MAGONTEC LIMITED — Interim / Quarterly Report 2013

Apr 22, 2013

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Magontec Limited (ASX Code MGL)

Quarterly Update. 1 January - 31 March 2013

23 April 2013

In the first quarter of our new financial year Magontec Limited (MGL or the Company) recorded an unaudited Net Profit After Tax of $75,356 (refer Attachment A).

While this represents only a small step towards an acceptable result, shareholders will be pleased to note that MGL has moved from an operating loss to an operating profit in this period.

This result reflects –

• the positive effects of restructuring undertaken over the last 12 months;

• the commencement of production at new facilities in Europe and China;

• a cost review; and

• a significant reduction in interest cost following the conclusion of a debt restructuring package finalised in early January 2013.

As at 31 March 2013 Interest Cover stood at 4.26 times, up from 2.28 times at 31 December 2012.

Earnings before net interest, tax, depreciation and amortisation (EBITDA – one measure for cash generated from operations) was positive $594,374 for the quarter ended 31 March 2013. The Appendix 4C cash flow statement released to the market simultaneously with this report shows operational cash flow for the quarter ended 31 March 2013 at a positive $514,195 (inclusive of net interest and taxation).

Negative impacts on profitability in the quarter include:

• -­‐ On-going provisions for restructuring of the European anode business

• -­‐ Carrying costs associated with an anode inventory build-up in Europe to smooth the transfer of manufacturing equipment between facilities

• -­‐ Start-up losses at the new Romanian anode manufacturing facility

• -­‐ Operating losses at the Xi’an alloy facility associated with existing contracts prior to a final transfer of all generic alloy manufacturing activity to the new Shanxi facility

• -­‐ Costs associated with upgrading the new Shanxi facilities to a Magontec standard for international customer qualification

• -­‐ Refurbishment costs at the Xi’an facility to accommodate relocated Chinese anode manufacturing activities

Most of these are non-recurring items and generated a total “one-off” cost in excess of $500,000 in the first quarter.

Qinghai

While MGL’s production and sales teams have focused on the Company’s restructuring plans, the New Projects team and senior management have concentrated on preparing for the construction of the new cast house and installation of equipment in Qinghai Province.

The Magontec Qinghai (MAQ) project team includes magnesium infrastructure specialists from within the group as well as individuals from external organisations with proven implementation experience. During the quarter there have been a number of visits to the site of the new electrolytic smelter under construction near Golmud in Qinghai and the Magontec

Magontec
Limited,
L8,139
Macquarie
Street Sydney
NSW
2000
AUSTRALIA

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team is now fully engaged with the companies charged with engineering and construction activities.

Market overview

Through the first quarter there has been no let-up in the pressure on prices, particularly in the Chinese anode business and in the export market for primary magnesium alloys. We have experienced volume declines in both businesses. While we have focused on improving our ability to manage volatility by lowering fixed overheads and better management of inventory and staffing, profitability from these two businesses will be constrained until external conditions improve.

The European anode business has performed well. Volumes have been strong and a growing market for sophisticated water heater products continues to support MGL’s push into higher technology Cathodic Corrosion Protection (CCP) products. Furthermore the Romanian anode facility is expected to reach full production towards the middle of the year, which will contribute to improved returns in the volume category.

Specialist alloys and R&D

Magontec continues to pursue new markets in the specialist magnesium alloy sector. In the last quarter of 2012 we engaged CAST, our R&D partner, to undertake further investigation into specific high temperature alloy formulations. Following beta trials we have secured new contracts to supply automotive manufacturers with growing volumes of specialist alloy formulations over the coming years, subject to continuing performance benchmarks. Through the Magontec marketing and distribution network we are also developing new markets for other specialist alloys in our technology portfolio. In the coming months we expect these to make a modest contribution to profitability.

Unfortunately CAST CRC failed to secure further support from the Australian Government in the last round of CRC funding applications. While this means that Australia’s leading light metal research organisation will cease to exist in its current form in June 2013, the community of magnesium researchers at Australian universities and within Magontec remain focused on developing new magnesium alloys and applications. In the near future we hope to announce a structure under which these scientists and Magontec will move forward. Australian research in this area is well respected around the World and remains a source of new product innovation that Magontec is keen to continue to partner and support.

Summary

In the 22 months since the Magontec assets were acquired the company has

• -­‐ Sold its alloy joint venture in Henan Province (subject to shareholder approval at the 2013 AGM),

• -­‐ Completed construction and commenced production of alloys and anodes in Romania,

• -­‐ Relocated Chinese primary alloy production from Xian to a lower cost facility in Shanxi Province,

• -­‐ Relocated Chinese anode manufacturing to its new quarters in Xian,

• -­‐ Reduced alloy inventory in Germany from over 2,000mt to less than 400mt (contributing to an overall $4.6 million reduction in inventory in the last 3 months),

• -­‐ Completed a debt restructuring agreement with Straits Mine Management (SMM) to reduce debt owing to SMM by $6.6 million and

• -­‐ Raised $13m of new equity to finance the Magontec Qinghai cast house project, fund further debt reduction and provide additional working capital

Net assets as at 31 March 2013 were over $20 million against a market capitalisation of $14.9 million. The company has reached a break-even result at the operating level and is generating modest free-cash. Over the next 12 months Magontec will complete the construction and installation of equipment for the Qinghai cast house. In late 2014/early 2015 Magontec expects to be producing and selling the world’s greenest (lowest CO2 producing)

Magontec
Limited,
L8,139
Macquarie
Street Sydney
NSW
2000
AUSTRALIA

==> picture [559 x 111] intentionally omitted <==

magnesium alloys to a customer base including automotive manufacturers who have `products.

Magontec continues to make progress in challenging markets. Over the last few months the company has acquired the financial resources to develop a larger earnings base over the coming quarters. I look forward to meeting with our shareholders at the Annual General Meeting of Magontec Limited on 17[th] May 2013 in Sydney for further discussion on your company.

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Nicholas Andrews Executive Chairman

Magontec
Limited,
L8,139
Macquarie
Street Sydney
NSW
2000
AUSTRALIA

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UNAUDITED ACCOUNTS FOR THE PERIOD 1 JANUARY TO 31 DECEMBER 2013

Attachment A

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Sale of goods Cost of sales Gross profit Other Income Interest Expense Impairment of inventory, receivables & other financial assets Travel accommodation and meals Research, development, licensing and patent costs Promotional activity Information technology Personnel Depreciation & Amortisation Office Expenses Corporate Other operating costs	CONSOLIDATED
	3 months to 6 months to
	31 Mar 2013 31 Dec 2012
	$'000 $'000
	38,926 61,607
	(36,214) (58,431)
	2,712 3,176
	185 5,469
	(270) (1,223)
	0 (686)
	(138) (281)
	(277) (204)
	(26) (17)
	(64) 0
	(1,108) (2,755)
	(372) (697)
	(47) (274)
	(602) (1,480)
	89 (178)
Profit/(Loss) before income tax expense from continuing operations	83 849
Income tax (expense)/benefit	(7) 92
Profit/(Loss) after income tax benefit from continuing operations	75 941
Loss after income tax expense from discontinued operations	0 (7)
Profit/(Loss) after income tax expense including discontinued operations	75 934
Other Comprehensive Income Exchange differences taken to reserves in equity – translation of overseas entities (196) 320 Movement in various actuarial assessments 0 (605) Total Comprehensive Income for the year (120) 648 Profit/(Loss) after income tax expense for the year (including discontinued operations) attributable to Minority interests 0 2 Members of the parent entity 75 939 Total 75 940 Comprehensive Income for the year attributable to Minority interests 0 2 Members of the parent entity (120) 653 Total Comprehensive Income for the year (120) 655
	(196) 320
	0 (605)
	(120) 648
	0 2
	75 939
	75 940
	0 2
	(120) 653
	(120) 655

The
split
of
profit
as
between
minority
interests
and
MGL
shareholders
reflects
100%
entitlement
by
MGL
shareholders
to
the
result
of
the
Magontec Shanxi
Company
Limited
joint
venture.
This
reflects
changes
to
the
profit
sharing
arrangements
under
the
joint
venture
that
are
currently
under negotiation.

Magontec
Limited,
L8,139
Macquarie
Street Sydney
NSW
2000
AUSTRALIA

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Attachment B

BALANCE SHEET

Current assets Cash and cash equivalents Trade & other receivables Future income tax benefit Inventory Other Total current assets Non-current assets Other receivables Other financial assets Property, plant & equipment Future income tax benefit Intangibles Other Total non-current assets TOTAL ASSETS Current liabilities Trade & other payables Borrowings Borrowings from/payables to related parties Provisions Total current liabilities Non-current liabilities Other payables Borrowings Owing to Straits Mine Management Pty Ltd Borrowings from/payables to related parties Provisions Other Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity attributable to members of MGL Share capital Reserves Accumulated losses Equity attributable to minority interests Share capital Reserves Accumulated losses Total equity	CONSOLIDATED
	30-Jun 31-Dec
	2013 2012
	$'000 $'000
	7,919 13,540
	23,533 22,991
	- -
	21,106 25,727
	443 125
	53,002 62,383
	341 476
	- -
	14,274 14,001
	1,600 1,642
	3,157 3,186
	- -
	19,372 19,305
	72,374 81,688
	17,476 19,804
	17,242 21,030
	- 49
	1,770 2,704
	36,489 43,586
	- -
	- -
	8,968 10,968
	- -
	6,732 6,826
	- -
	15,700 17,794
	52,189 61,380
	20,186 20,307
	44,923 44,915
	2,756 2,950
	(27,948) (28,023)
	454 463
	(2) -
	2 2
	20,186 20,307

Magontec
Limited,
L8,139
Macquarie
Street Sydney
NSW
2000
AUSTRALIA