Ferro-alloy Re. Regulatory News (FAR)

11 September 2023

Ferro-Alloy Resources Limited

("Ferro-Alloy" or "the Company" or "the Group")

2023 Interim Results

Ferro-Alloy Resources Limited (LSE:FAR), the vanadium producer and developer of the large Balasausqandiq vanadium deposit in Southern Kazakhstan, is pleased to announce its interim results for the six months ended 30 June 2023.

Overview

Feasibility Study

· Feasibility study ongoing with completion of Stage 1 of the study expected in April 2024 and Stage 2 later in 2024:

o  Ore resource for ore-body 1 was revised upwards during the period by SRK Consulting (Kazakhstan) to 32.9m tonnes at a mean grade of 0.62%, giving an increase of 35.4% in the resource and 23% in contained V2O5.

o  Drilling of ore-bodies 2, 3 and 4 has been completed with the exception of an area which is difficult to access. The Company is awaiting assays for these ore-bodies which are expected to provide the feed for the larger Stage 2 development of the deposit.

o  Metallurgical test-work is nearing completion.

Operations

· Final planned improvements completed at the Existing Operation (where the Group processes secondary materials and recovers the contained vanadium, molybdenum and nickel for sale to third parties) including:

o  The conversion of the fuel used for the various roasting ovens from diesel to natural gas.

o  A further press filter and tanks to allow a second pulpation process to give a further recovery of vanadium.

o  A further press filter and tanks to allow for recrystallisation of ammonium metavanadate, an essential step in producing a high purity product as required for electrolyte purposes.

o  Improved molybdenum processes to increase recovery to around 90% depending on the raw-material treated.

o  Various additional equipment to contain production emissions.

· Following poor availability of concentrate supply in Q1, Q2 achieved best production by the Group to date in terms of both tonnes of concentrates treated and tonnes of metal recovered across all product lines, however, H1 production constrained by a lack of raw materials caused by continuing defaults of certain of the Group's suppliers.

· The Group has subsequently made changes to suppliers and has secured future deliveries to allow full production from mid-late September 2023.

Financial

· Total revenues of US$3.3m for the period (H1 2022: US$3.9m) reflecting the reduced volumes of raw materials delivered to the existing plant for processing during the first quarter of the year.

· Overall loss for the period of US$1.5m (2022: loss of US$0.7m).

Corporate

· Post period, launched the first tranche of a new Kazakhstan exempt offer bond programme in July 2023. The proceeds of the Programme will be used to strengthen the Company's balance sheet and provide working capital, allowing the acceleration of the project's development as far as possible.

Commenting on the interim financial results, Nick Bridgen, CEO of Ferro-Alloy Resources said:

"I am pleased to report the good progress with the feasibility study. With the completion of the expansion of the existing process plant, and the improved raw-material supply position, I look forward to much better operational performance from the fourth quarter of this year onwards."

- Ends -

For further information, visit www.ferro-alloy.com or contact:

Operations Review

Balasausqandiq feasibility study

The Company is currently undertaking a comprehensive bankable feasibility study on the Balasausqandiq project, with completion of Stage 1 of the study expected in April 2024 and Stage 2 later in the year. Although a full mineral resource estimate has only been completed for ore-body 1 ("OB1"), indications are that Balasausqandiq will be one of the largest vanadium operations in the world.

The ore resource for OB1 was revised upwards during the period by SRK Consulting (Kazakhstan) Limited, the author of the feasibility study, to 32.9m tonnes at a mean grade of 0.62%, giving an increase of 35.4% in the resource and 23% in contained V2O5.

The drilling of ore-bodies 2, 3 and 4 has been completed with the exception of an area which is difficult to access. This is planned to be drilled closer to the time of mining when access has been developed. The Company is awaiting assays for these ore-bodies which are expected to provide the feed for the larger Stage 2 development of the deposit.

The metallurgical test-work is nearing completion. The Company's metallurgical process was previously tested in a pilot plant and the process parameters are now being rigorously tested in independent laboratory conditions by SGS Canada Inc under the direction of Tetra Tech Limited, who are carrying out the metallurgical section of the feasibility study.

Other parts of the study are also nearing completion and the overall study for Stage 1 is expected to be announced in April 2024, as noted above.

The existing operation

The existing operation was developed from the original 15,000 tonnes per year ore-treatment test plant which was used to develop and pilot the proposed treatment process of the Balasausqandiq ore. The plant was subsequently adapted to treat purchased concentrates. The most common raw material is the loaded catalysts used in refineries to remove the metal impurities from crude oil. The Group buys these secondary materials and recovers the contained vanadium, molybdenum and nickel for sale to third parties.

During the first half of 2023, the final planned improvements were made to the plant, including:

1. The conversion of the fuel used for the various roasting ovens from diesel to natural gas;

2. A further press filter and tanks to allow a second pulpation process to give a further recovery of vanadium, taking the average overall recovery of vanadium from catalysts treated to over 90%;

3. A further press filter and tanks to allow for recrystallisation of ammonium metavanadate ("AMV"), an essential step in producing a high purity product as required for electrolyte purposes;

4. Improved molybdenum processes to increase recovery to around 90% depending on the raw material treated; and

5. Various additional equipment to contain production emissions.

The Group received grant funding from the Kazakhstan National Scientific Council to develop the process and install equipment for the production of various oxides of vanadium suitable for use in electrolyte for vanadium redox flow batteries. The development work is in association with the Physical-Technical Institute of Almaty (part of the Satbayev University) who are building a laboratory in which a battery will be installed and electrolyte produced from the Group's oxides for test purposes.

Production

The second quarter of the year achieved the best production by the Group to date in terms of both tonnes of concentrates treated and tonnes of metal recovered across all product lines.

By comparison, production for the first quarter of the year was severely constrained by the availability of concentrate supply to the existing plant and is reflected in the corresponding production figures.

* contained in AMV

** contained in ferro-molybdenum

*** contained in nickel concentrate

Outlook

The first half of 2023's output was constrained by a lack of raw materials, caused by continuing defaults of certain of the Group's suppliers. The Group responded by signing several new long-term and spot supply contracts but further delays to delivery were experienced. In response, the Group has made yet further changes to its suppliers and signed new contracts to secure future deliveries. The indications are that more material is being offered to the Group, allowing the Group to select the more reliable counterparties. Despite these setbacks, sufficient volumes of raw materials have been purchased and are en route to the Group's plant site to allow full production from mid to late September. Winter transport delays may impact on winter deliveries, albeit to a lesser extent than previously experienced.

Corporate

The Company's previously issued and outstanding bonds, amounting to US$1.1m at 31 December 2022, were redeemed at maturity during March 2023. 

Subsequently, the Company launched a new Kazakhstan US$20m exempt offer bond programme ("the Programme") in July 2023. Cash proceeds generated by the Programme will be used, in general, to strengthen the Company's balance sheet and provide working capital for the existing operation. 

The key features of the Programme are as follows:

- the Programme can comprise of one or more tranches of bonds, each listed on the Astana International Exchange ("AIX");

- the total nominal value of all tranches issued under Programme will not exceed US$20m;

- only accredited investors resident in Kazakhstan will be eligible to invest in the Programme;

- bonds issued under the Programme will be denominated in either US dollars or Kazakhstan tenge;

- all bonds issued will rank as unsecured debt obligations of the Company;

- the applicable coupon rate, duration, issue price and other relevant terms of any bonds issued under the Programme will be defined and determined by the terms and conditions of each tranche of bonds issued; and

- the Programme is governed by the laws and regulations of the Astana International Finance Centre and is valid until 31 July 2033.

Following the launch of the Programme, the Company listed the first tranche of bonds on the AIX on 27 July 2023 with the ability to raise an initial US$3 million. As at the date of this report, the first tranche of bonds has been materially sold and the cash proceeds received.

The Company is preparing to list a second tranche of bonds on the AIX during the course of September / October with the ability to raise a further US$5 million. The cash proceeds from the second tranche will be deployed to accelerate the development of the project, including front-end engineering.

Product prices in the period

Vanadium pentoxide

At the start of 2023, the price of vanadium pentoxide was around US$9.30/lb, rising slightly to between US$10.00/lb and US$10.50/lb for the period January to March inclusive, after which the price dropped to US$6.85/lb during June before recovering to around US$7.50/lb at the period end. 

Ferro-molybdenum

At the start of 2023, the price of ferro-molybdenum was around US$79/kg rising sharply to a period high of US$101/kg in February before gradually falling to a period low of US$42/kg in April, after which prices stabilised at around US$50/kg for the balance of the period.

Earnings and cash flow

The Group generated total revenues of US$3.3m for the period (H1 2022: US$3.9m). The reduction in revenue reflects the reduced volumes of raw materials delivered to the existing plant for processing during the first quarter of the year.

The cost of sales for the period under review was US$3.6m in line with the first six months of 2022 (US$3.5m).

Administrative expenses for the period were US$1.3m (2022: US$1.2m).

The Group made a loss before and after tax of US$1.5m (2022: loss of US$0.7m).

Net cash outflows used in operating activities were US$1m (2022: cash outflow of US$0.5m). Net cash used in investing activities during the period was US$2.3m, an increase of US$0.6m in comparison to the prior period, reflecting the Group's continued investment in the Balasausqandiq feasibility study and planned upgrades to the plant at the existing processing operation. Net cash used in financing activities increased by US$1.1m between the periods due to the maturity and repayment of the Company's outstanding bonds in issue during March 2023.

Balance sheet review

At the period end, non-current assets totalled US$11.9m (2022: US$8.0m) reflecting the continued capitalisation of expenses incurred by the Group on the development of the Balasausqandiq feasibility study (as an exploration and evaluation asset) and capital additions made to the plant at the existing processing operation.

Current assets, excluding cash balances, totalled US$5.0m at the period end compared to US$4.8m for the prior period.

The Group held an aggregate cash balance of US$0.6m at the period end (2022: US$0.5m). As at the date of this report, the Group held an aggregate cash balance of US$1.8m.

The Group did not hold any significant or material non-current liabilities at the period end.

With respect to current liabilities, the reduction in the overall balance from US$4.2m at 30 June 2022 to US$3.0m at the period end can be attributed, in the main, to the repayment of the Company's outstanding bonds. 

Environmental, social and governance

Both the existing operation and the planned process plant for Balasausqandiq will have a strongly positive environmental impact. The vanadium from production will benefit energy storage in both vanadium redox flow batteries, the front-running technology for fixed ground long-term energy storage, but also potentially in certain technologies for mobile batteries used in electric vehicles.

Furthermore, in both operations we are aiming to leave little or no residues from processing operations, since all the components of the ore are potentially useful. The CO2 emissions created by our production at Balasausqandiq are expected to be a fraction of most other producers which generally require concentration and high-temperature roasting to liberate the vanadium. The carbon concentrate which we plan to market as a replacement for carbon black is produced without burning hydrocarbons, as is the usual production process.

Description of principal risks, uncertainties and how they are managed

(a) Current processing operations

Current processing operations make up a small part of the Company's expected future value but are expected to provide useful cash flows in the near term and allow the Group to gain valuable experience of the vanadium industry. The principal risks of this operation are the prices of its products (vanadium, molybdenum and nickel), availability of vanadium bearing concentrates and the efficiency of recovery of products from those concentrates.

The Group is constantly reviewing the market opportunities for supplies of vanadium bearing concentrates. The Group aims to extract all the useful components of the raw materials so that no residues remain on site and so maximum value is obtained from each tonne treated. By this means, we aim to be one of the most efficient and lowest cost secondary vanadium treatment plants so that our competitive position reduces the danger of high prices for raw materials making the operation uneconomic.

(b) Balasausqandiq project

The Balasausqandiq project is a much larger contributor to the Company's value than the current processing operation and is primarily dependent on long-term vanadium prices.

The project is dependent on raising finance to meet projected capital costs (see below) and the successful construction and commissioning of the project's proposed mine processing facilities. It is not unusual for new mining projects to experience unforeseen problems, incur unexpected costs and be exposed to delays during construction, commissioning, and initial production, all of which could have a material adverse effect on the Company's operations and financial position. The Company has taken steps to mitigate such potential adverse effects by engaging globally recognised engineers and consultants to assist with the development and design of the key elements of the project in addition to the Group's own highly qualified workforce.

(c) Geopolitical situation

The Directors remain vigilant of the situation created by the ongoing invasion of Ukraine by Russia. The continued main risk of the conflict is to the Group's transport routes, many of which involve transit through Russia. Whilst these are currently operating without issue, sanctions have been made against Russian and Belorussian vehicles transiting through Europe (but not against vehicles registered in other jurisdictions in the region such as Kazakhstan). There is a risk that further sanctions might prevent transit through Russia. The Company continues to review alternative transit routes for raw material imports and product exports through the West of Kazakhstan, either via the Caspian Sea or overland south of the Caspian Sea. Routes to China are working normally.

With respect to the global sanctions imposed on certain Russian entities and individuals, the Group monitors the implications of those sanctions on the Group's trading activities on an ongoing basis.

(d) Financing risk

The Balasausqandiq project will require substantial funds to be raised in debt and possibly further equity which will be dependent upon market conditions at the time and the successful completion of the Stage 1 feasibility study.

The existing operation is fully developed and operating well and, subject to the uncertainty over vanadium bearing concentrate availability, prices and costs, is forecast to make profits going forward.

In March of 2021 the Company signed an investment agreement with Vision Blue Resources Limited ("Vision Blue"). Under the terms of this agreement and in addition to Vision Blue's participation in the 2022 equity fundraise, investments totalling US$14.3m have already been made and Vision Blue has the right to subscribe a further US$2.5m at the original deal price of 9 pence per share at any time up to two months after the announcement of the Stage 1 feasibility study. Vision Blue also has further options to subscribe up to US$30m at higher prices to partially finance the construction of the Balasausqandiq project.

The favourable financial and other characteristics of the project determined by studies so far completed give the Directors confidence that the outcome of the Stage 1 feasibility study will be successful. Initial discussions with potential providers of debt finance have been encouraging.

(e) Climate change risk

The Group has not identified any particular climate change related scenarios that would likely have a significant impact on the Balasausqandiq project or the existing operation. The existing operation already functions in an environment that is subject to extreme weather conditions and is, therefore, considered to have a strong resilience to existing and future climate-related scenarios.

(f) Risks associated with the developing nature of the Kazakh economy

According to the World Bank, Kazakhstan has transitioned from lower-middle-income to upper-middle-income status in less than two decades. Kazakhstan's regulatory environment has similarly developed and the Company believes that the period of rapid change and high risk is coming to an end. Nevertheless, the economic and social regulatory environment continues to develop and there remain some areas where regulatory risk is greater than in developed economies.

(g) Commodity price risk

As already noted above, the success of the Company is dependent upon the long-term prices of the products to be produced by the planned mine processing facilities. As a result of there being no formally established trading markets for the Company's principal products from the project, there is a risk that price fluctuations and volatility for these products may have an adverse impact on the Company's future financial performance

These condensed unaudited financial statements were approved by the directors on 8 September 2023 and signed by:

_____________________________

William Callewaert

Director

Condensed unaudited Statement of Financial Positionfor the six months ended 30 June 2023

Notes to the Condensed unaudited Financial Statements for the six months ended 30 June 2023

1 (a) Basis of preparation

These Condensed unaudited Financial Statements have been prepared in accordance with IAS34 'Interim Financial Reporting' and International Financial Reporting Standards as adopted by the European Union ("IFRS") on a going concern basis.

The same accounting policies and basis of preparation have been followed as adopted in the annual financial statements of the Group which were published on 27 April 2023.

(b) Going concern

The Directors have reviewed the Group's cash flow forecasts for a period of at least 12 months from the date of approval of the financial statements, together with sensitivities and mitigating actions. In addition, the Directors have given specific consideration to the continued risks and uncertainties associated with the geopolitical situation with respect to Russia and Ukraine.

The Group has the plant facilities and capacity in place to operate profitably and although the amount of those profits available to fund the Stage 1 feasibility study and investment programme may vary with metal prices and other factors, the Directors are confident that the Company has sufficient resources to continue as a going concern for at least the next 12 months.

(c) Use of estimates and judgements

Preparing the financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

Carrying value of processing operations

The Directors have tested the existing operation's property, plant and equipment ("PP&E") for impairment (Note 9) at 30 June 2023. In doing so, net present value cash flow forecasts were prepared using the value in use method which required key estimates including vanadium pentoxide, ferro-molybdenum and nickel prices, production including the impact of ongoing PP&E maintenance costs and an appropriate discount rate. Key estimates included:

· Production volumes of 64 tonnes per month of vanadium pentoxide (as AMV), 6 tonnes of molybdenum (as ferro-molybdenum) and 41 tonnes of nickel (as nickel concentrate).

· Average prices of vanadium pentoxide of US$7.5/lb, ferro-molybdenum of US$50/kg and nickel of US$20/kg in 2023 and thereafter, reflecting management estimates having consideration of market commentary less a discount, and used by the Company as a long-term assumption for other planning purposes.

· Discount rate of 10% post tax in real terms.

Based on the key assumptions set out above, the recoverable amount of PP&E (US$31.8m) exceeds its carrying amount (US$6.1m) by US$25.7m and, therefore, PP&E has not been impaired.

Inventories (Note 12)

The Group holds material inventories which are assessed for impairment at each reporting date. The assessment of net realisable value requires consideration of future cost to process and sell and spot market prices at the period end less applicable discounts. The estimates are based on market data and historical trends.

Exploration and evaluation assets (Note 10)

The Group holds material exploration and evaluation assets and judgement is applied in determining whether impairment indicators exist under the Group's accounting policy. In determining that no impairment indicator exists management have considered the Competent Person's Report on the asset, the strategic plans for exploration and future development and the status of the Subsoil Use Agreement ("SUA"). Judgement was required in determining that a current application for deferral of obligations under the SUA will be granted and management anticipate such approvals being provided given their understanding of the Kazakh market and plans for the asset.

(d) Unaudited status

These Condensed unaudited Financial Statements have not been audited or reviewed by the Group's auditor.

2 Revenue

Vanadium products

Under certain sales contracts the single performance obligation is the delivery of products to the designated delivery point at which point possession, title and risk on the product transfers to the buyer. The buyer makes an initial provisional payment based on volumes and quantities assessed by the Company and market spot prices at the date of shipment. The final payment is received once the product has reached its final destination with adjustments for quality / quantity and pricing. The final pricing is based on the historical average market prices during a quotation period based on the date the product reaches the port of destination and an adjusting payment or receipt will be made to the revenue initially received. Where the final payment for a shipment made prior to the end of an accounting period has not been determined before the end of that period, the revenue is recognised based on the spot price that prevails at the end of the accounting period.

Other revenue related to the change in the fair value of amounts receivable and payable under the sales contracts between the date of initial recognition and the period end resulting from market prices are recorded as other revenue.

3 Cost of sales

4 Other income

5 Administrative expenses

6 Other expenses

7 Personnel costs

Personnel costs of US$495,000 (2022: US$421,000) have been charged to cost of sales, US$867,000 (2022: US$633,000) to administrative expenses and US$248,000 (2022: US$29,000) were charged to cost of inventories which were not yet sold as at the end of the period.

8 Finance costs

9 Property, plant and equipment

Depreciation expense of US$190,000 (2022: US$254,000) has been charged to cost of sales, excluding cost of finished goods that were not sold at the period end, US$20,000 (2022: US$15,000) to administrative expenses, and US$67,000 has been charged to cost of finished goods that were not sold at the end of the period (2022: US$21,000).

Construction in progress relates to upgrades to the processing plant associated with the expansion of the facility.

10 Exploration and evaluation assets

The Group's exploration and evaluation assets ("E&EA") relate to the Balasausqandiq deposit. During the six month period ended 30 June 2023, the Group capitalised the cost of geotechnical drilling work, technical design, sample assaying and project management costs, all relating to the Company's Stage 1 feasibility study. As at 30 June 2023, the carrying value of exploration and evaluation assets was US$5.6m (2022: US$2.8m).

11 Intangible assets