MAGONTEC LIMITED — Interim / Quarterly Report 2014

Apr 23, 2014

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Magontec Limited (ASX Code MGL)

Office 10 Level 8 139 Macquarie St Sydney NSW 2000 Australia Ph: 61 2 8231 7085 Fax: 61 2 9252 8960

Quarterly Update 1 January – 31 March 2014

23 April 2014

Comment

In the first quarter of 2014 the Group has recorded higher average monthly sales and a higher overall gross profit margin on sales compared with the previous corresponding period (the first quarter of 2013). The Group also continues to generate net positive cash flow.

While there has been an improvement in overall performance the Group continues to face challenges in maintaining profitability in Chinese primary alloy production prior to the relocation of that activity to a new facility in Qinghai Province.

The European recycling business has commenced the year strongly with volumes up over 30% on the previous corresponding period. The division reported a profitable result at the EBITDA level compared with a small loss over the same period last year.

The European anode business, which was relocated to a new factory in Romania through the second half of 2013, recorded a volume increase of over 50% and strongly increased contribution to Group profitability in the period.

Chinese magnesium alloy prices in both the export and domestic markets remain extremely challenging compounded by a sharp decline in pure magnesium raw material prices in the quarter. Magontec’s primary magnesium alloy production volumes were down by more than 10% compared with the previous corresponding quarter, and divisional EBITDA, while still positive, was significantly reduced.

A sharp decline in raw material (pure magnesium) prices negatively impacts inventory values. In the first quarter of 2014 the price of pure magnesium fell ¥625 or 4.1% to ¥14,550, its lowest point since 2009, and down nearly 14% since 1 January 2013. In April 2014 it has recovered to ¥14,900 and a continued rise through the second quarter should see some reversal of these pressures. Generally pure magnesium prices appear to be driven by growing capacity in an already oversupplied market. There are some indications that this is belatedly having an impact on higher cost producers.

Chinese anode markets have also been extremely competitive and Magontec’s Chinese anode division recorded another loss in the first quarter of 2014. There are remedial actions being taken in this division including investment in automation and other measures to reduce costs and improve competitiveness.

As a company that conducts all of its operations in offshore locations Magontec is particularly exposed to fluctuations in foreign exchange rates. The Australian dollar has been extremely volatile in recent months generating unrealised gains of over $2.2 million through 2013 and a loss of $0.4 million in the first quarter of 2014. In commenting upon the EBITDA results of operating divisions we have continued the practice of excluding the impact of unrealised FX movements.

Construction on the magnesium alloy cast house in Qinghai Province has re-commenced after the winter period. While the cast house will be able to operate year round, construction is constrained by very low winter temperatures. The magnesium cast house is expected to be completed by the fourth quarter of 2014 and our partners at Qinghai Salt Lake Magnesium Co Ltd have scheduled delivery of liquid pure magnesium in late 2014 or early 2015.

Nicholas Andrews Executive Chairman 23 April 2014

Summarised financial results at a glance

1. Divisional NPAT (Refer unaudited Comprehensive Income Statement for the quarter ended 31 March 2014 below.)

Head Office[(1)] Europe Asia Group ($889,856) $386,235 ($114,969) ($618,589) 1. Includes unrealised foreign exchange losses of $447,000

2. Underlying Operating Profit/(Loss)

2.	Underlying Operating Profit/(Loss)
	Net loss before income tax		($590,000)
	Add back net unrealised foreign exchange losses		$411,000
	Underlying operating loss before tax		($179,000)
3.	Approximate Cash From Operations
	Earnings before tax and depreciation		($147,000)
	Add back net unrealised foreign exchange losses		$411,000
	Approximate cash generated from operations(2)		$264,000
	2. Ignores the cash flow effects of trade debtors and trade creditors
4.	Sales & Gross Profit Performance
		3 months to	12 months to
		31 Mar 2014	31 Dec 2013
	Average monthly sales	$11,829,333	$10,719,250
	Gross profit margin for period	8.10%	7.66%

UNAUDITED ACCOUNTS

FOR THE PERIOD 1 JANUARY TO 31 MARCH 2014

Attachment A

CONSOLIDATED STATEMENT OF PROFIT & LOSS and OTHER 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 Foreign exchange gain/(loss)	3 months to 12 months to
	31 Mar 2014 31 Dec 2013
	$'000 $'000
	35,488 128,631
	(32,613) (118,773)
	2,875 9,858
	205 1,086
	(317) (973)
	- (459)
	(143) (645)
	(89) (551)
	(11) (62)
	(107) (395)
	(1,533) (4,732)
	(443) (1,717)
	(107) (249)
	(509) (2,622)
	(411) 2,252
Profit/(Loss) before income tax expense/benefit from continuing operations	(590) 792
Income tax (expense)/benefit	(29) (25)
Profit/(Loss) after income tax expense/benefit from continuing operations	(619) 767
Loss after income tax expense from discontinued operations	0 (10)
Profit/(Loss) after income tax expense/benefit including discontinued operations	(619) 756
Exchange differences taken to reserves in equity – translation of overseas entities Other Comprehensive Income - that will not emerge in the Profit and Loss Statement Movement in various actuarial assessments
	(1,279) 2,652
	0 219
Total Comprehensive Income for the year	(1,897) 3,627
Profit/(Loss) after income tax (incl discontinued operations) attributable to: Minority interests Members of the parent entity Total Comprehensive Income for the year attributable to Minority interest Members of the parent entity Total Comprehensive Income for the year
	- -
	(619) 756
	(619) 756
	- -
	(1,897) 3,627
	(1,897) 3,627

Attachment B BALANCE SHEET Current assets Cash and cash equivalents Trade & other receivables Inventory Other Total current assets Non-current assets Other receivables Property, plant & equipment Future income tax benefit Intangibles Total non-current assets TOTAL ASSETS Current liabilities Trade & other payables Borrowings Provisions Total current liabilities Non-current liabilities Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS Equity attributable to members of MGL Share capital Reserves Accumulated (losses)/profits Equity attributable to minority interests Share capital Reserves Accumulated (losses)/profits Total equity
	31-Mar 31-Dec
	2014 2013
	$'000 $'000
	10,132 7,375
	23,858 28,402
	29,877 24,466
	412 773
	64,279 61,017
	428 444
	15,583 16,479
	1,521 1,586
	3,206 3,255
	20,737 21,763
	85,017 82,781
	18,697 17,358
	21,400 21,225
	1,390 1,692
	41,487 40,275
	8,135 8,315
	8,135 8,315
	49,622 48,590
	35,395 34,191
	58,246 55,145
	4,574 5,853
	(27,888) (27,268)
	463 463
	- -
	- (2)
	35,395 34,191