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

Terrafame Ltd. was registered in the Trade Register on 5 June 2016 under the name Terrafame Mining Ltd. The company’s name was changed to Terrafame Ltd. (Terrafame) in August 2015. Terrafame commenced its actual operations on 15 August 2015 after having acquired the business of Talvivaara Sotkamo Ltd.’s bankruptcy estate, including the related inventories and fixed assets. The reporting period 1 January–31 December 2016 is the company’s second reporting period and its first full year of operations.

Operating environment

Demand for nickel grew quite significantly during 2016. Increased demand, particularly in the manufacturing of stainless steel and batteries for electric cars, drove the growth which was 7.5% globally. Nickel mine production decreased globally by about 1% in 2016. In the last quarter of 2016, the average price of nickel (LME) was USD 10,810 per tonne, which is 14.5% higher than in the last quarter of 2015. In 2016, nickel stock levels at the London Metal Exchange (LME) and the Shanghai Futures Exchange (SHFE) decreased by approximately 30,000 tonnes, totalling approximately 470,000 tonnes at the end of the year. 

In 2016, global demand for zinc grew by about 2.4%. Simultaneously, mine production of zinc decreased by almost 6%. The average price of zinc (LME) in the last quarter of 2016 was USD 2,517 per tonne which was 56% higher than in the fourth quarter of 2015. LME’s zinc stock levels decreased by approximately 35,000 tonnes to 428,000 tonnes during 2016.

At the end of 2015, the exchange rate between the euro and the U.S. dollar was at 1.089. The average monthly dollar exchange rate during January–October 2016 was approximately 1.115. Strengthening of the dollar at the end of the year had a positive effect on Terrafame. The average euro exchange rate in November was 1.080 U.S. dollars, and in December the average euro rate was 1.054 U.S. dollars.

The production ramp-up continued in 2016 as planned. In May, the company completed Section 2 of the primary leaching area and, in October, Section 3. During 2016, Terrafame mined, crushed and agglomerated 14.2 million tonnes of ore. Approximately 75% of the primary leaching area was in production at the end of the year. 

18.4 million tonnes of waste rock was excavated and used for the base structures of the secondary leaching heaps 3 and 4, which are under construction. 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 Centre for Economic Development, Transport and the Environment. Mining moved to the central part, that is, the so-called main pit. As a result, the cost-efficiency of the ore and waste rock mining improved significantly. By the end of 2016, the water was successfully removed from the north pit, and the northern part of the pit was connected to the main pit. 

During the year, we introduced two new Hitachi EH3500ACII dump trucks, the ninth dump truck in January and the tenth one in May. The utilisation rate of the fleet reached 82%, which is a clear improvement compared to the previous result and exceeds the target of 80%.

Reclaiming of the heaps in the primary leaching area slightly limited stacking of new ore in the first half of the year. In February, a second surface miner was introduced, and a third one was introduced in June. Regarding reclaiming of the heaps, Terrafame came close to the long-term target of monthly production of 1.5 million tonnes. The availability of the reclaiming conveyor system caused issues throughout the year. The utilisation rate of the conveyor system was 62%, which is clearly below target. Changes made to the feeder system at the end of the year have improved the availability of the conveyor system significantly.

Nickel and zinc content of ore remained at a good level. During 2016, 37,042 tonnes of nickel and 70,299 tonnes of zinc were stacked onto the primary leaching heaps. 

Safeguarding the quality of the agglomerate and the construction of the leaching heaps were key targets in ensuring the good operation of bioleaching. The target quality of agglomerate was reached 99% of the time at the end of the year. For the whole year, 95% of the quality target reached. Regarding the quality targets of the construction of the primary and secondary leaching heaps, we reached levels of 95% and 92%, respectively, for the whole year. Issues related to heap aeration, drainage and irrigation during the previous operator have been resolved by enhancements in agglomeration, as well as in drainage of the primary heaps by way of improvements made in the assembly methods regarding the accuracy of aeration and irrigation piping.

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

Annual stoppages at the metals production plant took place as planned in May and at the turn of September and October. Otherwise, the metals production plant was run with one precipitation line until July and with two precipitation lines in July–September. As of October, the metals production plant was run with full solution feed and with two hydrogen sulphide lines, which enabled larger production capacity. The well-functioning bioleaching has enabled steady operation of the metals production plant. As a result, the quality of nickel and zinc products has been very consistent and has met expectations. The customer deliveries of nickel and zinc products have met the company’s quality specifications. The nickel content of the nickel-cobalt product was 49.6% on average and the cobalt content was 1%. The zinc content of the zinc product was 60.7% on average.

Production at the metals production plant had to be suspended for four weeks due to a fire at the hydrogen sulphide plant 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.

 A term sheet regarding the financing arrangement to secure the financing needed for the completion of the ramp-up of Terrafame Ltd.’s production was signed on 15 December 2016. The ownership and financing arrangement that complied with the term sheet was completed in February 2017. The ownership and financing arrangement totalled EUR 250 million.

Financial review and key figures

Terrafame’s net sales totalled EUR 101.0 million. Customer deliveries of nickel product were 9,544 tonnes nickel contained. Customer deliveries of zinc product were 25,707 tonnes zinc contained.

EBITDA was EUR -120.4 million, and the result for the accounting period showed a loss of EUR 124.9 million.

Capital expenditure in 2016 was EUR 84.3 million. This included the lime plant, laboratory operations and the geodata acquired from Talvivaara Mining Company Plc. worth EUR 15.4 million. Other major investments were the centralised water treatment plant, which began its trial operation in November, the base structures for the third and fourth secondary areas, investments into blower and pumping plant buildings, retooling two fine crushers, and the investments into modernising of the hydrogen sulphide plant as well as the lime plant. Other significant investments included taking over the HSH lease equipment, two surface miners and two dumper trucks.

At the end of the accounting period, Terrafame’s inventories totalled EUR 76.2 million. On 31 December 2016, the value of work in progress totalled EUR 50.1 million, the gross value of raw material and spare part inventories was EUR 29.1 million, the value of the chemicals stock was EUR 2.4 million and the value of the finished product inventory was EUR 0.6 million. A reserve for slow-moving inventory of about EUR 6.0 million was allocated to raw material and spare parts inventory on 31 December 2016. 

Trade receivables on 31 December 2016 totalled approximately EUR 15.8 million. Other receivables, mainly value added tax receivables, totalled about EUR 8.3 million and receivables carried forward totalled EUR 2.7 million on 31 December 2016.

At the end of 2016, cash and cash equivalents totalled EUR 44.7 million. Shareholders’ equity on 31 December 2016 was EUR 165.1 million. 

Summary of the key financial figures is presented in the table below.

 

  2016 2015
Net sales 101,041,812.64 2,523,629.03
Operating loss -134,533,354.73 -91,753,412.40
Equity ratio % 45% 4%
Balance sheet 370,656,468.24 201,946,750.51
Personnel, average 626 480
Salaries and wages 27,934,434.97 8,035,241.50

Financing

In the financial year 2016, the operating cash flow was negative EUR 176.8 million. Cash flow from investing activities was EUR 74.0 million. Terrafame Group Ltd. has supported the ramp-up of Terrafame Ltd.'s operations during 2016. 

Increase in the unrestricted equity amounted to EUR 281.8 million during the financial year 2016. At the end of the financial year 2016, the invested unrestricted equity was EUR 379.8 million. Number of shares increased with 1,380,000 shares to 2,380,075 shares at the end of 2016.

Research and development 

Terrafame’s research and development activity focused on ensuring and developing the bioleaching as well as developing the efficiency of the metals production plant. In addition, a report was commissioned on further processing possibilities of nickel as well as the possibilities of recovering rare earth metals. The company also participated actively in the Ariel development initiative for new water purification technology, led by its parent company, Terrafame Group. 

The production plan is based on 15-month primary leaching period. In the primary leaching phase, it is crucial that leaching recovery and speed are as high as possible. We continued research collaboration with an international consultant specialising in heap leaching. The target was to ensure that the measures and improvements made in primary leaching will lead to the desired results. We will continue this collaboration and will expand it to include the analysis and development of secondary leaching. 

The process development of primary leaching was continued in collaboration with Finnish experts. Electrochemical measurements of the heap were started, and monitoring of the heap’s temperature profile was continued. Precise mineralogical monitoring of the feed ore was started. The target of this development work is to ensure as consistent and controlled process conditions as possible for primary leaching. 

Leaching columns were constructed to optimise bioleaching parameters and to conduct more in-depth research. With leaching columns, it is possible to test different process conditions in pilot scale. 

Further upgrades of nickel product through roasting process looks highly interesting based on a preliminary feasibility study. 

Uncertainties and risk management

In accordance with good corporate governance guidelines on risk management, Terrafame Ltd. complies with the risk management policies approved by the Board of Directors. Risks are identified, their impact on the company’s operations is evaluated and an appropriate action plan is created. In the beginning of 2016, key business risks were assessed, and this assessment will be updated on an annual basis.

The company’s business and operations are affected by various risks common to the mining industry, including risks on the availability of environmental and other permits, as well as risks concerning the production ramp-up of the new company which include risks on securing sufficient financing for the ramp-up. The most significant business risks are the market development of nickel and zinc, nickel and zinc prices, counterparty risks related to customers and other business partners, risks linked to the price of major raw materials and of electrical energy, changes in foreign exchange rates, and the cost of the ramp-up and the adequacy of its funding, as well as risks concerning the production process and costs, and permits granted by the authorities. 

Terrafame’s risk management regarding process safety, the environment and occupational safety has been based on the risk assessment done during the previous operator’s time in 2012–2015. During 2016, the risk assessment was updated extensively to correspond with Terrafame’s current operations as well as the company’s current practices and requirements. During 2016, work by an external expert for a comprehensive assessment of the environmental risks was launched.

We have succeeded in reducing operational risks during 2016. The most important measures include the systematic update of the PI diagrams and a clearer labelling for the process equipment. By the end of 2016, 60% of the work on PI diagrams had been completed. During the summer, a new operating model for the management of process changes was introduced in the metals production plant. The model was updated based on experiences gathered during the autumn, and, during 2017, the operating model will be implemented in all departments. The good functionality and speed of bioleaching is a key operational risk. During 2016, three external expert reports were commissioned to ensure the proper performance of the bioleaching.

Occupational safety

When Terrafame started its actual operations on 15 August 2015, it defined as its key guiding principles safety, efficiency and commitment. The most important target is safety, with a particular emphasis on both occupational and environmental safety. 

The work to improve occupational safety continued during 2016. When the company started operations, the number of lost-time accidents was much too high, and the attitude towards safe and responsible work and working methods had deteriorated. In 2016, the safety work was continued with management safety walks introduced in 2015, which were conducted weekly at different parts of the mine and plant areas. In addition, regular safety and housekeeping walks were started at different departments. Safety meetings, held every other week, were continued. In addition, all safety issues have been discussed as the first item on the agenda of the meetings of the Board of Directors, the Management Team, and in operational meetings. In 2016, we also introduced the CEO’s accident and near-miss meetings. Persons involved in the accidents and near misses and supervisors are invited to these meetings to discuss the root cause which led to the situation and the necessary measures to take. If the accident concerns a contractor working at the site, the contractor’s management is also invited to the meeting. During 2016, these coffee meetings were held almost every month.

During 2016, lost-time injury frequency developed positively and fell from 23.3 (end of 2015) to 8.4. However, we did not reach our goal of less than 7. In summer 2016, Terrafame achieved a new record of 80 accident-free days.

We continued the safety bonus programme introduced in 2015. The company is divided into three sections: the mine and materials processing, bioleaching and metals production plant, and administration and maintenance. If a section had zero lost-time injuries during a one-month period, a bonus of EUR 100 was paid to all employees of the section, excluding management. In June, we enhanced the programme until the end of 2016 so that an additional bonus of EUR 100 per person was paid if no lost-time injuries occurred in the section during the quarter. 

The emphasis and importance allocated to occupational safety are result of Terrafame’s complex production chain and the fact that several of the process phases and the raw materials used in production entail risk factors typical of the chemicals industry. Managing these risk factors appropriately is one of the cornerstones of our safety. On the other hand, a safety-driven approach to work leads to better and more efficient working methods and thus to higher productivity.

Environmental safety

In 2015, Terrafame took over responsibility for the mining operations in very challenging conditions in which the bioleaching solution volumes were 840,000 cubic metres, exceeding the level considered safe. In addition, there were more than 10 million cubic metres of stored waters at the mine area.

The use of the discharge pipe into Lake Nuasjärvi, which is critical for the management of the water situation, began in November 2015. The permit granted by the Regional State Administrative Agency for the use of the discharge pipe set the sulphate quota to 24,000 tonnes per year, and would have enabled the purification and removal of extra waters from the area within three years. In September 2015, the Vaasa Administrative Court issued an interim decision, halving the sulphate quota of the discharge pipe from the mining area into Lake Nuasjärvi to 1,000 tonnes per month. Due to this, the volume of waters accumulated in the mining area could not be reduced during the winter as planned and in accordance with the environmental permit granted. In spring 2016, the Vaasa Administrative Court issued its final decision regarding the discharge pipe permit. According to the final decision, the sulphate quota of the discharge pipe is limited to a maximum of 15,000 tonnes per year. The maximum monthly sulphate quota is 2,000 tonnes per month during the summer season and 1,000 tonnes per month during the winter months.

In early April 2016, the water at the dams of Kortelampi and Latosuo ascended to a level where the risk of uncontrollable leakage of water had risen too high, according to Terrafame’s assessment. Thus, Terrafame decided to start additional discharges of purified waters from Kortelampi and Latosuo water reservoirs. Between 8 April and 6 May, the additional discharges were carried out until the water surface reached the level that could be considered safe in view of dam and environmental safety. A total of 1.9 million cubic metres of water were discharged both to old discharge routes and through the discharge pipe. The waters discharged had been purified and the sulphate and metals concentrations were clearly below the limits stipulated in the environmental permit. 

At the end of 2016, there was approximately 3.8 million cubic metres of water stored at the area, 6 million cubic metres less than in the beginning, and approximately 500,000 cubic metres of pregnant leach solution (PLS) in the process ponds. Thanks to continuing mining operations and improved water balance, a total of 1.9 million cubic metres of water has been pumped to the bioleaching circulation during 2016. 

The water released into the Nuasjärvi discharge pipe was below the sulphate quota of 15,000 tonnes per year by approximately 1,400 tonnes in 2016, despite the additional discharges carried out in the spring. The sulphate load on the old discharge routes was 3,906 tonnes in 2016, meaning that the annual load quota of 1,300 tonnes was exceeded by 2,606 tonnes due to the additional discharges in the spring. 

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 stipulated permit limit values on average. Reject effluent from reverse osmosis has been directed into bioleaching circulation since March. In March–December, a total of 5,700 tonnes of sulphate included in the reject was led into bioleaching circulation, which is highly significant regarding the sulphate quota and for the water balance management of the mining area.

The company estimates that there is no need for extra discharges of purified water in spring 2017 when the snow melts. 

Based on measurements performed in Terrafame’s mandatory environmental monitoring, the autumn circulation of Lake Nuasjärvi has been successful. The water layers at the surface and at the bottom have intermixed well, meaning that there is no permanent layering in the lake. The concentrations in the water directed into the lake the discharge pipe have remained clearly below the limits stipulated in the environmental permit.

Permit processes

All permits regulating mining operations were transferred to Terrafame Ltd. when it took over operations. These include permits such as a mining permit, chemicals handling and storing permit as well as environmental and water permits. 

When Terrafame began operations, the main environmental permit processes were under appeal at the Vaasa Administrative Court. The Regional State Administrative Agency issued a permit decision in the spring of 2013 regarding water discharge along the old discharge routes. In the spring of 2014, the Agency issued a permit decision covering all of the mining operations and the extraction of uranium. In the spring of 2015, the Agency issued a permit decision concerning the discharge pipe to Lake Nuasjärvi. All of the above permits were pending at Vaasa Administrative Court at the beginning of 2016. 

In April 2016, the Vaasa Administrative Court issued its decision regarding the appeals made on the discharge pipe into Lake Nuasjärvi and other issues related to Terrafame’s environmental permits. The Administrative Court decided to increase the sulphate quota of the discharge pipe from the 12,000 tonnes in its earlier interim decision to 15,000 tonnes per year. In addition, it required Terrafame to apply for a new environmental permit by the end of August 2017. Terrafame operates according to valid environmental permits and follows the emission quotas decreed by the Administrative Court. 

Continuing the operations and further development of the mine is feasible in accordance with the current permits. However, Terrafame did not find the decisions of the Vaasa Administrative Court fully acceptable, and consequently, an appeal has been submitted to the Supreme Administrative Court. At the same time, the company is preparing to apply for new environmental permits by the end of August 2017. The new permit process is preceded by two environmental impact assessment (EIA) procedures, one for water management and the other for the entire mining operation. Terrafame started the water management EIA procedure in September and the other EIA procedure in November. 

In autumn 2015, Terrafame launched a project to build a centralised water treatment plant. In March, the company submitted the related environmental permit application to the Regional State Administrative Agency. In addition, the company prepared a permit application related to the processing and final disposal of sediment generated in water treatment processes. This permit decision is expected to be released in 2017. In October 2016, the company submitted a permit application for a separate waste rock area. The company is also preparing permit applications for the use of sulphur dioxide in metals production and for a third hydrogen sulphide production unit. In addition, having obtained a permit for experimentation, the company started testing the gypsum pond cover structure in 2016.

Personnel

The ramp-up of the mine and the metals production plant have required a large number of recruitments. The total number of employees increased from 529 persons at the end of 2015 to 645 persons at the end of 2016. In addition to Terrafame personnel, approximately 70 partner companies employing approximately 550 people operated full-time in the mining area at the end of 2016.

The average age of Terrafame personnel is 40 years. The company strives to meet the educational needs of individuals in their various career stages by developing, for instance, its supervisor and safety training. Terrafame has also developed a new-employee orientation process.

In December, the company agreed with the personnel on extending working hours for 2017, in accordance with the nationwide Competitiveness Pact. Depending on the personnel group, the work hours will be extended by decreasing accumulated working hour balance, extending shift change times and by adding unpaid training days. 

Shares and shareholders

Terrafame Ltd. has one series of shares. At the end of 2016, the company had 2,380,075 shares outstanding, a share capital of EUR 2,000,000 and total equity of EUR 165,139,635. Terrafame Ltd. is a wholly-owned subsidiary of Terrafame Group Ltd.

 

Corporate governance

Terrafame Ltd.’s administration and operations are the responsibility of the Annual General Meeting, the Board of Directors, and the Chief Executive Officer (as of 15 February 2016). As an unlisted company, Terrafame Ltd. follows, when applicable, the Finnish Corporate Governance Code (2015) for listed companies issued by the Securities Market Association. The company will publish a corporate governance statement as part of its Annual Report 2016.

The Chairman of the Board of Directors of Terrafame Ltd. is Lauri Ratia, and members of the Board are Esa Lager and Tuomo Mäkelä. Joni Lukkaroinen has been the CEO as of 15 February 2016.

Terrafame Ltd.’s auditor is the Authorised Public Accountants KPMG, with Antti Kääriäinen, APA, as the principal auditor. 

Future outlook

In summer 2016, Terrafame commissioned external experts to complete a mineral resource and ore reserve evaluation on Terrafame’s deposits in Sotkamo, to be undertaken in compliance with the JORC Code. The mineral resources of Kuusilampi total 656 million tonnes of which measured resources amount to 379 million tonnes and indicated resources to 277 million tonnes. Respectively, Kolmisoppi’s mineral resources total 802 million tonnes of which measured resources amount to 144 million tonnes, indicated resources to 170 million tonnes and inferred resources to 488 million tonnes.

The mineral resources contain approximately 3.9 million tonnes of nickel, 7.9 million tonnes of zinc, 0.3 million tonnes of cobalt and 2.1 million tonnes of copper. 

In the conversion of mineral resources into ore reserves, only proven and probable resources have been recognised. The techno-economic parameters used are from the mine’s history, Terrafame’s mining plans and the defined cost parameters. The ore reserves total 530.5 million tonnes of which proven reserves total 356.5 million tonnes and probable reserves 174.0 million tonnes. The large ore reserves provide good basis for mining and metals production for several decades.

The global nickel market developed favourably in 2016, and the positive development is expected to continue also in 2017. High stock levels will continue to limit 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 charges. In addition to zinc, the market outlooks for cobalt and copper are also positive.

The 2017 target for the lost-time injury frequency rate is less than 5, referring to the number of accidents resulting in absence per one million person-hours worked. The criteria and methods used to develop the occupational safety of Terrafame’s personnel are also used in developing the occupational safety of the personnel of partner companies working in the mine and plant area. 

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. 

Events after the review period

The repairs following a fire at the hydrogen sulphide plant were completed as planned at the beginning of the year, and operations at the metals production plant were re-started on 13 January 2017. 

Terrafame Ltd. and its parent company Terrafame Group Ltd. have been preparing an ownership and financing arrangement to secure the financing needed for the completion of the ramp-up of Terrafame Ltd.’s production. A term sheet regarding the financing arrangement was signed on 15 December 2016. In connection with the financing arrangement under preparation and continuation of the mining operations, the state-owner allocated an additional capitalisation of EUR 100 million to Terrafame Group Ltd.

Negotiations for an ownership and financing agreement that complied with the above-mentioned term sheet were completed in early 2017, with final agreements with Trafigura Ventures V B.V. and Galena Private Equity Resources Investment 2 L.P. fund, which are part of the Trafigura Group, being signed on 3 February 2017 and the transaction being closed on 10 February 2017. Sampo plc and Terrafame Group Ltd. act as co-investors in the transaction. The funding arrangement totals EUR 250 million. With the financing arrangement, Terrafame Ltd. has the funds to complete the ramp-up of production and achieve a positive cash flow.

Board of Directors’ proposal for profit distribution

Terrafame Ltd.’s result for the financial year 2016 shows a loss of EUR 124,912,129.51. On 31 December 2016, Terrafame Ltd.’s distributable equity totalled EUR 163,139,635.16. The Board of Directors proposes that the loss be recorded on the profit/loss account and that no dividend be distributed.