KENMARE R ESOURCES PLC. A NNUAL R EPORT & A CCOUNTS 2008 KENMARE RESOURCES PLC CHATHAM HOUSE, CHATHAM STREET, DUBLIN 2, IRELAND. TEL: +353 1 6710411 FAX: +353 1 6710810 EMAIL: [email protected] WWW.KENMARERESOURCES.COM ANNUAL REPORT & ACCOUNTS Mining & Processing Operations 1. Mining Dredges 2. Wet Concentrator Plant 3. Heavy Mineral Concentrate Stockpiles 4. Mineral Separation Plant 5. Product Storage Warehouse 6. Jetty 7. Trans-shipment Vessel 8. Customer Bulk Carrier 8 7 4 6 3 5 2 1 IE Y. CO : WWW.D N G ESI D Contents Chairman’s Statement 3 Operating, Marketing and Financial Review 6 Corporate Social Responsibility Statement 16 Board of Directors 24 General Information 30 Directors’ Report 31 Statement of Directors’ Responsibilities 35 Risk and Risk Management Report 36 Corporate Governance Report 38 Directors’ Remuneration Report 41 Independent Auditors’ Report 42 Consolidated Income Statement 44 Consolidated Balance Sheet 45 Consolidated Cash Flow Statement 46 Consolidated Statement of Changes in Equity 47 Company Balance Sheet 48 Company Cash Flow Statement 49 Company Statement of Changes in Equity 50 Statement of Accounting Policies 51 Notes to the Financial Statements 56 Shareholder Profile 78 Notice of Annual General Meeting 79 1 Kenmare Annual Report 2008 MAIN FOCUS: TO IMPROVE PRODUCTION 2 Kenmare Annual Report 2008 Chairman’s Statement Chairman, Charles Carvill Dear Shareholder, This set of projects, known collectively as the PIP, is being implemented largely by the contractor with close involvement by Over the past year we have worked with one main focus: to a dedicated Kenmare project team to ensure adherence to the improve production. We are now in a much improved position agreed schedule and scope of work. In the three months since it to deliver on our targets for the Moma Titanium Minerals Mine. was initiated, the PIP has been 75% completed across 326 action areas with all necessary new equipment either delivered, in transit While we have made significant improvements in production levels or in manufacture. While most tasks within the PIP fall under the over the past year, there have also been significant challenges. contractor’s responsibility, Kenmare is itself responsible for a sub-set These included Cyclone Jokwe, successive missed deadlines by of tasks necessary to achieve full production of 800,000 tonnes per our construction contractor and aspects of the plant which were annum of ilmenite plus co-products rutile and zircon. demonstrated as not being fit for purpose frustrating our ability to reach full production. However, the Board remains confident that the The PIP is addressing key areas that are vital to achieving production mine will reach full production by the end of this year and that the plan targets, including the upgrade of the dredge hydraulics, slimes and to get there is both achievable and realistic. tailings disposal pumping systems, material handling systems in the mineral separation plant, and provision of additional separation Key steps taken by the Board and Kenmare’s management team to equipment in the ilmenite, zircon and rutile circuits, combined with ensure that these targets are reached by late 2009 include: a new ilmenite reject scavenging system to optimise recoveries and product quality. Most of the work has to be completed before • Development of a detailed plan which addresses production issues achieving significantly higher production levels and implementation and their solutions; involves some disruption of production as work is carried out. • Implementation of a detailed Performance Improvement Project Nonetheless, production of heavy mineral concentrate, the limiting (“PIP”) to rectify deficiencies in the plant and equipment, parameter, increased by 18% in quarter 1, 2009 compared with 75% complete; and quarter 4, 2008. • Appointment of a new Chief Operating Officer and a new General Manager for the mine. Kenmare has recruited a new Chief Operating Officer and General Manager for the mine. Both have successful track records and In November 2008, Kenmare required the construction contractor considerable experience in the mineral sands industry in South Africa to participate in a set of performance tests on the facilities at the and Australia, which will benefit the mine. They have, in turn, appointed mine. These tests were witnessed by a jointly appointed independent a number of experienced personnel to key mining and processing observer and, as we anticipated, failed to achieve the required positions, further strengthening the capacity of the mine to deliver on performance criteria outlined in the contract in a number of key areas. production targets. This enabled Kenmare to present the contractor with a set of projects we considered necessary to reach full production, and to insist that Drilling completed during 2008 resulted in an upgrade of an Inferred implementation commence immediately. Resource at Namalope, the orebody on which the dredges are The Performance Improvement Project is addressing key areas that are vital to achieving production targets. Kenmare Annual Report 2008 3 Drilling results on the Namalope orebody increased this reserve adding an estimated 5 years to its mine life. working, to a Probable Reserve. As a result, the heavy mineral the additional liquidity necessary to enable Kenmare to achieve reserves for the Namalope orebody increased from 21 million tonnes production ramp-up plans. to 26 million tonnes of total heavy minerals, despite the consumption of 0.6 million tonnes during 2008. The new reserves have added an The profit after tax for the year is US$0.3 million and arises from estimated five years of mine life to the Namalope deposit. deposit interest earned and foreign exchange gains, less corporate and exploration costs. During 2008, operating and financial costs At our Board meeting on 16 April 2009, Dr. Alastair Brown retired net of revenue earned for the period, totalling US$60.1 million, were both from his executive position as Director of Geology and from the capitalised in property, plant and equipment as construction was not Board. Alastair was with Kenmare from 1987, providing the resource yet complete and as the mine was not yet capable of operating close definition which has enabled the financing and construction of the to design capacity. Senior and subordinated loans drawn at the year mine. He worked in difficult circumstances with limited resources, but end amounted to US$334.8 million, US$121.7 million of which were with rigorous methodology which has withstood examination by third Euro-denominated loans. party experts throughout the financing process. We all wish Alastair well in his retirement and thank him for his enormous contribution. At full production, we expect the mine’s operating cost will be in the lowest quartile for titanium feedstock producers. The resource base, The present difficulties faced by the world’s economies are impacting one of the largest in the world, will support successive expansions of on the uptake of titanium mineral products. In particular there has capacity. We remain confident that, despite the disappointing delays been strong inventory de-stocking, reducing demand by pigment in achieving full production, the mine’s potential is enormous and we producers, our key market. The bulk of the mine’s planned production expect it will provide huge value to our shareholders. for 2009 is covered under marketing contracts and the shipment schedule for the coming months remains busy. We are hopeful that this inventory de-stocking cycle is nearing completion and that normal market conditions, even if at reduced levels, will soon resume. In September 2008, we initiated a dialogue with our lenders with the objective of preserving liquidity. As a result, I am pleased to report that lenders agreed to a deferment of capital repayments during 2009, to allow us use funds in the Contingency Reserve Account (US$15 million) for project purposes, and to defer the date by which we would otherwise have been required to achieve financial completion. This arrangement, along with existing financial resources and an invoice Charles Carvill discounting facility being arranged with one of the lenders, will provide Chairman 4 Kenmare Annual Report 2008 THE RESOURCE BASE, ONE OF THE LARGEST IN THE WORLD, WILL SUpport SUCCESSIVE EXpansions OF capacitY Kenmare Annual Report 2008 5 Operating, Marketing and Financial Review Introduction OPERATING REVIEW The principal activity of Kenmare Resources plc (“Kenmare”), listed on the main board of the Irish and London Stock Exchanges, is the Description of mining and processing operations operation of the Moma Titanium Minerals Mine which is located on The mining operation consists of an artificial, freshwater mining pond the northern coast of Mozambique. The mine contains reserves approximately 800m long, 300m wide and up to 15m deep. Mining is of heavy minerals which include the economic titanium minerals conducted by two 2,500 tonne per hour capacity dredges which extract ilmenite and rutile, as well as the relatively high-value zirconium mineral-bearing sands from the pond mining face. The mineral-bearing silicate mineral, zircon. sands are pumped to the WCP where HMC is recovered by gravity separation. The products of the WCP are HMC and tailings. Tailings, Mining is by means of dredging in an artificial mining pond, with which consist of a coarse fraction (sand) that settles immediately, and a concentration of the heavy minerals in a floating wet concentrator fine