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ACACIA MINING PLC

Acacia Mining plc Production at North Mara mine was lower than expected

Acacia Mining plc (LON:ACA) reported first quarter results and announces Board changes

“We achieved gold production of 104,899 ounces for the first quarter of the year at an all-in sustaining cost (“AISC”) of US$1,023 per ounce sold,” said Peter Geleta, Interim Chief Executive Officer. “Production at our North Mara mine was lower than expected due to some unanticipated production issues at the Gokona underground and Nyabirama open pit mines. However, we took immediate steps during the quarter to address these, including the introduction of revised mining plans for both mines targeting higher volumes, grades and productivity for the remainder of the year. We, therefore, anticipate a step-up in production volumes for the second quarter with the production rate sustained at similar levels during the second half of the year. As such we still believe we will deliver within our full year guidance of 500,000 to 550,000 gold ounces at an AISC of US$860 to US$920 per ounce. Meanwhile throughout the quarter, we have continued to engage with and provide support to Barrick in its direct negotiations with the GoT and continue to prefer a negotiated resolution that will benefit all stakeholders.”

Operational Highlights

Gold production of 104,899 ounces, 13% below Q1 2018, following a fall of ground in the North Mara Gokona underground mine which prevented access to higher grade stopes, an excavator breakdown in the Nyabirama open pit, and a reduction in production at Buzwagi as expected following the transition to a lower grade stockpile processing operation
Gold sales of 104,985 ounces, broadly in line with production
AISC1 of US$1,023 per ounce sold, 5% higher than Q1 2018, mainly driven by the lower production base
Despite the production shortfall, we remain on track to achieve our Group production guidance for the year of 500,000 to 550,000 ounces at an AISC of US$860 to US$920 per ounce with cash costs of US$665 to US$710 per ounce
Continued strong safety record with a Total Recordable Injury Frequency Rate (TRIFR) of 0.20, 49% lower than Q1 2018
Bulyanhulu optimisation study in final stages, continuing to support provisional outcomes of potential for an average steady state production rate of 300,000 to 350,000 ounces per year at an AISC1 of US$700-750/oz. over an indicative life of mine of 18 years.
Encouraging results from updated Kenyan project study
Financial Highlights

Revenue of US$138 million, 12% lower than Q1 2018, with the lower sales base further impacted by a lower average realised gold price
EBITDA1 of US$24 million, 72% lower than Q1 2018 mainly due to the lower revenue and the impact of the US$45 million gain on the sale of a non-core royalty in Q1 2018, with adjusted EBITDA1 46% lower than Q1 2018 adjusted EBITDA1 of US$44 million
An adjusted net loss of US$7 million (US1.7 cents per share) compared to adjusted net earnings of US$7 million in Q1 2018 (US1.7 cents per share)
Cash balance as at 31 March 2019 amounted to approximately US$99 million representing a decrease of net cash of approximately US$17 million during the quarter, primarily as a result of the lower production
Board Changes

Alan Ashworth, Deborah Gudgeon and Adrian Reynolds appointed as independent Non-Executive Directors with immediate effect
The appointments have been made in furtherance of the Board’s previously announced succession planning and board renewal activities
Mike Kenyon and André Falzon to step down from the Board, effective 31 July 2019
Rachel English, Interim Chair, in welcoming the three new directors to the Acacia Board, said, “I am delighted that Alan, Deborah and Adrian will be joining the Board as independent Non-Executive Directors. Between them, they have broad technical and financial expertise, as well as a wealth of African mining experience. These complement the existing skills of the Board well, and we are looking forward to working with each of them. On behalf of the Board, I would also like to thank André Falzon and Mike Kenyon for their service and commitment to the Company over the past nine years, and additionally to thank them for their support in the handover and succession process with our new Directors.”

Three months ended 31 March Year ended 31 December
(Unaudited) 2019 2018 2018
Gold production (ounces) 104,899 120,981 521,980
Gold sold (ounces) 104,985 116,955 520,380
Cash cost (US$/ounce)1 850 715 680
AISC (US$/ounce)1 1,023 976 905
Net average realised gold price (US$/ounce)1 1,307 1,332 1,272
(in US$’000 unless otherwise stated)
Revenue 138,138 156,517 663,789
EBITDA 1 23,750 85,774 225,924
Adjusted EBITDA1 23,750 43,804 183,376
Net (loss)/earnings (6,806) 49,995 58,866
Basic (loss)/earnings per share (EPS) (cents) (1.7) 12.2 14.4
Adjusted net (loss)/earnings1 (6,806) 7,116 44,286
Adjusted net (loss)/earnings per share (AEPS) (cents)1 (1.7) 1.7 10.8
Cash (utilised in)/generated from operating activities (1,022) 23,954 126,133
Capital expenditure2 13,373 25,779 92,504
Cash balance 98,730 106,557 130,195
Total borrowings 28,400 56,800 42,600

1 These are non-IFRS measures. Refer to page 18 for definitions. Note the adoption of revised World Gold Council guidance on the calculation of AISC.

2 Previously reported capital expenditure on an accrual basis has been changed to reporting on a cash basis from Q1 2019. Cash capital expenditure excludes non-cash capital adjustments (mainly reclamation asset adjustments, finance lease assets and capital expenditure accrued but not yet paid) and includes land purchases recognised as long term prepayments.

Other Developments

Update on Discussions between Barrick Gold Corporation (“Barrick”) and the Government of Tanzania (“GoT”)

Through the quarter, Acacia has continued to engage with and provide support to Barrick in its direct negotiations with the GoT. On 20 February 2019 the Company noted further announcements by the GoT and by Barrick regarding their direct discussions. Acacia is looking forward to receiving a detailed proposal for a comprehensive resolution of Acacia’s disputes with the GoT, once Barrick’s negotiations have been successfully concluded, as Acacia continues to prefer a negotiated resolution that will benefit all stakeholders. Any proposal received by Acacia will be subject to review by the Independent Committee of the Acacia Board of Directors.

Operating Environment

During the first quarter the operating environment continued to be challenging for Acacia. Following the criminal charges brought by the GoT in October 2018 against three group companies as well as three current Acacia employees and a former employee, three of those charged continue to be held under non-bailable offences. All of the allegations made by the GoT are denied and the charges are being defended.

On 10 January 2019, the North Mara mine (“NMGML”) received an Environmental Protection Order (“EPO”) from the National Environment Management Council (“NEMC”) requiring payment of a fine of US$130,000, for alleged breaches of various environmental regulations in Tanzania and reported discharges of a hazardous substance from the North Mara mine. While the mine was not provided with the supporting reports, findings or testing data regarding the alleged breaches of environmental regulations, the reports of discharges related to seepage from the Tailings Storage Facility (“TSF”), an issue which was well known to the Company and the GoT. To dispose of all regulatory or other legal action in respect of the EPO, NMGML decided to pay the fine of US$130,000. The North Mara mine’s technical team has continued to work with the GoT within agreed timeframes to address their concerns regarding seepage from the TSF, through the installation of additional pumps and construction of additional containment infrastructure, to capture and return any seepage to the TSF and, therefore, seek to prevent seepage from entering the surrounding environment or posing a risk of contamination to public water source.

At the same time, the GoT issued a directive to the North Mara mine to construct a new TSF. The mine had already recognised the need for additional tailings management and storage capacity to meet its life of mine plans. The mine is working with the GoT on detailed plans and project schedules for the construction of a new facility. Acacia expects that a new TSF is likely to be an economically viable alternative to further expansions of the existing TSF at North Mara.

On 8 March 2019 the GoT directed the North Mara mine to resolve a separate issue that had resulted in the spillage of water into the local environment. The spillage resulted from a security incident in which sections of the pipe used to transport water from the polishing pond to the TSF were either vandalised or stolen. The incident led to the switching off of the pump used to transport water to the TSF, and the water level in the polishing pond subsequently overflowed. Following remedial actions, the temporary overspill from the pond was stopped, and the mine then worked closely with the authorities to implement improvements to the security of the areas around the polishing pond to help prevent any reoccurrence.

Board Changes

Acacia Mining plc today announces the appointment of Alan Ashworth, Deborah Gudgeon and Adrian Reynolds as independent Non-Executive Directors of the Company, with immediate effect. These appointments have been made in furtherance of the Board’s succession planning activities which were referred to and explained in some detail in the 2018 Annual Report.

Mr Ashworth’s career has spanned more than 40 years with the majority being spent with De Beers, including periods as General Manager of Namdeb (Namibia) and Head of Operations for their South African and Tanzanian Operations (where he also served on the Board of Williamson Diamonds Ltd). After leaving De Beers in 2006, he spent two years with Gold Fields as Managing Director of their Ghanaian Operations, before joining Gem Diamonds as Chief Operating Officer and member of the Board, a role he held until his retirement in 2016. He holds a BSc (Hons) in Mining Engineering from the University of Nottingham and a South African Mine Managers Certificate of Competency. Mr Ashworth will join the EHS&S Committee and, following the conclusion of the Annual General Meeting of the Company, will chair that Committee. He will also join a Technical Committee recently formed as a committee of the Board.

Ms Gudgeon is a chartered accountant with 30 years’ experience. She qualified with Coopers & Lybrand and in 1987 became a senior accountant for Salomon Brothers International. From 1987 to 1995, Ms Gudgeon served as a Finance Executive at Lonrho plc and was appointed a member of the Finance Committee in March 1993. From 1995 to 1998, she served as a Director of Halstead Services Limited, and from 1995 to 2003, she served as a Director at Deloitte, specialising in corporate finance. From 2003 to 2009, Ms Gudgeon served as a Founding Director of the Special Situations Advisory team for BDO LLP, providing integrated advice on corporate finance, restructuring, debt and performance improvement. From 2011 to 2017, Ms Gudgeon served as Managing Director of Gazelle Corporate Finance Limited. Ms Gudgeon has been a Non-Executive Director of EVRAZ plc (listed on the main market of the London Stock Exchange) since May 2015, where she is Chair of the Audit Committee and a member of the Remuneration Committee. Ms Gudgeon will join and, following the conclusion of the Annual General Meeting of the Company, will chair the Acacia Audit Committee. She will also join the Compensation and Nomination & Governance Committees.

Mr Reynolds has an MSc in Geology, a Graduate Diploma of Mining Engineering and over 30 years’ experience in the natural resources sector, including more than 15 years’ experience with Randgold Resources Limited. At Randgold, he was part of the executive team that developed that company’s original successful strategy whereby it grew from an exploration company to a very profitable mid-tier mining company. His key responsibilities included technical oversight of the mining operations including feasibility studies, audits, compliance and evaluation of new opportunities. He was also a Director of Morila Ltd and Société des Mines de Loulo S.A. Mr Reynolds initially built his experience in both oil and coal exploration and then moved into deep level gold mining with Gencor Ltd in the Free State Goldfields. Joining Rand Mines Limited in 1985, he held positions in geological management in Rand Mines Limited and its successor Randgold & Exploration Company Limited. Mr Reynolds is currently an independent consultant and a Non-Executive Director of Geodrill Limited (whose shares are listed on the Toronto Stock Exchange), and is a Non-Executive Director of Mkango Resources Ltd (whose shares are traded on the TSX Venture Exchange and AIM). Mr Reynolds was formerly Non-Executive Chairman of Digby Wells Environmental, one of the foremost mining environmental consultancies in Africa, and was formerly a Non-Executive Director of Aureus Mining Inc. (whose shares are traded on AIM and the Toronto Stock Exchange) until his retirement from both boards in 2016. Mr Reynolds will join and lead the new Technical Committee and will also join the EHS&S Committee.

All of the new Directors will also join the Independent Committee of the Board.

These appointments have been made in furtherance of the Board’s succession planning activities which were referred to in Acacia’s 2018 Annual Report. In particular, following a skills assessment based on the Company’s strategic priorities, and taking into account the anticipated retirement from the Board of Michael Kenyon and André Falzon, the Board concluded that additional appointments should be made to enhance the technical mining expertise available to the Board and to appoint an individual with a strong financial background and audit committee experience to succeed André Falzon as Chair of the Audit Committee. Mr Ashworth and Mr Reynolds will bring significant technical mining expertise to the Board. Ms Gudgeon, with her extensive financial experience, has the appropriate skillset to succeed Mr Falzon as Audit Committee Chair.

Mike Kenyon and André Falzon have resigned from the Board, such resignation to take effect from 31 July 2019 thereby allowing an orderly handover and succession process.

Following the new appointments, the Board of the Company shall be comprised of one Non-Executive Interim Chair, one Executive Director, six Independent Non-Executive Directors and one Non-Executive Director appointed by Barrick as a nominee director under their Relationship Agreement with the Company.

Bulyanhulu Optimisation Study Update

The Bulyanhulu optimisation study work continued during the quarter as planned, with the initial, favourable indications from the study’s earlier, provisional outcomes continuing to be confirmed. In the event that underground mining can be resumed, which in turn is dependent on Bulyanhulu’s ability to export concentrate, the future focus of underground mining would be on mining the higher grade ore in the Deep West area to achieve higher margin ounces in line with the Company’s focus on free cash generation. In addition, there would likely be a significant reduction in development requirements as a result of focusing solely on the Deep West area. We would also expect to see a reduction in the amount of tonnes required to be mined over any new life of mine plan. We announced revised reserves and resources estimates for Bulyanhulu as part of the 2018 preliminary results, which included certain reserves and resources reclassifications. Given our historic conversion rate, we have a high level of confidence in the ability to convert resources to reserves through further drilling over the first few years after any resumption of mining operations.

Indicative pre-production capital requirements are confirmed to be in the range of US$90-110 million with subsequent development and rehabilitation costs of a further US$30 million. Additional ramp-up costs are expected to total approximately US$20 million as per initial indications comprising Sustainable Communities initiatives and costs relating to the existing processing plant, recruitment and freight for supplies. These are now expected to be incurred over an 18-month period until first gold production from resumed underground mining operations. We then expect a ramp up period to full production from the underground mine of 18-24 months. The study confirmed the potential for an estimated average steady state production rate of 300,000 to 350,000 ounces per year at an AISC of US$700-750/oz over an indicative life of mine of 18 years.

The study work continues, including detailed operations resumption planning to position Bulyanhulu for an effective resumption of underground mining operations and associated ore processing, if a decision to resume underground mining operations can be taken. Any decision would be dependent on achieving a comprehensive resolution of Bulyanhulu’s disputes with the GoT, including the ability to resume concentrate sales.

International Arbitration

A negotiated resolution remains the preferred outcome to the Company’s ongoing disputes with the GoT. In 2017, however, BGML, the owner and operator of the Bulyanhulu mine, and PML, the owner and operator of the Buzwagi mine each referred their current disputes with the GoT to arbitration in accordance with the dispute resolution processes agreed by the GoT in its Mineral Development Agreements with BGML and PML. The commencement of arbitration by BGML and PML was necessary to protect their respective rights and interests and to promote a sustainable resolution of disputes. These contractual arbitration processes have continued through the first quarter of 2019 and the international arbitration claims are progressing. The hearings are scheduled for the beginning of the third quarter of 2019 and we expect the Tribunal’s findings to follow in the later stages of the year.

Safety

During the first quarter of the year we continued our good safety record, with a Total Recordable Injury Frequency Rate (TRIFR) in Q1 2019 of 0.20, just slightly over our Group-wide TRIFR for 2018 of 0.19 and 49% lower than the corresponding period in 2018. We also reduced the number of High Potential Incidents (HPIs) by 57% compared to Q1 2018. We continue to target zero injuries and remain committed to every person going home safely every day.

Contribution to Tanzania

We remain committed to paying all applicable taxes and royalties to the Tanzanian Treasury as well as to supporting efforts towards the country’s socioeconomic advancement, including the realisation of the Government’s Development Vision 2025. Since the inception of its businesses, over 15 years ago, the Acacia Group and its predecessors have invested over US$4 billion to build and sustain its mines and paid over US$1.3 billion in taxes and royalties. We have also spent over US$3 billion with Tanzanian suppliers to support the operation of our businesses and, since 2010, invested over US$92 million in our communities.

During the first quarter, Acacia paid/incurred a total of US$32.5 million in taxes and royalties to the GoT. This comprised provisional corporate tax payments for the year of US$12.5 million, royalties of US$10.6 million, payroll taxes of US$6.9 million and other taxes of US$2.5 million.

Acacia’s Sustainable Communities Strategy aims to contribute to the development of “sustainable communities” around its mines in order that they enjoy a thriving local economy, have access to social infrastructure and live in a safe and inclusive environment achieved through strong and transparent relationships with our businesses. The strategy focuses on education, health, water, roads, energy, and various economic development activities and is aligned with the Tanzania Development Vision 2025 as well as the United Nations’ Sustainable Development Goals.

During Q1 2019 we continued to focus on our newly-established Sustainable Communities Reference Groups (“SCRG”) as platforms for consultation and engagement with communities and local government around our mine sites. The SCRGs comprise representation from regional, district and village authorities, as well as community interest groups and special representatives for women and youth. The groups are responsible for identifying further priorities for development in their regions, tracking progress of ongoing projects and, in tandem with the mine, liaising with and channelling information to the communities.

Meanwhile Acacia continued its support for Tanzania’s education sector through the quarter. In January 2019 we signed an agreement with the local district authorities to supply US$300,000 worth of building materials for the construction of key facilities at primary and secondary schools in the Shinyanga region around our Bulyanhulu and Buzwagi mines. School enrolment numbers have risen significantly following the GoT’s free education policy that was introduced in 2016 and many schools are in need of additional infrastructure.

During Q1 2019 we also put a heavy emphasis on initiatives aimed at building a thriving local economy in the communities around our mines. As such, small businesses and agriculture remain important economic opportunities and means of diversifying the local economy. At Buzwagi, the development and implementation of a three-year US$1.1 million agricultural improvement project in partnership with Farm Concern International (“FCI”) continued during the quarter. Farmers started harvesting paddy rice on demo plots which have increased their yields since the project began. Further support from Acacia is planned in 2019, including the building of an agriculture resource centre and the purchase of a tractor to support mechanised farming. Following the completion of a project at Bulyanhulu in 2018 to develop sustainable small businesses and improved value chains for poultry and high-value horticultural crops, participating youth have been recommended by our project partner for access to loans and training in relation to small-scale enterprise from the local councils’ development departments.

Near Bulyanhulu, construction also continued on a 55-kilometre pipeline to carry water from Lake Victoria to 100,000 residents in the Lake Zone. Under the Joint Water Project Partnership (JWPP) with various Tanzanian districts, councils and Agencies, Bulyanhulu mine is investing around US$2 million in the Government project to help provide vital water supply and sanitation services to local communities. The pipeline will pass through 14 villages located in the vicinity of the mine and is scheduled to be completed in mid-2019.

Indirect Taxation Update

The net indirect tax receivables balance of US$179.1 million as at 31 March 2019 increased by US$ 0.4 million during the quarter. The increase was driven by a further US$13.8 million of VAT outflows, net of adjustments, for which no cash VAT refunds were received, offset by the first provisional corporate tax payment for 2019 relating to North Mara of US$12.5 million and foreign exchange revaluation losses of US$0.9 million. The provisional corporate tax payment has been offset against indirect tax receivables in line with an existing agreement with the Tanzanian Revenue Authority, resulting in a net cash impact of US$1.3 million.

As previously disclosed, Tanzania’s new mining legislation includes an Amendment to the VAT Act 2015 to the effect that no input tax credit can be claimed for the exportation of “raw minerals”, with effect from 20 July 2017. Bulyanhulu, Buzwagi and North Mara have each received notices from the Tanzania Revenue Authority that they are not eligible for any VAT relief from July 2017 onwards on the basis that all production (both doré and concentrate) constitutes “raw minerals” for this purpose. The total VAT claims submitted since July 2017 amount to approximately US$102 million. We have disputed this interpretation of the legislation as a matter of Tanzanian law, while this is also a matter that is in contravention of the relevant terms of our Mineral Development Agreements with the GoT and subject to our ongoing disputes with the GoT. In addition, there have been additional recent legislative changes that appear to safeguard VAT relief available to doré. We are seeking clarification on this legislation from the Tanzanian authorities.

Nyanzaga Project Update

We continue to work with the relevant authorities to complete the approval process for OreCorp Tanzania Limited (OreCorp Tanzania) to officially move to a 51% interest in Nyanzaga Mining Company Limited (NMCL). To date approval has been obtained from the Tanzanian Fair Competition Commission. The move remains subject to: (i) the approval of the newly-established Mining Commission, the application for which was lodged at the same time as the application for FCC approval; and (ii) the future payment of US$3 million to the Acacia Group. We also continue to engage with the Tanzanian Revenue Authority in order to obtain the clearance required to support our application for approval by the Tanzanian Mining Commission.

In the event that this approval process is successfully completed such that OreCorp can increase its interest to 51% of NMCL, members of the Acacia Group and members of the OreCorp Group will seek to implement the remaining steps under the completion agreement entered into last year, which would allow for OreCorp Tanzania to move to 100% ownership of NMCL, and thereby 100% ownership of the Nyanzaga Gold Project (Project). The move to 100% ownership of the Project remains subject to: (i) the Tanzanian regulatory approvals referred to above; (ii) the grant of the Special Mining Licence (SML) in respect of the Project; (iii) the making of a future payment of US$7 million; and the grant of a net smelter return production royalty over the Project, capped at US$15 million.

South Houndé Project Update

Acacia signed a binding conditional agreement last year with its partner, Sarama Resources Ltd (TSX-V:SWA) to terminate the earn-in agreement in respect of the South Houndé Project in south-western Burkina Faso. The termination of the earn-in agreement is conditional on definitive documentation being agreed by the parties before April 30, 2019. Acacia and Sarama are in the final stages of concluding agreements.

Supplemental Liranda Scoping Study

Following the outcome of the scoping study completed in Q3 2018, we had commissioned supplemental scoping study works, which included value engineering the Liranda project by means of performing a mining method options trade off study and review of operating and capital expenditure. These works have now been concluded with encouraging results that we are currently reviewing. A change in the envisaged mining method to a more conducive mechanised long-hole open stoping, with small to medium size equipment allows for reduced mining design dimensions with its associated lower mining costs and a significant reduction in dilution. Acacia is considering strategic options available to advance the project further.

Key Statistics
Three months ended 31 March Year ended  31 December
(Unaudited) 2019 2018 2018
Tonnes mined Kt 3,811 4,135 17,413
Ore tonnes mined Kt 1,246 838 4,048
Ore tonnes processed Kt 2,324 2,159 9,272
Ore tonnes processed exc. Tailings reclaim Kt 1,800 1,709 7,373
Process recovery rate exc. Tailings reclaim % 91.1% 91.0% 91.7%
Head grade exc. tailings reclaim g/t 1.8 2.2 2.2
Process recovery rate incl. tailings reclaim % 84.9% 86.5% 86.9%
Head grade incl. tailings reclaim g/t 1.7 2.0 2.0
Gold production Oz 104,899 120,981 521,980
Gold sold Oz 104,985 116,955 520,380
Cash cost per tonne milled exc. tailings reclaim1 US$/t 47 47 46
Cash cost per tonne milled incl. tailings reclaim1 US$/t 38 39 38
Per ounce data
     Average spot gold price2 US$/oz 1,304 1,329 1,269
     Net average realised gold price1 US$/oz 1,307 1,332 1,272
     Total cash cost1 US$/oz 850 715 680
     All-in sustaining cost1 US$/oz 1,023 976 905

Financial results

Three months ended 31 March Year ended 31 December
(Unaudited, in US$’000 unless otherwise stated) 2019 2018 2018
Revenue 138,138 156,517 663,789
Cost of sales (115,219) (108,400) (444,374)
Gross profit 22,919 48,117 219,415
Corporate administration (4,298) (5,458) (23,813)
Share based payments (485) 1,527 74
Exploration and evaluation costs (1,944) (3,623) (13,343)
Corporate social responsibility expenses (1,635) (1,546) (8,812)
Impairment charges (28,877)
Other (charges)/income (net) (15,806) 22,767 (36,094)
(Loss)/profit before net finance expense and taxation (1,249) 61,784 108,550
Finance income 287 132 1,421
Finance expense (3,190) (3,836) (13,200)
(Loss)/profit before taxation (4,152) 58,080 96,771
Tax expense (2,654) (8,085) (37,905)
Net (loss)/profit for the period (6,806) 49,995 58,866

1 These are non-IFRS financial performance measures with no standard meaning under IFRS. Refer to “Non IFRS measures” on page 18 for definitions. Note the adoption of revised World Gold Council guidance on the calculation of AISC.

2 Reflects the London PM fix price.