The announcement of a $6.5 million net loss has prompted West Perth based mineral explorer Consolidated Minerals Ltd's share price to nose dive almost 10 per cent in today's trading.
The announcement of a $6.5 million net loss has prompted West Perth based mineral explorer Consolidated Minerals Ltd's share price to nose dive almost 10 per cent in today's trading.
At market close, ConsMins share price was down 18.5 cents to $1.76.
The 'disappointing' loss compares with a $65.2 million profit the company reported last financial year.
In its letter to shareholders, the company said the loss was primarily influenced by a 36 per cent fall in the average manganese price to US$2.21/dmtu despite a 46 per cent ramp up in its manganese production to 888,432 tonnes.
"In March 2005, the company received manganese prices as high as US$4.17/dmtu, driven by increased alloy production in China, leading to tightening in global supply and price spikes in alloy and ore," the company said.
"Subsequent alloy oversupply and increase in ore stockpiles in China led to a fall in the ore prices we received to as low as US$2.11/dmtu in May 2006. However, in recent months the manganese market and prices have stabilised, with the ore market returning to balance."
The dramatic fall in manganese prices negatively impacted the company's manganese revenue to the tune of $87 million and earnings before interest tax and depreciation by $77.8 million.
Despite the loss, the company posted a significant 284 per cent hike in its nickel revenue to $51.8 million and close to a one per cent increase in its chromite revenue to $42.1 million.
Consolidated managing director Rod Baxter said that the company was looking to reduce the risk of volatility in commodity prices by diversifying its asset portfolio.
He highlighted the company's development and exploration of its nickel assets at Kambalda as the company's number one priority for the time being.
"Our East Alpha [nickel] operation commenced production in April and will have increased production to 5,000 tonnes per annum, at an annualised rate, by the end of December," he said.
"We are completing the East Alpha development, and will then bring on new production at the southern extensions of both East Alpha and Beta Hunt.
"We are targeting an increase in nickel production to 6,000 to 6,400 contained nickel tones in 2006/07, increasing further to 15,000 tonnes per annum within 3-5 years."
The net loss of $6.5 million included $26.7 million of non-trading items and write-downs which are discussed in the attached announcement.
Mr Baxter said former managing director and company founder Michael Kiernan's retirement late last year created a degree of uncertainty about the future direction of the company.
The announcement comes after Consmin forecast a profit of $85 million in March this year.
Mr Baxter said the company was in a position to turn the result around during the 2006-07 financial year.
"We expect a return to solid profitability in FY2007 driven by cost control across the group and our nickel expansion strategy leading to more than a 35 per cent increasew in our nickel production for the year," he said.
The company is focusing on three main priorities going forward:
- to optimise the current business to enhance margins;
- to expand the current business (nickel and manganese); and
- to diversify and grow the company through exploration and acquisition.
The company late last year and earlier this year announced a reshaping of its board including Richard Carter's appointment to non-executive chairman last December.
Below is the full announcement:
31 August 2006
Dear Shareholder
Following the release of Consolidated's 2006 financial results, I am taking this opportunity to
provide some additional context to the results and provide an update on the future outlook for
the business. I would also like to give you an insight into the strategies we will be
implementing to build on the last eight years of the company's development and position us to
achieve new levels of growth and prosperity.
Firstly, I wish to assure you that, despite a clearly unsatisfactory bottom line result for the year,
I believe we have the right strategies and personnel in place to return Consolidated Minerals to
its position as a strong and profitable resources group.
We have a foundation of excellent assets with high growth upside, a strong demand outlook
for our commodities, and sound business fundamentals. Consequently, this result should be
seen as a one-off aberration in what has otherwise been a very impressive growth story - one
which I am confident will continue into the future.
Our underlying objective remains to maximise shareholder value. While the disappointing
financial result has prevented us from declaring a final dividend, I would like to reaffirm our
commitment moving forward to the Company's long-established policy of paying dividends
equal to at least 50% of after tax profit.
Since assuming the role of Managing Director on 1 July, I have worked very closely with our
management team on developing strategies to ensure that Consolidated Minerals has all the
fundamentals in place to achieve our vision:
"To become a premier Australian mining house, delivering industry leading growth and
returns to shareholders."
The factors which contributed to last year's financial result are clear. While the key factor - the
fall in the price of manganese - was beyond the control of the company, such volatility in
commodity prices is always a risk for resource companies. We are expediting and enhancing
strategies that were already in place to reduce this risk by diversifying our asset portfolio, and
we are already beginning to see the benefits of this diversification strategy.
As we have outlined in our detailed ASX Announcement on the 2005/06 financial results, the
manganese market and prices have recently stabilised following the price fall during the year
which, combined with adverse exchange rate movements, negatively impacted our
manganese revenue by $87 million and earnings before interest tax and depreciation
(EBITDA) by $77.8 million.
In March 2005 the Company received manganese prices as high as US$4.17/dmtu, driven by
increased alloy production in China, leading to tightening in global supply and price spikes in
alloy and ore. Subsequent alloy oversupply and increase in ore stockpiles in China led to a fall
in the ore prices we received to as low as US$2.11/dmtu in May 2006. However, in recent
months the manganese market and prices have stabilised, with the ore market returning to
balance.
This has not been the only challenge facing the Company and impacting on market sentiment.
Late last year, former Managing Director and Company founder, Michael Kiernan, announced
his retirement. This announcement and his subsequent departure created a degree of
uncertainty about the future direction of the Company.
These two factors were further compounded by the general nervousness in the global
resources sector from May this year. Consolidated Minerals was one of many companies
affected, with some of the largest resource companies also experiencing share price
weakness and volatility during this period.
Turnaround Strategy
So what are we doing to turn this situation around? As I mentioned above, the management
team has recently conducted a comprehensive review of our business strategy and focus.
There will be no radical change in direction for Consolidated Minerals, but elements of the
strategy are designed to significantly reduce our exposure to commodity price risk. Our
business will expand, diversify and become more efficient; and our strategy for strong,
sustained profitability well into the future, is based on the strong growth potential of our nickel
business, our ability to optimise the existing manganese and chromite businesses, and further
diversification in growth assets with exposure to strong growth markets.
We have three main priorities:
- to optimise the current business to enhance margins;
- to expand the current business (Nickel and Manganese); and
- to diversify and grow the company through exploration and acquisition.
New productivity and growth strategy
(1) Optimising the existing business through cost reduction, efficiency and mine life
extension
A major priority for us going forward is to enhance our margins by extending the life of our
existing operations, increasing efficiency and reducing costs.
We have already had some success with our efforts to reduce costs in the 2006 financial year,
and we will be introducing further initiatives to optimise our operations in the months ahead.
Our established Woodie Woodie Manganese operation is a robust, long-life mine, which will
benefit in particular from these initiatives. The Manganese business will continue to deliver
solid profits into the future.
We have set ourselves tough cost control targets for the 2007 financial year and, through a
combination of cost reduction initiatives and productivity enhancements, we will continue to
shift our operations further down the cost curve.
(2) Expanding our current Business
Nickel
Investing in the development and exploration of our Nickel assets at Kambalda is our highest
priority right now. This is an exciting new growth opportunity for the business that is already
paying dividends. Our East Alpha operation commenced production in April and will have
increased production to 5,000 tonnes per annum, at an annualised rate, by the end of
December. We are completing the East Alpha development, and will then bring on new
production at the southern extensions of both East Alpha and Beta Hunt.
We are targeting an increase in nickel production to 6,000-6,400 contained nickel tonnes in
2006/07, increasing further to 15,000 tonnes per annum within 3-5 years.
We are fortunate to have an exclusive license to exciting new technology in the ore sorter at
Kambalda. This technology has already achieved a significant uplift in ore grade through
waste rejection, thereby increasing processing plant efficiency and improving margins.
It is also important to note that Consolidated controls the largely unexplored southern end of
the Kambalda Dome, and we are confident in the long term potential of this area. As a
precursor to developing a twin decline, we have invested in a new ventilation shaft. The first
phase of the twin-decline initiative will provide access to a nickel exploration target of some
90,000 tonnes.
The recently completed acquisition of nickel company Titan Resources Limited provides us
with a large area of prospective ground in the Widgiemooltha area. We expect to develop a
new mine at Widgiemooltha within 3 years. With total resources of 123,000 tonnes of nickel,
the Titan acquisition further enhances the growth potential of our nickel business.
Manganese
The seaborne manganese trade is forecast to grow at around 7% per annum for the next five
years. Consolidated's current mine capacity at Woodie Woodie is 1.1 million tonnes per
annum, while our 2005/06 production increased by 46% to 888,432 tonnes.
In 2006/07 we will increase production further to 900-925,000 tonnes, in line with demand.
With a resource of over 15 million tonnes and considerable exploration upside, manganese
will continue to be a profitable business for the long-term.
(3) Further Growth and Diversification through Acquisition and Exploration
A key focus for our management team moving forward is to pursue a prudent strategy to
manage our exposure to commodity price risk.
Consolidated's strategy is to pursue suitable acquisition and exploration opportunities, to
further grow and diversify our asset and commodity base.
While our initial focus will be on further advancing initiatives already in place in copper, zinc
and iron ore, we are open to other opportunities and, with the successful convertible note
issue, we have the financial capacity to pursue these. We are focusing on assets in growth
markets with exploration upside and where our skills in exploration, mining, logistics and
marketing can really add value.
Governance
7 Management
I have taken steps to underpin our business strategy with strong management capability at all
levels of the business. Having put in place an experienced team of people, I am confident we
will be able to run the business efficiently and capably.
Changes have also taken place at the Board level, with the restructured Board comprising a
group of talented and experienced people who have excellent skills and abilities. I believe
Consolidated Minerals' new leadership team will steer Consolidated into an exciting and
sustainable era of growth and profitability.
We are also focusing on cultural change within the business, with high value placed on
continuous improvement, technical excellence, team work and communication.
7 Sound business fundamentals
While the 2006 results were disappointing, we should not overlook Consolidated's sound
business fundamentals. Production is going well, and, in an environment of escalating cost
pressures, we have achieved excellent results in controlling costs in our manganese business
and reducing costs at our Kambalda Nickel operations.
This will continue to be a major priority for the business going forward. As I have outlined
above, we have set ourselves tough cost control targets for the 2006/07 financial year.
7 Increasing transparency and communication with our stakeholders
We have been working hard to rebuild the confidence of the investment community in the
company, the new leadership and the future direction of the business. I have been busy
making myself known to the market in order to build confidence in the new leadership and
direction. I am pleased to say that the feedback to date has been positive.
I will maintain a close dialogue with our investors and shareholders. We will improve
disclosure to the market. Having adopted a new policy on guidance in line with industry best
practice, investors will be better positioned to have an informed view of the Company's
progress and confidently assess performance. Rather than making profit forecasts (which are
inherently uncertain and are affected by changes in commodity prices that are not related to
the fundaments of our operating businesses), in the future we will talk about production targets
and cost outcomes rather than concepts such as trading profit. We will hold ourselves
accountable to the things that we can control, and not speculate on commodity prices or other
windfall opportunities.
--------------------------------------------------------------------------------
Looking Forward
In recent months we have been encouraged by signs of recovery in the Manganese market.
The longer term outlook for Manganese is good, with demand forecast to grow strongly as the
world steel industry continues to expand. As this is not a supply-constrained market, the rate of
price increases will depend largely on the discipline of the main suppliers. The manganese
and chromite operations at our Woodie Woodie and Coobina mines will continue to be the
workhorses of the company, providing sound profits and cashflows.
The nickel price has recently attained record highs, and the outlook for nickel is robust - driven
by strong stainless steel demand and supply limitations in the world nickel market. Our 32%
share holding in Jabiru Metals gives us significant exposure to strong copper and zinc
markets. Jabiru's new Jaguar Zinc-Copper Mine, which is on track for first production in the
June quarter of next year, will be an excellent operation from a cost perspective, and the high
prospectivity of the Jaguar tenements bodes well for future discoveries. We look forward to
receiving significant benefit from our holding in Jabiru when production commences next year.
The company has an unrealised gain of around $30 million on its Jabiru investment.
Nickel is the growth driver for the company, and the immediate expansion at our Kambalda
operations will enable us to produce around 6,000-6,400 contained nickel tonnes by the end of
the financial year.
Over the coming months I will report on progress towards major milestones, including:
-Completion of the production ramp-up at our East Alpha project, to reach 5,000tpa
annualised production by the end of 2006.
- Successful completion of the ventilation shaft at Kambalda, due in June 2007.
- Further nickel expansion at Kambalda and Widgemooltha to produce 15,000 tonnes
contained nickel per year in the next 3-5 years.
I look forward to working with our reinvigorated team at Consolidated to meet the challenges
ahead. Our approach is simple yet robust, and I believe it will be effective. In summary, I look
forward to keeping you informed as we move to implement our growth strategy and strive to
achieve superior results for our shareholders.
Thank you for taking the time to read this letter. I would welcome your feedback on our
strategies and performance and have enclosed a Comment Form for your convenience.
Please let me know your thoughts by completing and returning it to me via either post or
facsimile.
Yours sincerely
ROD BAXTER
Managing Director
