straits resources limited acn 056 601 417 annual report 30 june 2009

159 Pages·2009·1.53 MB·English

STRAITS RESOURCES
LIMITED

A.C.N. 056 601 417

ANNUAL REPORT
30 JUNE 2009
CONTENTS
Page

STRATEGY..................................................................................................................................................................................3
STRAITS OVERVIEW................................................................................................................................................................4
FIVE YEAR SUMMARY............................................................................................................................................................6
HIGHLIGHTS...............................................................................................................................................................................7
CHAIRMAN’S STATEMENT.....................................................................................................................................................8
CHIEF EXECUTIVE OFFICER’S REVIEW..............................................................................................................................9
FINANCE....................................................................................................................................................................................11
STRATEGIC COAL ALLIANCE..............................................................................................................................................13
BASE METALS..........................................................................................................................................................................16
PRECIOUS METALS.................................................................................................................................................................19
METALS DISTRIBUTION........................................................................................................................................................21
EXPLORATION.........................................................................................................................................................................22
HUMAN RESOURCES..............................................................................................................................................................24
OCCUPATIONAL HEALTH & SAFETY................................................................................................................................25
ENVIRONMENT........................................................................................................................................................................26
COMMUNITY RELATIONS....................................................................................................................................................27
MINERAL RESOURCE STATEMENT....................................................................................................................................29
ORE RESERVE STATEMENT.................................................................................................................................................32
CORPORATE GOVERNANCE................................................................................................................................................34
DIRECTORS’ REPORT.............................................................................................................................................................39
AUDITORS’ INDEPENDENCE DECLARATION..................................................................................................................57
AUDIT OPINION.......................................................................................................................................................................58
FINANCIAL REPORT AND NOTES TO THE FINANCIAL STATEMENTS.....................................................................60
DIRECTORS’ DECLARATION..............................................................................................................................................154
SHAREHOLDER INFORMATION........................................................................................................................................155
TOP TWENTY SHAREHOLDERS.........................................................................................................................................156
GLOSSARY..............................................................................................................................................................................157
CORPORATE DIRECTORY...................................................................................................................................................158

Annual General Meeting

The Seventeenth Annual General Meeting of Straits Resources Limited will be held at 12:00 noon on Monday 30
November 2009 at the Celtic Club, 48 Ord Street, West Perth, Western Australia.

2
STRATEGY

Our business strategy is to establish Straits Resources Limited as a growth focussed diversified resources group. This
includes growing our metals business with solid cash flows, and a pipeline of project opportunities in addition to our
profitable and growing coal business. We intend to remain aggressively growth orientated.

Straits has a successful track record of defining, acquiring and developing resource assets. Over the past three years we
gave emphasis to the growth of Straits’ coal business and we were very successful in growing this business into a world
class coal producer. Straits Asia Resources Limited alone had a market capitalisation of $1.7 billion at the end of June
2009.

In April 2009 we took the opportunity to realise value from our coal business, whilst retaining exposure to that business
through a retained 40% interest in PTT Asia Pacific Mining Pty Ltd. Consequent upon the partial realisation of our coal
assets, our aim is to grow Straits’ metals business to match the size and profitability that we created in our coal
investments.

To achieve this, as well as advancing projects from our existing portfolio, we will look to both expand Straits’ asset base
by acquisition and to divest assets that are considered “non-core”. We are currently reviewing our portfolio of metals
assets and we believe there is considerable latent value which can be unlocked over time by the application of capital and
geological expertise.

In assessing new projects we intend to create value by using geological assessment to identify undervalued resource
potential. We will apply our skills and capital to creating additional value by converting resource potential into mineable
reserves. Our business philosophy is to target large, regional sized geological opportunities and to focus on projects that
have the potential to be scaleable to a size that is internationally relevant.

3
STRAITS OVERVIEW

Straits is an ASX 200 diversified resources company focussed on generating strong and sustainable earnings for its
shareholders from a portfolio of resource projects and investments.

Based in Perth, Straits has a management team with an impressive track record of advancing resource projects through to
full production. Straits controls and operates the Tritton copper mine in New South Wales, the Hillgrove antimony/gold
mine, also in New South Wales (operations currently suspended), the Mt Muro gold mine in Indonesia, and the Whim
Creek copper mine in Western Australia. The Whim Creek copper mine is expected to reach the end of its life in late
2009. In addition, Straits has an outstanding portfolio of mining investments, development projects and exploration
ground throughout Australia and Indonesia. Straits also owns GfE, a speciality metals (noble alloys) European based
distribution business, and Magontec, a producer of high quality magnesium alloys with plants in Germany and China.

Strategic Coal Alliance

As announced on 23 March 2009, Straits sold a 60% interest in Straits Bulk & Industrial Pty Ltd to a wholly owned
subsidiary of PTT Public Company Limited (PTT) (the “PTT Transaction”). PTT is a diversified group of energy
companies engaged in oil and gas exploration and production, gas transmission and processing, energy trading and retail
distribution segments. PTT accounts for approximately 28% of total market capitalisation on the Stock Exchange of
Thailand. Straits Bulk & Industrial Pty Ltd was the holding company for Straits’ Brunei coal exploration interests,
Madagascan coal exploration interests and Straits’ 45.6% shareholding in the Singapore Securities Exchange listed Straits
Asia Resources Limited. Straits has also transferred a team of coal executives headed by Martin Purvis as Chief Executive
Officer to Straits Bulk & Industrial Pty Ltd as part of the PTT Transaction. Straits Bulk & Industrial Pty Ltd has since
been renamed PTT Asia Pacific Mining Pty Ltd. Straits still maintains a significant exposure to energy coal through its
remaining 40% interest in PTT Asia Pacific Mining Pty Ltd.

The total cash consideration for the sale of a 60% interest in Straits’ wholly owned subsidiary Straits Bulk & Industrial Pty
Ltd was US$335 million, including a deferred performance payment of up to US$115 million. It has recently been
announced that the Indonesian Government has now formally completed a process of rezoning land use across South
Kalimantan that clears the way for Straits to claim the deferred performance payment of US$115 million.

Pursuant to the PTT Transaction, Straits and the PTT Group created a strategic coal alliance aimed at growing an
internationally significant coal business based on the coal interests held through PTT Asia Pacific Mining Pty Ltd. Straits
retains a 40% ownership interest and Board participation in the coal venture.

Base Metals

In the year-ending 30 June 2009 Straits produced a total 34,200 tonnes of copper. This comprised of 23,713 tonnes of
copper in concentrate and 398 tonnes of copper cement from Tritton, and 10,089 tonnes of copper cathode from Whim
Creek. Throughput expansion at Tritton was completed during the year, taking annual installed capacity to 1.4 Mtpa. At
Whim Creek, operations went through a number of downsizing stages during the year as the project ceased mining
operations in October 2008. Recently Straits has announced that terms have been agreed to sell Straits (Whim Creek) Pty
Ltd to Venturex Resources Limited, and that an option agreement had been entered into for the sale of the Whim Creek
SX-EW plant to Finders Resources Limited.

Straits commissioned the Hillgrove demonstration plant in September quarter of 2008. The plant produced 745 tonnes of
antimony for the year, but the quantities produced have been significantly below design levels. In August 2009 Straits
announced a temporary suspension of processing activities to investigate the technical issues, the cost, and time necessary
to implement the required plant modifications to treat process water and achieve commercially viable production levels

Precious Metals

Mt Muro sold 48,367oz of gold and 297,558oz of silver for the year. A significant amount of eluvial ore was processed
from near mill sources during this time as a supplement to vein ore from the current main hard rock mine, Tasat. Pre-
mining gold inventory now exceeds 2 million ounces, and while exploration was curtailed in recent years due to financial
constraints, grass roots exploration has historically been very effective in generating targets and delivering gold resources
and reserves.

4
Metals Distribution

Group revenue for the GfE and Magontec businesses dropped sharply after the severe cutbacks in the steel related
industries following the global financial crisis. The market in Europe is still depressed, however, the Asian and US
markets are starting to show signs of recovery. Metal sales volumes for Magontec in the first half year 2009 were down
63% compared to the first half of 2008 due to sharp declines starting in November 2008. Sales volumes are showing signs
of improvement.

Exploration

Significant exploration activities are being undertaken by Straits. In June an important exploration programme was
commenced at Tritton to increase the resource/reserve inventory within the Nyngan copper district. At the Mt Muro gold
mine, work is well advanced to commence geophysical and drill testing of identified fertile gold structures with the aim of
increasing the resource inventory of the field. A drilling programme in large tenement areas held by Straits’ subsidiary,
Goldminco Corporation, in the Lachlan Fold Belt of New South Wales, has revealed an extended mineralised system
which is still open along strike. In South Australia, the Torrens project offers excellent potential to find an Olympic Dam
style deposit. Further, a strategic review is currently underway with respect to all Straits’ exploration assets with the aim
of potential divestment of any non-core assets from the Group.

5
FIVE YEAR SUMMARY

Year 6 Months Year Year Year
June to June December December December
2009 2008 2007 2006 2005

Profitability
Mining activities and other $’000 215,040 398,183 358,042 455,975 243,768
Metals distribution $’000 352,483 1,101,968 3,330,223 504,850 -
Total Revenue $’000 567,523 1,507,018 3,694,224 960,825 243,768

Gross Profit $’000 (131,571) 126,271 45,093 107,334 92,967
Operating profit/(loss) after $’000
tax attributable to members
of Straits Resources
Limited (42,107) (5,995) (16,110) 34,219 45,660
Earnings profit/(loss) per Cents
share (undiluted) (17.9) (2.6) (8.44) 21 32

Cash Flow
Cash flow from operations $’000 188,793 173,016 (6,273) 11,370 35,590

Balance Sheet
Total shareholders’ equity $’000 873,798 1,043,692 900,887 435,709 204,029
Net asset backing per share $ 3.57 4.48 3.98 2.28 1.26

Ratios
Return on shareholders’ %
funds (10) (1) (4) 14 32
Debt/(Debt + Equity)
excluding trade finance debt % 9 47 33 6 18

Production
Sebuku coal mine t’000 2,564 1,960 3,436 3,495 3,000
Jembayan coal mine t’000 5,271 2,498 - - -
Whim Creek copper mine t 10,089 6,037 15,339 14,800 8,746
Tritton copper mine t 24,111 8,372 18,549 23,088 19,296
Mt Muro gold mine Au oz 48,850 21,728 45,748 47,452 13,361
Ag oz 304,360 68,786 349,833 350,378 72,982

Market Capitalisation
Share price at 30 June 2009 $
& 31 December 2005 -
2008 2.11 6.84 6.60 3.53 2.36
Shares on issue (fully paid) Million 245.54 232.89 225.88 190.86 161.66
Market capitalisation $’M 518.1 1,593.0 1,490.8 673.7 381.5

Notes
1. Years 2005 through to 2009 have been prepared on the basis of Australian equivalents to International Financial
Reporting Standards.
2. Year 2009 excludes discontinued operation information for profitability

6
HIGHLIGHTS

FINANCIAL

• Profit after tax (before minorities) of $38.0 million.
• Profit of $259.0 million recorded on the sale of the 60% interest in SBI.
• Unfranked final dividend of 30 cents per share paid on 21September 2009.
• Cash on hand at 30 June 2009 of $223.0 million not including restricted cash of $22.0 million as security on
performance bonds.
• $80 million convertible note issue placed with Standard Chartered Private Equity Limited.
• A gearing ratio of 9%.
• Repayment of $58.0 million corporate debt.

OPERATIONAL and EXPLORATION

• Tritton copper production of 24,000 t.
• Whim Creek copper production of 10,000 t.
• Mt Muro production of 49,000 ounces of gold and 304,300 ounces of silver.
• Air core drilling programme at Goldminco’s Temora project in New South Wales extended the mineralised system
significantly and the system is still open along strike.
• Drilling commenced at Tritton Deeps.

CORPORATE

• Strategic coal alliance formed with the PTT Group, via the sale of a 60% interest in Straits wholly owned subsidiary
SBI for US$335 million.
• Divestments of non-core assets proceeding.
• Sebuku boundary rezoning announced in August 2009. Way forward cleared for Straits to claim US$115 million
performance payment from the PTT Group.

7
CHAIRMAN’S STATEMENT

Dear Shareholder,

In what has been an extremely challenging year in one of the most significant financial downturns in history, I am pleased
to report that Straits has weathered the storm well.

A company transforming transaction was completed in April 2009 when Straits announced the formation of a strategic
alliance with Asian energy major, the PTT Group, via the sale of a 60% interest in Straits’ wholly owned subsidiary, SBI
for up to US$335 million in cash.

The PTT Group is a diversified energy group that accounts for approximately 28% of Thailand’s total market capitalisation
on the Stock Exchange of Thailand. SBI has been renamed PTT Asia Pacific Mining Pty Ltd and its most significant
holding is the 45.6% in Singapore listed Straits Asia Resources Limited. Straits still maintains significant exposure to
energy coal through its remaining 40% interest in PTT Asia Pacific Mining Pty Ltd.

Production from the Tritton copper mine in the 12 months to June 2009 was 24,111 tonnes of copper (in concentrate and as
cement). Straits completed the plant expansion at Tritton to 1.4 Mtpa throughput (equivalent to 35,000 tonnes of copper
cement in concentrate). As the financial crisis took hold in late 2008 the underground mine expansion through the
development of declines to the Murrawombie and Larsens/North East ore bodies was suspended.

The Whim Creek SX-EW copper mine in Western Australia produced 10,089 tonnes of copper cathode for export in 2009.
Mining at Whim Creek ceased in late 2008 and currently the operation is harvesting the remaining copper in heaps. It is
anticipated that Whim Creek will close the SX-EW plant in late 2009. Straits has granted to Finders Resources Limited an
option for it to acquire the SX-EW plant for $5 million of shares in that company. Further, in August 2009, Straits agreed
to sell (subject to due diligence, now completed, and a formal sale and purchase agreement) the other Whim Creek assets,
including the Salt Creek and Balla Balla copper-zinc projects and associated tenements, to Venturex Resources Limited,
for shares in that company.

At the Hillgrove antimony/gold mine near Armidale in New South Wales commissioning commenced in 2008, however
production has been hampered by a number of technical issues, including issues with process water treatment management
and the interface between the leaching and electrowinning sections of the plant. In August 2009 processing activities at
Hillgrove were temporarily suspended to fully investigate the technical issues, the cost and the time necessary to
implement the required plant modifications to achieve commercially viable production levels.

On the general economic front, notwithstanding an apparent upturn in economic conditions, risks of further periods of
weakness and volatility remain. The forecast for commodity markets in the medium to long term remains robust with
prices for many products expected to remain above long term averages. Coal and copper market fundamentals look
particularly tight and these being the two most important commodities for your Company, bodes well for the future.

Straits has declared for the year ended 30 June 2009, a special 30 cents per fully paid ordinary share unfranked final
dividend based on the recent PTT Transaction.

The future outlook for Straits is very positive. Straits today has exposure to a large and expanding thermal coal business
and is the owner of a relatively immature but emerging base and precious metals business. In addition, Straits has a sizable
exploration portfolio, investments in a range of companies, a metals distribution business and significant cash resources.
Our strong balance sheet position, coupled with an experienced management team and a successful track record places us
in a good position to look at all opportunities to grow a large and successful minerals company.

The business strategy for Straits is a growth focussed, diversified producer with solid cash flows, and a pipeline of project
and exploration opportunities. In addition, Straits will focus on the Company’s asset portfolio providing a mix of stable
and mature business units with a base level of reliable earnings.

Alan Good
Chairman
30 September 2009
8
CHIEF EXECUTIVE OFFICER’S REVIEW

Background

The year in review will be remembered for unprecedented volatility in the financial and commodity markets.

Overall it was a year of two distinct halves. The proposed demerger of our coal assets was cancelled due to the collapse of
financial markets and lack of shareholder support at that time.

In response to the change in external environment Straits moved quickly to reduce expenditure, stabilise our businesses
and shore up our balance sheet. Decisive action was required in an environment that put unprecedented pressure on cash
flows and balance sheets of mining companies, in particular those exposed to base metals.

On the corporate front, the group refinanced US$300 million debt at Straits Asia, and repaid $58 million of corporate debt.
Trade finance facilities associated with the Varomet Group were significantly reduced and Straits’ balance sheet was
strengthened through support from the Standard Chartered Private Equity Limited Convertible Note.

The restructure of the coal business further strengthened Straits’ balance sheet whilst leaving the Company significant
annuity and growth exposure through a coal alliance with a very credible and large partner being the PTT Group.

Operations

Straits still maintains significant exposure to bulk commodities through its remaining 40% interest in PTT APM, which in
turn holds a 45.6% interest in Singapore listed Straits Asia. Straits Asia operates the Sebuku and Jembayan coal mines in
Indonesia. During the 12 month period, these mines produced a total of 7.8 Mt of coal and recorded sales of 8.1 Mt.
Target production from Straits Asia is 12.0 – 13.0 Mt for the 2010 calendar year.

Production from the Tritton copper mine totalled 24,111 tonnes of copper (in concentrate and as copper cement) for the 12
months to June 2009. Cash costs (excluding treatment costs and refining costs) for the year totalled US$1.09 per pound
and were less than US$1.00 per pound in the six months to June 2009. In 2008 the processing plant at Tritton was
expanded to an annual throughput rate of 1.4 Mtpa, enabling production capacity of 35,000 tpa copper in concentrates. In
addition, development began on two new underground declines to access the Larsens/North East and the Murrawombie ore
bodies. In late 2008 development of these declines was suspended due to the copper price collapse. The copper
cementation process at Tritton has proved successful and a small upgrade is planned. In the 12 months to June 2009, 398
wet tonnes of cement were produced.

Sales from the Whim Creek copper mine totalled 10,089 tonnes of copper cathode in the 12 months to June 2009. It is
anticipated that Whim Creek will close the SX-EW plant in late 2009. In August 2009 Straits agreed terms with Venturex
Resources Limited to sell all of the issued capital of Straits (Whim Creek) Pty Ltd (excluding the SX-EW plant which is
subject to an option to purchase agreement with Finders Resources Limited) and the Salt Creek and Balla Balla copper-
zinc projects and associated tenements. With the due diligence completed, the parties are now in the process of
constructing a formal sale and purchase agreement.

In 2009 production from Mt Muro exceeded 50,000 gold equivalent ounces. A business plan is currently under
consideration to access ore sources in the Serujan East and Soan areas. As a consequence of this plan, future production is
expected to increase and cash costs are expected to be reduced.

At the Hillgrove antimony, gold and tungsten mine near Armidale in New South Wales, commissioning commenced in
2008. However, production was hampered by a number of technical issues including process water treatment management
and the interface between the leaching and electrowinning sections of the plant. During 2009 the mine produced and sold
745 tonnes of antimony metal, however the operation has so far been unable to meet production forecasts due to a number
of issues in the processing plant. Consequently, plant operations were temporarily suspended in August 2009 to fully
investigate the technical issues, the costs, and the time necessary to implement the required plant modifications to achieve
commercially viable production levels.

In regard to the Varomet Group, the GfE business is dependent on a global recovery of the steel foundry and non-ferrous
markets, while Magontec’s future performance will be highly contingent on a recovery in the automotive sector.

There continues to be a strong focus on exploration at all operations in order to increase the resource and reserve bases and
to assist with the establishment of effective and sustainable business plans.

9
Financial Performance

While operating and corporate activities generated significant cash flow for the Group, the performance was materially
impacted by non cash losses and impairment charges, primarily related to the collapse of base metals prices.

Towards the end of the financial year all operating businesses were stable and operating cash flows were acceptable and
improving.

As a result of significant net cash generated from 2009 financial year activities, Straits has been able to declare a 30 cents
per share special dividend which was paid on 21 September 2009.

At year end our balance sheet is strong, with significant net cash at the corporate level.

Outlook

Straits is well positioned to maintain an aggressive growth profile, supported by an increasing, more stable and maturing
earnings base.

Straits’ purpose is to create long term value for shareholders through discovery, development, acquisition and the efficient
operation of natural resources. Ongoing investment to restructure, maintain and strengthen the Group’s base metals and
gold operations and improve production platforms and lengthen earnings profiles will continue through 2010.

Straits is currently undertaking a portfolio review to simplify and re-focus its balance sheet. The aim is to re-focus Straits
around fewer core opportunities, which may involve divesting non-core assets to streamline the asset portfolio.

Over the next 12 months, the Company will concentrate on its core operating base metal asset, the Tritton copper mine.
An exploration programme has been initiated to increase the resource and reserve base at and around the Tritton mine. The
operation has the capability to increase production in the short term to 35,000 tpa copper in concentrate once the resource
base and financial return is compelling.

Exploration on several large and scaleable opportunities will continue. The focus initially will be targets in South
Australia and the Lachlan fold belt of New South Wales, in the latter case through our subsidiary Goldminco.

The Company’s most significant asset continues to be our 40% ownership in PTT APM, where installed capital and
ongoing resource conversion is expected to deliver further growth and dividends. Additional growth is expected to come
from the pre-development and exploration opportunities in Madagascar and Brunei.

Straits is in a unique and unprecedented position, from an historic perspective, to deliver growth for shareholders. This is
expected to coincide with recovery in the world industrial base and financial markets over the coming years.

We are in the right core commodities being energy coal, copper and gold. We have asset diversity and a strong balance
sheet to support our aspirations.

I would like to extend my gratitude and thanks to our shareholders, our employees, suppliers, service providers and fellow
directors for their support during a very volatile and difficult 12 months.

Your support has allowed Straits to emerge from this recent environment in a relatively strong shape, and we expect to be
able to reward all for their ongoing support.

Milan Jerkovic
Chief Executive Officer
30 September 2009
10