| Tue 5 Feb 2008, 8:00 | | SAL - Sallies - Statement Of Chairman And Chief Executive |
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SAL
SAL
SAL - Sallies - Statement Of Chairman And Chief Executive
Sallies Limited
(Incorporated in the Republic of South Africa)
(Registration number 1903/001879/06)
Share code: SAL ISIN: ZAE000022588
("the company")
STATEMENT OF CHAIRMAN AND CHIEF EXECUTIVE
INTRODUCTION
I joined the board of Sallies as non-executive Chairman on 16 February 2007.
Shortly thereafter the blasting contractor at Witkop, the operational core of
your company, refused to blast as a result of protracted non-payment of his
invoices. I record this incident to illustrate the dire financial
circumstances which Sallies faced early in C2007. A 25-for-100 rights
offer at 60 cps, raising almost R75 million, was completed on 2 July 2007 and
this was expected to restore your company to financial health.
It became apparent thereafter, however, that the financial information systems
had deteriorated to the extent that management did not know its production costs
and as a result, uneconomical cut off grades were being implemented in the pits.
Re-building these information systems exposed the central problem of the
company. It was selling fluorspar at prices below its unit cost of production.
As a consequence, Sallies shareholders were subsidising its customers.
On 1 October 2007, subsequent to the resignation of the previous incumbent, I
accepted the executive challenge as CEO. Johann Blersch, a financial specialist,
who joined Sallies as a non-executive director concurrently with me in February
2007, also accepted an executive role as Commercial Director at the beginning of
October 2007. We believe that the most pressing challenges at Sallies have been
identified and are being actively addressed. Shareholders will be kept
transparently informed of progress.
SUMMARY
Sallies made a loss before taxation of R47 million during F2007 (F2006: R39
million). Of this, Witkop accounted for R34 million for the full year and
Buffalo accounted for R13 million between 1 August 2006 and 30 June 2007. These
losses were a function of poor operating performances combined with uneconomical
prices achieved. Even had operations delivered against budgets, the C2007 price
levels would have been lower than the unit production costs.
According to unreviewed, unaudited management accounts, the group lost R25
million during H1 F2008.
As I write, major shareholders have provided bridging finance during December
2007 and January 2008, are expected to provide further short-term finance, and
have underwritten a rights offer to raise R75 million.
Future profits will depend upon
(i) a sustainable operating turnaround at Witkop which delivers higher product
volumes than in F2007 whilst maintaining product specifications and tight
control of costs and capex;
(ii) successful re-engineering for the Buffalo project; and
(iii) fluorspar prices which are significantly higher than existing contracts.
Our core objective is to deliver growth in value to shareholders. This must be
founded on reliable operating performance and sensible pricing. At Witkop, the
ore body is low grade and highly variable. An experienced management team has
been assembled, and they are committed to establishing a track record of
consistent operating performance. At Buffalo, our consulting metallurgists and
engineers will present their conclusions on re-engineering the project early in
C2008.
MARKETING
Sales of all grades of fluorspar by Witkop increased by 6% to 98 705 dry metric
tonnes ("DMT") between F2006 and F2007. Sales from Buffalo were 16 088 dry
metric tonnes.
Witkop achieved sub USD180 per dry metric tonne prices during the financial
year. Because it is a newcomer to the market, and both its specifications and
delivery credentials must be established, Buffalo sold its output at a discount
to the Witkop prices. Existing and potential customers were appraised of
our price targets at the annual fluorspar conference in Frankfurt
early in November 2007. Against a background of China, the world`s largest
producer, progressively withdrawing low priced product for export in order to
add value in domestic forward integration, it is clear that the market has
tightened. Sallies has already sold substantial volumes of acid grade fluorspar
for export in C2008 at prices significantly higher than those achieved in C2007.
In support of our marketing drive we have made special efforts to guarantee
specifications and delivery.
OPERATIONS
Safety, health, environment
I am pleased to record that no operational fatalities occurred in F2007. At
year end, the accumulated fatality free shifts for Witkop and Buffalo were 6 072
and 1 137 respectively. No disabling injuries occurred at either operation
during the year. We will bench- mark our safety performance against industry
standards and set new objectives for health and environmental management in due
course.
Reserves, resources and mining rights.
The competent persons` report by RSG Global dated May 2006 stated that, as of
August 2005, proven and probable reserves at Witkop were 34.7 million tonnes at
a grade of 14.6% and that measured, indicated and inferred resources were 52.8
million tonnes at a grade of 13.8%.Our consulting geologist has completed
certain work on the impact of mining since 2005 and the sterilization of
reserves below dumps, and therefore the reserve/resource estimates need to be
updated.
After protracted delays, it seems that the final stages of conversion of old
order mining rights at Witkop to new order rights and the establishment of new
order mining rights at Buffelshoek, could have been reached. We hope to
finalise these rights as soon as practicable. The new order mining rights to
process tailings at Buffalo must still be separated from the rights attributable
to the vendors of Buffalo and an application to secure a prospecting right over
the ore deposit at Buffalo is in progress.
Production
Production of all grades of fluorspar at Witkop increased from 92 677 wet metric
tonnes in F2006 to 117 841 wet metric tonnes in F2007 (27%). Production at
Buffalo between August 2006 and June 2007 was 16 340 wet metric tonnes excluding
some 4 500 wet metric tonnes purchased from the previous owners of Buffalo.
These production volumes were significantly below budget.
At Witkop the initial challenge to increasing output is to create mining
flexibility in the pits by increasing waste stripping and re- establishing
mineable reserves. This will ensure that economic cut off grades can be
implemented and that the optimum blend of ore required by the plant to achieve
good recoveries can be delivered. In addition, ore losses and dilution must be
minimised by effective supervision of good drilling and loading standards.
Accurate drilling and blasting is required to optimise fragmentation, in order
that the crusher performs to expectations. The mining team is planning to fully
implement these improvements to the effectiveness of mining by July 2008.
During October a private metallurgical consultant audited the Witkop plant and
during November the representative of a mid tier consulting engineering company
repeated that audit. Both concluded that there is no short-term, low capital
cost opportunity to meaningfully increase capacity at the Witkop plant.
Increases in fluorspar volumes must originate in the pits and at the crushing
section, primarily from improved planning and control.
During October and November, the consultants referred to above similarly visited
Buffalo and the consulting company was subsequently retained to re-engineer the
processing of dumps 5 and 6. Initial conclusions from this exercise are
expected during Q3 F2008.
The majority of the additional funding requirement, referred to above, is
scheduled to strengthen the mining fleet and plant infrastructure at Witkop and
to establish the capacity to treat dumps 5 and 6 at Buffalo.
FINANCE
The rights offer referred to above proposes to raise the R75 million via the 24-
for-100 rights issue of convertible debentures (CDs) convertible at 50 cents on
or before 31 December 2012 on the basis of one CD for one new share. All
shareholders will be entitled to follow their rights during this issue.
HUMAN RESOURCES
Casper Badenhorst, Witkop`s recently appointed General Manager, has moved
swiftly to appoint a qualified geologist, experienced in fluorspar, to manage
mineral resources and in addition he has strengthened the mining team.
Gerrit Bleeker, who was appointed as General Manager of Buffalo on 23 October
2007, has similarly moved rapidly to recover production from its low point of
October 2007 towards break even until the re-engineering is complete.
The general managers are actively supported by the Group Finance, Engineering,
Plant Operations, Quality Control and Human Resource managers.
It is apparent from the strike related to working on public holidays during
F2007 and the wage strike during F2008 and subsequent interactions at Witkop,
that management does not yet enjoy the industrial peace which is so vitally
important to the future of the company. The F2008 wage strike resulted in
production losses of about 8 600 DMT worth about R10 million. A programme of
consultation and communication with union representatives and the workforce,
facilitated by a capable, experienced professional, began in January 2008.
OTHER CHALLENGES
Honeywell
On Monday, 14 January 2008, the Arbitral Tribunal in Zurich dealing with the
Honeywell arbitration gave its preliminary, non-binding assessment on the
evidence it heard at the witness hearings during the last week of September
2007. Its most important conclusions were:
(I) that the termination of the Witkop contract with Honeywell, by Sallies, was
legal according to Swiss law;
(II that the foundation upon which Honeywell based its USD6.9 million claim
against Sallies is unsustainable in Swiss law.
Honeywell must now motivate the legal grounds for a change in the basis of their
claim by 4 February 2008 and Sallies must respond to their argument by 25
February 2008.
If a change in the basis of the claim is accepted by the Tribunal, Honeywell can
present evidence supporting a revised claim by 7 April 2008. Sallies will then
have the opportunity to respond to this in due course.
Rare earths
Monazite is the most important rare earth occurrence at Buffalo. The consulting
engineering team responsible for the Buffalo re- engineering have been tasked to
propose a plant design which will extract rare earths concurrently with
fluorspar. Discussions with the principals of a rare earth processing company
are scheduled to take place during February 2008.
Exploration
Notwithstanding the management focus on current operations, Sallies is pursuing
an exploration agreement for a significant, high grade fluorspar deposit.
OUTLOOK
Certain existing major shareholders and a prospective new major shareholder have
once again resolutely stepped into the breach to financially support the
company. The new management group is committed to delivery of operating
improvements and is addressing the identified priorities. Prices achieved in
the export contracts agreed to date for C2008 delivery indicate that the market
is moving rapidly towards the sharply higher levels required by your company.
The environment for mining companies in South Africa is becoming increasingly
challenging on several fronts. Disruptions to electricity supply are disastrous
or extraction plants. According to current projections by Eskom, the national
electricity supplier, regular interruptions in power supply will be experienced
over the next five years, whilst current capacity is being upgraded, expanded or
maintained. This could have a negative impact on the company`s ability to
achieve its production targets. In addition, it is vitally important that a
partnership is established with all stakeholders to ensure that issues such as
safety management and the security of tenure of mining rights does not place
unwarranted burdens on management or abnormal risks on shareholders.
Sallies has, as yet, no clear competitive edge, and it is incumbent upon
management to develop such an edge and establish a track record for mining low
grade, variable fluorspar deposits.
In conclusion, I wish to thank our shareholders and bankers, my fellow
directors, management and staff and all other stakeholders for their support
during F2007.
TG Dale
Chairman and Chief Executive
5 February 2008
Johannesburg
Sponsor: Bridge Capital Advisors (Pty) Limited
Date: 05/02/2008 08:00:01 Produced by the JSE SENS Department.
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