African Rainbow Minerals Limited (ARI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the African Rainbow Minerals Interim Results Announcement for the 6 months ended the 31st of December 2021. [Operator Instructions] Please note that this call is being recorded. I'd now like to hand the conference over to Jongisa Magagula, the Head of Investor Relations. Please go ahead, Jongisa.

Good afternoon, everyone, and thank you for joining us today. I'm going to start off quickly by introducing the ARM team that is around the table. We have Mike Schmidt, the CEO, with us today; and then we have Tsundzukani Mhlanga, or Tsu as we call her, who is the Finance Director of ARM. We also have our 2 Chief Executives, Thando Mkatshana, who's the CEO of ARM Platinum as well as the coal business; and André Joubert, who's joining us as -- he is the CEO of ARM Ferrous; and [ Jade ]; and then we've also been joined today by [ Phillip Tobias ], who joined us as the Chief Operating Officer of ARM. I'm not sure that you've all met him, but I think with time you definitely will. And then [ Jade ] and myself are joining from the Investor Relations side. And I have no doubt that you probably had a chance to go through our numbers and some of you might have joined the webcast this afternoon. So we want to try and use the call as much as possible for addressing some of the specific questions that you may have or being directed into to the focus areas that you'd like us to spend some time on. But I will just hand over to Mike and Tsu, who will make some opening remarks on the overall performance for the 6-month period, and then we will move directly to Q&A. Over to you, Mike.

Thanks, Jongisa. And a warm welcome to all of you who have joined us online. We're obviously very pleased, it's -- around our safety results. It is an endless struggle in our quest [ to vie for zero harm ]. But we have realized this quarter improvements on all our safety cases in most of our operations. Pleasingly, Black Rock, which I believe is an the industry first for a single operation, has achieved 10 million fatality-free shifts. And that's taken nothing less than 14 years. Currently, we have at least 6 operations, which are millionaires, if not multimillionaires, and that's very, very pleasing on our journey. Regretfully, we did have a fatal at Two Rivers, and our real sincere condolences to the family and friends of Mr. Jacob Puleng. That was a fall-of-ground accident at Two Rivers. So our absolute commitment is to zero harm and to continue to work with all our employees and stakeholders to minimize the occurrence of disabling injuries and certainly the occurrence of fatals and fatal hazards. We are still, operationally on the domestic front, still being impacted with our volumes on the infrastructure and logistics and water supply, and, as most people on the call will realize, our overall dependence on the state-owned enterprises in terms of us being able to deliver. It's one thing to produce, but if you can't get metals to the market, you pay the price in [indiscernible] in more ways than one. And certainly, the cost position is -- unit cost position is hugely impacted because of that. And obviously, we are in very volatile times, but the market volatility also makes planning and forecasting quite challenging. Pleasingly, it's in the right direction for now, but it doesn't mean that's the sustainable view. That being said, we do remain confident in the metals we mine and produce. And maybe just a word on the headlines earnings. Predominantly, it was a marked drop in iron ore prices. The PGMs were affected by what we call the mark-to-market correction from what you realized as a revenue recognition and [ plus ] the pipeline which you actually declared in the books. It was quite a nice simplified explanation, I think, on Slide 32. That being said, the cash generation, pleasingly, remains very solid, commodity prices remain robust, all of our operation margins are nice and solid. And maybe a closing comment, the outlook remains pretty positive for the business as we stand. I would want to hand over to Tsu to take us through some of the financial slides, 2 or 3, and then, as Jongisa alluded, is rather focus more time and effort on questions. Tsu?

Thanks, Mike. So as we have reported, our financial performance, our headline earnings in terms of group earnings, we're down 27%. That is compared to the prior corresponding period. So our headline earnings -- group headline earnings decreased to ZAR 3.7 billion. If we look at the performance of the different divisions, ARM Ferrous, the decrease was 18% to ZAR 2.4 billion. Obviously, that's then off of the decline in the iron ore price during the period. ARM Platinum as well declined by 38% to ZAR 1.2 billion. And as Mike mentioned, part of the reason is due to that mark-to-market adjustment due to the come off of the -- both the rhodium and the palladium price. ARM Coal, pleasingly, due to rise in the coal price, increased to ZAR 351 million. In the prior corresponding period, we had a ZAR 222 million loss. So that was quite a nice turnaround that we hope will continue. In terms of dividends, the dividend that we declared was ZAR 12, which is a 20% increase off of the dividend in the same period last year, ZAR 10 last year to ZAR 12 this year, 20% up. In terms of the dividends that we received from our underlying operations, we received ZAR 3.5 billion from Assmang, which is a 133% increase from the previous year. We received ZAR 459 million in dividends from Two Rivers, which is a 6% increase on the previous year. And pleasingly, we received dividends from Modikwa [ post ] [indiscernible] the loans. In the prior year, we didn't have any dividends that came through to the company, whereas in the 6-month period, we're pleased to report that we received dividends of ZAR 415 million. If we look at our financial position, I think the foremost thing that we have mentioned is the Bokoni deal that we are currently concluding, or in the midst of concluding or process of concluding, which would be for consideration of ZAR 3.5 billion to be settled in cash to the Bokoni Platinum shareholders, being Atlatsa and Anglo. In terms of our group net cash, that improved by 35% to ZAR 11.1 billion, and that also talks to the improvement in the net cash-to-equity ratio, which is now sitting at 24.6%. ARM corporate cash and cash equivalents, that is sitting at ZAR 8.6 billion. That was as of the end of December. And then we also report on the Assmang cash and cash equivalents balance at the end of December, which was sitting at ZAR 4.4 billion. That is on an attributable basis. Mike, I think that's -- and in terms of highlights for -- oh yes, and then post -- so then earlier this week, we received an additional ZAR 2 billion from Assmang as a dividend. So yes, that came to our bank account on Monday. So the numbers that we had reported in the results exclude that ZAR 2 billion dividend treatment. Thank you.

Okay. Operator, I think back to you because as I said, we're mindful that we want to allow as much time as possible for questions. So back to you to take any questions from the audience.

[Operator Instructions] The first question comes from Brian Morgan from RMB Morgan Stanley.

I had to miss most of the Q&A call this morning, so I apologize if I repeat anything that was asked. Just on ARM coal debt, if I look at Note 12 of the financials, you've got ZAR 437 million sitting in long term, [ ZAR 181 million ] sitting in the short term, so that's ZAR 600 million. Is there anything else sitting in ARM coal or [indiscernible] in coal?

I think on slide, we did show the total amount of what is an ARM coal that is outstanding. And I think it is about ZAR 1.5 billion as [ at ] Slide 34.

Okay. Pardon me for asking that one.

On Slide 34, it's not broken down there between the 2 different entities, but the total amount that is outstanding in the system is ZAR 1.5 billion.

At current prices that should be pretty easy to get done this year, right?

Well, it depends on the current price level always [indiscernible] today, [indiscernible], no doubt, it should pay down very aggressively. But when we remodel based on our outlook and our price assumptions, it was another year to 2 years before we get fully paid on the -- look, there obviously have been challenges on the operational side, but all of this has continued. We've had some challenges around moving volumes and getting volumes to ports. And so we are seeing a little bit of an improvement to Transnet, but depending on how that stacks up. So it's very good at [ current ] prices, but we've got to get the stuff to the ports, right? So yes. And then you have a business that's generating strong cash though, that is unencumbered.

Yes, exactly. And then Mike, I haven't had a chance to ask you about Bokoni. I mean you're talking first production, '26 and full production, '28. I think a lot of people's fears out there is that the EV revolution will be in full force by then, and ICE vehicles will be losing market share and you might be in a bit of a death spiral for PGM demand. Is that something you subscribe to? Is that something you're concerned about?

I do, to your comment. And obviously, it is a concern, Brian. So the information that we've gone public with is pretty well contained in the presentation. There's obviously a lot of moving parts, particularly in terms of the ESA study, which has already commenced. But the fact that we don't have the keys to the business, we haven't had a free run to really fully comprehend what's possible. But on the face value, we -- look, the intention is, Brian, is you will recall that Bokoni, at the time of closure, we were predominantly mining Merensky out of that [indiscernible]. Then we looked at internally and decided for a number of reasons to stop that, to preserve it maybe another way, but not to continue mining the Merensky. So what we've been looking at is to go back to Middelpunt Hill, where they were mining UG2 on a conventional basis. There are 3 levels, which are well developed, open, with [ price ] availability. And the thinking as we sit here -- but it will be concluded with the study, Brian -- is that we would comfortably be able to get in there and produce and rapidly ramp up to about 50,000 tonnes, 60,000 tonnes comfortably within a year. And we will process that ore through the existing UG2 plant, which is very functional and new, albeit small, but it will comfortably handle the 60,000 tonnes. And this trade-off study was around what do we do, because we start literally from day 1 by doing what we call on-reef development. Now that obviously comes pretty dilutive. And that could have easily [ filled the maw ], and that was the initial intention, is to keep the UG2 [ maw ] full with on-reef development, which would also quite rapidly build up to the 60,000 tonnes while we're doing the full conversion on the Merensky plant. But -- and I'll revert now. So the current thinking is rather to stockpile the development reef, because it's on-reef development, and focus on that conventional ore body which is there and process that at these prices, it makes a sizable dent onto the overhead and the [indiscernible]. And if we can do that without compromising the conversion in the plant and without compromising our ultimate game or drive is to get established on a [indiscernible] that play out or patterns that play out for opening up and rapidly opening stoping. We're certainly looking at that. Brian, I think that will bring a lot of early answers -- it will bring early answers, a lot earlier than what we've publicly gone out on, but it's still subject to a due diligence study, which will conclude pretty quickly that part of the study, maximum 3 months, but we do need the keys to the property to engage various parties around the plant and the mining and the mining option. Then the intention with if we then stockpile all the reef development. And once the new plant is commissioned, which is approximately [indiscernible] do myself here, 18 to 24 months, is you're sitting with quite a sizable amount of development reef. And the thinking there is to look at pre concentration, but that optionality or that study is also going on fine. And then we have a sizable stockpile in front of the new [indiscernible] to process that into a seamless integration. So I think there will be a lot of optimization going forward, Brian, but it's not something I could stand on a podium and say.

Of course. And so where would you -- in the sort of that bigger phase that you were talking about, the original thing that you were talking about in December, where were you going to, or planning to, sink that decline?

So out of the Brakfontein Shaft, we're going to use the portal access. And at the second leg, we are going to put a triple decline down to the UG2. The vertical distance being 190 -- it's about 700 meters, 700, 800 meters, but it's a triple decline of heavy pure waste development to access the UG2. And that's why we say Brakfontein will -- which is a Merensky Shaft -- will be converted to a full UG2 plant, but we are not going to cannibalize or sterilize the Merensky. All of that will be preserved, kept in place. And as to where the [ slip stream ] stops moving is we may even advance some of that development to be really in a good position from a flexibility point of view to swing between the one or the other or combine both at whatever ratio we think to focus. So to come back to your question, yes, we will access the existing Brakfontein Shaft with rapid high-speed development. At this stage, we're looking at autonomous drill rigs operating on multi-blast conditions. Then if we take back to the Middelpunt Hill, and that's where I said we've got a challenge, I don't want to do the UG2 at the cost of utilizing the belt infrastructure, which is really not very big, at the cost of delaying the development onto UG2. So we have -- there's already a portal which is 200 meters up. I think it's got 300-odd meters to go, what they call, they call it -- it's called [ Klipcut ] portal. Now that, again, that development is about 6 months and another 6 months to establish the belt. Then we've got all the flexibility in the world to continue with the transition to UG2, whilst we even continue then mining that on a conventional basis. So Brian, those are the studies and the thinking that's going on currently. Phillip wants to say something.

Maybe just to add, Brian, with what Mike has said, the priority is basically to open up that UG2 [ block ] for that mechanization strategy. So whatever else, whatever options that we have, we're going to weigh it against that. Then if we compromise that, then it's going to be [indiscernible] in terms of the forecast.

So Brian, you would appreciate that we are converting this entire mine, like from a brownfield we're simply changing the ore body and we're starting [ afresh ]. We are going to pick up the surface infrastructure. We're going to do a massive change in the plant, absolute modern, look at focus on recoveries extraction. We're going to look at beneficiation and -- and so it's a full mine transition from what was historically a Merensky mine, for all the good reasons at the time, and refocus on UG2. Hope that answers you, Brian.

It does. That does. So obviously, I remember [ Atlatsa ] talking about the possibility of UG2 even 10 years ago at Bokoni, and that they've got a whole lot of stuff -- have had a whole lot of stuff on the go and other options available to them. But it is very high grade, and it's a very big resource. Why do you think they would have opted to do other stuff rather than this?

Well, it hasn't covered itself in glory in terms of delivery over time. And the -- and you will recall that its pure focus, which I could never criticize, had been platinum driven, and hence the Merensky. And the Merensky had 2 problems eventuated, and that was -- hindsight's a perfect science. Firstly, there's been a major shift from what was platinum-based into palladium and rhodium. That's the first fundamental shift that transpired in the last 5 to 7 years. And they were not in that position to recapitalize, I don't believe their partners Atlatsa has the capital to co-contribute. And Anglo was keeping on pumping money disproportionately in that. And secondly, Anglo has their own operations. Anglo would even offset Modikwa for capital, you will recall those conversations into operations, around 100%. And I and you would have done exactly the same. So that was the first problem. But in their mining this Merensky over time, the [ total ] intensity has really just kept on surprising on the full downside surprise and well-defined now is the [ total ] intensity is between 18% and 20%. And the implications of that, you have to do 30%, 40% more development. And the other thing practically with handheld equipment, you couldn't develop fast enough to replace the stope faces, which you were using at ever and going, you could never open up a panel and your extraction on those panels, because of the [ total ] intensity, pretty dismal in the region of 40%, 50%. Now in the years when they have been doing UG2 -- and obviously, they have quite a strong drilling database -- but being mining UG2 for the last, I think, 9 years on a small basis, it's very, very clear that the UG2, whilst it's not some [indiscernible] not as homogeneous, but the [ total ] intensity is between 8% and 9%. And all the work we've done supports that. So there's a double whammy today in while we simply have to put a huge amount of capital to that, the Merensky in itself can't survive currently, if the market fundamentals don't support it at 70% Merensky and the other is 30% whereas you know the swing now is more in favor of palladium and rhodium, 57%. And obviously, the UG2, the Merensky is about 4.5 grams a tonne and the UG2 is 5.7, 5.8 grams a tonne. So all the right figures. But you and I know that there's going to [indiscernible] years to come, and we must be prepared. We are looking at other mining methods to accommodate the high [ total ] intensity, and there are some thoughts that we're not there, and we saw [ quick ] not to mine, even as an interim period today, not to go back to the Merensky.

Cool. I had to jump off the call when [ Warren ] asked the question in terms of what are you actually paying, ZAR 3.5 billion...

Please go ahead, Brian. Please go ahead.

Can I go?

Yes, please go.

Okay. Cool. Sorry, I had to jump off the call when Warren asked a question about what you're actually paying in terms of cash?

So Brian, we've had this debate. There is currently a shareholders' loan at the Bokoni Mine level of ZAR 3.3 billion. And we are paying ZAR 3.5 billion to the existing shareholders, Atlatsa and Anglo. So that's what we're paying. What will happen over time is that when the operation starts generating cash, it will first service those loans, and we've got some flexibility in terms of the terms around that. There, it will service those loans. And once those are fully serviced, when I say service them, it means they will repay essentially all back. And what -- once those are fully serviced, the money will come back by way of a dividend. So we -- I had a debate with Warren about this and the temptation to say your net [ offer ] is ZAR 3.3 billion against the ZAR 3.5 billion, which I don't think is correct. We are paying ZAR 3.5 billion. Those loans are [ further ] equity, and essentially we are paying ourselves back. The disadvantage of those loans is that the cash will come back to ARM on a 100% basis first to settle those loans. And then when it starts coming back with dividends, obviously 15% of it will go to the external shareholders, being the 5% industrialists, 5% that's going to the communities that [indiscernible]. But to the external party which is the current shareholders, we are paying ZAR 3.5 billion.

So Brian, I know you've probably got another question, but I thought it was quite important that, to [ Jongisa's ] point, she's closer to the mark. Just to explain the unredeemed CapEx and the losses from a tax point of view and a [ recovery ] point of view for many years post operations, this entity is likely to be in a good tax position because of what is available, we firmly believe based on our evaluation of the tax structure. When we say...

Yes, It is clear, Mike, I think this is a key part of the due diligence when we were conducting it, it is obviously capital allowances that are a part of the business from a tax perspective [indiscernible], unredeemed losses that can be utilized for future benefit. So we were quite conservative when we assessed our returns in the sense that we discounted what portion of it would be available for use. But there's potential for upside insofar as [indiscernible] are concerned once these operations start generating cash. So that is some value uplift or [indiscernible] associated with that.

[Operator Instructions] Jongisa, at this time, there are no further questions in the queue. Can I hand back to you for us to conclude?

Fantastic, thank you very much. I think, just to reiterate that for everyone who is on the call, we are available beyond this call. If you've got any further questions, please feel free to drop myself an email, and I'll pass them on to the team. And I think, just to wrap up, we believe that we are moving into a really exciting phase in our path, where we expect our diversified portfolio to bear us well, particularly in the current volatile times. We've also got our different operations at different stages. Our iron ore operations have delivered fantastic cash for us, really great returns. They are at steady state. We are mindful of the outlook for a pullback in the iron ore prices, and we'll continue to kind of focus on making those operations more efficient and better from a cost perspective. We've made a significant investment in our manganese operations, which we really believe is going to bear fruit. So that CapEx hump is coming to an end from that side, and I think it will place these operations in a really great position on the cost curve, and it will be producing good quality grades, which are in demand. We're excited about our PGM portfolio, which is gaining critical mass very quickly. And all of this is happening at a time where we are maintaining a really strong financial position which is allowing us to grow, but at the same time really deliver a very competitive dividend to our shareholders. And we keep our eye on and focus on creating value for all stakeholders, so continuing to invest in our communities and a wider stakeholder realm. So we are really excited and confident about the outlook for our business. And I think that's all our time. Thank you very much for joining us this afternoon.

Thank you very much, ma'am. Ladies and gentlemen, that concludes today's conference. Thank you very much for joining us. You may now disconnect your lines.