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

Thank you for standing by, and welcome to the 29Metals Limited September Quarter Webcast and Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Slifirski. Please go ahead.

Thanks, Lexie. Good morning, ladies and gentlemen. We will be speaking this morning to 29Metals September 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 also the Open Briefing website. 29Metals Managing Director and CEO, Peter Albert; our COO, Ed Cooney; and CFO, Peter Herbert will lead you through the highlights of the quarter before we open the call for your questions. I'll now hand over to Peter Albert to commence the presentation. Thanks, Peter.

Yes. Thanks, Mike, and welcome, everybody and thank you for joining us this morning. In this last quarter, we've made significant progress on a number of key milestones at both Golden Grove and Capricorn Copper. The Capricorn Copper team has been focused on Phase 1 of the restart at the mine, whilst the Golden Grove, the team focus has been on the debottlenecking activities to support the acceleration of production in the coming next quarter, quarter 4. I'll come back to some specific activities shortly. As always, the safety and well-being of our people is our primary focus. The TRIFR, total recordable injury frequency rate continues to fall and is now at 7.7 for the group, although we did have 1 lost time injury during the quarter. Now to some detail. First of all, let's talk about Capricorn. We restarted operations ahead of plan on 1st of August. This does seem like a little -- a long while ago now, but worth remembering this major achievement by the team following the extreme weather event allowed us to restart operations in the last September quarter. During the first phase of restart, we were mining at the Mammoth and Greenstone mines, producing contingently at approximately 50% of normal total ore production as a result of the sublevel cave, Esperanza South (ESS) being offline due to the extreme weather event in March. Milling is operating on a campaign basis with approximately 2 weeks on and 2 weeks off. The fundamental enabler for minor mill restart was our ability to produce clean water from the low P&H mine impacted water from one of our holding structures, which was full as a result of the extreme weather event in March. You will remember that as a result of the weather event, we lost the water treatment plant and the workshop warehouse. So, what we have done was to create a relatively basic but effective interim water treatment facility from 2 existing small ponds or dams adjacent to the larger water holding structures. By adding lime and flocculants to the water, we are able to adjust the PH and precipitate metals out of the water. Inevitably, at start-up, this system had teething problems. But through trial and error and addition of sophisticated dosing and control systems, we now have a reasonably robust system. The success of the solution is a great example of the ingenuity, tenacity and skill of our people on-site and across the wider 29Metals team. The clean water we produce is used effectively in all of our underground mining equipment and in the operation of both the process plant and the paste plant. There are multiple advantages with this system. Firstly, we're no longer bringing in fresh water to run the operation, demonstrating our ability for the mine to eventually move into a negative water balance situation. Secondly, it uses the water held on-site and therefore, helps our overall water management and reduction strategy. And thirdly, the water use then gets locked up in the tailings that are stored in our tailings facility and in the paste that is pumped back underground, further assisting in water reduction. The other key effort for Capricorn has been our broader water reduction strategy. We now have 18 evaporators installed on-site, a number of which are floating units on the surface of the Esperanza pit, so-called EPit. Water reduction has been significant, with more than 3.5 meters drop over the quarter in the EPit. In addition, we've been able to remove some of the water in the sublevel cave, ESS to enable inspection of the high levels of the decline. Unfortunately, in July, we did have an unseasonal 52 millimeters of rainfall, which had a short-term negative impact as well as some short-term warranty issues affecting some of the new mechanical evaporator units. These warranty issues have been resolved and we are seeing good progress in water reduction. The ability to treat and bulk release large volumes of water during the coming wet season remains a subject of continuing engagement with the regulator, DES. The proposed bulk treatment of wet season release is not dissimilar to the water reduction strategies that applied in previous wet seasons, which supported a significant reduction in water levels before the start of the 2022-2023 wet season in November last year. In addition, large pumps for dewatering ESS are in progress of being delivered. These will enable greater removal of water from the mine. As mentioned previously, we have pumped enough water out of ESS at the moment to inspect ground support in the mine. And whilst we have known that rock [ boats ] will need replacement, we are pleased to see that the fiber creek that we've been able to inspect is in good condition and we don't anticipate requiring refurbishment or replacement. As part of our water management strategy, we had applied to DES late last year to increase the authorized level for water held in the EPit. As I mentioned, this application was made last year prior to the extreme weather event in March and it's followed a detailed update to water balance modeling for the site by external experts. And whilst not directly related to tailings management, the application and its progress was intended to inform our approach to further approvals associated with tailings management, including potential return to tailings deposition in the EPit for a short period as we transition to the planned new long-term tailing storage facility. Unfortunately, DES has decided to refuse this application, we are moving promptly to appeal that refusal. In addition, we have had engagement with regulatory stakeholders and government, including at ministerial level and some of the senior ministerial team and bureaucrats who I met with yesterday to improve confidence in the path going forward and ongoing engagement with DES. In parallel, this decision does not impact our immediate plans for operations and recovery and we will now be proceeding with approvals to support ongoing recovery activities and approvals related to tailings capacity. Copper production through the reduced period of operation at Capricorn in the September quarter was 1,100 tonnes, which were transported and sold directly into Glencore's Mount Isa smelter. Pleasingly, the last milling campaign at the end of September and early October continued to demonstrate improved consistency of operation and good production, which, if sustained, will support higher production outcomes in the December quarter. Moving to Golden Grove. The key focus has been on the final installation and commissioning of the large underground fans to support development and production at Xantho Extended, a very rich ore body called Xantho Extended. The fans were commissioned in September. In addition to the fans themselves, a significant underground ventilation reticulation has been modified to ensure maximum volume of air delivery to Xantho Extended. Development and production from Xantho Extended is now ramping up consistently. For the quarter, we achieved a nearly 20% improvement in development meters at Xantho Extended at 673 meters, noting that a significant component of this improvement was in the latter half of the quarter, with a record 287 development meters recorded in September, really pleasing progress in what is 29Metals' highest value ore body. Overall production at Golden Grove was in line with our plan with 5,500 tonnes of copper and 8,600 tonnes of zinc. In quarter 4, with improved access to high-grade ore sources at Xantho Extended, we have 3 production stopes ahead of us, each around 25,000 to 40,000 tonnes, and each with planned and grades of approximately 15% zinc. We remain confident of zinc production for the year achieving the lower end of guidance as previously guided. Like zinc, all other parameters remain within previously stated guidance. Costs across the group were well controlled despite materially higher activity, higher production and continuing inflationary pressures. Capricorn Copper is obviously a bit anomalous at the moment. So, to focus on Golden Grove, we have maintained our efforts on cost reductions and productivity improvements. C1 unit costs at USD 3.26 a pound were 25% lower than the prior quarter, with AISC costs showing a similar trend. We are focused on cost out and productivity initiatives across the business, which combined with anticipated metal production growth from Xantho Extended is expected to further improve unit costs over coming quarters. On exploration, as reported previously, we are very encouraged by the conversion drilling campaign at Cervantes at Golden Grove with some tremendous results released over the year. These results will feed into our conversion analysis, leading to a revised Resource and Reserve statement expected to be reported in February next year. At Capricorn, we have committed this year to 2 holes of -- in this year, this quarter, actually in this coming quarter, in quarter 4 to 2 holes of our initial 5-hole program. This program is targeting the definition of a potential new ore body at Capricorn, which, if proved up, would be a brownfield's mine development in close proximity to existing ground development. At the corporate level, of course, the very successful $151 million entitlement offer in late August, which was overwhelmingly supported by our existing institutional shareholders. And my thanks and appreciation to those investors and for their long-term belief in not only the copper market, but importantly, in our assets and the management team to deliver on our commitments. Through the entitlement offer, we also secured a key covenant relief from our senior lenders through to December 2024, such that our next covenant test is June 2025. Again, thanks and appreciation to our syndicate of lenders for providing their support. Of course, you'll be keen for an update on the insurance claim for the Capricorn Copper event. And since the last quarter report, we have received an interim progress payment of $24 million coming within 6 months of event. We continue to work with our insurers to progress our claim, including addressing the issuer's assessment that the underground component of our claim is not supported. And in relation to this underground component of the claim, we are working through the issues raised and with the insurers. I'll now hand over to Ed Cooney to talk in a little bit more detail about our operations, who will then hand over to Peter Herbert to talk in more detail about our financial outcomes. So over to you, please, Ed.

Thanks, Peter. [Technical Difficulty] Well, Peter has spoken to our safety metrics and production outcomes for the quarter, so I might progress -- begin with progress against our Recovery Plan at Capricorn Copper. So, we made good progress implementing the key water reduction initiatives. And while we have now successfully commissioned a significant increase in the number of evaporators on-site, our focus has shifted to maximizing the run time of these units as they're key to sustainable long-term water reduction. Peter made reference to a circa 3.5 meter reduction in the water level of the Esperanza pit. And to put this in context, the pit level increased by approximately 8 meters following the March event in addition to filling the workshop area and the estimated 500 megaliters that inundated Esperanza South underground. The Bureau of Metrology has recently declared the commencement of El Nino. Lower rainfall across Northwest Queensland would be a net positive with regards to the site's water balance with lower surface runoff into the site's regulated water structures and the additional install of evaporative capacity. But notwithstanding this, we must be prepared for a possible heavy seasonal rainfall. And to this end, project execution is underway to bulk treat water stored in both the mill creek dam and workshop areas in anticipation of release during the upcoming wet season. Engagement with the regulator regarding the potential for increased wet season releases remains constructive and ongoing. And to further improve protection of the Esperanza South underground to extreme rainfall events, enhancement of the surface diversion structure is also well progressed with all the weather access established and larger pumps also procured. The interim water treatment solution has caused some teething issues as we recommenced operations earlier in the quarter, affecting both the mine and the mill. Additional filtration has been installed, along with further refinement of how we control the lime dosage. And with the improvements implemented during the September quarter already observed during the most recent mill campaign, we do anticipate higher plant run time and metal production for the remainder of the year. And rehabilitation of Esperanza South underground will also commence in the coming weeks with an additional development jumbo recently mobilized at site. And looking ahead, progress continues to be made on a number of future capital projects with completion of concept studies and commencement of stakeholder engagement for a new long-term tailings storage facility during the September quarter and a focus on preliminary design, groundwater studies in the December quarter to support future submission to the regulator and concept designs for a new fit-for-purpose order treatment plant were also commenced. Moving on to Golden Grove and commissioning of the booster fans has resulted in an approximate doubling of the volumetric airflows in Xantho Extended ore body, which has met the design intent. The site team achieved record quarterly development events of more than 670 meters with a focus on key priority headings associated with planned December quarter high-grade zinc sources. Mining and processing performance was also good generally with volumes increasing by 20% and 9%, respectively. The proportion of copper ore relative to zinc ore and mill feed at Golden Grove increased to 58% from 49% quarter-on-quarter with a corresponding reduction of zinc ore and feed by about 10%. Copper feed grades increased to 1.5%, contributing to circa 30% more copper metal. However, zinc grades were lower, contributing to lower zinc recoveries in zinc metal production. With multiple high-grade zinc ore sources now coming online, both the proportion of zinc ore and mill feed and zinc grades are anticipated to be higher in the December quarter. And while the December quarter production is expected to be a material step up on prior quarters this year, we are well placed to deliver based on the continued improvement in development performance, supported by the installation of the booster fans and the high-grade stopes in our plant and the similar performance delivered in the December quarter of last year. I'll now hand over to Peter Herbert to discuss financial outcomes for the quarter.

Thank you, Ed, and good morning to everyone on the call. I'll start with revenue outcomes for the quarter. 29Metals unaudited revenue of $101 million in the September quarter was in line with the June quarter result with higher copper sales quarter-on-quarter at Golden Grove, lower zinc and precious metal sales at Golden Grove with production weighted to the December quarter, as just discussed, and $9 million of sales at Capricorn Copper following the partial restart of operations for the impact -- sorry, including the impact of the teething issues just discussed. Looking forward to the December quarter, Golden Grove gross sales are expected to increase with the weighting of production outcomes to that quarter. In particular, production from the high grades down to extended stopes supporting that production increase. Capricorn Copper sales are also expected to improve, assuming the improved mining and milling rates as seen at the end of the quarter can be maintained. Copper as a percentage of total revenue for the quarter was approximately 58%, an increase on the prior quarter result of 45%. This increase reflects higher copper sales at Golden Grove in the quarter and the partial resumption of operations at Capricorn. Commodity prices were largely flat in Aussie dollar terms with lower prevailing U.S. dollar commodity prices offset by a declining Australian dollar during the period. Turning now to costs. At Golden Grove, site cost for the September quarter of $81 million were approximately 4% higher than the prior quarter of $78 million, and this is despite material increases in mining and milling activity of 20% and 8%, respectively. Selling costs were lower by approximately $2 million to $18 million with lower concentrate volumes sold during the period. And capital is back into the bottom end of the guidance range, reflecting opportunities identified to defer or reduce capital spend, including reduced procurement commitments associated with TSF4 and the delayed completion of booster fans, which had a flow-on impact to the rate of development activity. At Capricorn Copper, the increase in site costs from $1 million to $19 million reflects the path of resumption of operations, albeit at run rates below the March quarter given the continued suspension of Esperanza South. However, Capricorn Copper unit costs remained elevated due to the teething issues discussed earlier. These are expected to reduce in the December quarter, in line with increasing production levels. So overall, recovery costs continued to track in line with expectations but at the lower end of guidance with the timing of the commitments being aligned to progress on key regulatory pathways. Thus far, 2023 has been a challenging year overall for costs with significant effort being applied to identify and execute cost containment opportunities. This has been reflecting in the leveling out of site costs at Golden Grove in particular, over the last 2 quarters, despite increasing activity levels. Notwithstanding this, group unit cost remains too high, improving unit cost outcomes will come from executing our plan to deliver high production, including in the December quarter and continuing to find further opportunities to streamline and simplify our business with planning underway for 2024, building on the progress achieved this year. Turning now to the balance sheet. 29Metals finished the quarter with unaudited cash of $227 million, an increase in the June position of $127 million. This increase in cash reflects $144 million in net proceeds received under the entitlement offer and a receipt of $24 million in an initial progress payment for the Capricorn Copper insurance plan in connection with the extreme weather event. As previously reported, the insurance claim process is ongoing with activity in the quarter focused on advancing the loss adjustment process for the service component of the claim, as well as 29Metals' response to insurers regarding the underground component of the claim. On a net debt basis, the group had an unaudited net debt of $15 million at the end of the quarter, improving on the position of $120 million at the end of the June quarter. Net debt is after USD 10 million in principal repayments during the quarter, higher than previous quarters and as agreed with lenders concurrent with the waivers received in connection with the entitlement offer. Whilst liquidity, post the completion of the entitlement offer is strong, the business is focused on improving operating cash flows expected in the December quarter, in line with rising production in both operations. Finally, stamp duty in connection with the acquisition of the Golden Grove IPO remains outstanding and we maintain a provision of $26 million in our accounts for that amount. Thank you very much. And I'll hand back now to Peter Albert.

Thanks, Peter. So, that's the end of the formal presentation side of things. So, happy to go to Q&A from here.

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

Look, my first one is in relation to Xantho Extended. Just wanted to get a bit of an understanding. I mean you've talked about 15% zinc rate going forward in the following quarters. Is this basically selective mining? Or like what is driving this high grade of zinc? And how should we think about that going forward?

I'll take that one. It's really linked to just the stope sequence. So, not selectively seeking to high grade. They're always in the plan for this year. Some delays, obviously, to boost the fan commissioning and development. So ideally, they would have been a little bit earlier in the plan, but notwithstanding still falling in calendar year '23. And in terms of grade distribution throughout the ore body is not necessarily uniform. So, you all always -- we will continue to have some stopes that are higher grade, high NSR in the sequence as we progressively extract more and more in the ore body.

And how is the broader ramp-up going, Peter, there in terms of Xantho Extended in terms of the proportion of the ore body where it sits today and where you end up perhaps by end of the year? I'm just trying to think about perhaps calendar year '24 versus your plans of having Xantho Extended and what proportion it ends up being?

Yes. So this year, the Xantho Extended ore tonnes would be sort of circa [ 200 to 300 ], which I think we've disclosed previously and our intentions are to obviously continue to ramp that up progressively. I think in our May outlook, we stated sort of a doubling to about circa 600,000 tonnes from Xantho Extended in calendar year 2024.

And that remains to plan?

Currently, yes.

Okay. Brilliant. One more then on Esperanza, just the refusal that you've received. If we assume that you have achieved your nameplate, how long can you delay this issue in terms of your tailings map and sort of how you deposit tailings going forward at site? How much time do we have here to fix this issue?

Well, first, thanks, Rahul. It's Peter here. First of all, it was a refusal for additional water volume within the EPit not to do with tailings. So, just to clarify that. And I should say that the refusal was quite a surprise, not only to us but to all our consultants that prepared the documentation. And indeed, feedback from the regulator was our submission was actually technically very sound. So, it was refused on a, I guess, they claim a precautionary principle, which has more to do with contingency and risk. With that, we're obviously -- and I said it in my notes going to immediately appeal that. And we've also immediately engaged with other government departments to address this concern. So that's well underway, let me say. In terms of tailings, yes, of course, the subsequent intention is to return to putting tailings into that facility. That was not part of this application, but it will be in the near term. And that would return us to doing what we have done in the past because that facility has been used for tailings deposition in the past and we will be looking to continue with that, not only the application but ultimately, the ability to do that and to see our way through to the long-term tailing storage facility, which, as Ed Cooney mentioned early on, it's progressing in terms of documentation and work associated with that and then submission to secure that long-term tailings -- longer-term tailing facility. A bit of a long winded answer there Rahul, but there are various sort of pieces to that puzzle, so to speak.

No, I completely understand. And obviously, Esperanza is part of your medium-term plan was being considered as a possible option in your medium-term plans for the tailings and that's why I wanted to understand. I mean, when do we have some sort of visibility on this in your opinion to gauge if there's going to be something more serious that we need to address here. That's all.

Yes. Thanks, Rahul. I'll continue the question and conversation there. So, we are focused on continuing our operations at Capricorn with the plan that we have in place because our commitment and our belief is that is -- that will be the outcome. We are well focused on ensuring that we get the right approach from the relevant authorities to ensure that takes place. So, I can't give you a definitive it will be on such and such a date, et cetera, but we remain confident of an outcome here.

Your next question comes from David Radclyffe from Global Mining Research.

My first question is on low zinc prices and then thinking about Golden Grove and how you manage this. Historically, the mine sort of switched to more copper-rich so where they can during these sort of times. So, is this starting to factor into your plans for the short term, although it doesn't sound like you can do much maybe in the very short term, but when do you think ahead to '24?

I can kick that off. In terms of a production perspective, I mean, our focus really is on the highest grade reserves [ anti-standard ], so that has high zinc grades, but it also does have some correspondingly pretty high copper grades, particularly in some areas. Yes, there's some flexibility in the rest of the ore body. Scuddles, for example, has some reasonable copper ore sources. Those sorts of things are absolutely something that we evaluate as we go through the budget process for 2024.

And then maybe following on, I mean, obviously, Golden Grove had a good quarter with tonnage up, unit costs are down. But then when you look to '24 and you're talking about potentially lower all-in sustaining costs and you're talking about cost out. Have you got a dollar or millions number for the potential from the cost-out initiatives? Or really, is the lower asset just primarily driven by the expectation of high grades?

I think it's a bit of both. But in terms of the cost-out question -- part of your question, we're going through planning for 2024 at the moment. I think you'll see that reflected in guidance when we come to put that out for 2024 formally and early next year. But clearly, the levers in the business are clear, as I've spoken to, we have a very good idea as to what's going to drive value in this business around increasing tonnages from Xantho Extended and that's the best thing that we can do to really drive that result. But we [Technical Difficulty] and production.

David, just to add to Peter's comments there and of course, we're going through the process for next year right now. But we'll reflect on Peter's earlier comments in terms of notwithstanding higher productivity levels and activity across the business and across absolute costs maintained and therefore, having a good impact on unit cost and we would seek to lock those in and build upon them next year.

So sorry, just trying to push a little bit to trying to think whether next year is another year when you think about the C1 including TCs and transport as sort of that $400 million-plus [ line ] or whether you can actually think you can break back down into that sort of $300 million level?

I think we're going to the process. So, I don't want to kind of speculate on that. But I mean, suffice to say, we'll be -- and clearly, some of those things you mentioned, TCs are subject to where the benchmark goes, of course. So some things, we have to wait and see how the market evolves albeit relatively encouraging sounds recently on that front, but a bit of water go under the bridge there.

Your next question comes from Daniel Morgan from Barrenjoey.

First question is just it appears, although not 100% clear that sales or shipments lag production. Can you just confirm this? And can you talk to this impact on revenue and cash flow?

Apologies, Daniel, I'm not sure I understood the question there. There was a question about the timing of shipments?

Yes. It's -- because you've given us production, but then you've also given us payable sales. It would appear to me that you had lower shipments than production in the period and therefore, lower than normalized revenue and cash flow. Have I got that right? And what was sort of the ballpark impact of that on your cash flow?

Right. Thank you. Yes, you'll see that flow through the cost line and the stockpile adjustment at Golden Grove primarily. So, I think it was $6 million flowing through there. That's effectively the cost of producing that material. So it's a proxy, but less than what we can sell it for.

And just on Golden Grove TSF4, when do you need approvals for that in order to execute on it and make sure that there's not a production impact?