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

Thank you for standing by, and welcome to the 29Metals Limited June Quarter Webcast and Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Mike Slifirski, Group Manager, Investor Relations. Please go ahead.

Thank you, Melanie. Good morning, ladies and gentlemen. My name is Mike Slifirski. We will be speaking to 29Metals' June quarterly report, which was released to the ASX this morning. The call and parallel webcast is being recorded, and will be available for replay via the 29Metals website and the Open Briefing website. 29Metals Managing Director and CEO Peter Albert; our COO, Ed Cooney; and CFO Peter Herbert will each lead you through the June quarterly highlights before we open the call for your questions. For now I'd like to hand over to Peter Albert to commence discussion. Thanks, Peter.

Yes. Thanks, Mike, and welcome, everybody, and thank you for joining us this morning. The June quarter was predominantly focused on Capricorn Copper and getting ready for a restart in the third quarter as well as advancing the debottlenecking activities at Golden Grove for the acceleration of production in the second half of the year. I'll come back to specific activities shortly. As always Group safety and well-being at 29Metals is our primary focus. TRIFR remained largely stable during the quarter, although we did have one lost time injury. Of course, there's no production yet to report from Capricorn as we're still in suspension. Golden Grove ramped up production in quarter 2 as compared to quarter 2 -- quarter 1, largely in line with our plans. Copper production at 4,200 tonnes was a 31% increase on Q1, and zinc at 13,400 tonnes was a 54% increase on Q1. Gold and silver production also increased against Q1. The two key drivers for the increase in production were, firstly, the release on the mill throughput constraint following approval of the TSF3 lift approval in late April, and secondly, the improved production from Xantho Extended. Oil production from Xantho Extended was 76,000 tonnes, a 73% increase on Q1. We also achieved a significant increase in developed meters at Xantho Extended to 570 meters from 410 meters in Q1, i.e., a 39% increase. Importantly, this increase in Xantho Extended development is before the ventilation updates and upgrades with the new booster fans, which will come online this quarter. Ed will talk to the booster fans in more detail shortly. We have provided an update to guidance today, guiding copper and zinc to be in the bottom half of guidance and adjusting our guidance for gold and silver to 15,000 to 17,000 ounces and 750,000 to 850,000 ounces, respectively. Whilst gold and silver production remains weighted to the second half as previously guided, the lower gold and silver production in the first half has resulted in guidance for the full year being revised. Cost guidance, including Capricorn Copper recovery costs remains unchanged. Absolute site costs in Q2 were reduced as compared to Q1 despite the increase in activity levels. This is, again, despite continuing inflationary pressure and reflects early results of the cost-out program we are implementing. Peter Herbert will talk to some examples shortly. C1 and AISC costs are recorded as increases on Q1, driven by a number of factors, notably reduced byproduct credits as a result of lower prevailing zinc prices and higher charges related to movements in stockpiles with a significant increase in Golden Grove concentrate stocks sold during the June quarter. Golden Grove, of course, by its very nature, is always lumpy in terms of cost outcomes, and we would not expect Q2 outcomes to be reflective of full year performance. Looking at longer-term operational derisking projects, besides the Xantho Extended booster fans, we are focused on life-of-mine tailing storage facility submission to the regulator in this third quarter and the Gossan Valley submission, which is slightly deferred to the fourth quarter this year. We continued conversion drilling activities at Cervantes during the quarter with approximately 4 kilometers of our 7-kilometer program for 2023 completed so far. The focus of this program is to convert a significant proportion of current inferred resources into indicated in order to inform feasibility studies for the project. This would likely occur in the second half of 2024 after release of our next update of mineral resources and ore reserves estimates early in the new year. At Capricorn Copper, our focus has of course been on recovery, with planned activities for the first phase of the restart of operations on schedule. In the first instance, this will be a restart of the Mammoth and Greenstone Mines and process plant in this current quarter that we're in today, with planned commencement of dewatering of Esperanza South in the fourth quarter of this year. Towards the end of the last quarter, the regulator, the Department of Environment and Science, DES, requested additional technical information for the purposes of the approval of the ETSF lift. The further extended approval process obviously puts additional pressure on tailing storage capacity. However, given reduced throughput, as well as the number of other short-term tailings options, we remain confident of an ability to secure tailings solutions prior to the implementation of our planned life-of-mine tailings storage facility outcome. We will be presenting the life-of-mine tailings storage facility proposal to DES shortly and, subject to any initial comments from DES, we will rapidly move to detailed design and approval submission. In terms of financial outcomes, Peter Herbert will discuss these in greater detail, but a couple of highlights. Revenue of $99 million as expected down for the quarter compared to the first quarter. This is of course a result of Capricorn Copper being suspended and lower revenue at Garden Grove primarily as a result of lower zinc prices. Cash balance at the end of the quarter of AUD 127 million noting the unwinding of the $31 million favorable working capital at -- the unfavorable working capital at the end of the first quarter and the drawdown of the USD 40 million revolving credit facility. Average copper price received during the quarter was USD 3.75 a pound and for zinc, USD 1.13 a pound, down 9% and 17% respectively on the March quarter. During the quarter, 29Metals lenders provided covenant relief under the group's corporate debt facilities. And in respect of insurance, significant progress has been made with 29Metals insurers. Key factors in our submission include the magnitude of the claim, the extent of damaged facilities and the complexity of the claim. Insurers have all the information they need to confirm their view on policy response, and we will be engaging with them closely regarding a progress payment to assist with the recovery costs at Capricorn Copper. I should say that notwithstanding the liquidity available to the company at 30th of June, we remain focused on enhancing our liquidity through delivering on higher production in the second half at Golden Grove, pursuing an interim payment from our insurers as a result of the extreme weather event at Capricorn, reviewing all nonessential capital items including those in connection with the recovery efforts, and reducing costs across the group. In addition, there are other moving pieces, such as the restart of Capricorn Copper coming soon, strong support and engagement from our lenders, as well as a positive engagement with insurers. We will of course update the market of key developments as they crystallize. I'll now hand over to Ed Cooney, the COO, on production activities at the two operating mines. And Ed will then hand over to Peter Herbert to talk about financial and commercial outcomes. So over to you, please, Ed.

Thanks, Peter, and good morning, everyone. Well, Peter has spoken about our safety metrics and production analysis for the quarter, so I'll begin with the progress against their recovery plan at Capricorn Copper. The key focus at the [ site ] Has been on progressing the various water reduction initiatives outlined in our May strategic update. During the quarter, we have recommissioned the existing additional evaporative capacity on site and procurement of new high efficiency evaporators is well advanced, with commissioning expected in early August. With the existing water treatment plants still inaccessible, reestablishment of water treatment to support mining and processing operations is well advanced via existing settling ponds 3 and 4, with commissioning of this new system expected in early August. This project is intended to avoid reliance on additional freshwater drawn from the adjacent well, contributing to an improved saltwater balance over the medium term. Additionally, detailed engineering is underway [ on ] expanded treatment of water contained within pumps [indiscernible] ahead of release opportunities during the upcoming wet season. Engagement with the regulator remains constructive and ongoing. Further technical matters related to our application for ETSF lift 2 have been raised, and we're working with our external subject matter experts to address these matters. The delay to this approval has necessitated a need to progress and accelerate alternative options, which were already previously being considered available to Capricorn Copper to address near-term tailings storage, notably the Esperanza pit in which tailings has been previously and historically deposited prior to the current lift on the ETSF. This option remains subject to the planned order reduction performance for the upcoming 6-month period in addition to an approval of the existing application to increase water storage capacity within the pit. In parallel, planning of the life-of-mine facility continues as a high priority. In terms of mining, both Mammoth and Greenstone orebodies are ready to recommence production, with recent activities focused on additional paste fill reticulation in order to maximize conversion of tailings to backfill underground; remobilization of Byrnecut resources, which are reallocated to alternative Byrnecut projects following the extreme rainfall event; and in parallel, progressing design and procurement of dewatering infrastructure for Esperanza South ore body. Additionally, a number of personnel, 600 to Golden Grove, are returning to Capricorn Copper ahead of planned recommencement of the Phase 1 restart in August. Moving on to Golden Grove, and progress on commissioning of the new booster fans for Xantho Extended has been marginally delayed by completion of the required civils infrastructure and subsequent interruption to Gossan Hill access following remediation of the portal following the activities undertaken in the -- late in the March quarter. Access has now been reinstated with a focus on completion of the outstanding civils followed by mechanical installation of the fans and then commissioning. No further procurement is required, and we anticipate commissioning of the fans to occur in August. As mentioned previously, these fans support increased volumetric flows into Xantho Extended, enabling higher mining activity levels at depth during the second half. Notwithstanding this delay to the booster fans, as Peter mentioned earlier, pleasingly, development performance at Xantho Extended increased by approximately 40% quarter-on-quarter. Construction progress of TSF 3 which was approved in early May has been excellent, and construction is expected to be completed ahead of schedule in August. We have been focusing on preparation of our application for our new life-of-mine tailings facility, TSF 4, and anticipate a submission this quarter. Given our focus of regulatory processes being on life-of-mine tailings facilities at Golden Grove and recovery and tailings capacity at Capricorn Copper, our submission for the Gossan Valley project is now expected to be made later in 2023, which we don't -- which we anticipate to have no impact on the longer-term GG outlook presented to the market in May. And in terms of production outcomes [indiscernible] at Golden Grove, June quarter performance saw a 23% increase in mill throughput relative to the March quarter, higher recoveries and metal production across copper, zinc, gold and silver. And looking forward, production during the second half is anticipated to be higher than the first half, notably in Q4 for zinc, not dissimilar to 2022. I'll now hand over to Peter Herbert to discuss financial outcomes for the quarter.

Thanks very much, Ed, and thanks, everyone, for joining the call this morning. I'll start with revenue outcome for the quarter. 29Metals' unaudited revenue of $100 million in the June quarter decreased 39% from March, impacted by the suspension of Capricorn Copper operations, with no [indiscernible] reported at Capricorn during the third quarter. Golden Grove revenues were also lower than the prior quarter, primarily due to lower commodity prices despite higher sales volumes than the last quarter, which also included the sale of [indiscernible]. High concentrate sales volume at Golden Grove were possible as a result of lifting of throughput constraints put in place to manage available [indiscernible] capacity. Turning to costs. Golden Grove costs were [indiscernible] on the quarter, as Peter mentioned, at $78 million. This is despite higher overall activity levels than the last quarter. The reduction in site costs reflects continued focus on managing costs in an inflationary environment, with efforts undertaken to rationalize contractors, including the in-sourcing of paste plant operations, reducing headcount on site, retendering contracts, including drilling, village and aircraft services, and deferring of nonessential expenditures. The push for improved productivity and lower costs will continue through the remainder 2023 and beyond. Golden Grove selling costs, however, were higher during the period, reflecting increased volumes sold and the sales mix, specifically a material increase in zinc concentrate sales. Despite reduction in site costs, June [indiscernible] costs for Golden Grove were elevated. Higher unit costs primarily resulted from materially lower byproduct credits, with lower zinc prices impacting zinc revenues, in addition to the impact of negative QP adjustments from prior period sales. Stockpile movement charges of $11 million also contributed to higher unit costs, reflecting a drawdown in ROM stockpiles as mill throughput rates increased prior to [indiscernible] in the last quarter, a drawdown on concentrate stockpiles with higher sales volumes during the period, and lower [indiscernible] zinc prices during the quarter. Assuming foreign exchange and commodity prices remains the same, unit costs are expected to decrease in the second half as production increases, and we continue progress on cost reduction efforts. As of 30 June, [ yearly total ] capital costs at Golden Grove are tracking towards the bottom end of our guidance range. Capricorn Copper total costs for the quarter of $28 million were predominantly recovery costs as the site team prepares for the first stage of the restart operations in August. While it's early in the recovery process, expenditures remain in line with expectations, noting that our cash outflows for the quarter on Capricorn Copper of $37 million were materially higher than costs, reflecting the unwind of working capital at Capricorn Copper post cessation of operations in the March quarter. But we will continue to evaluate opportunities to improve the profile of recovery expenses as the recovery works advance. 29Metals finished the quarter with unaudited cash of $127 million after the following key movements during the quarter: the unwind of a positive working capital lines from the March quarter of approximately $31 million, the [ path ] foreshadowed in the March quarter report; weakened cash flows at Golden Grove on materially lower [ zinc ] prices during the quarter, including the impact of negative QP adjustments from [ prior ] sales; cash outflows of $37 million at Capricorn Copper as working capital from the March quarter operations unwound in addition to the recovery works undertaken; and the drawdown of the group's USD 40 million working capital facility and repayment of $6 million to the bridge headline facility principal as well as the net interest costs. On a net total basis, the group had unaudited net debt of $124 million at the end of the quarter, an increase on the March quarter position of $34 million. As previously announced, 29Metals received a waiver of certain covenants at 30 June from its lenders recognizing the impact of extreme weather event on group performance. 29Metals continues discussions with its insurers on the impact of the extreme weather events in respect of property damage and business interruption and is working towards a potential interim payment. The company continues to evaluate options to improve near-term cash flow profile, including, as mentioned, [ ongoing ] discussions with our insurers, including the potential for an interim payment, exploring opportunities to reduce or deferred recovery expenditures and nonessential capital across the group, and in addition to reducing costs across the group as discussed earlier. Finally, stamp duty in connection with the acquisition of Golden Grove remains outstanding, $29 million is maintained to $26 million provision in relation to stamp duty. Thank you very much for your time. I'll now hand back to Peter Albert.

Thanks, Peter. So Melanie, we can go to Q&A now.

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

Rahul Anand here from Morgan Stanley. Look, if I can please start with perhaps the gold and copper being lower. I appreciate that the grades came through lower. Just what was interested to understand some of the drivers here. Is this mainly a mine plan change? Are there dilution issues or you didn't access specific areas of the mine? What drove the silver and gold miss in this period and the guidance downgrade?

Yes, thanks. I think you corrected yourself there, Rahul. Copper first, but gold and silver is obviously what you're focused on.

Rahul, I'll take that one. I guess a number contributing factors to gold and silver, and the decision for us to lower the guidance on those metals. If I start with the mill throughput, so that constraint on the mill throughput earlier in the year, that was longer than we had anticipated in terms of being a function of delays to that approval. Also, lower zinc metal production year-to-date, and really the gold -- the precious metals being associated predominantly with some of the zinc mineralization. And a third element would be [ stone ] underperformance. I think we reported in the first quarter as well, a bit of dilution in one of the production sources that had gold associated with it, and a deferral of another sort of heavy precious metal ore source, but lower base metal content, a deferral of one of those stopes into 2024. So probably those are the key reasons.

Okay. So just touching upon that throughput, obviously, there was a miss in the first quarter, I understand that. But milling throughput did pick up this quarter. It seems largely that the grades that came in were significantly lower for gold and silver. So if we can maybe break that down into like if you talk about the dilution side, did that continue into this quarter? And what are your expectations and what's baked into guidance for the rest of the year perhaps?

Yes. So the one in the first quarter, there was a Scuddles stope that did incur quite significant dilution. That was a remnant stope taken between a couple of backfill stopes. To mitigate that going forward in terms of future sources, we are leaving more substantial pillars around that for the next source. But that was the key sort of source of dilution, although you'll accept that, Rahul, that we do send over quite a lot of stopes. So from time to time, we do get some stopes that underperform via the recovery of dilution, but others that outperform. So it sort of depends on the period and the nature of the precious metal content as to those which are affected.

Okay. All right, perfect. Perhaps then turning to two other things, which are, firstly, the insurance claim and then perhaps capital availability. Obviously, firstly, the $61 million draw on the revolver, can we perhaps get an update on sort of capital availability going into the second half, and when you're expecting that insurance claim to have an update or some kind of a resolution?

In terms of the insurance, Rahul, we're obviously pressing the insurers, we've indicated already, to deal with our claim and to make an assessment. They -- as I indicated, they have all the information that they were seeking in terms of moving to that position. We are not in a position to know exactly when that will transpire, but we are of course pressing for an interim payment in the meantime. Can't advise because we don't know at this point in time when that might be.

Okay. And now that the claim is submitted, are you able to perhaps talk a bit about how we should be thinking about the claim itself in terms of -- I mean, is it going to include the production loss? Is it also going to include damage and recovery ramp-up-related losses? How should we think about that claim?

There are essentially two key components, is that the loss of equipment infrastructure, of course, and then there's a business interruption component. And those are the separate components. And as said, we -- they have the information that has been requested. The ball is in their court. We anticipate that the eventual outcome will take some time, which is normal in these processes. But of course we are, as I said, pushing for an interim payment in the meantime.

Okay. And then final one was just on the capital availability and flexibility. Just a quick reminder or a recap, perhaps, on available debt facilities as we stand today and capital budgets and if everything is still looking comfortable for yourselves.

Peter Herbert here. Yes, we're really focused on [ 3 things ] in terms of our cash flow profile for the rest of the year. It's delivering on a lot on the Golden Grove is looking at the profile in terms of the recovery expenditures and seeing how we can improve on that and reducing costs across the group -- and sorry, actually, that's in addition to the pursuing an interim claim from insurers. But as Peter said, some of that is [indiscernible]. So they're the things we're focused on in terms of improving our profile. Debt facilities, in terms of your specific question, are fully drawn at this point in time.

Your next question comes from Daniel Morgan with Barrenjoey.

Peter and team, just for the Capricorn Copper for the tailings approval, do you feel you need the approval to turn on the mill again in August? Or is -- are you willing to go forward with that placing tailings in the Esperanza pit, if required?

I'll start first. Dan, thanks for the question, and then Ed might add to that. Certainly very comfortable with continuing and commencing a start-up of Mammoth and Greenstone off the no production over the last five months. And as we've had indicated in the past, we're not intending that we'll have a 100% mill throughput from here until we get Esperanza South recommenced, restarted in the middle of the first half of next year. So not an insignificant reduction in the amount of material that we need to place in the tailing storage facility. Moving forward, plenty of options that we have that we're working through with DES. And as Ed indicated earlier, one of those in terms of the short term is the replacement of -- reengaging or replacing tailings into the Esperanza pit, which has always been or has historically been a disposal area. Very focused on our life-of-mine tailings storage facility, and as we indicated, advancing and presenting that to DES in the very near term and looking to move that as rapidly fast forward as we can over the coming months. So from a confidence perspective, we're very confident of our tailings position and being able to manage our current production profile and certainly for the -- and certainly anticipate resolving tailing storage facilities as we go through the next few months. Anything to add to that, Ed?

Perhaps a couple of additional points. By operating Mammoth and [ Greenstone ], you retain core skills resources on site to be able to manage the various water reduction projects. But to be honest, we are nondiscretionary. We need to return the site, reduce water inventory, return the site to compliance from that perspective. But additionally, by the processing ore and depositing tailings up on the Esperanza TSF, that does entrain quite a lot of water up on to what is quite a large evaporative pan, the Esperanza TSF, in addition to entrainment of additional excess water in pastes that goes underground as backfill. So there's a few additional water reduction opportunities that we can leverage by operating Mammoth and GST, notwithstanding the revenue that it also generates.

Just to follow up on the water reduction initiatives, I mean, what seems to be key to my mind is the wet season that's coming up and the ability to put water into, I guess, swollen creeks or what have you. What do you need to do to do that? Do you need the water treatment facility back up and running? And what's the latest on that?

Yes. No, that's absolutely -- it's a very important initiative we are focused on. We have a dedicated team and resources. We have detailed engineering underway to treat water contained in the site storage facilities in anticipation of release and the engagement with the regulator, DES, is constructive and ongoing as well.

Just one clarification point there, Daniel. If you were thinking or suggesting that we need the water treatment facility in full operation to be able to do that, that's not the intention through this period. The intention through this period is to treat water, bulk treat water to get it into a condition for release. So we're not reliant on a new water treatment facility, if that was the point of your question.

Your next question comes from Mitch Ryan with Jefferies.

Just focusing on Cap Copper, I'm wondering if you can sort of provide some more color on the recovery, and specifically the underground water in Greenstone and Mammoth, how high are the water levels? Have you gained access back into those areas? And what are the ground conditions like as you're reentering those areas?

Mitch, Ed here. I'll take that one. So just to clarify, so Mammoth and GST, which is where we'll recommence the operation in ore production in August, so that's fully dewatered. We have full access to that -- those two ore bodies. Esperanza South is the one that still has quite significant amounts of water in it. We've maintained the water level, so no additional ingress of water just through some small pumps, while we procure the larger dewatering pumps ahead of the proper dewatering efforts commencing later in the year. So we have -- we don't have an ability to inspect, obviously, beyond the current water level. But everything we've seen so far in terms of expecting up to where the water level is, conditions are fine, although we do anticipate that we will need to rehabilitate the ground support once we commence dewatering, so in parallel, dewatering, rehabilitation. And that's -- the recovery costs allow for that.

And then moving across to Golden Grove. When will you expect mine production to be restricted within upper Xantho if you don't get at [indiscernible] -- without leveraging of Xantho Extended, when does Xantho become constrained?

So the Gossan Hill complex. So there's probably -- I don't know the number, perhaps there's eight different ore bodies there, then there's also the Scuddles mine. So in the quarter just gone, we produced about 80,000 tonnes from Xantho Extended of the circa 350,000 tonnes, to give you an idea of proportion. Over the medium term, if you recall the outlook statement we made in May, the proportion of production from Xantho Extended increases each year. So next year, off the top of my head was sort of circa 600,000 or 700,000 tonnes the year after increasing further again, ultimately ramping up to 850,000 to 1 million tonnes or thereabouts. So the other Gossan Hill ore bodies and Scuddles will contribute to the remaining material. Hope that clarifies the question?

Yes. It does.

Just to add a different comment there, Ed. We are really quite pleased with the performance at Xantho Extended in this last quarter as we've got down there, opened up development headings, et cetera, et cetera, the increase in development rates as well as production tonnes. Without those new booster fans which are coming in very soon, we're starting to see that additional throughput -- sorry, additional production coming out of Xantho Extended. And it can only get better from here as we bring on that additional ventilation and able to put more equipment down there.