Principally engaged in primary strategic investment, resource investment, commodity business and principal investment and financial services.
The Group's profit attributable to shareholders for the 6 months ended 31-12-2019 amounted to HKD 46.94 million. Basic earnings per share was HKD 0.0385. No dividend declared. Turnover amounted to HKD 313.2 million, an increase of 3.22X over the same period last year, gross profit margin down 29.6% to 10.5%. (Announcement Date: 27 Feb 2020)
Business Review - For the six months ended December 31, 2019
APAC Resources Limited (@APAC@ or the @Company@) and its subsidiaries (collectively, the @Group@) reported a net profit attributable to shareholders of the Company of HK$46,939,000 for the six months ended 31 December 2019 (@1H FY2020@), compared with a net loss attributable to shareholders of the Company of HK$185,587,000 for the six months ended 31 December 2018 (@1H FY2019@). This profit was mainly attributable to the substantial reduction in the unrealized fair value loss recognized for the Group’s financial assets at fair value through profit or loss in relation to listed equity securities not held within the trading portfolios and a profit of HK$59,908,000 generated from our Resource Investment division, which was partly offset by the non-recurrence of reversal of impairment loss on the carrying value of the Group’s investment in Mount Gibson Iron Limited (@Mount Gibson@).
Primary Strategic Investments
Our Primary Strategic Investments are in Mount Gibson which is listed and operating in Australia and in the year ended 30 June 2018 we also acquired an investment in Tanami Gold NL (@Tanami Gold@).
The net attributable profit from our Primary Strategic Investments for 1H FY2020 was HK$80,951,000 (1H FY2019: Net profit of HK$113,525,000). Mount Gibson reported a 1H FY2020 net profit after tax of A$45 million.
Mount Gibson is an Australian producer of direct shipping grade iron ore products. Mount Gibson owns the Koolan Island mine off the Kimberley coast in the remote north-west of Western Australia which produces one of the highest grade iron ore products in Australia, and the Extension Hill/Iron Hill operations in the Mount Gibson Range south east of Geraldton. Mining of Direct Shipping Ore from its Mid West mines ended in the year ended 30 June 2019 although sale of low grade material from Extension Hill is expected to continue into the year ending 30 June 2020 (@FY 2020@).
Importantly, ore sales at the Koolan Island Restart Project started in April 2019, achieved commercial production in the June quarter 2019. The restart project had 21 million tonnes of 65.5% Fe reserves and the net present value of the project is A$252 million assuming Platts 62% Fe of US$55/dry metric tonne (@dmt@) and A$ of 0.75.
Mount Gibson reported a net profit after tax of A$45 million for 1H FY2020 from sales of 2.8 million tonnes.
Mount Gibson’s operating costs remained high in 1H FY2020, particularly as Koolan Island operations were impacted by a conveyor belt tear and replacement which deferred two shipments into 2020. It reported an all in cash cost of A$72 per tonne for 1H FY2020. We expect costs to remain high in FY 2020 due to an initial high strip ratio, which is forecast to progressively decline over the mine life.
Mount Gibson still boasts a robust cash reserve, including term deposits and tradable investments, ending 1H FY2020 with A$398 million or an equivalent of A$0.34 per share, despite paying a dividend in September 2019.
Mount Gibson sales guidance for FY2020 has been increased to 4.8 million tonnes to 5.3 million tonnes due to higher sales expected from the Mid West, at an all-in group cash cost of A$70-75/wet metric tonne (wmt) FOB.
After a very strong iron ore price in the first half of calendar 2019, the Platts IODEX 62% CFR China index reversed during 1H FY2020 as Vale restarted production, falling from highs above US$121/dmt, and has traded in a range of US$80/dmt to US$95/dmt since then. The iron ore price in early February 2020 is around US$80/dmt and has held up surprisingly well despite the expected economic slowdown related to the coronavirus, which we expect will flow through to steel mill production and margins. We continue to expect average iron ore prices to remain capped in the medium term given weak non-China steel demand and a continuing recovery in Brazil.
We currently own 46.3% of Tanami Gold.
Tanami Gold’s principal business activity is gold exploration. It holds 60% of the Central Tanami Project and has a cash balance of A$28 million, after it exercised its first put option in July 2018 to sell 15% of the project to Northern Star Resources Limited (@Northern Star@) for A$20 million cash. The remaining 40% is owned by Northern Star. 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 an additional 35% of the Central Tanami Project and Tanami Gold has a second put option to sell its remaining 25% of the project to Northern Star for A$32 million. Northern Star continues exploration in the Central Tanami Project at various prospects.
Financial Assets at Fair Value Through Profit or Loss
Financial assets at fair value through profit or loss mainly comprise the Group’s investments in Metals X Limited (@Metals X@) and Resource Investment. As at 31 December 2019, none of these investments represents 5% or more of the Group’s total assets.
The carrying values of Metals X as at 31 December 2019 amounted to HK$57,591,000 (As at 30 June 2019: HK$87,748,000) represented approximately 1.4% (As at 30 June 2019: 2.2%) of the total assets of the Group. In 1H FY2020, our investment in Metals X generated an unrealised loss of approximately HK$96,539,000 (1H FY2019: Loss of HK$134,437,000) which was accounted for in profit or loss.
At Metals X, the Renison mine produced 1,854 tonnes of tin (net 50% basis) up 9% year-on-year (@YoY@), however the average realised tin price of A$22,344 per tonne was down 7% YoY. Tin production at Metals X is currently impacted by lower grade ore but is expected to start mining from the high grade Area 5 in second half of calendar 2020.
Tin prices traded have weakened steadily during 1H FY2020 and recently traded in the US$16,000 per tonne to US$17,000 per tonne range. The tin price has been driven by weakness in the semiconductor sector as a result of the US-China trade war and is likely to remain under pressure while China battles to control the coronavirus outbreak. However we remain bullish on the medium term outlook for tin due to the lack of significant supply growth and new demand for tin from the growing electrical vehicle and energy storage industries.
In May 2019, Metals X announced a @Reset Plan@ for the Nifty copper mine which targeted production of 35ktpa by March 2021. In September 2019, APAC gave notices to Metals X requesting the directors of Metals X to call a general meeting of Metals X given the destruction of shareholder value since the acquisition of the Nifty Copper Mine. And in November 2019, Metals X announced that after an operational review, operations at Nifty were suspended. Mr. Brett Smith was appointed to the board of Metals X as a director.
Now that the Nifty mine is transitioning to care and maintenance, Metals X has announced a strategic review of its copper assets and has appointed financial advisors to explore options for Nifty including joint ventures and partial or complete divestment.
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$56,134,000 in 1H FY2020 (1H FY2019: Loss of HK$137,445,000), which after accounting for segment related dividend and other investment income and expenses, resulted in a segment profit of HK$59,908,000 (1H FY2019: Loss of HK$141,080,000).
Our Resource Investment division includes the results of the two resource portfolios which were announced in August 2016. In general, the majority of the metals sector has been subdued in 1H FY2020, dragged down by concerns relating to the trade war, although the gold sector retains its safe haven status and was a commodity where we made strong profits. During 1H FY2020 the average performance from a number of small cap resources indices averaged 12% (includes the Dow Jones US Mining Index, FTSE AIM Basic Resources Index, ASX Small Resources Index, the TSX Venture Composite Index and the NYSE Arca Exchange Gold BUGS Index among others). Brent oil prices traded in a range of US$55/bbl to US$65/bbl during 1H FY2020 and during the period was briefly impacted by several geopolitical events in the Middle East. US and Canadian gas prices have been particularly weak with US Henry Hub gas prices falling 16% during the period. Despite a steadier oil price, the average performance of several small cap oil and gas indices averaged -17% in 1H FY2020 (includes the S&P TSX Small Cap Energy Index and S&P 500 Energy Sector among others).
Precious metals (majority gold exposure) generated a net fair value gain of HK$55,490,000 in 1H FY2020 while the gold price was up 10%. As at 31 December 2019, the carrying value of the Precious segment was HK$285,069,000 (As at 30 June 2019: HK$80,468,000). Our largest gold investment in the Resource Investment division is in Westgold Resources (ASX: WGX) which generated a fair value gain of HK$44,830,000 with carrying value as at 31 December 2019 of HK$180,135,000. We also own Prodigy Gold (ASX: PRX) which generated a fair value loss of HK$8,035,000 with carrying value as at 31 December 2019 of HK$22,424,000. This was comfortably offset by gains in a number of smaller positions including Dacian Gold (ASX: DCN) which generated a fair value gain of HK$7,442,000 and Calibre Mining Corp (TSX: CXB) which generated a fair value gain of HK$3,279,000.
The Group’s strategy is to capture returns on its investment portfolio at opportune times subject to prevailing share prices and market sentiment. The Board has decided that the current environment represents an appropriate time to include the Group’s interest in Westgold Resources in the resource investment portfolio. As a result of this decision, the classification of Westgold Resources in the consolidated statement of financial position has changed from non-current assets to current assets in 1H FY2020.
Westgold Resources produced 120,127 ounces of gold in 1H FY2020 down 1% YoY despite the sale of the Higginsville project, which was offset by a ramp up at the Fortnum Gold Project. Westgold Resources forecasts that production will reach 275,000 to 300,000 ounces in FY 2020, and they achieved 43% of the bottom end of the guidance range in 1H FY2020.
The gold price strengthened after the Fed cut its benchmark rate by 25 basis points in July 2019. Since then, gold has traded around US$1,500 per ounce, fluctuating with sentiment around the economic outlook, the outcome from phase 1 negotiations in the US-China trade war, and Middle East geopolitical issues. More recently gold price has strengthened and in early February 2020 was trading around US$1,550 per ounce due to the outbreak of the coronavirus. We see potential for governments to use supportive measures such as interest rate cuts in the aftermath of the coronavirus which would also support the gold price.
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 Gladiator Resources. Its major shareholders include Independence Group, a reputable ASX listed gold company. At 31 December 2019 Prodigy Gold has A$12.6 million cash and no debt after raising equity in August 2019, and funds to be used for its ongoing exploration program.
Bulk commodities (all our exposure is in coking coal) generated a fair value loss of HK$266,000 as hard coking coal prices fell 20% due to weakness in steel making margins. As at 31 December 2019, the carrying value was HK$116,042,000 (As at 30 June 2019: HK$72,784,000). Our only investment in this segment during 1H FY2020 is in Shougang Fushan (HKEX: 639).
Shougang Fushan is a coking coal producer listed on the Hong Kong Stock Exchange. It has 3 mines located in China with reserves of 84Mt of raw coking coal at 31 December 2018 and during six months ended 30 June 2019 Shougang Fushan produced 2.2Mt raw coking coal. The market cap of Shougang Fushan in early February 2020 is around HK$8.4 billion, while its working capital reported at 30 June 2019 is HK$4.6 billion and it generated EBITDA of HK$1.2 billion in six months ended 30 June 2019. At the time of writing, Shougang Fushan has not reported its final results for the year ended 31 December 2019, but we are cautious on the outlook for steel related commodities given risk of a slowdown in China.
Base Metals segment (a mix of copper, nickel and zinc companies) delivered a fair value gain of HK$5,587,000 in 1H FY2020 as the copper and nickel prices increased by 4% and 14% respectively while the zinc price fell 7%. The Base Metals segment includes our investment in China Molybdenum (HKEX: 3993) which generated a fair value gain of HK$7,827,000 in 1H FY2020 and had a carrying value as at 31 December 2019 of HK$30,048,000 (As at 30 June 2019: HK$22,221,000).
The Energy segment (mainly oil and uranium exposure) had a fair value loss of HK$653,000 in 1H FY2020. Although oil price was up 3% during the period, energy indices fell significantly as discussed above. Our significant Energy investments include Yellow Cake (LSE: YCA), which generated a fair value gain of HK$1,008,000 and had a carrying value as at 31 December 2019 of HK$10,901,000 (As at 30 June 2019: HK$8,117,000) and Karoon Energy (ASX: KAR), which generated a fair value gain of HK$841,000 and had a carrying value as at 31 December 2019 of HK$8,192,000 (As at 30 June 2019: Nil).
We also have a fair value loss of HK$4,024,000 from the remaining commodity (diamonds, manganese and mineral sands among others) and non-commodity investments in 1H FY2020 and had a carrying value as at 31 December 2019 of HK$22,707,000 (As at 30 June 2019: HK$28,556,000). This segment includes our investment in Alibaba Pictures (HKEX: 1060), which generated a fair value loss of HK$3,100,000 and had a carrying value as at 31 December 2019 of HK$13,700,000.
Our iron ore offtake at Koolan Island recommenced as the mine restarted operations, and we continue to look for new offtake opportunities across a range of commodities. For 1H FY2020, our Commodity Business generated a loss of HK$10,862,000 (1H FY2019: Profit of HK$1,128,000).
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 1H FY2020, this segment generated a profit of HK$37,580,000 (1H FY2019: Profit of HK$13,715,000).
The Group engaged in money lending activities under the Money Lenders Ordinance of Hong Kong. For 1H FY2020, the revenue and profits generated from money lending formed part of results of the Principal Investment and Financial Services segment.
Business Outlook - For the six months ended December 31, 2019
The outlook for the global economy is likely to be weak in the first part of calendar year 2020 as China will be impacted by reduced industrial production and consumption as a fallout from the coronavirus. As discussed, at the time of writing, China has already rolled out measures to support businesses and we expect there is more to come from other central bank and governments. Against this difficult backdrop, 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. Our mining and energy investment portfolios are the platform for future mining and energy investments. Our largest investment is in Mount Gibson which is underpinned by a large cash reserve, and its Koolan Island mine reached commercial production in June 2019 and has started to generate cash flow.
Source: APAC Resources (01104) Interim Results Announcement