London Mining's (LIIGF) Graeme Hossie on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: London Mining (LIIGF)

London Mining PLC (OTC:LIIGF) Q2 2014 Earnings Conference Call August 21, 2014 4:00 AM ET

Executives

Graeme Hossie - CEO

Jim North - COO

Ben Lee - CFO

Analysts

Roger Bell - JP Morgan

Seth Rosenfeld - Jefferies

Richard Knights - Liberum Capital

Hunter Hillcoat - Investec

Brock Salier - GMP Securities

Alison Turner - Panmure Gordon

Kalim Aziz - Armajaro Asset Management

Alon Olsha - Macquarie

Tim Huff - RBC

Graeme Hossie

Hello everyone. Clearly, the first half of 2014 has been an extremely challenging environment, to be a developer and producer of iron ore, and particularly, to be one in West Africa. The main challenges which have been outside of our control, have been drastic and quite sudden fall in iron ore price, as well as the escalation of the Ebola crisis in West Africa that began in March.

I'd just like to outline that despite these challenges, we have continued to progress the development of our operations at Marampa, and to manage these risks effectively, including keeping our employees safe and keeping our operations performing.

As evidence of that, we have completed our ramp-up and are achieving the design volumes at 5.4 million tonnes per annum and more. This is delivering corresponding cost reductions at higher run rates, and there is more cost reduction to come in, in the second half. We have taken a number of measures to conserve cash and increase liquidity, these include how we are managing CapEx, the focus on cost reduction and continued reductions in overheads across the board, as well as importantly, increasing facilities with the support of our offtakers and banks by over $60 million during the period.

Our product, which is a premium grade FE product, which achieves a premium price, is and continues to be in strong demand, and we have competitive interest in the industry to achieve offtake rights or obtain offtake from us, and you saw that with the placement and the arrangements we made with Cargill, where we achieved very high pricing with no marketing fees.

This interest also underpins the key elements, a key element of value, seen by possible strategic partners, amongst other areas, and the process we are undertaking to secure a substantial investment in Marampa, is going well, and we expect it to complete by the end of the year.

Given the constraints that are now starting to being felt through the Ebola crisis and the various precautions and complexities involved, although operations haven't been impacted to-date, we are allowing that we won't be able to optimize and operate with full effectiveness, that we would otherwise, and Jim will explain around that a bit, and so we have gone away from the upper end of our guidance to guide toward the lower end of the guidance to allow for that.

Let me step back though from the short term challenges, and let's look at the fundamentals of Marampa, where we are and where we are going, and this chart is effectively showing you on page five, that the benefits of scale, the drive towards cost reduction that we have been able to achieve with where we are now, we have installed 5.4 million tonnes capacity, and that's giving us a sub-$50 operating cost, and we are now in the process of moving that to higher volumes, towards 6.5 million tonnes, and towards our life of mine operating costs of between 39 and 42, at that level. That's where we are, and we have been able to drive this into a sustainably low cost credential mine.

There are other elements of margin improvements and all-in cost reduction, which are also ongoing and which had substantially been achieved, and continuing to be achieved over the next 18 months, which -- just touching on them, we will touch on them later, but larger vessel loading, reducing the cost of shipping to destinations such as China, higher premiums and lower marketing fees which we have achieved with Cargill, and we expect to progress offtake arrangements too over time; continued reduction of overheads, and through the strategic partnership arrangement that we are seeking, we would expect to be lowering our interest costs, and de-leveraging post that arrangements, and that would further drop down all-in costs.

And what do strategic partners see, besides what I have talked about is, also the further potential for expansion. We have a very clear and low capital cost route to get to 8 million tonnes, which will further drop operating costs and the resource potential would allow 20 million tonnes or thereabouts production level from the mine, which gives additional scale of economies. And that just comes back to noting that Marampa is and continues to be, even in this pricing environment, a scarce and valuable long term asset; and unlike -- fundamentally, the value was there to attract strategic party.

The scale of economies that can be available, the level that we have already got the mine to, is moving to 6.5 million tonnes, and rapidly dropping our operating costs, but as well with the 275 million tonnes of production, that are not yet under offtake, over the life of the mine. So we have got 1 billion tonnes resource, simple mining. It's a reminder of low stripping, low labor costs, close to tidewater, low power requirements for processing, and importantly produce a high quality product, which is not the bulk of what is coming on to the market.

The process, just to give a little more color on that, I mean, it is underway. We have received non-binding expressions of interest from several industry parties. We are looking to progress these and secure investments before the end of the year, and the objective there is to unlock value from Marampa for shareholders to de-risk the company, improve the balance sheet, and to underpin the CapEx going forward, irregardless of the short term iron ore price, as we continue to reduce our costs. That's our strategy, the process is going well, and we will update the market, as and when its required.

So Ebola; Ebola obviously is a huge issue right now, it has become a huge issue in the press, and it has become an international issue. We however have been dealing with Ebola since it first started earlier in this year, and have built and developed operating measures to deal with it, and in particular, precautions to keep everyone safe, and we have been doing that since March. And so, we have procedures which keep employees safe, and keep our operations running, and we have not, as of yet, seen any significant impact on to our operations.

We have continued to adapt to the changing environment, however, we are starting to see, because of the additional travel restrictions, and the impact that that can have on delaying supply chain, spare parts, OEMs coming to site, that we won't be able to fully -- well we don't have the confidence that we can fully operate with the full efficiency that we would otherwise except, to be able to optimize the operations towards the high end o our production guidance. So we have guided towards the low end.

A little bit of what we are doing, proactive health monitoring on-site. There are various measures we are working, in concert with International SOS, World Health Organization, the governments, other bodies, educating communities, and taking the precautions and the proactive measures that one would expect. The transportation situation is being dealt with by chartered flights, to keep people's rosters in it, in and out of Sierra Leone, and those who can work remotely, admin etcetera, are working from under our London or Johannesburg offices handful of people. We have great respect for everyone who is working extremely hard in this crisis, to keep operations going and to work with more complex environments to do the work, and we are very proud of everyone's achievements in being able to keep our operations in our workforce Ebola free, safe and operating, and we do expect that to maintain.

So I will now pass over to Jim North, our Chief Operating Officer, to give an overview of the half. Thanks Jim.

Jim North

Thank you, Graeme. As Graeme mentioned, obviously, the health and safety of our employees is paramount, and there has been a lot of additional effort that's going in over and above what we would normally have, in an operation like ours, mainly because of the Ebola situation that Graeme talked about.

So just to provide a little bit of detail; so in essence, the government of Sierra Leone has responded to this crisis now as the other West African nations that are having this issue as well, in terms of what we have done, and we have done since March, is we have basically created a barrier around our operation. So unless you have business with London Mining, activities with London Mining, you don't get in and out. In terms of ongoing monitoring, we talked about monitoring on ground slot, it was one of the bullets.

Its not uncommon for you to have the temperature taken at Marampa four or five times a day, and we know that a fever is probably one of the earliest indicators of somebody getting ill, and Ebola is no different than that. So these are some of the things that we are actually doing, screening of people in and out, taking temperature, monitoring people and controlling the interaction of things that we can't control, and we can't control the outside environment, so we are tightly controlling our operations, and we have had that in place for a long time; and that's working extremely well.

So on HSE performance, as I have mentioned previously, we are very proud of HSE performance and our injury statistics continue to be much better than our peers, in the region. We have seen a marginal increase in terms of all injury frequency rate, you know, actually put that down to increased reporting. So we have driven over the last 12 months, a strong reporting culture, and as we will know, only by talking about with the things that actually don't go well, and the things that go wrong, you can actually put the controls in place, to make things better.

So we have a very good reporting culture, we have seen our LTI performance continue to be very good in relation to our peers, and we have seen a number of significant incidents and equipment damage continue to come down, and I would quote this marginal increase in all injuries as a result of that good reporting culture. And obviously, Ebola remains our biggest concern, so looking after the health of our employees through this period, and we'd expect its going to continue for some time.

We have talked internally in the organization, we would expect that statistics around Ebola will continue to deteriorate, at least for a couple of months. Its quite positive to see that organizations like WHO and the Doctors without Borders being funded by the World Bank; that's a lot of money that's being pledged now. But as you can imagine, to mobilize funding like that and a response program, its going to take some time before it starts to get traction and we see some improvement.

In terms of our production numbers, we have seen a 24% improvement in an equivalent period. We have now completed the commissioning of the milling and spirals plant, so we have seen that ramping up. But the ramp-up only concluded later in the quarter, so it was June that we actually saw us achieving our nameplate nominal capacity.

We have also seen moisture increase over the period, and that's as a result of now, we are getting to target production results we have seen, the instantaneous rate, have an impact on moisture, but well below our transportable moisture limits -- our transportable moisture limit is 10.9, so you can see our results are still well under.

Freight rates fell, as we expected and saw, when we talked about the Q2 results, and that's a result of two factors. We did see freight come down across the board, across all vessel classes, but were also moving into larger vessel classes, and we are in the Cape Class and loading baby capes and have been for some time.

In terms of seeing really the life of Marampa, as you can see, half one of this year was really commissioning and ramp-up, and you can see, there is a big step-up in volume, and that's mostly been towards the end of the half, as I mentioned, June was our best month and performing at nominal nameplate capacity.

Sales were disappointing, I will have to say, it was lower than our expectations, and largely due to a dispute that we had with one vessel, which we talked about in the Q2 results. That was a dispute over transportable moisture, and their interpretation on the code versus ours, and we talked about that being a one-off, and we've never had an issue previously to this vessel, and we haven't had an subsequent issue. So we'd expect that that's a one-off.

You could see by the grade line there that we mentioned after getting stabilization and getting our circuits running together, we'd see an improvement in grade scales; scale is a little challenging on the chart, but you can see it has actually kicked up in the second part of this half, and we'd expect that to continue now, as we move and continue to grow our business.

In terms of mining, very successful year in terms of mining. Our volumes have increased 55% compared to year-on-year, largely due to -- we had that issue in 2013 which we spoke about, we wanted a lot of ROM stock ahead of this year's wet season. So we had four months of ROM stock. Our efforts in mine development that we put in, in the first half of this year, in preparation for this year's wet season, have been very good and our mining productivity has exceeded our expectations, and that's meant that we have been able to maintain our ROM stocks into the first couple of months of the wet season, which is very positive, so it gives us lots of insurance. But obviously impacted cash costs for the first half of the year, and you will see that in the cash waterfall coming up. We would expect that that will come off in the second half, because of that investment that we put in.

In terms of processing, I have put this chart in and it shows really the evolution of Marampa, as we have gone up and you can see that our expectation and target has been shifting up, as we have been commissioning the plants, and already spoken that we had delayed commissioning and ramp-up, as we have spoken about a number of times. We have achieved our nominal nameplate capacity at the end of the half, in terms of 14.8 kilotons per day, and we have seen daily peak production up around 19 kilotons per day. So you can see on the trend here, as we have ramped up each of the plants, almost step-up and you can see it was extended in the wet season impact last year, but you can see through the trend there, that we are well above on any particular day above your nameplate capacity.

In terms of modification of our guidance, Graeme has already touched on that. We are revising our guidance to 4.9 to 5.1. Two reasons, obviously slower than expected ramp up than we would have liked for the first half of this year, and our expected impacts of Ebola going forward, and we have touched on some of that, Graeme has actually mentioned. We are starting to see major airlines cancel flights out of West Africa. We have mitigated that for our employees, in terms of getting them to the normal commercial hubs and get on to the normal fly-in, fly-out destinations. We are seeing challenges around the freight market, and Graeme has touched on that in terms of the supply chain. Again, we have been able to mitigate that, but expecting that things are probably going to deteriorate slightly more from where we are. We are being cautious in terms of what we are saying going forward in relation to guidance on production.

In terms of logistics, as you would have read in the note, our haulage contractor has decided to exit Sierra Leone. I think some people -- some commentary before the presentation is that related to Ebola? Its not related to Ebola. Our haulage contractor has a number of contracts in Sierra Leone over the past few years, and that's a business decision that they have made to leave Sierra Leone environment, and we are working with them, for us to have a takeover of that business.

I think its important to note, obviously transitions like that, people expect some risk around that. We would expect the majority of people in that business will transfer or become London Mining employees. I think its worth noting that they have a 97% Sierra Leonean work force. So there are people that are obviously there, living and working in the local environment. So its only really the management team that are expats, and again, the majority of them are intended to come over and work for us.

So we will be working through with them over the coming months in orderly handovers, so that there is no interruption to that service.

In terms of our export, we have talked about our new barging format and the new pusher barges that we have deployed later in the half, and we actually have now half of our fleet working under that new format, and we have seen improvements in terms of the cycle time, they halve the cycle time down the driver, and they consume about half the fuel of that previous operation. So we should start to see those costs, as improvement into costs flowing through into our performance in the second half.

We did do some remedial works to the port of Marampa late in the half, and that continued early into June, and that's now completed, and we are flagging a delay to our Capesize dredging program until probably Q1 next year. Again, that's related purely to the permitting process. We don't have an indication at the moment that it will be late, but we are expecting it -- the government of Sierra Leone has released new legislation, which bans public meetings. So mass gatherings and public meetings related to the Ebola outbreak, and a significant component of the environmental approval process is community consultation. So at the moment, we are working through with the government, to understand, how is it that we can complete this community consultation process, if there is no public or mass meetings allowed? We believe we will come up with a solution, but we are flagging that delay.

In terms of the Capesize dredging program, we acknowledge that we have made a commitment to move to full size capes, 180 [indiscernible] deep sized capes by the end of the year. We have got some alternatives which have been underdevelopment now for the last few months, and we believe that some of those are looking positive and we will be able to continue to make the expectation of moving to full sized capes by the end of this calendar year.

In terms of costs; so our half one operating costs were flat year-on-year. Additional commissioning costs related to the new plant, and obviously, the slower ramp-up in terms of volume meant that we did see some increased costs in terms of -- on a unit rate for processing. Mining, as already mentioned, we did invest some more money into mining development to prepare for the wet season in terms of roads and stripping related to that. But as we moved into the end of the half and got to full run rate in June, we did actually achieve an operating cost of $46 a tonne. So its an indication of when we are achieving the volume rates, we will see the cost reductions that we have flagged.

So looking forward into the second half, we will benefit from increased volume, so fixed cost dilution and draw-down of our ROM stocks. We have continued to reduce in the areas of G&A, so we continue to focus on that, and now we are an operating business, and we will see the impact of headcount reductions flowing through into our half two costs. We'd expect reduction and processing cost, as we increase plant uptime and deliver more volume, and I have already mentioned, the cost efficiencies from our new barging solution, that was deployed late in the first half, so we will see that flowing through in half two.

Some marginal impacts from the Ebola outbreak, we do need to flag that. We are expecting that to be $1 a tonne or less, but we will incur additional costs related to managing that, related to freight and charter flights in and out of Sierra Leone. But we are reiterating that guidance, we'd expect to be round about $50 a metric tonne for the full year.

With that, I will hand over to Ben Lee.

Ben Lee

Thanks Jim. Good morning. The defining factor for the first half was the iron ore price falling from $135 a tonne to $93 a tonne, which was -- as you all know, significantly below market expectations. In response to that, management took a number of actions to improve liquidity and reduce costs, including two offtake financings, deferrable non-essential CapEx, headcount reductions, and further cost saving exercises, and in addition, the hedging program that we have put in place, provided significant boost to earnings.

We also put in place, a short term $25 million working capital facility, as you saw earlier this month, which is required to be refinanced by the end of November, and the strategic process is ongoing, as Graeme described, strength in the balance sheet going forward.

On to the P&L; the revenues were impacted by the delayed pricing $4 million offtake contracts, which I will take you through in the following slide in some detail. Despite significant headwinds, Marampa EBITDA was positive, and the cost cutting measures that we previously put in place, reduced corporate overhead costs by 20% on the prior year, and further measures have been taken. And finally, as you can see, we realized a significant non-cash gain of $32 million on the Blackrock royalty, a result of a change in fair value assumptions, due to lower pricing assumptions, and a change in our assumptions on long term ultimate volume.

So on to revenue reconciliation; as we referred to in our Q2 production report, the reported revenue figure was materially impacted by the delayed offtake pricing formulas. This is essentially -- a number of our contracts have a portion or all of the pricing, such as the vessel loads in January, its price on the average of March, and the reason for that is that the market is moving that way, with the Chinese only wanting to buy vessels or commit to vessels once they are much closer to the port; and the impact of this was significant in the first half, obviously due to the sharp deterioration in the iron ore price over that period, and the fact that proportion of sales approximately [ph] rose from around 30% in the second half of last year, 40% in the first half of this year, and we expect it to be around 50% going forward, as the new contracts roll on, and the new spot pricing is done on this basis.

If you look in the bar on the far right, the 9, which is the impact; how does that break down? $6 per tonne is from contracts already realized in invoice during the half, that's locked in. $1 is in an accrual of an expected impact based on the full processing curve, and obviously that might change depending where pricing comes out, and $2 a tonne is from demurrage, which is charge on final invoice. And going forward, now that this has the potential to be material, we will reflect this in the quarterly production reports as well, so you have visibility.

Of note, I guess two things, one, we don't expect quite the same volatility as we had in this half going forward, because only the impact on pricing materially rises or falls, and if prices go up, we are going to benefit. So we look forward to that.

FE premium penalties on the left, the negative one there, that reflects the average grade over the period, and pricing will improve materially as FE recovers above 64%. I think its also very important to note, that no additional discounts are being requested from us or given in this difficult environment, its all based on the pricing formats that we originally negotiated, and we are having no impact from the environments at all, and demand for our product continues to be strong.

Marampa EBITDA; so the [indiscernible] impact on EBITDA in the first half was a reduction in pricing, which is not expect to recur in the second half. Against that, as you can see the hedging impact assisted significantly, and that was 1.3 million tonnes that we hedged around the $119 per tonne that was mitigated in the price pool, and we have just under 800,000 tonnes of H2 volumes hedged as well, at net $105.

As Jim said, the operating unit costs have fallen in the second half, as volumes increased and costs reduced, and costs for the second half are expected to be materially below $50 a tonne, to keep [indiscernible] costs around $50 a tonne, plus $1 a tonne for the expected Ebola impact.

Now on to the corporate cost evolution; so as you can see, strong progress has been made in reducing head office costs. We achieved a significant reduction both absolutely, and even more so, on a dollar per tonne. Although our H2 costs, although [ph] short term rises, impacted the financing costs come through.

Further cost saving measure already been taken, and we now look to achieve $13 million per annum on a steady state basis for our corporate costs, versus the $15 million we announced earlier this year. I should note, that these measures ahead offer us an addition to all the significant measures that we have taken down at fairly [indiscernible] costs as well.

The capital program; over $20 million non-essential CapEx has been deferred, and the CapEx that we have spent, has been focused on critical sustaining capital, and importantly near term volume expansion to achieve that 10% to 20% increase above the 5.4 million tonne number of capacity, that we didn't discuss that yet. Emerging CapEx again has been delayed to 2015, to reflect the delayed permitting process, and the fact that we are considering potential alternative solutions, and so you will note, first half versus second half, the immaterial -- that's CapEx coming through in the second half, [indiscernible] in particular that we have all done in Q1. CapEx program has the ability to be quickly restarted, once funding is in place, which is an important element as well.

Finally, on to net debt and finance costs; net debt increased by $17 million, as a result of lower cash balances, but there was only a small increase to the P&L charge of $27 million. That $27 million equates to a cash finance cost in the half of $23 million. Key difference is being cash interest costs at $2.5 million low, $15 million and the Blackrock cash royalty cost is $1.5 million lower than the 4.8 that you see there on the screen.

As you will also have seen from our accounts, an emphasis of matters being noted by orders [ph], due to the fact that we don't have committed funding for the next 12 months. However, the recent short term capital facility that has been put in place, demonstrates that our lending banks are supportive of our business and of the ongoing strategic partner process, to raise funds to address the future financing needs. London Mining has worked hard to secure a number of significant fundings in a challenging environment and we are confident we can continue to do so, as we go forward.

And with that, I shall pass back to Graeme, to wind up.

Graeme Hossie

Thank you, Ben. So as you have heard from Jim and Ben, and I think you can appreciate that our collective London Mining team has been working very hard and very effectively and dealing with various challenges that have come up over half one. But at the same time, have been continuing to deliver on our objectives, which has been to achieve our plant's integration into operations, which has expanded our capacity significantly over the first half of this year, and now at the run rates that we are expecting, with more potential to come, as we continue to optimize over the back part of this year.

We have been proactively and effectively managing the impact of Ebola, and our clear priority is to keep our employees safe as well as our operations performing. We have been reducing costs, and we have been deferring CapEx to allow for more short term liquidity, and for some medium term balancing of cash flows; although the deferrals can be quickly restarted, and through strategic investment, it can be accelerated again. So there is a lot of flexibility there.

We intend over the course of this year, outlook to further reduce our costs, to address the concerns of the balance sheet, with regards to lower margin environment in this pricing environment, particularly through bringing on strategic investment from a partner, who sees the long term value of the business, and you can add value in terms of developing value for shareholders going forward, to unlock that long term value that Marampa represents.

I'd like to open anything to questions, and you've got Tom, Jim, Ben and myself and please begin. Roger?

Question-and-Answer Session

Roger Bell - JP Morgan

Good morning gents. Thanks very much. Its Roger Bell from JP Morgan. Three questions if I may; first of all, you mentioned in previous statements about $50 million loan from the World Bank, IFC, could you just clarify where have those gone? What has happened to the notes, there is no mention in this release? Second is, just on the strategic partner process, I mean, thinking tactically, how do you insert some urgency in this process, given that, as you stated in the release, in current pricing environment, that they'd be at a risk, is it a growing concern say by year end effectively? And then the third question is just on slide 22, on the CapEx, you're sort of labeling -- allocating about $10 million to early works in 2014, and another $15 million to low cost expansion. Can you just clarify whether the $10 million is included in that $15 million, or those are two separate items?

Graeme Hossie

Ben, you can clarify the CapEx point. But as far as urgency in strategic partner process, we are confident in the timeframe that we have set out. There is a degree of competitiveness, shall we say, because there are several indications of interest from significant parties; and to some extent, the nature of the potential to develop 8 million tonnes or the life of mine fast, and the most efficient way of doing that is to go back to more or less the original plan, and that would involve starting a number of things earlier, than the deferred plan. And so that also provides a degree of timing, around which the optimum value for everyone can be achieved, and its in that context the discussions are being held.

As far as loans and additional source of capital, we are always having different backups, and plans B and C, and I will just -- Ben, why don't you comment on the IFC and others?

Ben Lee

Sure. I mean, on the IFC loan, we have been in discussions on that. Those discussions started prior to the deferred CapEx structure and started prior to the annual price falling significantly. So we got board approval from the IFC, and principally in terms of -- they did all the due diligence on our health and safety and our environmental and social plans, they are supportive of that; and then subsequent to that, there was a further committee, and they viewed it in the uncertain add-on price environment with the deferrable CapEx, that we would wait and see how the strategic partner process progresses. They were very much focused on looking at an independent business versus with a strategic partner.

And then just to -- Graeme, if you're able get to slide 22, just to address Roger's comment on CapEx. So if you look down, the top line, that's the only word [ph], so that's where the CapEx was initiated at the beginning of the year, prior to the deferral being put in place, and the commitment is already in place, they were put in place then. And what have we got from that, we have got a lot of parity work to enable us to move quickly when we do -- when the funding comes in, and we have brought some elements of long lead items, down payments.

If you then look down to the sustaining capital, high return optimizations. We did that. There is always this element of sustained capital which is critical, and then also within that is the expansion, the 10% to 20% above nominal nameplate capacity that Jim talked about, and if you look at the 2015, that takes us up to the 6.5 that we talked about previously.

Roger Bell - JP Morgan

Okay. So what you're saying is, the early works plus that 15 created this 6.4, so that's to get you -- that's to put in the extra wins that you require essentially. So that was previously $40 million, then lowered to --

Graeme Hossie

I can explain the $40 million. So there was a component of early works. So the way we allocated that capital in the $40 million, because really the program was two components of one projects, which is really a 6.5 life of mine. We had the $40 million originally allocated in that first year, which was made up of the early works capital, which Ben has largely explained, and then there was a chunk of starting earthworks in this dry season coming up, then we get to the end of the wet season, we were planning on starting earthworks in November/December using that dry season to do the earthworks for the life of mine extension. So that's the makeup of the 40.

Roger Bell - JP Morgan

And that's being cut so effectively?

Ben Lee

That's combined if you see. 2015 and 2016 --

Roger Bell - JP Morgan

Right, as we moved into there. Okay.

Seth Rosenfeld - Jefferies

Good morning. Its Seth Rosenfeld from Jefferies. I guess two questions, first, looking at a lot of additional volumes we have in the life of mine and that you had earlier. Obviously, it gives you some flexibility on further offtake agreements that could bring in some incremental financing, potentially in the coming months, recognizing that number is coming quite soon. Are you effectively saying that you want to keep all of that capacity, all that flexibility on the table for the strategic partner, or it would be possible to announce further offtake agreements in the interim, ahead of the strategic partner coming through? And the second question, looking at your freight rates and also looking at mostly where steel demand is moving? I am wondering if ultimately you're able to see some slightly better demand out of Europe, and if ultimately you can place some volumes into Europe, potentially significantly benefiting your realized FOB prices? Thank you.

Graeme Hossie

Thanks Seth. Yes you're correct, there is demand for future offtake, and we have been able to use that very effectively for near term, short term and capital contributing finance, which is effectively self-financed. And we believe we have substantial additional potential through that, at the moment. But we also noted, and part of the reason for the timing of the strategic process now, and the potentials for the mine life extension and expansion are very clear, and DFS has been completed, etcetera; and that we have not yet given substantial long term offtakes or life of mine offtakes. That is the nature of the kind of window to explore strategic interest, because strategic partners are by and large interested in the offtake. So that's why rather than continue, what you might say business as usual, let's play some more offtake, get more finance if needed. We have paused that to look at a full solution option, which would also substantially fund CapEx, derisk balance sheet etcetera, as we have described.

So we feel that its important and in the best interest of shareholders to explore that fuller option, and that's what we are doing. We always do have the offtake, because of the nature of the product and the demand as a financing option, but if we were to continue with that, it could impact some strategic partners interests.

And I am sorry, your other question is, when can we sell Europe, India, Middle East, China? Yes, its not necessarily all to go to China, the ability to achieve higher margin through reduced freight is one that generally is a subject of negotiation, it can't be completely assumed. But we are looking at those opportunities. Its not clear what volume that does represent in the near term, but certainly over the long term, we would expect to be selling into places other than China, a significant amount of offtake.

Seth Rosenfeld - Jefferies

Just one follow-up question. Going back to the [indiscernible] strategic partner, I am not sure if you can give us any color, but given this breakdown of the company that did do due diligence, how many of them or what percentage of them came back with [indiscernible] offers, and then alternatively from a different perspective, what the members of these interested parties are -- the industrial parties -- are they trading houses, that might currently have an [indiscernible] with you, if you can give any color on who's involved?

Graeme Hossie

You probably don't expect us to give that color, but we did say that there are industry parties that are interested, and by nature, the industry parties really are not looking at kind of short term issues, as much as they are looking at the long term nature of the mine, which in this case is kind of a 40 year proposition.

Richard Knights - Liberum Capital

Good morning gents, its Richard Knights from Liberum. Just a question on the dredging, we noticed that you mentioned the payment is being delayed until first half of next year. Just wondering if you could be more specific on what's happened there, and the likely timing around that? And also just a simple one on the financials, were the two offtake facilities fully drawn at June 30, just wondering if that has been reflected in your -- if the fully drawn offtakes was reflected in your cash balance?

Graeme Hossie

Jim, why don't you take that?

Jim North

Sure. I think its important to note that our permitting process hasn't been delayed up to this point. But the government last month released legislation which bans public mass meetings, and group gatherings, as part of the permitting process. We are actually required to hold the number of community consultation processes, and they happen usually in meeting hauls. You know, you get the effective communities and that we have a conversational Q&A and tell them about what we are doing. That's actually not allowed at the moment, that presents us a problem. So we are actually working with the EPA and government to work out, how is it possible for us to actually do that community consultation process, given that legislative change, and that's purely around restricting the possibility of transmission of Ebola, because obviously not having mass meetings, it doesn't happen.

So we are flagging that as potentially a delay. So we are saying Q1, we'd like to think that we can resolve that, but we are flagging that -- we'd expect a delay, because its challenging.

So in terms of -- we understand we have made a commitment to move to full class Capesize vessels at the end of this year. We have been, for quite some time, exploring opportunities and given the market conditions around certain types of machinery and equipment that's become available, we have come up with an alternative, which we are in stages of actually finalizing, so that we can deploy something else and meet our commitment to moving Capesize vessels, because its obviously a significant value-add for the company and for shareholders.

Ben Lee

So on return -- to the cash, I mean essentially yes, the details are a little more complicated, the Cargill prepayments and the Vitol prepayments are flat in terms of getting all the cash upfront, and then it revolves, whereas the original Vitol and Glencore facilities revolve with the way you payback over the month and you provide the product, and then you draw down at the beginning of the month. So I'd expect with the June 30 cutoff, an element of Glencore, an element of Vitol would have been redrawn at the beginning of July.

Hunter Hillcoat - Investec

Hi. Hunter Hillcoat from Investec. Couple of questions. One, without giving any detail, you seem supremely confident about getting a strategic partner or finishing the process by the end of the year. Is there a diarized sequence of events that the participants will adhere to, so that you have a date in mind, where all completes? And the other question is, you've always been targeting $80 a ton, a company that has been able to withstand $80 a tonne price, is that still the same, and is $80 a tonne good enough?

Ben Lee

In short, yes and yes, and we have a professionally designed and managed program with Goldman and Standard Chartered advising, and it has been going on for some time, and we see the steps forward and that's what allows us to make that confident statement of concluding things before the end of the year.

So that's the first question; and I am sorry, what's the second one? Oh, yes. In fact, that hasn't changed at all. Certainly, I suppose if we want to enlarge on this point, substantially less all-in cost is available if we were to go to 8 million tonnes or beyond that. But even at the 6.5 million sustained life of mine rate, we would expect to be in the sort of low 70s, once we have optimized that, and then the biggest impact is how we reduce debt and interest costs over time. But as far as operationally, the kind of low cost credentials of the mine, do yield for sure, a sustainably profitable project at an $80 annual price.

Graeme Hossie

Any questions on the phones?

Operator

(Operator Instructions). We will now take our first question from Brock Salier from GMP. Please go ahead. Your line is open.

Brock Salier - GMP Securities

Good morning gents. Two questions. The first one, on the Capesize, you mentioned a potential to go there by year end, pre-dredging, are you -- do you envisage being able to do that off-balance sheet; i.e., sort of without significant CapEx [indiscernible] dredges or similar, or is that something which is going to be dependent on CapEx? And the second question I had is, obviously with these iron ore prices dipping where they are, well its logical to expand, to reduce your costs? I think Graeme, you mentioned you have got a few plan B and plan Cs out there, is there a potential to diminish production to reduce cash burn, let's say, if iron ore prices drop further? Obviously something you'd have to do in agreement with your offtakers and creditors?

Graeme Hossie

Thanks Brock. Jim, why don't you address that?

Jim North

Yeah, sure. So in terms of the dredging alternatives we are looking at, there isn't CapEx associated with those solutions, so it’s a no CapEx solution. In terms of winding back production, look, I don't think that's the right answer, given what we are expecting to play out in the marketplace. Look, I mean, we do have options to turn things on and off as we like and mining is clearly one of those, when we have large amounts of ROM stock ahead of our plants. But that's not our intention at this point in time.

Brock Salier - GMP Securities

Thank you.

Operator

We will now take our next question from Alison Turner from Panmure Gordon. Please go ahead. Your line is open.

Alison Turner - Panmure Gordon

Hi gents, just a pretty straightforward one. I am just wondering, you know, a little bit of help reconciling $57 a tonne with the reported EBITDA?

Graeme Hossie

Ben?

Ben Lee

So the $57 a tonne is a $1 per tonne of production, and then the reported EBITDA, there was obviously two reported EBITDAs, the Marampa EBITDA and then there is the Group EBITDA. If you are asking me to walk through how we get the revenue, then dollars per tonne down to EBITDA, then perhaps we should do that offline. But does that answer your question?

Alison Turner - Panmure Gordon

It doesn't, because it was the latter. But I was always wondering whether to get a bit of help going through from that $1 per tonne down to reported. But if you want to do that offline, that's fine.

Graeme Hossie

It doesn't include royalties and the shipping costs in terms of --

Ben Lee

There is a number of details that I can take you through -- the dollar per tonne cost of production is -- and I will take [indiscernible] offline, how that goes through the EBITDA.

Alison Turner - Panmure Gordon

Okay, super. Bye.

Operator

And the next question is from Kalim Aziz from Armajaro Asset Management. Please go ahead.

Kalim Aziz - Armajaro Asset Management

Thank you very much. I want to focus on -- specifically three areas if I may. The first one I would like to have, is a clear idea of what is the CapEx required -- additional CapEx required to bring the full production rate to 5.4 million tonnes, and additional CapEx required to bring in to 6.5 million tonnes from where we are today? There is something -- I will repeat, I need to understand exactly how much CapEx is required in your view, to ramp up and sustain 5.4 million tonnes of production, and additional CapEx required to take 5.4 million to 6.5 million tonnes. That is the first question sir.

Graeme Hossie

I will let Ben talk about the capital expansion, because its in his slides. But in terms of 5.4 million tonnes, we have already installed that, there is no additional CapEx required, we have been achieving that rate since the end of the half.

Kalim Aziz - Armajaro Asset Management

And it means you can run 5.4 million tonnes for how long? I mean, without putting additional CapEx for expansion of mine, etcetera?

Graeme Hossie

Okay. So what we have flagged is, as part of our life of mine project, which we presented over a year ago now, we do have a limited tailings resource. The tailings resource is planned to be depleted in 2016, and our life of mine project, we have the ability to move from tailings to weathered ore. We have released to the market, an interim crushing solution, which allowed us to defer the CapEx, so we moved from tailings and weathered ore to weathered ore only, and then on to primary ore over a period of between now and 2019, which then the life of the mine CapEx needs to be deployed, so that we can move into the primary ore material for the life of mine, which is, in essence, 39 years beyond that point.

Kalim Aziz - Armajaro Asset Management

If I can understand you correctly, you came down to 5.4 million tonnes without any additional CapEx for two years, correct?

Ben Lee

So in essence, we don't intend to run at the 5.4 million tonne rate, and as we talked about in the last announcement, we have been working on some low CapEx optimizations, which will lift our nominal nameplate capacity between 10% and 20%. The first of those was the addition of some bleedlines, which utilizes the additional milling capacity which we have, and WHIMS capacity, which we were planning on utilizing, as part of the early works program. But given the limited amount of capital funds that were available, we came up with a low cost temporary solution to utilize some of that milling capacity, to get us up to nominally 6 million tonne per annum, until the cash flow allows, that we can continue to install those additional WHIMS and spirals.

Graeme Hossie

I think its important to note, that if no CapEx, that's probably what you're getting at, if no CapEx were spent, when the tailings were depleted, then the efficiency of the process would go down. Although we are looking at various low capital ways to actually improve that, as plans D and E. So we are estimating somewhat less than 5.4 million to 6 million tonnes would be achievable without further CapEx, until the primary ore, and then it would take potentially a stepdown again, in 2020, if there were no CapEx. So obviously, your operating costs would not get the efficiencies that would otherwise be obtainable, if you are spending the CapEx to make the front end very efficient, which is the plan, and that plan has been adapted to balance the CapEx with potential cash flows going forward.

So as we have always said, Marampa is a very flexible ore body to develop, and what we have in place now, is -- will continue to deliver for a long time, depending on how its run and what is added to it or not added to it.

Kalim Aziz - Armajaro Asset Management

Okay. Second question relates to your short term financing, which I understand, mature -- $35 million by November of 2014, and your strategic partners, that currently I guess is December 2014, and that is emphasis of mature in terms of ongoing concern issues. So if you have to repay 25 by November, and your strategic partner [indiscernible] in December, how do you reach this?

Ben Lee

Certainly. Obviously we have anticipated that with the banks, and you will see it in our note, we did talk about, under certain circumstances, it could be deferred -- repaid by the end of December, under the circumstances we are referring to.

Kalim Aziz - Armajaro Asset Management

Yes. And this loan is quite expensive, am I correct in saying that what would be the actual cost of this 25 in cash terms, through to December?

Ben Lee

You're correct in saying that loan is expensive. I didn't catch the second half of your question, sorry?

Kalim Aziz - Armajaro Asset Management

What would be the cash cost, I mean, $25 would cost us what, $1 million for three months?

Ben Lee

As we disclosed in the announcement, the margin is 8.5% of LIBOR, then $1 million payable on repayments, and then $2.5 million payable on the successful conclusion of the strategic partner process.

Kalim Aziz - Armajaro Asset Management

Okay. The third question sir I have, is in relation to the issue of alignment of interest between shareholders and management. I would have thought, that the current share price is significantly below the net asset value of the business, and I presume the strategic partnership share is done, not at the same discount as the stock prices, otherwise it will be dilutive to the shareholders. Would the management explore the possibility of this company being sold to a strategic partner via the share sale? i.e., [indiscernible] the strategic partner buying out the minorities or participating at the top PLC level rather than the project level? Because we have seen in the past like, I don't want to name names, South African minerals participation at the project level has proved disastrous for the shareholders. I am not insinuating or implying anything of that kind of a mess, but if the strategic partner is not at the same level, there is a possibility that the interest alignment can vary? Do you have any thoughts or comments on that please?

Graeme Hossie

Complex questions you're asking, and we are well aware of the pros and cons of taking on investment at different levels and how that would need to be structured in the best interest of shareholders. The purpose of this process and the aim of it, is to unlock greater value for shareholders, considering the depressed nature of the share price, which is substantially driven by balance sheets and other such concerns, and risks that we would expect the strategic partner to then resolve, so that the rating can be based on a long term cash flowing, lower cost mine, where shareholders can participate in the fundamental value. We are clearly interested in doing an arrangement that is in the full benefit of shareholders, and that's what we expect to achieve.

As we flagged previously, different, call them industry parties may have different interests and one arrangement might look one way and one might another way, which is why its very important to work very carefully, and understand where the areas of value are for all parties, and all stakeholders, so that that can be fairly deliberate. There are other options that could come to play. We are looking to achieve a very positive outcome for shareholders, and that's what we are committed to, and I don't think I can give any more detail at this point in time.

Kalim Aziz - Armajaro Asset Management

So if I may redirect, is the management extremely adverse or adverse, in any sense of the word, to a potential strategic partner buying out the company at the PLC level? Is that completely off the table in the discussions, or is an option [ph] which is awkward to the potential partners?

Graeme Hossie

We are not really prepared to comment, and its not really sensible to comment on this stage on detailed discussion. I'd just refer you to the announcement that did note that a number of structures are under consideration.

Kalim Aziz - Armajaro Asset Management

Thank you very much.

Graeme Hossie

Any other questions?

Operator

We will now take next question from Alon Olsha from Macquarie. Please go ahead. Your line is open.

Alon Olsha - Macquarie

Hi good morning. My first question is just on the cost outlook? You achieved $57 kind of in the first half, and you've reiterated guidance of $50 for the full year, which implies a very significant reduction in the second half, of about $43 a tonne. So can you just scroll [ph] that waterfall diagram for us, so that we can understand what's actually going to drive that in terms of dollar per tonne, reduction of scale efficiencies margin etcetera?

Graeme Hossie

So Jim, why don't you take that question?

Jim North

Sure. The major areas, if you revert to the slide, I think its slide 15, the one I talked to. I did actually step through. The exact percentages I don't have with me, but the areas where you can expect to see cost improvement is -- significant cost improvement in the mining area related to development costs, which I talked about in the first half. So you will see mining costs come down substantially, because we don't have the development costs, and our mining volumes are significant lower in the second half of the year, versus on the first half of the year. And that's related to stripping, accessing ore, and the weather preparations. You will see some, in terms of G&A, but obviously a smaller proportion, so there will be some volume dilution on G&A and impact of continued headcount reductions that we have been working through.

Processing costs was elevated, you won't see it elevated in the second half, obviously with again volume dilution and increased planned uptime, as we have concluded that commissioning and ramp-up process. I would think substantial, in terms of the barging solution, will fly through in the second half. The new barging format is twice as fast in terms of cycle time and 50% reduction, in terms of fuel and operating costs for those units. And then I was talking about a marginal increase related to Ebola. But largely, you get significant fixed cost dilution, you're talking about 2 million tonnes in the first half versus 3 million tonnes in the second half. So even if you just divide it by the volume, you get a substantial reduction in terms of unit rate.

Ben Lee

And just on the math obviously, Jim said that gives us then substantial reduction in unit rate, but also obviously, it’s a blended average for the year, and you got 40% in the first half and 60% in the second to get to an average of 50%, it wouldn't be 43, it would be more like 46 to get to an average of 50.

Alon Olsha - Macquarie

Thanks. And then just secondly, on the Marampa sales process, just kind of a practical question. I would imagine, that there should be some due diligence investigations being undertaken at present by interested parties, but is that actually happening? Is anyone actually willing to travel to the country to look at the assets?

Ben Lee

Substantial due diligence, including site visits, has been done already, by the majority of parties, and so that's where we are, and just to address, perhaps a friend from Armajaro further, management and the board are extremely aligned with shareholder interest, so you shouldn't have any worry about that.

Graeme Hossie

I would like to actually add to the point, that it is actually quite safe to travel to Sierra Leone. It is this perception, and I know the media, you know, have made quite a meal of this Ebola outbreak. But in essence, it’s a very difficult disease to catch, obviously for the people who do catch it and get infected, there is a high fatality rate involved with that. But in terms of the safety of our visitors, our expats, it’s a very difficult disease to catch, and the controls that we have put in place, mean that the indirection with infected people is near-on impossible. Now we obviously can't control what people do, but if people do and follow the procedures that we have put in place, for entering and exiting Sierra Leone, there is no possible way of transmission. Its very-very safe to travel to Sierra Leone, and we continue to do so, the senior leadership team.

Alon Olsha - Macquarie

Okay. Just one final question, you have spoken about the supply chain disruptions. I am just wondering, do you see any risk actually of shipping disruption? The maritime industry seems to be concerned about this, and we have heard reports of shore leaves being canceled and crews not being [indiscernible] in effective countries. Is there any risk that actually ships refuse to call at these ports?

Jim North

I think there is always a possibility. I talked in my presentation, that we can expect things around the Ebola and the communication around that for it to deteriorate. All I can comment on, in terms of our offtakers and the relationship that we have with vessel owners, we think quite proactive right through this outbreak in providing information. I will refer to what I just said in terms of how easy it is to contract this disease, it is not easy. And it all comes around, sensitization of providing information to people, so that they can make informed decisions, and we have continued to do that with our offtakers, we have information that's made available through International SOS and International Maritime Organization, that's provided to our offtakers and vessel owners and ship underwriters, so that we can make sure that they are informed, and can make informed decisions about it; and we haven't had an issue to-date.

Alon Olsha - Macquarie

All right. Thank you.

Operator

(Operator Instructions). We will now take our next question from Tim Huff from RBC. Please go ahead. Your line is open.

Tim Huff - RBC

Yes. I just had a couple of questions, follow-up on the Ebola questions as well. Its more on costs though. Number one is the $1 a tonne, I imagine that's coming out to around $5 million allocation, that you parked towards the Ebola issues for the full year, and I was wondering, secondly, if you could break that out a bit, maybe you could help us in terms of -- it sounds like you have done some great prep work there. How much of that was actually spent in the first half, and if you can give us an indication of how much is spent to-date in the second half? That'd be really helpful.

Ben Lee

None was spent in the first half. In terms of the second half, but as you noted, up to $1 a tonne. Its not $1 a tonne from what we can see today, but obviously we want to be prepared for the future. Of that, what's committed today, the most significant element is in Ebola bonus, that we are playing to the guys on the sites, to reflect the increased hardship, as much from the pressures they are getting through media, as much as anything else. There is an element of cost that's coming from the increased transport costs. As Jim mentioned, we put chartered flights on these type of elementary [ph] costs as well, and there is an element where you could pay supplies more or to air freight products in and obviously with reduced number of airlines, that is getting more difficult, and then its basically a contingency, because I expect that there will be elements that we have as yet, not identified that will need to be covered off, in order to continue to have the operations run smoothly.

Tim Huff - RBC

Okay. Does that mean you -- sorry, is it possible to give us an indication? I mean, we are a couple of months into the second half. I don't know if its possible to give us an indication of what has been spent to date, but if not, can you give us an idea of what your up to $5 million cost allocation, what sort of duration that anticipates, before operations get back to normal, in terms of -- from a cost perspective?

Graeme Hossie

To answer both of those questions, I'd say approximately 30% of that is committed, with some visibility beyond that, but not a whole lot. In terms of the duration, the World Health Organization is talking about three to six months is what the duration is expected now, with six months being probably more likely.

Tim Huff - RBC

Great. Thank you.

Operator

There are no further questions in the queue at this time.

Graeme Hossie

Okay. It has been quite a lengthy meeting. So if there are any other follow-up questions, management can be called on the mentioned numbers. So thanks for attending everyone, and good bye.

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