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BUSINESS REVIEW

Primary Strategic Investments

Our Primary Strategic Investments are in Mount Gibson (ASX: MGX) which is listed and operating in Australia and Tanami Gold NL (“Tanami Gold”) (ASX: TAM). The net attributable loss from our Primary Strategic Investments for FY2022 was HK$340,418,000 (FY2021: Net Profit of HK$130,374,000).

Mount Gibson

Mount Gibson is an Australian producer of direct shipping grade iron ore products. Mount Gibson owns the Koolan Island mine off the Kimberley coast in the remote north-west of Western Australia. Mount Gibson developed the Shine Iron Ore Project, located 85km north of Extension Hill, but suspended operations in November 2021 due to the widening discount for low grade iron ore and the high freight costs.

 

Ore sales at the Koolan Island Restart Project started in April 2019, and achieved commercial production in the June quarter 2019. The restart project had 21 million tonnes of 65.5% Fe reserves. Mount Gibson is near the end of a planned elevated waste mining phase, which should allow for increased production from the year ending 30 June 2023 (“FY2023”) onwards.

 

Mount Gibson reported a net loss after tax of A$174 million for FY2022 from sales of 1.7 million tonnes of iron ore. Operating costs remained high in FY2022 as the company continued its elevated stripping phase at Koolan Island but expect this will decline significantly in FY2023 as ore production increases and waste stripping falls. Mount Gibson financials were impacted by a non-cash impairment for the carrying value of both Koolan Island and Shine, for a combined impact of A$185 million.

 

Sales guidance for FY2023 is 3.2 million tonnes to 3.7 million tonnes.

 

Mount Gibson cash reserve, including term deposits and tradable investments, ended FY2022 with A$126 million or an equivalent of A$0.10 per share.

 

The Platts IODEX 62% CFR China index was very volatile in FY2022 and averaged US$138 per dry metric tonne (“dmt”). It fell from US$210 per dmt in July 2021 down to US$80 per dmt in November 2021 and then partially recovered to US$140 per dmt before ending FY2022 at US$120 per dmt. Since the end of the year the iron ore price has fallen further and at time of writing it is at US$100 per dmt. Iron ore prices have generally weakened since July 2021 due to weak property sales and construction activity in China. The outlook for iron ore remains challenging given China’s ongoing zero covid policy which remains an overhang for its economy, not to mention the weak economic outlook globally.

Tanami Gold 

We currently own 46.3% of Tanami Gold.

 

Tanami Gold’s principal business activity is gold exploration. It holds 50% of the Central Tanami Project and has a cash balance of A$33 million. In May 2021, Tanami Gold entered into a binding agreement with Northern Star Resources Limited (“Northern Star”) (ASX: NST) to establish a new 50–50 Joint Venture covering the Central Tanami Project. Northern Star agreed to pay A$15 million cash to increase its ownership in the project from 40% to 50%, and going forward both parties will be jointly responsible for funding exploration and development activities. This agreement was completed and Tanami Gold paid A$5 million cash to fund its share of the joint venture activity.

 

Financial Assets at Fair Value through Profit or Loss

Financial assets at fair value through profit or loss comprise mainly the Group’s investments in Metals X Limited (“Metals X”) and Resource Investment. As at 30 June 2022, APAC had significant investments representing 5% or more of the Group’s total assets in Shougang Fushan Resources Group Limited (“Shougang Fushan”) (HKEX: 639) and Metals X (ASX: MLX).

Significant Investments

 

Note:  On 25 May 2021, Metals X signed a binding term sheet with Nico Resources Limited (“NICO”) for the sale and spin out of its nickel asset portfolio to NICO with eligible Metals X shareholders to receive a direct holding in NICO shares (the “In-specie Distribution”). The In-specie Distribution was completed in January 2022 and market value in respect of the Group’s shareholdings in NICO arising from the In-specie Distribution for an amount of HK$9,972,000 was recognised as dividend income distributed by Metals X.

Brief description of principal businesses of the investee companies of the significant investments held by the Group:

 

Our investment in Shougang Fushan generated a fair value gain of HK$114,142,000 with carrying value as at 30 June 2022 of HK$379,705,000. 

Shougang Fushan is a coking coal producer listed on The Stock Exchange of Hong Kong Limited. Its principal businesses are coking coal mining, production and sales of coking coal products in China. It has 3 mines located in China with reserves of 69 million tonnes of raw coking coal at 31 December 2021 and during six months ended 30 June 2022 Shougang Fushan produced 2.7 million tonnes raw coking coal which is consistent with its 2022 guidance of 5.3 million tonnes of raw coking coal. 

For the six months ended 30 June 2022 Shougang Fushan generated EBITDA of HK$3,267,000,000 and net profit after tax of HK$1,936,000,000. The market capitalisation of Shougang Fushan in September 2022 is around HK$12.8 billion, while its working capital reported at 30 June 2022 is HK$6.7 billion. 

The average benchmark market selling prices of its company’s clean coking coal products in the first half of 2022 was up 89% year-on-year (“YoY”). However for second half Calendar Year 2022 Shougang Fushan has flagged the risks to coking coal demand given the National Development and Reform Commission have asked steel mills to cut crude steel production as recently as August 2022. 

Our other notable investment is in Metals X. The carrying value of Metals X as at 30 June 2022 amounted to HK$325,449,000 (As at 30 June 2021: HK$174,333,000) represented approximately 7.3% (As at 30 June 2021: 3.5%) of the total assets of the Group. In FY2022, our investment in Metals X generated an unrealised gain of HK$83,974,000 (FY2021: Gain of HK$115,935,000). 

In July 2020, Mr. Brett Robert Smith, who is the Deputy Chairman and an Executive Director of the Company, was appointed to the board initially as a non-executive director and subsequently as an executive director of Metals X. Since his appointment, Metals X has sold its copper asset portfolio and spun out its nickel assets into a separate company, NICO. APAC provided a loan facility to refinance Metals X debt, and the loan was fully repaid during the six months ended 31 December 2021. 

Metals X is focused on implementing its life of mine plan at Renison mine, including development of the high grade Area 5 deposit. During FY2022, the Renison mine produced 4,731 tonnes of tin (net 50% basis) up 19% YoY, and the average realised tin price of A$48,186 per tonne was up 78% YoY. 

Tin prices hit an all time high of US$50,050 per tonne in early 2022 but has pulled back significantly due to higher production from China, Indonesia and Myanmar. At the same time, concerns about global economic outlook and the impact on demand for consumer electronics has overshadowed solid demand from other end markets like autos, and solar. At time of writing, the tin price is US$23,600 per tonne. We remain comfortable with the medium term outlook for tin due to the lack of significant supply growth and new demand for tin from the growing electrical vehicle and energy storage industries. 

Resource Investment   

The investments in this division comprise mostly minor holdings in various natural resource companies listed on major stock exchanges including Australia, Canada, Hong Kong, the United Kingdom and the United States. Our investments focus on select commodities within several commodity segments, namely energy, bulk commodities, base metals and precious metals. 

Resource Investment posted a fair value gain of HK$169,137,000 in FY2022 (FY2021: HK$448,111,000), which after accounting for segment related dividend and other investment income and expenses, resulted in a segment profit of HK$171,572,000 in FY2022 (FY2021: HK$510,268,000).

Our Resource Investment division includes, among other investing strategies, the two resource portfolios announced in August 2016, with additional natural resource focused strategies subsequently established and focused on large caps and specialist opportunities. The aim of the portfolios is to produce a positive return using Company funds as well as to create a track record to attract potential third-party investments in the future. These various portfolios are managed under the Resource Investment segment of the Company, which is separate to the Company’s large strategic stakes. Our portfolios have a global long-only mandate (cannot short stocks) and strict parameters on market capitalisation, liquidity, development stage (exploration through to production) and jurisdiction to manage risk. 

One of the mining portfolios focuses on investments in Small and Mid-cap companies involved in battery metals, base metals, precious metals, uranium, bulks and other hard rock commodities. Since its inception on 1 October 2016, the Mining Portfolio has delivered a return on investment of 382.7% to 30 June 2022, which is an outperformance of 376.4% against its benchmark (currency adjusted equal weighting of ASX 200 Smallcap Resources, FTSE AIM All Share Basic Resources and TSX Venture Composite) return of 6.3%.

 A full breakdown of the Small and Midcap Mining Portfolio’s annual performance against its benchmark is presented in the table below.

For the year ended 30 June 2022, this strategy generated a return of 14.2%, which was 41.3% above the benchmark return of –27.1%. As in previous years, the alpha was driven by significant work on the underlying commodities and getting the sector calls mostly correct (including large overweights in coal, lithium and uranium), investing in producers with high spot free cash flow yields, as well as identifying a number of emerging exploration and development companies. The five largest positive contributors to Mining Portfolio profits for the financial year were, in order, Thungela Resources (LSE: TGA), Whitehaven Coal (ASX: WHC), Red Dirt Metals (ASX: RDT), New Hope Coal (ASX: NHC) and Stanmore Coal (ASX: SMR). 

The Energy Portfolio is primarily focused on the oil, gas and renewables sectors. At the end of 2019, the mandate for this portfolio was expanded to include investments in renewables, and with a broadened sector of investments, in the last 2.5 years from February 2020 (before the full impact of the COVID-19 Pandemic) to August 2022, the Energy Portfolio has generated a return on investment of 124%. 

The investment choices in the Energy Portfolio are selected through a combination of fundamental bottom up valuation and analysis of the prospects for different sectors. For instance, during the early days of the COVID-19 pandemic, the investments were focused in companies in the green energy sector given that the low interest rate environment was supportive of stocks with significant growth potential. More recently investments have focused on energy companies given the disruptions to energy markets due to the invasion of Ukraine. 

Precious

Precious metals (majority gold exposure) generated a net fair value loss of HK$139,065,000 in FY2022. As at 30 June 2022, the carrying value of the Precious segment was HK$319,354,000 (As at 30 June 2021: HK$317,518,000). Our largest gold investment in the Resource Investment division is in Northern Star (ASX: NST) which generated a fair value loss of HK$42,065,000 with carrying value as at 30 June 2022 of HK$76,775,000. We also own Newmont Corporation (NYSE: NEM) which generated a fair value gain of HK$493,000 with carrying value as at 30 June 2022 of HK$28,095,000. Other notable fair value gains include HK$4,223,000 generated from our investment in Asante Gold Corporation (CSE: ASE). 

Northern Star is the second largest gold company in Australia and owns high grade underground mines in Western Australian and Alaska. In FY2022 its production was 1,561,000 ounces of gold, and it generated free cash flow of A$477 million. In FY2023 its production target is 1,560,000 – 1,680,000 ounces of gold. 

Outside of a brief rally in gold prices to US$2,000 per ounce to include a geopolitical risk premium at the time of the Ukraine invasion, the gold price has been range bound in FY2022, trading in a range of approximately US$1,750 per ounce to US$1,850 per ounce.

Bulk

Bulk commodities segment generated a fair value gain of HK$309,550,000 in FY2022. As at 30 June 2022, the carrying value was HK$552,081,000 (As at 30 June 2021: HK$490,627,000). Our largest investment in this segment during FY2022 is in Shougang Fushan (HKEX: 639), which generated a fair value gain of HK$114,142,000 and had a carrying value as at 30 June 2022 of HK$379,705,000.

Base Metals

Base Metals segment (a mix of copper, nickel and zinc companies) delivered a fair value loss of HK$26,642,000 in FY2022. The copper price fell by 12%, while nickel and zinc rose by 27% and 11% respectively. The Base Metals segment includes our investment in China Hongqiao Group Limited (HKEX: 1378) which had a carrying value as at 30 June 2022 of HK$32,819,000.

Energy

The Energy segment (mix of oil and gas, uranium and renewables) had a fair value gain of HK$4,157,000 in FY2022. Our significant Energy investments include National Atomic Company Kazatomprom JSC (LSE: KAP), which generated a fair value loss of HK$15,550,000 and had a carrying value as at 30 June 2022 of HK$37,659,000.

Others

We also have a fair value gain of HK$21,137,000 from the remaining commodity (diamonds, manganese, rare earths, lithium and mineral sands among others) and non-commodity investments in FY2022 and had a carrying value as at 30 June 2022 of HK$177,578,000 (As at 30 June 2021: HK$117,161,000). This includes our investment in Glencore plc (LSE: GLEN), which generated a fair value gain of HK$1,572,000 and had a carrying value as at 30 June 2022 of HK$42,366,000.

Commodity Business

Our iron ore offtake at Koolan Island recommenced as the mine restarted operations, and we continue to look for new offtake opportunities across a range of commodities. For FY2022, our Commodity Business generated a segment profit of HK$53,649,000 (FY2021: HK$55,905,000).

Principal Investment and Financial Services

The Principal Investment and Financial Services segment, which covers the income generated from loan receivables, loan notes, convertible notes and other financial assets. For FY2022, this segment generated a profit of HK$32,466,000 (FY2021: Profit of HK$50,202,000).

Money Lending

The Group engaged in money lending activities under the Money Lenders Ordinance of Hong Kong. For FY2022, the revenue and profits generated from money lending formed part of results of the Principal Investment and Financial Services segment. 

Outstanding loan receivables net of loss allowances as at 30 June 2022 amounted to approximately HK$362,698,000 (As at 30 June 2021: HK$493,850,000). During the year, the Group has written back impairment losses on its loan receivables of approximately HK$1,613,000 (FY2021: Provision of HK$19,218,000). Details of each of the loans outstanding as at 30 June 2022 and the Group’s credit risk management in relation to loan receivables are disclosed in notes 20 and 33 to the consolidated financial statements respectively.

Forward Looking Observations

We remain cautious on the outlook for commodities and equities. The US Federal Reserve has indicated its focus is to reduce inflation which we believe will mean ongoing monetary tightening, and this is generally not supportive of equity prices. China’s current focus on its zero covid policy means that its economy will continue to be buffeted by negative impacts of city lockdowns. Both factors are likely to lead to weak global growth. Nonetheless we see opportunities in select commodities and aim to be nimble with our investments in the near term, and continue to look for high quality opportunities which will generate attractive returns over the long run. Our mining and energy investment portfolios are the platform for future mining and energy investments. Our largest investment is in Mount Gibson which is focused on ramping up production at the Koolan Island mine as it has largely completed its large waste stripping program, which will position it for free cash flow generation in coming years.

 
(update as of 27 September 2022)
 
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