MAGONTEC LIMITED — Interim / Quarterly Report 2018

Apr 29, 2018

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Suite 1.03, Level 1 46A Macleay St Potts Point NSW 2011 Australia Ph: +61 2 8005 4109 Fax: +61 2 9252 8960

30 April 2018 Company Announcements Office Australian Securities Exchange Limited 20 Bridge Street, Sydney NSW 2000

Dear Sirs,

Appendix 4C – Quarter Ended 31 March 2018

In this letter are –

• Attachment 1 – Unaudited Statement of Cash Flows for the 3 months to 31 March 2018

• • Attachment 2 – Appendix 4C Cash Flow Report for the quarter ended 31 March 2018

Attachment 1 is presented in the format that appears in the Company’s Half Year and Annual Reports and prepared on a basis consistent with the requirements of accounting standards.

Attachment 2 is presented in the format required by Paragraph 4.7B of Chapter 4 of the ASX listing rules.

Rounding Errors

The tables in this report may indicate apparent errors to the extent of one unit (being $1,000) in:

• the addition of items comprising total and sub totals; and

• the comparative balances of items from the financial accounts.

Such differences arise from the process of:

• converting foreign currency amounts to two decimal places in AUD; and

• subsequent rounding of the AUD amounts to one thousand dollars.

It is reiterated that all data presented in this report, including the supplementary cash flow statement in Attachment 1 is unaudited.

Yours sincerely

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John Talbot

Company Secretary

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Executive Chairman’s Commentary

Magontec Limited (ASX: MGL)

Quarterly Update for the 3 months to 31 March 2018 (Unaudited)

• Reported 1Q18 net profit after tax $0.1m, underlying 1Q18 net loss after tax* of ($0.3m) down on the prior corresponding period (PCP)

• 1Q18 Underlying Operational Cashflow of $0.8m, down on the PCP

• Total 1Q18 operational cash flow of $3.2m reflecting positive working capital movements

• 1Q 2018 Gross Profit of $3.7m Vs $3.8m in the PCP

Headline numbers
	3	months to	3	months to
A$M	31 Mar 2018		31 Mar 2017		$M Chg	% Chg
Underlying Operational Cashflow		$0.755		$1.561	($0.807)	(51.7%)
Total Operational Cashflow		$3.182		($7.667)	+$10.849
Gross Profit		$3.682		$3.798	($0.116)	(3.1%)
Gross Profit Margin (%)		11.3%		11.5%
Underlying EBITDA*		$0.725		$1.573	($0.848)	(53.9%)
Underlying EBIT*		$0.007		$1.186	($1.179)	(99.4%)
Underlying NPAT*		($0.307)		$0.557	($0.865)
Reported NPAT		$0.095		($0.186)	+$0.281
* Excludes unrealised FX effects of		+$0.402		($0.744)

ABOUT MAGONTEC LIMITED

Magontec is a leading manufacturer of magnesium alloys and Cathodic Corrosion Protection (magnesium and electronic anode) products

	Magontec activities - Converts pure Mg and alloying elements into Mg alloys - Casts and extrudes Mg alloys into anodes for supply to the global water heater industry - Distributes products through a global sales network to customers in Europe, Asia and North America		Magontec assets - World’s greenest primary Mg alloy producer in Qinghai Province PRC - Premier Mg alloy recycling assets in Europe - A portfolio of proprietary magnesium alloys and an active R&D program - Mg & electronic anode manufacturing facilities in Europe and China		Magontec profile - A leading global magnesium alloy manufacturer and sales organisation - A pioneer in the field of magnesium alloys and anode products - Vast experience in production and development of new Mg alloys and anode applications

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COMMENTARY

Gross Profit in first quarter of 2018 is in line with the previous corresponding period at $3.7m, down 3.1%. Similarly, 1Q 2018 Gross Profit margins of 11.3% are comparable to 11.5% in 1Q 2017.

However, costs associated with the Magontec Qinghai cast house and changes in exchange rates have negatively impacted EBIT in the period under review.

While the overall result is lower than the previous corresponding period (PCP) the divisions that underperformed in the second half of 2017 have shown an improving trend in the last few months and, in the case of Chinese magnesium anodes, a strong re-bound.

Cash flow and earnings recovering in 1Q 2018 (excluding unrealised FX)

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Underlying EBITDA (A$'000) Underlying cashflow (A$'000)
2,000 1,800
1,600
1,500
1,400
1,000
1,200
500
1,000
- 800
600
(500)
400
(1,000)
200
(1,500) -
1Q17 2Q17 3Q17 4Q17 1Q18
1Q17 2Q17 3Q17 4Q17 1Q18
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The management team in Romania has taken an aggressive approach to renewal and the restoration of efficient production in the magnesium alloy recycling cast house. While the business continues to suffer from higher operating costs and inferior production metrics these trends are moving in a positive direction.

A significant drag on the Company’s overall performance is the new cast house in Qinghai. As at the end of April supply of liquid pure magnesium alloy remains intermittent. However, the supply chain for Magontec’s magnesium alloy cast house, from brine purification, dehydration and electrolytic reduction, are all currently operational. In the next few weeks sufficient buffer stock and plant reliability is expected to enable liquid pure supply to commence on a continuous basis.

I am pleased to report again that there were no injuries across any of our operations in the period under review. In the light of our activities in Romania, where we have experienced very high turnover, in Qinghai where we have recruited and trained over 45 new employees and at

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the Shanxi plant, where we are slowly running volumes down, this performance reflects well on our plant management and safety standards.

Magontec Qinghai Cast House Project

On April 18[th] Magontec held an Opening Ceremony at its new magnesium alloy cast house at Golmud in Qinghai Province. The event was attended by more than 90 customers, agents and executives from partner companies as well as a delegation including the Deputy Head of Mission from the Australian Embassy in Beijing.

Magontec Qinghai – opening ceremony speakers and distinguished guests

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Tong Xunyou Zhou Hong Sen Xia Wang Zhu Qi Xie Kangmin Nic Andrews Gerald Thomson Lin Ruhai David Hansen Watanabe Kazuhiro
President Vice-Mayor Chaedam Asst to Governor President Exec Chairman Deputy Head of Mission Chairman Snr Director Procurement General Manager
Magontec Asia Golmud City Economic Zone Haixi State QSLI Magontec Ltd Aust Embassy Beijing China Mg Assoc Meridian LW Industries Nihon Plast PRC
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Over the last few months the new cast house has had many visitors from customers in China and around the world seeking to qualify the plant for supply to their die casting factories. This process will continue through the (northern hemisphere) summer when we expect visitors from a number of major European die casting companies.

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In the three months to the end of March 2018 the new production facility has already produced several hundred tonnes. At these volumes, although Magontec Qinghai is sustaining losses equivalent to labour and miscellaneous costs, under its lease and operating agreements, the Company does not pay utility or lease costs until supply of liquid raw material reaches a preagreed volume.

As we have reported in previous commentaries the cast house has been commissioned and operating since October in 2017, however our partner company, Qinghai Salt Lake Magnesium Co Ltd (QSLM), has not yet commenced a regular supply of liquid pure magnesium to Magontec’s alloying furnaces.

The magnesium alloy cast house continues to process and sell small volumes of magnesium alloy sourcing its material in the form of solid pure Mg manufactured by the QSLM plant. While this has allowed the production team to build skills and experience it is not an economic basis for higher volume production.

The delay in supply, while challenging for Magontec Qinghai, reflects the complexity of the electrolytic magnesium manufacturing process. At this time all three lines in the first dehydration plant are now producing prills at levels below rated capacity.

As a result of the slower than expected start-up of dehydration (prill production) the commissioning of further reduction cells has also been delayed. Our partner QSLM tell us that 15 cells are currently commissioned (out of 64), which will be sufficient to supply the Magontec Qinghai magnesium alloy cast house with an economic volume of liquid pure magnesium in the near future.

Magontec Qinghai – despatch warehouse

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In keeping with production protocols for this type of facility, sufficient stability of prill production and a certain level of inventory must be achieved prior to commissioning additional reduction cells and commencing supply of liquid raw material to the pure magnesium and magnesium alloy cast houses.

With the third line in Dehydration Unit #1 now operating, we understand that the daily production of prills will shortly provide an inventory buffer sufficient to require the commencement of supply

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to the reduction cells. On-site prill storage capacity is around 6,000mt or around 1 – 2 month’s production, from three lines operating at less than rated capacity.

Magontec staff share the frustration of shareholders in this delayed start to mass production at the new Qinghai facility. Having said this, there is comfort in the knowledge that all the production units of QSLM - brine purification, dehydration and reduction - are commissioned and operating, and a critical issue, the stability of the dehydration process, now appears to have been resolved.

Anode Products (Cathodic Corrosion Protection)

The Chinese Mg anodes business has enjoyed a strong start to 2018. The company has won new contracts on the back of a sharp improvement in conversion costs. Much of this additional volume did not start until the middle of March and expectations are that higher volumes in the months ahead will allow further improvement in the economics of this business.

In addition to re-gaining a supply contract to one of China’s largest hot water manufacturers, Magontec Xi’an has successfully competed for other smaller projects in recent months. PRC magnesium anode sales and volumes are up 3% and 4% respectively in the first quarter compared with PCP while Gross Profit and EBIT contributions were up over 50% on PCP.

In Europe the magnesium and electronic anodes business also enjoyed a stronger first quarter with sales up 5% and Gross Profit up 12% over PCP. This business has invested heavily in sales and product development over the last few years. The improved result in 1Q 2018 reflects both the quality of the product offered by this division and the focus that management has brought to bear on delivering a wholistic service to its customers. The Company’s anode customers are able to call on Magontec in-house experts for a variety of technical and aftersales services. This business has also successfully built a second customer stream targeted at smaller service companies supplying individual plumbers and plumbing companies in European downstream markets.

Magnesium Alloy Products

The European metals business in the first quarter of 2018 was down around 9% in volume terms versus the previous corresponding period (PCP) and down 37% at the Gross Profit level. This reflects both a very strong comparative period in 1Q 2017 in Germany and Romania, and the considerable challenges faced by Magontec’s Romanian magnesium alloy recycling plant from the second quarter of 2017.

The German recycling business continues to operate at satisfactory levels while the Romanian plant continues to re-build its efficiencies after a period of significant operating personnel turnover. At the Gross Profit and EBIT line the plant is profitable, having pared back losses over recent months. As unit conversion costs and personnel costs continue to fall with increased production, we anticipate this business making a profitable contribution at the EBIT line in the 2018 reporting year.

In China the sale of primary Mg alloys at the company’s leased plant in Shanxi Province has trended slightly higher than PCP in volume terms and slightly lower than PCP at the Gross Profit line. Including the losses incurred at the new Magontec Qinghai plant Chinese magnesium alloys Gross Profit was down 23% on the first quarter of 2017.

Through the next 6 months as Magontec’s primary magnesium alloy business transitions from Shanxi to Qinghai there will likely be additional business costs that will negatively impact the profitability of this division.

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Financial Comment

From a balance sheet perspective, the net debt to net debt + equity ratio decreased during the 3-month period to 31.6% as at 31 March 2018. This represents a more normal level compared with the 35.5% ratio reported as at 31 December 2017. This was driven by favourable working capital movements as a result of cash receipts from outstanding trade receivables. Total reported operational cash flow was $3.2m during the quarter. Underlying cashflow was positive $0.8m, albeit down on the prior corresponding period.

Summary

Over the first quarter of 2018 the Company has recovered some of the ground lost in the latter part of 2017 and has continued to improve elsewhere. While progress at the new facility at Qinghai has not met our expectations, this is not for want of efforts on the part of Magontec staff and management.

In Romania our management team is making extraordinary efforts to restore that business to levels of profitability experienced in previous years and the Company’s magnesium anode team in China has done an excellent job in re-building sales and production volumes through innovation and aggressive cost cutting in the manufacturing process.

Magontec remains poised to take advantage of production from the world’s greenest and largest magnesium manufacturing facility located in Qinghai Province PRC. The Company’s facilities are constructed and commissioned. Our sales and marketing efforts over the last 12 months have had a heavy focus on ‘green’ magnesium and our customers have been receptive to this message.

The automotive industry, our largest customer base, continues to seek energy efficiency and environmental advancement with increasing urgency. Magontec, through its proprietary Mg alloys (AE family alloys) and the supply of high volume, continuous process, ‘green’ magnesium alloys expects to play a growing role in meeting those challenges.

Nic Andrews Executive Chairman 30 April 2018

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Attachment 1

UNAUDITED STATEMENT OF CASH FLOWS

Unaudited Consolidated Cash Flow Statement
Source: Magontec Limited Consolidated Management Accounts
3 months to
$000 31-Mar-18
CASH FLOW FROM OPERATING ACTIVITIES
Cash generated from/ (utilised in) underlying operating activities 755
Net working capital assets
- Trade and other receivables 2,575
- Inventory (387)
- Trade and other payables 444
- Other (6)
Cash generated from/ (utilised in) net working capital assets 2,627
Other operating activities
- Net Interest paid (120)
- Income tax paid (79)
Cash generated from/ (utilised in) other operating activities (199)
Net Cash generated from/ (utilised in) all operating activities 3,182
CASH FLOW FROM INVESTING ACTIVITIES
Net cash out on purchase/disposal of property, plant & equipment (375)
Group information technology (125)
Security deposit (26)
Other 0
Net cash provided by / (used in) investing activities (526)
CASH FLOW FROM FINANCING ACTIVITIES
Bank Debt (1,596)
Net capital raised from issue of securities -
Other -
Net cash provided by / (used in) financing activities (1,596)
Net increase / (decrease) in cash and cash equivalents 1,060
Foreign exchange effects on total cash flow movement 136
Cash and cash equivalents at the beginning of the period 2,309
Cash and cash equivalents at the end of theperiod 3,506

Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Attachment 2

APPENDIX 4C

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Limited

QUARTERLY UNAUDITED CASH FLOW APPENDIX 4C

for the Period Ended 31 March 2018

• See chapter 19 for defined terms Quarterly report for 31 March 2018

Page 1

Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Magontec Limited

ABN: 51 010 441 666 Registered & Principal Office: Suite 1.03, Level 1 46 Macleay St, Potts Point, NSW 2011 Australia

Tel: +61 2 8005 4109 Fax: +61 2 9252 8960

Website: www.magontec.com Email: Corporate@magontec.com

Non-Executive Directors As at 31 March 2018

Zhongjun Li Kangmin Xie Andre Labuschagne

Independent Directors As at 31 March 2018

Robert Shaw Robert Kaye

Issued Capital (as at 31 March 2018)

Ordinary Shares (ASX Code MGL)

1,140,073,483 fully paid Ordinary shares on issue Options: Nil

Performance Rights[(1)] :

Performance Period Granted 1 Jan 2016 to 31 Dec 2018 19 May 2017 1 Jan 2017 to 31 Dec 2019 19 May 2017 1 Jan 2018 to 31 Dec 2020 23 Jan 2018 Total	Number 25,749,882 15,621,146 12,681,612
	54,052,640

Note:

(1) For terms of issue refer to the heading “Vesting of Performance Rights as Magontec Ordinary Shares” in paragraphs o to t of Resolution 5 of the 2017 AGM.

Substantial Shareholders

Shareholder	No. of shares(2)	Percent (3)
Qinghai Salt Lake Magnesium Industry Limited	330,535,784	28.99
Allan Gray Australia Pty Limited	176,858,972	15.51
Straits Mine Management Pty Limited	148,874,507	13.06

Notes:

(2) As per last “Notice of change of interests of substantial holder” lodged with ASX by shareholder.

Management Team

Nicholas Andrews Executive Chairman

John Talbot Company Secretary

Derryn Chin Chief Financial Officer

(3) “No. of Shares” divided by fully paid Ordinary shares on issue as at the date of this report.

Share Registry Services

Boardroom Pty Limited Level 7, 207 Kent St Sydney NSW 2000

Postal Address: GPO Box 3993 Sydney NSW 2001

Tel: 1300 737 760 or

International: +61 2 9290 9600

Fax: 1300 653 459

Website: http://www.boardroomlimited.com.au

The current share price can be obtained from the ASX Website – www.asx.com.au

• See chapter 19 for defined terms Quarterly report for 31 March 2018

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Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Appendix 4C

Quarterly report for entities subject to Listing Rule 4.7B

Name of entity

Magontec Limited ABN Quarter ended (“current quarter”) 51 010 441 666 31 March 2018

Consolidated statement of cash flows	Consolidated statement of cash flows	Current quarter $A’000	Year to date (3 months) $A’000
1. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8	Cash flows from operating activities Receipts from customers Payments for (a) research and development (b) product manufacturing and operating costs (c) advertising and marketing (d) leased assets (e) staff costs (f) administration and corporate costs Dividends received (see note 3) Interest received Interest and other costs of finance paid Income taxes paid Government grants and tax incentives Other (provide details if material)	38,336 (72) (31,216) (32) - (1,852) (1,783) - 15 (135) (79) -	38,336 (72) (31,216) (32) - (1,852) (1,783) - 15 (135) (79) -
1.9	Net cash from / (used in) operating activities	3,182	3,182

• See chapter 19 for defined terms Quarterly report for 31 March 2018

Page 3

Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Consolidated statement of cash flows	Current quarter $A’000	Year to date (3 months) $A’000
2. Cash flows from investing activities
2.1 Payments to acquire:
(a) property, plant and equipment1	(375)	(375)
(b) businesses (see item 10)
(c) investments
(d) intellectual property	(125)	(125)
(e) other non-current assets
2.2 Proceeds from disposal of:
(a) property, plant and equipment
(b) businesses (see item 10)
(c) investments
(d) intellectual property
(e) other non-current assets
2.3 Cash flows from loans to other entities
2.4 Dividends received (see note 3)
2.5 Other (provide details if material)	(26)	(26)
2.6 Net cash from / (used in) investing activities	(526)	(526)
3. Cash flows from financing activities
3.1 Proceeds from issues of shares
3.2 Proceeds from issue of convertible notes
3.3 Proceeds from exercise of share options
3.4 Transaction costs related to issues of shares, convertible notes or options
3.5 Proceeds from borrowings	4,047	4,047
3.6 Repayment of borrowings	(5,643)	(5,643)
3.7 Transaction costs related to loans and borrowings
3.8 Dividends paid
3.9 Other (provide details if material)
3.10 Net cash from / (used in) financing activities	(1,596)	(1,596)

• See chapter 19 for defined terms Quarterly report for 31 March 2018

Page 4

Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Consolidated statement of cash flows	Current quarter $A’000	Year to date (3 months) $A’000
4. Net increase / (decrease) in cash and cash equivalents for the period
4.1 Cash and cash equivalents at beginning of quarter/year to date	2,309	2,309
4.2 Net cash from / (used in) operating activities (item 1.9 above)	3,182	3,182
4.3 Net cash from / (used in) investing activities (item 2.6 above)	(526)	(526)
4.4 Net cash from / (used in) financing activities (item 3.10 above)	(1,596)	(1,596)
4.5 Effect of movement in exchange rates on cash held	136	136
4.6 Cash and cash equivalents at end of quarter	3,506	3,506
5. Reconciliation of cash and cash equivalents at the end of the quarter (as shown in the consolidated statement of cash flows) to the related items in the accounts	Current quarter $A’000	Previous quarter $A’000
5.1 Bank balances 5.2 Call deposits 5.3 Bank overdrafts 5.4 Other (provide details) 5.5 Cash and cash equivalents at end of quarter (should equal item 4.6 above)	3,506	2,309
	3,506	2,309
6. Payments to directors of the entity and their associates Current quarter $A'000 6.1 Aggregate amount of payments to these parties included in item 1.2 60 6.2 Aggregate amount of cash flow from loans to these parties included in item 2.3 - 6.3 Include below any explanation necessary to understand the transactions included in items 6.1 and 6.2
		Current quarter $A'000
		60
		-
Not applicable

• See chapter 19 for defined terms Quarterly report for 31 March 2018

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Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

7.	Payments to related entities of the entity and their	Current quarter
	associates	$A'000
7.1	Aggregate amount of payments to these parties included in item 1.2	-
7.2	Aggregate amount of cash flow from loans to these parties included
	in item 2.3	-
7.3	Include below any explanation necessary to understand the transactions included in
	items 7.1 and 7.2

Not applicable

8. Financing facilities available Add notes as necessary for an understanding of the position Total facility amount at quarter end $A’000 Amount drawn at quarter end $A’000 8.1 Loan facilities 24,753 19,974 8.2 Credit standby arrangements 8.3 Other (please specify) 8.4 Include below a description of each facility above, including the lender, interest rate and whether it is secured or unsecured. If any additional facilities have been entered into or are proposed to be entered into after quarter end, include details of those facilities as well.	Total facility amount at quarter end $A’000	Amount drawn at quarter end $A’000
	24,753	19,974

Borrowings facilities as at	31 December 2017
		Interest	Limit	Drawn	Security
Lender	Maturity	%	$A 000	$A 000	status

Borrowings facilities as at 31 December 2017	Borrowings facilities as at 31 December 2017	Borrowings facilities as at 31 December 2017
				Interest		Limit		Drawn		Security
	Lender	Maturity		%		$A 000		$A 000		status
	Commerzbank Germany 30-Sep-20			1.55%		14,849		12,438		Secured
	Commerzbank Germany 31-Dec-18			2.50%		222		222		Secured
	ING Romania Open			3.15%		3,638		2,446		Secured
	Bank of Communications China 3-May-18			4.70%		4,150		4,150		Secured
	Total borrowings balance sheet					22,860		19,256
	Postbank(factoring) 30-Nov-18			1.34%		1,894		719
	Total facilities					24,753		19,974

No additional facilities entered into or proposed to be entered into after quarter end.

• See chapter 19 for defined terms Quarterly report for 31 March 2018

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Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

9. Estimated cash outflows for next quarter	9. Estimated cash outflows for next quarter	$A’000	$A’000
9.1 Research and development 9.2 Product manufacturing and operating costs 9.3 Advertising and marketing 9.4 Leased assets 9.5 Staff costs 9.6 Administration and corporate costs 9.7 Other (provide details if material) 9.8 Total estimated cash outflows		(118) (31,576) (30) - (1,752) (1,532) -
		(35,008)
10. Acquisitions and disposals of business entities (items 2.1(b) and 2.2(b) above)	Acquisitions		Disposals
10.1 Name of entity	Not applicable		Not applicable
10.2 Place of incorporation or registration	Not applicable		Not applicable
10.3 Consideration for acquisition or disposal	Not applicable		Not applicable
10.4 Total net assets	Not applicable		Not applicable
10.5 Nature of business	Not applicable		Not applicable

Compliance statement

• 1 This statement has been prepared in accordance with accounting standards and policies which comply with Listing Rule 19.11A.

• 2 This statement gives a true and fair view of the matters disclosed.

Sign here: Date: 30 April 2018 (Executive Chairman)

Print name: Mr Nicholas Andrews

• See chapter 19 for defined terms Quarterly report for 31 March 2018

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Appendix 4C Quarterly report for entities subject to Listing Rule 4.7B

Notes

1. The quarterly report provides a basis for informing the market how the entity’s activities have been financed for the past quarter and the effect on its cash position. An entity that wishes to disclose additional information is encouraged to do so, in a note or notes included in or attached to this report.

2. If this quarterly report has been prepared in accordance with Australian Accounting Standards, the definitions in, and provisions of, AASB 107: Statement of Cash Flows apply to this report. If this quarterly report has been prepared in accordance with other accounting standards agreed by ASX pursuant to Listing Rule 19.11A, the corresponding equivalent standard applies to this report.

3. Dividends received may be classified either as cash flows from operating activities or cash flows from investing activities, depending on the accounting policy of the entity.

4. See chapter 19 for defined terms Quarterly report for 31 March 2018

Page 8