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

Good day, ladies and gentlemen, and welcome to the African Rainbow Minerals Provisional Results for the year ended 30th of June 2022. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Jongisa Magagula. Please go ahead, Jongisa.

Good afternoon, everyone, and thank you for joining us on the call today. And just by way of introduction, because this is not a video call, I just want to let everyone know who is on the line from our side as a management team. We've got Mark Schmidt, our CEO. He's been struggling with a bit of a cold, so his voice is under pressure, but he's going to do as much as he can. We then also have our Chief Operating Officer, Phillip Tobias, who I think a few of you have had the pleasure of meeting. We're also joined by our Finance Director, Tsundzukani Mhlanga; and then as well as our Chief Executive, Thando, the Chief Executive of ARM Platinum and Coal; as well as André Joubert, who's the Chief Executive of Ferrous. Joining us is also the gentleman who is responsible for all the Bokoni trouble, Jacques van der Bijl, Jacques is our Executive of Growth, and then Jade and myself. So as I said, Mark's struggling a little bit with his voice. He did well on the webcast today, but his voice is currently [ strained ]. So just for some brief opening remarks, I'm going to hand over to Phillip. There are quite a few people on the call. So the webcast was really focused on going through the slides. But for this session, I think it's more for everybody to engage and focus on the questions that you may have and getting those addressed. So without any delay, I'm going to hand over to Phillip, just to give a summary of some of the key highlights and then we will move straight over to Q&A.

Thank you. Thank you very much, Jongisa. Good afternoon, everyone. We are generally pleased with the overall performance of the operations, notwithstanding huge price volatility and also logistical challenges we experienced during the period. Logistical constraints continue to impact volume delivery, which resulted in increased unit costs. The high cost of raw materials, diesel and explosives were the main drivers of inflationary cost pressures that we have experienced over the reporting period. In line with our commitment to paying dividends, while especially in quality growth and maintaining a robust financial position, we are again pleased with the final dividend of ZAR 20, in total ZAR 32 for the year with a payout ratio of 83% of cash generated, 88% of the dividends received from underlying operations and are giving us a yield of 13% overall, which was basically 7% up on a previous year. Notwithstanding the drop in iron ore and PDM prices, operations maintained strong margins and the fundamentals for the metals we mined remain robust. We continue to assess value enhancing growth opportunities, bring both organic and also measures and acquisitions forecast. With the acquisition of Bokoni, we will more than double our attributable PGM over the next 5 years. Our commitment of ESG matters are aligned with the principles set out by ICMM, of which we are a member of. In terms of climate change, ARM aims to achieve net zero emissions by 2050, and we are busy with a number of initiatives and introducing pathways to deliver on these commitments. Innovative and appropriate technologies are being implemented at all operations to improve productivity and also to improve efficiencies. ARM Coal loans owing to Glencore were fully settled following the [indiscernible] in the thermal coal prices, which resulted in positive cash flows. Regrettably, we lost 2 of our colleagues in this reporting period. We remain resolute to eliminate all disabling injuries and committed to 0 harm to our people and the environment. Commendable safety improvements were recorded in all operations. Black Rock achieved 20 million -- 10 million fatality-free shifts, which took basically 18 years to achieve. Beeshoek achieved 5 million fatality-free shifts, which took 13 years to achieve. Headline earnings were down 13%. Excluding remeasurement losses of the coal loans adjusted headline earnings were down 6%. Ferrous and Platinum division headlines earnings were impacted by a drop in prices, but offset by the price value of coal. Group maintained a healthy balance sheet and has generated strong cash flows. As part of our capital allocation, we continue to evaluate opportunities to grow our company, deliver competitive returns to shareholders and create sustainable value for all stakeholders. On Bokoni mine, a new mine plan is being developed, which will focus predominantly on mining the UG2 resource, and will aim to employ mechanized mining methods and target predominantly on redevelopment. We are currently evaluating early mining opportunities to capitalize on current strong PGM basket prices while ramping up development. Thank you very much in the opening. Thanks.

Thank you so much, operator, and thank you Phillip for those remarks. As I said, as part of our call today, which is great. So I think -- and I do know that from the webcast, there were some questions that were not addressed. So we really do want to use the opportunity to engage and address some of the questions that you may have. So operator, with that, I would really like to open the session up to Q&A.

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

Can we just get an update on Bokoni in terms of the thinking about getting early answers there, just specifics around what you do in timing, CapEx, et cetera? That's number one. Number 2 is, just thoughts around the communities. You've had another couple of months to engage there, I presume. Just thoughts of how you're going to manage those community expectations [ which we're starting this month? ]

Okay. Jacques will answer that. Jacques, over to you.

All right. Brian, it's Jacques van der Bijl. Brian, so it's an opportunity that we've identified to enhance the overall ramp-up on Bokoni as well as potential early cash flow generation. As you are aware, there is an existing 60-kiloton per month UG2 plant at Bokoni that was operational up until 2017 when the mine was placed on care and maintenance. So we have employed DRA to do an assessment of that plant to understand exactly the condition and what it would be required to restart that concentrated plant. And then in addition to that, we've also employed the services of quasi to do open pit assessment for us. Bokoni has got quite a long strike distance of 21 kilometers of outcrop and both UG2 as well as Merensky. So we've identified suitable places where it would be possible to do shallow open pit mining. Obviously, you are limited by the dip of the ore body in terms of how you can go. But we're quite pleased with the initial results that have come out. And the intention would be if it's proven to be viable to a point out of the contractor to do that mining for us and then to process that material for the existing 60 kilotonnes for the month UG2 plant, whilst we construct the new plant and at the same time. What that does give us is both the ability to be able to produce early ounces of cash flow from a relatively low operating cost being open pit mining as opposed to underground. And then also to build stockpile from the open pit sources as well as potential early underground opportunities whilst we built a new concentrator plant. We are currently doing the assessment on those studies. We plan to have those studies completed by the end of this year, early next year and then to present to our Board with the recommendation to proceed. If those are positive, and our Board supports the plants, we believe that roughly towards the end of next year, we can see the first ore into the 60-kilotonne -- existing 60-kilotonne plant and also have the refurbishment work on that plant completed to start producing cash flows. So that would be producing ounces probably about 1.5 years before the new concentrator plant has been constructed and commissioned.

Okay. And then so 60,000 tonnes per met so we can extrapolate that in terms of ounces. You run it, in other words, you run at 100% capacity utilization.

Yes. So it would be milling the full 60,000 tonnes. The open pit opportunity indicates that it probably would be able to produce more. We're looking at around about an average of 80,000 tonnes per month. And the balance, we would stockpile for the commissioning of the new larger concentrated plant. In terms of ounces, you're probably looking between 80,000 and 100,000 ounces per annum from that 60-kilotonne plant, and that's 60.

Then Brian, I think the second part of your question referred to the community and how we are intending to manage some of the challenges around that. I think Thando will speak to that.

Okay. Brian, so with regard to the community for sets, we've had engagement over the last 2 weeks and going to introduce the new combined with ARM. And in those farms and the engagement we've been sort of gathering more of their concern going forward. I think the most pleasant part of this transaction, as you are aware is that community will also have a shareholding with regard to the mines. And I think our experience coming from Modikwa has -- or others can afford well in terms of us especially the communities for ARM as well as their shareholding in the mine. So those engagements are ongoing. Overall, we've been getting a better positive feedback. Everyone is looking forward to have the mine started, especially after being on care and maintenance for such a long time. it has had a huge impact on the employment numbers in that. So we've got a good support. And those enlargements went up caused a traditional relation business for ARM and unions as well as the Kingdom of Bapedi. Thank you.

Just to maybe stress what Thando has referred to in terms of , I think we've got the history and the experience with the structure where the community does have a shareholding. And we highlighted in the results this afternoon that this year to the communities that are neighboring the Modikwa mine who have the shareholdings, there was a dividend of ZAR 255 million that was declared to those communities as Modikwa was producing positive cash flow. So it's been a long and oftentimes challenging road with regard to that. But I think we've got the history and track record and the credibility now. So hopefully, that also helps us. Brian, I don't know if both of your questions are sufficiently or adequately answered.

Yes, that's cool.

[Operator Instructions] The next question comes from [indiscernible] from [ Doral Investment. ]

I just wanted to follow up on the community participation. And specifically, beyond the shareholder, what plans are in place for the community to meaningfully participate in the operations from an SME perspective, such that all they're not getting is jobs?

Thank you, [indiscernible]. Thando again. So if I may expand on that. So the community, obviously, as an obvious benefit comes as an employment opportunities, but we do have in our structure and how we operate in our mines the engagement of SMEs under the department on stakeholder engagement. So we do have what you call it, enterprise and supply development. That's why we work with the local communities to support them. And the support comes in forms at times with financial, technical support or business management support and that we work with them and they become suppliers or service providers to the mines. So we're looking to establish in that way. To this end, we have engaged and appointed a consulting company to help us in terms of just doing overall survey of what is available and what is the need of the community upfront and we will start building on that. And of course, the most important thing is how we operate ARM, we look at engaging with the communities. So that whatever we decide, we decided to strengthen with them and we work with them. We don't decide on their behalf. So we're going to really be forecasting on a lot of engagement processes going forward.

Just to add on to that a bit, is that matrix that you used to measure the effectiveness with whatever plans we may have with the communities?

Definitely yes. There's the metrics that we use, and it's as input into our black economic empowerment scorecard under the GTI and Charter. So we do use those metrics to measure ourselves. And I think we also have comforted that after [indiscernible] we not only complied or look into compliance into a mining charter, we go beyond into the GTI scorecard, which is more stringent and is more forecast in terms of passing the economic benefits to the -- your communities and SME in particular.

Okay. By the way, what's your name again?

The gentlemen who's speaking now is Thando Mkatshana, who is the CEO of ARM Platinum.

The next question comes from Andre Peters from Visio Fund Management.

Just a question and follow-up on Bokoni on the infrastructure side. I understand you're still seeing an assessment of the plant. Just your initial views on the infrastructure there in terms of electricity supply, cables, the like, what your initial assessment of the infrastructure there?

I'm going to let Jacques speak to that in terms of infrastructure that's there. Jacques, please go ahead.

Andre, yes. We've had the opportunity now to probably over the last 4, 5 months to start to do our in-depth review of the existing infrastructure over and above the due diligence study that we've obviously followed during the bid process. But I'm pleased to say that the infrastructure at Bokoni is still an excellent condition. They had to have high-voltage power supply to the mine site. There's an offtake agreement in place with Eskom for up to 50, I think it's 47 or close to 50 megawatts of power, that offtake agreement has been maintained by the previous owners. So we do have access [Audio Gap]

Coupled with a level of mechanization, the most important and appropriate technology and automation and IT support. I -- and then to look at what was historically labour intensives. And to put that into the right box or different levels of mining and not put everything from labour intensive on to narrow reef equipment this transitions and levels put a part, but all of them not being enhancements. That was but to mention by a few areas where we can improve productivity, efficiency, which is tried and proven technology, not something off the shelf, which is unproven. But I think your bottom line is so who's accountable. But I think the Board based the ultimate accountability, but I offer as long as my health goes, unconditionally might support to execute with what I call some of the best mining experts that I know that we'll deliver on this project, make it happen.

I wrote that down in my notebook as Mike will be [indiscernible]

Write down a [indiscernible], okay?

Okay. Can I ask some questions on coal guide? Thando, you guys obviously had a lot of contractor issues and then like you had issues with simultaneous combustion at your operations. Are those largely behind us? Number one. And number two, if Tsu is on the line, can I just ask those ARM partner loans that you're saying are sort of like still need to be completed between ARM Coal and ARM Fe. How much of those? And by the next time you guys report, will those be largely [indiscernible]?

No, that sounds a lot, [indiscernible]. Yes. So in terms of just operationally, quite pleasing that we have improved from the challenges we've had except, of course, the impact of Transnet. With regard to spontaneous combustion and blasting of hot coals, that challenge is still with us, but there's been a lot of process and advance in terms of say and developing of new leases to be able to blast even hot or colds. I think the last time we spoke, we be able to or able to blast last around 80 [indiscernible]. That has moved about 120 now. So we're seeing more efficiency in our blasting and we see the improvement associated with that our [indiscernible] has improved. Your next question is related to the issues on the loans between the companies. Maybe I'll give that to Tsu.

Thanks, Thando. And so [indiscernible] to your question. So yes, those are the shareholder loans between ARM and ARM Coal. The current balance as we stand today is ZAR 1.3 billion. So at the end of June, it was ZAR 1.8 million. However, we received ZAR 500 million towards those loans. In terms of when we expect those to be paid off, finger crossed, the coal prices hold, we expect that those loans will be fully settled by the end of the calendar year, probably sooner, but yes, end of calendar year.

So just to add, if you remember, when we restructured the loans, it was very clear that the cash flow that comes from the operations in terms of the waterfall would goes first to servicing those that were owed to Glencore. And then we've always said there was a loan that ARM had made into our ARM Coal, which would then be serviced after the Glencore loans were paid off. So that money that's going to flow instead of dividends to ARM really if they to come in the form of a loan settlement. So it's not, to an extend of a driver loans to ARM.

Yes. Yes, I do remember that, Jongisa. And then I just wanted to ask a question. We hosted [indiscernible] mentioned that the manganese allocation renegotiations are coming up next year. And that confused me a little bit because the last time I spoke to you, André, we sort of spoke about you guys having finalized your 4 million tonnes allocation. Could you just please clarify that for me?

André is joining us from his office, so he is [indiscernible]. André, are you able to hear us? Okay. I'm going to -- if you don't mind, and operator, we're going to mute him because maybe something has gone a little bit wrong. And I'll ask him, as I understand, and I think the MECA allocations that were currently in place were up until the earlier, I think, of March 2023 or when the [indiscernible] becomes operational. So is it not possible that they were referring to that, which is the export allocations that follow beyond that -- beyond the 2023? Yes, I think it was end of March or end of April, that the current allocations extended to. However, we are relatively comfortable in my last engagements with André that we -- for the purposes of the ramp-up of the Black Rock mine, we will have up to -- we do have up to 4 million tonnes, and that will be extended. I think what is possibly not at risk, but that we're still continuing to engage on is any potential for an increase beyond that. And those might be a little bit more challenging. So our ability to ramp up much beyond where we are now might be the challenge. But in terms of the 4 million tonnes, I don't think there are any concerns.

Okay. And then with regards to ramping up beyond the 4 million tonnes, do you think it's around the fact that Transnet would like to increase allocation to other smaller mines in the region? Or do you think there's other issues that can have that capacity, like overall capacity?

Yes, I certainly think that what you mentioned in your former reasons in terms of participation by the smaller producers and allocating [indiscernible] Q2. When I say smaller, I mean what newer entrants and not some of the larger producers is probably what is at play.

[Operator Instructions] The next question is a follow-up question from [ Andre Peter from Visio Fund Management. ]

Just a follow-up on Bokoni. Can you just please remind us as a comparison between the previous mining on the Merensky versus the plan on the UG2, how does the pothole density compare if you have the exact numbers as well as how did the grades compares?

Jacques, if you could comment?

Certainly. Thank you, Jongisa. So Andre, the pothole density previously at Merensky was round about 20%. And on UG2, that's 9%. So that's more than a 50% improvement in terms of the density of potholes. And then in addition to that, there's also significantly less geological features such as die structures, et cetera on UG2 compared to Merensky. So that gives us quite a lot of confidence, especially for manganese mining method that it will be a lot more disruptive to the mining method. In terms of grade, the overall 4-year grade on Merensky is 4.9 grams a tonne and on UG2 is 6.5. So that's roughly a 30% improvement in grade. So that obviously is quite beneficial in terms of the overall grade delivered to the mill and ultimately, for the same tonnes milled will produce the amount of ounces, and that will be produced from the operation.

The next question comes from Luvuyo Booi from Investec.

Just a quick one on thermal coal. I see that your export sales volume is up 15%, which probably makes you the only coal export to project an increase in export sales volumes. Just briefly, can you explain how you managed to achieve that?

I'll give Thando to speak to that.

Yes. Thank you so much for that. So in May, we've been able to put some of the coal on trucks. However, if I can take you to last year, we had a lot of coal that we sold into the domestic market at the back of coal demand that came from Eskom a year before. So we pushed a lot of that coal now back into the export market over the last year. And with the challenges we had this year, which came in the main -- they became more pronounced in the second half of the year as compared to the first half of the year. We put them an additional 1 million tonnes of coal on trucks into the export markets. It does come with a huge cost. I think the cost differential there is additional return per tonne, [indiscernible]. But yes, that did gives us coal prices, it still make a good margin for us. So that's how we manage to give out little. Obviously, those challenges are still with us. But as we said earlier on in the conference presentation is that we are quite encouraged to hear the in principle agreement between China as well as the Transnet.

Another question for André on the manganese side of the business. If I remember well, you had guided that you post the completion of the Gloria project, you manganese ore production could -- or the capacity rather would come to about 4 million or 4.5 million tonnes, and we're not anywhere close to that. So when should we expect to see the benefit of the investment that you've made there in the form of volume and improvement on efficiencies we should reflect cost increases going forward? When should we expect to see those benefits coming through Q4?

Yes. I think I just want to make sure everybody can you hear -- can you hear me?

Yes, I can hear you.

I'm not sure what happened. I think I pressed the wrong button on the previous call instead of meeting or did something else unmuting. So just to that question then, this month of September, this month, September '22, we're finishing off everything that we're doing at the Gloria project -- sorry, the [indiscernible] project. So [indiscernible] mine at the end of this month will be -- everything will be done and will be commissioned. It has -- we're in the process now of actually commissioning the final conveyor belts underground. And so far, that's going very well. So obviously, you appreciate that conveyor belt is one of those things that can be 100 kilometers long and 89% complete and it can't do 89% of the volume, it can do nothing. So in that context, we're commissioning those underground belts right now. We're decommissioning some of the trucks underground that we used to use. And I'm very confident that, that mine will do its 4 million tonnes this year. And obviously -- and then in the next year, with Gloria mine, the work at Gloria mine is also done. It's all completed and finished. There's just one section that we're still going to finish off early next year, but that doesn't impact the output of that mine because it's just another section that we're doing to create a bit more flexibility there. So that mine at the end of September of 2022 will be fully commissioned. We've also commissioned our rail load-out station. That's all done. And in fact, so we're well set up for our 4.6 million tonnes. Just remember that the 4.6 million tonnes is not export. Some of that comes just on about 250,000 tonnes goes to our current smelter at Cato Ridge works, which is domestic sales. And we sell a little bit to some other domestic consumers as well. So our export capacity at this point in time is set at 4 million tonnes. And to the previous question that was asked about Transnet, I just want to check, Jongisa, maybe you can help me did my answer come through on that one?

No, André, it didn't. But what I'd just say to [indiscernible] is that -- and you can confirm for me the current allocations run until April 2023. And is there any risk to our current 4 million tonnes, our potentially is probably going to be challenging. So if you can [indiscernible]

Yes. So the mine is done, it's all finished. We really -- we are geared up now for that, in fact, to produce 4.6 million tonnes. So at the moment, we -- got to the hands of Transnet and their performance or the challenges that they're facing at the moment. So that puts us -- we think we're going to do about 3.9, maybe 3.85 million tonnes of exports this year, which is -- if Transnet performs at their full capacity, they can do 4.2 million tonnes for us. The good news is that Transnet then get -- or they're in the process, I understand to finalize that agreement with the Chinese OEMs in terms of those spare parts of those logos. So the engagement that we have with Transnet indicated that line can be backed, they reckon those things -- those trends can all be fully operational again by April of 2023. So then hopefully, we will see re-ramp up to our tonnages. And then just another point to mention is that the current private rail siding. So we split our tonnages 50% roughly goes through to Saldanha. The other 50% goes to [indiscernible]. So it's -- and the trains that goes to Saldanha and actually take a 100-tonne payload per wagon currently because of the rail infrastructure from Sishen to Hotazel, that rail infrastructure can only do 63-tonne payloads. So we've started with the project. We really kicked that project off to upgrade our existing private sidings so that we can actually carry those payload wagons. And in the consultation and engagement with Transnet, they're also going to do some work on their line to make sure that, that section can carry the payload wagons. And then we can take 100 tonne payload wagons all the way to Saldanha. And just do your mathematics with the same number of trains, we will -- we should comfortably achieve our 4.6 million tonnes.

Luvuyo, do you have any further questions?

No, that's all.

Thank you very much. At this time, we have no further questions in the queue. Jongisa, if I may hand over to you for closing remarks. Thank you, ma'am.

Thank you so much, [indiscernible] and thanks to everyone for your time. As Phillip said when he opened, I think we're generally very pleased with the current results. He's been -- and I'm sure you guys experienced even more sensitive to increased volatility in the market. And I think for us, the focus is really just to button down, focus on the controllables, which are really mostly on the cost side to just improve these operations and makes them more efficient and yes, and that's what we continue to build on the relationships that we have with all the various stakeholders, particularly the communities really just to continue on our path for creating value. And with that, I think we can probably close the call. I just want to thank everyone for joining this afternoon. And we remain available if anyone has any follow-up questions post the call and look forward to seeing some of you on the roadshow. Thank you.

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