Antofagasta plc (ANTO) Earnings Call Transcript & Summary

Greetings from Chile. I am Iván Arriagada, Chief Executive Officer of Antofagasta. Due to the COVID-19 health emergency and the U.K. government's compulsory measures limiting public gatherings, this year's AGM will be purely functional in format to comply with the relevant legal requirements. However, I would like to share with you a brief overview on the performance of the company in 2019. Let me start by saying that the last few months with the onset of COVID-19 has introduced an unprecedented global challenge. As you can appreciate, our #1 priority has been the health and safety of our people, and we have taken proactive actions from the very beginning of the outbreak to limit the risk to our people and our facilities. We have put in place strict health protocols, and I will tell you more about this shortly. We have responded quickly, made swift changes and have done this while actively communicating and engaging with our people, local communities and the authorities. And because of this, we have been able to continue operating and supporting the economy, our employees, contractors and suppliers, both at local and national levels. At a time when other sectors have been particularly challenged in Chile, the mining industry has been adapting quickly, introducing new health at work measures and protocols and contributing to mitigate a potentially severe economic impact. The world is changing. And in the current context, the role of corporations and of sectors like mining will be more important than ever. Let me start by talking about purpose, which is developing mining for a better future. This encapsulates what motivates all of us at Antofagasta and goes beyond the day-to-day tasks that everyone is expected to do in their specific roles. As a mining business, we work to produce metals for the benefit of all by responsibly and safely mining metals that are essential for modern society, while at the same time, providing economic and social development opportunities. This purpose is core to who we are, how we operate and how we think about the future. This concept has shown to be particularly important in the last 12 months. In October last year, we witnessed the start of social unrest in Chile. And now with the COVID-19 global pandemic, even greater levels of social cohesion and collaboration will be required to build a better society. Moving to our strategic framework. I believe this is even more valid today than it was before. We operate with a purpose and the strength of our strategy is playing out. We have a relentless focus on health and safety, strong and reliable operation and financial position. And in the current context, we think we can accelerate the transformation of our business by implementing our digital road map faster. We have 5 pillars, which underpin our strategy and by which we measure how we perform. These are people safety and sustainability, which underpins everything we do, the safe and health of our people, especially now, our commitment to reducing our impact on the environment and sharing development benefits with our community. Competitiveness or economic performance, growth to ensure we continue to develop our business in the long term; and finally, how we are using innovation to transform our business, not only in the short term, but also in the long term. I will give you a brief update on the steps that we have taken following the outbreak of COVID-19, to ensure the safety of our people and communities and the continued resilience of our operations. We have introduced several measures and strict protocols to prevent the spread of the infection across our operations and to maintain a safe and healthy environment. These have included health screening, social distancing, organizing dedicated private transport, to and from our sites, and providing the necessary protective equipment. We have also changed the work rosters for some of our contractors. At the same time, we have been working very closely with the communities near our operations, and we have launched a $6 million fund for that purpose. This fund is being used to provide medical equipment and supplies to fight COVID-19, to create facilities where people can stay if they need to be quarantined and also to sterilize public spaces and create safe areas for neighboring communities. We have been working alongside government to deliver a coordinated response, supporting our smaller and medium-sized suppliers and contributing to Chile's economic and social recovery. Following the measures we have taken, we are currently operating with about 2/3 of our workforce on-site, with about 25% to 30% of the workforce teleworking successfully at home. We have temporarily suspended the construction work of the Los Pelambres expansion project as a precautionary measure for what we expect will be a maximum of 120 days. This not only reduces the number of people on-site, but also reduces the amount the workers traveled through the local communities. Our sales and shipments have so far been unaffected and we are seeing refined copper demand in China recovering after a sharp drop in quarter 1. There is continued demand by smelters for concentrates, but some mines have been required to restrict output, there has been a drop in spot TCRCs in quarter 2. There has also been a fall in demand for copper. But this has been partially offset by reduced copper production and lower scrap availability. Currently, we expect that to be a surplus in the refined copper market in 2020, but the situation remains volatile. In 2019, we had a workforce of over 25,000, of which about 26% were own employees and 74% were contractors at our operations. 10% were women, and just over half of our workforce came from the Antofagasta and Coquimbo regions where our operations are located. The expansion project at Los Pelambres will require at its peak during construction, around 3,000 people with at least 1/3 expected to come from local communities. And so this provides an extraordinary opportunity for us to continue expanding our contribution to local employment and to provide new opportunities for local suppliers. We believe we have good labor relations, and I've always believed that engaging and working closely with our unions is the best way to build trust and mutual collaboration through agreements that preserve the health of the business in the long term. However, we had our first strike ever last year at Antucoya, which was resolved after 18 days. Last year, we also increased the ethical minimum wage for contractors set by Antofagasta. Increasing the diversity of our workforce helps to broaden the range of views and skills in our talent pool. And we aim to double the current number of women in our workforce by 2022 at all levels of the organization. A pilot flextime system was introduced at the Centinela mine and the corporate offices in Santiago and will gradually be rolled out to other areas. The system allows employees to fit working hours around their individual needs, giving them more flexibility, particularly as regards shifts and allows them to take up to a year off, work for family or other reasons. Safety has always been our top priority. And during 2019, we had our best safety performance ever and this has continued into this year. I'm pleased to report that we have had no fatalities, and we have improved our safety performance across all our operations at the mining and the transport divisions. The number of serious accidents has continued to decrease, as shown in the graph. This progress reflects the great efforts we have been making over the 5 years since we implemented our safety management system. We continued working during the year through our community engagement model under the key principles of transparency and participation, and we had no material incidents with communities that directly impacted our operations. Our goal is to continue working under a jointly created and shared vision for social investment, developing the areas close to our operations and working closely with the communities, local governments and state agencies. At Los Pelambres, we call this engagement strategy, Somos Choapa and our Northern operations, Diálogos para el Desarrollo. In my view, we work best when we work in partnership with communities in which we operate. We may not always agree, but we believe constructive conversations help avoid misunderstandings and enable the resolution of any differences in opinion. The impact of climate change is a challenge for Los Pelambres this year and next and until the desalination plant is built as part of the expansion project, we will be very focused on monitoring and ensuring water availability at the mine. We're taking several actions at Los Pelambres to ensure water availability, including improving water usage efficiency, increasing the percentage of recirculated water, closely monitoring pipeline ceiling to avoid any unplanned incidents and covering the water storage ponds. We also have a high level of engagement with the authorities and communities to find ways to alleviate the impact of the water shortage on the region in the short, medium and long term. This includes, for example, pumping water from dedicated wells for use by the communities in times of shortage. The desalination plant we're building will supply Los Pelambres with up to 400 liters per second of seawater once it's completed. Antofagasta has been a pioneer in the use of seawater. In 2019, 46% of the water used by the mining group was from the sea and in completion of desalination plant at Los Pelambres, the proportion of our seawater usage will increase further. In 2019, some 30% of the power we used at our operations came from clean renewable sources, and this continues to increase. Earlier this year, Centinela signed 100% renewable energy contract. And this, together with other contracts already in place, will mean that 100% of our power will come from renewable sources in 2022. This is an important milestone for the group and shows our commitment to a greener future while also reducing the group's all-in power cost. Antofagasta is committed to mitigating and adapting to climate change. On mitigation, we have set a target to reduce our CO2 emissions by 300,000 tonnes by 2022 through energy savings and efficiency gains, and we're well on track to achieving this. We're also adopting the recommendation of the task force on climate-related financial disclosures and applying water stewardship framework of the International Council on mining and metals. Climate change is now incorporated as a specific risk in our risk metrics, are now working internally to address its implications with water and carbon emissions being the key issues. We had a record year of production, producing 770,000 tonnes of copper, 6.2% higher than in 2018. This increased production, together with operating consistently and tight cost control, help us achieve net cash cost for the year of $1.22 per pound. 5.4% lower than in 2018 and our best performance since 2016. Now I'll take you through our growth opportunities. Last year, we started the expansion of Los Pelambres. This is a high-return project, which will add an average of 60,000 tonnes of copper when completed. Construction of this $1.3 billion project will increase throughput at the plant and includes a 400-liter per second desalination plant. A subsequent Phase 2 expansion may follow, the timing of which will depend on the receipt of the necessary environmental approvals. This phase will extend the mine life of Los Pelambres by 15 years and further increase production. Last year, we approved the opening of the Esperanza Sur pit, which will improve Centinela's flexibility to supply ore to its concentrator. And over the initial years will increase production by some 10,000 to 15,000 tonnes of copper per year. This greater flexibility will also allow Centinela to smooth and optimize its year-on-year production profile. At Centinela, we're also finishing the optimized feasibility study of the second concentrator plant which could see production increase by up to 180,000 tonnes of copper equivalent. The final decision will focus on returns and is not expected to be taken before 2022. At Zaldívar, we have also begun construction of the CHLORIDE LEACH project that will increase recoveries by more than 10 percentage points. The project requires an upgrade of the solvent extraction plant and the construction of additional washing ponds at a net estimated capital cost of $190 million. Regarding our other business, last year, we completed 2 important milestones. We increased our transport division's haulage capacity to fulfill 2 new transport contracts. And we submitted that to metals mine plan of operations to the authorities in the U.S. In summary, we have attractive organic growth optionality. We will invest over time to bring this to market but only in accordance with the discipline provided by our capital allocation framework. However, due to the current health emergency, the construction of our growth project has been suspended for up to 120 days, as we respond to the COVID-19 crisis. We're now planning how we will resume construction, taking into account what will be required to integrate into each of the projects, the precautionary health measures and protocols we have adopted at our operations. Understanding that these will be needed to be in place for some time. The suspension of these projects is likely to have an impact on their original completion dates. We're working to mitigate these impacts. And when we complete these revisions, we will share them with you. We have made important progress on innovation during 2019. We have large-scale strategic initiatives, such as developing a way to leach primary sulfides, which we have continued to successfully advance and are now conducting industrial-scale tests at Centinela. We have accelerated the adoption of real-time information management and analytics across our organization. We're working on the design and deployment of our remote operation center for Centinela located in the City of Antofagasta, which will allow increased productivity and a reduction of on-site manpower numbers and costs given the high logistics content of Centinela, which runs 5 pits and 2 plants. We're using data analytics for plant throughput and recovery optimization of Los Pelambres and Centinela, and we're digitally transforming our support functions and maintenance process. In automation and robotics, we have implemented autonomous drilling operations at Los Pelambres and we are tendering for an autonomous fleet for the new Esperanza Sur pit, which will allow higher utilization and average speeds. We expect our investment in this area will start to bear fruit soon and we're targeting specific performance improvements to come from these changes. What we're also finding is that the current crisis is accelerating or adoption of some of these innovations, which will benefit the company after the crisis is over. 2019 was a solid year. As I mentioned, we had no fatal accidents and our serious accidents continue to decrease. Our strong safety performance and operational consistency was also reflected by 2019 being a year of record production when we produced 770,000 tonnes at a net cash cost of $1.22 per pound. Our EBITDA was $2.4 billion, nearly 10% higher than in 2018, and our EBITDA margin was 49%, also an improvement on 2018, and our earnings per share for the year were $0.509 per share. Our priorities for this year are, of course, firstly, safety and health, while minimizing the impact of COVID-19. We will continue managing our cash expenditure carefully. And we will advance our growth projects within the constraints allowed under COVID-19. A key priority is advancing the desalination plant at Los Pelambres. Innovation will continue to play a key role in transforming our company going forward, and the current crisis has accelerated its adoption in several areas. Finally, we are committed to maintaining our financial discipline with a focus on value creation and shareholder returns. Thank you.