BHR.L Regulatory News (BHR)

30 October 2013

Beacon Hill Resources Plc / AIM: BHR / ASX: BHU / Sector: Mining

Beacon Hill Resources Plc ('Beacon Hill' or 'the Company')

Quarterly Activities Report for the period ended 30 September 2013

3nd Quarter Highlights

· Phase 2A wash plant installed and commissioning remedial actions identified

· Updated Reserve Statement released with Minas Moatize Coking Coal Project economically robust during downturns in the resources cycle

· Total Run of Mine Proven and Probable ("P&P") Reserve (Air Dried Basis) of 39.38 million tonnes ('Mt'), Total P&P saleable Reserve of 16.16Mt, of which at least 8.3Mt is coking coal

· Reserve Statement confirmation that Minas Moatize has a mine life of up to 15 years

· The Phase 2B and 2C upgrades to commence and, subject to receiving senior debt finance, scheduled for completion in September 2014

· Planning application and EIA underway for superior rail offload site adjacent to the port of Beira

· Discussions ongoing for co-ordinated arrival of rolling stock from two suppliers at end of January 2014 in Beira Port

· Funding discussions are progressing with conventional pre-export senior debt provider to project finance the capex for Phase 2B and Phase 2C expansion

· Following the completion of these initiatives, the Company expects to move into a Tier 1 FOB cash cost position which is key to sustainable cash flow generation in a majority of price scenarios

Rowan Karstel, Chief Executive Officer of Beacon Hill commented, "During the quarter, record low coking prices reminded us of the need to build phase 2B and 2C of the wash plant as soon as possible, following the successful completion of phase 2A, so that we can move Minas Moatize into a tier 1 FOB cash cost producer. Having demonstrated that the Reserve at Minas Moatize is economically and technically viable for 15 years + during the quarter, we have made the decision that going forward, production will be reduced to minimise the cash burn until phase 2B and C is completed. Once complete, we expect to be in a Tier 1 cost position where the mine can ramp up into positive cash-flow in the majority of predicted price scenarios. With this in mind, we have mandated a leading bank to arrange a project finance facility for the necessary capital expenditures."

Minas Moatize Coking Coal Project

(a) Safety Performance

One High Potential Risk Incident (HPRI) resulting in a medical treatment injury and one first aid injury were reported during the last quarter. Year to date 1 HPRI, 2 medical treatment and 3 first aid injuries were reported.

(b) Safety Achievements

Fatality free man shifts at end of September: 729, 338

Reportable free man shifts as at end of September: 401, 525

Lost time injury free days stand at 444 days as at 30 September 2013.

The Technical Safety and Health Plan as required by the legislation has been revised and approved, and is currently in the process to be translated into Portuguese.

Risk Management Training (continuous hazard identification and risk assessment - TAKE 5) commenced during the last quarter and all employees including contractors will undergo the training.

(c) Occupational Health and Hygiene Performance

No occupational illness was reported year to date.

(d) Environmental Performance

No significant environmental incidents were reported during the last quarter. A new Incident reporting system is being developed and will be implemented in a manner which categorises the environmental incidents in order to obtain better information.

Production Update

Mining and processing operations were still in commissioning and ramp-up phases during Q3 2013, as a result 79,202 tonnes of ROM coal was mined with 17,859 tonnes of saleable coal produced.

The production ramp up continued to progress well with the plant producing both hard coking coal and thermal coal to expected specification and qualities. Due to the low commodity prices and to reduce the effect of negative cash burn it was decided to slow down production and focus on Phase 2B and 2C wash plant upgrade. Once the Phase 2B and 2C plant upgrade is completed the mine should be a tier 1 FOB cash cost producer and production will then be ramped up profitably.

Wash Plant (CHPP) Performance

To manage both risk and cash flow it was decided to build the Minas Moatize phase 2 wash plant in phases. Phase 2A was completed in May 2013 and in the last few months the focus was on successfully commissioning the wash plant. The most significant challenges to date were mainline power surges, supply of magnetite and some minor plant efficiency issues detailed below. The most significant achievement was the consistent production of specification hard coking coal during the period. Phase 2A ramp up has performed in line with our expectations to date and provided the necessary insights to remedy any in-efficiencies in the Phase 2B implementation.

Run of Mine Section

(a) Run of Mine Feed to Plant Size Distribution

The feed stock during the quarter was predominantly middle Chipanga and the upper portion of the lower Chipanga from TP2. The upper portion of the Lower Chipanga (hosting the thickest coking coal seams) was held back and only used selectively.

(b) Run of Mine Feed Size Reduction - ROM Pan Feeder and Triple Roll Crusher

During the third quarter, the Company took remedial actions to improve the feed bin and pan feeder arrangement for correct flow of material onto the pan feeder (Run of Mine feeder). This remedial action was due to the ROM pan feeder at intervals not being able to give feed rates consistently higher than 150 tph. Upon investigation it was concluded that the flow of the ROM feed material through the bin onto the pan feeder was biased towards the back end of the feeder, thereby not being affected sufficiently by the amplitude of the feeder to push the material at the required higher feed rates.

During the third quarter the Company took remedial action to acquire a new primary crusher which is planned to be installed during November 2013. The primary crusher is a double roll Shumar crusher that can handle feed tonnages of 600tph+ and reduce the ROM material from a top size of 450 mm to a discharge size of < 100 mm. The breaking plate and tensioning bolt from the Phase 1 washplant was damaged by tramp metal and the knock on effect resulted in a size reduction ratio was too high for the segments to allow at the desired throughput. Therefore, the feed rate was reduced at intervals.

(c) Power Supply

Power supply from EDM, the local power utility was poor during the quarter. A number of unplanned outages occurred as well as irregular voltage supply that affected plant equipment severely. Despite our investment in our mainline power supply, one of the challenges in Tete, Mozambique is a reliable power supply and the Phase 2B/2C plan involves installing additional generator-sets and voltage drop protection systems that will mitigate these effects on the plant.

Coal Beneficiation Performance

In regard to the coal beneficiation process, the feed to plant was well below the design throughput due to the issues listed above. This situation did not allow for the process circuit to be operated near the capacity. Thus, the issues that prevailed were;

(a) Raw Magnetite

During the 3rd quarter the Company progressed discussions with its preferred Magnetite Supplier to proceed with the implementation of an on-site storage depot on real estate provided by the Company main subsidiary Minas Moatize. The intention is to stock sufficient stocks of raw Magnetite at all times. The benefit to Minas Moatize will be a price concession per ton of raw Magnetite and continuous contingency stock immediately available. This remedial action was due to repeated poor availability from the supplier during the 3rd quarter. At times the plant operated at very low medium levels. This had a detrimental effect on the product yield as well as restricted throughputs.

(b) Primary DSM Feed Pump

The primary stage cyclone feed pump speed was increased to ensure that at higher feed tonnages the material can be pumped away and that the pressure in the cyclone is reached to ensure proper separation. As part of the commissioning rectifications, a different sized pulley will be delivered to the mine and installed during latter part of October 2013.

(c) Variable speed drive

 After commissioning stoppages the eventual cause of the trips was found to be related to the variable speed drive. The parameters were adjusted and during the last week of August (after the changes were made) and thereafter the primary cyclone feed pump operated with high availability.

(d) Fine Coal and Water Clarification Circuit

The Reflux Classifier has been pending correct commissioning during the quarter and is important to raising the coking coal recovery yield. The unit requires in the order of 50 m3 of water per hour for processing. The water has to be clean and during commissioning it was found that there was insufficient re-cycled clean water volume.

The existing Phase 1 lamella thickeners did not allow for sufficient settling and dirty water was being recycled back into plant that adversely affects the plant performance.

Remedial action was already incorporated in the design of phase 2B and 2C and a conventional rake thickener will be installed to help address above problems. This will ensure that the plant has clean recycled water, that the fines can be removed from the system and ensure that the large volumes of water required to operate the plant and Reflux classifier can be managed.

(e) Coal Quality

The saleable product stockpiles are being monitored and verified at up to hourly intervals by the Company's new on-site laboratory operated by Bureau Veritas and by an independent surveyor. Product quality from the plant is in line with the Company's expectations. Minas Moatize consigned a 20 tonne container of its Hard Coking Coal to its Marketing Agent for customer testing during the period.

Phase 2B and 2C of wash plant upgrade

The Company is now focused on pursuing Phase 2B/2C implementation for 1H 2014, subject to project financing, to deliver the required volume (2.8 million tons ROM) that will reduce unit production costs to that of a Tier 1 global hard coking coal producer. This will ensure that the Company is above all able to remain competitive and cash generative at current coal prices.

Phase 2B will increase the capacity of the plant from 1.8 to 2.8 Mtpa through an additional crushing station and a second dense medium cyclone plant. The plan is also to replace the old technology Lamellas with a thickener and increase the water recovery efficiency. Phase 2C will be a flotation plant with a filter press that will increase the coking coal yield from approximately 15% to 21%. Despite our investment in our mainline power supply, one of the challenges in Tete, Mozambique is a reliable power supply and the Phase 2B/2C plan involves installing additional generator-sets and voltage drop protection systems. The construction period for upgrading the plant will be 8 months from the date the order is placed.

The Company entered negotiations with a number of equipment providers to submit proposals on Phase 2B/2C wash plant upgrades. After the proposals were evaluated a preferred supplier was selected to implement the upgrade on a turn-key basis. The preferred means of financing is via senior debt and the Company has mandated a leading financial institution with respect to arranging a senior secured debt facility to complete its Phase 2B/2C capital expenditure.

Logistics

Rolling Stock Leasing/Services

All contractual matters for the rolling stock were finalised during the quarter. The remaining outstanding agreement is for the on-board computers (OBC) on the locomotives (controlled via a constellation of low-earth orbiting satellites, other networks and equipment that is required for the control of the trains). The train crews and other personnel, required for the running of the trains, have been trained by RRL Grindrod and passed out by the Mozambique national rail organisation Portos e Caminhos de Ferro de Moçambique (CFM).

Rolling Stock Fabrication and Delivery

The production of the locomotives is proceeding as per the agreement with RRL Grindrod. The inspection of the prototype rail wagon (MML001) took place on the 8 August 2013 at Transnet Engineering's workshops in Uitenhage in the Eastern Cape, South Africa. Transnet Engineering sub-contractor formally informed the parties of a minor delay with the procurement of the bogies and couplers from China and it is now foreseen that the delivery of the rail wagons will be delayed beyond the contractual delivery date of November 2013. The Company has therefore requested a co-ordinated delivery of the rolling stock simultaneously at or around the end of January 2014. The Company intends to operate the rolling stock during Q1 2014 in test phase moving coal on the Sena railway line. This is an important aspect of the Company's strategy to further de-risk the ramp up in phases and to demonstrate its long-term commitment to operating a successful business in Mozambique. A number of interested parties have approached the Company seeking logistics services for coal and a number of discussions are ongoing.

Rail Infrastructure and Site Design

The Company's railway consultants have completed most of the detailed designs and drawings for the coal off-loading site in Beira. Applications for planning permission and Environmental Impact Assessment requirements were ongoing during the quarter and are expected to be finalised by year-end. The development of a coal off-loading facility has been delayed as a result of extended discussions with CFM. It is foreseen that the construction of the off-loading site will be carried out during 2014.

The development of the Carbonoc Coal Loading Site in Moatize, Tete is advancing satisfactorily and the elements of the project that are still outstanding will be completed in the last quarter of 2013.

JORC Reserve Statement

During the quarter, the Company produced an updated JORC Coal Reserve Statement for the Minas Moatize Coking Coal Mine:

· Significant economically viable mineable Reserve demonstrated at Minas Moatize despite current depressed coking and thermal coal prices - establishes project as economically robust during downturns in the resources cycle

· Total Run of Mine Proven and Probable Reserve (Air Dried Basis) of 39.38Mt

· Total Proven and Probable saleable Reserve of 16.16Mt, of which at least 8.3Mt is coking coal

· Confirmation that Minas Moatize has a mine life of up to 15 years

Corporate

Board Changes

The company today announces Mr David Premraj has resigned from the Beacon Hill Resources Board. Mr Premraj joined the Board assist with the Company's turnaround strategy during 2012 which is now complete and was instrumental in the Company's rationalisation program to close the Australian office and de-list the Company from the ASX. The Board would like to extend its gratitude to Mr. Premraj for his service.

Funding 

Senior Debt Funding

A Due Diligence process commenced with a leading lending bank to provide new secured project finance facilities before year end to re-finance the Vitol senior debt facilities, refinance and replace any undrawn convertible loan notes, provide capex and general working capital and to substantially lower the overall cost of capital to the Company. The successful completion of this facility would potentially reduce or eliminate the requirement for drawing further convertible loan notes after period end and reduce any contingent dilution associated with their conversion (if any).

Cash Position

The Company is currently adequately funded with US$7.6 million (approximately £4.2 million) in cash and cash equivalent assets as at 30 September 2013, including contractor prepayments. Post period end the Company put in place a further US$19.4 million in Convertible Loan Note facilities (described below) of which US$4.1 million were drawn down on 3rd October 2013 and a further US$3.0 million is expected to be drawn prior to year end subject to shareholder approval.

Post Period End - Convertible Loan Notes

After quarter end, the Company announced the placing of unsecured convertible loan notes in October 2013 to raise up to approximately US$19.4 million:

· US$3.5 million of unsecured convertible loan notes with a subscription price of US$3.2 million were issued to Company shareholders; and

· An agreement was reached with Darwin Strategic Limited to issue at least £2.75 million (equivalent to US$4.45m) and potentially up to an aggregate of £11.0 million (equivalent to US$17.8 million) in unsecured convertible loan notes with a subscription price of up to £10.0 million (equivalent to US$16.2 million)

**ENDS**