A couple of points here. Obviously, most of the presentation will be about Kimberley Mineral Sands, as always, particularly the quarterly production report. But just wanted to highlight on the other two assets. So on South Atlantic, recognizing the need to preserve cash, you know, to support or potentially support Kimberley Mineral Sands, we've reached an agreement with the shareholders of the South Atlantic Project, where we will stop funding activities for now. So the other shareholders will provide funding to the extent it's required. But in doing so, we've agreed with them to retain the option. If we complete or effectively pay in the full $15 million, including what we've already paid, we would acquire the 20%. So we've reduced that, as a, let's say, near-term cash outlet.
And on Taprobane, which is Capital Metals interest, we actually sold that holding last week, basically in the market, as a block trade, for gross proceeds of about AUD 4 million. While we like the project and see that it has, you know, a lot of potential and, you know, certainly potential for more value than that in the future, again, we felt that it was more appropriate for us to have that cash in Sheffield Resources, to the extent it may or may not be required to support Kimberley Mineral Sands. So we took the chance to sell that stake. We did make a gain on that position. So that's sort of, yeah, corporately. So obviously, main focus continues to be on Kimberley Mineral Sands and the Thunderbird mine.
Just in terms of kind of what things look like on site at the moment, the picture on the left is the usual picture of the mine. It is actually in the process of just finishing one mining block and moving to the next. So, that's the block that's currently being mined now. That was the block just being finished when this picture was taken. And these, this sort of wall and this here is the wall we're building for the in-pit tailings, using predominantly the oversize off the back of the mining unit. So that work continues. A sense of what the pit looks like at the moment. And then on the right-hand side is the process plant, with the ilmenite stockpiles in the foreground. And nothing much changed here.
You can see a bit of water on the ground. We're obviously in the wet season, and that's part of our normal operations. The business plan, so you may recall, in March last year, we came up with a revised plan, which the primary point of was to increase the mining rate to 16 million tonnes by the first quarter of next financial year, so effectively the September quarter of this year, 2026 calendar year. And the core elements were around, first of all, lifting drill and blast capacity to enable an increase in mining rate, and then ultimately that would result in at or above the original design. Concentrate production. I think we've talked about it previously, but definitely, we've now seen the waste mining with drill and blast, and the new fleet is achieving very good productivity.
And we're very comfortable that the waste mining is now will not be a constraint on the mining activities. We've and we'll talk about this when we look at the last quarter, the last quarter results. The biggest push now is on effectively increasing the productivity and availability of the mining equipment. So, we have made changes, continuing to make changes to the DMU. We are, you know, working continually on improving that reliability. We had some mobile equipment issues, particularly late in the quarter, which the contractor has been addressing, but ultimately, that's what caused us to have a down quarter-on-quarter. But overall, we still believe we're on track to deliver that enhanced mining rate by the middle of this year.
And that's partly driven by the fact we had always anticipated a relatively flat change in the mining, and then with an acceleration in this March quarter and the June quarter, and we certainly still believe that that is possible. Just looking at the specific sort of key performance metrics. So, blue is the ore mined, green is the rougher head feed, and the dotted brown line is the grade mined. So you can see that after a couple of quarters of building up of mine performance, the December quarter was pulled back a little bit. A mixture of some, as I said, some availability issues, but also some seasonal weather impacts, particularly late in the quarter. We did have the first tropical cyclone in late December.
And we mined some lower grade zones as well, which partially impacted rougher head feed production. But overall, still believe we're on track to deliver the plan from a mining perspective. In terms of process plant. The recoveries of the two main products, so zircon and green TiO2 for ZrO2 for zircon and green, and TiO2 for ilmenite and blue. Recovery's been fairly steady in recent times as we've maintained fairly steady production. The recoveries are, or the process plant itself is impacted a little bit by variability of mining, and so ultimately what we're trying to do is get to a steady delivery of feed, which helps the performance of the plant. We continue to get pretty consistent quality of the two main products, again, in terms of ZrO2 for zircon concentrate and titanium dioxide and the ilmenite concentrate.
Just in terms of ore production, again, looking at just, you know, the quarter on quarter on quarter. So, the second quarter, the December quarter, was similar to the June quarter of last year. A little bit down on September. As I said, mainly driven by that reduced availability, reliability of the mining equipment. And we have maintaining and still believe that there's no reason why we can't mine at that equivalent of up to 4 million tonnes per quarter as required. We don't believe we'll need to mine 4 million tonnes every quarter to keep the plant full, but we do need to build up and obviously prove that we have that capability over the next couple of quarters.
In terms of zircon concentrate production and sales, in Q2, production down a little bit, again, mainly driven by lower effectively rougher head feed flowing through. We actually made reasonable shipments. We had a carryover shipment from the September quarter, and we did catch up some sales and, albeit with this, there was a little delay of a part of a shipment delayed at the end of December, so a pretty good quarter from a sales perspective, despite the weak market, and that was partly driven by making shipments to our partner, Yans teel, of zircon concentrate as well as ilmenite concentrate in the quarter. In the current quarter, we're expecting our production to be, you know, similar or higher. We have a bit of variability in there, partly, at least in June.
This is the quarter where we expect the biggest weather impact over a year, so there is more inherent variability in the first quarter production and potentially sales as well, given the need to, you know, shipments were also impacted by weather. So we allow for a little bit of variability in the current quarter. And we expect to sell, you know, pretty much what we produce, albeit that the timing of shipments can vary a little bit. So we sometimes, depending on when the shipment is, may not ship everything exactly in the same quarter as it's produced. Still building towards, again, as we get to fill the process plant, then we'd expect to be in that sort of 55, circa 55,000 tonnes per quarter of zircon production, sometime aiming for the first quarter of the next financial year.
Ilmenite, a fairly similar story. Production down on lower ore mining. There was a larger deferral of ilmenite shipment because of the weather event, loading at the end of the year. So the sales were impacted by that. We expect to catch that up in the current quarter. Again, production similar or a little bit higher, depending exactly on what happens with weather, and then building to that, sort of circa 220,000 tonnes a quarter of production from the first quarter of the next financial year. Our cash costs, we are seeing, well, while we saw a small increase in the second quarter, partly driven by lower volumes, we have seen that the higher production rates and some of the other cost-saving initiatives are reducing the overall cost base, so we're pretty pleased with this so far.
As always, there's more to do, and we and the KMS team continue to look for opportunities to save cost, wherever they can. You know, there have been some interesting opportunities identified, some of which have been delivered and some of which are still to be delivered. Even some of those delivered may not yet have fully impacted these costs, depending on the timing of when they were implemented. Then cash flow perspective for that quarter, we did have negative operating cash flow for the quarter. That's partly driven by timing of shipments and payments. So, you know, cash, both outgoings and ingoing, and incoming can be impacted by the timing of when payments are made. But we did have negative in the quarter.
That negative operating cash flow, CapEx and interest, the interest in leases, there was not interest to debt holders. That was deferred at the end of the quarter. That's lease payments associated with various items of lease equipment. And the operating deficit was made up by a combination of prepayments and the equity injection undertaken by both shareholders together in the, in November, about AUD 6.5 million. We did end with some reasonable inventory. The zircon inventory, particularly considering the small deferral of shipment, is about, as expected. The ilmenite shipment, a little bit, ilmenite inventory a little bit higher, more impacted by the deferred shipment in the, at, at the end of the quarter. So overall, had that ship left on time, our inventory is around, around about normal levels that we would expect to sustain in operations.
I think that's sort of all, I've got to say operationally. Just before I hand over to Peter for some questions, just a couple of comments on, I guess both the debt restructure and the debt ownership. Obviously, we announced that Shengf eng, which is a related party, part of the Yans teel Group, had acquired the debt from Orion. The Orion loan note. And during January, and we've got the debt restructure discussions continue now with NAIF and the new debt counterparty being Shengf eng. So, those discussions are incomplete. And, you know, obviously, we've said what we've been able to say so far about the debt restructure and Shengf eng. So, it's very difficult to provide any additional sort of commentary or whatever, given essentially those sorts of discussions are, they're, you know, they're done.
They're not done until they're done, and so, you know, until we have something that we can say, we won't be in a position to say anything.
Okay.
Thanks, Peter.
Brilliant. Thank you, Bruce. Right, just for everyone watching, if you do have questions, please submit them via the Q&A section, and we'll obviously get round to the ones that we can. But yeah, on the debt restructuring, I think like Bruce just said there, can't really say any more until the deal's done. So, I know a few questions have come through on that already. But yeah, in terms of looking through, first question that's come through, in terms of the zircon prices, Bruce, obviously, you've teased out of my background and whatnot, and background with in China. What's the forecast looking like? And even from my perspective, obviously, we have Chinese New Year coming up in, what, two, three weeks.
Is that going to make a big difference in the coming quarter that we're in now?
Yeah, look, I mean, probably a couple of comments around pricing, and I think we said this in the quarterly. And others have made similar observations, I think, including Iluka, with their results announcement last week, is that we, like others, have seen some signs that prices stabilized towards the y ou know, certainly in the fourth quarter. You know, prices were continuing to go down, albeit that overall, we didn't see a lot of decline quarter-on-quarter. We had some variation based on switching some sales from delivered to free onboard. I think the general view is that the market had sort of stabilized around current levels, with an open question about what happens next.
I think Chinese New Year, as everybody is probably aware, is pretty important in the China market. You know, typically one of two things, you do sometimes get restocking prior to Chinese New Year, and we actually saw that last year. That seems to be less of an issue this year at the moment, but often the post-Chinese New Year, you know, there is a certain amount of shipping and production based on, you know, it's a new year, and there are new views. So, you know, we'll wait and see. I think I would describe probably the general view is that we're at or near the bottom of the market, although you can of the zircon market, in particular in China. But it.
There may be a, you know, you typically cycles in mineral sands to be a little bit slower than some other commodities, and so, you know, certainly may be at these levels for a while. At this stage, we would expect certainly through the first half of this year, we certainly don't anticipate a rapid recovery in price in that time, and more likely to be some variation of where we are now.
Okay. Brilliant. Thanks, Bruce. Another one question here. Do you think another DMU would be helpful? As I know, it's a question that's been brought up quite a lot in the past. Is that still a consideration, do you think?
Look, it is something that y eah I mean, it is something we, you know, is discussed. The possibility of having a second DMU, you know, would give enhanced or could increase uptime. It is a significant amount of capital, and given the current DMU and, you know, fleet should be capable of doing it. So it is something that, you know, we, you know, all options continue to be on the table. But at this stage, the view still would be that a second DMU is more likely to be required when, you know, ultimately, as part of grade decline, eventually to sort of increase mining rate to keep the plant full later in life, rather than, you know, as a solution to the short-term availability.
We don't believe there is anything inherent in the DMU that means it can't operate at that level. It requires. Yeah, there's been a bit of learning by doing in terms of the task and potentially some, you know, some need for some maturing of the approach to maintenance in some of that equipment, you know, alongside the contractor in terms of, you know, getting the balance between preventative and breakdown maintenance right. Where we've changed components out to address, to align them better with the duty, generally, we've seen those things have a positive impact. It's then, you know, what are the new failures, and are things being run to failure rather than being replaced before failure, and some of those sorts of considerations?
Okay. Another question here, how much of the price drop from, say, around $526 per tonne USD to around $466 was due to the CIF/FOB differences? What do you think the comparative price is just based on CIF?
Look, comparative price on a CIF basis would be around $500 a tonne if we were selling everything at CIF. I'd say around probably five, you know, somewhere in the low five hundreds, somewhere between $500 and $510. It does depend a little bit on the quality of individual cargoes, so as the content varies up and down. So probably about, you know, more or less half of the difference is probably due to the selling mix versus underlying price difference.
Okay. How does debt novation address issues with FIRB, given the security of the project?
Look, I think, so before, I mean, we've said what we can say, that the loan was novated in its entirety. None of the terms have changed. So the changing of the ownership of the loan doesn't in and of itself change any of the terms and conditions of the loan. What it does change is the parties that are sitting at the table to negotiate renegotiate the loan. So the novation itself hasn't changed the debt situation at KMS.
Okay. Right, we're running low on questions here, so if anyone does have any more, please submit them now. Just one from me, Bruce. Obviously, you were talking, I think it sounded like you were pretty optimistic with the, with the waste, with the mine waste, management side of things and how that was going. But production was down for the quarter. Are you, are you still pretty happy and, I guess
Yeah
confident on the plan, the new business plan that you released last year?
Yeah, I mean, I think, as I've said, we continue to believe that is the right plan and that it's deliverable. I think in the detail of the plan, I got the question quite a lot last year about why was it gonna take so long anyway? We'd always envisaged that probably the second half of 2025, sort of the first half of the plan period, was really about, you know, that change in mining, in waste mining, some of the changes in mining and consolidating that. So we were not expecting the sort of upturn in the first half. We were expecting to, you know, things to improve, but we really needed to get ahead on waste mining. We've got there now. That's not to say I would've.
My preference would've been that the December quarter would've built on the September quarter. That would've been a better outcome, but we're not, we're not actually particularly out of line with the plan we had at the start of last year. And, you know, the key now is to make sure that we deliver that, or that KMS can, and alongside our mining contractor, can deliver that increase in mining rate over the next couple of quarters, which is when we had originally anticipated we would do that.
Okay. And then just in terms of, obviously, you do move around where the DMU is in the pit, et cetera
Yes
and grades differ. Where, what's- how long until it moves again? Are you, do you have
Yeah
any insight in terms of what the next place that DMU is moved into, what the grade is like? Any differences there at all?
Yes. Yeah, so typically, just, I mean, in simple terms, the DMU moves roughly once a month, that the mining blocks are more or less one month. So it's not exact, but that's a pretty good way to think about it. If we mine faster, it'll be slightly quicker than that, but that's the thing. The variation block on block, it does depend a little bit on whether the move, sometimes you're just moving to the panel next door, and then those changes, you know, there can always be some variability, but not much. If you move, like, around the corner and you're on a different face in the mine, which you do from time to time, then those, that can vary a little bit more.
Every block also, as we mine the profile, there is a profile in the ore from the top to the bottom. So there is a grade and mineral composition vary, you know, variation. So effectively, over the course of a block, you get the average grade and the average production, but it does vary throughout. So sometimes you know, so we see that variability as well. So when we go into a new block, we see certain grade and mineral performance, and then as you work your way down through the block, that changes, and then you get it again on the next block.
Okay. Interesting. Another question here. When assessing the project metrics, should investors compare average sale price against C1 costs, excluding or including inventory?
Yeah, I mean, it's interesting. Look, my personal approach is I focus on C1 costs, excluding inventory, because fundamentally, the in and out of inventory is whether you book it into inventory or not. At the end of the day, the C1 cost without inventory is what it's costing you to make the products you made, and over time, you need to sell them for, you know, more than they cost you to make, or you're not gonna make money. So I find the one that I sort of focus on is the cash cost without inventory movement as being probably the most meaningful measure of what the cost of production actually is, without kind of backing out the, "Well, I sold more ilmenite," or I build
Did I build more zircon into ilmenite into inventory versus ilmenite? It'll have a different impact on that inventory-adjusted cost.
Interesting. And now
Obviously, over extended periods, it doesn't make any difference because, you know, over a year or whatever, it makes less difference. But when you're looking at a month, in our case, internally or as a quarter as an investor, I think the without inventory is probably the more meaningful of the two.
Okay. In terms of the variability in the rougher head feed, grade, is that as expected, or has that been a bit of a surprise?
It is sort of. There are elements of it which are as expected because no ore body is perfectly homogeneous. There are also times where we've made decisions to mine more of the lower grade T1 material at the top of some zones where we believe there'll be more zircon, et cetera. And so in some cases, that is as expected, but not necessarily, you know, you've made a deliberate decision to do that. So for the most part, we are seeing. Ultimately, the grades we see in the process plant are what we'd expect given the block we're mining.
Okay
or how we've chosen to mine the block. If you take a bit more low-grade material, you see lower grade, but that's as expected.
Yeah. That makes sense. There is a question. I'm not sure how relevant it would be, Bruce, but is the agreement with the U.S. for rare earths? Does that have any impact on Sheffield at all?
Not really. I mean, our exposure to rare earths is pretty. I mean, it's useful, but a fairly small part of the value of both the paramag and non-mag concentrates. Ultimately, we're selling, you know, rare earth credits or monazite credits and another concentrate. They're all going to China at the moment, so I think the sort of U.S. piece is not super relevant there for us at the moment. We, like many other, or KMS continues to look at opportunities to sell those products outside of China as well. There are, as we all know, one of the challenges there is, where is the processing capacity? In our case, you need someone who can process the concentrate. So it's not about you know, we don't make monazite that someone could process to make rare earths.
We make concentrates that predominantly contain titanium minerals and/or zircon minerals, with a small amount of monazite credits in them. Whoever buys those needs to be able to process and remove the primary minerals before they can, before they can do anything with the, with the monazite.
Okay, interesting. Right. I think we're out of questions. There might be one more coming through. Is the unexpected supply of mineral sands still coming out of Africa? Do you see this being curbed by either price dynamics, dynamics or regulation in those regions?
It'd be fair to say, regarding regulation, we haven't seen anything obvious yet. Over time, you would expect price to matter. But there is a bit of a time lag on the data. So certainly, the most recent concentrate import statistics, which I've seen, which are from November, still show significant volumes of concentrates flowing into China, albeit that. Now, if you think about the time lag here, those decisions may have been made before, you know, prices had further reduced. Over time, I think one of the biggest things to consider with that flow of concentrate is the sheer volume of products that need to be moved, particularly ilmenite. So when people are bringing in HMC, it typically contains more titanium minerals than zircon.
That market, you know, that will be the market that constrains those imports rather than the zircon market.
Okay. Interesting. Good. Well, I think we're out of questions now. So, just to remind everyone, we are recording, and we will be sending out links via our social media channels, et cetera, for the full video, if you missed anything. Bruce, just before we wrap up, any final thoughts at all?
No, I just appreciate the opportunity to provide the update and, you know, look forward to to hopefully a better 2026.
No, agreed. All right. Bruce, thank you, and thank you everyone for attending.
Thank you.