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It has always been your Company's intention to maximise the value of its large nickel resource base through product beneficiation. It is very pleasing therefore, to report that shortly after the end of the year under review, we signed a memorandum of understanding with Jiangxi Rare Earth and Rare Metals Tungsten Group, a major, State owned, Chinese metals producer, for the financing and construction of a, jointly owned, nickel cobalt leaching plant and associated refinery. The leaching plant, with an annual capacity of up to 40,000 tonnes mixed hydroxide product, will be sited in the Philippines and will treat ore from our Ipilan deposit located on the east coast of Palawan island. The refinery will be located in China.
As to the year under review, the first year of full operations at our Berong nickel mine on the west coast of Palawan proved challenging for local management. In addition to learning to cope with the impact of severe weather conditions on production and shipping, the market price for nickel more than halved during the year and Chinese demand for direct shipping ore from the Philippines declined significantly in preference for higher grade Indonesian ore.
Fortunately, the Berong operations are in a near unique position with a secure off take contract with BHP Billiton for the supply of 500,000 tonnes per annum direct shipping ore to its nickel refinery in Queensland, Australia. Moreover, should market conditions warrant, Berong can produce and ship at least twice this amount for negligible additional capital expenditure.
Meantime and as mentioned previously, we continue to progress our plans to add value to our large nickel resources through beneficiation.
An important development in this regard occurred in June 2008, when we welcomed European Nickel plc to our register as the single largest shareholder (19.3%) and also as a partner (18.7%) in Berong Nickel Corporation. This followed a transaction between European Nickel, Investika Ltd of Australia and our then Chairman, Chris Kyriakou.
Our principal local Philippine partner, Atlas Consolidated Mining and Development Corporation, signalled its support for the European Nickel transaction by waiving its pre-emptive rights to Investika's interest in Berong Nickel Corporation. Atlas Consolidated is a major company in its own right and remains an important and valued ally for Toledo.
European Nickel has leading edge experience in the heap leaching of laterite ores and is applying its proprietary technology to the development of its Caldag nickel deposit in western Turkey. Additionally, the company's extensive exploration portfolio includes a joint venture on Rusina Mining's Acoje nickel deposit in the Philippines where European Nickel also operates a leaching test facility.
Following European Nickel's purchase of its interest in your Company, Chris Kyriakou, Bob Cleary and Roger Shakesby resigned as directors to be replaced by Simon Purkiss and Felix Pole. I would like to extend my sincere thanks to Messrs Cleary and Shakesby for their contribution to the development of the Company and especially to Chris Kyriakou, who, as Executive Chairman, played a lead role in securing and developing our nickel interests.
Simon Purkiss is a co-founder and Managing Director of European Nickel. Simon is a metallurgical engineer with over 25 years' operational and management experience in the metals industries with particular emphasis on the mining and treatment of nickel.
Felix Pole was a co-founder of European Nickel and remains advisor to that company. Felix has a broad financial and industrial background including having been a director of Titan Resources NL, a nickel miner which, through Pacific Ore Technology, developed the Bioheap bacterial leaching process for nickel and copper sulphide ores.
We are fortunate to be able to welcome Simon and Felix to the board and we can only benefit from their considerable industry specific experience and demonstrated business acumen. Likewise, I have no doubt that European Nickel will be a supportive and beneficial shareholder. Already, the application of European Nickel's leaching technology to Berong's ore is under active investigation and a test program is underway at European Nickel's Philippine test facility.
Our operating plan for the year ahead assumes that the nickel price will remain around current levels and that Chinese demand for Philippine direct shipping ore will continue to be muted. We will, nonetheless, maintain continuous dialogue with our customer base with a view to the profitable utilisation of presently spare productive capacity at Berong whilst, at the same time, pursuing further, sensible, operating cost reductions. We will, of course, focus our efforts on meeting our obligations under the recently signed memorandum of understanding and we will progress further value adding opportunities.
That we are able to move forward so positively is due in no small measure to the efforts of our management team and Philippine workforce, led most capably by our Chief Executive, George Bujtor. Thanks to them, we have managed not only to secure our operating base in the Philippines, underpinned by the off take contract with BHP Billiton, but also taken a significant step in adding value to our nickel resources through beneficiation. I wish to congratulate George and his staff for this achievement.
Our ultimate aim remains the same as ever: to maximise shareholder returns from being a significant, profitable player in the nickel industry.
CHIEF EXCUTIVE OFFICER'S STATEMENT
The Berong Nickel Mine has been in operation for just over one year and has successfully made shipments of laterite ore to Chinese and Australian customers. For the full year April 1 2007 through March 31 2008, approximately 467,278 tonnes of ore at an average grade of 1.52%Ni was shipped. From the commencement of trial metallurgical shipments in January 2007 until the end of June 2008, approximately 815,000 tonnes of ore at an average grade of 1.52% Ni was shipped into the market place.
Many of the temporary facilities put into place to capture the benefits of historically high nickel prices have been replaced by permanent facilities. These include the office complex, accommodation facilities, the laboratory, the heavy equipment workshops and environmental structures. The Dangla Road which was planned for construction for 2007 was deferred until 2008 due to the delays in gaining all the necessary approvals. Still under evaluation are the trestle/pylon conveyor and ship loader, and the development of the Dangla Bay as an additional stockpile area and barge loading facility.
Operationally, wet weather and rough sea conditions have had greatest impact on mine production and ship loading, respectively. The extreme wet conditions, with over 4 meters of annual rainfall at the mine site, make mining and drying of the laterite ore difficult. Similarly, the rough sea conditions during the period October through February make the trans-shipment of laterite ore from barge to the ocean going vessel unsafe and difficult. Without a trestle conveyor, ship loading is restricted to about 7 months of the year. Notwithstanding the elements, mine production is being progressively ramped up and optimized at an output rate of greater than 1million tonnes per annum using the existing infrastructure.
The Company continues to set new standards in responsible mining in the Philippines, and is being given full recognition as a role model for the mining industry. The development of systems for international certification in environmental management (ISO14001) and occupational health and safety (ISO 18001) continue to make good progress. Rehabilitation of the initial mined out areas had been undertaken, and a research area planted with various tree species. Rehabilitation around the coastal stockpile areas has also been undertaken. Over 112,000 endemic and value added trees (mahogany, rubber, jatropha), more than 230,000 stands of vetiver and other grasses, over 1,240 fruit trees, 5,500 pineapples, and 2,000 vegetables have been planted to meet our obligations of 50 new trees planted for every tree cut. In addition, over 175,000 wildlings have been collected for on-going progressive rehabilitation.
Under the Company's MOU with the local indigenous peoples, approximately US$360,000 was paid as part of the mandated royalty payments of 1%of gross revenue from laterite ore sales. Funds fromthe royalty payment are being used to establish essential community services as well as livelihood projects. Under the Company's Social Development and Management Plan, spending has been directed at community projects like potable water systems, footbridge over the Berong River, school buildings, health clinic, medical services and ambulance coverage.
The markets for Berong laterite nickel ore include dominantly China and Australia. In mid-2007 the Company signed a long term supply agreement with Queensland Nickel Pty Ltd, a wholly owned subsidiary of BHP Billiton, for up to 500,000 tonnes of ore per annum. Since September 2007, approximately 293,410 tonnes of ore has been shipped to BHP Billiton under the agreement, with the remainder of the ore shipments sold opportunistically to Chinese customers. Additional long term contracts are being sought in China.
The Chinese market for laterite nickel ore has split into two segments. The production of nickel pig iron for the stainless steel sector can be sourced from either the blast furnace process (requiring medium grade nickel ore with associated high iron grades) or the electric arc furnace process (requiring high grade nickel ore with associated low iron grades). Berong is well positioned to supply both ore types. In the medium term, the market for blast furnace feed is expected to decline in line with the Chinese Government policy to shut down all the small blast furnaces by year 2010. This is likely to lead to increased production from electric arc furnaces and hence demand for higher grade nickel laterite ores.
Whilst the direct sale of lateritic nickel ore has been a success, the long term future of the Company rests with in-country value added processing to leverage off the large pre-JORC resource of over 350 million tonnes of nickel laterite managed by the Company.
Considerable metallurgical sampling and testing has been undertaken on the various ore types at both Berong and Ipilan. The leaching processes tested include high pressure acid leaching (HPAL), atmospheric leaching (AL) and heap leaching (HL). Nickel and cobalt extraction rates under all three leaching processes have produced excellent results. SNC Lavalin has produced estimates of the capital and operating costs of all three leaching processes and the results are being evaluated as to the best processing option to employ.
European Nickel became a major shareholder and joint venture partner mid-way through 2008. This is seen as positive as the company has leading edge experience in heap leaching which will be invaluable in assessing the processing options most suitable for the Berong ore bodies. The recently signed MOU with Jiangxi Rare Earth and Rare Metals Tungsten Group Co. Ltd on the Celestial deposit provides an early opportunity to produce a mixed hydroxide product using either AL or HPAL.
Exploration and permitting activities in the tenement areas adjacent to the Berong mine, and the Celestial deposit, continued in parallel with mining and shipping activities. The Celestial deposit was extensively drilled and test pitted with over 80,000 meters of sampling undertaken. Internal estimates suggest a geological resource of approximately 75 million tonnes of laterite ore at an estimated grade of around 1.25% nickel. Snowdens Mining Industry Consultants is currently preparing the JORC compliant report. Studies continue on the development of a 'Direct Shipping Operation' to compliment the ore currently being shipped out from Berong. The Celestial deposit/Ipilan Project is located on the east coast of Palawan and will therefore benefit from year round shipping without interruption.
The achievements over the last year would not have been possible without the dedicated efforts of all our people, and the support of the local community, the Local Government Units, the Provincial Government, and the National Government. I congratulate them all and look forward to another successful year ahead.
The directors present their report with the audited Group financial statements for the year ended 31 March 2008.
Principal activities and review of business
The principal activity of the group is investment directly and indirectly in, and operation of mining exploration and development projects.
During the year the Group's main undertaking was the continuing development of the Berong nickel project, in which the Company has a 56.1% economic interest, the Ipilan nickel project, in which the Company has a 52% economic interest and the Ulugan nickel project in which the Company has a 58% economic interest.
A total of approximately 467,277 tonnes of laterite nickel ore was shipped to China and Australia in twelve separate shipments. These shipments generated revenue of US$29.09 million. The Group was fortunate that a number of these shipments occurred at a time when the nickel price was experiencing record levels.
An agreement was reached with BHP Billiton for the long term supply of laterite ore to the Yabulu plant in Queensland, Australia. The agreement is for the supply of up to 500,000 wet metric tons of ore per year, and runs for 5 years with BHP Billiton having the option to extend this for a further 5 years. The Company has the ability to supply to BHP Billiton more ore than the contracted quantities. Discussions are underway with several Chinese customers for similar long term supply agreements.
During the period, a JORC compliant mineral resource prepared by Snowdens Mining Industry Consultants from Perth, Australia was completed. The following is a summary of the JORC compliant mineral resource : The measured, indicated and inferred resource within the 288 ha MPSA area is estimated at 9.92 million tonnes at an average grade of 1.55% Ni using a 1% nickel cut-off grade. (Drilling within the MPSA area is ongoing and is aimed at delineating additional tonnage).
The Company has continued to advance its pro-rata share of funds as required to meet the ongoing mine development costs. In mid-2007, the Company recovered £3,129,520 (US$6,129,259), being funds previously advanced to Berong Nickel Corporation (BNC) in excess of the Company's $2 million commitment. In order to fund working and fixed capital requirements of the mine for the 2008 mining season, in early 2008, the Company advanced £2 million (US$4 million) to BNC. These funds have been advanced as interest-free, unsecured loans and have no fixed terms of repayment.
In early 2008, the Company advanced £0.9 million (US$1.8 million) to Atlas Consolidated Mining and Development Corporation (ACMDC) under the loan facility arrangement in place with that company. These funds were advanced to enable ACMDC to meets its share of working and fixed capital requirements of the mine for the 2008 mining season.
In May 2007, the Company consummated an arrangement whereby it agreed to make a loan facility available to Brooks Nickel Ventures, Inc. (Brooks) of up to $2.5 million to enable that company to meet its funding requirements to Ipilan Nickel Corporation under the Celestial joint venture agreement. Subsequently, the facility was increased to $8 million. The facility is for a three year term and loan drawdowns bear interest at the rate of 10% per annum, compounded annually. The loan is secured by a first charge over Brooks' share of earnings from the Ipilan nickel project and is repayable out of Brooks' share of the Ipilan nickel project cashflows. Over the year ended 31 March 2008, the Company advanced £2.5 million ($5 million) to Brooks under this facility.
Under the Celestial joint venture agreement, the Company has the option to take a 40% holding in Celestial Nickel Mining and Exploration Corporation. During the year, the board agreed to an advance of £0.45 million ($0.9 million) against the option exercise amount.
With respect to the Ulugan nickel project, the exploration permits required to enable the Company to proceed with exploration activities have yet to be granted by the Philippine authorities. Accordingly, the directors have taken a prudent view and have fully impaired the carrying value of this investment, resulting in an exceptional charge in the current year of £583,433.
Over the year, following the exercise of options and warrants, the Company allotted 950,000 ordinary shares to raise £1.4 million.
In August 2007, the Company incorporated China Nickel & Steel Corporation (CNSC) as a wholly-owned subsidiary to investigate the acquisition of a blast furnace business in China with the intention of producing pig nickel. The investigation did not proceed satisfactorily and CNSC remains dormant.
Further details of the Company's activities for the current year are set out in the Chairman's and Chief Executive Officer's Statements.
Results and dividends
The profit for the year from ordinary activities before tax amounted to £1,206,702 (2007 loss: £1,264,416). The directors do not recommend the payment of a dividend.
Details of share capital are given in note 24 to the financial statements.
See note 33 to the financial statements.
The directors anticipate the Company's major future developments will revolve around further investment in and development of the Berong and Ipilan nickel projects. In particular, the Company is planning to continue direct shipping operations at the Berong nickel project while simultaneously evaluating and progressing in-country value added processing opportunities to leverage off the large pre-JORC resource managed by the Company.
Principal risks and uncertainties facing the Group
The principal risks faced by the Group are as follows:
The exploration for and development of mineral deposits involves significant risks, which even a combination of careful evaluation, experience and knowledge may not eliminate. There can be no guarantee that the estimates of quantities and grades of minerals disclosed will be available to extract. With all mining operations there is uncertainty and, therefore, risk associated with operating parameters and costs resulting from the scaling up of extraction methods tested in pilot conditions.
The operations of the Group may be disrupted by a variety of risks and hazards which are beyond the control of the Group. These may include geological, geotechnical and seismic factors, environmental hazards, industrial accidents, occupational and health hazards, technical failures, labour disputes, unusual or unexpected rock formations, flooding and extended interruptions due to inclement or hazardous weather conditions, explosions and other acts. These risks and hazards could also result in damage to, or destruction of, production facilities, personal injury, environmental damage, business interruption, monetary losses and possible legal liability.
The Group's future success is substantially dependent on the continued services and performance of its key personnel. Their loss or the inability to recruit personnel of the appropriate calibre could have a significant adverse effect of the business of the Group.
The selling price of the nickel ore produced by the Group's operations varies in line with movements of the price of nickel as quoted on the London Metal Exchange.
Some or all of the operating and exploration licences issued in respect of the projects may be subject to conditions which, if not satisfied, may lead to the revocation of such licences.
The Group may have minority interests in the companies, partnerships and ventures in which it invests and may be unable to exercise control over the operations of such companies.
The operations of the Group are located in the Philippines where there may be a number of associated risks over which it will have no control. These may include economic, social or political instability or change, terrorism, hyperinflation, currency non-convertibility or instability, changes of laws affecting foreign ownership, government participation, taxation, working conditions, rates of exchange, exchange control, and exploration licensing.
The Group's total return and net assets can be significantly affected by currency movements.
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