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 year ended 30-06-2019 amounted to HKD 608.4 million, an increase of 85.4% compared with previous corresponding period. Basic earnings per share was HKD 0.6804. A final dividend of HKD 0.1 per share was declared. Turnover amounted to HKD 109.2 million, a decrease of 30.0% over the same period last year, gross profit margin up 26.1% to 52.6%. (Announcement Date: 25 Sep 2019)
Business Review - For the year ended June 30, 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$608,432,000 for the twelve months ended 30 June 2019 (‘FY 2019’), compared with a net profit attributable to shareholders of the Company of HK$328,115,000 for the twelve months ended 30 June 2018 (‘FY 2018’). We generated HK$273,750,000 from our share of results of associates, and HK$656,390,000 from a reversal of impairment loss on the carrying value of the Group’s investment in Mount Gibson Iron Limited (‘Mount Gibson’) which was partially offset by HK$319,356,000 loss from changes in fair value of financial assets at FVTPL, majority of which came from our investment in Metals X Limited (‘Metals X’) and in our business segments we generated a loss of HK$43,083,000.
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’). The net attributable profit from our Primary Strategic Investment for FY 2019 was HK$271,659,000 (FY 2018: Net profit of HK$178,306,000). Mount Gibson reported a FY 2019 net profit after tax of A$133 million.
Mount Gibson is an Australian producer of high quality direct shipping grade iron ore products. Mount Gibson owns the Extension Hill/Iron Hill operations in the Mount Gibson Range south east of Geraldton in Western Australia, and the high grade Koolan Island mine off the Kimberley coast in the remote north-west of the State. Mining of Direct Shipping Ore from its Mid West mines ended in FY 2019 although sale of low grade material from Extension Hill is expected to continue into the twelve months 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 project has 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$55/dmt and A$ of 0.75.
Mount Gibson reported a net profit after tax of A$133 million for FY 2019 from sales of 3.2 million tonnes.
Mount Gibson costs increased in the second half of 2019 due to the ramp up at Koolan Island and it reported all in cash cost of A$53 per tonne for FY 2019. Although costs will remain high in FY 2020 due to an initial high strip ratio, it is forecast to progressively decline over the mine life. Impressively, the Koolan Island mine was able to generate positive cash flow in its first month of commercial production despite it still being in ramp up mode.
Mount Gibson still boasts an impressive cash reserve, including term deposits and tradable investments, ending FY 2019 with A$385 million or an equivalent of A$0.34 per share, despite development spending on Koolan Island and paying a dividend in October 2018.
Mount Gibson sales guidance for the financial year ending 30 June 2020 is 3.7 million tonnes to 4.0 million tonnes at an all in group cash cost of A$70-75/wmt FOB.
The Platts IODEX 62% CFR China index was very strong during FY 2019, as it increased from US$60/ dry metric tonne (‘dmt’) to US$110/dmt by the end of FY 2019 as Vale was ordered to halt up to 70Mtpa of production after a tailings dam collapse in June 2019. Since the end of the year, iron ore prices have fallen sharply as Vale has been given the green light to restart production and the high prices incentivized additional production from other producers. The iron ore price in late August has fallen to around US$80/dmt and given weakness in the global economies, it is difficult to see strong steel demand. 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 43.55% 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 and Westgold Resources Limited (‘Westgold Resources’) and Resource Investment. As at 30 June 2019, none of these investments represents 5% or more of the Group’s total assets.
Following the first application of the HKFRS 9: Financial Instruments in the current year, the Group’s equity investments in Metals X and Westgold Resources were reclassified from available-for-sale investments at fair value through other comprehensive income to financial assets at fair value through profit or loss. The carrying values of Metals X and Westgold Resources as at 30 June 2019 amounted to HK$87,748,000 (As at 30 June 2018: HK$259,497,000) and HK$194,597,000 (As at 30 June 2018: HK$300,042,000) respectively and represented approximately 2.2% (As at 30 June 2018: 8.3%) and 4.8% (As at 30 June 2018: 9.6%) of the total assets of the Group. In FY 2019, our investment in Metals X generated an unrealised loss of approximately HK$195,693,000 (FY 2018: Gain of HK$34,739,000) and our investment in Westgold Resources reported a loss of approximately HK$19,495,000 (FY 2018: Loss of HK$8,581,000) which were accounted for in profit or loss.
Westgold Resources produced 255,221 ounces of gold in FY 2019 up 1% year-on-year (‘YoY’) despite the sale of the South Kalgoorlie project and driven by a strong ramp up at the Cue Gold Project (CGO). Westgold Resources forecasts that production will reach 275,000 to 300,000 ounces in FY 2020 as its growth projects continue to ramp up.
The gold price has fluctuated around expectations for Fed tightening or loosening, but has recently strengthened after the Fed cut its benchmark rate by 25 basis points in July. The weakness in global economies and concerns about recession has led to expectations for further loosening in global economies. The gold price is now trading around US$1,500 per ounce and we expect the gold price to remain linked to sentiment around the pace of interest rate cuts and the economic outlook.
The Group’s strategy is to capture returns on its investment portfolio at opportune times subject to prevailing share prices and market sentiment. The ‘Trade War’ between China and US, international political turmoil and rising risk aversion have led the Group to reconsider the investment value of gold. 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 will change from non-current assets to current assets subsequent to the year end date.
At Metals X, the Renison mine produced 3,562 tonnes of tin (net 50% basis) up 6% YoY, while the average realised tin price of A$27,920 per tonne was up 5% YoY. Metals X has commissioned the ore sorter, which removes waste feed before it enters the processing circuit.
In May 2019, Metals X has announced a ‘reset plan’ for the Nifty mine which targets production of 35ktpa by March 2021. In the June 2019 quarter production was running at a disappointingly low annualized rate of 12,288 tonnes per annum.
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. At the time of the notice, APAC called the board of Metals X to remove Mr. Peter Newton, Chairman of Metals X, and Mr. Milan Jerkovic, Non-Executive Director of Metals X, from their position as directors of Metals X and to appoint Mr. Brett Smith as a director of Metals X. Metals X intends to hold its annual general meeting in October 2019.
Tin prices traded around US$19,000 per tonne to US$20,000 per tonne range for the 1H of 2019 and then ran briefly traded up to nearly US$22,000 in 2H of 2019 before falling back to US$19,000 per tonne at year end. Since then, tin prices have fallen notably to below US$16,000 per tonne, driven by weakness in the semiconductor sector. We remain bullish on the medium term outlook for tin due to the lack of significant supply growth. During FY 2019 copper prices traded in a range of US$5,800 per tonne to US$6,600 per tonne, moving along with sentiment related to the trade war.
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 loss of HK$89,953,000 in FY 2019 (FY 2018: Gain of HK$69,224,000), which after accounting for segment related dividend and other investment income and expenses, resulted in a segment loss of HK$86,646,000 (FY 2018: Profit of HK$65,575,000).
Our Resource Investment division includes the results of the two new resource portfolios which were announced in August 2016. In general, the metals sector has been subdued in FY 2019, dragged down by the concerns relating to the trade war, although the gold sector retains its safe haven status and along with iron ore, were bright spots in the commodity complex. During FY 2019 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 and the TSX Venture Composite Index among others). Oil prices have been volatile during FY 2019 and WTI fell 21% during the year as it has similarly been impacted by concerns of weakening demand given the slowdown in the global economy. US and Canadian gas prices have also remained weak. The average performance of several small cap oil and gas indices has averaged -32% in FY 2019 (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$7,487,000 in FY 2019 while the gold price was up 13%. As at 30 June 2019, the carrying value of the Precious segment was HK$80,468,000 (As at 30 June 2018: HK$73,130,000). Our largest gold investment in the Resource Investment division is in Prodigy Gold (ASX: PRX) which generated a fair value loss of HK$2,000,000 with carrying value as at 30 June 2019 of HK$27,817,000. This was comfortably offset by gains in a number of smaller positions including Roxgold (TSX: ROXG) which generated a fair value gain of HK$3,069,000 and Eldorado Gold (TSX: EGO) which generated a fair value gain of HK$3,706,000.
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 two reputable ASX listed gold companies, St Barbara and Independence Group. At 30 June 2019 Prodigy Gold has A$6.4 million cash and no debt, and in August 2019 it raised an additional A$12 million cash, with funds to be used for its ongoing exploration program.
Bulk commodities (predominantly iron ore) generated a fair value gain of HK$8,432,000 as iron ore prices steadily trended upwards during FY 2019. As at 30 June 2019, the carrying value was HK$72,784,000 (As at 30 June 2018: HK$11,010,000). Within this segment, our significant investments include Shougang Fushan (HKEX: 639) which generated a fair value gain of HK$383,000 with carrying value as at 30 June 2019 of HK$72,784,000 and IRC (HKEX: 1029), which generated a fair value gain of HK$4,175,000 in FY 2019.
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 September 2019 is around HK$9.0 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.
Base Metals segment (a mix of copper, nickel, aluminium and cobalt companies) delivered a fair value loss of HK$97,489,000 in FY 2019 as the copper, aluminium and cobalt prices fell by 9%, 18% and 65% respectively. The Base Metals segment includes our investment in Cobalt 27 (TSX: KBLT) which generated a fair value loss of HK$24,884,000 in FY 2019 and had a carrying value of HK$27,125,000 as at 30 June 2019 (As at 30 June 2018: HK$45,484,000), and China Molybdenum (HKEX: 3993) which generated a fair value loss of HK$7,861,000 in FY 2019 and had a carrying value as at 30 June 2019 of HK$22,221,000 (As at 30 June 2018: Nil).
The Energy segment (mainly oil and uranium exposure) had a fair value loss of HK$7,743,000 in FY 2019 driven by an oil price drop of 21%. Our significant Energy investments include Carnarvon Petroleum (ASX: CVN), which generated a fair value gain of HK$8,873,000 and had a carrying value as at 30 June 2019 of HK$6,571,000 (As at 30 June 2018: HK$3,646,000) and Global Atomic Corp (TSX: GLO), which generated a fair value gain of HK$4,247,000 and had a carrying value as at 30 June 2019 of HK$12,220,000 (As at 30 June 2018: Nil).
We also have a fair value loss of HK$640,000 from the remaining commodity (diamonds, manganese and mineral sands among others) and non-commodity investments in FY 2019 and had a carrying value as at 30 June 2019 of HK$28,556,000 (As at 30 June 2018: HK$67,786,000). This segment includes our investment in Alibaba Pictures (HKEX: 1060), which generated a fair value gain of HK$8,200,000 and had a carrying value as at 30 June 2019 of HK$16,800,000.
Our iron ore offtake at Koolan Island recommenced as the mine restarted operations, although commercial production was only reached in late FY 2019. We continue to look for new offtake opportunities across a range of commodities. For FY 2019, our Commodity Business generated a loss of HK$3,808,000 (FY 2018: Profit of HK$8,778,000).
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 2019, this segment generated a profit of HK$47,371,000 (FY 2018: Profit of HK$31,198,000).
The Group engaged in money lending activities under the Money Lenders Ordinance of Hong Kong. For FY 2019, the revenue and profits generated from money lending formed part of results of the Principal Investment and Financial Services segment.
Business Outlook - For the year ended June 30, 2019
The outlook for the global economy is tenuous, and the trade war between the US and China provides ongoing pressure on the two largest economies in the world. 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 and has already generated a robust cash flow given the current relative strength in iron ore prices.
Source: APAC Resources (01104) Annual Results Announcement