TIDMZOX
RNS Number : 9920X
ZincOx Resources PLC
12 May 2016
12 May 2016
ZincOx Resources plc
("ZincOx" or the "Company")
Final Results for the year ended 31 December 2015 &
Restructuring of Loan Notes
ZincOx Resources plc (AIM:ZOX), developer of the Korean
Recycling Plant (KRP), one of the largest electric arc furnace dust
recycling facilities in the world, today announces its results for
the year ended 31 December 2015 and restructuring of its corporate
Loan Notes.
Highlights
2015
-- Funds raised to remove heat exchangers, removal improves reliability and performance
-- EAFD imported into Korea
-- KRP restructuring at 30 December 2015
o Korea Zinc Company Ltd Offtake and Development Loans converted
into equity
o Cancellation of the guarantee given by the Company in respect
of the loans to KRP
o Company reduced to 10% interest in KRP
Post Year End
-- Corporate Loan Notes restructured and extended to January 2018
-- Recycling project approved by Vietnamese government
-- Zinc price recovers to US$1,942 (29 April 2016) per tonne
from a low of US$1,461 in December 2015
-- Group overheads substantially cut back
-- Legal completion of transfer of 90% of shares in KRP to Korea Zinc Company Ltd
Commenting on the announcement Dr Rod Beddows, ZincOx's Chairman
said:
"2015 was an extremely challenging and frustrating year for the
Company. However, having proven the technology at KRP, we are now
moving forward to find and assess new projects where the technical
intellectual property developed by the Company can be used in the
future".
For further information, please contact:
ZincOx Resources plc Tel: +44 (0) 127 645
0100
Andrew Woollett, Chief Executive
Peel Hunt LLP (Nominated Adviser Tel: +44 (0) 207 418
and Broker) 8900
Daniel Harris / Euan Brown
For further information please go to: www.zincox.com
Chairman's Statement
2015 was an extremely difficult and frustrating year for the
Company. Notwithstanding successful modifications to the Korea
Recycling Plant ("KRP"), the commodity price crash in the second
half of the year led to continuous losses for the Group as a whole
which, in the absence of additional funding, has led to a major
restructuring of our ownership of the KRP asset, the result being
that our interest was effectively reduced to 10% at 31 December
2015. Your management team is now working extremely hard to find a
new project around which the Company can effectively be re-launched
and a number of opportunities are under consideration.
While the stocks of many commodities have been rising,
indicating a supply-demand imbalance, this is not the case for
zinc, where one sees a steady decline in LME zinc stocks reported
on most days. Hence reduced demand has been more than offset by a
reduction in output due to the exhaustion of some of the world's
largest mines. The outlook for zinc, therefore, remains positive.
Notwithstanding these fundamentals, in the latter half of 2015, the
general market sentiment for commodities was so poor that the price
of zinc was dragged down and from September through December 2015,
the price averaged only US$1,639 per tonne as opposed to an average
of US$2,077 per tonne for the previous five years. The fall in the
price of zinc had a catastrophic impact on the Company's cash flow
in Korea leading to the Company suffering heavy monthly losses.
The zinc price began to pick up in early 2016 and during April
2016 it averaged over US$1,850 per tonne, although day to day
prices remain volatile. It is extremely unfortunate that having
finally resolved the technical issues at KRP we were faced with the
lowest price of zinc as can be seen from the graph below and the
poorest sentiment towards commodities for over five years so that
insufficient shareholders were willing to commit further support
for the Company.
This graph below shows in detail the extent of the zinc price
fall during the second half of 2015. In early 2016, although the
zinc price remains very volatile, the market sentiment for zinc is
more positive with the zinc price having increased significantly
from the low point last year. The underlying EBITDA* at KRP for
each of the half years since the operation started to trade in 2012
had been improving up until the second half of 2015, as can be seen
from the chart below, which shows the half yearly underlying EBITDA
profile against the zinc prices over the period. The first half of
2015 generated a positive underlying EBITDA of US$2.9 million which
was offset in the second half of the year by an underlying EBITDA
loss so that KRP operation had a cumulative underlying EBITDA
profit of US$863k in the year.
http://www.rns-pdf.londonstockexchange.com/rns/9920X_-2016-5-11.pdf
Following the loss of control and restructuring of KRP, the
carrying value of the Company's investment in KRP has been reduced
to US$6.4 million resulting in a one off loss of US$36.7 million
which is reflected in the total net loss figure for the Group of
US$47.0 million.
As announced in the press release on 29 December 2015, under the
recently revised AIM Rule 15, the restructuring of our interest in
KRP completed on 29 April 2016 is "deemed to be a disposal
resulting in a fundamental change of business" and the Company
would need to carry out an acquisition which constitutes a reverse
takeover within six months of the date of completion of the
restructuring being 28 October 2016 otherwise the shares of the
Company will be suspended from AIM. It is our aim to have a
substantial new project in place within six months so that it can
form the basis of either maintaining the quotation of the Company's
shares on AIM or a re-application to AIM. A substantial amount of
the current trading in ZincOx's share is already carried out on
ISDX, as it is the preferred exchange for many market makers. It is
our intention to seek a dual listing on the ISDX market so that in
the event that there was a period while the quote for our shares
was suspended on AIM, shareholders could continue to trade our
shares on the ISDX market. The ISDX is a relatively new independent
market which has attracted several high growth junior companies
with the largest company having a market capitalisation approaching
GBP1 billion.
The fall in the zinc price has obviously had a dramatic impact
on the Company's business. However, the management team are
determined to try to rebuild value for shareholders and, during
this time, have agreed to take a very significant pay cut. I am
concerned that we need to maintain as much incentive as possible
for management and at the same time align, as strongly as possible,
their interests to those of the shareholders and given the current
financial position of the Company, there are few options open to
us. We have used share options to incentivise management in the
past and have a policy allowing them to hold 10% of issued shares
under option. However, the exercise price for these is so far from
the current share price that they no longer provide a meaningful
incentive for management, all of whom have agreed to substantially
reduced remuneration packages. We will, therefore, cancel all
outstanding share options with a view to reissuing them in due
course following this announcement. With good fundamentals
supporting the zinc price, a now proven technical process for EAF
dust recycling, considerable in-house technical expertise and your
strong and dedicated management team I believe there is a good
chance that we can identify a new project around which we can
rebuild the Company.
It has been an extremely difficult period for you, our
shareholders, all our staff, your management team and the Board. I
would like to take this opportunity to thank our staff and
management for their efforts and to reassure shareholders that
every possible effort was made to maintain the Company's interest
in KRP, and as we move forward no less effort is being made to find
a new project and create value for you all.
Finally I would like to thank our loyal shareholders for their
support over the past year, especially during the fundraising last
Summer.
Dr Rod Beddows
Chairman
11 May 2016
*KRP earnings before interest, tax, depreciation and
amortisation (in accordance with the revenue recognition policy of
the Company and adjusted to exclude foreign exchange gains and
losses)
Chief Executive's Review
Since first production in April 2012, the profitability of KRP
has been compromised by the frequent stoppages required to repair
the heat exchangers. In the first half of 2015, we redesigned the
gas handling system in a way that enabled the heat exchangers to be
removed with relatively little additional capital. The heat
exchangers were designed to pre-heat the furnace's combustion air
thereby reducing gas consumption, so that their removal led to
higher gas usage and increased operating costs. However, during the
first half of the year we completed trials that demonstrated that
about 40% of the total gas could be replaced by injecting
pulverised coal. As the cost of energy in the form of coal is about
quarter of that which it is for gas this would lead to a
significant operating cost saving which would more than compensate
for the additional energy required by the absence of the primary
heat exchangers.
In July 2015, under extremely difficult conditions and against a
backdrop of continuing losses, the Company raised GBP 2.9 million
(net of expenses) to carry out the modifications and provide a
modest budget for the pursuit of new projects.
The modifications to the plant were completed by the end of
November and the plant successfully restarted. The installation of
the coal injection was postponed pending additional vendor
quotations.
Unfortunately, soon after the funds had been raised, the price
of all commodities collapsed. This was a result of the fears of a
Chinese slowdown compounded by the concerns that Glencore, one of
the world's largest resource companies, might face insurmountable
debt obligations, something which has proved not to be the
case.
In the Autumn, as the zinc price collapsed, it became
increasingly obvious that the Company would not be in a position to
meet its debt repayment obligations to Korea Zinc in that it
required a tranche of principal repayment at the end of January
2016. We entered into discussions with our debt provider, Korea
Zinc, and it agreed to postpone capital repayments and interest by
one year, provided the Company could raise sufficient new equity to
see it through 2016, and consequently the loan renegotiation was
conditional on a US$5 million capital increase into ZincOx Korea.
Korea Zinc, the loans of which were fully guaranteed by both KRP
and ZincOx Resources plc, also offered to restructure the ownership
of the project, essentially converting their debt to equity on a
formula that would leave ZincOx with a 10% interest in a KRP, and
no debt owing to Korea Zinc.
In spite of your management's determined efforts to raise the
necessary new equity from new investors and existing shareholders,
the history of underperformance at KRP and weak market sentiment
for commodities prevented the necessary funds being raised which
led to the ownership in KRP being restructured along the lines
proposed by Korea Zinc. Since the end of the year KRP has continued
to suffer losses and Korea Zinc has undertaken further
modifications and other expenses, so that it has loaned US$5.4
million to KRP. Korea Zinc notified the Company that the
restructuring was legally completed on 29 April 2016 and we
understand that it is the intention of Korea Zinc to convert these
additional funds into equity, so that ZincOx's interest in KRP will
be reduced to about 9.2%.
On 11 May 2016, the repayment date on the GBP4.2 million
corporate Loan Notes, which ZincOx issued in 2013, was extended
from July 2016 to January 2018 (the "Transaction"). These corporate
Loan Notes are also secured against a plot of land for heavy
industrial use in Turkey which had originally been earmarked for
the development of a new Electric Arc Furnace Dust (EAFD) treatment
plant. The land was put up for sale at the start of last year,
however the political uncertainty in Turkey over the past twelve
months has discouraged new investment and the plot has not yet been
sold. Efforts to sell the plot are ongoing but in the event that it
is not sold or the receipt from its sale are inadequate to cover
the cost of its repayment then ZincOx's interest in KRP will be
used to further secure the position of Noteholders. The Company
plans to sell the land over the next few months. Should there be
any shortfall on the Loan Notes following the sale of the land in
Turkey, then corporate Noteholders remain fully guaranteed by the
Company, however, there is no certainty that the Company will have
sufficient assets to satisfy any shortfall. Further details of the
amendments to the Loan Notes are set our below including details in
relation to the warrants attached to them. The Noteholders include
two directors of the Company, Andrew Woollett and Gautam Dalal
("Lending Directors"), who hold GBP877,500 and GBP450,000 of the
Notes respectively. Due to the involvement of the Lending
Directors, the Transaction constitutes a related party transaction
for the purposes of Rule 13 of the AIM Rules for Companies. The
Independent Directors (the directors of the Company excluding the
Lending Directors), having consulted with Peel Hunt, the Company's
Nominated Adviser, consider that the terms of the transaction are
fair and reasonable insofar as the shareholders of the Company are
concerned.
We now look forward to relaunching the Company using its broad
and deep experience of zinc recovery processes. In the meantime,
however, in order to give management time to find a suitable
project, the overheads of the Company have been reduced to an
absolute minimum, the Belgian office has been closed and most of
the staff made redundant with executive directors on a greatly
reduced salary and non-executive directors foregoing any
salary.
We believe the Rotary Hearth Furnace is an attractive technology
for treating Electric Arc Furnace Dust ("EAFD"), provided its zinc
concentrate is further processed using our Consecutive Metal
Leaching ("CML") technology for the recovery of a high quality zinc
oxide chemical, an option that was not available to us in Korea
because the zinc concentrate was already contracted for sale to
Korea Zinc.
In August 2015, we learned that the Company had won, against
international competition, approval to build an EAFD recycling
plant near Ho Chi Minh City in southern Vietnam. Vietnam has had
one of the fastest growing steel recycling industries and annual
steel capacity would generate over 100,000 tonnes per annum of
EAFD. The government of Ba Ria Vung Tau province, where most of the
steel is recycled, were concerned about the generation of EAFD and
sought proposals from various companies. Following the approval of
our proposal we obtained our Investment Registration Certificate in
February 2016 and are currently finalising a purchase option over a
suitable site.
We are currently seeking partners to join us in the finalisation
of a Bankable Development Study that could form the basis of
project financing. An incoming partner could earn a significant
interest in the project and at the same time, therefore, reduce the
capital required by ZincOx for its development. Notwithstanding the
excellent economic returns presented by the project, the slow ramp
up at KRP and the continuing general sentiment towards commodities,
creates a very tough environment in which to find partners for the
project.
In addition to the Vietnamese project, the Company is examining
other projects and is actively engaged in discussions with
corporate strategic partners.
Andrew Woollett
Chief Executive
11 May 2016
Strategic Report
The directors of the Company and its subsidiary undertakings
(which together comprise "the Group") present their
Strategic Report, as approved by the whole Board,
for the year ended 31 December 2015. The Strategic
Report is a statutory requirement under the Companies
Act 2006 (Strategic Report and Directors' Report)
Regulations 2013 and is intended to provide fair and
balanced information that enables the Directors to
be satisfied that they have complied with s172 of
the Companies Act 2006 which sets out the Directors'
duty to promote the success of the Company.
Principal Activities
The principal activity of the Group is to undertake
activities for the production of high grade zinc concentrate
by the recycling of EAFD. The Company acts as a recycling,
development and holding company. A detailed review
of the business and future developments is included
in the Chief Executive's Review and the Operational
Review section of the Strategic Report.
Business Model
Scrap iron and steel is mostly recycled in electric
arc furnaces ("EAF") where the volatile constituents
(Zn, Pb, Cl, Na etc) are driven off as fine particles
and gasses, together with fine particles of rust.
This EAFD needs to be filtered from the flue gases.
Steel is generally protected from corrosion by galvanising,
a process whereby a thin coating of zinc is applied
to the surface of the steel. This coating insulates
the steel from reaction with air and so prevents corrosion.
Steel scrap is, becoming increasingly galvanised and
since zinc is a volatile element, it constitutes part
of the EAFD. The zinc content of the EAFD is generally
between 20% and 25%, and also contains 25% to 30%
iron, both of which occur largely as oxides. In addition,
the EAFD contains lead, cadmium and arsenic, all these
toxic elements are to some extent soluble in water,
which therefore makes EAFD a hazardous waste. EAFD
is probably the world's largest inorganic hazardous
waste problem.
The steel mills need to dispose of the EAFD either
in landfill or to processors which recover the zinc.
Process plants based on existing technology have never
been developed unless a significant disposal fee has
been paid by the steel mills.
The breakthrough technology used by ZincOx recovers
the zinc using a rotary hearth furnace (RHF). The
zinc forms a unique high quality zinc oxide concentrate
(HZO), an iron intermediate product (ZHBI). This means
that there will be no solid waste entering landfill.
The ZHBI can be further processed into pig iron and
a clean slag that can be used by the cement industry.
It has recently been demonstrated that the exceptional
quality of the HZO will enable it to be upgraded to
a zinc oxide chemical. The upgrading would greatly
enhance revenue and profitability. When developed
with the rotary hearth furnace as an integrated operation,
together with ZHBI upgrading the technology is referred
to as the "Full Cycle" approach.
The HZO which was produced by KRP proved to be a high
value material with significant benefits over other
zinc concentrates. The opportunity to further upgrade
the HZO to an industrial zinc oxide will be incorporated
into future projects to significantly improve the
economic returns.
Operational Review
Korean Recycling Plant (KRP)
The Korean Recycling Plant, KRP is one of the world's
largest EAFD recycling facilities, having a nominal
capacity of 200,000 tpa EAFD for the production of
about 70,000 tpa zinc concentrate (HZO) and 100,000
tpa of iron product (ZHBI). KRP has exclusive long
term EAFD supply agreements with eight steel companies
that have targeted output of 175,000 tpa. The plant
commenced production in April 2012.
During the year the plant processed 145k tonnes of
EAFD producing 50,538 tonnes of high quality HZO with
an average grade of 66.4% which is equivalent to 33,490
tonnes of zinc. The EAFD processed was an increase
of 21% over the previous year. And although the recovery
improved during 2015 the zinc grade in the EAFD fell
by 6% from an average grade of 27.2% to 25.6% with
the result that the zinc shipments improved by 17%
during the year from 28,564 tonnes to 33,490 tonnes
of zinc contained.
The well documented issues with the heat exchangers
were finally resolved during the plant closure at
the end of October 2015. This work allowed the four
primary heat exchangers on the plant to be replaced
with refractory lined tubes which meant that the ongoing
problem of heat exchanger corrosion could not recur.
The baghouse was also expanded in order to compensate
for the additional cooling air required, as a consequence
of the cooling effect lost by heat exchanger removal.
In the future, the energy input lost as a result of
the removal of the heat exchangers will be more than
compensated for by coal injection so that gas consumption
will reduce. The installation of coal injection is
expected to be completed in May 2016.
Following the restart in November 2015 the process
began to settle down to its new operating conditions
and progress was being made to make continual improvements
as can be seen by the weekly production charts shown
below:
http://www.rns-pdf.londonstockexchange.com/rns/9920X_1-2016-5-11.pdf
Steel production in Korea fell significantly in 2015
with proportionally less EAFD being generated. Indeed
since the start of 2015 our throughput was limited
by EAFD supply, and during most of the year we had
to run at a reduced feed rate, so that in addition
to stoppages for Heat Exchanger problems, the plant
was very significantly constrained by the availability
of EAFD. This is illustrated on the following graph
showing the history of EAFD availability since 2013.
The target quantity of EAFD is 16,666 tonnes per month,
whereas the actual deliveries averaged 12,210 tonnes
per month for the year. In previous years, however,
the slow ramp-up led to throughput significantly less
than 12,000 tonnes per month and KRP had been obliged
to send contracted EAFD to landfill, whereas there
was no landfill in 2015.
http://www.rns-pdf.londonstockexchange.com/rns/9920X_2-2016-5-11.pdf
In order to address the shortfall in EAFD, the Company
arranged for its importation. As a hazardous waste,
the import and export of EAFD is governed by the Basel
Convention, an international treaty designed to prevent
the dumping of such waste in countries where there
may be less strict and well managed environmental
protection. Compliance with the procedures laid down
in the Basel convention is a protracted exercise,
however the Company successfully obtained the necessary
permission and imports from two overseas mills commenced
towards the end of the year. A number of overseas
mills were contacted with a view to exporting EAFD
to KRP so that the plant could work at full capacity
by the middle of 2016.
The KRP plant has now been operating for four years
and all the lessons that have been learned in Korea
to build and develop the RHF will be incorporated
into any new RHF projects.
Technology
The Company has always reviewed new developments in technology
being used to treat EAFD to make comparison of these with our
RHF/CML approach. We still feel that the best way of creating long
term value is by using RHF technology and the upgrading of its
products, zinc and iron bearing products. Definitive progress has
been made with both these upgrades during 2015.
Zinc Concentrate (HZO) Upgrading
During 2014 and 2015, testwork on KRP's zinc concentrate ("HZO")
continued and confirmed the best way to upgrade it to an industrial
quality zinc oxide chemical. The best process was designed by
ZincOx's technical team and is called Consecutive Metal Leaching
("CML"). CML comprises a combination of existing technologies
specifically configured to remove the halides, sulphates and
deleterious base metals from the concentrate. The zinc oxide that
remains after CML has a grade of about 99.7% zinc oxide, high
enough to qualify for most industrial uses, including rubber and
ceramics.
Laboratory scale CML testwork has provided samples of the zinc
oxide. These samples have been used to make glazes for the ceramics
industry and samples of rubber, by laboratories that specialize in
the technical qualification of raw materials. In both cases the
zinc oxide produced by upgrading the HZO was confirmed to be
equally effective as leading market brands.
Iron Product (ZHBI) Upgrading
ZHBI, the iron product of the RHF, can be melted to produce pig
iron and saleable slag. Several melting techniques were
investigated and the Submerged Arc Furnace ("SAF") was found to be
the most attractive. Representative ZHBI samples have been analysed
and the results used to undertake sophisticated computer simulation
of the SAF technology. The simulation was carried out by Mintek, an
internationally recognised metallurgical laboratory. The computer
modelling gives likely energy and reagent consumptions as well as
iron, slag and fume compositions. This information has been used in
developing a scoping study for the installation of a melter to work
in combination with an RHF. The study was positive but due to the
high proportion of slag and energy required for its melting
development of such an installation would probably require a scrap
price in excess of US$250 per tonne.
New Projects
ZincOx has been actively researching potential sites for
recycling plants over the past eight years. Vietnam is likely to be
the next development but considerable work has been undertaken
elsewhere so that a series of developments could be envisaged.
Vietnam has a fast growing steel industry comprised of both
primary steel making using blast furnaces and the recycling of
steel scrap in EAF's.
http://www.rns-pdf.londonstockexchange.com/rns/9920X_3-2016-5-11.pdf
There are no large scale plants treating EAFD in Vietnam, the
disposal of which presents a growing problem for the EAF operators.
The bulk of the EAFs are located in the Phu My industrial zone,
about 100km south-east of Ho Chi Minh City. The government of Ba
Ria Vung Tau province invited bids to build a central EAFD
treatment plant, and this was won by ZincOx in September 2015. The
Company was awarded its Investment Registration Certificate in
February 2016. A site for the VRUP has been selected on the Phu My
3 industrial zone and negotiations to purchase the land are well
advanced.
The Vietnam Recycling and Upgrading Plant ("VRUP") is designed
to have a capacity of 100,000 tpa EAFD and cost about US$107
million to develop. Economic indicators, assuming a zinc price of
US$2,000 per tonne, pre-tax and ungeared, are as follows:
NPV (10% disc. rate), US$ million 89
IRR 23%
EBITDA, US$ million per annum 27
The sensitivity of the EBITDA of the operation to the zinc price
is presented below:
http://www.rns-pdf.londonstockexchange.com/rns/9920X_4-2016-5-11.pdf
The cost of producing zinc units, net of by-products and
chemical premium, will place it among the lowest cost zinc
producers in the world.
Other
In the USA, during the early part of 2015, the Group's Big River
Zinc facility continued to provide services to third parties
distributing sulphuric acid and diesel emission fluid. As was
highlighted in the Annual Report last year the Company considered
USA to be a low priority target because the capacity of EAFD
recycling in North America was broadly in balance. Having explored
many activities at Big River in recent years the directors took the
decision to sell Big River and stop any drain on the resources
required to support it and as a result the asset was disposed of in
August 2015.
In Russia, the Company has a joint venture with the Magnezit
Group, for the investigation of an EAFD recycling plant to service
steel mills in the former Soviet Union. The investigation, which is
at early stage, is still being led by the Magnezit Group.
Performance Review
Financial
Group Results Overview
The Group result for the year is a loss of US$46.7 million
(2014: US$33.2 million). This includes the loss from KRP, which is
classed as a discontinued operation, of US$36.7 million (2014:
US$14.9 million) and the loss from the continuing operation of
US$10.0 million (2014: US$18.4 million). The KRP result is for the
period to the 30 December 2015, the date on which operational and
accounting control of KRP was effectively lost.
Due to the collapse in the zinc price in the second half of the
year, KRP was making losses that precluded repayment of the debt
scheduled to begin at the end of January 2016. Korea Zinc were
prepared to postpone repayment, provided the Company could inject
at least US$5 million of new equity into KRP before the year end,
in order to fund losses through to the middle of 2016. Due to the
ongoing losses at KRP and the very negative investor sentiment
towards commodities in the last quarter of 2015, the Company was
unable to raise sufficient additional equity. Rather than miss a
loan repayment date with Korea Zinc, the ownership of KRP was
restructured, by prior agreement, such that the loans did not go
into default. KRP is owned 100% by ZincOx Resources (Korea) Ltd
("ZincOx Korea"), which, up to 30 December 2015, was wholly owned
by the Company.
The agreed restructuring achieves the following:-
-- As at 31 December 2015, a reduced Company interest in ZincOx
Korea of 10% was agreed, with the balance held by Korea Zinc. Legal
completion of this position was notified to the Group on 29 April
2016.
-- The conversion of Korea Zinc's Offtake and Development loans into equity, and
-- The cancellation of all guarantees given by the Company, in
respect of the Offtake and Development loans.
The restructuring will result in ZincOx Korea having a nominal
share capital value of US$64 million, of which US$6.4 million (10%)
is owned by the Company. This valuation will be used in future if
loans to ZincOx Korea are to be converted to equity.
Since 30 December 2015, whilst the restructuring is being
undertaken, KRP has, to date, required additional working capital
of about US$5.4 million. This is being met through the provision of
a new loan from Korea Zinc to ZincOx Korea, it is likely that Korea
Zinc will convert this loan to equity in the near future. If this
were to be done, ZincOx's interest in ZincOx Korea, and therefore
KRP, would reduce to 9.2%. The Group financial result for the year,
reflects the loss of operational and accounting control of ZincOx
Korea on 30 December 2015, and as such, ZincOx Korea's result up to
this point, has been consolidated and shown as a discontinued
operation. The balance sheet of ZincOx Korea has been
deconsolidated at the year end, with the Company's remaining 10%
interest in ZincOx Korea being reclassified, within investments, as
a "financial asset" under IAS 39.
When the discontinued activity for KRP is excluded, the Group
made an underlying EBITDA* loss of US$4.2 million for the year to
31 December 2015 (2014: US$4.7 million). KRP finished the year with
an underlying EBITDA gain of US$0.9 million (2014: underlying
EBITDA loss of US$1.3 million) as detailed in note 5, and this
improvement was due to a continuing improvement in the operational
performance at KRP, although this has been masked by the collapse
of the zinc price in the second half of the year.
Key Performance Indicators in relation to KRP
Building on the physical throughputs and operational
performance, the Group sold 33,490 tonnes of zinc contained in
concentrate in the year from KRP (2014: 28,564 tonnes). This was
the plant's third full year in production and although it continued
to have minor teething issues in the year, up until the heat
exchangers were replaced during the November shutdown, the physical
sale of final product increased by 17% in the year. In addition to
stoppages due to the heat exchangers, throughput was, for almost
all the year, constrained by a shortage of EAFD supply.
This increased production did not translate into increased
revenues due to the collapse in the zinc price during the second
half of the year. The average zinc price during the first half of
the year was US$2,133 per tonne which reduced by 19% to an average
of US$1,730 during the second half of the year.
The collapse in the zinc price began in early August and
continued through to the end of the year, with a low point of
US$1,461 per tonne during December. This compares to the low point
during the first half of the year of US$1,984 per tonne during
March. The low zinc price during the second half of the year
triggered the restructuring of KRP discussions with Korea Zinc. The
continuing low zinc price and uncertainty over when the price might
rise, meant that raising new equity of US$5 million, as a condition
of the loan refinance, was not possible and ultimately led to the
agreement to restructure the Korea Zinc loans.
The fall in zinc prices during the second half of 2015 impacted
the underlying EBITDA profit for KRP which fell from US$2.9 million
at the half year to US$0.9 million for the full year.
Key metrics ("KPIs") were monitored through the year up to 30
December 2015 as well as other key economic operating factors
through regular management meetings.
KPI's (KRP) 2015 2014 % change
------------------------------------ -------- -------- ---------
Zinc in Concentrate sold (tonnes) 33,490 28,564 +17%
Average zinc price (US$/tonne) 1,927 2,164 -11%
Zinc revenue billed (US$ millions) 36.4 37.5 -3%
Underlying EBITDA (US$ millions)* 0.9 (1.3) +169%
EAFD processed (tonnes) 144,679 119,124 +21%
------------------------------------ -------- -------- ---------
*before any one-offs and foreign exchange impact
The directors continued to monitor any hazards that were
reported on operational sites during the year and review any
accidents and incidents as part of the ongoing environmental health
and safety procedure. During the year, the total number of man
hours worked across the Group were 206,776, with no lost time
incidents (2014: 182,000 hours and one lost time incident).
At the Group level, the directors continue to monitor the cash
requirements of the business when compared to cash available.
Following the loss of control of KRP, the directors have undertaken
a cost cutting review for the period in which the Company is now
considering its future options. New projects and initiatives are
being pursued, with detailed consideration being given to any
financing opportunities. At the same time, the search for strategic
and or project partners is ongoing.
Funding
In March 2015, negotiations took place with Korea Zinc to amend
the repayments due against the Development loan, replacing a bullet
repayment in February 2016 with six equal payments of US$3.1
million, beginning in February 2016 and payable every six months.
These instalments include the deferred interest that Korea Zinc had
previously agreed to roll up and in recognition of this, the
offtake agreement with Korea Zinc was increased to 1,050,000
tonnes.
In July 2015, the Group completed an equity fundraising of
GBP2.9 million (equivalent to US$4.0 million) after expenses. These
funds were raised to enable the removal of the heat exchangers at
KRP and expansion of the baghouse and to allow for its further
optimisation.
Following the significant drop in the zinc price during the
second half of the year, the Development loan repayment, that fell
due at the end of January 2016, was renegotiated during November
2015 to push the payment out by a further 12 months, conditional on
the Group injecting a further US$5 million of equity into KRP
before the end of 2015. This fundraising was unsuccessful due to
the continued uncertainty over the expected future zinc price.
In Korea, the Group also made use of a rolling "receivables
purchase agreement" during the year with Standard Chartered Bank
Korea ("SCBK"), whereby it could receive funds in between the
monthly receipts that are received from Korea Zinc.
Funding that has been required by KRP, since the Group lost
operational and financial control on 30 December 2015, has been
provided as a loan by Korea Zinc. Due to the continued low zinc
price funding of US$5.4 million has been provided by Korea Zinc.
It's expected that this continued support and funding by Korea Zinc
will lead to a dilution of the Group's interest in KRP as discussed
above.
In July 2015, the Group also completed a renegotiation with the
corporate Noteholders to extend the redemption date by a further 12
months to July 2016. The corporate Loan Notes were initially issued
in August 2013, amounting to GBP4.2 million, bearing interest at a
rate of 10%. Security for the Loan Notes was provided by the
Company and in addition a charge was taken over land in the heavy
industrial zone at Aliaga in Turkey. During 2015, all the remaining
land in the light industrial zone was sold, and in December an
amount of GBP420k was paid off against the Loan Notes. The funds
realized by the sales will also cover the interest payments on the
Loan Notes until July 2016, when they were due to be repaid in
full.
On 11 May 2016, the terms of the Loan Notes were renegotiated so
as to extend the date to January 2018. The Company intends to sell
the industrial land in Turkey against which the Noteholders have a
charge. As a result of falling land values and the depreciation of
the Turkish Lira, the land sale may not realize enough cash to
cover completely the outstanding amount of the Loan Notes and the
Company would be required to make good any shortfall. Furthermore,
the Company has granted a charge to the Noteholders over ZincOx's
shares in ZincOx Korea, although there is no certainty that the
assets of the Company will be sufficient in such circumstances to
satisfy such shortfall. After July 2016, the interest will continue
at the same rate, 10% per annum, but will be rolled up into the
principal amount of the Loan Notes until such time as the
Noteholders are repaid in full. The Noteholders include two
directors of the Company, Andrew Woollett and Gautam Dalal
("Lending Directors"), who hold GBP877,500 and GBP450,000 of the
Notes respectively.
The Loan Notes have warrants attached, the amount and price of
which are adjusted as new shares are issued, so as to maintain the
interests of the Loan Note holders. As at 31 March 2016, the
Noteholders were entitled to warrants over 19,217,840 shares at an
exercise price of 25p. If, as would seem likely, the Company
carries out further funding by issuing new equity over the life of
the Loan Notes, additional warrants would need to be issued. In
order to simplify the situation and reduce future dilution, it has
been agreed in May 2016, that the number of warrants will be
reduced to 9,450,000 with a new strike price of 5p.
Due to the involvement of the Lending Directors, the Transaction
constitutes a related party transaction for the purposes of Rule 13
of the AIM Rules for Companies. The Independent Directors (the
directors of the Company excluding the Lending Directors), having
consulted with Peel Hunt, the Company's Nominated Adviser, consider
that the terms of the transaction are fair and reasonable insofar
as the shareholders of the Company are concerned.
The interest charge for the year, in relation to the Loan Notes
was US$0.6 million (2014: US$0.7 million) which accrues at a rate
of 10% per annum.
Liquidity
The cash funds of the Group at 31 December 2015 were US$0.7
million (2014: US$1.2 million). These cash funds were held in a
range of currencies at the year end, the most significant of which
were US Dollars 0.5 million (2014: US$0.7 million), and Pounds
Sterling 0.1 million (2014: GBP0.1 million).
Going Concern
Since the end of 2015 the directors have initiated a cost
reduction programme covering all areas of the business whilst at
the same time, investigating new projects around which the Company
can be rebuilt. These cost reductions include significantly cutting
the salary of all the directors.
The Company has been in discussions with potential strategic and
project specific partners, for the development of new recycling
projects, whilst looking at opportunities to use the intellectual
property that has been developed, on other potential assets. The
fundraising in February 2016 for GBP205,000 (before expenses), was
completed to allow the Company time to explore these opportunities
on a reduced overhead basis, as well as allowing enough time to
realise value from KRP.
Following the loss of operational control of KRP, at the end of
2015, the Group now has a 10% holding of KRP in exchange for both
the Development and Offtake loans being extinguished. Furthermore,
accumulated losses brought forward in ZincOx Korea would need to be
extinguished before any dividend can be paid out to the Company by
ZincOx Korea. The timing of any dividend receipt is dependent on
future profits of KRP which in turn are dependent upon the future
zinc price and the directors have used consensus forecasts produced
by 13 zinc analysts during March 2016 of US$1,793 per tonne for
2016, US$1,990 per tonne in 2017, US$2,296 per tonne in 2018,
US$2,497 per tonne in 2019 and a long run zinc price of US$2,218
per tonne thereafter. On this basis and assuming the same operating
metrics that were measured in the operation during 2015 and before
any coal injection improvements, it is unlikely that a dividend
would be paid before 2018. The low zinc price at the beginning of
2016 led to continuing losses. Korea Zinc has, however, continued
to fund KRP and the Group will not be required to support KRP.
The ability of KRP to pay dividends in future periods may affect
the ability of the Group to exploit its intangible assets in the
future and as a result the carrying value of the intangibles will
continue to be reviewed at future reporting dates to ensure the
future viability of the Group permits their commercial
exploitation.
The directors have assessed the material uncertainties
concerning the Group's future funding requirement which may cast
significant doubt upon the Group's ability to continue as a going
concern and compared them with the levels of expected finance
available and have a reasonable expectation that the Group has
adequate financial resources to manage its business risks and
continue in operational existence for the next twelve months from
the date of this report. The directors considered various scenarios
in reviewing the budgets and projections for 2016. These scenarios
review the financial modelling of very low activity "hibernating"
budget allowing time to realise value from KRP, through to new
funds being raised so as to enable the development of new projects,
whether that is using RHF/CML or other technology.
Financial Review of Operations
Korean Recycling Plant (KRP)
KRP sold 33,490 tonnes of zinc in concentrate to Korea Zinc in
the year to 31 December 2015 (2014: 28,564 tonnes). All of the
material was sold to Korea Zinc under the offtake agreement which
had been signed in April 2011 as part of the financing of the
project. This resulted in revenues of US$36.4 million (2014:
US$37.5 million) as detailed in note 5. The quality of the product
was higher during 2015 with an average zinc grade of 66.4% compared
to 65.6% during 2014.
Monthly revenues at KRP are dependent on the London Metal
Exchange (LME) zinc price because the product sold by KRP is a zinc
oxide concentrate sold under an international pricing formula. For
the first half of the year, the LME zinc price was in line with the
range seen in the previous five years, with a high of US$2,400 per
tonne. In the second half of the year, however, the price
collapsed, reaching a low of US$1,461 per tonne, in December.
The analysts and forecasters who watch the zinc market generally
agree that, as certain key mines have now been exhausted such as
Century Mine in Australia and Lisheen in Ireland, there will be
reduced supply. The weakening Chinese economy, however, is expected
to have a significant impact on demand. One key indicator to
support a rising zinc price expectation, is the LME zinc stocks,
which were 690,825 tonnes at the start of 2015, dropping by 33% to
464,400 tonnes by the year end. The reduction has continued since
the year end such that, by the end of April 2016, the stock had
fallen a further 9% to 400,000 tonnes.
A further impact on the result for the year was the volatility
in the foreign exchange rates. The sales of zinc concentrate are
made in US Dollars and the majority of costs incurred at KRP are
incurred in Korean won, the high point for this exchange rate in
the year was 1,204 KRW per US$ (2014: 1,135 KRW per US$) and the
low point was 1,070 KRW per US$ (2014: 1,010 KRW per US$) with an
average for the year of 1,127 KRW per US$ (2014: 1,055 KRW per
US$).
The underlying EBITDA gain for KRP included in discontinued
activities (see note 5), prior to any foreign exchange movements,
was US$0.9 million during the year (2014: EBITDA loss US$1.3
million).
EAFD is a waste which we receive from the Korean steel mills the
quality of which is dependent up the scrap buying policies of the
steel mills. The incremental production in the year was achieved in
spite of the zinc grade in the EAFD reducing to an average of 25.6%
from an average of 27.2% during 2014.
As has been noted, the plant had various stoppages through the
year mainly to remediate the heat exchangers. Despite these
stoppages the plant still managed to process 145,000 tonnes of EAFD
in the year compared to 119,000 tonnes the year before. The impact
of running the KRP below its capacity of 200,000 tonnes per annum
was that certain operating consumptions were above the target
levels. In addition, extra costs were incurred for remediation of
the heat exchangers. It is expected Korea Zinc will make certain
improvements during 2016 that had been planned for KRP, including
coal injection to reduce the gas consumption in the plant.
Other Projects
USA
Following the impairment of the Big River Zinc smelter in USA at
the end of 2014, the Group continued to seek alternative uses for
the asset during the year as well as looking for opportunities to
dispose of the asset, which would have the effect of removing any
ongoing holding cost for the Group. As a result, the Big River Zinc
smelter assets were sold on 24 August 2015, for a gross price of
US$750,000.
In 2007, the Group purchased a 17 acre site in Ohio which was
intended to be the site of the first RHF plant. The EAFD supply
agreements in the USA are under relatively long term arrangements
between the mills and existing recyclers and, as a result, the land
in the USA is currently surplus to requirements. The land was put
up for sale and subsequently sold, since the year end, realising
US$187k, net of expenses. The land in Ohio is shown at the year
end, as an asset held for sale in the Group balance sheet.
Turkey
Land held in Turkey within the light industrial zone, was fully
disposed of during 2015, and this realised approximately GBP378k.
Proceeds from land sales have been partially used to repay capital
of GBP420k and interest of GBP417k in respect of the Loan Notes
that were taken out in August 2013.
In view of the charge over the land in Turkey, in favour of the
holders of the Loan Notes, any remaining funds are held in an
escrow account, against the Loan Notes. At the end of December the
balance in the escrow account was GBP262k (2014: GBP948k).
Environmental, Health, Safety & Quality
The Group believes that what is good for the planet is good for
business and good for the communities in which ZincOx operates.
There is an overriding commitment to Sustainable Development which
is pursued through the effective management of Environment, Health,
Safety and Quality ("EHSQ") using best practices from ZincOx and
other third parties.
As the projects are progressed internationally, the directors
remain relentless in their pursuit of an injury free environment
for all employees and others who come onto ZincOx sites and the
Group seeks to ensure that its business contributes lasting
benefits to society through the consideration of health, safety,
social, environmental, ethical and economic aspects in all
decisions and activities.
During 2015, some 206,776 hours were worked in ZincOx worldwide,
including projects, with no significant environmental incidents and
no lost time incident. ZincOx's management believe that all
incidents and injuries are preventable and strives to create a
workplace culture where all employees and contractors share these
beliefs.
Risks
Set out below are certain risks which may affect performance.
Such risks are not intended to be presented in any
order of priority. Although the directors and senior
management have significant experience and take steps
continually to mitigate and review risks under their
control as far as possible and reasonably practicable,
any of the risks set out below, as well as any other
risks referred to in this annual report, could have
a material adverse effect on business performance.
In addition, the internal and external risks set out
below are not exhaustive and additional risks, not
presently known to the directors, or which the directors
currently deem immaterial, may arise or become material
in the future. The operational and financial risks
which might relate to the operation of KRP are deemed
as risks on the Group which may affect the ability
of KRP to pay a dividend in the future.
Operational risks
* The ability of KRP to generate profits and hence pay
dividends to the Company is dependent on:
o Remediation at KRP which may impact future profitability
of the plant,
o Unexpected failure of equipment,
o Failure of third party services which is managed
by electrical back up on site,
o Materials and equipment availability, in a timely
manner, which is managed through regular dialogue
with external suppliers and monitoring of equipment
on the site by the maintenance team,
o Environmental incidents are managed by routine monitoring
and training of staff, and
o Reduced availability of EAFD in Korea, which is
being mitigated by finding new sources of dust for
import.
* Health and safety incidents,
* Single project dependence,
* Reduced availability of EAFD in Korea, which is being
mitigated by finding new sources of dust for import,
* Loss of key personnel, and
* Ability to exploit intangible assets in the future.
Financial risks
* Zinc price movement and associated volatility will
affect the monthly profitability of KRP,
* Funding of any short term loans in KRP provided by
Korea Zinc, as a result of operational issues or zinc
price reduction, with a financial risk that it may
dilute the Group's holding if the group does not
follow its corresponding obligation,
* Zinc price movements will affect the amount of
finance which may be available for the development of
other projects within the Group. Any decline in zinc
prices will therefore have an adverse impact on the
business. No hedging is currently undertaken to
mitigate this risk,
* Unscheduled loss of production at KRP will impact
profitability which will impact on ability to pay a
dividend to fund the Group,
* Foreign exchange movements; this is continuously
monitored and no hedging is currently undertaken to
mitigate this risk,
* Cost inflation is managed by reviewing alternative
suppliers where appropriate,
* In KRP the renewal of a suitable receivable purchase
agreement,
* Insurances may not cover all liabilities. Insurance
policies are held both at the Group level and at the
project level, and are reviewed annually,
* Sale of land in Turkey and the ability for the sale
proceeds to cover the value of the Loan Notes, and
* Any legal proceedings.
All of these risks could materially affect the Group,
its business, results of future operations or financial
condition.
Uncertainties
Set out below are certain principal uncertainties
which may affect potential growth across the Group.
* Dependence on the EAFD supply contracts, which is why
the Group is aiming to sign up long term EAFD
agreements with suppliers of EAFD within target
territories for expansion,
* Availability of capital to fund other recycling
projects. The directors continue to maintain a good
relationship with prospective suppliers of finance,
* Ensuring intellectual property and know how is
protected,
* Competitor technology and,
* Going concern.
The Group is further exposed to uncertainty connected
with the political, fiscal and legal systems, including
taxation and currency fluctuations in the territories
in which the Group operates.
On behalf of the Board
Andrew Woollett
Chief Executive
11 May 2016
Forward Looking Statements
The Chairman's Statement, Chief Executive's Review and the
Strategic Report contain discussion of future operations and
financial performance by use of various forward looking words such
as "anticipates," "estimates," "expects," "projects," "intends,"
"plans," "believes" and terms of similar substance. These forward
looking statements are based on management's current expectations
and beliefs about future events but as with any projection or
forecast, they are inherently susceptible to uncertainty and
changes in circumstances which could cause the Group's actual
activities and results to differ materially from those contained in
the forward looking statements.
CONSOLIDATED INCOME STATEMENT
FOR THE YEARED 31 DECEMBER 2015
2015 2014
Notes $'000 $'000
--------------------------------------- ------- ----------- -----------
Continuing operations
Revenue 246 605
Cost of sales (1,827) (687)
--------------------------------------- ------- ----------- -----------
Gross loss (1,581) (82)
--------------------------------------- ------- ----------- -----------
Administrative expenses (net
of gains and impairments) 3 (7,754) (17,571)
--------------------------------------- ------- ----------- -----------
Operating Loss (9,335) (17,653)
--------------------------------------- ------- ----------- -----------
Underlying EBITDA Loss (4,213) (4,687)
Other gains 1,584 1,119
Impairment provisions (2,364) (13,917)
Foreign exchange (loss) /
gain (2,101) 1,531
Depreciation and amortisation (2,241) (1,699)
Operating Loss
--------------------------------------- ------- ----------- -----------
2 (9,335) (17,653)
--------------------------------------- ------- ----------- -----------
Finance income 1 1
Finance costs (643) (699)
--------------------------------------- ------- ----------- -----------
Loss before tax (9,977) (18,351)
Taxation (36) -
--------------------------------------- ------- ----------- -----------
Loss for the year from continuing
operations
(10,013) (18,351)
Discontinued operations
Loss for the year from discontinued
operations 5 (36,651) (14,878)
--------------------------------------- ------- ----------- -----------
Net Loss (46,664) (33,229)
--------------------------------------- ------- ----------- -----------
From continuing and discontinued
operations
Basic and diluted loss per 4 (26.45) (21.11)
ordinary share (cents)
Adjusted loss per ordinary 4 (24.43) (12.24)
share (cents) *
From continuing operations
Basic and diluted loss per 4 (5.67) (11.66)
ordinary share (cents)
Adjusted loss per ordinary 4 (4.33) (2.82)
share (cents) *
--------------------------------- ---- ---------- ----------
* adjusted loss per ordinary share calculation excludes
impairment provisions
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2015
2015 2014
$'000 $'000
--------------------------------------- ---------------------- ----------------------
Loss for the year
Other comprehensive income (46,664) (33,229)
Items that will be subsequently
reclassified to profit or loss
Exchange differences on translating
foreign operations (2,460) (3,068)
--------------------------------------- ---------------------- ----------------------
Total comprehensive income for
the year (49,124) (36,297)
--------------------------------------- ---------------------- ----------------------
CONSOLIDATED BALANCE SHEET
AS AT 31 DECEMBER 2015
2015 2014 2013
Notes $'000 $'000 $'000
----------------------------- ------- ------------ ------------ ------------
Assets
Non-Current Assets
Intangible assets 6 4,242 8,615 16,352
Property, plant
& equipment 22 115,681 134,078
Investments 7 6,560 100 106
Trade and other
receivables - 10 -
----------------------------- ------- ------------ ------------ ------------
10,824 124,406 150,536
----------------------------- ------- ------------ ------------ ------------
Current Assets
Inventories - 1,651 1,403
Trade and other
receivables 508 4,405 3,540
Restricted cash 389 1,476 667
Cash and cash equivalents 655 1,195 4,752
----------------------------- ------- ------------ ------------ ------------
1,552 8,727 10,362
----------------------------- ------- ------------ ------------ ------------
Assets held for
sale 1,970 3,107 1,484
Total Assets 14,346 136,240 162,382
----------------------------- ------- ------------ ------------ ------------
Liabilities
Current Liabilities
Trade and other
payables (688) (14,368) (13,640)
Loans and borrowings 8 (5,611) (12,238) (2,026)
----------------------------- ------- ------------ ------------ ------------
(6,299) (26,606) (15,666)
----------------------------- ------- ------------ ------------ ------------
Non-Current Liabilities
Trade and other
payables (96) (4,598) (3,730)
Loans and borrowings 8 - (52,739) (59,664)
----------------------------- ------- ------------ ------------ ------------
(96) (57,337) (63,394)
----------------------------- ------- ------------ ------------ ------------
Total Liabilities (6,395) (83,943) (79,060)
----------------------------- ------- ------------ ------------ ------------
Net Assets 7,951 52,297 83,322
----------------------------- ------- ------------ ------------ ------------
Equity
Share capital 46,679 46,310 45,795
Share premium 185,590 181,371 176,944
Retained losses (199,965) (153,491) (120,592)
Foreign currency
reserve (24,353) (21,893) (18,825)
----------------------------- ------- ------------ ------------ ------------
Total Equity 7,951 52,297 83,322
----------------------------- ------- ------------ ------------ ------------
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEARED 31 DECEMBER 2015
2015 2014
Notes $'000 $'000
------------------------------------------------------------------- ------- ----------- -----------
Loss before taxation due to continuing operations (9,977) (18,351)
Loss before taxation due to discontinued operations 5 (36,651) (14,878)
------------------------------------------------------------------- ------- ----------- -----------
Loss before taxation (46,628) (33,229)
Adjustments for:
Depreciation and amortisation 8,253 7,827
Interest received (4) (3)
Interest expense 4,140 5,322
Impairment of intangible assets 2 2,011 7,503
Impairment of property, plant and equipment 2,5 1,225 6,467
Impairment of assets held for sale 2 285 -
Share based payments 190 330
Increase in trade and other payables 1,556 2,130
Decrease / (increase) in trade and other receivables 693 (875)
Decrease / (increase) in inventories 133 (248)
Foreign exchange losses 6,784 1,257
Loss due to loss of operational control of subsidiary 22,136 -
Other gains (1,552) (1,119)
------------------------------------------------------------------- ------- ----------- -----------
Cash utilised in operations (778) (4,638)
Interest paid (2,609) (2,571)
Taxation (37) -
------------------------------------------------------------------- ------- ----------- -----------
Net cash flow from operating activities (3,424) (7,209)
------------------------------------------------------------------- ------- ----------- -----------
Investing activities
Net proceeds from disposal of assets 660 1,895
Net proceeds from disposal of scrapped assets 3 10
Cash disposed of with loss of operational control of subsidiary (5) -
Purchase of intangible assets (613) (596)
Purchase of property, plant and equipment (3,344) (2,639)
Insurance proceeds received 300 -
Interest received 4 3
------------------------------------------------------------------- ------- ----------- -----------
Net cash used in investing activities (2,995) (1,327)
------------------------------------------------------------------- ------- ----------- -----------
Financing activities
Proceeds from borrowings 1,271 1,270
Repayment of borrowings (623) -
Restriction of cash - (809)
Release of restricted cash 1,087 -
Net proceeds from issue of ordinary shares 4,588 4,942
------------------------------------------------------------------- ------- ----------- -----------
Net cash received from financing activities 6,323 5,403
------------------------------------------------------------------- ------- ----------- -----------
Net decrease in cash and cash equivalents (96) (3,133)
Cash and cash equivalents at start of year 1,195 4,752
Exchange differences on cash and cash equivalents (444) (424)
------------------------------------------------------------------- ------- ----------- -----------
Cash and cash equivalents at end of year 655 1,195
------------------------------------------------------------------- ------- ----------- -----------
The above cash flows aggregate those from continuing and
discontinued operations. Separate disclosure has been made in note
5 for those cash flows relating to discontinued operations
only.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARED 31 DECEMBER 2015
Share Share FX Retained Total
capital premium reserve losses equity
$'000 $'000 $'000 $'000 $'000
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Balance at 1 January 2013 45,271 169,985 (18,536) (94,638) 102,082
Share based payments - - - 377 377
Issue of share capital 524 6,959 - - 7,483
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Transactions with owners
Loss for the year
524 6,959 - 377 7,860
Other comprehensive income
items that will - - - (26,331) (26,331)
be subsequently reclassified
to profit or loss
Exchange differences on translating
foreign operations - - (289) - (289)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Total comprehensive income
for the year - - (289) (26,331) (26,620)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Balance at 31 December 2013 45,795 176,944 (18,825) (120,592) 83,322
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Share based payments - - - 330 330
Issue of share capital 515 4,427 - - 4,942
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Transactions with owners
Loss for the year
515 4,427 - 330 5,272
Other comprehensive income
items that will - - - (33,229) (33,229)
be subsequently reclassified
to profit or loss
Exchange differences on translating
foreign operations - - (3,068) - (3,068)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Total comprehensive income
for the year - - (3,068) (33,229) (36,297)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Balance at 31 December 2014 46,310 181,371 (21,893) (153,491) 52,297
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Share based payments - - - 190 190
Issue of share capital 369 4,219 - - 4,588
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Transactions with owners
Loss for the year
369 4,219 - 190 4,778
Other comprehensive income
items that will - - - (46,664) (46,664)
be subsequently reclassified
to profit or loss
Exchange differences on translating
foreign operations - - (2,460) - (2,460)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Total comprehensive income
for the year - - (2,460) (46,664) (49,124)
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Balance at 31 December 2015 46,679 185,590 (24,353) (199,965) 7,951
-------------------------------------- ---------- ---------- ---------- ----------- ----------
Notes:
1. Preparation of non-statutory accounts
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 December 2015
or 2014 or 2013 but is derived from those accounts. Statutory
accounts for 2014 and 2013 have been delivered to the registrar of
companies, and those for 2015 will be delivered in due course. The
auditors have reported on those accounts; their reports were (i)
unqualified, (ii) included a reference, without qualifying their
report to an emphasis of matter in relation to going concern in
2015 and (iii) did not contain a statement under section 498 (2) or
(3) of the Companies Act 2006.
2. Critical Accounting Estimates and Judgements
Estimates and judgements are continually evaluated and are based
on historical experience and other factors, including expectations
of future events that are believed to be reasonable under the
circumstances.
The Group makes estimates and assumptions concerning the future,
which by definition will seldom result in actual results that match
the accounting estimate. The estimates and assumptions that have a
significant risk of causing material adjustments to the carrying
amount of assets and liabilities within the next financial year are
discussed below:
(a) Impairment Reviews
Intangible assets
In accordance with the accounting policy stated above, the Group
performs an assessment of the recognition and recoverability of
intangible assets to see whether any of the Group's development
expenditures have suffered impairment. This assessment is dependent
on the future viability of the relevant technology and expected
products, the methodology followed in order to assess the
recoverable amount of an individual cash-generating project is to
consider a cash flow model over 20 years or the life of the plant,
whichever is shorter, and with appropriate assumptions for the zinc
price, operating and capital development costs. In performing any
cash flow analysis the Group uses risk adjusted discount rates
based on support from third parties. It should be noted that, where
discounting is used, the zinc price and the discount rate will have
the most significant impact on the value in use calculations.
The intangible assets, which the Group is carrying at the end of
2015, relate to historic spend incurred on the development of the
RHF technology, as a way to treat EAFD, but also for further
development activities which has resulted in the CML technology
being able to produce a commercial grade zinc oxide product,
following the initial generation of the HZO from the RHF. As
directors, we feel that we can monetise the carrying value of the
Group's intangible assets in the future.
During the year, impairment reviews have taken place to impair
any spends which were incurred on items which may not be expected
to generate an expected future economic benefit, e.g. the carrying
cost of development spends in relation to KRP2 (see table below).
In addition the Company has also adopted FRS 102 in the year and
has changed the amortisation of the intangible assets to a 10 year
useful life. The table below summarises the impairment provisions
made in the year and included in the Group income statement. In the
event that any future development activity is abandoned or the
directors cease to believe that the projects can be commercially
exploited, then the expenditure associated with that project will
be fully impaired through the Group income statement.
Minor Total
KRP2 Other ORP Projects Impairment
Impact on Group Notes $'000 $'000 $'000 $'000 $'000
------------------- ------- -------- -------- -------- ---------- ------------
Intangible assets 6 605 756 - 650 2,011
Property, plant
& equipment - - - 68 68
Assets held
for sale - - 196 89 285
2015 provision 605 756 196 807 2,364
------------------- ------- -------- -------- -------- ---------- ------------
For the year ending 31 December 2015, the Group made
impairments, on continuing operations, of US$2,011k against
intangible assets, US$68k against property, plant and equipment and
US$285k against assets held for sale. In addition, an impairment
provision in the year of US$1,157k was made against property, plant
and equipment in respect of discontinued operations (see note
5).
Carrying value of 10% holding in KRP
Following the Group's loss of control over KRP at the end of the
year, the Group has adopted a carrying value for the 10% holding in
KRP of US$6.4 million. This valuation, at 31 December 2015, uses
the "price of recent investment" guidelines as described by the
International Private Equity and Venture Capital Valuation
Guidelines. Following the extinguishing of the Development and
Offtake loans with Korea Zinc, the equivalent value of a 10%
holding in KRP is US$6.4 million.
The Group has also followed the guidance in IAS 39, indicating
that the 10% holding should be categorised as a "financial asset"
within investments. The accounting treatment for this asset is that
it should be recognised at its initial value and then subsequently
fair valued with any adjustment booked to the income statement.
A cashflow was prepared, covering a 20 year period and expected
future dividend receipts over that time, using a discount rate of
9%, reflecting the 10 year Korean government bonds and an equity
risk premium. The cashflow also uses consensus zinc price forecasts
of US$1,793 per tonne for 2016, US$1,990 per tonne in 2017,
US$2,296 per tonne in 2018, US$2,497 per tonne in 2019 and a long
run zinc price of US$2,218 per tonne thereafter. The resulting flow
of dividends returns an NPV that shows no indication of impairment
at the year end.
(b) Share Based Payments
In order to calculate the charge for share based payments as
required by IFRS2, the Group makes estimates principally relating
to the assumptions used in its option or warrant pricing model. The
charge made in the year in respect of options is US$57k (2014:
US$330k) and for warrants is US$133k (2014: US$ nil).
(c) Going Concern
The directors considered various scenarios in reviewing the
budgets and projections for 2016 covering a period of at least
twelve months from the date of this report. These scenarios review
the financial modelling of different cash flow scenarios, ranging
from a base case, namely, to put the Group into hibernation until
value can be obtained from the remaining interest in KRP, through
to the development of new opportunities, following further funding
being made available to the Group.
All cases assume the ongoing savings from a continuing Group
wide cost reduction programme, until future funding is secured,
which was started immediately after the loss of control of KRP. It
should also be noted that any discretionary spending has been
stopped during this critical period while the Company looks for
projects to deploy the zinc recovery technology it has developed
over recent years. No dividend income from KRP is expected during
the next twelve months.
Any ongoing funding for KRP is assumed to be funded by Korea
Zinc during 2016 and any contribution required by the Group to
participate is expected to be dealt with through an agreed dilution
formula with Korea Zinc, thus no immediate cash will be required to
support KRP.
The Group had outstanding Loan Notes of GBP 3.78 million which
were due to be repaid in July 2016. The directors have agreed with
the Noteholders to extend the repayment date to January 2018. The
Loan Notes are secured against the land in the heavy industrial
zone and interest will be payable from the funds held in the escrow
account until July 2016, following which any interest on the Loan
Notes (at the existing interest rate of 10%) will be rolled up
until the Loan Notes are repaid in full. Any unpaid amounts will
also be secured against the assets of the Company including the
existing cash holdings and the remaining interest in KRP.
The Company has been in continuing discussions with potential
strategic and project specific partners for the development of new
recycling projects and looking at opportunities to use the
intellectual property and know-how that has been developed on other
assets. The fundraising in February 2016 for GBP205,000 (before
expenses) was completed to allow the Company time to explore these
opportunities on a reduced overhead basis as well as allowing time
to realise value from KRP.
The directors have considered various scenarios in reviewing the
budgets and projections for the twelve months from the date of this
report. These scenarios range from the financial modelling of a
hibernation budget, allowing time to realise value from KRP through
to new funds into the Group to develop new projects, whether that
is using RHF technology or another technology which the Group has
developed in prior years. However, given the existence of these
material uncertainties which may cast significant doubt over the
Group's ability to continue as a going concern and, therefore, as a
result, it may be unable to realise its assets and discharge its
liabilities in the normal course of business. If this were the
case, the presentation of the Group financial statements on a going
concern basis would be inappropriate and the Group financial
statements would need to be presented on a break up basis.
The cumulative deficit on profit and loss reserves at the end of
December 2015 for the Group of US$200 million includes the loss for
the year of US$47 million. The Group has unrestricted cash at the
year end of US$655k. The directors have prepared forecasts which
demonstrate that the Group can continue in existence for at least
the next twelve months, assuming the successful implementation of
the cost reduction programme and taking into account the deferral
of the Loan Notes. Furthermore, the exploitation of the intangible
assets in relation to technology which the Group has developed and
which are carried at a value of US$4.2 million will importantly
either require new funds to be raised or for the Group to enter
into a new project without injecting any Group cash.
The directors have assessed the material uncertainties
concerning the Group's future funding requirement which may cast
significant doubt upon the Group's ability to continue as a going
concern and compared them with the levels of expected finance
available and have a reasonable expectation that the Group has
adequate financial resources to manage its business risks and
continue in operational existence for the next twelve months from
the date of this report.
3. Administrative Expenses (net of gains and impairments)
2015 2014
Notes $'000 $'000
--------------------------------- ------- ---------- ----------
Administrative costs (excluding
depreciation/amortisation) (4,827) (5,026)
Other gains 1,584 1,119
Impairment provisions 2 (2,364) (13,917)
Foreign exchange (loss)/gain (2,101) 1,531
Depreciation and amortisation (46) (1,278)
--------------------------------- ------- ---------- ----------
(7,754) (17,571)
--------------------------------- ------- ---------- ----------
4. Loss Per Share
Continuing and discontinued operations
The calculation of the loss per share is based on the loss
attributable to ordinary shareholders of US$46,664k (2014:
US$33,229k) divided by the weighted average number of shares in
issue during the year of 176,579,687 (2014: 157,388,897).
An adjusted loss per ordinary share for the year has been
presented to exclude the impairment provisions made in the year of
US$3,521k (2014: US$13,970k). It has been calculated based on
adjusted loss attributable to ordinary shareholders of US$43,143k
(2014: US$19,259k).
Continuing operations
The calculation of the loss per share from continuing operations
is based on the loss attributable to ordinary shareholders of
US$10,013k (2014: US$18,351k) divided by the weighted average
number of shares in issue during the year of 176,579,687 (2014:
157,388,897).
An adjusted loss per ordinary share for the year has been
presented to exclude the impairment provisions made in the year of
US$2,364k (2014: US$13,917k). It has been calculated based on
adjusted loss attributable to ordinary shareholders of US$7,649k
(2014: US$4,434k).
There is no dilutive effect of the share options in issue during
2015 and 2014.
5. Discontinued Operations
Following the restructuring of KRP, as discussed in the
Performance Review section of the Strategic Report, the Group lost
effective operational control of ZincOx Korea on 30 December
2015.
The legal restructuring of ZincOx Korea, including the issuance
of shares to Korea Zinc, and the cancellation of the Offtake and
Development Loans made by Korea Zinc, was notified to the Company
by Korea Zinc on 29 April 2016.
Analysis of loss for the year from discontinued operations
The combined results of the discontinued operations (i.e. from
KRP) included in the loss for the year are set out below. The
comparative loss and cash flows from discontinued operations have
been re-presented to include those operations classified as
discontinued in the current year.
2015 2014
$'000 $'000
-------------------------------------------- --------------------- --------------------
Revenue 36,422 37,546
Cost of sales (39,266) (42,726)
-------------------------------------------- --------------------- --------------------
Gross loss (2,844) (5,180)
-------------------------------------------- --------------------- --------------------
(30,313) (5,077)
-------------------------------------------- --------------------- --------------------
Operating Loss (33,157) (10,257)
-------------------------------------------- --------------------- --------------------
Underlying EBITDA Gain / (Loss) 863 (1,288)
Other losses (32) -
Impairment provisions (1,157) (53)
Loss due to loss of operational
control of subsidiary (22,136) -
Foreign exchange loss (4,683) (2,788)
Depreciation and amortisation (6,012) (6,128)
Operating Loss
-------------------------------------------- --------------------- --------------------
(33,157) (10,257)
-------------------------------------------- --------------------- --------------------
Finance income 3 2
Finance costs (3,497) (4,623)
-------------------------------------------- --------------------- --------------------
Loss before tax (36,651) (14,878)
Attributable income tax expense - -
-------------------------------------------- --------------------- --------------------
Net Loss (36,651) (14,878)
-------------------------------------------- --------------------- --------------------
Cash flows from discontinued operations
2015 2014
$'000 $'000
---------------------------------------------- -------------------- --------------------
Net cash outflows from operating
activities (3,757) (2,335)
Net cash outflows from investing
activities (325) (2,589)
Net cash (outflows) / inflows
from financing activities (2,102) 3,310
---------------------------------------------- -------------------- --------------------
Net cash outflows (6,184) (1,614)
---------------------------------------------- -------------------- --------------------
The 10% holding in KRP has been classified as a financial asset
within investments (see note 7)
6. Intangible Assets
Deferred Computer Total
Group Software Intangible
Development $'000 Assets
Costs $'000
$'000
-------------------------- ------------------------------- ---------- ------------
Cost
At 1 January 2013 15,295 560 15,855
Additions 1,966 5 1,971
Disposals (281) (33) (314)
Impairment provisions (513) - (513)
Foreign exchange 242 12 254
-------------------------- ------------------------------- ---------- ------------
At 1 January 2014 16,709 544 17,253
Additions 596 - 596
Impairment provisions (7,503) - (7,503)
Foreign exchange (488) (35) (523)
-------------------------- ------------------------------- ---------- ------------
At 1 January 2015 9,314 509 9,823
Additions 613 - 613
Impairment provisions (2,011) - (2,011)
De-consolidate ZincOx
Korea subsidiary (529) - (529)
Foreign exchange (391) (29) (420)
-------------------------- ------------------------------- ---------- ------------
At 31 December 2015 6,996 480 7,476
-------------------------- ------------------------------- ---------- ------------
Accumulated Amortisation
At 1 January 2013 4 549 553
Charge for the year 347 7 354
Released on disposals (4) (33) (37)
Foreign exchange 19 12 31
-------------------------- ------------------------------- ---------- ------------
At 1 January 2014 366 535 901
Charge for the year 378 6 384
Foreign exchange (42) (35) (77)
-------------------------- ------------------------------- ---------- ------------
At 1 January 2015 702 506 1,208
Charge for the year 2,167 2 2,169
Foreign exchange (115) (28) (143)
-------------------------- ------------------------------- ---------- ------------
At 31 December 2015 2,754 480 3,234
-------------------------- ------------------------------- ---------- ------------
Net Book Value
At 31 December 2015 4,242 - 4,242
At 31 December 2014 8,612 3 8,615
At 31 December 2013 16,343 9 16,352
-------------------------- ------------------------------- ---------- ------------
Following an impairment review at the year end of the deferred
development costs carried by Zincox Resources plc, impairment
provisions of US$2,011k have been made against their carrying value
(see note 2 for details).
All deferred development costs that have been written off in the
year are included in profit or loss in arriving at an operating
loss.
The intangible assets of ZincOx (Korea) Ltd were de-consolidated
from the Group as at 30 December 2015, following the loss of
operational control of the Korean Recycling Plant (KRP).
7. Investments
A residual investment of 10% in ZincOx (Korea) Ltd is now
classified as a financial asset and fair valued at US$6,395k (see
note 2). Furthermore, a US$70k receivable from KRP to the Group has
been classified as a financial asset.
In addition, the Group holds a 51% interest in an unincorporated
joint venture with Ural Recycling Ltd, a wholly owned subsidiary of
Magnezit Group Limited, a Russian company looking at the potential
to develop a zinc recycling plant in Russia.
8. Loans and Borrowings
2015 2014 2013
$'000 $'000 $'000
------------------------------------- -------- -------- --------
Current
Korea Zinc Company Limited secured
loans - 3,413 976
Standard Chartered Bank Korea
Ltd facility - 2,260 999
Secured loan notes 5,603 6,541 -
Other bank borrowings 8 24 51
------------------------------------- -------- -------- --------
5,611 12,238 2,026
------------------------------------- -------- -------- --------
Non-Current
Korea Zinc Company Limited secured
loans - 52,739 52,739
Secured loan notes - - 6,925
------------------------------------- -------- -------- --------
- 52,739 59,664
------------------------------------- -------- -------- --------
Korean loans
Following the loss of operational control of ZincOx (Korea) Ltd
as at 30 December 2015, both the Offtake and Development loans,
granted by Korea Zinc Company Limited ("Korea Zinc"), have been
de-recognised in the Group balance sheet. Both loans with Korea
Zinc were secured by a debenture over the assets of KRP only.
At the same time, the US$5 million rolling Receivables Services
facility that was taken out by ZincOx (Korea) Ltd with Standard
Chartered Bank Korea Ltd ("SCBK") in April 2013, was de-recognised
in the Group balance sheet.
Secured loan notes
In July 2013, the Company issued Loan Notes to a value of GBP4.2
million together with four year warrants over 9,450,000 new
ordinary shares of the Company. During the year, GBP420k was repaid
to lenders leaving an outstanding balance of GBP3.78 million
(US$5.6 million) at 31 December 2015.
Interest is 10%, and the Loan Notes repayment date has been
renegotiated so that the Loan Notes will now be repayable by
January 2018. Interest on the notes will be payable from the
restricted cash until July 2016, following which, it will then roll
up until the Loan Notes are repaid in full as described in the
Strategic Report. The warrants associated with this loan are
described in note 9 below.
The Loan Notes are secured against the shares in ZincOx Anadolu
Cinko SVTAS, the Company's wholly owned subsidiary that owns the
freehold land held at Aliaga, Turkey.
Other loans
Other bank borrowings represent an unsecured facility taken out
by ZincOx Resources Belgium Sprl to fund short-term working capital
requirements.
9. Post Balance Sheet Events
On 1 February 2016, the Company raised GBP205,000, before
expenses, by way of a conditional placing of 20,500,000 ordinary
shares at a price of 1p. At the same time, the Company took the
opportunity to simplify the share structure by cancelling all
103,466,716 outstanding Deferred Shares that carried limited
participation rights.
On 29 April 2016, the Company announced the completion of the
legal transfer of 90% of the shares of ZincOx (Korea) Ltd, from the
Company to Korea Zinc Company Limited, leaving the Company with a
10% interest in ZincOx (Korea) Ltd.
In May 2016, the terms of the Loan Notes were renegotiated to
extend the redemption date to January 2018. Interest will be paid
until July 2016 after which time it will be rolled up until the
Loan Notes are repaid in full. Any unpaid amounts will also be
secured against the assets of the Company including cash holdings
and the remaining interest in KRP. The existing 19,217,840 warrants
will be cancelled and replaced by 9,450,000 with a strike price at
5p.
10. Annual Report
In accordance with AIM Rule 20, copies of the Annual Report
together with the Notice of Annual General Meeting and Proxy Card
will be sent to shareholders by 19 May 2016.
The Annual Report, Notice of General Meeting and Proxy Card will
be available to view on the Company's website at www.zincox.com by
19 May 2016, or from the Company at Knightway House, Park Street,
Bagshot, Surrey, GU19 5AQ. It should be noted that online voting
will be available from 20 May 2016.
11. Annual General Meeting
The Annual General Meeting of the Company will be held at
12.30pm on 17 June 2016 at the offices of Eversheds LLP, One Wood
Street, London EC2V 7WS.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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