project produces provisional invoices based on loading date quotation period prices, and calculates final invoices based on landing date quotation period prices. Management makes estimates of the effect of changing spot prices between loading and landing, but where these occur over the end of a quarter, they remain estimates only, and are subject to later adjustment once final invoices are received. In Q1, the effect of prior period adjustments was approximately -$2/t, and in Q2 approximately -$7/t due to the sharp decline in prices.

As a result of all of the above, the FOB received price in the first half of the year was just $49/t (H1 2013 : $77/t). A royalty of 3.2% of revenue was paid to the Government of Sierra Leone, as per the fiscal terms of the Mining Lease, amounting to $11m, in addition to payroll and other taxes.

Operating Costs

The Company reports its cash operating costs on the internationally accepted C1 basis, being the cash cost of goods sold. This measure excludes royalties, selling costs (including demurrage) and corporate office costs, which are reported separately.

The C1 cash cost for the half year was $39/t (H1 2013 : $43/t), on a FOB basis. Cash costs have not yet stabilised and have varied from $45/t to $34/t over the first 6 months, before inventory movements.

Some of the budgeted interventions to bring cash costs down to $30/t by year end have not yet been implemented, for example buying-in currently contracted out services and procuring capital equipment. These interventions would typically require capital to have been spent to allow operating costs to be reduced, but the current focus on working capital has meant that expenditure has so far been deferred.

However, the commissioning of the 1G plant, idling of 1A, 1C and 1E plants, and the establishment of the de-sliming circuits, are expected to have a major positive impact on cash costs, principally in reducing re-handle volumes and increasing throughput to dilute fixed costs.

We are confident that the project remains on track to achieve C1 cash costs of c$30/t at the sustainable 20Mpta production level once all cost interventions have been fully implemented, prior to continuing our ramp up to 25Mtpa.

All in cash cost for the first half of the year was $47/t (H1 2013 : $60/t), on a FOB basis. This decrease reflects lower operating costs, sales commissions, general and administration costs and sustaining capex spread over a higher rate of exports.

 

Balance Sheet

 

The Total Debt of the Group (excluding shareholder's loan of $56m on a nominal value basis due to SISG) was $766m (31 December 2013: $823m). The decrease was due to the repayment of $42m towards the Pre-export finance facility and $15m repayments towards other facilities. The Total Debt includes the following facilities:

 

·      Fully drawn $400m outstanding (31 December 2013: $400m) of convertible bonds with a coupon rate of 8.5% and a redemption date of 9 February 2017.

·      Cost over-run facility of $37.5m outstanding (31 December 2013: $37.5m) which was renegotiated with another lender in February 2014. This facility was subsequently fully repaid in August 2014.

·      Pre-export finance facility was $208m outstanding (31 December 2013: $250m) at an interest rate of LIBOR plus 5.5%. This facility requires repayment of $10.4m per month from March 2014 with final maturity in February 2016. The Group is seeking to replace this debt in order to more closely align the maturity profile of the Project companies' debt with its revenue generation profile, as further discussed in Note 2 to the unaudited interim condensed financial statements.

·      Two equipment financing facilities in aggregate of $120m outstanding (31 December 2013: $135m). The interest rates on the facilities are LIBOR + 5.59% and LIBOR + 6.0% and their maturity dates are in June 2017 and June 2018.

The cash position of the Group was $332m (31 December 2013: $362m), and includes $284m (31 December 2013: $305m) restricted cash for Phase II expansion and another $30m (31 December 2013: Nil) held in escrow as collateral for the cost over-run facility.

 

Project Update

1G

The construction and commissioning of the 1G process plant, adding c9Mtpa of production capacity, is complete and ramp up is currently underway. The 1G plant will initially be configured as a dry screening plant, and will then be modified to wet screening to produce standard lump and fines product, prior to conversion incorporating de-sliming.

De-sliming

The Group has previously highlighted a number of technical interventions that it had proposed regarding materials management, particularly geared toward the wet season. The most significant of those is the establishment of screening and de-sliming circuits. These are being installed to further treat the sub-10mm fines material which contains fine sticky clay and ultra-fines. The de-sliming circuits will be fitted to our 1B and 1D processing plants which are currently producing this fines product, and will be retro-fitted to the new 1G process plant once it is fully commissioned. Conversion of 1B, 1D and 1G is currently expected to be completed by the end of Q1 2015.

The establishment of these screening and de-sliming circuits will significantly enhance our wet season strategy, in that most if not all of our product will now be able to be shipped year round. The removal of fine sticky clay from our material and the termination of production of A32 will also greatly improve our port material handling capabilities.

De-sliming circuits will also decrease moisture levels and freight rates, increase the number of dry tonnes sold, and significantly reduce our re-handling volumes currently associated with stockpiling and drying activities.

Friable Hematite Concentrate

As announced on 3 July 2014, we expect to commence production of high value hematite concentrate at the end of 2015. The low capital cost conversion of our 1B process plant and construction of concentrator facilities is expected to cost $311m (+/- 25%) and will produce 11Mtpa of 63% Fe concentrate, with a low moisture level of under 9% and with low contaminants., with associated significant positive impact.

The commencement of production of a high quality concentrate is expected to improve our revenue per tonne by up to $25/t (at current prices) thereby expanding our margin while maintaining our +25Mtpa production profile. The replacement of over 45% of our current DSO tonnage by this high grade high value concentrate product, and the concurrent running of concentrate alongside DSO, will allow us to defer further capital expenditure for additional concentrators, which will now only be required to be in production in or after 2020, allowing more of the Project's near-term cash flow to be returned to the Project's shareholders.

The Project has now been provisionally approved by its board, subject to tightened engineering design.

Guidance

With Q3 building firmly on the results of H1 2014, even during the wet season, we remain confident of exporting between 16 and 18Mt during 2014, and reiterate guidance of cash costs for the year in the range of $34 and $36 per tonne.

With the improvement of our infrastructure capacity already achieved, the commissioning of 1G and de-sliming circuits, an expanded production capability, and the various cost interventions already described, and all-year-round shippable products, we expect to achieve production during 2015 of 21-23Mt, with cash costs for the full year under $30/t.

We expect to exit 2015 with a demonstrable 25Mtpa sustainable export run rate, and cash costs around $25/t.

Corporate Update

Additional working capital at the project companies

As a result of the low received price ahead of our major margin improvement programmes, which are expected to start to benefit our balance sheet from the next quarter, the Group had an operational loss before special items in H1 of $58m. This is exacerbated by the amortising debt profile of our PXF facility and associated interest costs.

As disclosed in our Q1 production report released on 21 May 2014, and the subsequent market update of 6 August, the Group has continued to evaluate opportunities regarding an optimum debt structure, including re-profiling of its current debt facilities and other strategies including accessing the $284m restricted cash held by the Project companies.

We are pleased to have reached an agreement with our partners, Shandong, to allow access to the $284m of funds previously earmarked for expansion capital purposes, for general working capital purposes.

In line with the commitments made in August 2014, $82m was drawn down from the Project's Hong Kong funds in August, and has been used primarily for working capital purposes. The Board of the Project Companies also approved the draw down of a further $161m in September and October for further essential payments, including to fund the approved cost reduction initiatives, to finance working capital and to cover operating losses and debt repayments until the Project becomes cash flow positive.

 

Most Favoured Treatment claim

The Project's corporate advisors have been consulted regarding the value of restitution that is payable to Shandong (as offtake customer) under the "most favoured treatment" clause, as a result of a prepay contract entered into with another customer. The advisors' view is that the fair settlement of this claim is de minimus.

Tewoo Transaction

Tianjin Materials and Equipment Group Corporation ("Tewoo") and African Minerals continue to advance their relationship, and nothing has been discussed to the contrary of the terms outlined. While both parties remain interested in pursuing a transaction, in light of the currently depressed iron ore market and share price, AML no longer believes it realistic to expect a near term conclusion of any proposed transaction.

Renaissance Capital Litigation

Renaissance Capital had filed a claim against the Group for financial adviser's fees amounting to approximately $133m plus interest and costs in relation to historic fundraisings and transactions.  The case was heard by the Commercial Court in London in March and April 2014. Judgement was issued on 27 June 2014, in favour of the claimant on certain aspects of the claim, amounting to $35m plus interest and costs. AML had strongly contested the claim, and had provided $6m as a potential award in its audited accounts for 2012. Post period end, the Company paid the amount of $42m and has been granted leave to appeal. The appeal is expected to be heard in H1 2015. The Board is confident that the appeal has a good prospect of success.

Allegation against Directors

Allegations of fraud involving the Executive Chairman and Dermot Coughlan were made earlier in the year. Following a detailed investigation carried out by Good Governance Group, an external agent acting on behalf of the independent directors, those allegations were not upheld, and no evidence was found of any fraud by either person. Although there was no proven event of fraud, it did however highlight a lack of full disclosure by Dermot Coughlan.

Resignation of Director

After serving as an independent director for over four years, Dermot Coughlan resigned in July. The Company continues to actively consider its Board structure in light of this recent change and its future requirements.

 

FINANCIAL REVIEW

1.  Basis of preparation

 

The unaudited interim condensed consolidated financial statements of the Group have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting as adopted by the European Union for the six months ended 30 June 2014. The unaudited interim condensed consolidated financial statements are not a complete set of financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2013. These unaudited interim condensed consolidated financial statements are prepared in accordance with the International Financial Reporting Standards ("IFRS") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), as issued by the International Accounting Standards Board ("IASB") and adopted by the European Union ("EU"). The Group presents its unaudited interim condensed financial statements in US dollars.

  

CONSOLIDATED INCOME STATEMENT

 

2.  Income statement

 

An abridged analysis of the consolidated income statement for the six months ended 30 June 2014 is shown below:

$ million (unless otherwise stated)		Six months ended 30 June 2014		Six months ended 30 June 2013
Revenue		399.2		404.8
Operating costs (excluding depreciation, amortisation and special items)		(396.5)		(304.8)
EBITDA		2.7		100.0
Depreciation and amortisation		(60.9)		(60.6)
Operating (loss)/profit before special items		(58.2)		39.4
Special items		(26.9)		(57.7)
Operating loss		(85.1)		(18.3)
Imputed interest cost of deferred income		(36.4)		(34.1)
Gain on non-controlling interest put option		167.6		103.8
Impairment of available for sale investments		-		(39.6)
Profit before finance items and taxation		46.1		11.8
Finance expenses		(53.3)		(36.3)
Loss before taxation		(7.2)		(24.5)
Income tax credit/(charge)		15.9		(4.8)
Profit/(loss) for the period		8.7		(29.3)
Non-controlling interest		(0.2)		1.6
Profit/(loss) for the period attributable to equity holders of the Company		8.9		(30.9)
Earnings/(loss) per share based on profit/(loss) for the period - US cents
Basic profit/(loss)		2.70		(9.34)
Loss per share based on Underlying Profit - US cents
Basic loss		(41.35)		(12.25)

 

 

  

3.  Revenue

 

Revenue is determined using dry tonnage rates quoted by the benchmark Platt's 58% Fe North China Price less freight costs, customer discounts, deduction for chemical impurities and processing charges. An analysis of how revenue is recognised in the consolidated income statement is set out below:

 

		Six months ended		Six months ended
		30 June 2014		30 June 2013
		$m		$m
Gross revenue		709.1		581.7
Freight costs		(205.6)		(102.4)
SISG offtake discount		(6.4)		(23.5)
Other customer discounts		(10.6)		(8.3)
Chemical impurities and processing charges		(93.7)		(66.2)
Net revenue		392.8		381.4
Release of deferred income - SISG		6.4		23.5
Revenue recognised in the income statement		399.2		404.8

 

 

http://www.rns-pdf.londonstockexchange.com/rns/0045T_-2014-9-30.pdf

 

Revenue for the first half of 2014 was $399.2m, a reduction of $5.6m compared to the first half of 2013 as the fall in the iron ore price was partially offset by the increased volumes sold.

 

The average price used to determine revenue for the period was $88.9 (six months ended 30 June 2013: $118.1) per tonne, which compares to the average benchmark Platt's price of $93.9 (six months ended 30 June 2013: $119.4).The difference reflects timing differences as export sales are not evenly priced across the period.

 

The Group exported 8.9m wet metric tonnes (equivalent to 8.0m dry metric tonnes) on 51 Ocean Going Vessels ("OGV") in the first half of 2014 compared to 5.5m wet metric tonnes (equivalent to 4.9m dry metric tonnes) on 32 OGVs in the corresponding period of 2013, an increase of export sales volumes of 61.8%.

 

Freight costs are quoted in wet metric tonnes and adjusted to a freight price per dry metric tonne depending on the moisture level of the product. There was an average freight cost for the period, based on wet metric tonnes, of $23.1 (six months ended 30 June 2013: $18.5) per tonne.

 

The Group has delivered under various offtake contracts with several customers during the period. There are fixed discounts that vary according to each offtake contract, with the discount depending on moisture content, product type and Platt's price at the time of delivery. Similarly, there are discounts that vary according to each offtake contract depending on the grade of iron of the product shipped and contained deleterious elements. These charges are higher in the first half of 2014 compared to 2013 because of the increased volumes sold in comparison to the prior period.

 

Other customer discounts have increased in the first half of 2014 as there was an increased volume of iron ore invoiced to customers with larger discounts as compared to the prior period.

 

After these deductions, the realised price for sales (i.e. FOB achieved price) was $49.3 (six months ended 30 June 2013: $77.5) per dry metric tonne, $44.6 (six months ended 30 June2013: $41.9) per tonne.

 

In March 2012, Shandong Iron and Steel Group ("SISG") invested $1.5 billion in return for a 25% stake in the underlying assets of the Tonkolili project and a discounted offtake agreement over the life of the mine. As a result, SISG's future discounts on shipments were recorded as deferred income (a liability) in the Group accounts (see Note 14 to the unaudited interim condensed financial statements). Therefore, in the case of sales to SISG, a portion of the deferred income is released with a corresponding credit to revenue to offset the discounts on the sales in the period. As a consequence, the actual cash consideration derived from sales is less than the recognised revenue in the consolidated income statement.

 

Under the above offtake agreement, the discount to which SISG is entitled is dependent on the price of iron ore, and below a certain level, sales to SISG no longer attract a discount. Due to lower iron ore prices in the first half of 2014, certain sales to SISG did not attract a discount. As a result, the release of deferred income is lower in the first half of 2014 than the deferred income release in the comparative period.

 

4.  EBITDA

 

Measuring earnings before interest, taxation, depreciation and amortisation (EBITDA) gives an indication of the Group's ability to generate cash from its underlying operations. This performance measure removes non-cash items and those components which are special items that do not impact the underlying trading performance of the Group. During the six months ended 30 June 2014, the Group recorded EBITDA of $2.7m compared to $100.0m for the six months ended 30 June 2013.

 

 

		Six months ended		Six months ended
		30 June 2014 $m		30 June 2013 $m
Revenue		399.2		404.8
Operating cash costs (excluding depreciation,  amortisation and special items):
Cost of sales		(343.7)		(236.3)
Selling and distribution expenses		(31.6)		(39.9)
General and administrative expenses		(21.2)		(28.6)
EBITDA		2.7		100.0

 

 

 

Operating cash costs of $396.5m (six months to 30 June 2013: $304.8m) includes cost of sales of $343.7m (six months to 30 June 2013: $236.3m), selling and distribution expenses of $31.6m (six months to 30 June 2013: $39.9m), and general and administration expenses of $21.2m (six months to 30 June 2013: $28.6m). Operating cash costs exclude depreciation and amortisation of $60.9m (six months to 30 June 2013: $60.6m).

 

Cost of sales

 

By type of operation, cost of sales are split between the mine ($180.0m), rail ($30.7m), port ($107.6m), central services ($25.4m), and depreciation ($59.1m). By type of expenditure, the largest categories of cost relate to contractors ($184.9m), consumables ($79.4m) and personnel costs ($44.2m).

 

Mine

Expenditure for the mine primarily relates to the costs of mining, processing and rehandling material. Contractors costs comprise the majority of the expenditure at the mine, mainly relating to the mining contractor and the contractors which operate the processing plants. Other costs include labour, fuel and consumables.

 

Mining costs increased to $180.0m (six months ended 30 June 2013: $108.6m) primarily due to increased production volumes of 15.0mt compared to 8.7mt in the prior period. Part of the increase in mining costs was also due to higher rehandling costs of $23.8m reflecting increased drying of fines material to meet shipping targets.

 

Rail

The costs at the rail mainly consist of maintenance costs for the locomotives, wagons and track. Fuel for the locomotives is also an expense, together with labour, although the rail operation is less labour intensive than the mining operations.

 

Rail costs increased to $30.7m (six months ended 30 June 2013: $25.5m) due to higher volumes railed (9.5mt in the six months ended 30 June 2014 compared to 5.4mt during the six months ended 30 June 2013).

 

Port

Expenditure for the port mainly relates to the cost of contractors for the operation of the transhipment vessels and the tugs. Other costs include labour and consumables.

 

Port costs increased to $107.6m (six months ended 30 June 2013: $79.0m) due to the increase in tonnes shipped from 5.5mt to 8.9mt. The increase in port costs also reflects the hire of an additional transhipper and a tug to ensure export targets are met.

 

Central services

Central services includes functions which provide common services across all parts of the business in Sierra Leone, for example, IT, communications, community, sustainable development, security and government affairs. Central services costs increased to $25.4m (six months ended 30 June 2013: $23.2m) mainly due to increased security costs to safeguard the sites in Sierra Leone.

 

Selling and distribution expenses

 

Selling and distribution expenses include $11.3m (six months ended 30 June 2013: $11.7m) of royalties paid to the Government of Sierra Leone. These are calculated based on the terms of the mining agreement at 3.0% of net revenues. There are also further payments of 0.1% each to two environmental and development funds that support projects in the surrounding areas to Pepel and Tonkolili.

 

Selling and distribution expenses also includes $0.3m (six months ended 30 June 2013: $3.8m) for demurrage costs, which are shown net of port income derived from the provision of services to the OGVs when they are at anchor outside Pepel. The decrease in demurrage costs is driven by the reduced number of days on demurrage as operations become more efficient, and an increase of $2.7m in port income in the current period reflecting a higher number of OGVs which were loaded in the period. Sales commissions include commission payable to CRM of $19.5m (six months ended 30 June 2013: $19.5m), a shareholder, as part of its original investment.

 

General and administrative expenses

 

General and administrative expenses (excluding depreciation and amortisation) were $21.2m for the current period, compared to $28.6m in the corresponding six months of 2013. In the second half of 2013 a major cost reduction exercise was completed at the corporate office resulting in lower personnel and travel costs in the first half of 2014.

 

5.         Cash costs

 

The Group measures "C1" production cash cost in order to monitor and control its production costs on a per tonne basis. The "All-in" cash costs indicate how well the Group has managed its end-to-end operational costs on a per tonne basis.

 

"C1" production cash cost calculation is the cash cost of the mine, rail and port operations divided by wet tonnes shipped and excludes depreciation and amortisation. "All-in" cash cost represent the cash costs of production (mining, rail and port), selling, general and administration expenses and sustaining capital expenditure, excluding depreciation and amortisation, divided by wet tonnes shipped.

 

Both "C1" production cash cost and "All-in" cash cost per tonne are highly geared towards export volumes given the majority of costs within the business are fixed. During the first half of 2014, the costs per tonne reduced due to higher volumes which diluted fixed costs per unit.

 

"C1" production cash cost and "All-in" cash cost are calculated as follows:

 

	Six months ended		Six months ended
	30 June 2014 $m		30 June 2013 $m
Cost of sales	(402.8)		(296.1)
Depreciation allocated to cost of sales	59.1		59.8
"C1" production cash cost	(343.7)		(236.3)
Selling costs	(31.6)		(39.9)
General and administrative expenses (excluding depreciation and amortisation)	(21.2)		(28.6)
Sustaining capital expenditure	(25.0)		(29.8)
"All-in" cash costs	(421.5)		(334.6)
Ore shipped (wet tonnes)	8,890,315		5,533,817
"C1" production cash cost per tonne (US$)	38.66		42.70
"All-in" cash costs per tonne (US$)	47.41		60.46

 

6.         Operating loss

 

The operating loss of $85.1m (six months ended 30 June 2013: $18.3m) includes operating costs of $396.5m (six months ended 30 June 2013: $304.8m), $60.9m (six months ended 30 June 2013: $60.6m) of depreciation and amortisation, and special items of $26.9m (six months ended 30 June 2013: $57.7m).

 

 

Special items

 

Special items are presented separately, due to their nature or the expected infrequency of the events giving rise to them. The breakdown of special items excluded from EBITDA is set out below:

 

		Six months ended 30 June 2014		Six months ended 30 June 2013
		$m		$m
Penalties for SISG warranty breach		5.7		40.0
Transaction costs and other professional fees		2.9		3.3
Project optimising costs		8.8		-
Onerous offtake contracts and contractor claims		9.5		8.2
Impairment of property, plant and equipment		-		6.2
Total special items		26.9		57.7

 

Further detail on each of the special items is provided below:

 

§ In 2013, the Group reached a commercial settlement of claims with SISG for $40.0m which includes claims for not achieving the minimum production rate of 12mtpa which was expected at the beginning of 2013 and certain other warranty claims. In 2014, a penalty of $5.7m was recognised in respect of these warranty claims.

 

§ Transaction costs and other professional fees in the period of $2.9m (six months to 30 June 2013: $3.3m) principally include legal fees relating to defending the claim for financial adviser's fees filed by a third party. The amount of $3.3m in 2013 includes residual costs of the investment made by SISG in 2012.

 

§ Project optimising costs relate to debottlenecking certain aspects of the rail and port operations to allow capacity to increase to 25mt per annum.

 

§ During 2014, onerous offtake contracts and contractor claims include compensation charges of $9.5m (six months to 30 June 2013: $8.2m) for the Group's inability to fulfil sales volumes under certain offtake contracts.

 

§ No impairment charge was recorded during the first half of 2014 compared to a $6.2m charge recorded during the six months ended 30 June 2013.

 

7.         Profit before finance items and taxation

 

Profit before finance items and taxation of $46.1m (six months ended 30 June 2013: $11.8m) includes a fair value gain of $167.6m (six months ended 30 June 2013: $103.8m) on the SISG put option (see note 14 to the unaudited interim condensed financial statements). This gain was partly offset by $36.4m (six months ended 30 June 2013: $34.1m) of imputed interest cost on deferred income. During the six months ended 30 June 2013 an impairment of available for sale investments of $39.6m was recorded.

 

Further detail on each of these items is provided below:

 

§ The fair value gain of $167.6m (six months ended 30 June 2013: $103.8m) is calculated based on the fair value movement using an enterprise value model of the quoted African Minerals Limited share price. An option exists in the SISG agreement whereby SISG can sell back its 25% interest in the project companies at fair value in the unlikely event Frank Timis (Executive Chairman) voluntarily chooses to resign from the Board. The put option valuation utilises an African Minerals Limited share price of $1.80 (six months ended 30 June 2013: $3.57) and an estimated significant influence component of $33.5m (six months ended 30 June 2013: $54.8m).

 

§ The Group recognised an imputed interest cost of $36.4m (six months ended 30 June 2013: $34.1m) in the current period, being the charge associated with the unwinding of the deferred income arising from the SISG discounted offtake agreement.

 

§ The market value of the Group's available for sale investments has stabilised in the current period and as a result no further charge was recorded during the six months ended 30 June 2014. In the six months ended 30 June 2013, the Group recognised an impairment charge of $32.2m in Cape Lambert Resources Limited, $7.3m in Obtala Resources Limited and $0.1m in Stellar Diamonds due to a significant decrease in the market valuation of these investments for a prolonged period.

 

8.         Finance costs

 

Finance costs of $53.3m (six months ended 30 June 2013: $36.3m) mainly comprise borrowing costs and financing fees. The borrowing costs are the effective interest costs on the Group's borrowings, namely $22.8m (six months ended 30 June 2013: $22.0m) arising on the convertible bond, $11.0m (six months ended 30 June 2013: $3.5m) on the pre-export finance facility with the balance split between the cost overrun facility and the equipment financing facilities. Financing fees include political risk insurance for facilities secured on the Group's assets in Sierra Leone and other debt raising related costs.

 

9.         Taxation

 

					Six months ended 30 June 2014		Six months ended 30 June 2013
					$m		$m
Loss on ordinary activities before tax					(7.2)		(24.5)
Group's domestic tax rate is as follows:
Profit/(loss) before tax multiplied by the standard rate of UK corporation tax 21.5% (30 June 2013: 23.5%)					1.5		5.8
Effects of:
Net income not taxable					36.0		24.4
Expenses not deductible for tax purposes					(1.8)		(20.4)
Derecognition of previously recognised deferred tax assets					(0.4)		(9.0)
Recognition of previously unrecognised temporary differences					-		0.1
Tax adjustments in respect of prior years					(16.6)		1.3
Losses not recognised					(6.7)		(6.7)
Effect of overseas tax rates					3.9		(0.3)
Total taxation credit/(charge)					15.9		(4.8)

 

 

 

During the six months ended 30 June 2014, a taxation credit of $15.9m (six months ended 30 June 2013: $4.8m charge) was recognised relating to the recognition of deferred tax assets on qualifying expenditure and tax losses in Sierra Leone. In the effective tax rate reconciliation set out above, the most significant movements relate to:

 

§  Net income not taxable relates to the non-taxable gain arising on the SISG interest put option;

 

§  Expenses not deductible for tax purposes is principally due to share options and interest disallowances in the Project Companies based in Sierra Leone;

 

§  Tax adjustments in respect of prior years of $16.6m (six months ended 30 June 2013: $1.3m credit) includes $12.8m relating to a change in brought forward tax losses on account of the revised tax treatment of certain prior period non-recurring items and a revised claim for capital allowances. For the six months ended 30 June 2013 tax adjustments in respect of prior years of $1.3m relate to a change in the accounting treatment of deferred tax liabilities previously held on consolidation.

 

§  Deferred tax losses not recognised relate to tax losses incurred at head office level for which no deferred tax asset has been recognised.

 

§  The $3.9m taxation credit due to the effect of overseas tax rates (six months ended 30 June 2013: $0.3m charge) represents an adjustment reflecting different taxation rates in Sierra Leone compared to the UK effective rate of 21.5% (30 June 2013: 23.5%).

 

10.        Profit/(loss) for the period

 

The Group's profit for the period was $8.7m compared to a loss of $29.3m during the six months ended 30 June 2013. The profit for the period was due to an operating loss of $85.1m, finance costs of $53.3m, an imputed interest charge of $36.4m on the unwinding of the deferred income, offset by a gain of $167.6m on the SISG put option and a taxation credit of $15.9m.

 

11.        Underlying Profits

 

The Group uses "Underlying Profits" as an alternative measure of earnings. The Group believes that this provides a more consistent measurement for comparing the underlying financial performance of the Group's operations. Underlying Profits is the profit or loss attributable to equity holders excluding special items and the revaluation of the SISG put option, and their resultant tax effect.

 

During the current period the Group recorded EBITDA of $2.7m, and Underlying Profits of negative $137.3m. The difference between the two is primarily due to $60.9m of depreciation and amortisation, finance costs of $53.3m and an imputed interest cost of $36.4m, offset by a tax credit of $15.9m.

 

  

The reconciliation from profit/(loss) attributable to equity holders to Underlying Profits is as follows:

		Six months ended 30 June 2014		Six months ended 30 June 2013
		$m		$m
Profit/(loss) attributable to equity holders		8.9		(30.9)
Gain on non-controlling interest put option		(167.6)		(103.8)
Impairment of available for sale investments		-		39.6
Special items		26.9		57.7
Tax effect from above items		(5.5)		(3.2)
Underlying Profits		(137.3)		(40.6)

 

 

 

 

12.        Earnings per share

		Six months ended 30 June 2014 $m		Six months ended 30 June 2013 $m
Weighted average number of common shares in issue (millions)		331.9		331.4
Earnings/(loss) per share - US cents:
Based on profit/(loss) after taxation - basic		2.52		(9.34)
Based on Underlying Profit - basic		(41.35)		(12.25)

 

 

The only change to the weighted average number of shares in issue relates to 424,584 share options which were allotted during the period.

 

 

CONSOLIDATED BALANCE SHEET

 

13.        Property, plant and equipment

 

Of the total capital expenditure of $48.4m incurred during the six months ended 30 June 2014 (for the full year to 31 December 2013: $252.4m), $25.0m related to sustaining and optimising capital expenditure (full year to 31 December 2013: $50.4m), $16.6m related to expenditure on the friable hematite project (for the full year to 31 December 2013: $50.6m) and $6.8m related to residual Phase I expenditure (full year to 31 December 2013: $151.4m).

 

14.        Capital employed

 

Capital employed (as defined by the Group) comprises equity attributable to shareholders, non-current interest-bearing loans and borrowings, the non-current element of deferred income relating to the SISG discounted offtake agreement and the fair value of the SISG put option. The deferred income and fair value of the SISG put option have both been included within capital employed as they originate from the $1.5 billion investment made by SISG in March 2012.

 

Capital employed decreased by $181.3m at 30 June 2014, predominantly due to the repayment of the pre-export finance facility of $41.7m and a reduction in the fair value of the SISG put option by $167.6m. These decreases were partially offset by an increase in other deferred income of $44.2m representing cash received from a customer for future sales of iron ore and an increase in SISG deferred income of $30.0m on account of the imputed interest cost.

 

		30 June 2014		31 December 2013
		$m		$m
Total equity		987.8		981.4
Non-current interest-bearing loans and borrowings		500.0		571.9
Non-current deferred income		603.7		551.9
SISG put option		368.6		536.2
Capital employed		2,460.1		2,641.4

 

 

15.        Net financial indebtedness

 

Net financial indebtedness (as defined by the Group) comprises cash and cash equivalents and interest-bearing loans and borrowings. A summary of the net debt position is shown below:

 

		30 June 2014		31 December 2013
		$m		$m
Cash and cash equivalents		331.8		362.4
Current interest-bearing loans and borrowings		(290.6)		(263.8)
Non-current interest-bearing loans and borrowings		(500.0)		(571.9)
Net financial indebtedness		(458.8)		(473.3)

 

Cash and cash equivalents of the Group includes restricted funds of $314.0 (31 December 2013: $304.6m), which includes $284.0 cash received from the SISG transaction. This restriction is based on the shareholders' agreement with SISG in which use of these funds requires the joint approval of the Company and SISG. The intention of both shareholders was that these funds would be allocated towards the funding of the friable hematite project. The remaining restricted cash includes cash collateral of $30.0m held as security against the cost overrun facility ("COF"), which was used to repay the COF in August 2014.

 

Interest bearing loans and borrowings include a convertible bond with a nominal value of $400.0m at the Parent Company level. The coupon rate is 8.5% and the redemption date is 9 February 2017. Also at the Parent Company level there was the COF with a nominal balance of $37.5m at 30 June 2014 (31 December 2013: $37.5m). This facility was repaid in August 2014.

 

In April 2013, a $250.0m pre-export finance facility was entered into by the project companies. This facility was fully drawn by December 2013 and carries an interest rate of LIBOR plus 5.5%. This facility requires repayment of $10.4m per month from March 2014 with final maturity in February 2016. Given current iron ore prices and with export volumes still ramping up to the planned long-term run-rate, the Group is seeking to replace this debt with longer-term funding in order to more closely align the maturity profile of the project companies' debt with their revenue generation profile. Whilst the Directors are confident this refinancing exercise will be successful, until it completes, the Group faces a material uncertainty as regards its ability to service its debt in the short term, as discussed in Note 2 to the unaudited interim condensed financial statements. Note 2 also sets out a number of other material uncertainties which could impact the Group's ability to continue as a going concern for the foreseeable future.

 

At the project company level there are two equipment financing facilities whose nominal value in aggregate was $120.3m (31 December 2013: $135.2m). The interest rates on the facilities are LIBOR + 5.59% and LIBOR + 6.0% and their maturity dates are in June 2017 and June 2018.

 

Included within net financial indebtedness is a shareholder loan due from the project companies to SISG with a nominal value of $56.3m (31 December 2013: $56.3m) which is due for repayment by 31 December 2014. There is also a shareholder loan due from the project companies to the Parent Company of $62.6m (31 December 2013: $101.5m) which is eliminated on consolidation. The reduction in this shareholder loan is mainly on account of sales made to the Parent Company to fulfil a prepayment agreement of which $35.8m has been delivered to 30 June 2014.

 

16.        Non-controlling interest put option and deferred income

 

The non-controlling put option liability of $368.6m (31 December 2013: $536.2m) is an estimated amount measured at fair value that would be payable to SISG, as detailed above, in the unlikely event Frank Timis (Executive Chairman) chooses to resign voluntarily from the Board. This put option is fair valued at each period end with the resulting movement being recognised in the consolidated income statement. The basis of the valuation is described in Note 14 to the unaudited interim condensed financial statements.

 

The Group has two sources of deferred income aggregating to $667.9m (31 December 2013: $593.7m). The first source of deferred income of $603.7m (31 December 2013: $573.7m) represents the net present value of the future discounts on iron ore shipments that SISG will receive under its offtake agreement. The movement in the period is due to the imputed interest cost of $36.4m (31 December 2013: $68.9m) partially offset by the release of $6.4m (31 December 2013: $32.5m) to revenue representing the discount received on iron ore shipments delivered to SISG.

 

The second source of deferred income of $64.2m (31 December 2013: $20.0m) represents cash received from a customer for future sales of iron ore. The increase during the current period reflects an advance cash receipt of $80.0m partially offset by associated iron ore sales of $35.8m.

 

17.        Non-controlling equity interest

 

The non-controlling equity interest of $136.7m (31 December 2013: $136.9m) recognised in the consolidated balance sheet is the 10% holding that the Government of Sierra Leone owns in African Railway and Port Services (SL) Limited (ARPS) and which is based on the net assets of ARPS as at the balance sheet date.

 

 

CONSOLIDATED CASH FLOW STATEMENT

 

18.        Summary of cash flow movement

 

A summary of cash flows is shown below:

 

		Six months ended 30 June 2014
		$m
EBITDA		2.7
Release of deferred income		(42.2)
Interest paid		(30.3)
Share based payments		3.8
Net cash flows from operating activities before capital expenditure and working capital movements		(66.0)
Sustaining capital expenditure		(25.0)
Working capital movements		177.2
Free Cash Flow		86.2
Friable Hematite project capital expenditure		(16.7)
Cost to complete Phase I capital expenditure		(6.8)
Other movements		(48.2)
Movement in net debt		14.5

 

19.        Free Cash Flow

 

Free Cash Flow is a measure of the cash generated by operating activities. Capital expenditure relating to the completion of the construction of the project and early design and evaluation work for the Friable Hematite project has therefore been omitted from Free Cash Flow.

 

The release of deferred income of $42.2m is a non-cash item which has been credited to revenue and relates to the discounts received by SISG ($6.4m) and sales made to another customer ($35.8m) which has prepaid for future sales of iron ore. Released deferred income is included within revenue, but is excluded from operating cash flows, as it is a non-cash item.

 

Interest paid during the period was $30.3m and relates to the interest costs paid on the Group's debt facilities, of which the most significant components were $17.0m of interest paid on the convertible bond, $7.1m paid on the pre-export finance facility and $4.1m on the equipment financing facilities.

 

Sustaining capital expenditure principally includes the ongoing capital expenditure relating to increasing the capacity of the tailings storage facility and construction of fuel storage and camp facilities.

 

The working capital inflow of $177.2m is principally due to $80.0m of cash received from a customer for future sales of iron ore, a reduction in trade and other receivables of $50.0m largely due to strong sales revenues in December 2013 for which cash receipts were remitted in January 2014 and an increase in trade and other payables by $39.5m reflecting active management of payments to creditors in a period of low iron ore prices.

 

Other movements include the non-cash accounting charge for borrowing costs and non-cash special items charged to the consolidated income statement which are excluded from EBITDA.

 

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2014

 

INDEPENDENT REVIEW REPORT TO AFRICAN MINERALS LIMITED

to the shareholders of African Minerals Limited

 

Introduction

 

We have been engaged by the Company to review the interim condensed consolidated financial statements in the Interim Report for the six months ended 30 June 2014 which comprises the Interim Condensed Consolidated Income Statement, Interim Condensed Consolidated Statement of Comprehensive Income, Interim Condensed Consolidated Balance Sheet, Interim Condensed Consolidated Statement of Cash Flows, Interim Condensed Consolidated Statement of Changes in Equity and related notes 1 to 19. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim condensed consolidated financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The Interim Report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Report in accordance with International Accounting Standards 34, "Interim Financial Reporting," as adopted by the European Union.

 

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The interim condensed consolidated financial statements included in Interim Report have been prepared in accordance with International Accounting Standards 34, "Interim Financial Reporting," as adopted by the European Union. 

 

Our Responsibility

 

Our responsibility is to express to the Company a conclusion on the interim condensed consolidated financial statements in the Interim Report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the interim condensed consolidated financial statements in the Interim Report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union.

 

Emphasis of Matter

 

In forming our opinion on the interim condensed consolidated financial statements, we have considered the adequacy of the disclosures made in Note 2 to the interim condensed consolidated financial statements concerning the Group's ability to continue as a going concern. The conditions described in Note 2 indicate the existence of material uncertainties which may cast significant doubt about the Group's ability to continue as a going concern.  The material uncertainties include the Group's ability to refinance the pre-export finance facility and raise additional funding; the ability to obtain waivers for forecast covenant breaches on debt facilities; continued low iron ore prices; the impact of the Ebola outbreak; and AML parent company's ability to meet its financial commitments. The interim condensed consolidated financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

 

Ernst & Young LLP

London

29 September 2014

AFRICAN MINERALS LIMITED

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

For the six months ended 30 June 2014

 

		Notes		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Revenue		4		399.2		404.8		869.1
Cost of sales		5		(402.8	)	(296.1	)	(656.4	)
Gross (loss)/profit				(3.6	)	108.7		212.7
Selling and distribution expenses		6		(31.6	)	(39.9	)	(79.7	)
General and administrative expenses		6		(23.0	)	(29.4	)	(50.4	)
Operating (loss)/profit before special items				(58.2	)	39.4		82.6
Special items		6		(26.9	)	(57.7	)	(152.1	)
Operating loss				(85.1	)	(18.3	)	(69.5	)
Finance income				-		-		0.1
Finance costs		7		(53.3	)	(36.3	)	(85.9	)
Imputed interest cost of deferred income		14		(36.4	)	(34.1	)	(68.9	)
Gain on non-controlling interest put option		14		167.6		103.8		169.8
Impairment of available for sale investments				-		(39.6	)	(39.6	)
				77.9		(6.2	)	(24.5	)
Loss before taxation for the period				(7.2	)	(24.5	)	(94.0	)
Taxation		8		15.9		(4.8	)	4.4
Profit/(loss) after taxation for the period				8.7		(29.3)		(89.6	)
Attributable to:
Equity holders of the parent				8.9		(30.9)		(90.7	)
Non-controlling interest				(0.2	)	1.6		1.1
				8.7		(29.3	)	(89.6	)
Earnings/(loss) per share based on profit/(loss) for the period - US cents
Basic earnings/(loss)		9		2.70		(9.34	)	(27.37	)
Diluted earnings/(loss)		9		2.52		(9.34	)	(27.37	)
Loss per share based on Underlying Profit - US cents
Basic and diluted loss		9		(41.35	)	(12.25	)	(24.65	)

 

AFRICAN MINERALS LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2014

 

				(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Profit/(loss) after taxation for the period				8.7		(29.3	)	(89.6	)
Other comprehensive (expense)/income:
Items that will be reclassified subsequently to profit and loss
Loss on available for sale investments				(4.0	)	(28.5	)	(24.6	)
Reclassification of previous loss on available for sale investments				-		39.6		39.6
Deferred taxation on temporary differences				(2.2	)	-		2.5
Other comprehensive (expense)/income for the period				(6.2	)	11.1		17.5
Total comprehensive income/(expense) for the period				2.5		(18.2	)	(72.1	)
Income/(expense) attributable to:
Equity holders of the parent				2.7		(19.8	)	(73.2	)
Non-controlling interest				(0.2	)	1.6		1.1
				2.5		(18.2	)	(72.1	)

 

 

AFRICAN MINERALS LIMITED

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

At 30 June 2014

		Notes		(Unaudited) 30 June 2014 $m			(Unaudited) 30 June 2013 $m		(Audited) 31 December 2013 $m
Assets
Non-current assets
Intangible assets				1.7			10.0		2.1
Property, plant and equipment		10		2,486.4			2,515.9		2,498.5
Available for sale investments				13.0			13.1		16.9
Inventories				32.2			30.0		32.0
Deferred tax assets		8		85.8			60.4		72.1
Deposits				3.0			-		3.0
Total non-current assets				2,622.1			2,629.4		2,624.6
Current assets
Inventories				82.5			64.3		81.5
Trade and other receivables				116.2			136.1		166.2
Cash and cash equivalents		11		331.8			501.6		362.4
Total current assets				530.5			702.0		610.1
Total assets				3,152.6			3,331.4		3,234.7
Equity and liabilities
Equity
Share capital		12		3.3			3.3		3.3
Share premium		12		903.5			903.1		903.2
Equity reserves		12		133.3			139.8		141.6
Fair value reserve		12		(0.2		)	(0.1	)	3.8
Retained losses				(188.8		)	(147.6	)	(207.4	)
Equity attributable to owners of the parent				851.1			898.5		844.5
Non-controlling interest				136.7			137.4		136.9
Total equity				987.8			1,035.9		981.4
Non-current liabilities
Interest-bearing loans and borrowings		13		500.0			493.1		571.9
Deferred income		14		603.7			520.7		551.9
Provisions		15		38.0			33.1		36.5
Total non-current liabilities				1,141.7			1,046.9		1,160.3
Current liabilities
Interest-bearing loans and borrowings		13		290.6			290.1		263.8
Trade and other payables				227.1			304.1		187.6
Deferred income		14		64.2			27.2		41.8
Non-controlling interest put option		14		368.6			602.2		536.2
Provisions		15		72.6			25.0		63.6
Total current liabilities					1,023.1		1,248.6		1,093.0
Total liabilities					2,164.8		2,295.5		2,253.3
Total equity and liabilities					3,152.6		3,331.4		3,234.7

 

The financial statements were approved by the Board on 29 September 2014 and were signed on its behalf by:

 

 

 

Alan Watling	Matthew Hird
Chief Executive Officer	Chief Financial Officer

AFRICAN MINERALS LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 30 June 2014

 

		Notes		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Operating cash flow before working capital changes		17		(72.4	)	27.0		93.4	*
Increase in inventories				(1.2	)	(10.2	)	(29.4	)
Decrease/(increase) in trade and other receivables				50.0		(93.6	)	(135.4	)
Increase/(decrease) in provisions				8.9		(37.2)	*	3.2
Increase in other deferred income				80.0		-		20.0	*
Increase/(decrease) in trade and other payables				39.5		(43.3	)	(148.4	)*
Net cash flow from operating activities				104.8		(157.3	)	(196.6	)
Cash flows from investing activities
Interest received				-		-		0.1
Payments to acquire property, plant and equipment				(48.5	)	(161.0)	*	(222.5	)*
Proceeds received from pre-production sales (commissioning adjustment)				-		50.8		52.2
Net cash outflow from investing activities				(48.5	)	(110.2	)	(170.2	)
Cash flows from financing activities
Proceeds of exercise of options and warrants				0.1		0.6		0.7
Proceeds from borrowings				-		217.4		266.1
Repayment of borrowings				(56.7	)	(12.5	)	(69.9	)
Interest paid and costs of financing				(30.3	)	(38.3)	*	(69.0	)
Net cash flow from financing activities				(86.9	)	167.2		127.9
Net (decrease)/increase in cash and cash equivalents				(30.6	)	(100.3	)	(238.9	)
Net foreign exchange difference				-		-		(0.6	)
Cash and cash equivalents at beginning of period				362.4		601.9		601.9
Cash and cash equivalents at end of period		11		331.8		501.6		362.4

 

* Prior period numbers have been restated to reflect consistent disclosure treatment with the current period.

AFRICAN MINERALS LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2014

 

		Attributable to equity holders of the parent
		Share capital $m		Share premium account $m		Equity reserves $m		Fair value reserves $m		Retained losses $m		Total $m		Non- controlling interest $m		Total $m
As at 1 January 2013		3.3		902.4		137.9		(11.2	)	(116.7	)	915.7		135.8		1,051.5
(Loss)/profit for the year		-		-		-		-		(90.7	)	(90.7	)	1.1		(89.6	)
Loss on available for sale investments		-		-		-		(24.6	)	-		(24.6	)	-		(24.6	)
Reclassification of previous loss on available for sale investments		-		-		-		39.6		-		39.6		-		39.6
Deferred taxation on temporary differences		-		-		2.5		-		-		2.5		-		2.5
Total comprehensive income/(expense)		-		-		2.5		15.0		(90.7	)	(73.2	)	1.1		(72.1	)
Allotments during the year		-		0.7		-		-		-		0.7		-		0.7
Remeasurement of warrants		-		-		2.1		-		-		2.1		-		2.1
Share-based payments		-		-		(0.8	)	-		-		(0.8	)	-		(0.8	)
Reserves transfer - warrants		-		0.1		(0.1	)	-		-		-		-		-
As at 31 December 2013 (Audited)		3.3		903.2		141.6		3.8		(207.4	)	844.5		136.9		981.4
Profit for the period		-		-		-		-		8.9		8.9		(0.2	)	8.7
Loss on available for sale investments		-		-		-		(4.0	)	-		(4.0	)	-		(4.0	)
Deferred taxation on temporary differences		-		-		(2.2	)	-		-		(2.2	)	-		(2.2	)
Total comprehensive (expense)/income		-		-		(2.2	)	(4.0	)	8.9		2.7		(0.2	)	2.5
Allotments during the period		-		0.1		-		-		-		0.1		-		0.1
Share-based payments		-		-		3.8		-		-		3.8		-		3.8
Reserves transfer - options		-		0.2		(9.9	)	-		9.7		-		-		-
As at 30 June 2014 (Unaudited)		3.3		903.5		133.3		(0.2	)	(188.8	)	851.1		136.7		987.8
As at 1 January 2013		3.3		902.4		137.9		(11.2	)	(116.7	)	915.7		135.8		1,051.5
(Loss)/profit for the period		-		-		-		-		(30.9	)	(30.9	)	1.6		(29.3	)
Loss on available for sale investments		-		-		-		(28.5	)	-		(28.5	)	-		(28.5	)
Reclassification of previous loss on available for sale investments		-		-		-		39.6		-		39.6		-		39.6
Total comprehensive income/(expense)		-		-		-		11.1		(30.9	)	(19.8	)	1.6		(18.2	)
Allotments during the period		-		0.6		-		-		-		0.6		-		0.6
Share-based payments		-		-		2.0		-		-		2.0		-		2.0
Reserves transfer - warrants		-		0.1		(0.1	)	-		-		-		-		-
As at 30 June 2013 (Unaudited)		3.3		903.1		139.8		(0.1	)	(147.6	)	898.5		137.4		1,035.9

 

  

1. BASIS OF PREPARATION

 

Basis of preparation

The unaudited interim condensed consolidated financial statements of the Group have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting as adopted by the European Union for the six months ended 30 June 2014. The unaudited condensed consolidated financial statements are not a complete set of financial statements and should be read in conjunction with the Group's annual financial statements for the year ended 31 December 2013. These annual financial statements are prepared in accordance with the International Financial Reporting Standards ("IFRS") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC"), as issued by the International Accounting Standards Board ("IASB") and adopted by the European Union ("EU").

 

The unaudited interim condensed consolidated financial statements for the six months ended 30 June 2014 do not constitute statutory accounts and have been drawn up using accounting policies and presentation consistent with those applied in the audited accounts for the year ended 31 December 2013. In order to apply consistent disclosure treatment with the current period's disclosures, certain prior period items have been restated within the interim condensed consolidated statement of cash flows. The auditor's report for the year ended 31 December 2013 was unqualified.

 

New and amended standards and interpretations

The accounting policies adopted are consistent with those of the previous financial year. The following new and amended IFRS and Interpretations have the following effective dates and related impacts on the Group:

		Effective		Impact on the Group
IFRS 10	Consolidated Financial Statements	1 January 2014		Immaterial impact
IFRS 11	Joint Arrangements	1 January 2014		No impact
IFRS 12	Disclosure of Involvement With Other Entities	1 January 2014		Immaterial impact
IAS 28	Investments in Associates and Joint Ventures - Amendment	1 January 2014		No impact
IAS 36	Recoverable amounts disclosure for non-financial assets	1 January 2014		Immaterial impact
IFRIC 21	Levies	1 January 2014		Immaterial impact

 

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

Going concern

The Directors have prepared these unaudited interim condensed consolidated financial statements on the assumption that the Group is able to continue as a going concern (please refer to Note 2 for further details).

 

Accounting convention

The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments that have been measured at fair value. The unaudited interim condensed consolidated financial statements are presented in US dollars and all values are rounded to the nearest millions except when otherwise indicated.

 

Non-GAAP performance indicators

The Group discloses certain non-GAAP financial performance indicators, including EBITDA and Underlying Profits, and those are reconciled to comparable IFRS financial measures. These non-GAAP performance indicators are used to assess the performance of the Group, and are used for management reporting only. They are not a substitute for the IFRS measures and should be considered alongside those measures.

 

Significant accounting judgements, estimates and assumptions

The preparation of the Group's unaudited interim condensed consolidated financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the unaudited interim condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Those accounting judgements, estimates and assumptions for the unaudited interim condensed consolidated financial statements are consistent with those disclosed in the Group's consolidated financial statements for the year ended 31 December 2013.

 

Segment reporting

The Group is managed as a single operating segment which developed a mine and related infrastructure achieving commercial production from the beginning of January 2013. In accordance with IFRS 8 Operating Segments, the Group presents its results as a single segment.

 

The Group does not have any significant non-current assets that are located in the country of domicile of the Company. The majority of the non-current assets are located in Sierra Leone.

 

2. GOING CONCERN

The Group has prepared a cash flow and financial forecast based on best estimates of key variables including volumes, iron ore prices, operating costs, capital expenditure and ongoing legal cases (as discussed in Note 16) through to December 2015 that supports the conclusion of the Directors that there is sufficient funding available to meet the Group's anticipated cash flow requirements to this date. However, there are a number of matters which could impact the Group's ability to continue as a going concern:

 

·      The Group put in place a $250.0m pre-export financing facility in April 2013 and as at 30 June 2014 it was fully drawn. The pre-export finance facility requires repayments of $10.4m per month from March 2014 for 24 months and repayments have been made in full to date. As this repayment schedule is not aligned with the long term cash flows of the project there is a risk that the Group will not be able to sustain these monthly repayments throughout the forecast period. In addition to refinancing the pre-export finance facility, the Group also needs to raise further funding to provide sufficient working capital for ongoing operations and liquidity for capital expansion and development of the friable hematite ore body. In the financial results for the year ended 31 December 2013, the Group disclosed this matter as a material uncertainty. 

·      The Group's debt facility arrangements require compliance with certain financial ratios. The financial covenant tests for all facilities in the period, up to and including 30 June 2014, have been passed. However, based on the forecast, the Group will not comply with all of these ratios in the forecast period.

·      The Group is exposed to volatile iron ore prices. Iron ore prices occasionally dip significantly, as they have done at the present time. Historically though, such dips have only lasted for a few months at a time. However, the current low prices have now remained below $80 per tonne since 19 May 2014 thereby negatively impacting the Group's cash flows.

·      As a result of the recent Ebola outbreak in West Africa, the Government of Sierra Leone has declared a State of Public Emergency and certain international airlines have suspended services to the region.  Further escalation of this outbreak could negatively impact the Group's ability to operate the mine and associated facilities.

·      During August 2014, AML and SISG agreed to make available $284m of cash held at the project level, previously earmarked for Phase II expansion, for working capital purposes. It was also agreed that the Project Companies should be financially and operationally separate from the activities of AML.  In light of this financial separation, there is uncertainty over the sources of funding to meet AML's future financial commitments.

 

Having considered the above matters the Directors have concluded that a series of negative events associated with any one or combination of these issues may have a negative impact on the viability of the Group. The Directors have therefore concluded that these matters constitute material uncertainties that may cast significant doubt over the Group's ability to continue as a going concern. 

 

Nevertheless, after making appropriate enquiries and considering these material uncertainties, the Directors believe that the Group will continue to operate as a going concern for the foreseeable future for the following reasons:

 

·     The Directors have a detailed plan to refinance the pre-export finance facility with longer-term funding from bank financing and/or the debt capital markets, and for both options, advisers have been appointed. In respect of bank financing, technical consultants have been engaged by the mandated lead arranger and are in the process of reviewing the five year operating plan, and prospective lenders have already been approached to gauge their appetite to a long term loan which refinances the pre-export finance facility, provides sufficient working capital in the near term and puts in place sufficient liquidity to allow an expansion in capacity to 25mt per annum and development of the friable hematite ore body. Extensive preparation has also been completed for any potential debt capital issuance, including completion of due diligence and related documentation.

·     The Group has successfully negotiated waiver of covenants in the past, including for the forthcoming September 2014 test date, and is confident that this will be achievable in the future.

·     Historical experience and the most recent analyst forecasts indicate that iron ore prices will recover from their current low levels. The directors of the Project Companies have also approved a financial recovery plan that includes an increase in export volumes, a reduction in the cost base and a revenue enhancement strategy, with a view to making the Project Companies cash flow positive on a sustainable basis by the end of 2014 in the current depressed iron ore price environment. In addition, the proposed refinancing of the pre-export financing facility above will provide additional working capital to address the short term impact of low iron ore prices.

·     The Government of Sierra Leone and the international community are taking actions to control the spread of Ebola. Furthermore, controls have been introduced at the sites of the Group and contingency plans have been put in place so that the employees and contractors of the Group are protected from the spread of Ebola. Despite all of these measures, there remains a residual risk that a spread of Ebola will impact the Group's ability to operate the project.

·     As a result of approval from SISG and AML to release the funds restricted for Phase II expansion, and other options to manage working capital, including implementation of the financial recovery plan, the Project Companies should have sufficient cash to meet near term commitments including the provision of additional working capital, funding of cost reduction initiatives and financing operating losses and debt repayments. To date, $142.0m has been released, and a further $101.0m has been agreed to be released in October 2014, leaving $41.0m remaining in the restricted bank account.

·    The Directors are reviewing the optimum capital structure for AML, with a view to putting in place a funding plan for AML separate from the funding needs of the Project Companies. The plan will involve raising shorter term funding to meet AML's commitments in the near term and in addition, the Company is working with its advisors on other sources of funding for the medium to long term.

 

Accordingly, these financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group were unable to continue as a going concern.

NON-GAAP PERFORMANCE INDICATORS

The Directors monitor the financial performance and financial position of the Group based on a number of key performance indicators including EBITDA, "C1" production cash costs, "All-in" cash costs, Underlying Profits and net financial indebtedness.

(a) EBITDA

The Group presents EBITDA because it believes that EBITDA is a useful measure of the profitability of the Group and is a proxy for cash earnings from current trading performance. The Group calculates EBITDA as earnings/(loss) before tax, finance, depreciation, impairment, amortisation and special items.

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Loss before non-operating items and taxation		(85.1	)	(18.3	)	(69.5	)
Depreciation		60.5		60.2		119.6
Amortisation		0.4		0.4		0.7
Special items		26.9		57.7		152.1
EBITDA		2.7		100.0		202.9

 

 

(b) Underlying Profits

"Underlying Profits" is an alternative earnings measure, which the Directors believe provides a more consistent measurement for comparing the underlying financial performance of the Group's operations. Underlying Profits is the profit/(loss) for the period excluding special items, revaluation of the SISG put option and their resultant tax and non-controlling interest effect.

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Profit/(loss) attributable to equity holders of the parent		8.9		(30.9	)	(90.7	)
Gain on non-controlling interest put option		(167.6	)	(103.8	)	(169.8	)
Impairment of available for sale investments		-		39.6		39.6
Special items		26.9		57.7		152.1
Non-controlling interest of special items		-		-		(1.1	)
Tax effect from above items		(5.5)		(3.2	)	(11.8	)
Underlying Profits attributable to equity holders of the parent		(137.3	)	(40.6	)	(81.7	)

 

 

3. NON-GAAP PERFORMANCE INDICATORS (continued)

(c) "C1" production cash cost and "All-in" cash costs

"C1" production cash cost represents the cash costs of the mining, railway and port operations divided by wet tonnes shipped and excludes depreciation and amortisation.

"All-in" cash cost represent the cash costs of production (mining, railway and port) selling, general and administration expenses and sustaining and optimising capital expenditure divided by wet tonnes shipped.

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Cost of sales		(402.8	)	(296.1	)	(656.4	)
Add: Depreciation within cost of sales		59.1		59.8		116.9
"C1" production cash cost		(343.7	)	(236.3	)	(539.5	)
Selling costs		(31.6	)	(39.9	)	(79.7	)
General and administrative expenses		(23.0	)	(29.4	)	(50.4	)
Add: Depreciation within general and administrative expenses		1.4		0.4		2.7
Add: Amortisation of intangible assets within general and administrative expenses		0.4		0.4		0.7
Sustaining capital expenditure		(25.0	)	(29.8	)	(50.4	)
"All-in" cash costs		(421.5	)	(334.6	)	(716.6	)
Ore shipped (wet tonnes)		8,890,315		5,533,817		12,128,348
"C1" production cash cost per tonne (US$)		38.66		42.70		44.48
"All-in" cash costs per tonne (US$)		47.41		60.46		59.08

(d) Net financial indebtedness

Net financial indebtedness as defined by the Group comprises cash and cash equivalents and loans and borrowings.

 

		(Unaudited) 30 June 2014 $m		(Unaudited) 30 June 2013 $m		(Audited) 31 December 2013 $m
Cash and cash equivalents		331.8		501.6		362.4
Current loans and borrowings		(290.6	)	(290.1	)	(263.8	)
Non-current loans and borrowings		(500.0	)	(493.1	)	(571.9	)
Net financial indebtedness		(458.8	)	(281.6	)	(473.3	)

 

4. REVENUE

 

Revenue by product:		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
All in 32		253.2		198.4		225.0
Fines		90.8		126.4		252.9
Lump blend		55.2		80.0		391.2
Total revenue		399.2		404.8		869.1

 

All export sales of iron ore in 2014 were delivered to China (six months to 30 June 2013 and year to 31 December 2013: All to China).

 

4. REVENUE (continued)

Revenue by customer:

 

During the period, sales were made to the following customers as revenue from export sales of iron ore:

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Shandong Iron and Steel Group		189.7		220.0		460.6
China Railway Materials Commercial Corporation		95.8		107.5		248.8
Other customers		113.7		77.3		159.7
Total revenue		399.2		404.8		869.1

Other customers include sales of 869,107 wet tonnes with a value of $35.8m in the six months to 30 June 2014 delivered under prepay contracts (six months to 30 June 2013 and year to 31 December 2013: nil). The Group has entered into two prepay contracts, details of which can be found in Note 14.

 

5. COST OF SALES

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Contractors		184.9		125.5		297.8
Consumables		79.4		51.2		118.0
Depreciation of mine, railway and port assets		59.1		59.8		116.9
Personnel costs		44.2		46.5		82.5
Travel and entertainment		4.3		5.5		10.3
Freight costs		4.4		3.5		9.6
Maintenance and repairs		2.5		3.5		6.3
IT and communications		3.1		2.3		6.0
Consultants		5.0		1.6		4.8
Changes in inventories		9.3		(7.4)		(7.7	)
Other		6.6		4.1		11.9
Total cost of sales		402.8		296.1		656.4

 

 

 

Cost of sales by function:		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Mine		180.0		108.6		275.3
Rail		30.7		25.5		55.3
Port		107.6		79.0		162.0
Central services		25.4		23.2		46.9
		343.7		236.3		539.5
Depreciation of mine, railway and port assets		59.1		59.8		116.9
Total cost of sales		402.8		296.1		656.4

6. NET OPERATING EXPENSES

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Selling and distribution expenses
Sales commissions		20.0		24.4		44.5
Government royalties		11.3		11.7		24.9
Demurrage		0.3		3.8		10.3
Total selling and distribution expenses		31.6		39.9		79.7
Demurrage is shown net of income from the port of $5.1m during the period (six months to 30 June 2013: $2.4m; year to 31 December 2013: $6.8m).
General and administrative expenses
Personnel costs		11.8		16.6		25.9
Travel		2.7		4.7		6.2
Share based payments expense		3.8		2.0		(0.8	)
Office costs		1.7		1.3		3.1
Insurance		0.5		2.6		4.7
Depreciation of property, plant and equipment		1.4		0.4		2.7
Amortisation of intangible assets		0.4		0.4		0.7
Other operating charges		0.7		1.4		7.9
Total general and administrative expenses		23.0		29.4		50.4
Special items1
Penalties for SISG warranty breach		5.7		40.0		46.3
Transaction costs and other professional fees		2.9		3.3		9.0
Project optimising costs		8.8		-		-
Onerous offtake contracts and contractor claims		9.5		8.2		19.7
Impairment of property, plant and equipment		-		6.2		25.1
Impairment of exploration expenditure		-		-		7.6
Adviser's fees claim		-		-		37.0
Provision for doubtful debts		-		-		7.4
Total special items		26.9		57.7		152.1

¹     Special items are significant items of income and expense, presented separately, due to their non-recurring nature or the expected infrequency of the events giving rise to them.

 

Penalties for SISG warranty breach

The purchase and sale agreements with SISG guarantee that the Group's Tonkolili operation would reach a production rate of 12mtpa by the start of 2013. This production rate was not achieved until 1 May 2013 for which SISG claimed compensation. The agreements also contain warranties by the Group about the business and finances of the project Companies as at the closing of the transaction, and certain breaches have been identified and claimed by SISG.

The Group has reached a commercial settlement of these claims with SISG, which is in full and final settlement of all production guarantees, and all warranty claims except those relating to environment and tax which have a longer limitation period. In 2014, a penalty expense of $5.7m was recognised in respect of these warranty breaches (six months to 30 June 2013: $40.0m; year to 31 December 2013: $46.3m).

 

Transaction costs and other professional fees

Transaction costs and other professional fees in the period of $2.9m (six months to 30 June 2013: $3.3m; year to 31 December 2013: $9.0) principally include legal fees relating to defending the claim for financial adviser's fees filed by a third party. The amount of $3.3m in 2013 includes residual costs of the investment made by SISG in March 2012.

 

6. NET OPERATING EXPENSES (continued)

Project optimising costs

 

Project optimising costs relate to debottlenecking certain aspects of the rail and port operations to allow capacity to increase to 25mt per annum.

Onerous offtake contracts and contractor claims

There was an additional expense of $9.5m for onerous offtake contracts recognised in the six months to 30 June 2014 (six months to 30 June 2013: $8.2m; year to 31 December 2013: $19.7m). The amounts include compensation charges for an inability to fulfil several offtake contracts in 2014 and 2015.

Adviser's fees claim

In 2013, an expense of $37.0m was recognised relating to a claim for financial adviser's fees relating to fund raisings and transactions in prior years (refer to Note 16 for further details). This expense is net of an existing provision of $6.2m relating to this claim which was recognised in 2012.

7. FINANCE COSTS

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Borrowing costs		41.9		35.4		75.4
Financing fees		9.8		0.9		11.2
Unwinding of discount on restoration and decommissioning provision (Note 15)		1.6		-		1.6
Gain on related party discounted interest rate (Note 13)		-		-		(4.4	)
Warrants costs (Note 12)		-		-		2.1
Total finance costs		53.3		36.3		85.9

Borrowing costs relate to the effective interest rate incurred on facilities referred to in Note 13. 

Financing fees include political risk insurance for facilities secured on the Group's assets in Sierra Leone, legal fees incurred in relation to finance raising activities and bank charges.

 

8. TAXATION

Analysis of credit for the period: 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Deferred tax
Current period		32.5		(6.1	)	1.2
Tax adjustments in respect of prior periods		(16.6	)	1.3		3.2
Deferred tax credit/(charge)		15.9		(4.8	)	4.4

The effective corporate income tax for the year is lower than the statutory rate of corporation tax in the UK of 21.5% (30 June 2013: 23.5%; 31 December 2013: 23.3%).

A reconciliation between the tax credit reflected in the consolidated income statement and the expected tax credit based on the statutory rate of corporation tax for the period is shown below:

8. TAXATION (continued)

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended     31 December 2013 $m
Loss on ordinary activities before tax		(7.2	)	(24.5	)	(94.0	)
Group's domestic tax rate is as follows:
Loss before tax multiplied by the standard rate of UK corporation tax 21.5% (six months to 30 June 2013 23.5%; year to 31 December 2013: 23.3%)		1.5		5.8		21.9
Effects of:
Net income not taxable		36.0		-		39.5
Expenses not deductible for tax purposes		(1.8	)	4.0		(34.4	)
Derecognition of previously recognised deferred tax assets		(0.4	)	(9.0	)	(9.0	)
Recognition of previously unrecognised temporary differences		-		0.1		0.6
Tax adjustments in respect of prior periods		(16.6	)	1.3		3.2
Losses not recognised		(6.7	)	(6.7	)	(16.4	)
Effect of overseas tax rates		3.9		(0.3	)	(1.0	)
Total taxation credit		15.9		(4.8	)	4.4

 

Deferred income tax asset

Based on the Group's iron ore production in the six months to 30 June 2014 and forecast performance, the Directors have increased confidence of its ability to generate taxable profits against which brought forward tax losses may be utilised.

The movement in deferred tax assets and liabilities during the period, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: 

 

 

Deferred income tax assets		Tax losses $m		Other temporary differences $m		Property plant and equipment $m		Total $m
At 1 January 2013		395.3		6.3		0.2		401.8
Credited/(charged) to consolidated income statement		108.0		(4.7	)	(0.2	)	103.1
Credited to other comprehensive income		-		2.5		-		2.5
As at 31 December 2013		503.3		4.1		-		507.4
Credited to consolidated income statement		64.3		0.3		-		64.6
Charged to other comprehensive income		-		(2.2	)	-		(2.2	)
As at 30 June 2014		567.6		2.2		-		569.8
At 1 January 2013		395.3		6.3		0.2		401.8
Credited/(charged)  to consolidated income statement		60.3		(5.9	)	(0.2	)	54.2
As at 30 June 2013		455.6		0.4		-		456.0

 

8. TAXATION (continued)

Deferred income tax liabilities								Property plant and equipment $m
At 1 January 2013								336.6
Charged to consolidated income statement								98.7
As at 31 December 2013								435.3
Charged to consolidated income statement								48.7
As at 30 June 2014								484.0
At 1 January 2013								336.6
Charged to consolidated income statement								59.0
As at 30 June 2013								395.6

 

Net deferred tax asset
At 1 January 2013								65.2
Tax credit recognised in consolidated income statement								4.4
Tax credit recognised in other comprehensive income								2.5
As at 31 December 2013								72.1
Tax credit recognised in consolidated income statement								15.9
Tax charge recognised in other comprehensive income								(2.2	)
As at 30 June 2014								85.8
At 1 January 2013								65.2
Tax charge recognised in consolidated income statement								(4.8	)
As at 30 June 2013								60.4

Unrecognised tax losses

Where the realisation of deferred tax assets is dependent on future profits, losses carried forward are recognised only to the extent that business forecasts predict that such profits will be available. The Group has unrecognised deferred tax assets of approximately $45.9m (31 December 2013: $39.8m) in respect of tax losses that are available indefinitely for offset against future taxable profits. Furthermore, the Group has unrecognised deferred tax assets of nil (31 December 2013: $0.1m) on future deductions available in relation to employee share schemes, $0.8m (31 December 2013: $0.6m) in relation to capital allowances in excess of depreciation and $0.6m (31 December 2013: $0.7m) in relation to unrealised capital losses on investments held.

Change in corporation tax rate

United Kingdom

Provisions to reduce the rate of corporation tax to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015 were substantively enacted on 2 July 2013 under the Provisional Collection of Taxes Act 1968. Deferred tax balances have therefore been provided for at the 20% rate.

Sierra Leone

The rate of corporation tax is 25% as provided for in the Group's Mining Lease Agreement and has not changed in the period.

 

9. EARNINGS/(LOSS) PER SHARE

(a) Basic and diluted earnings/(loss) per share based on profit for the period

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended    31 December 2013 $m
Profit/(loss) for the period attributable to owners of the parent		8.9		(30.9	)	(90.7	)

 

Basic earnings per share is calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the period.

 

 

		Shares		Shares		Shares
Weighted average number of common shares in issue		331,903,535		331,412,112		331,402,576
Basic earnings/(loss) per share - US cents		2.70		(9.34	)	(16.19	)

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For share options, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.

Where there is a basic loss per share, the dilution effect is ignored.

 

		Shares		Shares		Shares
Weighted average number of common shares in issue		331,903,535		331,412,112		331,402,576
Adjustment for share options and warrants		23,290,237		-		-
		355,293,772		331,412,112		331,402,576
Diluted earnings/(loss) per share - US cents		2.52		(9.34	)	(27.37	)

 

(b) Basic and diluted earnings per share based on Underlying Profits

Basic earnings/(loss) per share based on Underlying Profits is calculated by dividing Underlying Profits by the weighted average number of ordinary shares in issue during the period. 

 

	(Unaudited) Six Months Ended 30 June 2014 $m	(Unaudited) Six Months Ended 30 June 2013 $m	(Audited) Year Ended 31 December 2013 $m
Underlying Profits (Note 3)	(137.3	(40.6	(81.7
	Shares	Shares	Shares
Weighted average number of common shares in issue	331,903,535	331,412,112	331,402,576
Basic and diluted loss per share - US cents	(41.35	(12.25	(24.65

Where there is a basic loss per share, the dilution effect is ignored.

 

10. PROPERTY, PLANT AND EQUIPMENT

During the six months ended 30 June 2014, the Group acquired property, plant & equipment and assets under construction with a cost of $48.4m (six months to 30 June 2013: $191.5m; year to 31 December 2013: $252.4m). Of these acquisitions, $25.0m related to sustaining and optimising capital expenditure (six months to 30 June 2013: $29.8m; year to 31 December 2013: $50.4m), $16.6m related to the friable hematite project expenditure (Phase 2) (six months to 30 June 2013: $25.4m; year to 31 December 2013: $50.6m) and $6.8m related to residual Phase 1 expenditure (six months to 30 June 2013: $130.1m; year to 31 December 2013: $151.4m).

 

The total depreciation on property, plant & equipment for the six months to 30 June 2014 was $60.5m (six months to 30 June 2013: $60.2m; year to 31 December 2013: $119.6m). There was a $6.2m impairment recognised at 30 June 2013 in relation to certain infrastructure at the project sites (six months to 30 June 2014: nil; year to 31 December 2013: $25.1m).

 

The Group did not transfer any assets under construction to property, plant & equipment during the six months to 30 June 2014. During the six months to 30 June 2013, $2,516.8m was transferred from assets under construction to property, plant & equipment. Most of this balance was transferred at the beginning of January 2013 as the Group commenced production as at 1 January 2013 and depreciation commenced thereafter. As at 30 June 2014 assets under construction of $115.7m (30 June 2013: $30.1m; 31 December 2013: $84.2m) predominantly related to capitalised expenditure on the friable hematite project.

 

Certain property, plant and equipment is pledged as security over the equipment financing facilities. Refer to Note 13.

11. CASH AND CASH EQUIVALENTS 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended    31 December 2013 $m
Restricted cash		314.0		460.9		304.6
Cash at bank and in hand		17.8		40.7		57.8
Total		331.8		501.6		362.4

Restricted cash includes $284.0m (30 June 2013: $460.9m; 31 December 2013: $304.6m) received from the Shandong Iron and Steel Group ('SISG') transaction, which is allocated towards the funding of the friable hematite project (Phase 2). This restriction is based on the shareholders' agreement with SISG, which requires the approval of the Company and SISG for the drawdown of funds. Restricted cash also includes $30.0m held in escrow as cash collateral for repayment of the cost overrun facility. Refer to Note 13.

 

12. SHARE CAPITAL AND RESERVES

(a) SHARE CAPITAL

		(Unaudited) Six Months Ended 30 June 2014				(Unaudited) Six Months Ended 30 June 2013				(Audited) Year Ended 31 December 2013
		Number of shares		$m		Number of shares		$m		Number of shares		$m
Authorised
Common shares of US$0.01 each		500,000,000		5.0		500,000,000		5.0		500,000,000		5.0
Preference shares of US$0.001 each		100,000,000		0.1		100,000,000		0.1		100,000,000		0.1
Issued and fully paid - common shares of US$ 0.01 each
As at 1 January		331,492,530		3.3		331,225,862		3.3		331,225,862		3.3
Allotments during the period		424,584		-		225,000		-		266,668		-
As at 30 June/31 December		331,917,114		3.3		331,450,862		3.3		331,492,530		3.3

Preference shares are authorised but not issued.

12. SHARE CAPITAL AND RESERVES (continued)

 (b) SHARE PREMIUM

 

		$m
At 1 January 2013		902.4
Share allotments during the year		0.7
Reserves transfer - warrants		0.1
As at 31 December 2013		903.2
Share allotments during the period		0.1
Reserves transfer - options exercised		0.2
As at 30 June 2014		903.5

 

At 1 January 2013		902.4
Share allotments during the period		0.6
Reserves transfer - warrants		0.1
As at 30 June 2013		903.1

Common share allotments during the period were as follows:

Share options

108,334 (six months to 30 June 2013: nil; year to 31 December 2013: 41,668) new common shares were issued for consideration of $0.1m (six months to 30 June 2013: nil; year to 31 December 2013: $0.1m) on the exercise of share options.

Warrants

No new common shares were issued in the six months to 30 June 2014 on the exercise of share warrants. In the six months to 30 June 2013, 225,000 new common shares were issued on the exercise of share warrants for a consideration of $0.6m (year to 31 December 2013: $0.6m).

Share scheme

316,250 new common shares were issued during the period on the achievement of corporate objectives under the Employee Share Scheme (year to 31 December 2013: nil).

Total allotments

424,584 (six months to 30 June 2013: 225,000; year to 31 December 2013: 266,668) shares were issued for consideration of $0.1m (six months to 30 June 2013: $0.6m; year to 31 December 2013: $0.7m).

12. SHARE CAPITAL AND RESERVES (continued)

(c) EQUITY RESERVES

The balance held in equity reserves relates to the equity component of the convertible bond, share based payments, options and warrants. 

		$m
As at 1 January 2013		137.9
Remeasurement of warrants		2.1
Share-based payments		(0.8	)
Reserves transfer - warrants		(0.1	)
Deferred taxation on temporary differences		2.5
As at 31 December 2013		141.6
Share-based payments		3.8
Reserves transfer - options lapsed		(9.7	)
Reserves transfer - options exercised		(0.2	)
Deferred taxation on temporary differences		(2.2	)
As at 30 June 2014		133.3

 

As at 1 January 2013		137.9
Share-based payments		2.0
Reserves transfer - warrants		(0.1	)
As at 30 June 2013		139.8

(d) FAIR VALUE RESERVES

Balances held in fair value reserves relate to fair value movements in the period on available for sale investments.

 

		$m
As at 1 January 2013		(11.2	)
Loss on available for sale investments		(24.6	)
Reclassification of the previous loss on the available for sale investments		39.6
As at 31 December 2013		3.8
Loss on available for sale investments		(4.0	)
As at 30 June 2014		(0.2	)

 

As at 1 January 2013		(11.2	)
Loss on available for sale investments		(28.5	)
Reclassification of the previous loss on the available for sale investments		39.6
30 June 2013		(0.1	)

 

13. LOANS AND BORROWINGS

	Unsecured			Secured
	Convertible bond	SISG shareholder loan		Cost overrun facility	Pre-export facility	Equipment financing facility - 1	Equipment financing facility - 2	Other asset financing		Total
	$m	$m		$m	$m	$m	$m	$m		$m
Carrying values of loans and borrowings
At 1 January 2013	358.7	-		79.4	-	85.7	57.0	0.4		581.2
Conversion of payable to loan	-	56.3		-	-	-	-	-		56.3
Drawn down	-	-		-	250.0	-	16.1	-		266.1
Capital repayment	-	-		(42.5)	-	(17.1)	(10.2)	(0.1)		(69.9)
Interest accrued at the effective rate	44.8	1.3		8.5	10.2	5.5	5.1	-		75.4
Interest and transaction fees paid	(34.0)	-		(7.8)	(17.6)	(4.9)	(4.7)	-		(69.0)
Gain on related party discounted interest rate	-	(4.4)		-	-	-	-	-		(4.4)
At 31 December 2013	369.5	53.2		37.6	242.6	69.2	63.3	0.3		835.7
Capital repayment	-	-		-	(41.7)	(11.1)	(3.8)	(0.1)		(56.7)
Interest accrued at the effective interest rate	22.8	2.1		2.1	11.0	2.3	1.6	-		41.9
Interest and transaction fees paid	(17.0)	-		(2.1)	(7.1)	(2.0)	(2.1)	-		(30.3)
At 30 June 2014	375.3	55.3		37.6	204.8	58.4	59.0	0.2		790.6
At 1 January 2013	358.7	-		79.4	-	85.7	57.0	0.4		581.2
Drawn down	-	-		-	201.3	-	16.1	-		217.4
Capital repayment	-	-		(5.0)	-	(7.4)	-	(0.1)		(12.5)
Interest accrued at the effective rate	22.0	-		4.3	3.5	3.0	2.6	-		35.4
Interest and transaction fees paid	(17.0)	-		(5.1)	(11.2)	(2.6)	(2.4)	-		(38.3)
At 30 June 2013	363.7	-		73.6	193.6	78.7	73.3	0.3		783.2
At 30 June 2014
Current	32.0	55.3		37.6	128.5	23.4	13.7	0.1		290.6
Non-current	343.3	-		-	76.3	35.0	45.3	0.1		500.0
At 31 December 2013
Current	32.0	53.2		37.6	101.5	24.2	15.1	0.2		263.8
Non-current	337.5	-		-	141.1	45.0	48.2	0.1		571.9
At 30 June 2013
Current	32.0	-		73.6	32.4	78.7	73.3	0.1		290.1
Non-current	331.7	-		-	161.2	--	-	0.2		493.1
Nominal value of loans and borrowings
At 1 January 2013	400.0	-		80.0	-	87.6	58.8	0.4		626.8
Conversion of payable to loan	-	56.3		-	-	-	-	-		56.3
Drawn down	-	-		-	250.0	-	16.1	-		266.1
Capital repayment	-	-		(42.5)	-	(17.1)	(10.2)	(0.1)		(69.9)
At 31 December 2013	400.0	56.3		37.5	250.0	70.5	64.7	0.3		879.3
Capital repayment	-	-		-	(41.7)	(11.1)	(3.8)	(0.1)		(56.7)
At 30 June 2014	400.0	56.3		37.5	208.3	59.4	60.9	0.2		822.6
At 1 January 2013	400.0	-		80.0	-	87.6	58.8	0.4		626.8
Drawn down	-	-		-	201.3	-	16.1	-		217.4
Capital repayment	-	-		(5.0)	-	(7.4)	-	(0.1)		(12.5)
At 30 June 2013	400.0	-		75.0	201.3	80.2	74.9	0.3		831.7

All borrowings are denominated in US$.

 

 

13. LOANS AND BORROWINGS (continued)

Convertible bond

The Company issued $350.0m of convertible bonds in 2012, subsequently upsized to $400.0m with China Railway Materials Commercial Corporation subscribing a further $50.0m.

The principal terms of the bond are as follows:

·     5 year term (inception 10 February 2012 and maturity 9 February 2017),

·     A coupon rate of 8.5% including the equity component and issue fees. The effective interest rate is 12.62%,

·     Coupon payable semi-annually in arrears,

·     Convertible into fully paid ordinary shares of the Company,

·     Conversion price is $10.98.

The Group has the option to call the bonds at 110% after 24 February 2015 with a minimum of 45 days notice and maximum of 60 days notice. In addition, the Group has the right to redeem the bonds if at any time the aggregate principal amount of the bonds outstanding is equal to or less than 15% of the aggregate principal amount of the bonds initially issued.

The bonds will be redeemed at par at maturity on 9 February 2017, unless converted or previously redeemed.

The fair value of the equity component was recorded as $52.9m at settlement on 9 February 2012. Transaction fees of $10.6m were recorded against the bond liability at the transaction date.

Pre-export finance facility

On 5 April 2013 a $250.0m pre-export finance facility was entered into by Tonkolili Iron Ore (SL) Limited and African Railway and Port Services (SL) Limited, the principal operating companies within the Group. As at 30 June 2014, the facility was fully drawn.

Transaction fees of $8.7m were incurred against the loan on inception.

The principal terms of the facility are as follows:

·     An interest rate of LIBOR + 5.5%, with an effective interest rate being 8.35%,

·     Interest is payable monthly on the last day of the month,

·     Equal monthly repayments commencing on 31 March 2014 until the date of maturity,

·     The inception date was 5 April 2013 and maturity on 5 April 2016.

The Group has granted security over the cash flows from a third party sales contract.

Equipment finance facility - 1

A facility of $92.5m to fund the purchase of equipment was signed in September 2011 by African Railway and Port Services (SL) Limited, and was subsequently increased to $96.5m in March 2012.

The principal terms of the facility are as follows:

·     An interest rate of LIBOR + 5.59%, with an effective interest rate being 7.23%,

·     Interest is payable quarterly on last day of the quarter,

·     Repayments are payable quarterly until the date of maturity,

·     The inception date was 29 September 2011 and maturity on 30 June 2017.

The Group has granted security over certain items of property, plant and equipment financed by this facility.

13. LOANS AND BORROWINGS (continued)

Equipment finance facility - 2

A facility of $92.0m to fund the purchase of equipment was signed in November 2012 by Tonkolili Iron Ore (SL) Limited and African Railway and Port Services (SL) Limited.

The principal terms of the facility are as follows:

·     An interest rate of LIBOR + 6.0%, with an effective interest rate being 7.33%,

·     Interest is payable quarterly on last day of the quarter,

·     Repayments are payable quarterly until the date of maturity,

The inception date was 23 November 2012 and maturity on 30 June 2018.

The Group has granted security over certain items of property, plant and equipment financed by this facility.

SISG shareholder loan

On 9 September 2013 the Group entered into an agreement to borrow $56.3m from SISG in the form of a shareholder loan. The loan was entered into with Tonkolili Iron Ore (SL) Limited.

The principal terms of the facility are as follows:

·     An interest rate of 1.0% in 2013, which increased to 2.0% throughout 2014, with an effective interest rate being 8.35%,

·     Interest is payable at the final maturity date,

·     Repayment of the principal is due at the final maturity date.

In 2013 a gain of $4.4m was recorded on inception of the loan due to a substantially lower rate of interest compared to a similar facility in the market.

Cost overrun facility

This facility was arranged by African Minerals Finance Limited to cover additional expenses arising from the construction phase of the Tonkolili iron ore project. The facility was fully drawn in 2011, and was subsequently restructured with amended terms on 5 April 2013. The repayment date was extended beyond April 2013, at which time the margin would increase incrementally to a cap of 11.0% if not repaid by December 2013.

This facility was refinanced with another financial institution in February 2014 and was subsequently repaid in August 2014.

The principal updated terms of the refinanced facility are as follows:

·     An interest rate LIBOR + a margin ranging from 8.0% to 9.0%, with an effective interest rate of 13.92%,

·     Interest is payable on last day of the month,

·     The nominal balance of $37.5m is repayable in full on maturity.

Cash collateral of $10.0m was provided on inception of this refinanced facility in February 2014, with incremental installments of cash collateral of $10.0m, $5.0m, $5.0m, $5.0m, and $2.5m to be pledged in March, April, May, June and July 2014, respectively.

Warrant costs of $2.1m in 2013 relate to a modification of the exercise price during the year for warrants issued in 2012 relating to this facility.

The Group has granted security over the Company's equity shares in the Group's intermediate holding companies, as well as assets held in the head office subsidiaries.

 

13. LOANS AND BORROWINGS (continued)

Other asset financing

Other asset financing relates to borrowings for fixtures and fittings in the London office.

The Group has granted security over certain items of property, plant and equipment financed by this facility.

 

14. NON-CONTROLLING INTEREST PUT OPTION AND DEFERRED INCOME

 

		Deferred income - SISG		Deferred income - other		SISG non-controlling interest		Total
		$m		$m		$m		$m
As at 1 January 2013		537.3		-		706.0		1,243.3
Unwinding of time value of money		68.9		-		-		68.9
Release of deferred income		(32.5	)	-		-		(32.5	)
Other deferred income		-		20.0		-		20.0
Gain on revaluation of put option		-		-		(169.8	)	(169.8	)
As at 31 December 2013		573.7		20.0		536.2		1,129.9
Unwinding of time value of money		36.4		-		-		36.4
Release of SISG deferred income		(6.4)		-		-		(6.4)
Other deferred income		-		80.0		-		80.0
Release of other deferred income		-		(35.8)		-		(35.8)
Gain on revaluation of put option		-		-		(167.6)		(167.6)
As at 30 June 2014		603.7		64.2		368.6		1,036.5
As at 1 January 2013		537.3		-		706.0		1,243.3
Unwinding of time value of money		34.1		-		-		34.1
Release of deferred income		(23.5	)	-		-		(23.5	)
Gain on revaluation of put option		-		-		(103.8)		(103.8	)
As at 30 June 2013		547.9		-		602.2		1,150.1
Comprising:
Non-current 30 June 2014		603.7		-		-		603.7
Current 30 June 2014		-		64.2		368.6		432.8
		603.7		64.2		368.6		1,036.5
Non-current 31 December 2013		551.9		-		-		551.9
Current 31 December 2013		21.8		20.0		536.2		578.0
		573.7		20.0		536.2		1,129.9
Non-current 30 June 2013		520.7		-		-		520.7
Current 30 June 2013		27.2		-		602.2		629.4
		547.9		-		602.2		1,150.1

 

Deferred income - SISG

On 30 March 2012, SISG completed a $1.5bn acquisition of a 25% shareholding in the mine, rail and port, and power subsidiaries comprising the Tonkolili iron ore project, for a cash consideration of $1.5bn. The proceeds of $1.5bn were allocated to deferred income of $505.6m and the non-controlling interest put option of $994.4m based on the fair values as determined as at 30 March 2012. The key assumptions in fair valuing the deferred income and the non-controlling interest put option are described below.

 

14. NON-CONTROLLING INTEREST PUT OPTION AND DEFERRED INCOME(continued)

A discounted offtake agreement was signed in 2012 for the purchase of iron ore with discounts ranging from 0% to 15%, depending on the benchmark FOB iron ore price, specifically: volumes of 4.8 Mtpa of Phase I production, increasing to 10 Mtpa following completion of Phase II. Subsequently, in December 2013, the Group entered into a revised offtake agreement with SISG, which increased the contracted iron ore to be purchased from 4.8 Mtpa to 6.5 Mtpa, up to a project capacity of 25 Mtpa; to 7 Mtpa when project capacity is at 25 Mtpa; and 7 Mtpa plus 3/10 of the capacity in excess of 25 Mtpa, up to a maximum of 10 Mtpa at a capacity of 35Mtpa or more. The updated offtake agreement has an effective date of 1 January 2014, with the same discount range as the previous agreement.

The amount recognised at the balance sheet date represents the present value of the iron ore offtake discount that SISG will receive under the agreement. The discount rate used in the valuation is 12.5%, based on the Group's estimated cost of capital. Volume and iron ore prices are based on the Directors' best estimate. This amount is released to the consolidated income statement as SISG takes delivery of its offtake volumes and revenue is recognised by the Group.

In the period $6.4m of deferred income has been recognised in revenue (six months to 30 June 2014: $23.5m; year to 31 December 2013: $32.5m). $36.4m (six months to 30 June 2013: $34.1m; year to 31 December 2013: $68.9m) has been treated as an interest expense being the unwinding of the discount of the deferred income. The interest expense reflects the passage of time recognised as a borrowing cost at the Group's estimated  cost of capital (12.5%). The net of these two variables comprises the movement on deferred income of $30.0m (six months to 30 June 2013: $10.6m; year to 31 December 2013: $36.4m).

The current portion of nil (30 June 2013: $27.2m; 31 December 2013: $21.8m) relating to this offtake agreement reflects the Group's best estimate of the discount attributable to the benchmark FOB iron ore price and deliveries to SISG in the year to 30 June 2015 of 6.5mt.

Deferred income - Other

Other deferred income relates to two prepay agreements which the Company has entered into with a third party customer. The first was entered into on 23 December 2013 and the Company received $100.0m ($20.0m in December 2013 and $80.0m in the six months to 30 June 2014) under this arrangement. The second was entered into on 27 June 2014, with $50.0m being received by the Company in July 2014.  As described in Note 4, the Group delivered 0.9mt with a sales value of $35.8m during the six months to 30 June 2014 under the first prepay agreement. No such sales were recorded in 2013.

A further 1,750,000 wet tonnes is scheduled to be delivered during the the six months to 31 December 2014 under these prepay agreements with the remainder to be delivered in the first half of 2015. 

Non-controlling interest put option

A put option exists in the agreement whereby SISG can sell back their 25% interest in the Project Companies (as mentioned above) at fair value, in the unlikely event that Frank Timis (Executive Chairman) resigns voluntarily from the Board.

The liability recognised is the Directors' best estimate of the amount of the fair value that would be payable to SISG in the unlikely event Frank Timis leaves the Group and SISG exercises its option to sell back its interest.

The put option was valued at inception and is revalued at each reporting period to fair value using an enterprise value model. The fair value calculation has key assumptions that include the utilisation of the quoted African Minerals Limited share price in estimating the market capitalisation of the mine, rail and port and power subsidiaries and an estimated significant influence premium component to reflect SISG's 25% shareholding in the mine, rail and port, and power subsidiaries. As at 30 June 2014, the put option valuation utilises an African Minerals Limited share price of $1.80 (30 June 2013: $3.57; 31 December 2013: $3.15) and an estimated significant influence component of $33.5m (30 June 2013: $54.8m; 31 December 2013: $48.8m).

The put option was valued at 30 June 2014 at $368.6m (30 June 2013: $602.2m; 31 December 2013: $536.2m). The fair value gain on the put option for the six months to 30 June 2014 is $167.6m and has been recognised through the consolidated income statement (six months to 30 June 2013: $103.8m gain; year to 31 December 2013: $169.8m gain).

15. PROVISIONS

 

		Restoration and decommissioning provision $m		SISG warranty provisions $m		Other provisions $m		Total $m
As at 1 January 2013		-		51.1		12.7		63.8
Arising during the year		31.5		-		54.3		85.8
Unwinding of discount on provision		1.6		-		-		1.6
Settlement		-		(51.1	)	-		(51.1	)
As at 31 December 2013		33.1		-		67.0		100.1
Arising during the period		-		-		9.5		9.5
Unwinding of discount on provision		1.6		-		-		1.6
Settlement		-		-		(0.6	)	(0.6	)
As at 30 June 2014		34.7		-		75.9		110.6
As at 1 January 2013		-		51.1		12.7		63.8
Arising during the period		31.5		-		13.9		45.4
Settlement		-		(51.1	)	-		(51.1	)
As at 30 June 2013		31.5		-		26.6		58.1
Comprising:
Non-current 30 June 2014		34.7		-		3.3		38.0
Current 30 June 2014		-		-		72.6		72.6
		34.7		-		75.9		110.6
Non-current 31 December 2013		33.1		-		3.4		36.5
Current 31 December 2013		-		-		63.6		63.6
		33.1		-		67.0		100.1
Non-current 30 June 2013		31.5		-		1.6		33.1
Current 30 June 2013		-		-		25.0		25.0
		31.5		-		26.6		58.1

Restoration and decommissioning provision

During 2013, the Group recognised a mine restoration and decommissioning provision. The provision represents the discounted value of the estimated costs to decommission and reclaim the mine site at the date of depletion of the deposit. Provision calculations assume a discount rate of 10% and inflation of 6%. The liability becomes payable at the end of the useful life of the mine, being the renewal term of the mining lease. Uncertainties in estimating these costs include decommissioning and reclamation alternatives.

SISG warranty provisions

In 2013, the SISG warranty provisions that were provided for in 2012 were settled.

 

 

Other provisions

Other provisions as at 30 June 2014 include $5.0m (30 June 2013: $18.7m; 31 December 2013: $5.6m) for contractor claims, $3.4m (30 June 2013: $1.7m; 31 December 2013: $3.4m) for Sierra Leone end of service benefit provision and $24.3m for onerous sales contracts (30 June 2013: nil; 31 December 2013: $14.8m). There was also $43.2m provided as at 30 June 2014 for legal disputes (30 June 2013: $6.2m; 31 December 2013: $43.2m).

Legal disputes and contractor claims are in respect of litigation and claims against the Group typically arising from contractual interpretation disputes. Provisions for legal disputes and contractor claims are based on valuations from expert legal advice.

 

15. PROVISIONS (continued) 

The provision for onerous offtake contracts include compensation charges for an inability to fulfil several offtake sales contracts. The provision is determined by calculating non-fulfilment of sales contracts.

The end of service benefit provision relates to employees based in Sierra Leone who have been employed for longer than 5 years. The principal assumptions for the calculation include future salary increment, discount rate and the average time of service for these employees.

16. COMMITMENTS AND CONTINGENCIES

Contingent liabilities

Financial adviser's fees

A third party filed a claim against the Group for financial adviser's fees amounting to approximately $133.0m plus interest and costs in relation to fund raisings and transactions in prior years. The case was heard by the Commercial Division of the High Court in March 2014 who issued judgement in June 2014 in favour of the claimant on certain aspects of the claim, for which a provision was recognised as at 31 December 2013 and continues to be so as at 30 June 2014, including fees and estimated expenses. The Group was granted leave to appeal. The Directors' view (based on legal advice) is that there are reasonable prospects of success on appeal. In light of the recognition criteria of IFRS, the Group recognised a liability for the current judgement, including interest and estimated legal costs of the other party, but no potential benefit of success relating to any appeal has been recognised.

There is a risk that the claimant may appeal on some parts of the claim which were not found in their favour. The maximum exposure of this risk is $63.0m plus interest and costs. The claimant was refused leave to appeal but have requested this from the Court of Appeal. If granted, the Directors believe there are good prospects of successfully defending such an appeal as supported by legal advice and initial judgement. There is, therefore, a risk that further losses may accrue to the Group in excess of the provision recognised of $43.2m as at 30 June 2014.

By 31 July 2014, $41.6m of the liability had been paid to the third party following the judgement issued by the High Court. The balance of the liability recognised as at 30 June 2014 of $1.6m is an estimate of the residual legal fees due to the claimant.

MFT Claim by SISG

As disclosed in note 14, the Company entered into certain pre-pay sales contracts with a third party. SISG has alerted the Company to claims that it has against the Project Companies in respect of application of the "Most Favoured Treatment" (MFT) pricing treatment in the iron ore off-take agreements which it entered into in 2013. The Directors have taken external legal and financial advice which indicates that the most likely outcome of this claim would not be material. No provision has therefore been recognised as at 30 June 2014 relating to this claim as the Directors do not believe that a material outflow of funds is likely to arise in the future as a result of this claim. However, as with any legal case there is a possibility any final settlement reached with SISG may exceed the Directors' current expectations.

Other

The Group has conducted its operations in the ordinary course of business in accordance with its understanding of applicable tax legislation in the countries where the Group has operations.

Sierra Leone tax legislation and custom regulations continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by the tax authorities and other Governmental bodies. Instances of inconsistent interpretations are not unusual. The uncertainty of application of UK and Sierra Leone transfer pricing legislation and the continued evolution of Sierra Leone's tax laws, including those affecting cross-border transactions, create a risk of additional tax payments having to be made by the Group, which could have a material effect on the Group's financial position and performance.

Capital commitments

At 30 June 2014, the Group had commitments of $35.2m (30 June 2013: $29.0m; 31 December 2013: $42.5m) including $13.2m (30 June 2013: $23.2m; 31 December 2013: $9.3m) relating to port and rail infrastructure and $22.0m (30 June 2013: $5.8m; 31 December 2013: $33.2m) in relation to the mine.

17. OPERATING CASHFLOW BEFORE WORKING CAPITAL CHANGES

 

		(Unaudited) Six Months Ended 30 June 2014 $m		(Unaudited) Six Months Ended 30 June 2013 $m		(Audited) Year Ended    31 December 2013 $m
Loss before taxation from operations		(7.2	)	(24.5	)	(94.0	)
Adjustments to add/(deduct) non-cash items:
Finance costs		43.5		36.3		74.8	*
Depreciation of property, plant & equipment		60.5		60.2		119.6
Amortisation of intangible assets		0.4		0.4		0.7
Share based payments		3.8		2.0		(0.8	)
Imputed cost of deferred income		36.4		34.1		68.9
Release of SISG deferred income		(6.4	)	(23.5	)	(32.5	)
Release of other deferred income		(35.8	)	-		-
Fair value gain on financial instruments		(167.6	)	(103.8	)	(169.8	)
Impairment of property, plant and equipment		-		6.2		25.1
Impairment of available for sale investments		-		39.6		39.6
Penalties for SISG warranty breach		-		-		46.3
Finance income		-		-		(0.1	)
Impairment of exploration expenditure		-		-		7.6
Provision for doubtful debts		-		-		7.4
Unrealised foreign exchange loss		-		-		0.6
Total adjustments to add/(deduct) non-cash items		(65.2	)	51.5		187.4
Operating cash flow before working capital changes		(72.4	)	27.0		93.4

* Prior period numbers have been restated classified to reflect consistent disclosure treatment with the current period.

18. RELATED PARTY TRANSACTIONS

 

														Non-
		Revenue/				Purchases/		Commissions/						controlling
		cost		Accounts		interest		warranty		Accounts		Deferred		interest put
		recharge		receivable		expense		breach costs		payable		income		option		Borrowings
		$m		$m		$m		$m		$m		$m		$m		$m
Shareholders:
China Railway Materials Commercial Corporation
Six months to 30 June 2014		95.8		20.3		3.4		19.5		3.1		-		-		50.0
Year to 31 December 2013		248.8		24.8		49.5		39.0		3.1		-		-		50.0
Six months to 30 June 2013		107.5		3.2		16.3		19.5		13.2		-		-		50.0
Shandong Iron and Steel Group
Six months to 30 June 2014		189.7		42.6		2.1		5.7		5.7		603.7		368.6		55.3
Year to 31 December 2013		460.6		84.9		1.3		46.3		0.3		573.7		536.2		53.2
Six months to 30 June 2013		220.0		64.1		-		40.0		50.0		547.9		602.2		-
Companies in which Directors hold an interest:
African Petroleum Corporation Limited
Six months to 30 June 2014		0.2		0.2		0.7		-		0.4		-		-		-
Year to 31 December 2013		0.2		0.2		0.8		-		0.5		-		-		-
Six months to 30 June 2013		-		-		0.2		-		-		-		-		-
International Petroleum Limited
Six months to 30 June 2014		-		-		-		-		-		-		-		-
Year to 31 December 2013		0.3		-		-		-		-		-		-		-
Six months to 30 June 2013		0.1		0.6		-		-		-		-		-		-
Pan African Minerals Limited
Six months to 30 June 2014		0.1		1.4		1.5		-		-		-		-		-
Year to 31 December 2013		1.2		1.4		2.2		-		-		-		-		-
Six months to 30 June 2013		0.8		3.0		-		-		-		-		-		-
Dundee Resources Limited
Six months to 30 June 2014		-		-		1.8		-		1.8		-		-		30.0
Year to 31 December 2013		-		-		3.8		-		1.9		-		-		30.0
Six months to 30 June 2013		-		-		1.8		-		5.2		-		-		30.0
Others:
Global Iron Ore Corporation
Six months to 30 June 2014		-		-		-		-		-		-		-		-
Year to 31 December 2013		-		-		1.1		-		23.6		-		-		-
Six months to 30 June 2013		-		0.5		-		-		30.0		-		-		-

 

Shareholders

China Railway Materials Commercial Corporation is a shareholder in the Company. Transactions relate to iron ore sales and materials purchased for railways for $0.3m (six months to 30 June 2013: $13.2m; year to 31 December 2013: $43.1m). Transactions also include an annual marketing commission of $39.0m, and interest accrued on the borrowings related to the subscription of convertible bonds (see Note 13) for $3.1m (six months to 30 June 2013: $3.1m; year to 31 December 2013: $6.4m).

Following its $1.5bn cash acquisition of a 25% shareholding in the mine, rail and port, and power subsidiaries comprising the Tonkolili iron ore project, Shandong Iron and Steel Group became a related party in 2012. Transactions relate to the sale of iron ore through offtake contracts, warranty breach costs (see Note 6), interest accrued on the SISG shareholder loan (see Note 13), deferred income on the offtake agreement and the non-controlling interest put option (see Note 14).

Companies in which Directors hold an interest

African Petroleum Corporation Limited is a company of which Frank Timis is a Director and has an ownership interest of 39.07%. Transactions relate to provision of jet services by African Petroleum Corporation Limited to the Company and recharges by the Company to African Petroleum for shared London office rental and related expenses.

International Petroleum Limited is a company of which Frank Timis is a Director and in which he has an ownership interest of 37.75%. Up until 31 December 2013, transactions related to recharges by the Company to International Petroleum Limited for shared London office rental and related expenses. At 31 December 2013, the balance due from International Petroleum Limited of $0.8m was impaired.

18. RELATED PARTY TRANSACTIONS (continued)

Pan African Minerals Limited is a company of which Frank Timis is a majority shareholder. Transactions relate to recharges by the Company to Pan African Minerals Limited for the provision of certain AML staff on Pan African Minerals Limited projects, and vice versa, and for shared office rental and related expenses.

Dundee Resources Limited is a wholly owned subsidiary of Dundee Corporation, of which Murray John is a Named Executive Officer. Borrowings relate to the subscription of convertible bonds. Purchases and accounts payable include interest payable accrued on the borrowings related to the subscription of convertible bonds (see Note 13).

Others

Global Iron Ore Corporation is a company in which Dermot Coughlan's son held a senior management position. Dermot Coughlan was a Director of the Company until 16 July 2014. Interest accrued in 2013 related to the interest recognised on the payment of agency commission fees from 2012.

All the above transactions have been approved by the Board and have been carried out on an arm's length basis.

19. SUBSEQUENT EVENTS

1) In August 2014, the Group repaid the cost overrun facility of $37.5m in its entirety.

2) In July 2014, $50.0m was received from a third party customer in relation to a prepay agreement entered into on 27 June 2014.

3) In August 2014, the Group announced that an agreement had been reached between the Company and SISG for the release of $284.0m of restricted cash relating to the SISG investment earmarked for the Friable Hematite project (Phase 2) for working capital purposes. To date, $142.0m has been released and a further $101.0m has been agreed to be released in October 2014.

4) Also in August 2014, the Group announced the notification by SISG of further claims against the Group's Project Companies, under the "Most Favoured Treatment" pricing treatment in SISG's offtake agreements (see Note 16).