29Metals Limited (29M) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the 29Metals Full Year 2021 Financial Results Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Mike Slifirski. Please go ahead.

Thanks, Aman. Good morning, ladies and gentlemen. My name is Mike Slifirski. Welcome to 29Metals FY '21 Full Year Results Call. 29Metals Managing Director and CEO, Peter Albert will commence the presentation before handing over to CFO, Peter Herbert, to take you through the detail of the results. The full year results and presentation are available on the ASX platform and on the 29Metals website. The presentation is also available on the open briefing website. At the conclusion of the presentation, the operator will invite your questions. 29Metals COO, Ed Cooney, and Group Manager, Exploration, Mark van Heerden, will also be available at that time to answer any questions. So I would now like to hand over to Peter Albert to commence the presentation. Thanks, Peter.

Thanks, Mark -- Mike. Well, good morning, everybody, and thank you for joining us today. It is indeed an auspicious day for 29Metals with the release of our first full year financial results. Mike has done the introduction, so I won't go through that again. And hopefully, you've got access to the presentation. So I will refer -- Peter and I will refer to slides on the way through. So Slides 2 and 3. I'll draw your attention to the important information slides at least regarding the forward-looking statements in the presentation materials and the non-IFRS financial information. Moving straight to Slide 5. First of all, some key outcomes. Our safety performance was very good. We did have too many minor injuries, mostly hand, which has been a little bit frustrating, but our lost time injuries and high potential incidents are very low. Our 68,000 copper equivalent tonnes produced, we exceeded our prospectus forecast for copper equivalent production. And with the polymetallic mines such as Golden Grove, the profile, as you all know, as we all know, can be a little lumpy at times. So whilst the third quarter was a bit challenging, the fourth quarter, especially for copper was very good, and Capricorn Copper, of course, had a great second half of the year. Like the rest of the industry, we experienced significant cost pressures exacerbated by COVID and border closures, but we nonetheless achieved an AISC outcome of USD 3.41 a pound. For the group with a very healthy margin against the average copper prices for the year of USD 4.22, remembering, of course, that 29Metals reported AISC includes capitalized development and the only things it doesn't include is growth capital and group exploration. The EBITDA outcome of AUD 254 million on a pro forma basis is especially pleasing when compared to our prospectus forecast of $221 million. Most importantly, we are well positioned to execute our growth strategy. We have low gearing combined with near-term growth options, which we are currently pursuing, particularly at Golden Grove, which is a great success in 2021. And we're working on creating new options through our exploration program in 2022 and a little more of that later. If I can move to Slide 7. Presenting our results for a year where we completed an IPO midyear brings an added layer of complexity. In the materials we have released today, you will see that we have presented our statutory results, and we've also presented results on a pro forma basis. Statutory results for 2021 or for the Golden Grove Group on a stand-alone basis for the first half of the year and the consolidated group, i.e., including Capricorn, Red Hill Corporate, et cetera, for the second half of the year. The 2020 results of the Golden Grove's stand-alone -- Golden Grove Group's stand-alone results. This all reflects the timing of completion of the IPO transactions in early July and the determination that Golden Grove Group was the acquirer for accounting purposes. The pro forma results present the operating and financial performance of the 29Metals Group for the full 12 months to 31st of December 2021 as if the restructuring and the IPO transactions and debt repayments took place prior to the 1st of January 2020. This is consistent with the way that the pro forma financial information for the 29Metals Group was presented in our prospectus for the IPO. It is important to note that the statutory results are audited and the pro forma financial information presented today is non-IFRS financial information and is unaudited. We have also provided some additional 2022 guidance today in relation to D&A and other financial metrics. Now I'll hand over to Peter Herbert to take us through the financial results in more detail and our 2022 guidance, and I'll come back a little later to discuss briefly our growth pipeline. Over to you, Peter. Thank you.

Thanks very much, Peter, and welcome to everyone, and thanks for taking the time to join the call today. As Peter mentioned, today, we reported our statutory results for 2021, and those results do indeed reflect the complexity and timing of the various transactions undertaking to form 29Metals. Starting with the statutory results summarized on Slide 8. Revenue increased materially on the prior year, reflecting the impact of including Capricorn Copper in the second half and materially higher copper prices than it's seen in 2020. This was partially offset by lower production from Golden Grove, particularly byproduct metals due to lower grades in 2021 and higher and high Australian dollar. Gross profit of $137 million on a statutory basis increased by $28 million on the prior period as higher costs partially offset revenues for the period, reflecting labor and cost pressures reported in the September quarter quarterly report. Statutory NPAT of $121 million includes a material tax benefit for the period of $119 million, resulting from the entry of Golden Grove into the 29Metals tax consolidated group and it's also after IPO transaction expenses, including a provision for stamp duty. Normalizing for nonrecurring expenses and reversing the impact of IFRS accounting impacts on the pre-IPO Golden Grove partnership structure, adjusted NPAT of $56 million was lower than the prior period by $27 million, reflecting the impact of unrealized losses on derivative financial instruments and foreign exchange. This is a reversal on the prior period, which recorded gains on both those items during 2020. Turning to Slide 9, which sets out our net debt for 29Metals. 29Metals finished the year with a low net drawn debt balance of approximately $3.5 million, a reduction on the prior period balance of $113 million. During the year, 29Metals completed a refinance of the Golden Grove debt facilities with new group facilities, providing greater headroom at a lower cost of funding. Cash and equivalents of $197 million means we are well positioned to reinvest in growth opportunities in our portfolio. During 2021, a provision of $26 million was made substantially in connection with the reverse acquisition of Golden Grove. This amount remains outstanding and is subject to confirmation by the WA revenue authorities. Turning to Slide 10. We outlined the historical hedging arrangements in place as at 31 December 2021. In summary, 7,200 tonnes of copper were settled over the period January to September 22. This had a mark-to-market liability of approximately $31 million as of 31 December 2021. Beyond September, 29Metals is completely unhedged to copper. Golden Grove has 44,000 ounces of gold hedged over the period to 2025, with a mark-to-market asset value of $1.5 million as at 31 December 2021. 29Metals has no other commodity hedging in place. Turning to Slide 12, which summarizes 29Metals pro forma results for 2021 shown against the prospectus pro forma forecast for the same period. On a pro forma basis, revenues of $710 million were supported by high commodity prices and higher copper production for the period, reflecting strong production results from Capricorn Copper, offset by lower byproduct production from Golden Grove. 2021 EBITDA of $254 million exceeded pro forma forecast by $33 million, with revenues partially offset by higher costs and includes the impact of lease accounting of $27 million for the year. 2021 NPAT was $10 million lower than pro forma forecast, reflecting unrealized foreign exchange losses, unrealized losses on derivative instruments and higher net interest costs relative to the pro forma forecast. Turning to Slide 13, we set up a commodity mix for revenues in 2021. This shows the copper was the dominant commodity for the 29Metals in '21 accounted for 65% of revenues, assisted by higher copper prices for the year and a higher rent of share of production, particularly driven by the strong performance of Capricorn Copper in the second half of 2021. Turning over to Slide 14. The results -- those results reflected in the segment outcomes. Capricorn Copper exceeded pro forma EBITDA forecast by $36 million, more than offsetting a weaker Golden Grove result, which was $7 million lower than forecast. On Slide 15, we step through the EBITDA bridge, taking pro forma actual EBITDA outcomes to the pro forma prospective forecast. The result was supported by higher Australian dollar metal prices than forecast in 2021, partially offset by higher operating costs, including realization costs such as royalties. A buildup in inventory over the year also improved cost outcomes, reflecting concentrate and rolling stockpiles building up by year-end. The result also included a $7 million realized gain on foreign exchange from the refinancing of the Golden Grove asset level facilities during the year. Turning now to Slide 16, where we set out our guidance for next year, including operating cost guidance, which was released with our December quarter report. In addition to this guidance, we also provide today our guidance on depreciation and amortization for 2022, which we expect to be between $135 million and $155 million, reflecting full year outcomes and purchase price accounting post completion of the various acquisitions to form the 29Metals Group. On a net basis, we do not expect to be in a tax payable position for 2022 following the outcomes of the IPO and in particular, on the entry of Golden Grove into the 29Metals tax consolidated group. Thank you, everyone, for listening. I'll now hand back to Peter, and over to you now.

Well, thanks, Peter. I know today is a financial results presentation, but I'll spend a couple of minutes just talking about our pipeline, our growth opportunity. So Slide 19. Before we move to Q&A, Slide 19 talks through the vision and strategy that we articulated in the prospectus, i.e., to execute and deliver on our plans. And as you can see from this slide, we've achieved a number of significant successes in 2021, along with the financial results, of course, reported today. This slide also talks to our approach to growth via our existing pipeline of organic growth opportunities. And if we go to Slide 20, at Golden Grove, -- in Slide 20, as a cross section in Slide 20. Xantho Extended is a very rich orebody there under the Gossan Hill mine. We are mining from this area now, although the true value of this orebody will be delivered progressively over a number of years to come. So a really exciting orebody we've got there. Gossan Valley on this slide. Of course, we've talked about this a few times. The work completed to date gives us confidence that it will become a third mining front at Golden Grove. And we see additional opportunities to optimize Gossan Valley and looking at then how to integrate it with the other opportunities we have such as, of course, at Cervantes. That optimization work is currently underway. The Cervantes results, of course, Cervantes sitting there under the Scuddles mining front have been outstanding and continue to be outstanding. We're working on scoping studies today, and we'll be assessing the optimal outcomes for the business in coming months. Really at Golden Grove, we are blessed with those options, and we're hoping to make some decisions in the second half of this year. Slide 21. At Capricorn, of course, at the 3 mining fronts, we're testing a depth extensions at Mammoth, Greenstone, and in Esperanza South. And on our 1,800 kilometer squared tenement package, the regional targets that we'll be focusing on there this year at Grey Ghost and Eagles Nest in that -- in one of those tenement packages you can see in the bottom left-hand corner there. And at Red Hill, where we've commenced work, the first ground exploration work there for a number of years. And at the conclusion of the current season, we would expect to have a greater understanding of the potential at Red Hill, which will inform our future drilling programs. Very briefly, just to recap on our growth opportunities. And now Aman, I'll hand back to you, and I think we can go to questions and answers.

[Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley.

Look, Peter, perhaps if you continue the conversation there in terms of growth. I just wanted to touch on 2 things, if I may. Xantho Extended, you said the orebody gets exciting as we go. And absolutely, the zinc grades do get better. But in terms of scheduling, when do we expect the crux of that to start hitting the production numbers, especially in light of the paste plant? That's the first one.

Thanks, Rahul. If I may, I'll hand over to Ed Cooney, the COO. He can handle that question, Rahul.

Rahul, in sometimes in the paste plant, we had advised expected commissioning sort of later in the Q2 this year, and then that enables a higher zinc contribution from Golden Grove in the second half. And then sort of further out, progressively, the overall tonnes contributed by Xantho Extended increases year-on-year over the coming sort of 4- to 5-year horizon.

Okay. So in terms of the material contributions going into, let's say, calendar year '23, is there a proportion especially you can provide? Or how should we think about the grade uplift perhaps?

We probably haven't disclosed that far, Rahul, at this point in time with some sort of life of mine activities ongoing as we speak, but certainly increasing contribution each year from Xantho Extended.

Okay, sure. Look, the next one was about Golden Valley perhaps being the third front. I also wanted to perhaps touch upon Cervantes. And I mean, what I want to get my head around is, basically, could this be a 4 mining front orebody? Or could this basically be only a 3 front with Cervantes perhaps starts earlier than Gossan Valley given the success that you've had in your exploration program? How are you thinking about it internally in terms of your growth options? And how do you view whether it's the 4 front or 3 front or whether Cervantes comes before Gossan Valley front?

A bit. Thanks, Rahul, for the question. A little bit early. That's perhaps didn't make it clear enough. That's what we're doing at the moment in terms of understanding the best way to optimize these opportunities that we have. I don't have the answer to that question right now except to say we've got opportunities and how it plays out, we'll see over the coming months. But having both Cervantes and Gossan Valley as options or opportunities is an envious place to be. So I can't really answer that question right now. A little early for us, Rahul.

That makes sense. Okay. Just one quick follow-up there then, perhaps in terms of the Scuddles Hoist, what type of tonnages can it max out at?

We've sort of been able to achieve about sort of 25,000 tonnes per day maximum out of the Hoist. So that's been reinstated during 2021 and performing pretty well at the moment.

Your next question comes from Matt Greene from Credit Suisse.

Congratulations on your first results. My first one is just on capital management. And I guess, as we move into '22, what you're thinking is potentially on introducing a dividend policy?

Dividend, he said?

Yes.

Thanks, Matt. So thank you for that. So I think what we've said in the release here, it's -- let me just elaborate a little, if I may. Of course, as we stated in the prospectus last year that we didn't anticipate that we would be paying a dividend for the year 2021. Of course, last year, very, very positive, very good results, a good cash outcome, of course. So that's a great position to be in. And of course, the very low gearing position gives us opportunities and options as well. Subject to sustained performance this year and sustained prices, we should be in a pretty good position going through the year. And as indicated here in the announcement, the Board intends to consider at the half year, whether a dividend outcome is the right result for the company and the shareholders. So it's a work in progress, working process very much front of mind, Matt, but that's hopefully a little bit of color to what's in that statement there.

Yes. Peter, and I guess, just on the growth theme though, you were reported in the media looking at some opportunities out there. Can I ask where would you -- if the right opportunity were part of you, where would you feel comfortable pushing your leverage in gearing to? Do you have a sort of, I guess, a sweet spot in terms of potential size of an acquisition?

I don't think we've considered that in the context of things. I don't think that reflects our position of being very much focused on internal growth options. I think it's very much we are opportunistic in the inorganic space, Matt. And we'll look at, first of all, an opportunity has to make sense for the company and add value for shareholders. But as I say, what the right gearing is for any and future acquisitions is clearly something that will be assessed as each individual opportunity presents itself, not something that we've got to prescribe sort of leverage function for.

Got it. That's fine. And I guess just on tax, you mentioned the stamp duty there. I appreciate that the timing is somewhat out of your control. But do you have a rough sort of expectation of when you will pay this? And then are there any tax catch-up payments expected this calendar year?

Starting with the second one first. There's no tax catch-up payments. In fact, when you get a chance to go through the accounts, you'll see there's an income tax receivable actually in our accounts. So in terms of the timing of the stamp duty payment, look, I mean, frankly, we thought we would have paid this last year. Our understanding is that the various government authorities there are short staff like many other businesses in that state. So we do expect to pay it in the March quarter, but we have expected it to be paid last year previously. So it is a little delay there. So yes, we wait and see.

Yes, that's great. Appreciate it. And look, lastly, just on -- I mean, just given the static answer, but tricky to get this right. So can you just help me on the guess, you mentioned a wrong buildup at the end of the year, but your inventory is at about $76 million. How should we be thinking about that number, I guess, on a go-forward basis?

Is the sort of the stockpile movements number you're referring to there, Matt?

Yes. I guess just on a working cap just on the inventory levels here. How should we be thinking about that? How much…

Yes, we're going to -- we -- it is a difficult thing to forecast. I mean, as Peter mentioned in the -- at the top there, we do have lumpy flows from time to time. So it's not one that's easy to give strong guidance on as to how that moves. Look, we try and obviously keep those stockpile buildups as low as possible. We're trying to get sales out as quickly as we can, but we are impacted by the vagaries of shipping and timing of certain things. So look, it's not one that it's easy to give firm guidance on, I was going to say that we're obviously trying keep the sort of the buildup of inventories as low as possible.

[Operator Instructions]

Okay. Aman, if there's no further questions…

Yes. I'm sorry. So just one question in the queue. So the next question is from Hayden Bairstow from Macquarie.

Just a question on the production outlook. I mean, I know this is a big indication, so I guess it should be stronger based into the second half of the year just based on what we can see on the grade profiles. Is there any sort of more color you can provide on that? Or is there any key variability that we might need to think about in the sort of first half versus the second half?

Probably on the -- all that we've mentioned in the prior December quarter, I think, Hayden, in terms of copper outlook should be fairly consistent throughout the year. But certainly, zinc with higher contribution from Golden Grove postal commissioning and delivering in the second half, that should see higher zinc production in the Golden Grove in the second half. So there's a higher zinc, so -- sorry, zinc weighted to the end of the year. But apart from that, probably nothing else to add at this point, Hayden.

Okay. Great. And just with the border opening. I mean obviously, the being able to move the executives from some site to sites being impossible. But just sort of what do you see as some potential advantages of being able to now finally freely travel between Cap and GG?

Yes. Looking forward to that, Hayden, and Ed and I already booked our first tickets to get across to Golden Grove. And in fact, we got up to Capricorn Copper a couple of weeks ago. So it's starting to move around from a -- as you said, from a corporate perspective, which is great. We have a tremendous sort of communication link that is happening all the time between the 2 sites, really good relationship, where sharing of information that happens almost on a daily basis. And we have had already a handful of people who have transitioned from one operation to the other. But now what we'll be able to do is actually send people across to counterclockwise, so to speak, to each operation and to share learnings on the ground and to -- and potentially to transfer people as I wish and as a company wishes. So I think that will build for us over the coming months. Great opportunities there and a quite right leaders here, as you understand, a little frustrating to not have been able to do that to date. We're really looking forward to those sharing opportunities in a greater context than we've been able to achieve so far. So it's a great outcome as far as I'm concerned.

Okay. Great. Just one last one. Just on the commodity prices are pretty decent levels. I mean, is there much you could do in short-term mine plan adjustments to sort of take advantage and maybe get material outside of reserves that was an economic basis? Or is the mine plans fairly rigid to sort of this year?

Look, we do constantly test that, Hayden, in terms of shorter-term engineering processes. We look to maximize metal and tonnes that are economic on the current date prices as we take each type obviously. So we tend to do that day to day, week to week.

Our next question is a follow-up question from the line of Matt Greene from Credit Suisse.

Just one last one for me on Gossan Valley. The study you completed, I appreciate you're looking to optimize that. So -- but are you able to give some color as to what made it -- I guess the economics potentially unfavorable. Was this really a cost push? Or were there any sort of technical challenges that arose when you were looking -- when you're finalizing that study?

I'm sorry, Matt, but there's a little confusion there. We've never suggested it was unfavorable, quite the opposite. It's definitely favorable. And what we've identified as opportunities to make it even more attractive. And then, of course, Cervantes is coming up close behind. We have to consider the best solution for the business and the outcomes for shareholders. So no suggestion whatsoever there's anything unfavorable about it, quite the contrary.

Okay. Are you able to give us some color as to what's the return it stands at the moment? And I guess where that -- assuming that the optimization goes well, where that could go to?

Not at this stage, Matt. We've -- that's not in -- we haven't put that out in the results. So we couldn't be talking about that here today I'm afraid. But what we have said is that it's -- the results supported what we had done in the pre-feasibility study, and that information, I think, was in the prospectus. So that's as good as starting point as any, Matt.

The next question comes from Michael Evans from Acova Capital.

A quick one for me. On your headline results, you got EBITDA of $177 million and operating cash at $75 million, down the $75 million -- down from $130 million last year. I noticed in the back, there's some tax and some one-offs, which sort of explains some of that. And I assume there's some working capital in there. Can you just give us some more color on that operating cash flow? Just a bit lower than we expected. And should we expect any -- I think you made the comment that you don't expect a tax liability generated this year or to pay any tax [ details ] -- is there was a quite a significant tax item? Just trying to get a better feel for cash this year.

Yes, sure. Thanks. So on the -- yes, on the cash flow, so you're right, there is a fair bit running to the accounts in terms of working capital changes this year. And in fact, I appreciate you haven't had a chance to absorb this. But when you look at the sort of reconciliation in the balance sheet in terms of those working capital items, you'll see that there was a fair bit of cash that went to address those matters. And in fact, of course, the IPO was designed to raise funds in order to just to pay down debt and improve working capital returns for the business in some respects. So the combination of that plus the buildup of the inventory, which on a year-to-year basis is in the order of sort of $30 million swing there plus the one-off items transaction costs. They all did impact the cash generation as reported today. Maybe just making sure that EBITDA number you mentioned, that is the statutory results of it. Just the second half of Capricorn and Golden Grove for a full year basis. So that's sort of some of the key things there that do impact the cash movement. Your second question there on tax is correct. One of the advantage of this transaction is that we do get the opportunity to reset the tax cost base of Golden Grove as that enters the 29Metals tax consolidated group. So what you'll see in the accounts is a tax benefit rather than a tax expense coming through the accounts this year roughly at $119 million. So the depreciation of some of those amounts means we don't expect on a net basis to be paying tax this year.

Right. See, okay. See, so that 20 -- there's about $23 million in the account for cash out -- tax out the door that you don't expect that this year. Okay.

That's right. Yes. Correct.

Our next question comes from Kate McCutcheon from Citi.

A quick one from me. With zinc prices where they are, have you thought about hedging some of that? Is that something you're able to do or something you've thought about?

We've certainly looked at it, Kate. And in fact, we do consider that the Board does look at that from time to time. At this stage, I think we're pretty clear we're looking to provide exposure as much we can to commodity prices. In fact, -- at the point of time we looked at it, everybody thought it was looking good and then it went up. So I think we believe is in the zinc price, we think probably an underappreciated metal in terms of its outlook. And look, at this stage, I think we're pretty clear that we're not looking to hedge commodities. But it is -- but that said, it is something that we will consider and review on a regular basis.

Yes. So just to be clear, the strategy moving forward is to roll off all the hedges you've got to become unhedged in totality?

Yes. That's correct. I mean just to expand on it. I mean clearly, we will continue to assess that. And in fact, obviously, we -- as things change and evolve in the future, if there are requirements to put in hedging as a function of debt or anything else, then that's obviously something that we'll consider. But at this stage, that is the stated strategy, yes.

There are no further questions at this time. I will now hand back to Mr. Albert for closing remarks.

Yes. Thanks, Aman, and thanks, everybody, for joining us today, and thanks for the good discussion and questions. I know it is a very busy time, plenty of results coming out today. The recording of this webcast will be published on our web page, so you can pick it up again there. 2021 was an incredible first year for 29Metals. The first half of the year dedicated to getting the IPO away, no mean feat, one of the biggest mining IPOs in recent years. Then post the IPO to deliver against our plans where the operating fee environment have got a whole lot tougher, and the COVID inflation, extended border closures, which we've talked about operating the business from behind our computer screens. We did it. And the teams across the whole business performed extremely well at all of our operations and offices around the country. And our shareholders and investors, thank you for your continued support and recognizing that we at 29Metals, so we have a winning formula. One of the aspects of our business, which we have focused on significantly since divesting is ESG. And just to touch on that briefly. We are currently completing our first sustainability report, which will be included in the annual report later this half. We also intend to present our road map to TCFD reporting, which will identify our ESG commitments and strategy over the next 3 years and beyond. We're now well into 2022, and we won't be resting on our laurels. I have no doubt that 2022 will be another great year for us. And thank you once again for being part of the company and being joining us here this morning. Back to you, Aman, and thank you very much.

Thank you very much. Ladies and gentlemen, that does concludes our conference for today. Thank you for participating. You may now disconnect your lines. Thank you.