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

Good day, ladies and gentlemen, and welcome to the African Rainbow Minerals interim results for the 6 months ended 31 December 2024. [Operator Instructions] Please note that this call is being recorded. I would now like to conference over to Thabang Thlaku, Executive, Investor Relations. Please go ahead.

Thank you very much. Good afternoon, everyone. Thanks for calling us. As you know, this is a platform to get the more detailed questions through to management and some of the questions that we couldn't cover because we ran out of time. In the boardroom, I've got with me Phillip, Tsu, Thando and [ Mike ] and Andre and Jacques are joining us. They're also on the call. So the management is ready to cover all your questions. So let's -- I don't think we should do an introduction. I think we should go straight into Q&A. So happy to take questions.

[Operator Instructions] The first question we have is from Tim Clark of SBG Securities.

I've got a couple. I'll start with a couple and then maybe I'll come back and take a second turn. Sorry I got cut off on one of the answers on closure costs and care and maintenance costs at Beeshoek. So if AMSA does shut its longs business and if we assume that Beeshoek doesn't have another route to market, can you just remind us of what the sort of -- you'd expect the closure costs and the care and maintenance to be? That's my first one.

Shall I answer that? I just want to understand, can I answer this? Andre here.

Thanks, Andre.

Andre, you can go ahead.

Okay. So the Beeshoek, call it, the care maintenance cost will be ZAR 120 million a year. That's what our current estimate is. And then the closure cost, including replacement, will be about ZAR 350 million. That's exactly based on the scenario that you described, Tim.

Okay. Perfect. That's really very helpful. Sorry, my second question is on Bokoni, please. Just you've got quite a different plan going into conventional mining. Just based on the guidance, it looks like volumes are about half of what they were in the first half, but costs will be lower and grades are higher. I wonder if you could just give us a little bit more granularity on your cost guidance for mining. And then again, I just missed the -- sorry, I had a very bad line, but I just missed the standing cost for Bokoni that you spoke about Amplats before 2021 there's a certain level. But just what the standing costs are? So I'm just trying to get some sort of sense of what Bokoni looks like in its new form, please?

It's Thando here. So perhaps start with your last question here. So let's start with your last question, in terms the care maintenance, what we highlighted was that the previous owners were spending in a region of about ZAR 24 million. Based on -- putting inflation and the additional areas where we've opened, we come at a number of around ZAR 30 million. That is per month expenditure that we estimate it will cost us for care and maintenance. With regard to the mining, as we highlighted, we will be moving and focus more on the stoping aside from the underground as well as the open pit, the underground for volumes ranging between 25,000 and 30,000 tonnes a month, same from the open pit to be able to fill the plant. That is what we are planning for. And we estimate that with that forecast, we will be taking our costs to that range. So the unit cost of 6E ounce will be in the reading of about ZAR 23,000 per 6E ounce. And that should give us that cash burn of just under ZAR 30 million a month. That is excluding all the other work that we kind of indicated we are still trialing, that will come as part of capital cost.

Thanks, Thando. Very useful. Just to further the math on Bokoni and maybe it's too difficult to say, but how should we -- I mean, the rhodium prices ticked up a little bit in the last day or 2. Looks like some of these big deficit markets and PGMs are starting to have a little bit of an impact. The OEMs look like they're coming back to the market a little bit. What should we think of as the trigger for you guys to advance the bigger project, the 240 plants. Is that what a -- how does management sort of think of the trigger? Do you look for a sustained period of cash flow? Or what are you guys looking for to sort of bring back that decision? Or how do you get certainty?

Yes. So Tim, if I may carry on, I think as you correctly point out, it's not something that is easy to confirm. But we look at the total picture of ARM and Tsu can come in there with the details in terms of cash available that will sort of help us to be able to move forward. However, a sustained, say, 15% improvement on the price, we'll be able to trigger us. But in terms of the investment rate in order to look at the total cash availability and how we manage the balance sheet going through that process, but yes.

And maybe just to comment -- thanks, Thando. Maybe just to comment, I mean, the responsible thing, as we said as well, will be to take a phased approach. From the 60 most probably look at what do we do with the current 120 kiloton Merensky plant? Do we convert that into Phase 2, UG2 taking us to 120 or do we convert into Merensky. Obviously, those conversations, are we going to go co-extraction or just continue on UG2. So most probably the big bang approach of over so many billion rands over time, I don't think it will be sustainable, take into account the volatility that we have seen. So the responsible thing would be a phased approach, building towards ultimately 240 at a certain time, but not like the next step jumping from 60 million to 240 million.

[Operator Instructions] The next question we have is from Brian Morgan of RMB Morgan Stanley.

Just if we could just ask on manganese costs. In the commentary, you talked about cost of sales up 7% and then you break it down or you say mainly due to marketing costs, volumes and inventory adjustments. Can you just dive into the marketing costs and the inventory adjustments?

Did you hear the question?

Yes, yes. I did. Thabang, should I go?

Yes, please, Andre.

Yes. I mean we've got in terms of our shareholders' agreement, the marketing cost is 3.5% of the FOB revenue. This is a marketing fee. And then on top of that, there's also what we call an agency fee, which is about is 2.5%.

Okay. So it's basically just moved in line with revenue then? Okay. And then the net realizable value adjustments on the stock?

Yes. There were some -- remember -- so there's some material that we mine that is not of a grade of quality because you go through material and then in this time period that we saw the massive drop in pricing when we did a net realizable value adjustment, negative adjustment, on the material that was already on surface even associated with that if you sell it, it was going to be a loss. So that's the adjustment that we made there. So that's also really market driven.

You don't know what that was in rand value that was it?

Brian, I don't have that number in front of me right now, but we can simply give it, yes.

Okay, that's cool. And then just on Khumani, I may. You said 8% cost inflation of which 2 percentage points was stripping. Can you give us a bit of flavor into what to look for, for the next couple of periods?

Yes, certainly. So as you know, that mine is a mature mine. The average stripping ratio of the mine is 2.8. The average stripping ratio of Khumani will remain 2.8. But the next 5-year period, we're going into an area that requires a bit more -- it's almost like a pushback. And during that time, we're going to ramp up the waste stripping to a ratio of 3.2 for that period. And it's going to start now. We're slowly ramping it up. It's still now about 2.9. Then we're going to -- next year, it will remain at 2.95 then 2.3. And then 3.2 and then we're going to go -- remain at 3.2 for another 4 years and then come back. But overall, over the larger part, the stripping ratio will be 2.8. Yes, so we're going to see the next, let's say, the next period of that is a bit of a higher stripping ratio.

Okay. Tsu, if I can just ask a question. There's new disclosure in the segmentals. It's available-for-sale assets, which is not disclosed in the segmentals, which wasn't before. And ARM Ferrous, there's ZAR 1,829 million sitting in available-for-sale assets. Could you just give us a bit of color on what it is?

Brian, can you hear me?

yes.

So that relates to the Assmang investment in Sakura, so during the period, we have reclassified that investment as now being an asset held for sale in terms of IFRS 5. And according to that standard then, you need to evaluate at a fair value, which is I think, with how we've spoken about Sakura and all the developments there, that's how we are seeing or viewing the investment as being a held for sale. So basically meaning that disposal -- we anticipate disposal within the next 12 months. So that's what it relates to, Brian. And in terms of the detail, you can see it in Note 4 of our financial statements under investments.

Okay. That's very useful. And just to be clear that ZAR 1,829 million is on an Assmang basis, so it's 50% attributable to you?

100%.

Okay. Very good.

But when I say 100%, I mean...

[Operator Instructions] We have Tim Clark.

The first one is just that I've noticed that you've spoken about it for a long time, but there's obviously a little bit of concern on the risks on water at Khumani. And I just wondered what's -- how you've got confidence that you're not going to get cut off by Kumba. I suppose that's the right way of sort of saying it. Maybe let's start there.

Andre again. I'm sort of laughing at that, but it's not a laughing matter. So yes, we've done a lot of work -- Khumani needs 450 megaliters per day. And in terms of that, I only get about 60%, between 55% and 60% of that, from the Vaal Gamagara pipeline. So I have to be supplemented by Kumba, and through Kumba -- I mean the Sishen mine and the Kolomela mine. So on the Kolomela side in dewatering from their mine, and obviously, there have to be water, but they're also under obligation through the mining, absolutely, they would utilize that to pump a certain amount of water into that pipeline because that pipeline is quite critical to the surrounding communities as well. And if you understand that picture, you'll know why the Water Board is spending money on fixing the end of the line first before they fix the pumping -- the front end of the line. And then we also have arrangement with Kumba. We take up through the water use again, they've got what we call gray water, which is all the storm water and everything that they capture into one of their big pits. So we also have a mining -- a water use license to extract that water. So we've improved -- or reduced the risk of this hugely by doing that. And then we also drilled -- at Khumani, we also drilled for our own resources. And we're also getting water there. So over time, we initially, let's say, if I talk about 2 years ago, I was dependent only on water from the Vaal Gamagara system. But now I can get water from 4 sources. The one is from Khumani internal, from the pipeline from Kolomela and also from Sishen. And then and I've also got arrangement with the Sishen CEO and internal relations with the general managers as well. We've now put telemetrics on all of those systems and we're monitoring. If something goes wrong, we find Kumba, we engage with them and we sort it out. So -- but that doesn't mean the risk has gone away. So we also work now very hard with the Department of Water and Sanitation and we're going to the route of the Lebalelo water scheme where -- and that's already registered that the water pipeline will become a water user Association. And I'm already a director on that Board. And one of my key people that works with me is the Chairman of that Board, just really because of timing, that you can devote full time and energy to that and we're doing a lot of work there. And we've now appointed [ pro ] plan that's done the feasibility work. And we are now in that phase through the Mineral Council that we're registering a company so that we can take on this challenge. But I can't say -- and I've had our various engagements with Khumani, I can't say that they will willfully just shut this down to keep us out of the market. And they understand that they are the people, specifically Sishen, they are the people that's dewatering us, that they've got the obligation to give us water for our operations. Thanks for that.

Thanks, Andre. Then just -- this might be another question for you. Just Cato Ridge Section 189 process and smelting under a huge amount of pressure. You can see that chrome smelters are also shutting in South Africa. Just sort of what's the ultimate long term -- or what you're thinking at the moment is and how you're going to -- how you're thinking of the future of those operations?

Yes. I like the way that you posed -- that you phrased the question is what is our thinking, not what our decision is. So we're in the process now, I mean, you don't do Section 189 just for fun. So our plan is that we want to close that plant down completely. We don't want to -- you know the history is that we had 5 furnaces running, then we had 4. Then we cut it back to 3. We only have 2 running now, and it's not economical. It doesn't make sense. I mean, we're bleeding cash there. And so our objective is to close Cato Ridge Works down completely and also to exit from Sakura. So we hold the view that conventional submerged -- high-energy intensive submerged smelting is not viable anymore. So our thinking is that we want to get out of this business 100% completely. And we've already pulled the trigger on -- in terms of the Section 189 at Cato Ridge Works and Alloys. So the Cato Ridge Alloys can obviously not produce if Cato Ridge Works is not there. So the 2 of them work close together.

And then will there be a holding cost that we should think about ultimately on that? Or is it too early to talk?

Yes. It's a little bit too early. We're engaging, negotiating with the entity to buy the land around Cato Ridge Works and Alloys. And then the idea is that we will clean up the land and everything for -- so that it can be developed. It's actually very, very sought after property, if I can say, from that perspective. And so we're in the process here, but we haven't concluded yet. That's why I said the question about the thinking. So the thinking is close it down, sell the land, rehabilitate. The new buyer takes over the liability, environmental liabilities, known and unknown, but we will obviously not rehabilitate. We'll clean it up and break down the building and whatever and then sell the land. So with the stock that's on hand with that cost and the purchase price, the thinking at a broad level is almost like a break-even situation, but it's not going to happen...

That's very helpful. Yes, yes. That's very helpful. Then something more short term. Just on manganese ore, the prices rebounded from up to sort of $4.75 or there it is or 44%. Are you -- is that a signal that you're back -- would you go back to trucking? Or is it -- I'm trying to get a sense of where the trucking breakeven is.

Yes. No, we're not -- at this point in time, we're definitely not going to truck that. That I can show you -- say to you, for sure because all the benefits that you build up through operational efficiency, cost CapEx, it is destroyed by putting it on a road truck. So what our thinking is -- I'm also pretty mindful of what I'm saying now. So we want to build stock. And I think on the manganese side, and I'm not going to bank on that. I'm not going to really make any promises, but we're building up a little bit of stock and we're also getting rid of some of our low-grade materials that we could not sell last year. So then the idea is that if and when transit capacity becomes available, we'd rather than rail that and then get much more value out of that material for us. So yes, we're happy that the prices have picked up. But we also know that [indiscernible] is coming back in. So to -- we're not going to be foolish now to dump material onto the market and collectively push the price again like we did as the manganese ore mining industry and the prices ticked up like they did early last year .

That's very helpful. I've got a couple of questions on Nkomati and Modikwa quickly. They're very easy ones, I think. Just starting with Nkomati, when you closed the transaction, am I right in -- so I haven't thought about this for a while, but I just thought about it this morning. Am I right that you just doubled the environmental liability because you will have acquired the liability from the other side? And then maybe just for the next couple of years, can you give me a bit of guidance on how much you'll be spending or you're expecting to spend so I can put the right number into the model under Nkomati?

Thanks, Tim, I'll answer the first part, and then Thando can answer the second. So in terms of the liability, you are correct in that we'll be taking on the other 50% of the rehab liability. But just to note, Tim, that in terms of the agreement that we've entered into with Norilsk, Norilsk will be contributing some money, ZAR 350 million, towards that liability. So you'd have to just net that off and that is the net that we would be taking onto -- or extra we have that we'll be taking on to the -- on balance sheet from the transaction. Thando, maybe you can answer the other question.

Thank you. Thanks, Tim. So Tim, currently, the care and maintenance is costing us around ZAR 12 million, ZAR 15 million a month. However, when we take over, we've got some projects that we are evaluating. And at the right time, we'll share with the investor community those projects and that also significantly and positively contribute towards the Nkomati mine.

Okay. Great. Well, we look forward to that. That sounds good. Sorry, my last one, I'm just reading the contingencies and I noticed the dispute with Nkwe Platinum on Maandagshoek on Modikwa that you've applied now to the Constitutional Court as an appeal. Is there any impact at all on your sort of reserve mining situation from -- I mean, let's ignore what the legal outcome is. Assuming that status quo is stays where it is, is, is there any impact on your reserves, on your mining? Or is it just sort of outside of -- sorry, I don't remember exactly where [indiscernible] is happening.

Yes. It's [ Mike ] here. Our surface rights or the surface rights [ rightly ] belong to government, but is our mineral rights. And it will not impact in the next 20 years that we have to get vent shafts down there and eventually we'd have to find other places to do it. So we just see that as a legal issue that they've taken -- illegally just occupied land, which doesn't belong to them. And we are in court about the matter. But no, it will not impact our operations in the next 20 years, Tim.

Tim, as you know, as the owners of the mineral rights under the surface, the [ auditors ] consultate with us with regard to any infrastructure they want to put on surface. It's related to the infrastructure they want to put there. Thank you.

Sorry, it's maybe an off-the-wall or random question, the last one is. I've had 2 clients say to me that they've heard that there are derivative structures being considered around Harmony. And I've heard nothing about this and I've read nothing in the release about it. Are you looking at all at hedging or protecting your how many valuation? Is there something going on there that I should know about?

Tim, it's Thabang. If you remember at our FY '24 results, when Chairman was asked about Harmony, he sort of stood up and said that we are considering various options because outright selling is sort of not on the cards at the moment. And he did speak about a financial instrument, which, yes, at the moment did -- we are looking at some sort of collar to see how we can monetize that without selling. But it really is early days and when we've done our homework, we'll come to the market.

We have a follow-up question from Brian Morgan of RMB Morgan Stanley.

Just 2 quick ones. There was an issue with the water use license at Sishen that you -- I think you guys were struggling to get a new water use license beyond 12 months to be able to draw down on the Sishen wastewater. So have you gotten -- or have they got a new water use license yet?

Yes, Brian, we updated that. But unfortunately, that license is -- not unfortunately, but that license is -- that license that's restricted to a certain volume of water. And that will also -- if you look at the rate that we're extracting, will last us about 5 years. But I've been to the Premier of the Northern Cape and both parties are also engaging with the Department of Water Affairs, so they understand fully what the potential impact is if that license is not extended. So although it is a risk, we have flagged it, but I'm not overly concerned. We're doing a lot of work in that area to make sure that it's not going to impact on our business negatively.

Okay. Yes, yes. While I've got you on the line...

Just remember that NRV adjustment that I didn't have the numbers, so I did my [ back of envelope ], ZAR 335 million for the first half, that was the NRV, just the actual number.

That's very useful. And then just staying with you, Andre. In terms of the volumes that you guys sold to Cato Ridge at the moment, when it closes, what's your thinking about that?

Yes. We're thinking that, that will -- if you look at my guidance, Brian, you'll see that we're going to go up 3.7, next year will be 3.6 million tonnes because Cato will still take a bit of turn -- no, no, Cato is not going to take anything next year, but that is just aligned with the [ draft ] because originally, originally many years ago, that was a justification for Cato to get manganese units out of the country because of the rail constraint that we had. But I'm going to go to the 3.7 and we're going to focus a lot on the quality of material from a revenue -- upping the revenue perspective. And then from 2027, I'm going to go up to 3.9 million tonnes. And then beyond that, we're going to go back to 4 million tonnes. And we believe that, that will tie with the improvements and benefits and improved performance from transit as well. Yes, just so that you know also that marketing fee for manganese ore, if you combine the total fee, I just want to make sure that I said it correctly, when you combine the 2 fees together, the management and the marketing fee and the agency fee, it is 6.25% of FOB revenue.

It seems we have no further questions on the lines.

Thanks very much. If there's no further questions, we are happy to conclude the call here. Thanks to Brian and Tim. And yes, we'll be going on the road, so we look forward to seeing investor and other analysts. Thank you, everyone.

Thank you.

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