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

Good afternoon, ladies and gentlemen, and welcome to the African Rainbow Minerals condensed results for the year ended 30 June 2024. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Phillip Tobias. Please go ahead, sir.

Thank you very much, and good afternoon, everyone. We have just released our results today, and I will start by just giving a high-level overview in terms of how African Rainbow Minerals performed for the financial year '24. On the safety side, sadly, we had a loss of life of Mr. Thomas Ubisse on the 16th of June at Bokoni platinum mine from a fall-of-ground fatalities. Our deepest and heartfelt condolences to the families and friends and colleagues, and we are continuing to work very hard to make sure that every employee returns home unharmed. On the positive side, we saw a 19% improvement year-on-year on the total loss injury frequency rate and also on the total injury frequency rate. So quite a lot of effort that is going into that space. With regard to the headline earnings, we saw a decrease of 43% to ZAR 5.1 billion from ZAR 9 billion last year, financial year 2023, mainly due to the decline in the average USD 6E PGM price and also the lower thermal coal prices. We declared the final dividend of ZAR 9 per share, taking the total dividend for the year to ZAR 15. On the production side, we saw a flat performance on the PGM ounces, production and also on the iron ore side as well and yet the 15% regression on the manganese production output. Cost side, we've had some serious cost pressures, especially at Two Rivers Mine, where we saw a 17% increase year-on-year on the unit cost and also 20% cost increase on manganese Black Rock Mine. So these things are really receiving all the attention that it requires. So that we can really read the storms, especially during these headwinds and this different difficult challenging market conditions. So I'd just like to leave it at that and then we can basically take questions and give you answers to that. Thank you very much.

[Operator Instructions] The first question that we have comes from Nkateko Mathonsi of Investec Bank.

So my question is actually relating to cost. And if you look at your peers, be it the PGMs or be it -- on the iron ore side, we've since Section 189. I know with Two Rivers you placed the Merensky project on care and maintenance. But I don't know what is -- what you're doing around Modikwa. I don't know, in terms of even on the iron ore side, enough, the managing partner there. But even on the iron ore side, I mean, we've seen Kumba actually issue a Section 189 and restructure for the next 3 years because of the constraints on the rail side. So -- on the African Rainbow side, I -- you spoke a lot about how you're looking at costs, et cetera, but I have not necessarily seen the actions -- similar actions that we've seen from your peers. So if you can talk to -- if you can give us a little bit more detail on what you are doing to contain costs in this environment where the metal pricing is under pressure on both be it the PGMs, manganese or even -- and even iron ore.

Thank you very much. I'll ask André to just respond on that.

Thank you so very much. I didn't get the name very well. Yes. Okay. Thank you very much for that question. Yes. So starting at Modikwa as you would have seen, Modikwa in general, for this supporting period, we've managed to really contain their costs and increases within an inflation level. However, yes, we're not resting on that, and we put some intervention in terms of cost management. That in turn in a main regime, our input costs on coming sites working with Anglo, who is the lead in terms of our procurement, we revisited most of the contracts and we negotiated some of the suppliers to lower levels of increases. Secondly, at the mine itself, we had some intervention in terms of reviewing all the high across areas of production, those high ounces. We spend time in terms of curtailing them and so on. We, unfortunately, lastly also had to revert into a Section 189 process, whereby 333 employees affected. Of those, we've managed to retrain and redeploy about 200 employees. We had a voluntary separation of about 70 employees and through natural attrition, again, we lost about 40, and we ended up with just around 80 employees that were put on a forced retrenchment -- that is the process that we've taken as a last result. Further on, what we are currently reviewing is areas of additional ore production we are exploring in a trial with an open cast operation to try and increase the volume with higher trade ore. So those are the intervention and we did go through the one itself. We continue to review our cost in terms of areas where we see opportunity. At Two Rivers, as you correctly highlighted, we went through the process of putting the Merensky on Section 1 on care and maintenance to that period, then we also revisited the UG2 operation, and we similarly went through a lot of cost curtailment going through from the supply side, consumables. And as a last result, again, we also had to retrain our goal for Section 189 process between the Merensky as well as the UG2 employees, and that also impacted just over 200 people. We managed to redeploy some of the crews -- the mining crews out of 6, we deployed 3 to go and assist with the UG2 operation overall, I think we ended up losing just around 40 people to retrenchment and another 40 natural attrition and about 20 who took voluntary separation processes. Yes, I think I did highlight also earlier on in terms of the ramp-up of the UG2 [ part normality ] that has started and is promising, having been able to negotiate the geological challenges that we experienced in the previous year. So again, probably, yes, you're correct. We haven't been out talking about the Section 189 processes that we went to, but we have controlled those at our operations as well.

And maybe, just to add. I mean, if you look at our PGM forecast from, I think, 2023, you would have seen that we are going to ramp up the Merensky production, basically the PGM production with an inclusive of Merensky project, I mean that would have meant employment of additional labor, one, you can look at it as basically a lost employment opportunity that we could not really bring those extra people to come and work. So as we said in the morning, we identified and justified that as a loss-making ounces and there was no need, especially after -- on this market conditions to really bring new ounces into the market, but also technically some lost opportunities and as far as employment is concerned. I hope that answers and addresses your question.

100% and that's on the PGM side, but if you can also comment a bit on the ferrous side, I don't know if you're able to comment, but on the ferrous side, because it -- I mean if we look at your here and I'll use Kumba because of rail issues and also the pricing environment is not necessarily glorious right now. We've seen a bit of restructuring happening. So I just want to get a little bit of granularity on what is happening on the ferrous side as much as the business is doing well at this point in time.

Okay. Thank you very much. We'll ask Andre to just opine on that, Andre.

Yes. Great. Thank you for the question again. We've got the 2 mines, Khumani Mine and Beeshoek Mine. So let me just start with Beeshoek Mine. Beeshoek Mine, we had a contract with South African steel producer -- and for 2.8 million tonnes for 2 consecutive years, and they just never took the tonnages, and we've now rightsized that mine for a 2.2 million tonne mining profile for at least the next 5 years. And unfortunately, on that specific line, the stripping ratio because we always try to mine as efficiently as we can. So the mine is getting deeper -- so we -- our stripping ratio on that mine is now increasing from a stripping ratio of 3.2. It is increasing to just over 4 a stripping ratio of over 4. So you realize that the total tonnes that we're going to mine will actually increase, although our production is decreasing. So what we're going to do then is to say that we want to then integrate the Beeshoek Mine and the Khumani Mine as one managing unit. And through that process, we're going to -- if I can say that we're going to save on the expensive positions. Like we're not going to appoint another general manager there that mine will then fall under the one General Manager of -- for both of the mines. And then also our procurement process where we will consolidate that between our 3 Northern Cape operations so that we can save a lot of money on that on our centralized procurement process. And then also all our technical services like our financial services, HR services and training. We're going to consolidate that between the 2 mines that we don't -- between the 2 iron ore mines that we don't duplicate that amount of work. And then on Khumani Mine specifically, we've -- I mean we've been involved with this Transnet. It's not a surprise to us. I mean this is another third year in a row that we're doing just about 12 million tonnes per annum. So what we did is we parked a fleet of equipment, and we sort of through natural attrition and which is actually cheaper than a once-off retrenchment package, we use natural attrition and through that process, we reduced our labor force. And in that context, we're going to reduce our total overhead costs. In terms of the production output, the grade that -- we don't see that we must cut back further on production. I mean, I think 12 million tonnes for export on our iron ore business. In fact, we plan for 12.3 million tonnes. And we're working very closely with Transnet, and I see that is a feasible objective to achieve. And then also the water challenges that we had that set us back quite a bit where you add the workers, you add the people, you add everything, but you couldn't produce because we didn't have water. And we put a lot of measures in place. So just more specifically, we're pumping water now from our on-site underground water. Remember, Khumani is a mine that's being dewatered by Kumba. So we up-dip from Kumba. So -- and the other thing that we're doing is that we're now getting what they call gray water or storm water that is excess water at Kumba, not water from the groundwater sources, but from the -- they call it -- we call it brown -- sorry, gray water. So we're pumping that water now over to Khumani. And through that process, we are supplementing our water supply into the mine to ensure that we can maintain our 12 million or 12.2 million tonnes of production. So -- over the last 3 years, we've already slowly started to, through natural attrition, get to the right workforce where we are at right now.

[Operator Instructions] The next question we have comes from Thobela Bixa of Nedbank.

I have a couple of questions. So maybe the first one, I think, would be for 2. Just looking at the net cash position where you're currently at of around about ZAR 7.2 billion. It's I mean it has increased over the number of years. I mean if 1 looks at the longer-term, you are in a net debt position in about FY '17, FY '18 or so. So I'd like to know as to what is the drive for you to build that much cash buffer in your balance sheet? And then also your CapEx should be going down over the next couple of years as you have guided with your project capital expenditure also reducing. So would you still continue to keep that level of cash buffer? And then I guess, we have seen some of your peers give us a targeted cash buffer that they want to hold on the balance sheet? And also maybe sort of give us some clarity as to they're hoping to use that cash flow. If you could just talk to us as to what your level of cash buffer you're targeting is? And perhaps what are you keeping that cash on your balance sheet for -- and then I'll ask questions afterwards.

So in terms of our net cash, it's actually been decreasing over the years with the large cash outflows that we've had in the prior corresponding period during 2022, we had to date ZAR 3.5 billion that extends for -- and you'll see that it's just been going down. So yes, we are in a net cash position compared to some of our peers who are more likely to be in a net debt position. And then I just wanted to just clarify. So yes, you see that cash balance sitting there on the balance sheet, but that's made up of cash sitting at the different operations. So what we just like to highlight, and you see it in Note 13 of the financial statements, which shows a breakdown in a cash and cash equivalents are limited. We're sitting on cash of ZAR 6.1 billion, which obviously is going to be a significant amount is going to be good enough now with the dividend that we're declaring which will be paid in October, so the ZAR 9 per share. And then you have cash sitting at -- on platinum -- and Two Rivers a little bit, but Two Rivers have taken out debt, as I mentioned. On platinum is for Bokoni. So we don't believe that we're sitting on a big amount of cash. That cash is sitting at a different operation for a number of different reasons. So whether it is to actually fund CapEx, OpEx -- that money is earmarked for that. Where there is free cash flow, and it flows up through to ARM and it's available then to give it out to the ARM shareholders. So that's just on the one. And then Thobela just on the CapEx, could you maybe just repeat your question on the CapEx, the guidance?

Okay. Now I was just trying to get an understanding as to with your CapEx reducing, then would you still continue to keep that level of cash in your balance sheet?

No, Thobela, so we don't -- so if there is no identified other opportunities where we can deploy that cash where we believe we can get a superior return, obviously, based on the further rates that we've set for ourselves and the operations don't meet SIB capital, then we're more than happy to give you out that cash. And you also asked around Atlatsa...

Do you have a target in place or yes.

Yes. So right now, and I think you can appreciate with the downward turn in the commodity prices where you don't know how long the downturn will be so we're really in a cash preservation mode -- we have Bokoni that still requires some money, a lot of the PGMs, all of the PGM operations are currently not generating cash, actually got 2 rigs that's break even, okay. So in that type of situation, it kind of changes things a bit. So initially, what we were thinking Thobela before this downturn, we were looking at a minimum cash of between ZAR 2 billion to ZAR 3 billion. But however, with the current market in an way is, we are rethinking that amount. So it is fluid, it is fluid because we don't know how long this will last, and we just need to make sure to have enough money to sustain the business until we get out of this downturn and the cycle.

Okay. And then other questions I have related to PGM operations. I mean, I just did a rough calculation in terms of where the PGM operations are. I think in my calculation, I see that your operations -- I'd say, free cash flow negative after paying for CapEx, obviously, with at Two Rivers, you had that big CapEx coming out, perhaps due to the project, but it could come down. So just -- could you tell us as to what your thinking is around the portfolio given that at current prices, your operations are burning cash. And also just in terms of what is the pack in order in terms of the importance the assets we have seen that you have put the Merensky project on care and maintenance. If you could just how you view the assets? Just talk to us as to what is the pack in order within your assets in terms of importance? If prices were to sustain at these levels, which would come next on care and maintenance. And then I guess I'll ask a final 1 later on.

André, please go ahead. Thank you.

Thanks a lot, Thobela. And Thobela it's still highlighted, I'm sorry, obviously, with the exception of Two Rivers, if you take out the cash flow that was associated with the project, Two Rivers is able to watch its pace. Modikwa and it's sitting on the net cash negative at this stage, and the Bokoni is still on the ramp up, obviously, to require cash. So our forecast is improving the situation, particularly if you look around Modikwa what I highlighted with regard to additional source of production, and that will be able to cushion the need for cash, and then we are driving that. That and open pit comes with a benefit obviously of UG2. So it comes with the benefit of also the [ come ] associated -- so we do believe that we will be able to cushion that and minimize that. And we are continuously reviewing areas where we could cut back in line with what also I've highlighted in terms of the action that has been taken. Bokoni, obviously, at the current production level at 60% it's going to need additional funding, and we for the project team and the operations team were already working with us to look at other opportunities that could be explored and also taken a benefit of -- in terms of increasing the production. And at this stage, we are really evaluating all the options that are there and to be able to come up with a better solution. I think we should be able to give a better view in terms of where we're standing on Bokoni at the next supporting periods. Your question really in terms of the pack in order, I think each operation gets reviewed based on the challenges and looking for it and so on. And as you collect, as you will know, we also have joint venture partners who accepted Bokoni. So we do engage with our pack in. And as I think Phillip highlighted this morning at the presentation Thobela that it is our intent to not to carry loss-making operations forever. So we will review them from time to time and make sure that either we turn them around or we take action, as we've indicated with the Merensky project.

Okay. No, that's good. I think, yes, I'll leave it there for now.

[Operator Instructions] The next question we have comes from [indiscernible] from Investec.

I think my key question is mainly, I think, to André, looking at your guidance for your export volumes for manganese I just wanted just you can confirm as you highlighted earlier on that there had been an increase in rail capacity for your manganese business. So I just want to just confirm the actual increase, is it actually at 3.6 million tonnes which is what you guys are guiding within the next 2 years? And if it is, are you comfortable with rail volumes would translate being at 100% of this assumes that we will be in transporting 16 million tonnes per annum. And then also, could you kind of provide me with color on to FY -- for FY '27, your export volumes go up to 3.9.

Right. I'll deal with the manganese. Did you also mention if I heard you correctly, you were talking about 16 million tonnes or did I hear you incorrectly?

So 16 million tonnes in relation to the rail capacity of Transnet for manganese?

Okay. Okay. Okay. I'm with you. I thought you were talking about. No, that's all right. I may not understand the question. All right. I think on the manganese side of the business, we -- our -- we've got -- there's 2 numbers. There's what we call the contractual number that we have and also then sort of a discretionary or additional capacity that Transnet gives us. So this past 2 years, our contractual capacity and for some reason, it's confidential information that we have with Transnet. We're not allowed to disclose the actual tonnages of the contract. And -- but I think I can state that let's say, the tonnages that Transnet should move for us is then 3.4 million tonnes, okay? And then because of the -- what we call the emerging miners did not take the allocated tonnages. We got about 100,000 tonnes additional from that. And then there was a rollover -- it's always -- sometimes it happens that a ship does not get loaded right at the end of the month. And the numbers that you see is not necessarily the real tonnages. It's always -- it's the sole tonnage and that can add between 150,000 or 200,000 tonnes, which is maybe a ship load to the tonnages. But for this year going forward, we've -- Transnet has allocated an additional 200,000 tonnes to us. So that takes us to the 3.6 million tonnes. And that is what we're now manning and staffing and planning our minds on. So those not contracted. So we've taken a bit of a risk, but I think it's well thought through and it's a low probability and with a lot of engagement. And so Transnet was not prepared to give us a contract for those tonnages, but they're going to allocate those tonnages for us. If it from a commercial sense. The only difference is that we can claim if they don't deliver less than 90% on the contracted volumes. And on this one, we sort of at their mercy. So -- but with current tariff and with current rate that we see in the performance of Transnet on the manganese side is sort of on par with what our contractual commitments are. And we -- it also looks pretty good because we know and we understand what Transnet is doing to achieve this extra 200,000 tonnes. It's not just a pipe dream or whether it is physical work that they've done through additional loops and some fine-tuning in terms of their management system in the Northern Cape to streamline the flow of ore through to PE and to Saldana. So in fact, we're increasing some of the tonnages through Saldana. And so that brings us to the 3.6 million tonnes. And then if that is successful, with Transnet, and we can maintain that and which we believe we can. That's where you see the step up in 2 years -- 3 years' time to the 3.9 million tonnes, a number that you were quoting. So that's the rationale and our mine. As you know, that previously, many -- a couple of years ago, we -- 2 to 3 years ago, we completed our what we call the Black Rock expansion project and modernization project. And that project was actually earmarked to be able to enable the mine to mine 4.5 million tonnes of ore, but it doesn't help to produce 4.5 million tonnes per ore and you've got a road ore that extra 500,000 tonnes or 600,000 tonnes. All the value that you've gained through operational efficiency, you immediately destroy by putting that material on road. And we took a conscious decision, but we also don't want to be part -- we don't want to destroy South Africa's roads any further by putting that additional tonnage on the road, and we're going to -- we made a conscious decision to maintain the rail capacity, and we're working very hard with Transnet to maintain that rail capacity. So on the 16 million tonnes, yes, that's the capacity now. But again, from a strategic perspective, Transnet is now working on a program to see if we can increase that tonnage over the time period to 22, I'm not 100% sure yet, but maybe to 25 million tonnes per annum rail capacity. But that is not going to happen in the next 5 to 7 years.

[Operator Instructions] Sir, at this stage, there seems to be no further questions on the conference call.

Okay. Maybe then I can just wrap up. And thank you very much to everyone who was on the line. So in closing, I mean, it's a challenging environment of lower commodity prices. And then we basically are positioning ourselves. And as I continue to say, focus on things that are within our control and make sure that we put relentless effort and focus on operational efficiency, doing more with what we have so that we can really enhance our revenue and also the issue of cost management and then making sure that where there's opportunities to optimize our cost to eliminate waste stages, we do that and disciplined capital allocation. I mean a lot of question has been asked in terms of what we're going to do going forward and that so every potential project will be reviewed on merit and then in line with our investment decision-making matrix and rank them accordingly and take it forward. So our proactive strategies in these key areas will enable us to capitalize on future market recoveries. Bearing in mind that, as we said, we do have some flexibility at the Two Rivers Mine, but it will be subject to the market commodity recoveries and that. So that's the flexibility that you'd want to have so that when the price trend that you basically optimize and exploit that situation and get ahead of everyone. Ladies and gentlemen, I think we will close it here. Thank you very much for attenders. Over to you.

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