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BUSINESS REVIEW
Primary Strategic Investments

Our Primary Strategic Investment is in Mount Gibson which is listed and operating in Australia and in FY 2018 we also acquired an investment in Tanami Gold NL (“Tanami Gold”). Metals X Limited (“Metals X”) is no longer classified as a Strategic Investment after we sold 21.5 million shares in Metals X in July 2016 and 22 million shares in February 2017. The net attributable profit from our Primary Strategic Investment for FY 2018 was HK$178,306,000 (FY 2017: Net profit of HK$45,317,000). Mount Gibson reported a FY 2018 net profit after tax of A$99 million. 

Mount Gibson

Mount Gibson is an Australian listed iron ore producer. Mining of Direct Shipping Ore from its Extension Hill mine has ended, and the Iron Hill mine has started production. Mount Gibson approved the Koolan Island Restart Project in April 2017 and then announced an extension to the eastern end of the Main Pit in April 2018. 

Mining at Iron Hill commenced in March 2017 and first ore sales were achieved in July 2017. Life of mine sales is expected to total 5.5 to 6.0 million tonnes, with production to end in late 2018. 

The Koolan Island Restart Project will reconstruct the seawall and dewater the Koolan Island pit, with reserves increased to 21 million tonnes of 65.5% Fe reserves from 12.8 million tonnes of 66% Fe reserves after extension of the pit. Maximum cash draw for the project has increased from A$145 million to A$175 million, while NPV of the project is now A$252 million assuming Platts 62% Fe of US$55/dmt and A$ of 0.75. Site works started in June 2017 and the project is more than 80% complete. 

Mount Gibson was awarded a further A$64 million from the business interruption component of its insurance claim, in addition to the A$86 million received for the property damage component. The payment was received in July 2017. Negotiations continue with the last outstanding insurer who represents the remaining 7.5% of the business interruption coverage.

 Mount Gibson sales guidance for the financial year ending 30 June 2019 is 2.7 million tonnes to 3.3 million tonnes. 

Mount Gibson reported a net profit after tax of A$99 million for the twelve months ended 30 June 2018, boosted by A$64million payment for the proceeds of the Koolan Island business interruption insurance settlement. Removing this one-off payment leaves an underlying net profit after tax of A$35 million from sales of 3.6 million tonnes. 

Mount Gibson continued to focus on costs, and all in cash cost was A$45 per tonne in FY 2018 compared to A$52 per tonne in FY 2017. Mount Gibson still boasts an impressive cash reserve, including term deposits and tradable investments, ending FY 2018 with A$457 million or an equivalent of A$0.416 per share, despite development spending on Koolan Island and paying a dividend of A$22 million. 

The Platts IODEX 62% CFR China index has remained volatile, and during FY 2018 it traded in the range of US$60/dry metric tonne (“dmt”) to US$80/dmt and is urrently around US$60–65/dmt. Iron ore prices have remained fairly resilient, and earlier in the year were being supported by healthy steel margins and generally stable steel production growth. In recentdays, iron ore prices have been dragged down along with the rest of the commodity complex on concerns about the US-China trade war. The discount for low-grade ore remains wide as steel mills prefer medium and high grade ore. We continue to expect average iron ore prices to remain capped in the short term given weak non-China steel demand and continuing supply growth in Brazil and Australia. 

Tanami Gold

In June 2018 we acquired 38.09% of Tanami Gold for a consideration of A$20,142,575 (equivalent to approximately HK$126,495,000). Tanami Gold’s principal business activity is gold exploration, and currently its key project is 60% of the Central Tanami Project. The remaining 40% is owned by Northern Star Resources Limited (“Northern Star”), and under the terms of the joint venture, Northern Star will sole fund all expenditure until commercial production is achieved at the Central Tanami Project. After commercial production is reached, Northern Star can earn additional 35% of the Central Tanami Project and Tanami Gold has an option to sell its remaining 25% of the project to Northern Star for A$32 million. 

Northern Star recently completed a drilling program in the Central Tanami Project targeting an extension to the existing Hurricane-Repulse system. Best results include 17m at 6g/t gold from 17m and 19m at 4.6g/t from 136m. 

After 30 June 2018, we acquired an additional 30 million shares in Tanami Gold, and now own 40.6% of Tanami Gold.

Available-for-sale Investments – Metals X and Westgold Resources 

In July 2016, APAC disposed of 21.5 million shares in Metals X through an on-market transaction. The disposal ties in with APAC’s decision to place Metals X under strategic review. Immediately after the disposal, the Group’s interest in Metals X decreased to below 20%. Metals X ceased to be an associate of the Group and is now accounted for as an available-forsale investment. In February 2017 we sold a further 22 million shares in Metals X and 11 million shares in Westgold Resources Limited (“Westgold Resources”) for an aggregate consideration of A$46.2 million.

In December 2016, Metals X spun out its gold assets into Westgold Resources, which now holds the Higginsville, Central Murchison and Fortnum projects. The remaining base metals assets including tin via its 50% interest in the producing Renison mine in Tasmania, copper through the recently acquired Nifty mine of Aditya Birla Minerals Limited (ABY) and nickel through its world scale Wingellina nickel development project remain in Metals X. Both companies remain listed in Australia.

As at 30 June 2018, the carrying value of available-for-sale investments was HK$598,049,000 (As at 30 June 2017: HK$551,813,000), which included primarily our investments in Metals X and Westgold Resources. The carrying values of Metals X and Westgold Resources as at 30 June 2018 amounted to HK$259,497,000 (As at 30 June 2017: HK$224,758,000) and HK$300,042,000 (As at 30 June 2017: HK$308,623,000) respectively and represented approximately 8.3% (As at 30 June 2017: 7.7%) and 9.6% (As at 30 June 2017: 10.6%) of the total assets of the Group. In FY 2018, Metals X generated a fair value gain, net of tax, of approximately HK$34,739,000 (FY 2017: Gain of HK$59,873,000) and Westgold Resources reported a fair value loss of approximately HK$8,581,000 (FY 2017: Gain of HK$151,362,000). 

Westgold Resources produced 253,210 ounces in FY 2018 down 5% year-on-year (“YoY”) driven by a drop in production at the Higginsville (HGO) project and the sale of the South Kalgoorlie project, partially offset by a ramp up at the the Fortnum Gold Project and improved production at the Central Murchison Gold Projects (CMGP). Westgold Resources forecasts that production will reach 300,000 to 320,000 ounces in the twelve months ended 30 June 2019, and increase to greater than 350,000 ounces in the twelve months ended 30 June 2020 as its growth projects continue to ramp up. 

The gold price was fairly stable until March 2018, but has since weakened as the US dollar has strengthened on the back of interest rate increases, expectations for ongoing Fed tightening and a strong US economy. The outlook for interest rate hikes in other large economies such as UK and Europe are increasing as well, which makes gold comparatively less attractive. The gold price is now trading around US$1,200 per ounce and we expect the gold price to remain linked to sentiment around the US dollar, the pace of Fed rate hikes, although geopolitical tensions remain high which could elevate its safe haven status. 

At Metals X, Renison mine produced 3,370 tonnes of tin (net 50% basis) down 3% YoY, while the average realised tin price of A$26,595 per tonne was essentially flat YoY. Metals X is now commissioning the ore sorter, which is expected to increase production to roughly 4,000 tonnes of tin (net 50% basis) by removing waste feed before it enters the processing circuit. 

After acquiring the Nifty mine in August 2016, Metals X set a target copper production rate of 40,000 tonnes per annum. However, the ramp up has been impacted by its ability to access higher grade stopes and in the most recent June 2018 quarter, production was running at an annualized rate of 15,200 tonnes per annum. Metals X has now completed stoping plans to support the 5 year mine plan, opened up additional mining areas, and expect to ramp up production to a target rate of 40,000 tonnes per annum over the next 12–18 months. 

Tin prices remained largely range bound in FY 2018, trading between US$19,000 per tonne and US$22,000 per tonne. However recently, tin prices have been dragged down with other commodities. We remain bullish on the medium term outlook for tin due to the lack of significant supply growth. Copper prices were strong until mid June, reaching a multi-year high of US$7,275 per tonne. However, like other commodities, it has sold off heavily, particularly after a strike at the Escondida mine was averted. 

Equity investments at fair value through profit or loss – Resource Investment 

The investments in this division comprise mostly minor holdings in various natural resource companies listed on major stock exchanges including Australia, Canada, Hong Kong, the United Kingdom and the US. Our investments focus on select commodities within several commodity segments, namely energy, bulk commodities, base metals, and precious metals. Some of our positions are exploration or development stage companies and this section of the market is particularly sensitive to risk aversion, lower commodity prices, and the difficult financing markets.

Resource Investment posted a fair value gain of HK$69,224,000 in FY 2018 (FY 2017: Gain of HK$55,402,000), which after accounting for segment related dividend and other investment income and expenses, resulted in a segment profit of HK$65,575,000 (FY 2017: Profit of HK$67,400,000). 

Our Resource Investment division includes the results of the two new resource portfolios which were announced in August 2016. After a strong start in early FY 2018, the metals sector weakened, dragged down by falling commodity prices. From 1 July 2017 to 30 June 2018 the average performance from a number of small cap resources indices averaged -11% (includes the Dow Jones US Mining Index, FTSE AIM Basic Resources Index and the TSX Venture Composite Index among others).Oil prices have generally improved throughout FY 2018, although it has similarly been impacted by recent concerns relating to the trade war. US and Canadian gas prices remained weak throughout FY 2018. The average performance of several small cap oil and gas indices has averaged +18% in FY 2018 (includes the S&P TSX Small Cap Energy Index and S&P 500 Energy Sector among others). 

Precious

Precious metals (majority gold exposure) generated a net fair value gain of HK$682,000 in FY 2018 while the gold price was up 2%. As at 30 June 2018, the carrying value of the Precious segment was HK$73,130,000 (As at 30 June 2017:HK$66,744,000). Our largest gold investment is in Prodigy Gold (ASX: PRX) which generated a fair value loss of HK$4,237,000 with carrying value as at 30 June 2018 of HK$29,815,000. This was comfortably offset by gains in a number of smaller positions including Medusa Mining (ASX: MML) and Perseus Mining (ASX: PRU). 

Prodigy Gold is a gold exploration company listed on the Australian Securities Exchange. Its exploration portfolio is located in the Tanami Gold district in Northern Territory with resource of 15.7Mt at 2g/t. It is focused on drilling out several prospective areas including Bluebush and Suplejack and has farmed out acreage to Independence Group, Newcrest and Thunderbird Metals. Its major shareholders include two reputable ASX listed gold companies, St Barbara and Independence Group. At 30 June 2018 Prodigy Gold has A$6.1 million cash and no debt, which will be used to fund its ongoing exploration program. 

Bulk

Bulk commodities (predominantly iron ore) generated a fair value gain of HK$1,999,000 even though iron ore prices fell 3% during FY 2018. As at 30 June 2018, the carrying value was HK$11,010,000 (As at 30 June 2017: HK$4,718,000). Within this segment, our significant investments include Grange Resources (ASX: GRR), which generated a fair value gain of HK$585,000 in FY 2018. 

Base Metals

Base Metals segment (a mix of copper, nickel, aluminium and cobalt companies) delivered a fair value gain of HK$50,254,000 in FY 2018 as the copper, aluminium and cobalt prices increased by 10%, 11% and 30% respectively. The Base Metals segment includes our investment in Cobalt 27 (TSX: KBLT) which generated a fair value loss of HK$4,758,000 in FY 2018 and had a carrying value of HK$45,484,000 as at 30 June 2018 (As at 30 June 2017: HK$24,308,000), Australian Mines (ASX: AUZ) which generated a fair value gain of HK$27,656,000 in FY 2018 and had a carrying value as at 30 June 2018 of HK$57,258,000 (As at 30 June 2017: HK$3,964,000) and Katanga Mining (TSX: KAT) listed in Canada, which generated a fair value gain of HK$6,473,000 in FY 2018 and had a carrying value as at 30 June 2018 of HK$16,812,000 (As at 30 June 2017: HK$14,426,000). 

Cobalt 27 is a cobalt investment vehicle that invests in streams and royalties. It currently owns around 3,000 tonnes of physical cobalt which was valued at US$265 million at 30 June 2018. It acquired one stream and is in the process of acquiring a second stream, and owns 6 royalties over projects that are currently in the exploration phase. The first royalty is from the Voiseys Bay mine which is expected to start production in 2021, and the second is the Ramu Nickel-Cobalt Mine which is currently in production. 

Australian Mines is focused on development of the Sconi Cobalt-Nickel-Scandium project in Queensland which has a resource of 89Mt at 0.11% Cobalt and 0.81% Nickel. It is currently working on a Bankable Feasibility Study while it continues with its resource extension drilling campaign. It has signed an offtake with SK Innovation for up to 12,000 tonnes of cobalt sulphate per year for an initial 7 year period. 

Energy

The Energy segment (mainly oil exposure) had a fair value gain of HK$5,462,000 in FY 2018 driven by an oil price increase of 58%. Our significant Energy investments include Gran Tierra (TSX: GTE), which generated a fair value gain of HK$3,443,000 and had a carrying value as at 30 June 2018 of HK$8,373,000 (As at 30 June 2017: HK$6,232,000) and Sinopec Corp (Stock Code: 386), which generated a fair value gain of HK$1,380,000 and had a carrying value as at 30 June 2018 of HK$10,515,000. Gains in smaller positions including Premier Oil and Beach Energy. 

Others

We also have a fair value gain of HK$10,827,000 from the remaining commodity (diamonds, manganese and mineral sands) and non-commodity investments in FY 2018 and had a carrying value as at 30 June 2018 of HK$67,786,000 (As at 30 June 2017: HK$36,743,000). This segment includes our investment in Mineral Deposits (ASX: MDL) listed in Australia, which generated a fair value gain of HK$19,298,000 and had a carrying value as at 30 June 2018 of HK$28,833,000 (As at 30 June 2017: HK$19,731,000). 

Commodity Business 

Our iron ore offtakes at Koolan Island and Tallering Peak have ceased to deliver shipments with both mines closed, so we are now looking for new offtake opportunities across a range of commodities. For FY 2018, our Commodity Business generated a profit of HK$8,778,000 (FY 2017: Profit of HK$2,838,000). 

Principal Investment and Financial Services 

The Principal Investment and Financial Services segment, which covers the income generated from loans receivable, loan notes, convertible notes and other financial assets. For FY 2018, this segment generated a profit of HK$31,198,000 (FY 2017: HK$9,824,000). 

Money Lending

The Group engaged in money lending activities under the Money Lenders Ordinance of Hong Kong. For FY 2018, the revenue and profits generated from money lending formed part of results of the Principal Investment and Financial Services segment.

 
Forward Looking Observations

Global economic outlook is uncertain. While US growth remains robust as seen in strong quarterly GDP numbers, the impact of its trade war with China has yet to be fully realized. The Chinese economy had generally been cooling on the back of deleveraging policies, however the impact of US tariffs is likely to mute the economy further, which the government expects to mitigate through fiscal stimulus. Mount Gibson is underpinned by a large cash reserve, and is focused on its Koolan Island Restart Project, with the seawall under construction and production expected in early 2019. This is a timely development given the large disparity between low grade and high grade iron ore, and once in operations, Koolan Island will be the highest grade DSO mine in Australia. Our new investment portfolios are the platform for future mining and energy investments. We remain defensive and selective with our investments in the near term, and continue to look for high quality opportunities which will generate attractive returns over the long run.

(update as of 21 September 2018)
 
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