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

Thank you for standing by, and welcome to the 29Metals 2022 First Half Year Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Slifirski, Group Manager of Investor Relations. Please go ahead.

Thank you, Katy. Good morning, ladies and gentlemen. My name is Mike Slifirski, and welcome to 29Metals first half 2022 financial results conference call. We'll be talking to the Appendix 4D and first half '22 presentation that we released to the ASX this morning. The call is being recorded and will be available for replay via the 29Metals website and the open briefing website. 29Metals Managing Director and CEO, Mr. Peter Albert, will commence the discussion before passing on to CFO, Peter Herbert, to lead you through the results. When we work through the result, we will be talking to the presentation and we will advise what page number we are on. Other 29Metals executives will not formally be presenting, but our Chief Operating Officer, Ed Cooney and our Group Manager of Exploration, Mark Heerden, will be available during Q&A to address any operating or exploration questions. I'll now hand over to Peter to commence the discussion. Thanks, Peter.

Yes. Thanks, Mike, and thanks for the introduction. Welcome, everybody, and thank you for joining us this morning. I will provide a brief introduction and a recap on key operational matters and key headline financials. Then our CFO, Peter Herbert, will take us through in detail the 2022 first half year financial results. Before we start, I'd like to say a few words on the market outlook. A number of key players, commentators and forecasters have been stating their views of the future outlook for the copper market. I can say that I personally endorse most of those views, i.e., we are about to enter a copper age, the likes of which the world has probably never seen before, driven, of course, by the need to decarbonize and to transition to a green energy environment. Whichever way one looks at it, conservatively or optimistically, there's going to be a significant deficit in the copper space over the next 10 years. It is possible that there may be an oversupply next year, as some have suggested, I'm personally doubtful. But after that, the demand will outstrip any possibility of the supply satisfying that demand by a number of millions of metric tons. And without too much speculation about the outcome of this deficit, it is apparent that 29Metals with 2 high-grade underground mines with 10-year mine lives each and significant growth potential is in the right space at the right time. So I'll draw your attention to Slide 2, the important information and move straight on to Slide 3. Full production on a copper equivalent basis, we've made 34,000 tonnes of copper equivalent in the first half of this year compared to about 30,000 tonnes for the same period last year on a pro forma or like-for-like basis. And on a cost basis, our C1 cost at USD 2.38 were 11% lower than for the same period last year, again, on a similar basis. We continue to undertake and implement projects to support the long-term sustainability of operations, including significant ventilation upgrades at both sites, construction of the new pasta facility at Golden Grove and now that we're in production at Xantho Extended implementing the 45-meter sub-level intervals, which enhances efficiency and reduces mining costs. I'm also pleased to advise that the zinc regrind circuit at Golden Grove is back in operation and the commissioning of the Golden Grove paste plant is well progressed with first paste plant to be placed underground this week. Our growth aspirations have moved forward significantly during the first half of this year with excellent drilling results coming out of ESS, Esperanza South at Capricorn Copper and Cervantes of Golden Grove. The latter, of course, coming after significant mineral resources growth at Cervantes announced with our mineral resource and ore reserve update released in the March quarter this year. Our exploration program at Red Hill has delivered some quite exciting results, and we anticipate updating the market soon with the balance of those results from our first field there in Southern Chile. We've also continued advancement of the pre-feasibility study at Cervantes and the optimized feasibility study at Gossan Valley. Both of these are on track for completion by the end of the current quarter. As a result of the good production as well as good commodity prices, we have seen operating cash flow grow to AUD 109 million, an increase of AUD 68 million compared to the same period last year on a statutory basis. Our net cash position has increased to $16 million with cash and cash equivalents of $220 million and drawn debt unchanged at USD 150 million, but recorded in the balance sheet at AUD 213 million using the lower exchange rate at the June 30. Most importantly, the Board is very pleased to determine the first dividend for the company, albeit a modest dividend of $0.02 a share fully franked. It's a very positive signal of the company's intent and intention to return funds to shareholders. Given the progress we have made and the positive results, we thought it was very important to provide an initial modest return to shareholders as soon as we could. Turning to Slide 5. Our sustainability and ESG goals and priorities have been well articulated. And in the June quarter, we reported on progress made on all of our key priorities, being safe and inclusive workplace, responsible environmental stewardship and partnering with stakeholders. We continue to make progress on all of these items, and we'll provide further updates in upcoming quarterly reports. On that note, I will now hand over to Peter Herbert, our CFO, to take us through in some detail the financial results.

Thank you, Peter, and good morning to everyone on the call. Thanks for your time and attention. Starting on Page 5, the basis of preparation for a brief reminder of what 29Metals is reporting today. Today, we report statutory results for the half year to 30 June 2022, representing results for the group. And statutory results for the prior corresponding period being the half year to 30 June 2021, representing results of Golden Grove only, i.e., a pre-IPO result. Because the statutory results for the prior corresponding period limited to Golden Grove, we have also disclosed pro forma results also for the prior corresponding period, representing results of the group. The pro forma results were prepared as if the group was formed and the IPO occurred prior to the 1st of January 2021, including provision for group corporate costs, but excluding IPO costs. Turning to Page 6. We highlight key results for the group, which were supported by higher production and sales, stronger prices and a weaker Australian dollar. This has supported delivery of $356 million in revenue, an increase of 23% of the pro forma result, $94 million in EBITDA, also up 23% on the pro forma outcomes and operating cash flows of $109 million for the first half of 2022. Now moving to Slide 7, where copper remained dominant commodity in our sales mix, contributing 62% of group sales for the half. Golden Grove and Capricorn Copper both contributed to increased group copper production, which was up 17% on the pro forma result for 2021. Group cost outcomes set out on Page 8. 29Metals demonstrated cost discipline in a challenging business environment given industry-wide cost pressures, while site operating costs increased 13% on pro forma outcomes for 2021, higher activity levels were a key driver of the increase, with mining and milling up 3% and 8%, respectively, in the first half 2022. 29Metals was not exposed to the inflationary pressures associated with east coast energy markets in the first half through 29Metals gross power connections at both Golden Grove and Capricorn Copper. And it's worth noting that 29Metals high-grade, low tonnage mines moderates our exposure to inflationary costs linked to activity levels, for example, diesel consumption. Lower stockpile credits in the current period compared to statutory and pro forma outcomes reflects the timing of sales, with strong sales, including provisional invoices received prior to 30 June 2022, supporting cash generation in the first half. This focus on costs and higher production achieved a reduction in C1 unit cost of approximately 11% relative to the prior period on a pro forma basis. An increase in depreciation and amortization in the first half reflects higher activity levels and investment in and utilization of tailings facilities. Stepping through the EBITDA bridge now on Page 9, you can see the impact of higher volumes and prices on revenues for the current period. The increase in revenues is net of QP adjustment losses for the first half of approximately $31 million, reflecting the reduction in prices towards the end of the first half. And net of TCRs for the first half of $29 million, which were higher on account of zinc TCs, including escalators linked to the zinc price. As discussed, higher site operating costs of $25 million in the first half reflects higher activity levels and industry-wide inflationary pressures. Improved volumes, prices and higher unit freight costs account for the $11 million increase in royalties and other selling costs. And now stepping through the cash bridge on Page 10. Operating performance delivered $109 million in operating cash flows, reflecting the matters discussed previously, including the timing of sales in the period to 30 June. And I note that operating cash flow is a net of $19 million in settlements of commodity hedges during the first half. Investing cash flows captured mine development, pace plant and TSF expenditures during the first half. Financing relates primarily to AASB16 lease accounting outcomes. Turning to Page 11. 29Metals cash flow delivered a net cash position as of 30 June, a function of operating results, commodity prices and the timing of sales towards the end of the first half. As a reminder, the interim dividend Peter talked to, is not brought to account in the half year results today given it will be paid after period end. 29Metals term loan remained unchanged in U.S. dollar terms at $150 million or $213 million in Australian dollar terms. Amortization of the group's term loan will commence in the second half with USD 12 billion in principal repayments. And as a further reminder, stamp duty remains outstanding with a provision of $26 million maintained in the half year accounts. Finally, on hedging, as set out on Slide 12, the company settled the majority of its remaining copper hedges during the first half. The balance of which will be settled during the September quarter, post which 29Metals will have full exposure to copper prices. Remaining hedges remained solely to gold with 37,000 ounces priced at AUD 2,590 an ounce. These will settle over the period to 2025. Thank you all for your time. Back to you, Peter.

Thanks, Peter. So Katy, back to you in terms of coordinating any questions and answers. We go to Q&A now.

[Operator Instructions] Your first question comes from Adam Baker with Macquarie.

Just wondering if you've got a going-forward dividend policy or what should we read through or what should we model based on the current dividend payment you're expecting in the second half this year?

Peter might answer that in a second, Adam. But of course, the dividend policy is always under review and we'll consider that and the Board continues to consider it. We have a dividend policy, which is stated from last year, and we'll review that going forward. But we're not refreshing that at this point in time.

I think that's well captured, Peter. And I think very much at the moment a qualitative dividend policy reflecting the work ongoing around matters including Cervantes and Gossan Valley. Over time, as those things become clearer and clearly, those policies will be reviewed not only for those outcomes, but obviously to rather matters as they change in front of us.

Okay. Great. So there's no delay to the Cervantes or Gossan Valley optimization studies. They're still expected this quarter. Is that right?

As we've stated, I think, probably a number of times and restated this morning, looking to complete those internally this quarter. And then post that, we'll obviously update the market with those outcomes and any decisions we will make as a consequence of our work.

Okay. Great. And what about income tax benefits? Do you have any tax benefits remaining? And when should we start modeling tax payments into the future?

Yes, there are some tax losses on the -- in the balance sheet, and that's set out in the accounts. Clearly, how they become utilized as a function of our performance and commodity prices going forward.

Your next comes from Matt Greene with Credit Suisse.

Just want to start with on QP pricing. TC mention a $31 million hits in the first half, I mean impacted a lot of base metal miners out there. But I guess we have seen pricing improve since the end of the June quarter. So I'm just trying to get the mechanics around your provisional pricing agreements and settlement times. Can you just tell me, is most of your copper concentrate being sold to Glencore currently? And if so, can you just provide a bit of color on the mechanisms around pricing and settlement timing once the shipment occurs?

Yes, sure. So the majority of our material is actually sold to Trafigura Europe, although we do deliveries into Mount Isa, Capricorn Copper I'm talking about, of course, which is a Glencore facility, but the purchaser is not Glencore for that, it's actually Trafigura. Now in terms of the QP mechanics, typically, our sales sell anywhere between 1 and 3 months after the date of shipment. The purchase, the off taker has the first call to the time period over where they want that to settle. We would then have the option of choosing either month 2 or 3 in that period. So our objective here is clearly to try and spread the material over the year in a way that gives us an even spread of pricing, and we achieve that through the options that we have to select months after the off take has made their decision or not made a decision as the case may be. So it's a fairly dynamic exercise that requires us to manage it proactively. But the mechanics in our off take mechanism allow us to spread those sales in a way that we can achieve the average of the price curve for the year.

So since the month of June, has that settlement period narrowed to close to a month? Or is it being quite similar to what you saw in the -- I guess, in the June quarter?

Look, I mean, based on where prices are today from 30 June, that QP loss will turn around and include that moves on a day-to-day basis. I don't have a current day figure there, and I obviously can't talk to that. But where we end up at the next quarter will be a function of where prices go to from here. But clearly, from 30 June, prices have improved somewhat since then.

Okay. And if I could just move on to Golden Grove. The paste field plant, you mentioned that first paste is getting delivered this -- or next week, I think you said. How long do you expect the commission to take where are you focusing the filling? Or I guess you're starting on the shallower levels if your mining and then look to migrate to the deeper levels once fully commissioned?

Yes. I might ask Ed to comment there. Ed?

I know you're spot on. We're well advanced in terms of commissioning, sort of high 90%. The expectation that we will send paste field underground later this week. So initially to a near surface void just to mitigate any risks and then further on into Xantho Extended. And just in terms of risk, we'll do the mitigation of existing cement and hydraulic fields that we can always deliver around the line, including Xantho Extended. Obviously, preference for us is to get the paste field to the ore body. The delivery times are quicker, the curing times are quicker, and it will allow us to turn our stocks more quickly. So a lot of focused dedication from the site team on that very point at the moment.