Ferro-Alloy Resources (LSE:FAR) — Interim Results

0:01 Good morning, and welcome to the FERRO-ALLOY RESOURCES LIMITED interim results investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and could be submitted at any time by the q and a tab situated right in the corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question received in an easy itself. Have the company review all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Nick Bridgen, CEO. Good morning to you, sir.

0:31 Good morning. Good morning, everybody. Yes. This presentation, let me run through it fairly quickly because a lot of you have seen it before, and and there's a more full version on our website. But anyway, let me go through. First of all, if we turn to the overview, very quick summary. We're listed on the London Stock Exchange and the Astana International Exchange, AIX. All our operations are in Kazakhstan. Our head office is in Guernsey. We have an existing operation which extracts vanadium, molybdenum, and nickel from purchased concentrates. But the main reason we exist, the main driver of our value is the Balasovskandik project, which we are completing a feasibility study on.

1:23 Target production is 22,400 tonnes a year in addition to our existing operation, which would make it make us produce about 10% of world supply. So we're a very significant addition to the vanadium story. Vanadium, I'm gonna say a little bit more in a minute, is is a green metal. It's a critical metal on on almost all countries' lists, certainly US, Europe, and The UK. It's essential for the move to net zero, but it's essential anyway for for the continuation of the world economy. Now the Balfour Skandik deposit first because that's the most important. 96% of our future NPV is this project.

2:13 And turning again to the advantages sorry. I should be turning the pages off. Someone's doing it. Now now, really, this deposit is it takes every box that that the mining people like. But the most important one is the second one down of this. This deposit is not a typical vanadium deposit. The problem with vanadium, vanadium is very common in the earth's crust. The the difficulty of extracting it is all about cost. The usual source of magnetite accounting for more than 90% of the world's vanadium supply is is magnetite. Sorry. Source of vanadium is magnetite.

2:59 To liberate it, the normal process is to high temperature roast it. Now that's very energy energy intensive. But our deposit is sedimentary. This is the single most important difference between us and everyone else, and that's what makes us far cheaper, economically far far more attractive. We don't have to concentrate the ore, and we don't have to roast it. So big two big savings in capital and operating costs. But I very quickly, the other advantage is it's outcrops to surface, open pit for easy mining. It's very large. We're only ore body number one is already 34,000,000 tons of reserve, but we've got seven altogether, I think, at the last count.

3:49 So very, very large. Visible geological cutoff, low stripping ratio. Very good transport links already there. We have a surfaced road already to site. Shealy, our nearest town is on the motorway that connects Western Europe to China. We already have a a high voltage, high capacity power line connected. And and last but not least, from an environmental and social point of view, this is a very clean, easy project. First of all, we aim both in our existing operation and the main operation to use all the constituents of the ore.

4:39 There should be no long term storage of waste products. There's no arable land being disturbed. The the the area is rocky, outcropping terrain, use useless for agriculture. And we're 16 kilometers from the nearest habitation, so no people are being disturbed. As I already indicated, our process uses much less energy than others because we're not concentrating and because we're not roasting. So we expect our vanadium to be very low on on emissions compared with everybody else's. Moving on again. Yeah. No. Just a word of warning. These figures are now out of date because they're all going to be updated by the feasibility study, and they're all five years old. But I'm putting them here because I want want everyone to know why we think this is such a good project.

5:34 Our cash cost of production is much lower than everybody else's. Expected at that time was $1.54 per pound. Now I think the the others that I've seen published are up between 5 and 6 per pound. And and because we've got very interesting byproducts, actually, if you offset the byproducts against costs, we have a negative production cost. In other words, this this project would make money even if the vanadium price went down to zero. And that translates into very exceptional financial statistics. NPV, five years ago, remember, was forecast to be 2 billion 79% operating margin, an absolutely incredible 89% IRR, and huge cash flows, $430,000,000 from phase one and two combined.

6:30 Now saying a little bit about the vanadium market. Again, let's move on one. This shows the steady growth. Obviously, there's been a hiccup in 2022 for for reasons everyone knows. China slowed down mainly.

6:45 But but you can see the long term very steady and very significant growth rate. That yellow bit at the top, which is quite hard to see on my screen, is the growing energy use. But that's expected to grow to become a very significant component of demand. I'm putting putting this on the next slide another way. Now this excludes energy storage because energy storage is very hard to predict. So this is this is more reliable drivers. The traditional demand for vanadium is as is as an alloy of steel. And and you add a tiny bit of vanadium, roughly one kilogram per ton, it greatly improves the strength. And so what's happening in the world is that, first of all, vanadium is in lockstep with steel demand, and steel demand tends to follow GDP, world GDP.

7:40 So there's a growth rate built into it already. And then the orange part is is the expansion because a greater use of vanadium per ton of steel. We call it the increasing intensity. And you can see back in history that's been it's up and down, but but the the growth rate is quite strong, and that's expected to continue. That will be continued all the more so because steel making steel is a very single large source of c o two emissions. Roughly 10% of the world's c o two emissions come from making steel. And anything which reduces the quantity of steel that you need because of the greatest strength is gonna be good for the world. It's a single way of of making a significant reduction in the world's c o two output.

8:31 So even without any energy storage, well, net zero requires more use of vanadium. And that's why we're we're vanadium is a critical metal on everybody's lists. Next slide.

8:46 This is just drilling down into the non steel applications. And the interesting one here is the yellow, which is for most of the period, the bottom line. You can see how it it went up in 2017. That was when the vanadium price was low. And then came to a rather abrupt halt when the vanadium price went up from a low of just over $3 to to almost $30 per pound, and that rather reduced the demand for batteries. But but with vanadium from 2020 onwards reaching a a fairly average steady state, that that demand has has started to grow strongly and is expected to grow a lot more. So so, again, another critical application.

9:35 The last last slide that that I wanted to to talk about today is the financial results, but I think Will will answer that much better than me. Thanks, Nick. Yes. This this slide here just summarizes the headline figures for our interim results that we put out a few weeks ago and also reflects some of the commentary in the trading update that we issued last month as well. The the results for h one twenty three were were down compared to '22 mainly due to the lack of concentrate available for processing, and then that automatically really feeds through into into our turnover. We have a a level of fixed cost that we incurred by having having the the plant in place. So any reduction turnover fees straight through to our gross profit and gross loss line.

10:32 I think one point to note is that during the period, we've where we had had sales contracts, they've been on a spot basis rather than price on delivery basis, and so we've had less adjustments for fair value when when the product's being delivered and the revaluation hasn't has or hasn't been needed. Then respect to other costs, they've been in line with expectations, and that's so we sort of summarize where where we've got to. Not much else to say, and hopefully, that that that covers the the position. Now I think we'll move on to the to the q and a. Perfect. Nick, William, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen.

11:22 Just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we received a number of questions both pre submitted and throughout today's live event. And William, if I could just hand out to you just to read out those questions where appropriate to do so, I'll pick up from you at the end. Great.

11:42 Thanks, Alessandro. As with previous presentations, we've tried to group the questions into categories, those gen generally being rates to finance, This is the operation and the ongoing feasibility study. We'll start off with the finance section, and I should be able to deal with most of those. So the first question, can the company confirm whether the $4,200,000 Vision Blue loan notes are going to convert into shares and whether there's an intention by Vision Blue to inject capital this year? Yes. The intention is that the loan note will be converted into shares at some point in the future

12:24 under the terms of the loan notes agreement between us and Vision Blue. But it is important to point out that following the recent bond issues that we that we've announced, we're not planning raising any further, money at the moment, and that, you know, Vision Blue is doesn't doesn't con control that aspect for us. We don't have any sight of Vision Blue's funding plans other with respect to us anyhow, with respect to investment agreement other than the three options that that we're that we're currently aware of. The second question is, are the bonds funded in US dollars or Kazakh tenge? To date, all the tranches for the bonds that have been issued have been in US dollars.

13:13 However, under the terms of the bond program, we can offer an issue bonds in either US dollars or or Kazakh tenge. Third question is, assuming the company raises $3,000,000 for working capital, $5,000,000 for a FEED study, what might the other potential $12,000,000 bond financing be used for?

13:38 Just to start off, we don't have any other plans to issue further tranches above and beyond the two tranches that we've already issued. So there's no plans to raise any further money at the moment from from bond issue. And I think the second important point is we're we're not committed to issuing bonds for the entire facility. We may issue further tranches in due course to fund the elements of the big project as and when required, but the the 20 the $20,000,000 is just the capacity for the facility. It's not a, a guaranteed drawdown by by the company. The next question, with the share price near to all time lows, what do you see as the catalyst for a rerate in the price? I think there's there's two points to this.

14:24 I think we would the feasibility study continues and elements of that are completed, we'll announce those. So, as for example, Metallurgy is is one of those. And I think we'd expect as as the elements of the feasibility study are announced, that that would have a positive effect on our share price.

14:44 And then, obviously, when the feasibility is published as a whole, I think we're we're expecting that that would also be a catalyst for the rerate for for for a a change in the share price as as well.

14:59 The last question with respect to finance is, what is the share price on the ASX? Is it higher or lower than the LSE listing? I think it's just important to point out to the outset that we're obviously, we are dual listed. Main listing is in London on the LSE main market, and the other listing is actually on the AIX in Astana, not the ASX. The company shares are fully fungible between the two exchanges, albeit to date, none of the company shares have been traded on the AIX. And in the event that they were traded concurrently, the share price would be the same between exchanges. Otherwise, you'd end up with sort of potential arbitrage situation.

15:45 As and when the company shares are traded on the AIX, we'd expect the AIX share price to be published on the company's page on the AIX website. The next, area of questions around vanadium market. So, Nick, I think this one's for you. The question is, what do you think is causing the current slump in vanadium prices compared to a rise in iron ore prices? It's a very interesting question. First thing to say is I'm not sure that you can say the vanadium price has slumped. It's sort of fallen off a little bit over the last few months. But it's actually a a pretty solid average price for the vanadium market. And likewise, iron ore prices, they bucket around quite a lot just as much as vanadium does.

16:37 And if you look back five years, it's also a pretty average price. So although the sort of the recent movement of vanadium was down and and iron ore up, I don't think you can read too much into that. But both of them are are fairly average. But the the the the interest in the question comes from the fact that vanadium is both a byproduct of making steel from magnetite as well as going into steel. So the the the correlation that you'd expect of increasing demand for steel leading to increasing demand for vanadium isn't as obvious as it sounds because the more steel that's demanded, the more vanadium is made as well as used. So this is a subject of great debate amongst all of us in the industry. Is is rising all demand for steel good for vanadium or bad?

17:30 It's not entirely clear. Okay. Thanks, Nick. The next three questions are with respect to the existing operation, and Andre is going to help us with those. The first question is, with concentrate supplies, what is the profit margin of the existing operation, and how does this compare with other operations? Hello, everyone. Thanks, Will. I will refer to the gross profit margin before the salaries and the average based on the existing operation, the the the number jumps between 45% in the I would say in the normal circumstances.

18:17 Of course, it was impacted recently by the increase in the logistics costs, but on average, it's between 45%. In relation to the second part of the question, how does this compare with other operations? In the full honesty, we do not know. Reason being that there are no public information of these operations that are running across the globe. Okay. Thanks. The next question, assuming forward purchase of concentrate, how long does it take from purchasing concentrate concentrate to sales of product? And are any supply prices linked to sales prices to hedge vanadium price volatility?

19:05 Well, the it's a good question. The first the the the first note that I would like to make is that it very much depends from where the concentrate is coming from. On average, it takes between one to three months as a lead time for the logistics. And, of course, the processing takes, I would say, very good full lot is run about one month. So anything between two to four months is the lead time that we're working with today. In relation to the hedging, of course, all of our purchase contracts are linked to the metal bulletin prices as well as the sales contracts as as the percentage of the either latest road average for the month road.

19:58 So it's they're all linked. Great. The next question. With continued supply issues of concentrates since the Ukraine invasion, do you foresee a scenario where the plant is generating free cash flow? Yes. The plan today is after investment program from last year is in full operation, all parts have been finalized and ready. We are working with today several different supply contracts of concentrates. So as soon as this area is resolved, the plant is ready and fully in operation, and we'll be generating free cash flow as we as we're expecting.

20:49 The next question, assuming the supply problem has been solved, will the existing plant operate close to capacity from now on? Yeah. That's that's very much linked to the previous question that the plant is operating and existing plant and with supply problems are also solved. So we're we will be operating we're expecting to operate at the full capacity. Thanks, Andre. And final question. Does the company have any binding contracts with buyers to supply fixed amount of metals, and will the company have to make up shortfall of supply? Nope. Today, the all of all of our commercial contracts, sales contracts, they're not binding.

21:39 So we're working very closely with our partners both on the sales and purchase price to ensure that there are no shortfalls. But in case if that's happening, there are no legal legal binding in the in in the commercial contracts as of today. Perfect. Thanks, Andre. And moving on to the next group of questions that relate to the feasibility study and the ballast house candidate deposit. Nick, you're you're gonna fill these for us. The first question is, how is the future mine planning study being progressed in relation to sanctions on Russia? Well, there's very little direct effect of the sanctions on Russia on on us.

22:27 So in terms of the I'll interpret the question as the feasibility study in general. Obviously, on the mining, there's very little. I I would guess when we come to equipment selection, it's unlikely whether we'll be choosing Russian suppliers for any of the major equipment. But but that that was not so likely anyway, so I can say very little impact. Okay. The next question, is early q two the final revision to the publishing of the phase one feasibility study? When will phase two of the study be published? Yes. Yes. The feasibility study for phase one is is scheduled for April now.

23:17 And phase two, we haven't got a direct timeline on it, but the the big job is done, the drilling of ore bodies two, three, and four, which will provide the feed for for for for the expanded plant, which is subject to phase two. So it should be relatively fast. Obviously, an awful lot of the work done for phase one will apply to phase two too. So sometime next next year, for sure. Okay. Next question. What is the what is the reason for the further delay in the feasibility study completion date? Is it to do with carbon product marketing, capital constraints, or delays in testing processes? The last of those. It's it's testing processes.

24:04 The 100% of the delay is just caused by the time it's taking for our test laboratory in Canada to to complete the work. There there's been a lit quite a few steps added. The variability testing indicated a a bit more variability in the ore than we expected, which required a little bit more work to be done. But all on track, it's just taking an awful long time. And then, unfortunately, our consultants seem to take the best part of the month off for Christmas, which which means that any delay past Christmas adds on another month automatically. So I'm afraid that's the way it's coming out. But it's nothing to do with the carbon. The carbon testing is progressing well.

24:52 We've got a bit more testing actually ongoing as we speak, and there's a well, I there's there's interest in the product, so that will go well. We're not going to hold up the study to to to to wait for the carbon. The carbon will be at the point that it's reached when the rest of the study is ready. And, possibly, if we need to get offtake agreements for the carbon, they may follow after the study. But but, no, it's just the length of time it's taking to to to go through the metallurgical test work. Okay. The next question, is there any market interest in ferroalloys carbon among tire manufacturers yet, or will this only appear when the project is close to production?

25:42 Yes. We've we've held exploratory meetings with several tire manufacturers, and there's definite interest. Tire manufacturers are extremely motivated to reduce the c o two emissions and other emissions of the of tires, both in the manufacturer and in use. So they're extremely interested to to review our product. Now they are waiting for this further test work, so those expressions of interest are just that so far. We we need to to get more test work out and then explore the market and see where that process leads us. K. Thank you. And final question for this section. Now the completion of the feasibility study is in sight, are you now beginning to negotiate a price and delivery of long lead items for the new mine?

26:38 Sort of, but but really not yet. The part of the feasibility study process is to get quotations for for the equipment that we need to to build the mine. And, obviously, some of those initial discussions will lead eventually to to purchase orders and and potentially early orders of long lead time items, but we're not in the business of ordering the long lead time items yet. We need to substantially finish the the study at least. So not yet. Okay. Well, that was the end of end of the questions. I think we're gonna hand back over to Alessandro. Yep. Perfect. Nick, William, Andre, thank you very much for addressing all those questions for investors.

27:25 And, of course, the company will review any further questions submitted today, and we'll publish those responses on the investor meet company platform. But just before redirecting investors to provide you with their feedback, which you know is particularly important to the company, Nick, could I just ask you for a few closing comments? Yes. Just thank thanking thanking everyone for attending. This this is this format, I think, is a very useful one, and I'd encourage everybody to submit their questions, and we'll do our best to answer them. I hope we have today. Nick, William, Andre, thank you once again for updating investors today. Could I please ask investors not to close the session as you'll now be redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of FERRO-ALLOY RESOURCES LIMITED, we'd like to thank you for attending today's presentation, and good afternoon to you all.