ANGLESEY MINING PLC - Annual Report and Notice of AGM

It is pleasing to report, after several years of depressed market conditions, that in several areas of significance to Anglesey Mining there are now real signs of resurgence. I believe we have passed the bottom of the mining cycle and there is a strong expectation of upward movement in metal prices, particularly for zinc and to some extent for copper, in the near future.  This positive outlook is now being reflected in the capital markets where after several years of depressed market conditions there is renewed investor interest in the mining sector and the opportunity to raise new capital is being demonstrated. 

Parys Mountain -  2017 Scoping Study

Against this background of improving metal prices and increased investor interest it would seem opportune that we have recently undertaken a new Scoping Study on the Parys Mountain copper-lead-zinc project in North Wales which demonstrates a viable mine development and a healthy financial rate of return.

The Scoping Study was prepared by Micon International Limited (Micon) and Fairport Engineering Ltd (Fairport).  The selected base case envisages a mining rate of 1,000 tonnes per day, to produce an average annual output of 14,000 tonnes of zinc concentrate at 57% Zn, 7,200 tonnes of lead concentrate at 52% Pb and 4,000 tonnes of copper concentrate at 25% Cu annually over an initial mine life of eight years. 

The overall net smelter return (NSR) for the three concentrates, including the silver and gold precious metals contributions, is expected to total more than $270 million at the forecast metal prices used for the base case calculations. 

The base case yields a pre-tax net present value of $33.2 million, or £26.6 million, at a conservative 10 per cent discount rate, using present day metal prices of $1.25 per pound for zinc, $1.00 per pound for lead, $2.50/pound for copper, $17.50 per ounce for silver and $1,275 per ounce for gold and at an exchange rate of £1.00 = $US1.25. With an estimated pre-production capital cost of $53 million, or £42 million, this results in an indicated internal rate of return (IRR) of 28.3%. 

Using longer term metal price projections of $1.35 per pound for zinc and $3.00 per pound for copper the NPV10 would be $43.2 million, or £34.6 million.  At an 8% discount rate, used to reflect the relatively low risks of the project given its advanced level of development and low political risk in the UK, the NPV8 would be enhanced to $41 million, or £32.8 million, for the base case metal price scenario and to $53 million, or £421.9 million for the higher longer-term metal prices, with an IRR of 33%.

Importantly, the study was based on only the 2.1 million tonnes of indicated resources reported by Micon in 2012. Micon had also reported a further 4.1 million tonnes of inferred resources which were not incorporated into the Scoping Study.  It is expected that a high proportion of these inferred resources will be converted to indicated probable reserves once exploration drilling from underground takes place. These additional resources would be processed through the same concentrator plant and would significantly increase the projected life of the mine, to perhaps double the projected mine-life to 15 or 18 years, and enhance the NPV.

I have been involved with the Parys Mountain project for many years, and I am encouraged that many of the variables and moving parts, including metal prices, treatment charges and used plant availability, have now moved in our favour and present a real and realisable opportunity for the Parys Mountain project.  There is of course still much to be do but we now have a clear path forward.

Iron Ore

The price of iron ore doubled during calendar 2016, driven by increased Chinese demand, reaching a two-year high of US$80 per tonne in December 2016 and moved even higher in early 2017, hitting a high of US$97 per tonne in February 2017, its highest level since mid-2014, before retreating somewhat to approximately US$70 per tonne in July 2017.   Our investments in Grangesberg Iron and in Labrador Iron rely heavily for their future success on this commodity.

Grangesberg Iron

Our operations at Grangesberg have been restricted during the past year while we continue to manage the project on behalf of both the company and Grangesberg’s other shareholders.  The economics of Grangesberg are more positive than many other iron ore projects but will still require both higher long-term iron ore prices as well as major levels of capital expenditure. The high-quality product from Grangesberg, together with the extensive existing infrastructure and the potential for sales within Sweden’s domestic markets, will be key to making the project viable when iron prices do move. Together with the other shareholders and stakeholders in Grangesberg we will continue to investigate all options to develop a viable business plan for the project.

Labrador Iron

During the year Labrador Iron Mines Holdings Limited (“LIM”) completed a financial restructuring as part which creditors were issued with shares in LIM and its subsidiary and as a result the group’s holding in LIM was diluted from 15% to just under 12%.  LIM is now debt free and continues to hold its iron ore assets in Labrador and Quebec.  Nevertheless, it will require a significant and sustained increase in the price of iron ore for the Labrador operations to be restarted.

Outlook

The outlook for Anglesey Mining is now brighter than at any time during the last few years.  Metal prices particularly zinc, copper and lead, which form the basis of Parys Mountain revenue, seem set for their long-awaited upward movement. 

Based on the positive results of the Scoping Study we now plan to engage in discussions with potential financiers or partners for the development of the Parys Mountain project.   Recommendations have been made by Micon and Fairport regarding further work to optimise and enhance the project as the next step ahead of mine development.  It is hoped that financing for this work can be arranged as speedily as possible and will be followed by subsequent financings to move towards mine construction.

We expect that sterling will continue to be traded at relatively low levels against the United States dollar for the foreseeable future whilst negotiations over the Brexit withdrawal and the ensuing uncertainty around the actual exit take effect.  It may be that sterling will experience even further weakness in the longer term, which would benefit the Parys Mountain project.  Apart from these matters we do not expect Brexit issues to unduly influence the group.

It is likely that China will continue to experience economic growth and will make ever increasing demands for commodities that could be produced from your Anglesey’s projects.  Normal industrial demand in the United States and Europe, as well as larger developing countries, will also play an important part of the commodity markets.  China’s continuing growth coupled with a reluctance by major miners to embark on large new projects, generally in geographically and politically difficult environments, should see continuing demand for metals resulting in a long term and sustainable uplift in metal prices.

The strength in the markets and return of investor interest has been reflected in the price of the Company’s shares which has increased around fourfold from this time last year.  This has been coupled with strong trading volumes and gave us the opportunity to raise funds on two occasions during the year. 

I would like to thank all our shareholders, whether at a major investment level or at smaller levels, for their continuing support during the difficult recent years that we have been through. 

We trust that your patience and support will soon be recognised and rewarded.

John F. Kearney

Chairman

28 July 2017

Strategic report - Operations

Principal activities and business review

Anglesey Mining is engaged primarily in the business of exploring and evaluating its wholly owned Parys Mountain zinc, lead, copper project in North Wales. Although site activities there have been limited during the year to care and maintenance, a scoping and economic study bringing earlier reports up to date has been prepared during the year.

Under various agreements the group participates in the management of the Grangesberg iron ore property in Sweden in which it has a 6% holding and a right of first refusal to acquire a further 51% ownership interest. The group also has a 12% holding (2016 – 15%) in the Labrador iron project in eastern Canada, currently in care and maintenance.

The aim of the group is to create value in the Parys Mountain property, including by co-operative arrangements where appropriate, and to actively engage in other mineral ventures using the group’s own resources together with such external investment and finance as may be available where appropriate

Parys Mountain

The Parys Mountain property hosts a significant polymetallic zinc, copper, lead, silver and gold deposit. The site has a head frame, a 300m deep production shaft and planning permission for operations. The group has freehold ownership of the minerals and surface land. Infrastructure is good, political risk is low and the project enjoys the support of local people and government.

An independent JORC resource estimate completed in 2012 by Micon International Limited reported a resource of 2.1 million tonnes at 6.9% combined base metals in the indicated category and 4.1 million tonnes at 5.0% combined base metals in the inferred category with substantial exploration potential.

Physical operations at Parys Mountain were again kept at a low level during the past year, with only essential maintenance work carried out, while the main focus of activity was undertaking a new scoping study.

Scoping Study 2017

The Scoping Study was prepared by Micon International Limited (Micon) and Fairport Engineering Ltd (Fairport) and was completed in July 2017. 

Development Plan

The original feasibility studies conducted on the Parys Mountain project in the 1990s envisaged production at a rate of 1,000 tpd being mined at depth through the 300-metre-deep Morris Shaft.  During the period 2006-2010 Anglesey Mining carried out a detailed drilling programme on the White Rock Zone which lies adjacent to the Morris Shaft and largely overlies the deeper Engine Zone deposits, but which extends to surface.  As a result of this drilling the 2012 resource estimate carried out by Micon included both the White Rock Zone and the Engine Zone. 

A new mining plan based on a surface decline to access the White Rock zone was prepared.  The proposed decline would be developed by mining contractors and would be used as the initial means of access to the resource for development and mining. Mined ore would be trucked up the decline to the proposed surface processing plant. During the initial production phase from White Rock the decline would continue to be driven to reach the current bottom of the Morris Shaft and beyond.  The shaft would then be dewatered and deepened by approximately 150 metres and would be recommissioned as a hoisting shaft for the remnant White Rock ore and for the deeper and more valuable Engine Zone ore.

Production Alternatives

The initial work on the Scoping Study was designed on a throughput of 500 tonnes per day using conventional processing.  As the first results became available it became apparent that a higher daily production throughput would be financially more attractive.  Accordingly, assessment of increased throughput alternatives of 700 tpd and 1,000 tpd were added to the initial scope of the study. 

In addition, the concept of adding a dense media separation plant ahead of the main concentrator was reviewed.  Dense media separation (DMS) is a process to remove largely non-metal bearing material from the mine feed ahead of the concentrator.  This results in a substantial reduction in the tonnage of ore to be treated by the concentrator.  Obviously there are additional costs associated with building and operating a DMS plant, and there is some loss of metal associated with the DMS tailings, but overall inclusion of a DMS plant improves the financial performance. 

Concurrent with evaluation of these processing options, mine planning at 700 tpd and 1,000 tpd was also studied.  Mining would be carried out initially from the main decline using rubber-tyred equipment including drill jumbos, load-haul-dump machines and trucks to remove development waste to surface and production ore to the processing plant.  It was concluded that after an initial ramp-up period, the higher production level can be maintained.  In due course, the lower level of the shaft will be accessed from the decline and deepened as originally planned. The existing hoist and headframe will be refurbished and used to bring ore to the surface for delivery to the adjacent processing plant.

The processing plant was initially designed in a modular form with a capacity of 500 tpd throughput expandable to 1,000 tpd to minimise up-front capital costs.  The plant will consist of crushing and grinding followed by conventional three stage flotation to produce copper, zinc and lead concentrates to be shipped to smelters in Europe.  The study showed that the best results can be obtained with higher throughputs.  There is little additional capital cost required for the higher throughput and this increase is offset by lower operating costs and increased revenue.

Based on these outcomes it was concluded that the preferred development option for the Parys Mountain is a 1,000 tpd mine and plant with a DMS section and a mine life of approximately eight years.

Mineral Resources and Exploration Potential

The 2017 Scoping Study utilises the Micon 2012 JORC Code compliant resource estimate of 2.1 million tonnes at 6.9% combined base metals in the indicated category.  Micon had also reported a further 4.1 million tonnes at 5.0% combined base metals in the inferred category. These inferred mineral resources are not included in the current study but would significantly extend the projected operating life of the mine with a consequential increase in the resultant estimated valuation. 

As reported in 2012, the resource estimate was made using a gross metal product value cut-off of $80 per tonne.  It is noted that the cash operating cost of the project, prior to royalties and taxes, is forecast at $47 per tonne.  This will enable some further review of the resource to be undertaken.  A lower cut-off grade would increase the tonnes in the indicated category at the same time as reducing the grade.  The larger tonnage would increase the mine life but would reduce the annual revenue due to the lower feed grade to the plant.  An optimisation study will be required to determine the optimum cut-off grade that would provide the maximum increased return over that currently reported.

In addition to the indicated and inferred resources reported by Micon, the Parys Mountain area, over which the group holds the mineral rights, contains numerous indications of mineralisation across several kilometres many of which have been disclosed in earlier releases and reports.  As most of these indications have been encountered in drilling at some depth, further exploration would be more effective from underground locations once mining operations commence.  Should any of these exploration efforts prove successful an increased throughput and a further extended mine life would be the likely outcome.

Capital and Operating Costs

The pre-production capital cost of the preferred option base case including mining, DMS, concentrator and infrastructure is estimated at $53 million.  The initial capital cost for mine development is estimated to be $13 million, the concentrator $29.5 million including $3 million for the DMS plant and infrastructure $10 million, for a total of $53 million.  Included within these figures is a $4 million contingency provision. 

The major component of capital costs is initially associated with the processing plant and surface infrastructure.    Capital costs have been estimated based on quotes provided by equipment suppliers together with construction costs forecast by Fairport. Capital costs for the processing plant and infrastructure includes, when suitable, some used and reconditioned plant which has been identified as readily available.  The remainder would be new equipment. 

Despite the quite wide spread in throughputs studied it became apparent that the lower throughput options did not present significant savings in capital cost.  This is largely due to minimum equipment sizes required for several units that could also accomplish the duty for the higher throughputs and with the fixed items of work required for buildings, construction and infrastructure that do not change materially across the throughput range. Mine development capital costs are based on all new equipment and on mine contractor development costs.

Operating costs have been developed by Micon and Fairport based on current knowledge and experience. Cash operating costs at the higher levels of production are forecast at around $47 per tonne of ore treated. Whilst capital costs were fairly constant across the throughput spectrum, operating cash costs per tonne of ore mined and milled varied significantly with the higher throughputs benefitting from much lower costs.  This lead to the clear conclusion that the higher the throughput the better the financial result. 

The following table shows the key financial outcomes derived for each of the alternatives.

• Pre-Tax Based on Cu $2.50/lb, Zn $1.25/lb, Pb $1.00/lb, Ag $17.50/oz, Au $1,275/oz

Selected Base Case Option - 1,000 tpd

The 1,000 tpd option is clearly the most favourable financial outcome.  The additional capital cost required is only $5 million higher than the lowest cost option and at these levels that is not considered critical.  The inclusion of the DMS plant results in the rejection of approximately 37% of mined material ahead of the concentrator.  Included within this is approximately 4.5% of the metal in feed that will be permanently lost to tailings.  As a result of the application of the DMS the net concentrator feed to the floatation circuits will be approximately 700 tpd.

The NPV and IRR generated are significantly better at 1,000 tpd than the lower throughput options.  Therefore the 1,000 tpd option has been chosen as the base case for further consideration. No detailed study was carried out on a 1,000 tpd throughput without the DMS.  However, a short study indicated that it is likely that DMS will be far more favourable when the plant capacity is expanded to around 1,500 tpd which should occur when the inferred resources are upgraded to the indicated category.  The incorporation of DMS is therefore considered advisable and prudent.

Metal Production

Metallurgical performance and recovery is based on the large volume of information available from test work on Parys Mountain ores over the years.  Total base metal recovery in the concentrator to each of the three copper, zinc and lead concentrates is forecast to be 89.8% and taking into account the DMS losses overall recovery will be approximately 85.7%.  Significant amounts of silver and gold will report to each of the concentrates.  Some free gold will be recovered by gravity methods ahead of the concentrates and will be sold as Welsh gold.

It is expected that each of the three base metal concentrates will be sold to smelters in Europe.  Smelter payment terms and penalties have been based on treatment charges currently prevailing from these smelters.  It is possible that better terms could be obtained from Chinese smelters from time to time but the cost of shipping to the Far East compared to the proximity of shipping to continental Europe is likely to make such options less viable.

On average 14,000 tonnes of zinc concentrate at 57% Zn, 7,200 tonnes of lead concentrate at 52% Pb and 4,000 tonnes of copper concentrate at 25% Cu, will be produced annually.  These figures will vary somewhat during the life of the mine as mine feed varies depending upon the particular ore bodies being mined at any time. This will result in average annual metal production into concentrates of 17.6 million pounds of zinc ,8.3 million pounds of lead and 2.2 million pounds of copper.

Using estimated shipping costs, smelter terms and penalties, the overall NSR for the three concentrates, including the precious metals, is expected to total in excess of $270 million at the metal prices used for the base case.  This would represent a NSR of approximately 72% of the metal value in concentrates delivered to the smelters. 

Project Financial Results

The base case yields a pre-tax net present value of $33.2 million, or £26.6 million, at a conservative 10 per cent discount rate, using present day metal prices of $1.25 per pound for zinc, $1.00 per pound for lead, $2.50/pound for copper, $17.50 per ounce for silver and $1,275 per ounce for gold and at an exchange rate of £1.00 = $US1.25. With an estimated pre-production capital cost of $53 million, or £42 million, this results in an indicated internal rate of return (IRR) of 28.3%. 

Using longer term metal price projections of $1.35 per pound for zinc and $3.00 per pound for copper the NPV10 would be $43.2 million, or £34.6 million.  At an 8% discount rate, used to reflect the relatively low risks of the project given its advanced level of development and low political risk in the UK, the NPV8 would be enhanced to $41 million, or £32.8 million, for the base case metal price scenario and to $53 million, or£421.9 million for the higher longer-term metal prices, with an IRR of 33%.

The pre-tax net present values, at 10% and 8% discount rates, and internal rates of return, are illustrated in the table below, all at a sterling:US dollar exchange rate of £1.00 = $US1.25.

Further work on Parys Mountain

Both Micon and Fairport have recommended that further work to optimise and enhance the project as the next step ahead of mine development, including more detailed mine and stope design, underground geotechnical studies, additional infill drilling in some locations, more detailed engineering studies, additional metallurgical test work including work to improve recovery of specific metals to their own concentrate, and review of tailings management and paste processes. Several opportunities for cost reduction or productivity improvement have been identified for further study. It is planned to carry out these and other activities as suitable funds are available.  This will then lead to the generation of more detailed production and costing feasibility reviews to support project financing to move towards mine construction.

The directors are of the opinion that the Parys Mountain project is at an advanced stage and the existence of the current JORC resource estimate, the new scoping study and the original feasibility study, together with the valid planning permissions, represent a solid base from which to move the project towards production. There is in addition substantial exploration potential on the property.

Grangesberg Iron AB

The Grangesberg iron ore mine is situated in the mineral-rich Bergslagen district of central Sweden about 200 kilometres north-west of Stockholm. Until its closure in 1989 due to prevailing market conditions, Grangesberg had mined in excess of 150 million tonnes of iron ore. GIAB is a private Swedish company founded in 2007 which in 2014 completed (with assistance from the group) a financial and capital restructuring of the mine. GIAB holds a 25 year exploitation permit covering the previously mined Grangesberg underground mining operations granted by the Swedish Mining Inspectorate in May 2013.

The group has a direct 6% interest in GIAB and, until June 2018, a right of first refusal over 51% of the enlarged share capital of GIAB. This right has been granted in exchange for the group continuing to co-manage GIAB on a cost recovery basis. The group also has shareholder and cooperation agreements such that it holds operatorship of GIAB subject to certain conditions and appoints two out of five directors to the board of GIAB.

In September 2014 an NI 43-101 Technical Report was prepared by Roscoe Postle Associates Inc (“RPA”) showing a compliant resource estimate for the Grangesberg Mine of 115.2 million tonnes at 40.2% Fe in the indicated category and 33.1 million tonnes at 45.2% Fe in the inferred category. RPA concluded that the Grängesberg iron ore deposit hosts a significant iron resource that has excellent potential for expansion at depth.

During the coming year, Grangesberg will continue to operate under the direction of the group. It is planned that subject to the availability of adequate funding, Grangesberg will advance a number of environmental studies and other activities as a pre-requisite to a definitive feasibility study.

Labrador Iron

The group has an investment holding of 12% (2016 -15%) in Labrador Iron Mines Holdings Limited which in the three years up to 2013 produced a total of 3.6 million dry metric tonnes of iron ore from its properties in Labrador, Canada. Since then mining operations have been suspended due to low iron ore prices. In December 2016 LIM completed a financial restructuring which resulted in the conversion of liabilities into equity of LIM and its subsidiaries. As a result, the group’s interest in LIM has been diluted from 15% to 12%.

LIM continues to own all of its direct shipping iron ore projects in the central part of the Labrador Trough region, one of the major iron ore producing regions in the world, containing extensive iron ore resources, and where LIM owns processing plants and equipment and rail infrastructure and facilities being held on care and maintenance. 

Other activities

The directors continue to seek out new properties suitable for development within a relatively short time frame and within the financing capability likely to be available to the group.

Performance

The directors expect to be judged by results of project development and/or exploration and by their success in creating long term value for shareholders. The group holds shares in mineral companies and has interests in exploration and evaluation properties and, until economically recoverable reserves can be identified, there are no standardised performance indicators which can usefully be employed to gauge the performance of the group, other than the market price of the company’s shares.

The chief external factors affecting the ability of the group to move forward are primarily the demand for metals and minerals, levels of metal prices and exchange rates; these and other factors are dealt with in the risks and uncertainties section below.

Financial results and position

The group has no revenues from the operation of its properties. The loss for the year ended 31 March 2017 after tax was £307,968 compared to a loss of £256,450 in the 2016 fiscal year. The administrative and other costs excluding investment income and finance charges were £141,022 compared to £112,279 in the previous year.

During the year there were no additions to fixed assets (2016 - nil) and £84,196 (2016 - £49,433) was capitalised in respect of the Parys Mountain property as mineral property exploration and evaluation, the increase being largely due to the expenses of the scoping study.

At 31 March 2017 the group held mineral property exploration and evaluation assets with a carrying value of £15.0 million. These carrying values may not reflect the realizable value of the properties if they were offered for sale at this time.

The group’s cash balance at 31 March 2017 was £392,293 (2016 - £11,504) the increase being due to two placings of new shares for cash during the year which raised £493,037 net of share issue costs. The foreign exchange gain of £178 (2016 – loss £2,039) shown in the income statement arises on cash balances held in Canadian dollars and Swedish Krona.

At 31 March 2017 the company had 177,608,051 (2016 - 160,608,051) ordinary shares in issue following the two share placings referred to above.

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