IFOS.V · 2020-08-26 12:00:00

Itafos Reports Q2 2020 Financial Results and Operational Highlights

Production Results Financials

ITAFOS REPORTS Q2 2020 FINANCIAL RESULTS AND OPERATIONAL HIGHLIGHTS

TORONTO, ON – August 26, 2020 – Itafos (TSX-V: IFOS) (the “ Company”) reported today its Q2 2020

financial results and operational highlights. The Company’s fin ancial statements and management’s

discussion and analysis for the three and six months ended June 30, 2020 are available under the

Company’s profile at www.sedar.com and on the Company’s website at www.itafos.com. All dollar values

are in thousands of US Dollars except as otherwise noted.

“We delivered strong financial and operational performance during Q2 2020, demonstrated by our adjusted

EBITDA for the quarter improving $14 million year-over-year. Ou r focus on improving margins and

corporate-wide cost savings initiatives, in addition to a disciplined approach to capital allocation and efforts

to mitigate sulfuric acid supply disruptions all contributed to these results,” said Dr. Mhamed Ibnabdeljalil,

CEO of Itafos. “Looking forward, we are maintaining our origina l guidance for full year 2020 adjusted

EBITDA and we are continuing to make progress on extending Itaf os Conda’s mine life, optimizing Itafos

Conda’s EBITDA generation capability and advancing our newly la unched stage-gate restart program for

Itafos Arraias.”

Overall Highlights

For the three months ended June 30, 2020, the Company’s financial highlights were as follows:

 generated adjusted EBITDA of $11,324 [Q2 2019: $(2,347)], repr esenting a 582% increase year-

over-year primarily due improved margins at Itafos Conda, cost savings following the idling of Itafos

Arraias, and implementation of aggressive corporate wide cost s avings and deferral of spending

initiatives;

 recorded a write-off of mineral properties of $8,449 at Itafos Paris Hills following the Company’s

decision to wind down the concession following completion of the technical report titled “NI 43-101

Technical Report on the Itafos Conda and Itafos Paris Hills Mineral Projects, Idaho, USA” and dated

as of July 1, 2019 (the “Itafos Conda Technical Report”), which defined Husky 1/North Dry Ridge

(“H1/NDR”) as the Company’s path forward for mine life extension at Itafos Conda;

 incurred net loss of $(20,814) [Q2 2019: $(21,597)], represent ing a 4% decrease year-over-year

primarily due to the same factors that resulted in improved adjusted EBITDA, which were offset by

a write-off of mineral properties at Itafos Paris Hills;

 drew an additional $5,300 under the Company’s unsecured and su bordinated promissory note (the

“CLF Promissory Note ”) with an additional $10,700 remaining available to be drawn b y the

Company at its sole discretion through December 31, 2020 (the “Availability Period”); and

 continued to advance aggressive corporate wide cost savings an d deferral of spending initiatives,

including corporate streamlining initiatives resulting in dissolution of two unutilized legacy entities.

For the three months ended June 30, 2020, the Company’s business highlights were as follows:

 continued corporate-wide risk mi tigation measures to address p otential impacts to employees,

contractors and operations as a result of the novel strain of c oronavirus (“COVID-19”) resulting in

no material impact to operations;

 demonstrated sustained environmental, health and safety excell ence at Itafos Conda and Itafos

Arraias, including no environmental releases and one recordable injury;

 produced total production volumes at Itafos Conda of 134,391t [Q2 2019: 150,934t], representing

an 11% decrease year-over-year pr imarily due to a disruption in sulfuric acid from its primary

supplier resulting in lower APP and MAP production;

 generated adjusted EBITDA at Itafos Conda of $14,458 [Q2 2019: $11,283], representing a 28%

increase year-over-year primarily due to improved margins as a result of lower input costs;

 realized net income at Itafos Conda of $3,428 [Q2 2019: $560], representing a 512% increase year-

over-year primarily due to the same factors that resulted in improved adjusted EBITDA;

 advanced activities related t o extending Itafos Conda’s mine l ife through permitting and

development of H1/NDR, including preparing and submitting an up dated Mine and Reclamation

Plan to the Bureau of Land Management (the “BLM”) as part of the National Environmental Policy

Act (“NEPA”) permitting process;

 advanced activities related to optimizing Itafos Conda’s EBITD A generation capability, including

advancing development of MAP enhanced with zinc as an additiona l product in the new line of

micronutrient enhanced products an d evaluating proposals receiv ed for pilot testing and a front-

end engineering and design (“ FEED”) study related to anhydrous hydrogen fluoride and

precipitated silica (“AHF/PS”) by-product recovery and a feasibility study related to on-site ammonia

production;

 maintained the idling of Itafos Arraias following best practic es and monetized remaining inventory

and raw materials to partially offset costs;

 launched a stage-gate restart program for Itafos Arraias, incl uding designing a detailed in-fill drilling

program and engaging a third party to conduct the metallurgical test work that will form the basis

of the revised beneficiation process; and

 advanced the development of Itafos Farim to construction ready state, including achieving

substantial completion of constru ction of the contractor’s camp and advanced project financing,

related permitting and offtake initiatives.

For the three months ended June 30, 2020, the Company’s other h ighlights included issuance of 11,347

shares (net of 3,653 shares withheld to pay applicable taxes) due to vesting under the Company’s restricted

share unit plan (the “RSU Plan”).

Subsequent to the three months ended June 30, 2020, the Company’s overall highlights were as follows:

 decided to conduct a reduced scope plant turnaround at Itafos Conda during July 2020 as part of

its risk mitigation measures d uring the COVID-19 pandemic, whic h was completed with no

environmental releases or recordable injuries;

 announced that Itafos Conda ha s been experiencing a significant disruption in sulfuric acid supply

from Rio Tinto’s Kennecott mine and advanced efforts to mitigat e potential adverse effects of the

disruption;

 closed a $20,000 secured working capital financing at Itafos C onda with JPMorgan Chase Bank,

N.A. (the “Revolving Facility”), which refinanced the $20,000 secured working capital financing at

Itafos Conda with Gavilon Fertilizer, LLC (the “Gavilon Facility”), of which $10,000 was drawn at

closing;

 repaid the Gavilon Facility in full in connection with closing the Revolving Facility;

 drew an additional $5,300 under the CLF Promissory Note with a n additional $5,400 available to

be drawn by the Company at its sole discretion through the Availability Period;

 advanced the wind down of the Itafos Paris Hills concession, i ncluding issuing mineral lease

termination letters to land owners, following completion of the Itafos Conda Technical Report, which

defined H1/NDR as the Company’s path forward for mine life extension at Itafos Conda; and

 cash settled 27,154 RSUs fo r $6 under the RSU plan.

Financial Highlights

For the three months ended June 30, 2020 and 2019, the Company’s financial highlights were as follows:

(unaudited in thousands of US Dollars For the three months ended June 30, For the six months ended June 30,

except for per share amounts) 2020 2019 2020 2019

Revenues $ 62,111 $ 103,072 $ 137,472 $ 176,250

Operating loss (10,576) (14,079) (22,819 ) (20,089)

Adjusted EBITDA 11,324 (2,347) 10,536 (200)

Net loss (20,814) (21,597) (39,103 ) (34,928)

Maintenance capex $ 1,582 $ 11,861 $ 3,501 $ 17,047

Growth capex 1,463 3,164 2,869 6,180

Basic loss per share $ (0.11) $ (0.15) $ (0.21 ) $ (0.25)

Fully diluted loss per share $ (0.11) $ (0.15) $ (0.21 ) $ (0.25)

For the three months ended June 30, 2020 and 2019, the Company’s financial highlights were explained

as follows:

 revenues were down year-over-yea r primarily due to lower sales volumes and lower realized prices

from continued downward pressure on diammonium phosphate (“ DAP”) New Orleans (“ NOLA”)

prices to which MAP sales prices are linked at Itafos Conda and the idling of Itafos Arraias;

 adjusted EBITDA was up year-over-year primarily due to improve d margins at Itafos Conda, cost

savings following the idling of Itafos Arraias, and implementation of aggressive corporate wide cost

savings and deferral of spending initiatives;

 net loss was down year-over-yea r primarily due to the same fac tors that resulted in improved

adjusted EBITDA, which were largely offset by a write-off of mineral properties at Itafos Paris Hills;

 maintenance capex was down year-over-year primarily due to the Company’s decision to conduct

a reduced scope plant turnaround at Itafos Conda during July 20 20 as part of its risk mitigation

measures during the COVID-19 pandemic; and

 growth capex was down year-over-year primarily due to reduced spend at Itafos Farim upon

reaching construction ready state.

As at June 30, 2020 and December 31, 2019, the Company’s financial highlights were as follows:

(unaudited in thousands of US Dollars)

June 30,

2020

December 31,

2019

Total assets $ 450,713 $ 510,764

Total liabilities 345,087 368,505

Net debt 212,135 187,319

Adjusted net debt 153,469 136,900

Total equity 105,626 142,259

As at June 30, 2020 and December 31, 2019, the Company’s financial highlights were explained as follows:

 total assets were down period-over-period primarily due to low er inventory at Itafos Conda and

Itafos Arraias and higher depreciation and depletion at Itafos Conda, which was partially offset by

fixed assets additions primarily at Itafos Conda;

 total liabilities were down period-over-period primarily due t o lower trade and taxes payable at Itafos

Conda;

 net debt was up period-over-period primarily due to lower cash and cash equivalents and additional

debt resulting from paid-in-kind interest related to the Compan y’s secured term credit facility (the

“Facility”) and draw under the CLF Promissory Note;

 adjusted net debt was up period-over-period primarily due to l ower cash and cash equivalents and

additional debt resulting from paid-in-kind interest related to the Facility; and

 total equity was down period-ov er-period primarily due to net loss recorded during the period.

Itafos Conda Highlights

The Company is closely monitoring potential risks to Itafos Conda’s employees, contractors and operations

as a result of COVID-19. Itafos Conda has been deemed an essential business as part of the fertilizer and

agriculture sector and therefore has not been forced to shut down operations on account of COVID-19. The

Company is not currently projecting any material impact on Itafos Conda’s operations as a result of COVID-

19.

In response to COVID-19, the Company has implemented and continued risk mitigation measures at Itafos

Conda to address potential impacts to its employees, contractors and operations as follows:

 adopted temporary travel restrictions;

 established a daily COVID-19 emergency operations center to tr ack and respond in real-time to

regional and local developments;

 implemented measures to reduce on site presence and interaction of staff;

 increased cleaning and disinfecting measures;

 adopted new policies related to sick leave and isolation in case of symptoms;

 established ongoing dialogue with key business partners (custo mers, logistics providers, mining

contractor, health insurance provider) to continually monitor the situation;

 requalified supervisors and staff on applicable critical opera tions in the event of an outbreak; and

 assessed business relief options.

To date, there has been one confirmed case of COVID-19 amongst employees and two confirmed cases

amongst contractors at Itafos Conda. Following such confirmed cases, Itafos Conda implemented stringent

quarantine and sanitation efforts to isolate such incidents and prevent further spread.

For the three and six months ended June 30, 2020, Itafos Conda continued its strong track record of

environmental, health, and safety excellence with no environmental releases and one recordable injury.

For the three months ended June 30, 2020, Itafos Conda experien ced lower MAP and APP production

resulting from a disruption in sulfuric acid from its primary supplier, while SPA production remained largely

consistent. Margins improved due to lower input costs from improved mining rates and lower raw materials

costs, which were partially offset by lower realized prices.

For the six months ended June 30, 2020, Itafos Conda achieved h igher SPA throughput from improved

production efficiencies and higher railcar availability, which resulted in lower MAP and APP production. The

lower MAP and APP production was also impacted by a disruption in sulfuric acid from its primary supplier.

Itafos Conda also completed a second successful production run of its new line of micronutrient enhanced

products, MAP+. Margins were largely consistent year-over-year as lower input costs from improved mining

rates and lower raw materials costs were mostly offset by lower realized prices and higher depreciation and

depletion.

For the three and six months ended June 30, 2020, overall ferti lizer market prices remained depressed,

particularly granular products, after a sharp decline since Q1 2019 due to lower consumption resulting from

unusually wet weather conditions in North America.

For the six months ended June 30, 2020, the Company advanced ac tivities related to extending Itafos

Conda’s mine life through permitting and development of H1/NDR, including securing support from the

Idaho legislature via House Joint Memorial #11, which passed unanimously as well as numerous letters of

support from local and state officials and preparing and submitting an updated Mine and Reclamation Plan

to the BLM as part of the NEPA permitting process.

For the six months ended June 30, 2020, the Company advanced ac tivities related to optimizing Itafos

Conda’s EBITDA generat ion capability, including completing the micronutrient addition to granulation

project to support its new line of micronutrient enhanced produ cts, advancing development of MAP

enhanced with zinc as an additional product in the new line of micronutrient enhanced products and

evaluating proposals received for pilot testing and a FEED stud y related to AHF/PS by-product recovery

and a feasibility study related to on-site ammonia production.

On July 10, 2020, the Company announced its decision to conduct a reduced scope plant turnaround at

Itafos Conda during July 2020 as part of its risk mitigation me asures during the COVID-19 pandemic. On

August 20, 2020, the Company announced that Itafos Conda comple ted the reduced scope plant

turnaround with no environmental releases or recordable injuries.

On August 20, 2020, the Company announced that Itafos Conda has been experiencing a significant

disruption in sulfuric acid supply from Rio Tinto’s Kennecott m ine. Itafos Conda fulfills approximately 40%

of its sulfuric acid requirements from volumes produced interna lly and approximately 60% from a

combination of volumes received from Rio Tinto’s Kennecott mine under a long-term supply agreement and

volumes procured from other third party suppliers. On August 18 , 2020, Rio Tinto announced that its

Kennecott mine in Utah has experienced delays to the restart of the smelter. According to Rio Tinto’s

announcement, such delays to the restart of the smelter are due to unexpected issues that appeared

following planned maintenance. Rio Tinto further announced that they are working closely with their

customers to limit any disruptio ns and expect to have the smelt er fully operational in two months. The

Company has been and will continue working to mitigate potentia l adverse effects of the disruption in

sulfuric acid supply to Itafos Conda from Rio Tinto’s Kennecott mine.

On August 10, 2020, Itafos Conda closed the Revolving Facility, which refinanced the Gavilon Facility. The

Revolving Facility considers a commitment to loan up to $20,000, of which $10,000 was drawn at closing.

The proceeds of the Revolving Fa cility were initially used to r epay the Gavilon Facility and thereafter will

be used for working capital and general purposes. At closing, a n additional 10,000 remained available to

be drawn by Itafos Conda subject to certain terms and conditions.

For the three months ended June 30, 2020 and 2019, Itafos Conda’s business highlights were as follows:

(unaudited in thousands of US Dollars For the three months ended June 30, For the six months ended June 30,

except for volumes and prices) 2020 2019 2020 2019

Production volumes (t)

MAP 85,018 92,248 175,566 191,003

MAP+ 1,538 — 6,813 —

SPA 37,173 36,998 77,438 72,531

MGA 120 581 703 611

APP 10,542 21,107 12,767 26,534

Total production volumes 134,391 150,934 273,287 290,679

Sales volumes (t)

MAP 70,812 121,886 178,584 198,763

MAP+ 3,811 — 6,464 —

SPA 33,388 34,195 72,619 67,639

MGA 190 1,231 703 1,261

APP 11,967 18,900 13,614 21,348

Total sales volumes 120,168 176,212 271,984 289,011

Realized price ($/t)

MAP $ 316 $ 394 $ 303 $ 415

MAP+ $ 360 $ — $ 362 $ —

SPA $ 975 $ 997 $ 957 $ 1,001

MGA $ 1,026 $ 555 $ 967 $ 565

APP $ 456 $ 472 $ 456 $ 472

Revenues ($)

MAP $ 22,364 $ 48,067 $ 54,196 $ 82,553

MAP+ $ 1,371 $ — $ 2,337 $ —

SPA $ 32,558 $ 34,082 $ 69,464 $ 67,715

MGA $ 195 $ 683 $ 680 $ 712

APP $ 5,460 $ 8,925 $ 6,203 $ 10,082

Total revenues $ 61,948 $ 91,757 $ 132,880 $ 161,062

Revenues per tonne P2O5 $ 816 $ 872 $ 767 $ 897

Cash costs per tonne P2O5 $ 638 $ 774 $ 635 $ 768

Adjusted EBITDA $ 14,458 $ 11,283 $ 22,753 $ 22,739

Maintenance capex $ 1,582 $ 11,272 $ 3,501 $ 13,845

Growth capex $ 1,229 $ 1,323 $ 3,153 $ 1,811

For the three months ended June 30, 2020 and 2019, Itafos Conda ’s business highlights were explained

as follows:

 total production volumes were down year-over-year primarily du e to a disruption in sulfuric acid

from its primary supplier resulting in lower APP and MAP production;

 total sales volumes were down year-over-year primarily due to lower MAP sales, as Q2 2019 saw

substantially higher lifting compared to normal run-rates, with lower APP also contributing;

 revenues per tonne P 2O5 were down year-over-year primarily due to significant and cont inued

downward pressure on DAP NOLA prices to which MAP sales prices are linked;

 cash costs per tonne P 2O5 were down year-over-year primarily due to lower input costs fr om

improved mining rates and lower raw material costs;

 maintenance capex was down year-over-year primarily due to the Company’s decision to conduct

a reduced scope plant turnaround at Itafos Conda during July 20 20 as part of its risk mitigation

measures during the COVID-19 pandemic; and

 growth capex was largely consistent year-over-year primarily due to activities related to extending

Itafos Conda’s mine life through permitting and development of H1/NDR.

Itafos Arraias Highlights

The Company continues to monitor potential risks to Itafos Arraias’ employees, contractors and operations

as a result of COVID-19. Itafos Arraias has been deemed an essential business as part of the fertilizer and

agriculture sector and therefore has not been forced to shut do wn operations or care and maintenance

activities on account of COVID-19. The Company is not currently projecting any material impact on Itafos

Arraias’ operations or care and maintenance activities because of COVID-19. Notwithstanding, the

Company is improving the measures to mitigate the risk of contr actors and employees during the in-fill

drilling program expected to take place during H2 2020.

In response to COVID-19, the Company has implemented and continued risk mitigation measures at Itafos

Arraias to address potential impacts to its employees, contractors and operations as follows:

 adopted temporary travel restrictions;

 temporarily closed the São Paulo office and implemented measur es to facilitate employees working

from home;

 cancelled all non-critical site visits and implemented measure s to safely continue critical activities

(e.g., tailings dam inspections);

 increased safety measures relat ed to screening site visitors;

 increased cleaning and disinfecting measures;

 adopted new policies related to sick leave and isolation in case of symptoms; and

 adopted the procedure to conduct COVID-19 tests to all employe es and contractors in a weekly

basis to ensure a safe and healthy environment during the in-fill drilling program.

Currently, there are no confirmed cases of COVID-19 amongst employees or contractors at Itafos Arraias.

For the three and six months ended June 30, 2020, Itafos Arraia s continued its strong track record of

environmental, health, and safety excellence with no environmental releases or recordable injuries.

On November 21, 2019, the Company announced its decision to idl e Itafos Arraias and suspend the

previously announced repurpose plan at Itafos Arraias as part of a disciplined approach to capital allocation

considering the continued downw ard pressure on global fertilize r prices and the additional capital

requirements to complete the Repurpose Plan.

For the three and six months ended June 30, 2020, the Company s afely completed and maintained the

idling of Itafos Arraias following best practices to protect an d preserve the value of the underlying assets.

Following receipt of approval from the labor union, the Company completed the employee layoffs and

contractor terminations at Itafos Arraias associated with the i dling. Notwithstanding the idling of Itafos

Arraias, the Company will continue to employ personnel that are necessary for the care and maintenance

of the assets and will continue to maintain all licenses and pe rmits in good standing and compliance with

existing regulations. In addition, the Company successfully monetized inventory and raw materials at Itafos

Arraias to partially offset costs.

In parallel with its decision to idle Itafos Arraias, the Company engaged the services of Golder Associates

Inc. (“Golder”) and Jesa Technologies LLC (“ Jesa”) to conduct third party reports on Itafos Arraias’ mine

and beneficiation plant, respectively. The third party reports, which were completed in January 2020,

confirm that restarting Itafos Arraias’ mine and beneficiation plant is feasible and outline the respective

timing and capex requirements.

For the three months ended June 30, 2020, the Company launched a stage-gate restart program for Itafos

Arraias. Each stage-gate must be cleared before progressing to the next stage of the program, thereby

limiting exposure, and managing t he risk. The first stage-gate is the development of a revised geological

model and long-term mine plan of the Domingos pit. Accordingly, the Company designed a test work

campaign aimed at the metallurgical characterization of the Domingos ore as well as a detailed in-fill drilling

program. The revised long-term mine plan will be developed to v erify ability to deliver constant ore grade

to the beneficiation process, while the beneficiation plant pro cess design will be revised to match the

geometallurgical characterization of the ore. As part of this stage-gate, the Company engaged Jesa in June

2020 to conduct the metallurgical test work that will form the basis of the revised beneficiation process. The

metallurgical test work being conducted by Jesa is expected to be completed in approximately nine-months.

In February 2020, Itafos Arraias secured important long-term tax incentives. As Itafos Arraias is domiciled

in Brazil, the business is subject to a federal tax rate of 34%, composed of a federal corporate income tax

of 25% and other taxes of 9%. The location of Itafos Arraias’ a ssets makes it eligible to participate in a

regional development program administered by the Superintendênc ia do Desenvolvimento da Amazônia

(“SUDAM”). Created in 1966 to promote development of the Amazon region in Brazil, SUDAM offers tax

incentives that allow eligible companies to reduce the federal tax rate of 34% to 15.25% by means of a 75%

discount to the federal corporate income tax of 25%. In Februar y 2020, SUDAM accepted Itafos Arraias’

application, granting Itafos Arraias the tax incentives for a period of ten years with an opportunity to extend

thereafter.

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