STOCK EXCHANGE RELEASE
9 November 2011
Talvivaara Mining Company
Interim Report for January-September 2011
Solid financial performance whilst working to overcome operational
challenges
Highlights
Q3 2011
Nickel
production of 3,153t, adversely impacted by problems in hydrogen sulphide
generators
Net sales of EUR
60.6m
Operating profit of EUR
5.5m
Q1-Q3 2011
Nickel
production of 11,319t, up 73% versus Q1-Q3 2010
Net sales of EUR 164.7m (Q1-Q3 2010: EUR 91.9m)
Operating profit of EUR 16.0m (Q1-Q3 2010: EUR
11.1m)
Highlights after the
reporting period
Full year
2011 production target revised to a minimum of 16,000t of nickel, as announced
in the Operational Update released on 7 October
Both production lines at the metals recovery
plant in uninterrupted operation since mid-October and production on track to
achieve the targeted nickel output
In response to the volatile and uncertain market environment and
decline in nickel prices, short term focus shifted from maximising production
volume to optimising profitability
Pekka Perä, Talvivaara's CEO, to retire from active executive
duties over the coming months, but will retain his shareholding and an active
role on the Board; the Board has commenced the search for a new
CEO
Amendment agreement to EUR
100m revolving credit facility signed in October; facility increased to EUR 130m
and maturity extended by one year to June 2014
Key figures
EUR million
Q3
2011
Q3
2010
Q1-Q3
2011
Q1-Q3
2010
FY
2010
Net sales
60.6
45.1
164.7
91.9
152.2
Operating profit (loss)
5.5
10.9
16.0
11.1
25.5
% of net
sales
9.1%
24.2%
9.7%
12.1%
16.7%
Profit (loss) for
the period
(3.4)
5.1
(8.9)
(6.9)
(7.7)
Earnings per
share, EUR
(0.02)
0.01
(0.05)
(0.03)
(0.04)
Equity-to-assets
ratio
28.7%
40.1%
28.7%
40.1%
31.7%
Net interest
bearing debt
410.2
263.4
410.2
263.4
315.0
Debt-to-equity
ratio
128.1%
66.8%
128.1%
66.8%
81.7%
Capital
expenditure
22.0
36.9
57.6
92.2
115.7
Cash and cash
equivalents at the end of the period
38.6
6.0
38.6
6.0
165.6
Number of employees at the end of the
period
446
370
446
370
389
All
reported figures in this release are unaudited.
CEO Pekka Perä comments:
"As we announced in our latest operational update, we
continued to face reliability and availability issues at our metals recovery
plant during the third quarter. Production was hurt particularly by problems in
hydrogen sulphide generators, which suffered from the lack of critical spare
parts and could only be operated at an overall capacity utilisation level of
around 35% during the quarter. While both of our hydrogen sulphide generators
have been back in operation since mid-October, we expect to keep running them
below full capacity to avoid any further disruptions until a sufficient spare
parts inventory has been received, expected by the year-end. Whilst we are
naturally disappointed by the ongoing production constraints, we are however
pleased to note that we have already demonstrated that all of our processes can
be run at design capacities.
Despite the production
issues, we achieved a solid financial result for the quarter. The significant
improvement in net sales compared to the previous quarter reflected deliveries
of nickel left in inventory at the end of Q2, and we recorded an operating
profit of EUR 5.5 million. We have also strengthened our liquidity position by
signing the amended EUR 130 million revolver, as well as establishing an up to
EUR 100 million commercial paper programme.
During the third quarter,
conditions in the financial and commodity markets became increasingly volatile
and challenging with the nickel price closing the quarter at around USD 17,500
per tonne, which is its 2011 low point. While a degree of confidence on the
commodity markets has been restored in recent weeks, we have responded to the
challenges created by the market environment as well as our own production
constraints by developing a revised short term operating plan. We are currently
focusing on maximising the profitability of our operations rather than the
production volume. Our financial position remains solid, however we have already
taken action to defer some capital expenditure into 2012 and to optimise our
operations to realise operating cost savings.
Going forward, we remain as
committed as ever to a successful ramp-up of our operations. While all the
processes are in place for full-scale production, further progress is needed
with optimising our operations and implementing a robust management systems
infrastructure. Already, we are seeing a clear improvement in the personnel
morale and attitude, and I can only express my sincerest gratitude for the
efforts of our employees in addressing the most acute production issues during
the last few months.
As part of Talvivaara's
transformation from a project to an operating entity, I have decided to retire
from active executive duties and increasingly focus on shaping our strategy as a
member of the Board of Directors. I am also committed to retaining my
shareholding in the company. We have an experienced and established management
team in place to lead Talvivaara forward, and have commenced the search for a
new CEO."
Enquiries:
Talvivaara Mining Company Plc. Tel. +358
20 712 9800
Pekka Perä, CEO
Saila
Miettinen-Lähde, CFO
Merlin PR Tel. +44 20 726 8400
David Simonson
Anca Spiridon
Webcast and conference call on 9 November
2011 at 12:00 GMT/14:00 EET
A combined webcast and conference call on the
January-September 2011 Interim Result will be held on 9 November 2011 at 12:00
GMT/14:00 EET. The call will be held in English.
The webcast can be accessed through the following link:
http://qsb.webcast.fi/t/talvivaara/talvivaara_2011_1109_Q3/
A conference call facility will be available for a Q&A with
senior management following the presentation.
Participant - Finland: +358 (0)9 2313 9201
Participant - UK: +44 (0)20 7162 0077
Participant - US: +1
334 323 6201
Conference id: 891450
The webcast will also be available for viewing on the
Talvivaara website shortly after the event.
Financial review
Q3 2011
(July-September)
Net sales
and financial result
Talvivaara's net sales for nickel and cobalt
deliveries to Norilsk Nickel and for zinc deliveries to Nyrstar during the three
months ended 30 September 2011 amounted to EUR 60.6 million (Q3 2010: EUR 45.1
million). Net sales increased by 61.0% compared to the previous quarter, mainly
as a result of substantial nickel and cobalt deliveries having been delayed from
Q2 2011 into Q3 2011 due to a maintenance stoppage at Norilsk Nickel Harjavalta.
Product deliveries during the period amounted to 4,586 tonnes of nickel, 126
tonnes of cobalt and 8,848 tonnes of zinc.
Change in inventories of finished products
and work in progress amounted to EUR 2.6 million (Q3 2010: EUR 20.9 million),
with the small increment for the quarter reflecting the recovery of the
unusually large finished product inventories of nickel and cobalt at the end of
the previous quarter. Materials and services during the third quarter amounted
to EUR (29.1) million (Q3 2010: EUR (26.9) million), and other operating
expenses to EUR (12.3) million (Q3 2010: EUR (11.0) million). Costs were at a
slightly lower level compared to the previous quarter, reflecting the lower
production volume. On the other hand, the cost level was increased by
maintenance costs relating to the issues with the hydrogen sulphide generators
as well as improvements to the primary heap reclaiming system.
Operating profit for Q3 2011 was EUR 5.5
million (Q3 2010: EUR 10.9 million), and loss for the period amounted to EUR
(3.4) million (Q3 2010: profit of EUR 5.1 million).
Statement
of financial position and financing
Capital expenditure for the quarter totalled
EUR 22.0 million (Q3 2010: EUR 36.9 million). The expenditure related primarily
to the construction of secondary heap foundations and a gypsum pond, as well as
to pressure filters acquired for drying of the zinc product.
In September, the Finnish State completed the
redemption of the Talvivaara-Murtomäki railroad and reimbursed Talvivaara
Infrastructure Ltd for the construction expenses of the railroad. The total
reimbursement amounted to EUR 40 million (VAT 0%), of which EUR 20 million had
been paid in June 2010 and the remaining EUR 20 million in September 2011. In
conjunction with the final reimbursement, the railroad became property of the
Finnish State and part of the national rail network. Subsequently, Talvivaara
repaid the EUR 18.7 million term loan used to finance the construction of the
railroad as well as interest subsidy loans amounting to EUR 4.2 million.
Also in September, Talvivaara entered into
receivables factoring agreements amounting to a total combined factoring credit
limit of EUR 100 million.
In August, Talvivaara entered into a
commercial paper notes programme of up to EUR 100 million with Nordea Bank,
Sampo Bank and Svenska Handelsbanken. On 30 September 2011, the outstanding
commercial paper notes amounted to a nominal value of EUR 10 million.
Q1-Q3 2011
(January-September)
Net sales
and financial result
Talvivaara's net sales during the nine months
ended 30 September 2011 amounted to EUR 164.7 million (Q1-Q3 2010: EUR 91.9
million). Product deliveries during the period totalled 11,136 tonnes of nickel
(Q1-Q3 2010: 5,614t), 24,266 tonnes of zinc (Q1-Q3 2010: 14,610t), and 266
tonnes of cobalt (Q1-Q3 2010: 47t).
The Group's other operating income amounted
to EUR 2.6 million (Q1-Q3 2010: EUR 17.2 million), primarily relating to
indemnities on a damaged drilling rig and transformers, gain on the sale of the
railroad, and fair value gains on derivatives.
Materials and services during the nine months
ended 30 September 2011 amounted to EUR (97.3) million (Q1-Q3 2010: EUR (68.3)
million). The increase reflected the increased level of production, whilst the
largest cost items were consumables, external services and production chemicals,
particularly propane and lye (caustic soda).
Employee benefit expenses including the value
of employee expenses related to the employee share option scheme of 2007 were
EUR (19.1) million (Q1-Q3 2010: EUR (14.4) million). The increase was
attributable to the increased number of personnel.
Other operating expenses amounted to EUR
(42.6) million (Q1-Q3 2010: EUR (30.2) million). Energy and maintenance costs
comprised over two thirds of the total. The impact of maintenance costs was
particularly high in the second quarter of 2011 due to the maintenance and
upgrading programmes carried out in April-May.
Operating profit amounted to EUR 16.0 million
(Q1-Q3 2010: EUR 11.1 million), representing an operating margin of 9.7% for
Q1-Q3 2011.
Finance income for the nine month period was
EUR 1.0 million (Q1-Q3 2011: EUR 6.9 million), which mainly consisted of
interests on bank accounts and exchange rate gains. Finance costs of EUR (27.8)
million (Q1-Q3 2010: EUR (27.0) million) primarily related to interest and
financing expenses on borrowings. As further explained in Note 6 to this Q3 2011
interim report, Talvivaara has reclassified the US dollar denominated Nyrstar
advance payment as a non-monetary liability from Q3 2011 onwards. As a result of
the reclassification, foreign exchange rate gains and losses in finance income
and costs have decreased, and relevant financial information for prior periods
since Q1 2010 has been restated accordingly.
The Company's loss for the period amounted to
EUR (8.9) million (Q1-Q3 2010: EUR (6.9) million).
Total comprehensive income for the nine month
period was EUR (16.3) million (Q1-Q3 2010: EUR (15.4) million), including a
reduction in hedge reserves resulting from the occurrence of the hedged
sales.
Statement
of financial position
Capital expenditure during Q1-Q3 2011
totalled EUR 57.6 million (Q1-Q3 2010: EUR 92.2 million). The expenditure
primarily related to construction of secondary heap foundations, a gypsum pond
and the uranium extraction circuit. On the consolidated statement of financial
position as at 30 September 2011, property, plant and equipment amounted to EUR
751.4 million (31 December 2010: EUR 728.2 million).
In the Group's assets, inventories amounted
to EUR 225.0 million on 30 September 2011 (31 December 2010: EUR 175.4 million).
The increase in inventories reflected the ramp-up of production and the
consequent increase in the amount of ore stacked on heaps, valued at cost.
Trade receivables amounted to EUR 47.6
million on 30 September 2011 (31 December 2010: EUR 52.4 million). The 88%
increase in trade receivables compared to EUR 25.4 million on 30 June 2011
reflected the higher level of nickel and cobalt deliveries during the third
quarter, resulting from the recovery of the inventories accumulated at the end
of Q2 2011 due to a maintenance stoppage at Norilsk Nickel Harjavalta.
On 30 September 2011, cash and cash
equivalents totalled EUR 38.6 million (31 December 2010: EUR 165.6 million).
In equity and liabilities, total equity
amounted to EUR 320.2 million on 30 September 2011 (31 December 2010: EUR 385.6
million). In June, Talvivaara acquired an additional 4% shareholding in its
subsidiary Talvivaara Sotkamo Ltd from Outokumpu Mining Oy, increasing
Talvivaara's ownership in Talvivaara Sotkamo from 80% to 84%. As a result of the
acquisition, equity decreased by EUR 61.5 million as the acquisition price of
EUR 60 million and the transaction costs of EUR 1.5 million were deducted from
equity under IFRS. On the other hand, the equity component of EUR 9.0 million
for the senior unsecured convertible bonds due 2015 was recognised in equity
during the period.
A total of 465,085 new shares were subscribed
and paid for during Q1-Q3 2011 under the company's stock option rights 2007A and
2007B and the convertible bonds due 2015, with the entire subscription price
recognised in equity.
Borrowings decreased from EUR 480.6 million
on 31 December 2010 to EUR 448.7 million at the end of September 2011. The
changes in borrowings during the period included determination of the equity
component for the senior unsecured convertible bonds due 2015, issuance of EUR
10 million of commercial paper notes and repayment of the railroad loan and
interest subsidy loans.
Total advance payments as at 30 September
2011 amounted to EUR 242.1 million (31 December 2010: EUR 259.9 million). The
changes in advance payments during Q1-Q3 2011 consisted of the reclassification
of the Nyrstar advance payment as a non-monetary liability, recognition of the
advance payment for the railroad as revenue, EUR 7.0 million in advance payments
from Cameco Corporation under the uranium off-take agreement as well as
amortization of the Nyrstar advance payment. The reclassification of the Nyrstar
advance payment as a non-monetary liability better reflects the financial nature
of the transaction, as the advance payment is repaid through physical deliveries
and therefore there is no actual foreign exchange risk. The effects of the
reclassification on deferred tax assets, equity, advance payments, profit/loss,
and earnings per share for the relevant periods are further described in Note 6
to this interim report. The restatement does not have any impact on the
operating earnings or cash flows of prior periods.
Total equity and liabilities as at 30
September 2011 amounted to EUR 1,114.4 million (31 December 2010: EUR 1,214.5
million).
Financing
In September, Talvivaara received EUR 20
million from the Finnish State as the final redemption amount for the
Talvivaara-Murtomäki railroad. Subsequently, Talvivaara repaid the EUR 18.7
million term loan used to finance the construction of the railroad as well as
interest subsidy loans amounting to EUR 4.2 million.
Also in September, Talvivaara entered into
receivables factoring agreements amounting to a total combined factoring credit
limit of EUR 100 million.
In August, Talvivaara established a
commercial paper notes programme of EUR 100 million. On 30 September 2011, the
outstanding commercial paper notes amounted to a nominal value of EUR 10
million.
In February, Talvivaara signed a uranium
off-take agreement with Cameco Corporation. According to the terms set forth in
the agreement, Cameco is to provide an upfront investment of up to USD 60
million to cover the construction costs of the uranium extraction circuit at the
Talvivaara mine. Talvivaara will repay the investment through deliveries of
uranium concentrate during the initial years of the agreement. Once the capital
has been repaid, all uranium concentrate produced thereafter until 31 December
2027 will be bought by Cameco at a price based on market prices at the time of
delivery. As at 30 September 2011, Talvivaara had received a total of EUR 7.0
million in advance payments from Cameco.
In January, an Extraordinary General Meeting
of Talvivaara resolved to approve the proposal of the Board of Directors for the
issue of special rights in relation to EUR 225 million senior unsecured
convertible bonds due 2015 which were issued in December 2010. The bonds are
convertible into 27.0 million fully paid ordinary shares of the Company. The
interest rate applied to the convertible bond is 4.00% and the yield to maturity
6.50%, reflecting a redemption price of 114.5% at maturity.
Currency
option programme
In June 2011, Talvivaara entered into a
currency option programme comprising USD options for six months from July 2011
through December 2011. The monthly obligation amounts to USD 7.5 million and
protection to USD 5.0 million. As at 30 September 2011, the remaining collar
ranges from EUR/USD ratio of 1.2884 to 1.4900.
Production review
During the third quarter, Talvivaara's
production was constrained by problems in hydrogen sulphide generators. Because
hydrogen sulphide is an essential reagent in the metals recovery process, the
unforeseen downtime in the generators had a direct impact on Q3 2011 production
output, which for nickel amounted to 3,153 tonnes and for zinc to 7,286 tonnes.
Year-to-date production at the end of September amounted to 11,319 tonnes (Q1-Q3
2010: 6,550 tonnes) of nickel and 21,291 tonnes (Q1-Q3 2010: 16,092 tonnes) of
zinc.
In metals recovery, primary focus during the
quarter continued to be on improving the reliability and availability of the
overall process, in particular the hydrogen sulphide plants. Both of
Talvivaara's hydrogen sulphide generators were serviced and upgraded during the
second quarter. Following the maintenance, the generators functioned well, but
the operating procedure followed in the hydrogen sulphide process subsequently
proved more wearing to certain heating elements than previous experience would
have suggested. Talvivaara's spare parts inventory consequently proved
insufficient, and given the long lead times of the required specialty steels,
the hydrogen sulphide generators and therefore the entire metals recovery
process had to be operated significantly below full capacity. The overall
capacity utilisation of the hydrogen sulphide generators was only around 35%
during the quarter.
The mining department continued to operate
without material disturbances. The department produced 3.0Mt of ore (Q3 2010:
3.4Mt) and 4.5Mt of waste (Q3 2010: 5.4Mt). Emphasis during the period shifted
increasingly towards ore mining, as primary heap reclaiming improved and was no
longer restricting ore production for most of the quarter.
In materials handling, the earlier
commissioning issues in primary heap reclaiming were largely addressed during
the third quarter. As a result of the modifications made to the reclaiming
equipment during Q2 2011, the feeding of ore into the system and overall
availability of the process improved significantly during the third quarter.
Additionally, more of Talvivaara's own staff and equipment as well as additional
contractor resources were allocated to the process. Due to the measures taken,
reclaiming of the primary heap is no longer a bottle-neck to the stacking of new
ore and the entire materials handling process now operates at a satisfactory
level. Crushing and stacking of ore in Q3 2011 amounted to 3.0Mt (Q3 2010:
3.4Mt), and during Q1-Q3 2011 to 7.9Mt (Q1-Q3 2010: 10.4Mt).
Bioheapleaching continued to progress
according to plan during the third quarter, with the main sources of leach
solution being primary heap sections 3 and 4. Nickel recovery from heap section
3 has reached around 65% in the slightly over a year that the heap has been in
production, with heap section 4 following a similar pattern. During the third
quarter, the average nickel grade in solution pumped to metals recovery was
stable between 2.0-2.5 g/l.
The newly stacked primary heap section 1 was
completed in September and has, along with the secondary heap, been taken into
production during the fourth quarter, enabling a further ramp-up of production.
Leaching in both the new heap section 1 and the secondary heap is progressing
well.
Production key
figures
Q3
2011
Q3
2010
Q1-Q3
2011
Q1-Q3
2010
FY
2010
Mining
Ore production
Mt
3.0
3.4
7.9
10.4
13.3
Waste production
Mt
4.5
5.4
15.0
11.7
16.7
Materials handling
Stacked ore
Mt
3.0
3.4
7.9
10.4
13.3
Bioheapleaching
Ore
under leaching
Mt
32.2
21.4
32.2
21.4
24.3
Metals recovery
Nickel metal content
Tonnes
3,153
3,211
11,319
6,550
10,382
Zinc
metal content
Tonnes
7,286
7,557
21,291
16,092
25,462
Sustainable development and permitting
Environment
Environmental monitoring during the third
quarter confirmed Talvivaara to comply with all of its environmental permit
limits for water emissions. As a result of continued process improvements in
metals recovery and other environmental investments, sulphate, sodium and
manganese discharges to nearby lakes have continued to decrease.
Hydrogen sulphide (odour) emissions to air
have also remained within the permitted limits, apart from briefly exceeding
them during the third quarter due to the unstable running rate of the overall
metals recovery process. Dust emissions have been addressed through watering
systems on mine area roads, dust removal systems particularly in the crushing
and screening areas, and modifications to the mining process. Dust emissions
have been within permitted limits in all but one measurement point at the
screening building.
Talvivaara is committed to minimizing the
environmental effects of its mining operations, and targets at setting the bar
in environmentally sustainable mining.
Permitting
Talvivaara submitted an application for the
renewal of the existing environmental permit to the regional environmental
permitting agency in March. Talvivaara continues to augment the application.
In June 2011, Talvivaara submitted to the
Ministry of Employment and Economy an application in accordance with the Mining
Act (503/1965) for the expansion of the Talvivaara mining concession area by
approximately 70 km2. Subject to approval of the expansion, the total area
of the Talvivaara mining concession will be approximately 130 km2. The
expansion of the mining concession area relates to the previously announced
increase in the Talvivaara mineral resources, the full exploitation of which is
not possible within the existing mining concession area.
Baseline studies of the environment and
preparations for the Environmental Impact Assessment relating to the potential
production expansion (Operation Overlord) and the expansion of the mining
concession area continued during the third quarter.
In March 2011, Talvivaara submitted the
environmental permit application for uranium extraction to the regional
environmental permitting agency, with the decision on the permit expected during
Q2 2012. In April 2010, Talvivaara applied to the Ministry of Employment and
Economy for a permit to extract uranium as a by-product, in accordance with the
Nuclear Energy Act. Processing of the permit application at the Ministry of
Employment and Economy is ongoing and Talvivaara expects to obtain this permit
in early 2012.
Safety
At the end of the third quarter, the injury
frequency among the Talvivaara personnel was 13.9 lost time injuries/million
working hours on a rolling 12 month basis (31 December 2010: 10.7 lost time
injuries/million working hours).
Planned uranium extraction and uranium
off-take agreement with Cameco Corporation
In February, Talvivaara signed a uranium
off-take agreement with Cameco Corporation. Under the terms of the agreement,
Cameco will provide an up-front investment, up to a maximum of USD 60 million,
to cover the construction costs of the uranium extraction circuit and related
facilities. Cameco's capital contribution will be repaid through deliveries of
uranium concentrate in the initial years of the agreement.
Once the capital is repaid, Cameco will
purchase the uranium concentrate produced at Sotkamo through a supply agreement
that will be in effect until 31 December 2027. Cameco will provide Talvivaara
with payment for the uranium based on a formula that references market prices at
the time of delivery.
Annual uranium production is estimated at
350tU (ca. 770,000 pounds), corresponding to approximately 410t (900,000 pounds)
of yellow cake (UO4).
Cameco is providing technical assistance to
Talvivaara in the design, construction, commissioning and operation of the
uranium extraction circuit to be constructed at the Sotkamo mine.
The agreements between Talvivaara and Cameco
are subject to ratification by the Euratom Supply Agency and the approval of the
European Commission pursuant to the Euratom Treaty. These approvals are expected
in late 2011.
During the third quarter, the construction
permit for the uranium recovery facility was received, and construction work
commenced. Commissioning of the facility, subject to receiving the necessary
permits and authorizations, is expected during the second half of 2012.
Production expansion - Operation
Overlord
Conceptual studies relating to production
expansion beyond 50,000tpa of nickel continued. The dedicated project team
consists of nine members with metallurgical, infrastructure, bioheapleaching,
materials handling and project coordination expertise.
Scoping studies are currently based on the
target of doubling up the presently planned production to approximately
100,000tpa of nickel. Whilst studies relating to various processing options
continue, it appears relatively likely that a substantial part of the expanded
production would be LME quality nickel metal. Production of cobalt metal is also
an option, but refining of zinc to zinc metal is currently not within the
planning scope. For certain products and raw materials, e.g. manganese and
sulphuric acid, joint ventures or other partnering arrangements will be
investigated.
Investment into the expansion project is
planned to be carried out in a modular fashion to allow stretching of the
expenditure over an estimated 5-6 year period starting in 2013. The modular
approach also allows commissioning of the equipment and processes sequentially
in the order of the process stages, which is expected to reduce the risk of
serious start-up issues.
Acquisition of an additional 4% shareholding
in the operating subsidiary Talvivaara Sotkamo Ltd from Outokumpu Mining
Oy
Talvivaara Mining Company signed an agreement
on 1 June 2011 with Outokumpu Mining Oy and its parent company Outokumpu Oyj to
acquire an additional 4% shareholding in Talvivaara Sotkamo Ltd. As a result of
the acquisition, Talvivaara's ownership in Talvivaara Sotkamo increased from 80%
to 84% and Outokumpu Mining's ownership decreased to 16%. The acquisition price
for the 4% stake was EUR 60 million.
Simultaneously, Talvivaara entered into an
exclusive option agreement with Outokumpu Mining Oy and Outokumpu Oyj (the
"Option") whereby it will have the right, at its sole discretion, in one or more
installments, to acquire Outokumpu Mining's remaining 16% shareholding in
Talvivaara Sotkamo for EUR 240 million at any time prior to 31 March 2012.
Should Talvivaara choose to exercise the Option, entirely or partially, it will
consider appropriate funding arrangements for the payment of the exercise price
at that time.
Redemption of the Talvivaara-Murtomäki
railroad by the Finnish State
In 2008-2009, Talvivaara constructed a 25 km
railway connecting the Talvivaara mine with the national railway grid. Subject
to agreed minimum transportation volumes on the railroad being achieved, the
Finnish State agreed to reimburse the construction expenses to Talvivaara
Infrastructure Ltd up to an amount of EUR 40 million (0% VAT) in two instalments
and to redeem the railroad as part of the national rail grid. The first agreed
transportation milestone was reached in 2010 and the Finnish State subsequently
paid EUR 20 million in June 2010 as a partial reimbursement. The remaining
minimum transportation volumes were reached in January 2011, and the Finnish
State paid the remaining EUR 20 million in September 2011. In conjunction with
the final reimbursement, the railroad became property of the Finnish State and
part of the national rail network.
Inclusion of Talvivaara Mining Company in
the OMX Helsinki 25 index
Talvivaara was included in the OMX Helsinki
25 index of the Helsinki Stock Exchange from 1 August 2011.
Annual General Meeting
Talvivaara's Annual General Meeting was held on 28 April 2011
in Sotkamo, Finland. The resolutions of the AGM included:
that no
dividend be paid for the financial year 2010;
that the annual fee payable to the members of the Board in 2012 be
as follows: Chairman of the Board EUR 160,000, Deputy Chairman (Senior
Independent Director) EUR 69,000, Chairman of the Audit Committee EUR 69,000,
Chairman of the Nomination Committee EUR 53,000, Chairman of the Remuneration
Committee EUR 53,000, Chairman of the Sustainability Committee EUR 53,000, other
Non-executive Directors and Executive Directors EUR 48,000;
that the number of Board members be seven and
that Mr. Edward Haslam, Mr. Eero Niiva, Ms. Eileen Carr, Mr. D. Graham Titcombe,
Mr. Pekka Perä, Mr. Tapani Järvinen and Ms. Saila Miettinen-Lähde be
re-elected as Board Members;
that the auditor be reimbursed according to the auditor's approved
invoice and authorised public accountants PricewaterhouseCoopers Oy be elected
as the company's auditor for the financial year 2011;
that the Board be authorised to decide on the
repurchase, in one or several transactions, of a maximum of 10,000,000 of the
Company's own shares. The repurchase authorisation is valid until 27 October
2012. The proposed authorisation replaces the authorisation to repurchase
10,000,000 shares granted by the Annual General Meeting of 15 April 2010;
and
that the Company shall issue
stock options partly to the key employees and partly to the personnel of the
Company and its subsidiaries. The maximum total number of stock options issued
will be 5,500,000 and the stock options entitle their owners to subscribe for a
maximum total of 5,500,000 new shares in the Company or to receive existing
shares held by the Company. The beginning of the share subscription period shall
require attainment of certain operational or financial targets determined by the
Board annually.
Risk
management and principal risks
In line with current corporate governance
guidelines on risk management, Talvivaara carries out an ongoing process
endorsed by the Board of Directors to identify risks, measure their impact
against certain assumptions and implement the necessary proactive steps to
manage these risks.
Talvivaara's operations are affected by
various risks common to the mining industry, such as risks relating to the
development of Talvivaara's mineral deposits, estimates of reserves and
resources, infrastructure risks, and volatility of commodity prices. There are
also risks related to counterparties, currency exchange ratios, management and
control systems, historical losses and uncertainties about the future
profitability of Talvivaara, dependence on key personnel, effect of laws,
governmental regulations and related costs, environmental hazards, and risks
related to Talvivaara's mining concessions and permits.
In the short term, Talvivaara's key
operational risks relate to the ongoing ramp-up of operations. While the Company
has demonstrated that all of its production processes work and can be operated
on an industrial scale, the rate of ramp-up is still subject to risk factors,
including various technical and operational risks, that may currently be unknown
or are beyond the Company's control. In order to better mitigate operational
risks going forward, Talvivaara has in place an ongoing production reliability
programme, which targets at reducing downtime and risk of accidents through
detailed evaluation of all equipment and processes and subsequent improvement of
operating procedures and maintenance. The Company is also undertaking a detailed
evaluation of management systems at the operational level and a concomitant
performance improvement programme.
The market price of nickel is, together with
production volumes, the main determinant of Talvivaara's revenues. The
volatility of nickel price has historically been high and the volatility is in
the Company's view likely to persist also in the future. Talvivaara is unhedged
against variations in nickel prices, which means that nickel price volatility
will have a substantial effect on the Company's revenues and results. Full or
substantially full exposure to nickel prices is in line with Talvivaara's
strategy and supported by the Company's view that it can operate the Talvivaara
mine profitably also during the lows of commodity price cycles.
Talvivaara's revenues are determined mostly
in US dollars, whilst the majority of the Company's costs are incurred in Euro.
Potential strengthening of the Euro against the US dollar could thus have a
material adverse effect on the business and financial condition of the Company.
Talvivaara hedges its exposure to the currency exchange risk relating to the US
dollar on a case by case basis with the aim of limiting the adverse effects of
US dollar weakness as considered justified from time to time.
Personnel
The number of personnel employed by the Group
on 30 September 2011 was 446 (Q3 2010: 370).
Wages and salaries paid during the three
months to 30 September 2011 totalled EUR 4.9 million (Q3 2010: EUR 3.8 million).
Wages and salaries paid during the nine months to 30 September 2011 totalled EUR
16.2 million (Q1-Q3 2010: EUR 12.2 million).
As part of the Group's long term incentive
plan, the employees of Talvivaara resolved on 18 June 2011 to establish a Group
personnel fund to manage the earnings bonuses paid by Talvivaara. In accordance
with its bylaws, the fund will invest a substantial proportion of its assets in
Talvivaara Mining Company shares. The fund is managed by personnel
representatives elected by the employees. Registration of the fund is pending at
the Ministry of Employment and Economy.
Shares and shareholders
The number of shares issued and outstanding
and registered on the Euroclear Shareholder Register as of 30 September 2011 was
245,781,803. Including the effect of the EUR 85 million convertible bond of 14
May 2008, the EUR 225 million convertible bond of 16 December 2010 and the
Option Scheme of 2007, the authorised full number of shares of the Company
amounted to 290,636,391.
The share subscription period for stock
options 2007A is between 1 April 2010 and 31 March 2012 and for stock options
2007B between 1 April 2011 and 31 March 2013. By 30 September 2011 a total of
340,586 Talvivaara Mining Company's new shares had been subscribed for under the
stock option rights 2007A and a total of 1,992,514 stock option rights 2007A
remain unexercised. A total of 48,763 new shares of Talvivaara were subscribed
for under the stock option rights 2007B and a total of 2,284,337 stock option
rights 2007B remain unexercised. In addition, a total of 214,736 new shares of
the Company were subscribed for under the convertible bonds due 2015.
As at 30 September 2011, the shareholders who
held more than 5% of the shares and votes of Talvivaara were Pekka Perä (23.0
%), Varma Mutual Pension Insurance Company (8.6%), Ilmarinen Mutual Pension
Insurance Company (5.7%) and Solidium Oy (5.1%).
Events after the review
period
Operational and Management
update
On 7 October 2011, Talvivaara announced a
revised operating plan and strategic decision to focus on maximising
profitability of operations rather than the production volume over the remainder
of 2011, in response to the heightened volatility and uncertainty in the
commodity and financial markets. During Q4 2011, savings will be sought by
deferring approximately EUR 10 million of capital expenditure into 2012, as well
as minimizing the use of contractors and optimizing the scale of mining
operations. Based on the short-term foreseen availability of the metals recovery
plant, the Company also rebased its full year 2011 production guidance to a
minimum of 16,000t of nickel.
Simultaneously, Talvivaara announced a number
of measures to address the improvement requirements of the management systems
applied at the Company. Effective as of 1 October 2011, the production
organization has been restructured into two operating divisions: the ore
processes, i.e. mining and materials handling, and the metals processes, i.e.
bioheapleaching and metals recovery. The management systems at the operational
level are addressed through a detailed evaluation and concomitant performance
improvement programme commencing in Q4 2011. All management systems are under
review also on the corporate level, including reorganisation of the Executive
Committee and redefinition of the duties within it.
Retirement from active
executive duties of CEO Pekka Perä
On 7 October 2011, Talvivaara announced that
CEO Pekka Perä had stated to the Board of Directors his decision to retire from
active executive duties over the coming months. Consequently, the Company will
seek to appoint a new CEO at the earliest opportunity, and Mr Perä has agreed
to continue with his current duties until that time. Mr Perä has also confirmed
that he intends to continue as an active member of the Board and to retain his
current shareholding in the Company.
The Board has commenced the search for a new
CEO and will update the market as appropriate, to ensure a smooth handover of
responsibilities and effective transition.
Signing of the revolving
credit facility amendment agreement
In October, an amendment agreement was signed
by Talvivaara and the lending banks to an originally EUR 100 million revolving
credit facility agreement. In addition to certain amendments to reflect
Talvivaara's current stage of development, the facility was expanded to EUR 130
million and the maturity was extended by one year to June 2014. The lenders and
arrangers of the facility are Nordea Bank, Sampo Bank, Svenska Handelsbanken and
Pohjola Bank. The facility, which is currently undrawn, carries a varying margin
of 1.75-3.00% depending on the Company's leverage ratio.
The
amended EUR 130 million facility replaced the EUR 80 million commitment by
Nordea Bank signed in June 2011, primarily as back-up financing relating to the
acquisition of Talvivaara Sotkamo shares from Outokumpu Mining.
Strike of the Metal
Workers Union and Trade Union Pro
The Finnish Metal Workers Union and the Trade
Union Pro commenced a strike on 21 October 2011 across 40 companies within the
technology industries. Certain mining companies including Talvivaara were
however excluded from the scope of the strike. The strike ended on 24 October
2011.
Environmental permitting
The Kainuu Centre for Economic Development,
Transport and the Environment (the "ELY Centre") resolved on 21 October 2011
that the increase in