Level 3, 24 Outram Street, West Perth WA 6005 PO Box 497, West Perth WA 6872 Australia
Attached please find the financial statements of Sundance Resources Limited (ASX: SDL) for the 12 months ended 30 June 2015.
The directors present their report together with the financial report on the Sundance Consolidated Group, consisting of Sundance Resources Ltd ('Company') and the entities that it controlled during the financial year ended 30 June 2015 ('Sundance' or 'Group' or 'Consolidated Entity'), for the financial year ended 30 June 2015 and the auditor's report thereon. In order to comply with the provisions of the Corporations Act 2001, the directors report as follows:
The Project's focus is the development of the Mbarga and Nabeba mines and their associated infrastructure at an increased capacity of 40Mtpa of high grade hematite for a life over 13 years and then at least 35Mtpa of a high quality concentrate for at least a further 15 years.
The Mbarga and Nabeba mines plan to utilise a dedicated deep water port terminal at Lolabe in Cameroon and a 540 kilometre rail line dedicated to the transport of iron ore through Cameroon which is to be constructed and owned by the Government of Cameroon.
Following the Cameroon Prime Minister Philemon Yang's recent visit to Beijing, where he met with the Chinese President Xi Jinping and the Chinese Premier Li Keqiang, the Government of Cameroon has expressed its optimism that it will be successful in the financing of the port and rail infrastructure. This has given Sundance a high level of confidence that the Government of Cameroon will be able to achieve sovereign funding on the port and rail which supports the Project and will now focus on funding, constructing and operating the Mbarga and Nabeba mines, process plants and associated infrastructure ('Mine Infrastructure') in Cameroon and Congo. With the recently announced increase in High Grade Hematite Reserves and increase in capacity to 40Mtpa, the Project has increased its global competitiveness and will have economics that are robust under a broad range of iron ore price scenarios.
With the progress being made by the Government of Cameroon on the appointment of EPC's and sourcing debt funding for the rail and port infrastructure, Sundance can progress funding discussions with equity and debt providers having only to focus on the Mine Infrastructure whilst demonstrating the Government support that has been given on the port and rail infrastructure.
Additional information as to the progress made during the year is provided below:
The Transition Agreement with the Government of Cameroon was signed on 30 June 2015 in Yaounde, Cameroon and came into effect on 7 July 2015 when all conditions precedent were satisfied. This Transition Agreement is between Cam Iron, its subsidiaries, Sundance and the Government of Cameroon setting out the key steps, terms, conditions, rights and obligations by which the parties will restructure the Project. The following key items are included in the Transition Agreement:
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Exploration Permit 92 ('EP92') has been extended to 24 July 2017;
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The Mbalam Convention Long Stop Date has been extended to 24 July 2017;
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The Government of Cameroon will own 98% of the port and rail infrastructure entities and in recognition of the capital invested to date by Sundance's subsidiary Cam Iron and the ongoing support that Sundance will provide towards the development of the port and rail infrastructure, Cam Iron will receive a 2% free carried interest in these entities until the date of first commercial production. Cam Iron will not be required to provide any equity or debt funding for the construction of the port and rail infrastructure. After the date of first commercial production, Sundance will retain its 2% interest so long as it contributes its pro-rata share of any equity requirements;
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The Government of Cameroon (or one or more Government Entities appointed by the State), will appoint suitably qualified contractors to:
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design, construct and commission the port and railway; and
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undertake the port and the railway Operations,
such that the port and railway are designed built and operated in a manner to provide 40Mtpa capacity to Sundance subsidiaries Cam Iron and Congo Iron;
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Cam Iron and Congo Iron will enter into take or pay agreements incorporating a commercial tariff for each tonne transported and loaded using the infrastructure;
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Sundance is required to achieve a financing commitment (credit approved term sheet) for the Mine Infrastructure no later than 9 months (or such later date as agreed) after the Government of Cameroon achieves its financing commitment for the rail and port infrastructure. If this is not achieved within the timeline or any agreed extension, Cam Iron may, at the request of the Government of Cameroon, be required to transfer EP92 to a nominee of the Government of Cameroon for no consideration;
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Sundance will provide technical support to the Government Ministries as requested; and
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Sundance will conclude the work currently being undertaken on the Declaration of Public Utility ('DUP').
High Grade Hematite Ore Reserve Increase
On 20 May 2015 Sundance advised that the high-grade Hematite Ore Reserve for Stage One of the Project has increased by 18.5% to 517 million tonnes ('Mt') at a grade of 62.2%. This reserve came from an underlying High Grade Mineral Resource of 805.7Mt at a grade of 57.5% Fe announced at the same time as the Ore Reserve.
The increased Ore Reserve over the entire Life of Mine maintains low impurities with Silica at 4.46%, Alumina at 2.80% and Phosphorus at 0.09%.
This increase in Ore Reserves ensures that Stage One maintains a life of over 13 years before moving to concentrate production in Stage Two. The first ten years of production include an average product grade of 63.1% with low impurities (Silica at 3.87%, Alumina at 2.58% and Phosphorous at 0.09%). The quality of this product is comparable to, or better than, most product expected to be produced from the Pilbara in Western Australia.
All Ore Reserve estimates for the Project are classified and reported in accordance with the JORC Code 2012 Edition. The estimate, pit designs and mine schedules for the Project have been produced by Sundance and comprehensively reviewed by AMC Consultants Pty Ltd ('AMC'). Ore Reserves are based on the estimated saleable product.
Itabirite Hematite Mineral Resource Increase
On 20 May 2015 Sundance advised that the Itabirite Hematite Mineral Resources for the Project had significantly increased to 5.638 Billion tonnes ('Bt') at a grade of 33.4% Fe from the previously announced (26 October 2012) 4.047Bt at a grade of 36.3% Fe.
The Itabirite Resource will ensure that Stage Two of the Project will have a multi-decade life producing an Itabirite product of either a Blast Furnace grade concentrate of 66.6% Fe with low impurities of 3.5% silica and 0.3% alumina or a Direct Reduction grade concentrate of 68% Fe with even lower impurities of 1.8% silica and 0.2% alumina.
Increasing Project capacity from 35Mtpa to 40Mtpa
An engineering review of the Project identified minimal capital cost solutions which would increase the name plate capacity of the mine, rail and port systems to 40Mtpa from the DFS level of 35Mtpa. This increased capacity improves the project economics via a substantial increase in annual revenue and a reduction in operating costs.
The increased ore reserve also allows the Project to maintain its Stage One life over 13 years even with the increased annual production.
Port and Rail Development Process
The Government of Cameroon has commenced a process to select a Chinese Engineering, Procurement and Construction ('EPC') contractor for the construction of the port and rail infrastructure. This will support its application for a loan from China and possible other friendly countries to construct the port and rail infrastructure.
Tenders from EPC Contractors for the railway line and port construction have now been received by the Cameroon Government and detailed evaluations of the tenders are now being carried out by an expert committee. It is expected that an MOU with the preferred EPC contractor will be signed with the Government of Cameroon in the September quarter.
Sundance expects it will take approximately 6-12 months for the Government of Cameroon to finalise their financing commitment (credit approved term sheet) for the port and rail infrastructure. It is anticipated that construction will commence before the end of 2016 and, based on previous understanding of the length of construction time for the port and rail, it is expected that first commercial shipment could occur sometime in 2020.
Sundance announced on 6 June 2014 that Mota-Engil Africa had been appointed as the EPC contractor to build the port and rail infrastructure for the Project. With the restructure of the Project and the change of ownership of the infrastructure from Sundance to the Government of Cameroon, it is highly unlikely that the conditions precedent to this contract will be satisfied prior to the end date of 31 December 2015. Sundance will then have no ongoing liabilities with respect to this contract.
Mine Infrastructure Equity and Debt Funding
Sundance has commenced the process to seek funding for the Mine Infrastructure. Given the comments from the Government of Cameroon and the support that the Project is expected to receive from the Chinese Government, Sundance will be concentrating its efforts into China for the Mine Infrastructure equity and debt funding.
Even though the actual draw-down of funds for the construction of the Mine Infrastructure will not be required until sometime after the construction of the port and rail starts due to the shorter construction period, Sundance is planning to achieve its financing commitment (credit approved term sheet) in mid-2016 and financial close to occur before the end of 2016. This is within the time requirement set out in the Transition Agreement to retain EP92 until it is converted into a Mining Permit.
Sundance announced on 6 June 2014 that it had appointed Standard Bank, Africa's largest bank by assets and earnings, to advise on funding and be the lead debt arranger for the Project rail, port and Mine Infrastructure. With the restructure of the Project, the roles of Standard Bank and other advisors are being reviewed.
Sundance will over the coming months re-engage with a number of potential equity investors and present the restructured project and economics. Likely mine equity partners include:
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Chinese steel mills/traders;
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Chinese financial investor with iron and steel connection/background;
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The Government of Cameroon preferred infrastructure EPC contractor; and
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Potential mine EPC contractors.
To facilitate the debt funding required, Sundance will update the Mine Infrastructure engineering to a level required to run a competitive process with Chinese EPC's to select a preferred contractor for construction of the Mine Infrastructure.
Sundance will work with the potential future equity partner and the EPC contractor to source the debt funding requirements from Chinese financial institutions and others as required.
The debt funding is expected to be 70% of the total funding requirement for the Mine Infrastructure with the majority of that coming from import/export financial institutions who will require the sourcing of the majority of the equipment and materials for construction of the Mine Infrastructure to be supplied from China.
Declaration of Public Utility ('DUP')
A DUP was issued by the Government of Cameroon for the entire project railway corridor in 2011. Work commenced during the financial year on implementation of the DUP including public consultation meetings, cadastral surveys and evaluations for compensation and resettlement purposes. The work also includes physical examination and marking of the route on the ground and potential minor adjustments of the alignment to minimize impacts to communities and the environment. It is anticipated that this work will be completed in the second half of 2015.
Government Relations - Republic of Congo
On 24 July 2014, the Government of Congo signed the Nabeba Mining Convention ('Nabeba Convention'). The Convention was agreed and signed at a ceremony in the country's capital city of Brazzaville with representatives of Sundance, Congo Iron and the Government of Congo.
Signing of the Nabeba Convention follows the issuing of the Nabeba Mining Permit which was approved by the Ministerial Council for the Congo on 28 December 2012. A Presidential Decree confirming the grant of the mining permit was issued to Congo Iron on 6 February 2013.
The Nabeba Convention outlines the fiscal and legal terms and the conditions to be satisfied by Congo Iron for the development and management of the Nabeba Iron Ore Project.
The key terms of the Nabeba Convention are:
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25-year operating license effective from the publication of the Mining Permit Decree and renewable for successive terms of up to 15 years, depending on remaining reserves;
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A mining royalty equal to 3% of the mine gate value of the ore extracted from the Mining Permit;
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5-year corporate tax holiday following start of production. Corporate tax will then be levied at a rate of 7.5% for 5 years and 15% thereafter;
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The Government of Congo will take a 10% stake in Congo Iron, which will be non-dilutory;
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There will be no fees, levies or taxes charged in respect to the export of iron ore. There will be exemptions from import duties and taxes on plant and equipment imported temporarily for project construction and limited import duties and taxes on other mining equipment and consumables throughout the production phase; and
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Congo Iron will make annual contributions to a fund established as an association or non-profit foundation whose purpose is to promote the economic, social and cultural development of local communities that are impacted by the mining operations.
Government Relations - Cameroon
The Mbalam Convention between Cam Iron and the Government of Cameroon was signed on 29 November 2012 which outlined the fiscal and legal terms and the conditions to be satisfied by Cam Iron for the development and management of the Project. Since that time, Sundance's subsidiary Cam Iron has continued to work cooperatively with the Government of Cameroon particularly with the Inter Ministerial Committee and COPIL which are the Government formed committees to work on the Project.
Regular meetings occurred during the year in which both parties monitored the state of the iron ore market and Sundance's/Standard Banks progress on funding. These meetings led to the parties negotiating and signing the Transition Agreement on 30 June 2015.
Sundance will continue to support the Government with its technical expertise as the infrastructure is funded and the Government of Cameroon will continue to support Sundance in the development of the mines which will be required to support the infrastructure loan.
Financial Position
Cash and cash equivalents decreased during the year to $13.7 million at 30 June 2015 from $14.4 million at 30 June 2014.
On 3 September 2014, Sundance announced it had reached an agreement with a new strategic investor regarding a A$40 million investment in the Company via convertible notes and options. Global resources investor Gennadiy Bogolyubov made the investment through his vehicle Wafin Limited ('Wafin'), to take up the convertible notes with a conversion price of 10 cents per share.
The key terms are:
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Wafin invested A$40 million via three‐year zero coupon unsecured convertible notes ('Wafin Notes') with a conversion price of 10 cents;
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Wafin also received options over 260 million ordinary shares with an exercise price of 12 cents ('Wafin Options'), which expire on the earlier of 60 months from issue or 20 business days after the project's Financial Close or a Change of Control Event. 50 million of these Options were not subject to Shareholder approval and were issued on 23 September 2014 ('Tranche 1 Options') but 210 million of these Options were subject to shareholder approval which was received at the Annual General Meeting held on 27 November 2014 ('Tranche 2 Options');
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If not converted into Sundance shares, the Wafin Notes are redeemable at maturity for 130% of face value; and
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Wafin will have the right to appoint a representative to the Company's Board if its total shareholding in
Sundance exceeds 12.5% of Sundance's total issued share capital. Wafin will also have certain anti‐dilution rights, including a right of first refusal and (subject to an ASX waiver) a top‐up right where the right of first
refusal does not apply.
In December 2014, Sundance reached agreement with Hanlong to extend the maturity date of the $5 million convertible notes to December 2015 and pay of 10% interest semi-annually in arrears.
The consolidated statement of cash flows indicates that expenditure continues to be directed towards development activities on the Project of $24.4 million (2014: $23.0 million) and payments to suppliers and employees $12.5 million (2014: $20.0 million).
The financial position of the Consolidated Entity as at 30 June 2015 remains positive. Net assets of the Consolidated Entity amounted to $160.7 million (30 June 2014: $234.3 million). Mine development assets decreased to
$232.0 million (30 June 2014: $254.0 million) due mainly to $47.6 million for port and rail costs written off.
At 30 June 2015, the Consolidated Entity had a net working capital deficiency of $34.2 million due mainly to the convertibles notes with a redemption value totalling $44 million which are due for repayment in November 2015 and
$5 million which is repayable on 31 December 2015. Refer to Note 1 - 'Going Concern' and Note 15 - 'Events Occurring After the Reporting Period'.
The total loss for the period amounted to $78.3 million compared to $32.9 million for the year ended 30 June 2014. Of this total loss, $18.5 million related to non-cash convertible note financing charges (2014: $8.9 million) and $47.6 million for port and rail costs written off.
Total comprehensive income amounted to a loss of $78.2 million (2014: loss $22.8 million) for the year ended 30 June 2015, which includes an exchange gain on translation of foreign operations. This gain amounted to $0.1 million (2014: $10.2 million) and is due to a movement in the Central African CFA francs against the Australian Dollar from 454 at 30 June 2014 to 449 at 30 June 2015.
Corporate:
Cost Reduction:
The Company reviewed the timing of all discretionary expenditures, including exploration and development costs, and wherever necessary these costs have been minimised or deferred to match the Company's cash flow forecast.
On 16 December 2014, Sundance advised that, due to the poor state of the iron ore market, the Company was undertaking a number of cost reduction measures to ensure it appropriately manages its cash position into 2016 whilst retaining the ability to move the Project into production rapidly when market conditions improve.
The actions taken resulted in:
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Reduction in Board size to 5 (from 8 in November 2014);
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10% salary reduction for senior managers and the Board;
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Salary freeze for all other positions;
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40% reduction in staff numbers in the Perth office;
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25% reduction in expatriate numbers in Cameroon and Congo; and
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80% reduction in contractors.
These initiatives have resulted in an over 50% reduction in overhead and project support costs whilst allowing the continued advancement of the Project.
New Chairman
Mr George Jones retired as the Company's Chairman at the conclusion of the Annual General Meeting on 27 November 2014. Mr Jones was succeeded by Sundance Independent Non-Executive Director Mr Wal King.
Convertible Notes
At 30 June 2015 the Company had the following convertible notes on issue (see Note 5(c) - 'Borrowings' for full details):
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$20 million note with Noble Resources International Pte Ltd ('Noble ') with a redemption value of $20 million due on 4 November 2015;
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$20 million note with a consortium consisting of Senrigan Master Fund ('Senrigan') , D. E. Shaw Galvanic International, Inc. ('DE Shaw') and BSOF Master Fund L.P. ('Blackstone') (together, 'Investor Consortium') with a redemption value of $24 million due on 4 November 2015;
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$40 million note with Wafin Limited ('Wafin') with a redemption value of $52 million due on 23 September 2017; and
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$5 million note with Hanlong (Africa) Mining Ltd ('Hanlong') with a redemption value of $5 million due on 31 December 2015.
Subsequent to 30 June 2015, the Company reached agreement with Noble and the Investor Consortium and with approval from Wafin which, subject to, among other things, formal documentation and shareholder approval, will extend the maturity date of the Noble and Investor Consortium convertibles notes to 23 September 2017. Refer to Note 15 - 'Events Occurring After the Reporting Period' for full details.
Material Business Risks
The material business risks faced by Sundance that are likely to have an effect on the prospects of the Company are considered below:
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Working Capital Funding
At 30 June 2015, Sundance held cash of $13.7 million. Sundance is not currently in a position to generate income from operations and as such is reliant upon the equity and/or debt markets for additional working capital funding. At 30 June 2015, the Consolidated Entity had a net working capital deficiency of $34.2 million due mainly to the existing convertibles notes with a redemption value totalling $49 million which are due for repayment in November and December 2015. For further details on the convertible notes see Note 5(c) to the financial statements. As set out above, Sundance has reached agreement with Noble and the Investor Consortium regarding the Notes that are due on 4 November 2015 to extend the maturity date to 23 September 2017. Further, Sundance has reached agreement with a consortium consisting of Noble, Senrigan, DE Shaw and Wafin to provide an additional $7 million in working capital funding via a new convertible note. Refer to Note 15 - 'Events Occurring After the Reporting Period' for full details. This working capital funding is expected to be received in October 2015 after completion of documentation. The Directors believe that at the date of signing these financial statements there are reasonable grounds to believe that the Group will have sufficient funds to meet its obligations as and when they fall due.
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Project Funding
Sundance will need to raise further capital and/or debt financing in order to advance the development of the Project. Sundance has commenced the process to achieve funding of the Mine Infrastructure by concentrating its efforts into China for the Mine Infrastructure equity and debt funding Sundance is seeking a Chinese equity partner to acquire a significant equity interest in the Mines. The success and the pricing of any such sale of equity in the Mines and/or debt financing will be dependent upon the prevailing market conditions at that time. Failure to secure appropriate funding for the development of the Project will result in a delay or inability to develop the Project, the potential loss of the Project and the impairment of the carrying value of the capitalised Mine Development expenditure related to the Project.
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Commodity Price
The price of iron ore can be volatile and is affected by numerous factors beyond Sundance's control such as supply and demand dynamics; and changes in global economic conditions. The decision to develop the Project, and the returns to be achieved from it, are dependent upon the future price of iron ore. The current spot iron ore price is at its lowest level since early 2009. The price has reduced by approximately 50% in the last 12 months due mainly to reduced steel demand in China and a significant surge in supply by the iron ore major producers. Sundance expects that iron ore pricing will continue to exhibit volatility on a short term basis however notes that the Project is a mid to longer term project where long term iron ore price forecasts are more favourable than the current spot price and short term outlook.