Pensana Plc review: Rare earth exploration & development updates

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The board is pleased to present its review of Pensana Plc (LON:PRE), the rare earth exploration, mining and processing group, whose flagship development assets are the Longonjo NdPr Project and the Coola exploration project in Angola alongside the Saltend rare earth processing hub in the UK.

Half Year Highlights

Finalisation of revised Longonjo execution plan allowing for staged mine development reducing upfront capital expenditure to US$217 million with US$105 million deferred until year three.
Deployment of US$15 million Fundo Soberano de Angola (FSDEA) loan facility as part of a broader US$80 million investment (subject to due diligence and the finalisation of investment terms) to facilitate the development of the Longonjo Project.

Offtake memorandum of understanding for up to 100% of Longonjo production.
Ongoing mineralogical studies confirm processing potential of the rare earth host minerals at the Coola carbonatite and Sulima West exploration targets.
Meeting with United Kingdom (UK) Minister Nusrat Ghani to discuss the potential UK and United States (US) government support for the Saltend Project.
Pensana, working in partnership with Polestar, Route2 and the Universities of Leeds and Hull, awarded £316,643 in conditional grant funding by Innovate UK under its CLIMATES programme.
Letter of intent signed between Pensana and The Yorkshire Energy Park (“YEP”) for the site of a future permanent magnet metal facility within the park. The YEP is located adjacent to the Saltend End Chemicals Park in the Humber Freeport UK.

Post period-end

The Company, through its 84% owned subsidiary Ozango Minerais SA (Ozango), which owns 100% of the Longonjo project, has concluded a non-binding term sheet (Term Sheet) with the Longonjo lender consortium for a US$156 million project finance debt facility (Facility).
Approval by one of Pensana’s major potential customers of the product qualification specifications for Longonjo’s proposed mixed rare earth carbonate (MREC) product.
Technical due diligence report on the Longonjo rare earth project reported on by The Mineral Corporation (TMC) to ABSA Capital (ABSA) as the Mandated Lead Arranger for potential debt funding of the Project.
Review by the six-member board, head of investment and key analysts of FSDEA to review the early-stage construction activities being funded by the US$15 million bridging loan from FSDEA, ahead of conclusion of the main financing.

CEO’s Review

Dear Pensana Shareholders,

Over the period our owner’s team, along with key financial support from our major shareholders, have focused on rapidly repositioning our Longonjo Rare Earth Project and the Saltend separation facility into a staged development programme targeting first production in early 2026.

The significant efforts have culminated in the finalisation of a Class 2 AACE study being completed providing a high degree of confidence around the capital estimates and contingencies and the lender appointed Independent technical experts, The Mineral Corporation, being able to carry out a detailed review on the updated project.

Additionally, all preferred vendors of major and long-lead equipment items were identified over the Period and have been engaged in preparation for project development; coupled with ongoing improvements and enhanced modularisation enabling for a de-risked off-site pre-fabrication, testing and containerised transport ensuring a faster and more efficient construction phase in terms of schedule, equipment and manpower requirements.

The reduced US$217 million capital cost metallurgical plant is a downscaled version of the identical processing unit stages within the existing defined mining, comminution, flotation, thickening, calcining, leaching and product precipitation process route.

The key points in the revised development implementation that allowed the team to rapidly facilitate the reworked phased development plan were that:

Existing permits remained intact including the Exploitation Licence, the Environmental and Social Impact Assessment (ESIA) construction permit, the Resettlement Action Plan (RAP) and the Livelihood Restoration Plan (LRP) as developed in conjunction with the local community and relevant provincial authorities;
Pre-production spend was minimised whilst still ensuring that the project’s potential for generating economic benefits on a larger scale were not compromised;
Production of a standardised and globally saleable refined radionuclide-free mixed rare earth product from Angola, independent of other developments;
The modular sulphuric acid plant production unit capacity provides the pivot point around which the engineering and design work was undertaken and optimised;
The historical testwork and pilot plant trials conducted in collaboration with equipment vendors continued to underpin the plant design criteria;
Job creation in Angola along with training and skills transfer mechanisms remain intact.

Notable developments towards de-risking aspects of the project included:

The SRK team finalising their geotechnical investigation in support of the dual-purpose TSF detailed design over the Period. The selected TSF site was confirmed as also being able to provide suitable excavated material for use in the TSF starter walls, pit haul roads, plant terracing and other construction-related requirements, thus mitigating the need to develop borrow-pit sources and associated licensing and material transport costs as well as reducing the overall environmental impact.
Integration of the Longonjo Project bulk reagent consumption requirements (including sulphur and caustic soda) into the Trafigura/Mota Engil-led strategic mineral-focused Lobito Corridor port and rail concessions is being pursued as part of the ongoing operations readiness preparation. Logistical and operational expenditure benefits are obvious in terms of broader reagent supply to the existing Democratic Republic of the Congo (DRC) Copperbelt mines alongside the limestone which will be sourced from the existing quarries in the Lobito area.
Negotiation of global procurement and logistical support for the construction phase with Deugro, an internationally established freight-forwarding business with a specific relationship with their Africa-centric specialised project logistics division. This combination of global and local logistics to enable efficient movement of material to and from the project site is considered by management to contribute to significantly de-risk this aspect of the project.

Saltend

With the focus on bringing the Longonjo project through financing and into development, on-site activity for the Saltend Project along with all significant engagements with third-party contractors continued to be put on hold whilst the financing options are being advanced. The existing Intellectual Property developed to date and core technical team expertise remain available to the group. Once Longonjo is in construction, attention will turn to the completion of the financing and development of the Saltend facility.

Update on construction activities at Longonjo

Over the Period the early-stage development activities continued to be funded via a US$15 million bridging loan provided by FSDEA ahead of the main finance. The significant activities have been the civil works for the camp, the rehabilitation of the access road to the Longonjo railway station and the agricultural demonstration plots under the Livelihood Restoration Programme.

The 4.5 kilometer road linking the site to the Benguela railway line has been upgraded. The enhanced road features include an improved roadbed substructure, a redefined road profile and rapid drainage systems. Serving as the primary route for inbound materials during construction and later for reagent import and the export of Mixed Rare Earth Carbonate in containers, the road connects the mine to the Longonjo station for rail access to the port of Lobito for shipping.

The Benguela railway line is part of the Lobito corridor undergoing a US$550 million investment from the US Government. The investment aims to secure critical minerals across central Africa to be exported via the port of Lobito and is anticipated to become one of Africa’s most important rail transport systems.

Several kilometers of overhead powerlines, together with an underground water supply and effluent disposal system have been installed ahead of the arrival of the 350-person modular camp, which has been assembled at Johannesburg and is being relocated to site. The camp will be the primary operations base for the construction team.

Agricultural demonstration plots have been established by South African agriculture consultants, Vuna Agri, as part of the Livelihood Restoration Programme. The demonstration plots have an area of nine hectares and have now successfully completed their first full season. The Livelihood Restoration Programme was established to provide replacement land for any displaced farmers and additionally to provide a training base for those persons affected by the project to develop their agricultural skill sets.

The objective is to help local growers and farmers create healthy and sustainable agro-ecosystems, boosting household income in nearby communities, whilst enhancing overall food security. This ongoing programme is being conducted in collaboration with local universities with a view to continually improving farming practices.

With well on 50 engineering contractors and Longonjo staff now working on site in preparation for the commencement of main construction there has been a very positive reaction to the activities on site amongst the local community, in particular with the creation of well-paid jobs and the successful implementation of the first phase of the livelihood restoration programme.

We have a strong team supporting the main construction which is being managed by MCC a leading project management team with a track record of delivering projects across Africa, including Angola. The engineering team is supported by ADP and ProProcess, both being African minerals specialists in the detailed design, construction and commissioning of modular mineral processing plants with extensive development experience in Angola.

Environment Social Governance (ESG)

The business continues to ensure ESG is at the heart of its activities with the core business strategy focused on providing a source of sustainable rare earths to the market.

Health, Safety and Environment

From a health, safety and environment view the business embeds HSE into its operating culture and has had zero recordable cases and zero environmental incidents in the Period. In Angola several staff residing in the community reported the contraction of malaria and the business therefore has delivered a malaria awareness programme.

Angola

In the Period the finalisation of the revised Longonjo execution plan including sections on environmental, health and safety, stakeholder relations and social and communities was completed.

After the completion of phase one of the resettlement action plan (RAP) in October 2022, 28 project affected households continue to receive transitional support food packages to supplement their temporary loss of livelihood. The project plan will see the requirement for more resettlement to occur in 2024, to ensure land is available for the project. The team are currently in the process of contacting, engaging with and updating the records of all those who will be affected by the next phase of the project. During the period the RAP delivery plan has been reviewed and the project can therefore ensure compensation will be fair and transparent.

Stakeholder engagement continues apace with regular meetings taking place over the period between the project team and key stakeholders. This includes local and national authorities, transitional leadership, project affected people, training institutions and much more. This is supported by continued operation of an active grievance mechanism with community engagement with the process. All grievances raised have continued to be resolved at step 1, between the complainant and Ozango staff.

Further progress has been made over the Period in developing the replacement land to support the economic relocation of agricultural land affected by the project. During the period further studies were undertaken to review existing land use, biodiversity, and agricultural potential, confirming the availability of sufficient suitable land. Additionally, the project has agreed with the local community that Ozango will not affect any existing agricultural land and land not currently used for agriculture will be purchased for a value of at least market price. Furthermore, the project has invested in the formation of two demo plots, one in each of two replacement land blocks, to further investigate the most effective techniques and crops for optimal yield and to further demonstrate to PAPs that the replacement land can effectively host agriculture. These supplement the ongoing test and demonstration work at the existing plots within the mine boundary.

In the UK, the business continues to explore research and development opportunities and during the period a studentship, in partnership with University of York and University of Leeds has commenced looking at the social impacts and opportunities from rare earth mining, using our Longonjo project as a case study. This is in addition to the ongoing project funded by innovate UK’s CLIMATEs fund to investigate, in partnership with University of Leeds, University of Hull, Route2 and Polestar, opportunities across the value chain to support Pensana’s objective of delivering a sustainable rare earth value chain.

Exploration

In August the Company reported high grade TREO soil sampling results at Sulima West and encouraging results from other targets on the Coola exploration licence area. This was subsequently followed by a report on the Mineralogical Characterisation studies undertaken by SGS South Africa of samples collected at Sulima West and the Coola carbonatite during 2022.

The report highlighted that:

the Sulima West laterite mineralisation contains monazite which hosts NdPr with moderate liberation and exposure which should be amenable to some degree of simple upgrading at the current location, prior to processing at Longonjo;
the Coola carbonatite contains a significant amount of bastnaesite which is host to more than 90% of the NdPr. The bastnaesite is moderately liberated and exposed, again suggesting that there is potential for recovery using the physical separation at the current location prior to processing at Longonjo.

The initial mineralogical study has confirmed the processing potential of the rare earth host minerals for both the Sulima West laterite and the Coola Carbonatite. The opportunity for upgrading the ore at the current location using physical separation techniques is currently being further assessed with the testing of larger samples which have been collected. We obviously see both Sulima West and Coola carbonatite as having the potential for upgrading the ore at its current location and thereby providing a high-grade near-term feedstock which would be transported to Longonjo for further processing and extraction of the rare earth elements.

Ground geophysical surveys were completed at both targets in 2023 which helped to better define known areas of mineralization and added additional exploration targets which will be further investigated in 2024.

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Post-period end we continued with mineralogical studies and anticipate results to be reported by mid-year. Exploration drilling of the most prospective targets is scheduled for the latter half of 2024.

Operating and Financial Review

During the period, the consolidated entity incurred a comprehensive loss for the period of US$3,657,839 (31 December 2022: US$4,218,451 loss).

Administration expenses decreased to US$3,461,420 (31 December 2022: US$4,044,824). This was due to a decrease in consultancy fees, travel expenditure and legal fees incurred.

The group incurred a foreign currency exchange gain of US$50,471 for the six months ended 31 December 2023 (loss of US$42,468 during the six months ended 31 December 2022). These gains and losses arise from the settlement of invoices in currencies other than the functional currencies (USD, GBP, AUD, AOA), as well as the translation of balances denominated in currencies such as the pound and Australian dollar to the US dollar, where the balances are held in currencies other than the functional currency of the relevant company and reflect the movements in these currencies during the respective periods.

Group net assets decreased in the period from US$56,760,602 at 30 June 2023 to US$53,812,514 at 31 December 2023. This was due to a decrease in cash of $7,266,475 during the period, as explained below. The decrease in cash was partially offset by an increase in property, plant and equipment and intangible assets of US$5,531,583, mainly due to the construction programme at the Longonjo project.

The decrease in cash was due to expenditure at the Longonjo development project of US$10,425,893 (Six months ended 31 December 2022: US$8,615,868). This was partially offset by the receipt of the bridging loan facility from FSDEA which is secured over the company’s shareholding in Ozango. By 31 December 2023, $4.7 million of the facility was drawn down.

The Group experienced net cash outflows from operating activities of US$3,223,494 (31 December 2022: US$4,074,921) with the decrease primarily reflecting working capital movements.

Net cash outflows from investing activities of US$8,827,832 increased from cash outflows of US$7,359,572 for the six months to 31 December 2022, mainly due to a decrease in capex items locked up in working capital, due to the timing of payment of invoices. Cash outflows for both periods under review related to cash spent on additions to the Longonjo project, as well as the Saltend project for the six months ended 31 December 2022. During the period, the group also received a R&D tax credit of $1,598,061 for work related to Saltend in the UK ($1,037,336), as well $560,725 for work related to Longonjo.

The decrease in the cash inflows from financing activities from US$10,000,000 for the six months ended 31 December 2022 to US$4,784,851 for the six months ended 31 December 2023 was mainly the result of no equity being issued during the period. The group did however receive a bridging loan facility from FSDEA of $4.7 million as explained above.

The ability of the company and group to continue with its plans to develop the Longonjo mine are contingent on the successful completion of the proposed debt and equity funding arrangements currently underway in the normal course of business. It is anticipated that the contemplated financing across the group may include further issues of equity at the asset level and export credit-backed debt financing. There is a risk that funding may not be available and/or the cost of financing may be higher than expected.

The ongoing support provided by the Angolan government and the approval of a non-binding term sheet from the Longonjo lender consortium as announced recently is expected to enable the Group to refinance the US$15m FSDEA loan facility.

The Group has received a loan facility from two of its directors for GBP2 million to meet the underlying operating costs of the UK over the next 6 to 9 months, excluding the existing UK contractor balances and capital development costs. The Board continues to engage proactively with the UK contractors to maintain support while further funding is secured to enable settlement, with non-binding letters of intent and agreements setting out the route to settlement under discussion with the key contractors.

Please refer note 3 to the financial statements for the going concern statement which includes a material uncertainty in relation to going concern.

Principal Business Risks

The Group is exposed to several risks and uncertainties which could have a material impact on its long-term development, and performance and management of these risks is an integral part of the management of the Group. An overview of the key risks which could affect the Group’s operational and financial performance was included in the company’s 2023 Annual Report, which can be accessed at www.pensana.co.uk. These may impact the Group over the medium to long term; however, the following key risks have been identified which may impact the Group over the short term.

Financing and liquidity

The group is in pre-production phase and therefore has no revenues from operations currently.

Details of the Board’s going concern assessment are provided in note 3 to the financial statements and include a material uncertainty in respect of going concern.

Development of the Longonjo and Saltend Projects

The group’s operations are at an early stage of construction development and future success will depend on the group’s ability to manage the Longonjo and Saltend Projects (the projects) and the production of NdPr-rich MREC for export to the Saltend refinery and further processing into a rare earth oxide. In particular, the group’s success is dependent upon the directors’ ability to develop the projects by commencing and maintaining production at the sites and there is no certainty that funding will be available. Development of the projects could be delayed or could experience interruptions or increased costs because of supply chain or inflationary pressures or may not be completed at all due to a number of factors.

Logistical challenges and delays

Global supply chain challenges could result in logistical risks relating to availability, potential delays and increased costs of equipment and material both for the project and operations phase.

Commodity price

If the group is able to develop the Longonjo and Saltend Projects and/or the Coola Project for production and the market price of rare earth oxide decreases significantly for an extended period of time, the ability for the group to attract finance and ultimately generate profits could be adversely affected.

Attracting skilled employees

The group’s ability to compete in the competitive natural resources and specialist rare earth chemical processing sectors depends upon its ability to retain and attract highly qualified management, geological and technical personnel. The loss of key management and/or technical personnel could delay the development of the Longonjo Project, exploration at the Longonjo Project and the Coola Project and development and commissioning of the Saltend refinery thereby negatively impacting on the ability of the group to compete in the resources and chemical processing sectors. In addition, the group will need to recruit key personnel to develop its business as and when it moves to construction and ultimately operation of a mine, each of which requires additional skills.

Mr. Tim George

Chief Executive Officer

28 March 2024

INDEPENDENT REVIEW REPORT TO PENSANA PLC

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2023 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom’s Financial Conduct Authority.

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2023 which comprises the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows, and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK adopted international accounting standards and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Basis for conclusion

We conducted our review in accordance with Revised International Standard on Review Engagements (UK) 2410, “Review of Interim Financial Information Performed by the Independent Auditor of the Entity” (“ISRE (UK) 2410 (Revised)”). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 3, the annual financial statements of the Pensana Plc are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, “Interim Financial Reporting.

Material uncertainty related to Going Concern

We draw attention to note 3 to the half-yearly financial report which indicates that the group will require additional funding to settle outstanding amounts due to suppliers and further subsequent additional funding to meet its commitments and planned expenditures which is not guaranteed. As stated in note 3, these events or conditions, along with other matters as set out in note 3, indicate the existence of a material uncertainty which may cast significant doubt over the group ability to continue as a going concern. Our conclusion is not modified in respect of this matter.

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the

Disclosure Guidance and Transparency Rules of the United Kingdom’s Financial Conduct Authority.

In preparing the half-yearly financial report, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom’s Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

Ryan Ferguson

BDO LLP

Chartered Accountants

London, UK

28 March 2024

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).