Terrafame Group Ltd.'s annual review for 1 January – 31 December 2016

Terrafame Group Ltd. is a special assignment company owned by the State of Finland and is subject to ownership steering by the Ministry of Economic Affairs and Employment. Terrafame Group Ltd. was entered into the Trade Register on 9 February 2015 as part of the preparations of the State of Finland for the arrangements concerning Talvivaara Sotkamo Ltd.’s bankruptcy estate. At the end of the accounting period, the Terrafame Group included Terrafame Ltd., wholly owned by the parent company. The subsidiary Winttal Oy, wholly owned by Terrafame Group Ltd., entered voluntary liquidation as dispensable and was dissolved during the 2016 accounting period. The liquidation of Winttal Oy was registered on 29 December 2016.

Key events of the period

Terrafame Group Ltd.’s most important asset item is its subsidiary, Terrafame Ltd. Terrafame Ltd. has continued the ramp-up of production at its multi-metal mine, located in Sotkamo. During 2016, the ramp-up continued as planned.

During 2016, Terrafame mined, crushed and agglomerated 14.2 million tonnes of ore. The company completed Section 2 of the primary leaching area in May and Section 3 in October. Approximately 75% of the primary leaching area was in production use at the end of the year. At the beginning of the year, mining was carried out in the northern part of the Kuusilampi open pit. In April, the water stored in the central part was moved to the northern part with the permission of the Kainuu Centre for Economic Development, Transport and the Environment (hereinafter “ELY Centre”). Mining moved to the central part, that is, the so-called main ramp. As a result, the cost-efficiency of the ore and waste rock mining improved significantly. By the end of 2016, the water from the north pit was removed successfully, and the northern part of the pit was connected to the main ramp. The nickel and zinc concentrations of the ore remained at a good level. During 2016, 37,042 tonnes of nickel and 70,299 tonnes of zinc were heaped at the primary leaching heap.

Reclaiming of old heaps in the primary leaching area slightly limited stacking of new ore in the first half of the year. In February, a second Wirtgen surface miner was introduced, and a third one was introduced in June. Regarding reclaiming of heaps, Terrafame came close to the long-term target of monthly production of 1.5 million tonnes.

Primary leaching has worked as expected. In Section 1 of the primary leaching area, taken into production in November 2015, the leaching recovery rate was 40% for nickel and 50% for zinc at the end of 2016. Both precious metals had a recovery rate target of 35% in primary leaching. The leaching recovery rate of Section 2 has developed somewhat less efficiently than Section 1. However, Section 3 has made better progress than Section 1. Secondary leaching has worked as expected. The good, even particle size achieved in surface mining has contributed greatly to the efficacy of secondary leaching. During 2016, 11,584 tonnes of nickel and 27,868 tonnes of zinc were leached.

As of October, the metals production plant was run at full solution stream and with two H2S reactors, which enabled a larger production capacity. The well-functioning bioleaching has enabled the steady operation of the metals production plant. As a result, the quality of the saleable products has been very consistent and has met expectations. The customer deliveries of nickel and zinc have met the quality specifications. The nickel concentration of the nickel-cobalt product was 49.6% on average and the cobalt concentration was 1.0%. The zinc concentration of the zinc product was 60.7% on average.

Production in the metals production plant had to be suspended for four weeks due to a fire in a H2S reactor on 16 December 2016. The costs resulting from the fire totalled approximately EUR 0.5 million. As a result of the fire, the December production was clearly below the planned level. The nickel production of the metals production plant was 9,554 tonnes and the zinc production was 22,575 tonnes in 2016.

The ramp-up of production has been covered in more detail in Terrafame Ltd.’s annual review of the Board of Directors.

In accordance with the agreement between the companies, Terrafame Group Ltd. produced Terrafame Ltd. services concerning, for instance, legal matters and communications, during the accounting period. The water treatment technology project has been described below in connection with research and development activities.

In December 2015, Terrafame Group Ltd. acquired Winttal Oy, where Nyrstar Sales & Marketing AG had moved its receivables from Talvivaara Mining Company Plc. The receivables in question were moved to Terrafame Ltd. in June 2016, and they were used as compensation when Terrafame Ltd. acquired the proprietary rights of the lime plant, the laboratory and the geological data, necessary for the production process. As dispensable for the Group’s business, Winttal Oy entered voluntary liquidation on 5 August 2016, and it was registered as dissolved on 29 December 2016.

In May 2016, the state owner decided that private financing, necessary for completing the ramp-up and achieving positive cash flow, must be secured by the end of 2016. At the same time, it was decided that preparations must be made for the mine’s controlled, early shutdown. In November 2016, the state owner revised its decision, enabling negotiations aimed at securing private financing to continue also after 31 December 2016. At the end of summer 2016, Terrafame Group Ltd. and Terrafame Ltd. started a project aimed at securing private financing. The preliminary agreement on ownership and financing arrangements was signed on 15 December 2016.

Financial review and key figures

In the 2016 accounting period, Terrafame Group’s net sales totalled EUR 101 million (2015: EUR 2.5 million) and operating loss totalled EUR -136.7 (2015: EUR -93.1 million). The Group’s result before profit-adjusting entries and taxes totalled EUR -127.2 million (2015: EUR -93.1 million). The loss for the accounting period was EUR -127.2 million (2015: EUR -93.1 million).

Terrafame Group’s balance sheet total was EUR 377 million (2015: EUR 309.7 million). The Group’s return on equity was -88.52% (2015: -80.26%) and equity ratio was 45.44% (2015: 37.45%).

The Group’s equity totalled EUR 171.3 million (2015: EUR 116.0 million), liabilities totalled EUR 43.6 million (2015: EUR 31.6 million) and provisions totalled EUR 162.0 million (2015: EUR 162.0 million). The Group had EUR 1.3 million of external capital (2015: EUR 3.5 million) of which EUR 1.3 million was short-term (2015: EUR 2.2 million) and EUR 0 million was long-term external capital (2015: EUR 1.3 million).

 

Key financial figures

Group 2016 2015  
Net sales EUR 101.0 million EUR 2.5 million
Profit/Loss EUR -136.7 million EUR -93.1 million
Operating profit % -135% -3689%
Equity ratio 45.44% 37.45%
Balance sheet total EUR 377 million EUR 309.7 million
Salaries EUR 28.4 million EUR 8.1 million
Personnel 629 482
       
Parent company      
Net sales EUR 0.2 million 0.0 million
Profit/loss EUR -2.3 million EUR -1.2 million
Operating profit % -1088% N/A
Equity ratio 99.94%

99.91%

Balance sheet total EUR 388.2 million EUR 208.1 million
Salaries EUR 0.5 million EUR 0.1 million
Personnel 3 2

Personnel

At the end of the accounting period, Terrafame Group Ltd. employed 5 people and Terrafame Ltd. employed 645 people. Part of Terrafame Group Ltd.’s personnel are within a performance-based bonus system. Terrafame Ltd. reports on the remuneration of its personnel in its annual review of the Board of Directors and in its remuneration report.

Environmental factors

Terrafame Ltd. assumed responsibility of the mine in 2015 in a highly challenging situation where the solution volumes of the bioleaching pools were 840,000 cubic metres, which is above a level considered safe. In addition, there were nearly 10 million cubic metres of excess water stored in the area.

In early April 2016, the water at the dams of Kortelampi and Latosuo climbed to a level where the risk of uncontrollable leakage of water into the environment had become too high, according to Terrafame’s assessment. Thus, Terrafame decided to perform additional discharges of purified waters from Lake Kortelampi and Lake Latosuo between 8 April and 6 May until the water surface at the water reservoirs reached a level that can be considered safe in view of dam and environmental safety. A total of 1.9 million cubic metres of water was discharged to the old discharge routes and into the discharge pipe. The water discharged in the additional discharges was purified and its concentrations were clearly below the limits stated in the environmental permit.

Thanks to continuing mining operations and good efficacy of the bioleaching process, Terrafame has been able to decrease the amount of water stored at the mine area significantly during summer and autumn 2016 and within the terms of the environmental permit. At the end of 2016, there was approximately 3.8 million cubic metres of water stored in the area and approximately 500,000 cubic metres of solution in the circulating bioleaching solution.

The quality of the purified waters discharged from the mining area was good in 2016. The sulphate concentration of the waters was less than half of the limit value on average, and the metal concentrations were less than a tenth of the set limit values on average.

According to Terrafame Ltd.’s estimate, there will be no need for additional water discharges in spring 2017 as the snow melts.

Research and development

Of the capital injected into Terrafame Group Ltd. by the state owner, EUR 2 million has been reserved for a pilot project on water treatment. As part of this work, Terrafame Group Ltd. launched a special R&D project in September 2015 in order to identify new technological solutions for the treatment of the water at the mine. The primary goal is to reduce the sulphate levels of water discharged from the mine. The new technologies being sought may involve production process optimisation, process technology or new water treatment methods.

At the first stage of the project in November 2015, Terrafame Group Ltd. announced a call for mini demonstrations which was open to all actors, such as businesses, research institutions and universities. Eight solutions, which partially complement each other, were selected for execution. The projects were completed during the beginning of 2016. Based on the projects and other reports, Terrafame Group Ltd. formulated a plan and a concept for comprehensive sulphate management. The solution and connected unit operations were protected with patent applications and were published at a seminar held in June 2016. The concept is based on changes in chemistry done in the recovery of metals as well as changes in the mine’s post-processing. This way, the sulphate is mainly either recycled in the process or recovered as a by-product. Preparations for the concept’s pilot-scale demonstration started in July 2016. The pilot tests started in October 2016. Results and concept reviews based on them can be expected during the next operating period. The costs of the project totalled about EUR 1,040,000 in the 2016 accounting period (2015: EUR 120,000).

A steering group has been appointed for the water management pilot project, with a wide representation of Finland’s leading water expertise from actors such as universities and research institutions. The steering group includes:

  • Päivi Kinnunen, Chair of the Steering Group; Research Team Leader, Material Recycling and Geotechnology, VTT Technical Research Centre of Finland
  • Pekka Oinas, Professor, Plant Design, Aalto University
  • Riitta Keiski, Dean of the Faculty of Technology, Professor of Process and Environmental Engineering, University of Oulu
  • Tuomo Sainio, Professor, Separation Processes, Lappeenranta University of Technology
  • Marja-Liisa Räisänen, Senior Scientist, Geological Survey of Finland
  • Timo Koski, Senior Advisor, Finnish Water Forum
  • Tommy Jacobson, CEO, CLIC Innovation Oy
  • Harry Sandström, Programme Director, Geological Survey of Finland

Assessment of significant risks and uncertainties

The Board of Directors is responsible for arranging internal control, risk management and internal audit.

The internal audit of the Terrafame Group companies is performed under the supervision of the Board of Directors and the CEO of each company.

Terrafame Group Ltd.’s key risks from the viewpoint of ownership value concern the success of the ramp-up and the development of the business of Terrafame’s mine, availability and terms of external financing as well as environmental permit terms concerning the mine.

Terrafame Group Ltd.’s Board of Directors monitors and assesses the risks and risk management concerning the company’s operations on a regular basis.

Terrafame Ltd.’s risk management and risks concerning its operations are described in Terrafame Ltd.’s annual review the Board of Directors.

The financial statements for 1 January – 31 December 2016 were prepared on a going concern basis, assuming that the financial position of Terrafame Ltd. and its parent company Terrafame Group Ltd. can be secured and their business operations continued in the foreseeable future. The possibilities for this are considered good since the ramp-up of Terrafame Ltd.’s mine has proceeded according to plan, and key objectives for 2016 were achieved. The business plan of Terrafame Ltd. has been drafted applying the prudence concept. The company has great potential to improve the cost-effectiveness of its processes and optimise its process yields and product quality.

During the accounting period, Terrafame Group Ltd. and Terrafame Ltd. have been preparing an ownership and financing arrangement in order to secure the financing required for completing the ramp-up of Terrafame Ltd.’s production. The term sheet on the matter was signed on 15 December 2016. Related to the financing arrangement being prepared and continuing the mining operations, the state owner allocated EUR 100 million in the 2017 draft supplementary budget to be used as capitalisation for Terrafame Group Ltd.

The negotiations concerning the ownership and financing arrangement detailed in the aforementioned term sheet were closed in the beginning of 2017, with the result that the final agreements with Trafigura Ventures V B.V. and Galena Private Equity Resources Investment 2 L.P. fund, both part of the Trafigura Group, were signed on 3 February 2017 and the arrangement was implemented on 10 February 2017. Sampo plc and Terrafame Group Ltd. acted as co-investors in the arrangement. In total, the scope of the financing arrangement is EUR 250 million. With the financing arrangement, Terrafame Ltd. has the funding to complete the ramp-up of production and to achieve positive cash flow.

Shares and shareholders

The State of Finland owns Terrafame Group Ltd.’s entire share capital consisting of 391,600 shares. Each share entitles its holder to one vote.

Corporate governance

The main set of rules applied to a special assignment company owned by the State is the Limited Liability Companies Act of Finland (624/2006) as well as the State Shareholdings and Ownership Steering Act (1368/2007). In addition, Terrafame Group Ltd.’s corporate governance is guided by the Resolution on State Ownership Steering Policy (13 May 2016) as well as the Articles of Association and the principles and guidelines defined by the company’s Board of Directors.

The Annual General Meeting, the Board of Directors and the CEO are responsible for Terrafame Group Ltd.’s governance and operations.

The Chair of the Terrafame Group Ltd.’s Board of Directors was Janne Känkänen. The other members of the Board of Directors were Juha Majanen and Minna Pajumaa.

The Board of Directors has no committees.

All Board members are independent of the company. Board members are not independent of the company’s sole shareholder, the State of Finland.

Terrafame Group Ltd. complies with the rules of procedure adopted by the Board of Directors.

KPMG Oy Ab, with Chartered Accountant Antti Kääriäinen as the responsible auditor, is the auditor of Terrafame Group Ltd. and its subsidiaries.

Remuneration of the Board of Directors and other executives

During the period 1 January – 31 December 2016, the monthly remuneration of the Chair of the Board was EUR 2,500 and that of the members of the Board was EUR 700, in addition to which an attendance fee of EUR 500 was paid for each meeting of the Board of Directors, its committees and the steering group of the subsidiary, Terrafame Ltd. (the operation of the steering group is combined with the meetings of the Board of Directors of Terrafame Ltd.). Board members do not own shares in the company and the company has no share option scheme.

In 2016, Terrafame Group Ltd.’s Board of Directors had a total of 23 meetings (of which 8 by decision minutes, no attendance fees). All of the Board members attended all of these meetings. Board member Janne Känkänen participated in a total of eight meetings of the steering group of the subsidiary, Terrafame Ltd. A total of EUR 46,800 was paid to Terrafame Group Ltd.’s Board members in monthly remunerations and EUR 26,500 in attendance fees. 

 

  Monthly remunerations, EUR Attendance fees, EUR Total remuneration, EUR Board meetings Subsidiary's steering group  
Janne Känkänen 30,000 11,500 41,500 23/23 8/11  
Juha Majanen 8,400 7,500 15,900 23/23    
Minna Pajumaa 8,400 7,500 15,900 23/23    
Total remuneration 2016 46,800 26,500 73,300      

The subsidiary Terrafame Ltd. reports the remunerations paid to its Board members and other executives in its own annual review of the Board of Directors. During the 2016 accounting period, Terrafame Group Ltd. bought expert services worth a total of EUR 180,000 from a company owned by the related parties of Lauri Ratia, Chair of the Board of Terrafame Ltd. The expert services purchased were related to matters such as the start-up of the operations of Terrafame Group, the ramp-up of mining operations and stabling and reorganising operations as well as consultation related to the acquisition of financing. Purchasing the services in question was necessary at the start-up and ramp-up phase of Terrafame Group’s operations as well as for the financing negotiations, ongoing at the time. The expert services were priced at current value.

Matti Hietanen, CEO of Terrafame Group Ltd., was the sole member of the Board of Directors of Winttal Oy in 4 December 2015 – 22 June 2016. No separate remuneration was paid for this position.

The CEO’s duties entitle him to a fixed monthly remuneration, which was EUR 13,000 on 31 December 2016. The CEO has no performance bonus system and receives no fringe benefits. Neither is he covered by a contribution-based or other additional pension insurance. The total amount of remuneration paid to the CEO in 2016 was EUR 165,360. The CEO’s period of notice is one month without a separate severance pay. The CEO does not own shares in the company, and the company has no share option scheme.

Key events after the accounting period

On 3 February 2017, Terrafame Group Ltd., Terrafame Ltd. as well as Trafigura Ventures V B.V. and Galena Private Equity Resources Investment 2 L.P. fund, both part of the Trafigura Group, signed an agreement on an ownership and financing arrangement concerning Terrafame Ltd. The arrangement was put into effect on 10 February 2017. The financing arrangement totals EUR 250 million. Thus, the financing arrangement covers the EUR 150–200 million needed to complete the ramp-up of Terrafame’s operations. In the arrangement, Terrafame’s pre-transaction value before the equity investment is EUR 381.8 million, which is equivalent to capitalisations made by Terrafame Group Ltd. into Terrafame Ltd. before the arrangement.

In the arrangement, the Galena fund made an equity investment of EUR 75 million into Terrafame Ltd. and gained an equity stake of approximately 15.5% in the company. Terrafame Group Ltd. made an additional equity investment of EUR 25 million in Terrafame Ltd. Terrafame Group Ltd.’s share of ownership in Terrafame at the time of the arrangement’s execution is 84.2%. In addition, Terrafame Group Ltd. made an equity investment commitment of EUR 50 million to Terrafame Ltd., available for use until the end of 2018.

As part of the arrangement, Trafigura granted Terrafame Ltd. a loan of EUR 75 million, and, in addition, Sampo plc granted a loan facility of EUR 25 million with terms similar to Trafigura’s. With the loan, Galena and Sampo plc get the right to subscribe for Terrafame’s shares with a sum that is equal to the capital of the loan as well as the accrued interest. The option rights agreement is valid for a period of 5 years. The 1.5% drawdown fee was paid in shares of Terrafame Ltd.

As part of the agreement, it was also agreed that Trafigura will buy 100% of the nickel-cobalt and 80% of the zinc sulphide that Terrafame Ltd. produces for the next seven years.

The arrangement has no effect on Terrafame Ltd.’s business plan, management or personnel.

The work to repair the damage caused by the fire in the H2S reactor was completed in the beginning of the year as planned. The production of the metals production plant was resumed on 13 January 2017.

Estimate on future development

Put into effect on 10 February 2017, the financing and ownership arrangement concerning Terrafame Ltd. enables completing the ramp-up of the mine’s production and achieving positive cash flow. Terrafame Group Ltd. continues its operations as the Group’s parent company as well as offering research and development concerning the Ariel project and expert services to Terrafame Ltd.

In summer 2016, Terrafame Ltd.’s mineral resource and ore reserve evaluation was updated. The ore reserves of Kuusilampi and Kolmisoppi total 530.5 million tonnes of which proven reserves total 356.5 million tonnes and probable resources 174.0 million tonnes. The large ore reserves provide conditions for mining and metals production for several decades. The world market price of nickel is estimated to continue to develop favourably in 2017. High stock levels will continue to curb the increase of the price of nickel, but stocks are expected to continue decreasing during 2017. With zinc, the deficit in mine production and low stock levels are expected to contribute to the favourable development of the price of zinc and the processing premiums. In addition to zinc, the market outlooks for cobalt and copper are also positive. Terrafame Ltd.s lost-time accident frequency goal is below 5, when the goal stands for the number of accidents resulting in absence per one million work hours. Terrafame’s target is to continue ramping up production and delivery volumes and improving cost efficiency. The company is preparing for the commercialisation and sales of copper during 2017. Thanks to the good water situation in the mining area, there will be no need for additional discharges of treated waters in spring 2017 according to the current estimates.

The Board of Directors’ proposal for the result

Terrafame Group Ltd.’s result for the accounting period 2016 shows a loss of EUR -2,451,035.57. On 31 December 2016, the Group’s distributable equity totalled EUR 385,681,155.28.

The Board of Directors proposes to the Annual General Meeting that Terrafame Group Ltd.’s loss for the accounting period be recorded as a reduction in the profit/loss account and that no dividend be paid.