VRX SILICA LIMITED ABN 59 142 014 873 ANNUAL REPORT 30 JUNE 2021 CORPORATE DIRECTORY DIRECTORS Paul Boyatzis (Non-executive Chairman) Bruce Maluish (Managing Director) Peter Pawlowitsch (Non-executive Director) David Welch (Non-executive Director) SECRETARY John Geary REGISTERED AND PRINCIPAL OFFICE Level 1, 6 Thelma Street West Perth WA 6005 Telephone: (08) 9226 3780 Facsimile: (08) 9226 3764 Website: www.vrxsilica.com.au SHARE REGISTRY Computershare Investor Services Pty Ltd Level 11, 172 St George's Terrace Perth WA 6000 Telephone: (08) 9323 2000 Facsimile: (08) 9323 2033 AUDITORS RSM Australia Partners Level 32, Exchange Tower 2 The Esplanade Perth WA 6000 AUSTRALIAN SECURITIES EXCHANGE VRX Silica Limited shares (VRX) are listed on the Australian Securities Exchange. VRX Silica Limited 1 LETTER FROM THE BOARD OF DIRECTORS TO SHAREHOLDERS Dear Shareholders It has been a very busy and productive year for VRX Silica Limited as your Company continued to advance its high-grade silica sand projects at Arrowsmith North, Arrowsmith Central and Muchea. The Western Australian government has maintained a hard border stance which has kept the mining industry in WA relatively insulated. This stance although understandable has not been without consequences, with labour and skills shortages being experienced across many sectors of the mining and general business community. The immediate and continuing impact and risk of COVID-19 to the mining and exploration industry has been ever present in our daily considerations. VRX Silica Limited, fortunately is headquartered in Perth Western Australia as are the Company’s personnel and consultants. Likewise, the Company’s Silica Sand Projects: Arrowsmith North, Arrowsmith Central, Muchea and Boyatup are all located in Western Australia. This has enabled your Company to keep its experienced team and consultants fully engaged and actively progressing all projects. Significant progress has been made during the past year and a comprehensive and detailed description of the important events follows in the ‘Company Review’. However, it is worth highlighting some of the key achievements: • • • • • • • • • • • • • • Mining leases granted for all the company’s three Silica Sand projects; Extensive environmental studies conducted on all the company’s silica sand projects over each season; Comprehensively reviewed a ‘proof of concept’ Vegetation Direct Transfer (VDT) trial; Lodged Project Referrals with Federal and State environmental assessment agencies; Continues to engage with those agencies to progress the environmental approvals for mining at Arrowsmith North; The first 6 to 10 years of proposed mining at Arrowsmith North has been grade controlled; Significant test work was successfully conducted in order to produce a number of specific marketable products; Significant progress has been made on the engineering of the proposed plant by experienced engineers ProjX; The proposed plant design was conducted with the aim to operate predominately with recycled water; Commencement of drilling the Bore field water supply for the plant; Investigated opportunities for the project to be powered by gas with supporting solar; Engaged with potential final use offtake partners and sent numerous samples of various volumes for testing. VRX Silica Limited is very conscious of its social licence obligations and during the year proactively engaged with the traditional owners, conducted Heritage Surveys at all projects, and engaged with stakeholders; Completed greenhouse gas emissions estimates as part of its maiden ESG reporting included in this Annual Report. I am pleased to advise that during the year the Company was chosen by Morgan Stanley Capital International to be included in their MSCI Australia Micro-Cap Index which is designed to measure the performance of the Micro-Cap segment of companies traded on the ASX. VRX Silica Limited 2 LETTER FROM THE BOARD OF DIRECTORS TO SHAREHOLDERS Also, a large international institution joined our shareholder register as a Substantial Shareholder which recognises the prospectivity of the Company’s projects. A high exercise rate of the Company’s listed options (VRXO) places the Company in a strong financial position. Finally on behalf of the Board, I would like to thank all staff, contractors and consultants for their valuable contribution during the year which globally has been impacted by the Covid-19 pandemic. Paul M Boyatzis Chairman For and on behalf of the Board VRX Silica Limited 3 COMPANY REVIEW Review of Operations During the 2021 financial year, VRX Silica Limited (Company or VRX) focused on advancing its silica sand projects, in particular at Arrowsmith North and Arrowsmith Central and Muchea, which in aggregate contain a total Mineral Resource Estimate of silica sand of 1,056 million tonnes. Arrowsmith Silica Sand Projects Native Title Clearance The Arrowsmith North and Arrowsmith Central Silica Sand Projects (Arrowsmith Projects) are located 270km north of Perth, Western Australia, and are held by VRX in its wholly owned subsidiary Ventnor Mining Pty Ltd. In October 2020, conclusive registration of the Yamatji Nation Indigenous Land Use Agreement (ILUA) occurred, which cleared the path for grant of the Company’s Mining Lease and Miscellaneous Licence applications for its Arrowsmith Projects. The ILUA is an alternative settlement by the Western Australian Government of Native Title claims covering a significant portion of land in the Mid West, including the Southern Yamatji People’s claim covering the Arrowsmith Projects. This Government-led ILUA settled all Native Title claims over the Arrowsmith Projects area. Negotiations had been progressing in good faith between VRX and the Southern Yamatji People Native Title claimants prior to its implementation and these ceased automatically under the ILUA. Nevertheless, the strong and supportive relationships established with the Southern Yamatji People will continue to benefit all parties as the Arrowsmith Projects are developed, and the Company intends to continue to consult and work closely with the Southern Yamatji People. Arrowsmith North will present employment and contract opportunities to local Indigenous groups and VRX intends to support the local ranger program. Aboriginal Heritage Survey In November 2020, VRX announced the results of an Aboriginal heritage survey at its Arrowsmith Projects. The comprehensive archaeological and ethnographic survey was conducted during October in conjunction with Amangu representatives of the Yamatji Nation and Yamatji Marlpa Aboriginal Corporation (YMAC) personnel over proposed initial mining and critical infrastructure areas. The survey found no isolated artifacts and no onerous heritage recommendations were made. Preliminary advice received by the Company from YMAC confirmed that the Arrowsmith North Access Road, Services Corridor and Production Area have been approved for the stated works to proceed for 10 years of production. The Arrowsmith Central Production Area and Arrowsmith Central Infrastructure Areas are cleared for five years of production, see Figure 1. VRX Silica Limited 4 COMPANY REVIEW Figure 1 - Critical infrastructure and mining areas surveyed at Arrowsmith Projects Grant of Mining Leases On 17 November 2020, VRX announced the grant of Mining Leases for its Arrowsmith Projects, see Figure 2. This, together with the Aboriginal heritage clearance for the proposed works on both projects, is an important step forward for their development. The combined Mining Lease areas cover over 3,600ha, sufficient for more than 100 years of production. VRX Silica Limited 5 COMPANY REVIEW The grant of these Mining Leases was another significant milestone for the Company and came shortly after the grant of the Mining Lease for VRX’s Muchea Silica Sand Project (Muchea Project), see Figure 8. It enables the Company to step up negotiations to finalise sales contracts for the high-quality silica sand products and secure the necessary funding for their development. Figure 2 - Arrowsmith Silica Sand Projects Location Environmental Approval Referral and Permitting As part of the environmental approvals process for the grant of a Mining Permit at the Arrowsmith Projects, the Company continued to compile the necessary data to support the Environmental Referral Document (ERD) referrals to the Federal Department of Agriculture, Water and Environment (DAWE) and the State Department of Water and Environmental Regulation (DWER). The Company and its environmental consultants held pre-referral meetings with representatives from DWER and received comments regarding further requirements for the referral. Pre-referral meetings with representatives from DAWE and the DWER provided valuable feedback regarding requirements for these referrals. In the first half of the 2021 financial year, VRX submitted a formal Environmental Review Document to DAWE for assessment under the Environmental Protection and Biodiversity Conservation Act 1999 (EPBC Act). DAWE responded with a determination that Arrowsmith North was a controlled action subject to assessment by DWER and approval under the EPBC Act before it could proceed. VRX Silica Limited 6 COMPANY REVIEW In October 2020, VRX submitted a draft ERD to DWER with comments returned in November 2020 requiring further clarification in the formal ERD and follow-up work and consultation. In March 2021, VRX submitted this referral to DWER for assessment by the Environmental Protection Authority of Western Australia (EPA), under Section 38 of the Environmental Protection Act 1986, for environmental approval for Arrowsmith North. The referral was the culmination of wide-ranging environmental studies undertaken by and for the Company over the past three years and extensive pre-referral consultation with the EPA. In May 2021, the Company’s Arrowsmith North Silica Sand Project moved to the next stage of the environmental approval process with the EPA, which informed the Company that it would assess the proposal under s39A(1) of the Environmental Protection Act 1986 at a Public Environmental Review (PER) level of assessment. The Company lodged a draft Environmental Scoping Document (ESD), which detailed the environmental studies that are required to inform the assessment of the project. The following additional studies were progressed subsequent to year-end for lodgement with the EPA: • Cultural and Heritage Assessment • Greenhouse Gas Emissions Estimate • High-Level Air Quality Assessment study Preparation of the ESD is a fundamental step in the EPA administration procedures to inform the Environmental Impact Assessment of Arrowsmith North. The Company is confident the project has addressed the Environmental Principles, Factors and Objectives of the guidelines for assessment. The comments will enable the Company to clarify the timeline to completion of the approvals process and development of the project. Other government agencies will be restricted from approving any approvals related to the full development of the project until the EPA process is complete (noting exploration and investigations are not restricted). The Commonwealth Department of Agriculture, Water and Environment (DAWE) has determined that the project will be assessed by accredited assessment under the Environmental Protection Act 1986 (WA) in the form of a PER with a four-week public review period which aligns with the EPA decision. In parallel with the environmental approval process, the Company will seek approval for its Mining Proposal and the issue of a mining permit from the Department of Mines, Industry Regulation and Safety (DMIRS). Rehabilitation and sustainability VRX has developed a unique and progressive mining and rehabilitation method specifically for Arrowsmith North and its other silica sand projects to minimise the environmental impact of the Company activities. VRX’s Vegetation Direct Transfer (VDT) method lends itself to rapid and extensive regeneration of affected areas based on continuous rehabilitation as silica sand mining progresses. Root structures in the loose sand at Arrowsmith North are relatively shallow at 200-300mm in depth. The VDT method removes a 400mm deep sod, with the topsoil containing the vast majority of native flora and invertebrate fauna preserved with near-surface humus and its microbial contents remaining intact. A video of the Company’s proposed VDT method is available for viewing at: https://vrxsilica.com.au/miningandrehabilitationmethodology/ VRX’s referral to the EPA, which incorporated pre-referral feedback received from the EPA in December 2020 to the Company’s draft referral submitted in September 2020, concludes that Arrowsmith North can be developed without significant residual impacts on the environment given the implementation of mitigation measures, in particular the proposed mining and rehabilitation methodology. VRX Silica Limited 7 COMPANY REVIEW In February 2021, VRX received approval to conduct a trial rehabilitation program over a sample section of the project area. VRX trialled and videoed a front-end loader to establish the capability of removing and replacing sods of topsoil as proposed in our mining and rehabilitation methodology. The front-end loader was equipped with a standard sand bucket, not the proposed modified bucket. The trial was undertaken between late March and April 2021 and successfully demonstrated the VDT methodology and practicality. VRX will use no harsh chemicals and produce no dust while processing the mined silica sand, with efficient attritioning beneficiating the sand to glass-quality product for export. The Company will recycle a substantial proportion of water used in processing, with preliminary engineering work targeting an up to 95% recycling rate and the Company further investigating the ability to recycle even more water. Water will be sourced from the deeper Yarragadee North aquifer. All mining will be conducted well above the surficial water table. Importantly, thorough planning will allow VRX to deliver its silica sand projects sustainably and efficiently, with a very low carbon footprint. Figure 3 - Arrowsmith Vegetation VRX Silica Limited 8 COMPANY REVIEW Grade Control Drilling During March 2021 VRX conducted a 130 hole grade control drill program at Arrowsmith North. The grade control area is wholly within the previously reported area of the Ore Reserve Statement (ORS) of 204 Mt @ 99.7% SiO2 within Mining Lease M70/1389 and contains approximately 10.2Mt of Probable Ore Reserve. The grade control area was not expected to materially change the tonnage in the ORS or the bankable feasibility study (BFS) for Arrowsmith North as reported 1, see Figure 4, but was anticipated to upgrade the ORS in the area drilled to a Measured Resource and Proven Reserve and increase the geological knowledge and confirm the continuity and homogeneity that has been demonstrated by previous drilling. Drilling was conducted over 10 days with assay results and other determinations received in late May 2021. The results were in line with expectations and allowed the Company to update the Mineral Resource Estimate in the area covered by the drilling. The Company has conducted a detailed review of the outlined production for the next 6 years with a detailed mining and processing schedule. There were no material changes to the material assumptions underpinning the production target and detailed in the BFS. The drilling of tight spaced grade control holes at Arrowsmith North was another key pre-production activity undertaken in preparation for the commencement of mining. The drilling also generated a significant tonnage of additional raw material for VRX to conduct supplementary bulk metallurgical test work to confirm the design and operating parameters of the process plant and for approvals required by Mid West Ports for the shipping of silica sand under its environmental licence with DWER. Importantly, the testwork generated additional commercial sample for despatch to potential offtake partners as demand for VRX’s silica sand continues to grow. Sources of supply of quality silica sand throughout the Asian region are shrinking at a rapid rate, and this has led to tremendous interest for VRX’s silica sand from potential customers who are acutely aware of the supply problem. 1 ASX announcement of 28 August 2019, “Arrowsmith North BFS and Maiden Ore Reserve” VRX Silica Limited 9 COMPANY REVIEW Figure 4 - Mineral Resource Estimate within the grade control drilling area Engineering The Company has commissioned experienced sand processing engineers, ProjX Engineering, to carry out a detailed engineering design for the Arrowsmith North processing plant. The design is based on a comprehensive testwork regime and the proposed process circuit. Preliminary engineering design is well developed with most all of the key process equipment identified, sized and selected, and plant design well advanced across all disciplines including civil, structural, mechanical and electrical. Site layout and access design is well progressed along with non-process infrastructure requirements being determined. 3D modelling will culminate in the creation of an overall site and plant model. The Company will specify and tender appropriate processing equipment for the plant to be procured at the earliest opportunity following a decision to mine at Arrowsmith North. To enable a timely construction program. the Company will identify long-lead items and commence the procurement process at the appropriate time. VRX Silica Limited 10 COMPANY REVIEW Power The Company has been in discussions with a number of potential power providers to supply the power requirements at Arrowsmith North. The Company’s sustainability goals include having a low carbon footprint at all of its silica sand projects, and all providers have indicated that a renewable energy solution to be ultimately driven by solar and wind options supported by gas is not only viable but will also be cost-effective. Port and Logistics The Company has continued its discussions with the Mid West Ports Authority (MWPA), operators of the Geraldton Port, around logistics and access to port facilities for export. The outcome of these discussions has been positive as the Company looks to secure a long-term relationship with MWPA. The Company has completed the testwork on Arrowsmith North silica sand final product and has forwarded results to MPWA to allow it to amend its EPA licence conditions to facilitate export of silica sand products from Geraldton Port. Importantly the respirable silica results are well below the allowable limits to allow shipping of silica sand products from the Port. The Company has also continued work on logistics planning and implementation for the project, including transport and shipping solutions. Financing Interest remains strong from third party debt financiers to fund development and construction of the plant for Arrowsmith North. The Company has engaged AMC Consultants to undertake a comprehensive independent technical review of the project, which will underpin due diligence on the project by potential financiers. Water Bore The Company commenced drilling of a water production bore which will be the source of water supply for the proposed processing plant at Arrowsmith North, see Figure 5. The supply of good quality processing water is a critical step in the development of Arrowsmith North. Water is being sourced from the deep and plentiful Yarragadee North aquifer and the project will not affect the local users of the shallower Eneabba basin surficial water supplies. Drilling is being undertaken by a licenced water bore driller, see Figure 6, under an approved Licence to Construct or Alter a Well, CAW205840(1), from DWER, which has accepted the Company’s application for an allocation of 900,000 kilolitres. The 5C licence to take water will be applied for once the bore construction and geophysical logging and test pumping results have been forwarded to DWER. VRX Silica Limited 11 COMPANY REVIEW Figure 5 - Water Bore Location Figure 6 - Water Bore Rig onsite VRX Silica Limited 12 COMPANY REVIEW Muchea Silica Sand Project On 29 October 2020, VRX announced the grant of a Mining Lease for its Muchea Silica Sand Project (Muchea Project), located 50km north of Perth, Western Australia. The Mining Lease (M70/1390), held in the Company’s wholly owned subsidiary Wisecat Pty Ltd, covers approximately 1,008ha including the development area, sufficient for at least 25 years of production, see Figure 8. The grant of the Mining Lease was a significant milestone for VRX and a major step forward in the Company’s journey to becoming a global, long-life supplier of high-quality silica sand. The Company also continued work on progressing an expansion of the current proposed development area to extend the Muchea Project’s mine life to well beyond 25 years and assessment of available options to do so while addressing concerns relating to the file notation area 12671 that sits adjacent to that area. During the period, as for its Arrowsmith Projects, the Company progressed compilation of necessary data to support referrals to DAWE and the EPA with pre-referral meetings held with representatives from DAWE. As studies have been completed at Arrowsmith North following consultation with EPA, the same studies have been duplicated at both Arrowsmith Central and Muchea. Demand from potential customers for long-term supply of silica sand from the Muchea Project is strong. As with the Arrowsmith Projects, the grant of the Mining Lease enables the Company to step up negotiations to finalise sales contracts for the high-quality silica sand products and secure the necessary funding for the project’s development. The Muchea Project is a world-class, high-grade and low environmental impact silica sand project with outstanding economics and located in a Tier 1 jurisdiction. Its development will support a substantial export industry in Western Australia and provide significant financial and employment benefits in the north-eastern corridor of Perth. The low vegetation at Muchea, which includes the recalcitrant sedges and grasses have root systems which are 200-300 mm below the surface will be addressed by the same rehabilitation method (VDT) which has been developed at the Arrowsmith Projects, see Figure 7. The larger widely spaced Banksia trees will be propagated and tube planted to ensure the same density of trees. VRX Silica Limited 13 COMPANY REVIEW Figure 7 - Muchea Vegetation VRX Silica Limited 14 COMPANY REVIEW Figure 8 - Muchea Silica Sand Project Location VRX Silica Limited 15 COMPANY REVIEW Silica Sand Offtake The Company has continued discussions with potential customers in Asia for long-term contracts for offtake of products from its Arrowsmith Projects and Muchea Project. These customers are in Malaysia, Thailand, Taiwan, Japan and South Korea. The outbreak of COVID-19 in early 2020 caused the cessation of all possible face-to-face meetings with potential clients. However, the Company has progressed discussions via video conferencing and interest remains strong, despite the current challenging health and economic climate in those countries. More recently second and third-wave lockdowns in Japan and Korea have further postponed offtake discussions, with no possibility for VRX to conduct face-to-face meetings. Despite the COVID-19 impediment, global market conditions continued to improve over the period. Sources of supply of high-quality silica sand throughout the Asian region are shrinking at a rapid rate and increasing the already strong demand for silica sand products capable of production from VRX’s projects, providing the Company with comfort its considered and disciplined approach to offtake deals will deliver significant value to shareholders. Product samples have been shipped to potential offtake partners and grade-control drilling conducted during March 2021 generated additional commercial samples for interested parties. The majority of recipients have confirmed that the sand quality meets their specification requirements and underpins their desire to secure long-term supply. Interest in the Company’s products from Arrowsmith North remains incredibly strong and continues to grow. Demand for significant bulk samples for final furnace testing, which is regarded as the last quality assurance test before supply contracts are agreed with potential offtake partners in South Korea, Japan and Taiwan, has led the Company to undertake a substantial pilot plant-scale testwork program on 1 tonne of Arrowsmith North ore. Some samples have been dispatched and further samples are waiting on final PSD and assays. It will also enable the Company to further test the project’s process circuit design. The Company is well-positioned to benefit from the rapidly changing, and improving, market conditions and will continue negotiations to secure formal offtake agreements. Project Economics The Company’s silica sand projects have outstanding economic prospects and will support a substantial export industry in Western Australia that can provide significant financial and employment benefits to the State. With all three Mining Leases granted at the Arrowsmith Projects and the Muchea Project and development of the projects well-progressed, VRX is on the cusp of becoming a global player in high-quality silica sand supplies. VRX Silica Limited 16 COMPANY REVIEW Aggregate Project Metrics Key outcomes and summary financial model outputs for each individual project, and in aggregate, from the BFSs for each project 2 are set out below. The combined post-tax NPV10 of $727.8 million Arrowsmith North Arrowsmith Central Muchea Total Post Tax, ungeared NPV10 $242.3m $147.6m $337.9m $727.8m Post Tax, ungeared NPV20 $99.8m $56.1m $146.4m $302.3m Post Tax, ungeared IRR 79% 60% 96% 83% Payback period (yrs) (post tax) (ramp up rate) 2.4 2.8 2.3 2.4 Exchange Rate US$/A$ $0.70 $0.70 $0.70 $0.70 Life of Mine (yrs) (Scope of BFS Study) 25 25 25 25 Total Sales (initial 25 years) no escalation $2,773m $2,167m $3,345m $8,285m EBIT $1,144m $737m $1,540m $3,421m Cashflow after finance and tax $835m $539m $1,123m $2,497m Capex (2 mtpa) $28.3m $25.9m $32.8m $87m Capex contingency (inc) 20% 20% 20% 20% Life of Mine C1 costs, FOB Kwinana (inc royalties) $30.18 $27.67 $32.74 $30.24 Tonnes Processed (initial 25 years) (Mt) 53 51 54 158 Production Target (Mt) (BFS Study) (initial 25 Years) 47.7 39.6 48.3 136 Probable Ore Reserves (Mt) 204 18.9 18.7 242 Ore Reserve life (yrs) 102 10 9-10 JORC Resources (million tonnes) 771 77 208 1,056 Notes: 1. A proportion of the production target for each of Arrowsmith Central and Muchea is based on Inferred Mineral Resource. There is a low level of geological confidence associated with inferred mineral resources and there is no certainty that further exploration work will result in the determination of indicated mineral resources or that the production target itself will be realised. 2. The Ore Reserves and, in the case of Arrowsmith Central and Muchea, the Inferred Mineral Resource underpinning the above production targets have been prepared by a Competent Person in accordance with the requirements of the JORC Code. 3. Full summaries of economic assumptions are set out in the BFS for each project. All such material assumptions continue to apply and have not materially changed from the dates of release of the BFSs. 4. All figures are presented in Australian dollars, unadjusted for inflation 2 ASX announcements of 28 August 2019, “Arrowsmith North BFS and Maiden Ore Reserve”, 17 September 2019, “Arrowsmith Central BFS and Maiden Ore Reserve” and 18 October 2019, “Muchea BFS and Maiden Ore Reserve”. VRX Silica Limited 17 COMPANY REVIEW Biranup On 1 July 2020, the Company announced it had entered into a conditional agreement with New Energy Metals Limited (later renamed Nickel X Limited) (NickelX) for the sale of its Biranup Project and an IPO and listing of that company on the ASX. Originally expected to complete by the end of 2020, completion of the sale of the project took place 6 May 2021 and NickelX shares commenced trading on ASX on 7 May 2021. The Biranup project comprised a total project area of almost 400km2 with six granted tenements having no pastoral lease or native title claims. The project covers a region which hosts many varying mineralisation styles. VRX had previously identified the potential for base metal mineralisation and successfully drilled and intersected copper and nickel sulphides on a structurally controlled geophysical target at the Fire Dragon Prospect. Studies have shown the right geology is present for Nova Type mafic intrusive Ni-Cu Deposit. Under the terms of the sale agreement, the consideration comprised 6,250,000 fully paid ordinary shares in NickelX issued at completion (escrowed for 12 months in accordance with ASX requirements) and up to $900,000 in cash payments subject to achievement of milestones linked to delineation of a JORC resource, completion of a feasibility study and commercial production. The Company lodged the required substantial shareholder notice advising the market of its 9.11% holding in NickelX. Biranup is the last of the Company’s non-silica sand projects. The sale enables VRX to share in any future exploration success in the project and allow the Company to focus on its stated aim of becoming a global supplier of high-quality silica sand, initially from its Arrowsmith and Muchea silica sand projects. Corporate On 20 November 2020, VRX announced that it had received binding commitments for a capital raising via a share placement to institutional, professional and sophisticated investors to raise $7 million b