Atalaya Mining Copper, S.A. (ATYM) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Atalaya Mining Plc Q2 2022 Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit following poll. I'd now like to hand you over to Alberto Lavandeira, CEO. Good afternoon to you, sir.

Good afternoon. Thank you, Alessandro. Thank you. Welcome, everybody. Sorry, you cannot see my face, I have a very bad connection. So just for clarity of the voice, I have taken the camera off. We will try later to see if you can see my face directly. In any case, we are here to go through the presentation of the last quarter. With me -- I have with me also disconnected the camera Cesar Sanchez and our CFO, which is on the other line. We are going to look -- go through the second quarter results and as a summary of the first half results. You have the numbers in the presentation. It has been a tough quarter from the cost point of view. From operational point of view, the company really worked quite well. We continue with production as guided, and we recovered from the smallest slump in the first -- quarter 1, but the cash costs were much higher. The all-in sustaining costs were much higher, and we can go through that a little bit later, and I will focus the presentation actually go through those numbers. As a result of that, the EBITDA was also lower than before. And we -- and our cash flow is also quite tight. But we continue to have a fantastic balance sheet, because we continue to invest in the solar plant and in the E-LIX System through the quarter. A few other things that are shown in the Slide 5 of the presentation are completion of the Astor litigation and so on. I would not bother to go through all of those. You can read them and I would prefer to concentrate directly into the key points of the quarter and also to leave some time -- make it brief and leave some time for questions. So in Slide 6, you can see the evolution of the last quarters. And first graph, you will see the production was the ore through the mill was close to 16 million tonnes -- 15 million tonnes. So this is basically very much steady rate, except the smallest land that we had in the first quarter due to a national strike. Copper recovery steady and copper production recovering from first quarter and going into the range of around 55,000 tonnes -- 54,000 tonnes of copper at the end of the year. So slightly the lower guidance -- first guidance, but still very much in what we have planned. So if we go to Slide 7, is when you start comparing what happened in the first quarter and first half of this year compared to the previous quarter. Revenues have been lower due to slightly lower production, slightly lower copper price and due to a provisional adjustment in some accounting number of sales that were produced during first quarter -- sorry, excuse me, during the second quarter, but are going to be sold in the third quarter -- paid in the third quarter. So accounting rules ask you to make a provision. That means that if these sales -- are sold at a lower price, you have to take a hit in your revenue, and that's accounted for that. The big increase is in operating cost. There's almost a EUR 30 million increase from equivalent quarter of 2021 to 2022. This is almost all of it due to the high electricity prices prevailing in Spain and Portugal, and I would say the whole Europe. And then we can go to that a little bit later. As a result of that higher operating cost, almost in the same amount, our EBITDA goes down from EUR 52 million to around EUR 15 million. And our profits go down from EUR 32 million to EUR 11 million. Still a decent result, but I would say quite a disappointment, although expected due to the higher electricity prices and high inflation in general. The operating cash flow is lower. Remember that we include everything in these operating cash flow, including all our heads -- everything. But -- and also, we invested around EUR 20 million in the solar plant in E-LIX and other things, ongoing working capital -- volume construction. We financed part of this investment with loans basically dedicated to the solar plant. And our free cash flow during the period was reduced by EUR 26 million. Going -- excuse me, going to that same slide, Slide 7, you will see in the lower part our net cash position. Still, after all these results, we maintain a very solid balance sheet with net cash of around EUR 67 million -- EUR 68 million, which is a big difference from our past quarters where we were even having almost EUR 30 million negative working capital. In summary for the whole half year, it's more or less joining what we have already reported during the first quarter and during the second quarter. The operating costs go up as a result mainly of electricity. The profit has gone down to EUR 30 million and more or less the same thing that I just mentioned about the second quarter. The important point is that at the end of the year -- at the end of this quarter, at the end of mid-2022, we had EUR 127 million in cash, fantastic working capital surplus of EUR 130 million, which is higher than what we had in 2021, EUR 102 million. So for a company of our size it's a fantastic balance sheet to take us to 2023. Let me go and explain a little bit on Slide 9, which deserves a little of talk of what's the reason of the higher costs. The main one that accounts for almost 70% of all the inflation is electricity prices. On Slide 9, you will see that historic prices in the last, I would say, 10 years, being hovering around EUR 50, EUR 60-megawatt hour. The first part of this year, they went up to EUR 300 per megawatt hour. And actually, in August, they were around EUR 150 per megawatt hour. In that slide, you will see, in the third point -- second point, last part of this second point, uncertainty remains in relation to realized rates and market rates. It means that the Spanish government and Portuguese government have disconnected or have been allowed to disconnect the prices of electricity from the gas prices in comparison to Europe. Until mid-June, the prices of electricity were set by the higher cost producers or a marginal cost producer. And there has been a regulation that has allowed Spain and Portugal to set a maximum cap for the gas prices in order to calculate that, because actually, we are not getting the gas from Europe. We are getting it from LNG stations around Spain, Portugal. But because this has cost for the gas producers that have to start their combined cycles, the gas generation, the power gas -- generated by gas. Anyway, this extra cost, it is still not clear who is going to pay, obviously, the consumers and the prices that are being mentioned in the Public notes are around EUR 240, the global prices, which means in addition to these market prices, there will be a compensation to the gas companies, to the gas producers of X kilowatts per hour, still unknown depending on who are the payers, who are the consumers, which will increase the final electricity prices to, I would guess, around EUR 200 per megawatt hour. Actually, we believe around EUR 250 per megawatt hour. This is 400% higher than what we had in 2021 and has a huge influence in our costs. Just to give you an idea. Normally, in our operation, we were paying around EUR 2 million per month, invoices. And recently, we were paying even EUR 7 million, even EUR 8 million per month. There, you can see who are the problems of EBITDA going. There are other sources of inflation that take us to the next slide, which are explosives, which are linked to gas, we have gone from basically 50% higher or more. Diesel, diesel seems to be starting to go down already. Steel balls gone up, although starting to go down. Lime is still high due to the use of gas, but we are using less lime, so it's not affecting us too much. So the other 2 key drivers of inflation are diesel and explosives, which are key for our mining costs, where we have been going from around EUR 5.5 million normally in '21 per month to EUR 6.8 million which means EUR 1.4 million more every month, still very far away from the extra cost of electricity, prices of steel, reagents and so on are not that inflated, and we have been able to control them by buying all over the world to maintain our cost because in some places, the steel was not as bad as in Spain. Other things were transport cost, the Baltic Index reached a peak in around May, but has been going down quite a lot for sea freight. So we went -- that also affects another $0.10 per pound. With all those numbers, we come to the results of first half and our expectations in use for the remaining of this year. We expect to have copper production of around 52,000 tonnes to 54,000 tonnes. Right now, as we speak, July has been quite good. August is going quite well and rates have been higher than we had in the first half. So it seems that we are going to be around 54,000 tonnes of copper with good recoveries of around 86% and throughput expected to be around 15.5 million tonnes per year. With those numbers, our cash costs are going to be around between $3 and $3.25 and all-in costs, including investments and so on between in $3.25 and $3.45. Of course, this depends on assumptions of electricity, and this can make a big swing depending on what happens in Ukraine or specifically in the gas of Europe. We are prepared for the worst. But we know that we have quite a tough year ahead. These prices of electricity, extra EUR 100 per megawatt hour means directly that extra cost around $0.4 per pound extra costs. So that's what we are guiding. In addition to that, we just announced a small dividend obviously, people would have expected probably more because we had an excellent dividend. We were questioning the Board if we should give a dividend or not considering the uncertainties in copper prices and inflation and so on. But we believe we have a good balance sheet, and we are prepared for the future. We know that this situation of high cost is temporary because I will speak a little bit later on the measures we are having to reduce these costs in 2023. So we -- the Board decided to give an interim dividend of around 0.03p per share. And the details are shown in the slide and in the press release. And we will review the final dividend at the end of the year or beginning of next year, depends on the results. The reason for even if this dividend is symbolic is that it's our policy that the moment we had cash that was ready to be returned to the shareholders. We will do so. We did that last year, and we want to be consistent with this policy and even with this hard situation that we experienced in this first part of the year. We still are giving out 30% to 50% of our free cash flow to our shareholders. So is this all? Or is it just a bad quarter [indiscernible] let's look how we advance what we have in our [indiscernible] the burden of a 50-megawatt solar plant that would take care of a 22% for our electricity [indiscernible] 3 years ago. So we didn't do this in an opportunistic way. Simply, we did -- we thought it was a good thing. We also started construction of the E-LIX, which we will be [indiscernible] value. We are permitting and doing all the work to [indiscernible] which just decides [indiscernible] continue to [indiscernible] continue with the [indiscernible] we are very confident that this [indiscernible] and we continue with exploration so [indiscernible] of this, first the electric costs will [indiscernible] our footprint recovery and extend the mine life, increase the optionality. And with diversification, with trading -- higher trading liquidity, higher production, we believe we have a good future. [indiscernible] , what's the effect of this 50-megawatt power plant that takes care for around 20% of our needs, more or less second quarter next year [indiscernible] . So starting let's say second half next year, 22% of electricity in the [indiscernible] cash cost of 0 [indiscernible]. In addition to that, for instance with this -- with the situation of high [indiscernible] . We signed power purchase agreement at PPA with Endesa, starting in January 2023, [ a 52. ] I remind you that we are running right now at EUR 245 megawatts. So we have signed something that almost 5x lower for 33% of our needs. That means that starting next year, even if the situation stays as bad as it is right now, which we hope will not, our cost of electricity will reduce more than half. Basically, we reduce at least EUR 30 million to EUR 40 million less per year which is a very significant amount. That's -- and forever because this PPA is for 10 years life [indiscernible] not only. We have started already the permitting of 4 windmills. In total, they are around 90 gigawatts per year, basically another 25% of our needs. They will be located -- they are 100 meters high. They are located beside [indiscernible] behind San Dionisio. The preliminary studies have been positive. We are with the permitting in parallel of detailed measurements during a couple of months while the permitting is going. But looking at the numbers, this one seems that's going to be positive and is going to go ahead. The capital cost of this is around EUR 15 million to EUR 20 million, slightly higher cost per kilowatt hour -- per megawatt hour than the solar, but still quite economic and even more economic with the situation of energy that we have right now. We have also been studying pumped hydro, but those studies have not been as successful as those related to winter. We continue with E-LIX. We have already started the construction of the building and the civil is ongoing. So by the end of this year, we hope we will be able to show some significant progress in this place. We believe that the big addition of higher grade material will come from the extension of Cerro Colorado which is called San Dionisio. You can see in the picture 18 how higher copper grade goes all the way to surface. The past minor -- the past operators mined just the core of the center of the pit, and now we are looking at the spanned pit, and we are permitting this one. And we hope we can start sooner rather than later in 2023. At Masa Valverde, we are still in the permitting stage, it's a longer shot and will not affect the short-term cash flow as growth and I would like to mention a small but significant progress in Touro. As you know, it was a project that was delayed, it was stopped due to a negative environment impact declaration by the Galician government. One of the issues of the anti-mining was that there were some acid water storage operations that were [indiscernible] some acid waters. One of the things we did is to advance the water treatment plant that was going to be involved anyway in the future project. And we have started and finished the construction. The plant is already working. You can see some of the pictures in picture 20 of the results of the first tests the water is coming in as expected, of course, perfectly clean and the authorities are extremely happy of our commitment. This is an endorsement that we believe that this time, we will get the permits because all the excuses of the asset generation of the mines can be avoided. So with that, I will probably go to the questions.

Yes. Alberto, thank you very much for your presentation. [Operator Instructions] I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via our investor dashboard. As you can see, we've received a number of questions throughout today's presentation, and thank you to all the investors for submitting those. Alberto, could I just ask you to read out those questions and give responses where it's appropriate to do so, and then I'll pick up from you at the end.

That's excellent. One question, last quarter, you discussed your evaluation of other renewable energy options such as wind turbines, pumped hydro. Have you made a decision from these options? I just commented that we have already made the decision to start the permitting of the wind turbines for wind turbines of around a little bit less than 6 megawatts each, a little bit high, with a specific location, and we don't know how long this will take, but we have taken the decision to all the permit as soon as we can. The pumped hydro, we have completed the first test and so far with our with our approach, this didn't give a good economic numbers. Second question I have is diesel prices are high. Can your mining contractors switch to electric trucks like some other miners? Well, in our case, the problem is that electricity prices is very high in Spain. And also you need a certain infrastructure to go with electric. It is not very common in other places, and it's only possible when you have very cheap electric prices from hydro. In our case, it's not possible. What we are doing to minimize the effect of diesel is to optimize as maximum distance of haulage. Also we are looking carefully at the markets and looking at buying a significant amount of diesel to store the port when the prices are [indiscernible] and use that -- let's say, buy it not only in the national market, but in the general market. Another question is when our E-LIX plant begins production, will it mainly produce copper or zinc? We will start with zinc. We can produce both. All the test works that we have done in the last few months have been extracting the zinc from the copper concentrates. So we will be able to treat some materials that have copper with a lot of zinc in the concentrate, which right now we cannot produce. And we will not be able to get paid for the zinc but still get paid for the copper. This is the way we will start, but the plant will be able to produce only the copper or only zinc. The recoveries of zinc, which right now we are not paid for, are extremely high and very fast and without affecting the copper at all. Another question comes when will you announce more exploration results from Masa Valverde . We are -- we will continue where we have a group of results. We have 4 rigs there, 2 with infill and doing some specific work in Masa Valverde, another 2 in the satellite so-called Campanario [indiscernible], where we have found some new areas totally, the areas is 5 kilometers long. So it takes some time be testing all these anomalies. But so far, we will be announcing as the -- probably in this -- during this quarter. Another question is what proportion of your costs are in euros? I would say approximately 80% -- 80% to 84%, 85%. The only costs that are not in euros are the freight, the TCs, RCs, and penalties and some of the cost of buying materials outside like [ balls ] and so on, that sometimes we have to pay -- if we buy them outside and we have to pay in euro. Noncurrent asset loans have increased from 2.3% to 7.7% in relation to E-LIX system. The loan has a 4-year grace period, why has the contract being structured in this way? What is the maximum foreseen debtor balance and how will [indiscernible] fund the loan repayment? Well, starting by answering the last one, it's I would say, the problem of [indiscernible] technologies. We have warrant this over the technology, we try to get an equity placement there, but the line insisted that they just wanted loans because they don't want to lose the majority of this technology. This, we believe, it's going to be a breakthrough technology. It's going to -- could change the way some things are treated. So we negotiated this system in order to refinance part of the installations that are, let's say, common, common [ noise ], those are ours and some of the things we give the line the money for them to buy some specific materials and some specific technologies that are not in the public knowledge. It was basically the only way we could advance in this way. Current assets loans have increased -- that's the same one. Why has the debt been drawn down rather than surplus cash balances? Does this not increase interest cost? It's a good point. Our interests are 1.5% to 1.75% with no liabilities -- sorry, no warranties. So it's a very good financing. And it's always good to have a good question in your balance sheet instead of having to go with negative working capital as we have been doing during the last year. So that's the reason it was like cheap financing without recourse, without hedging without any sort of balance, and we thought it was a good system. Why are VAT receivables so high? Is there a risk they will fully recover? No, there's no risk. Simply, they are higher simply because of the amount of business going on, specifically with the increase in electricity and an increase in operating costs. The VAT is basically goes attached to your operating costs and there's no risk of getting this number. We have never had in not my life in Spain, we have never had any problem of receiving the VAT back.

Just to add some more color on the VAT. So the VAT normally gets paid back in a pretty of time of about 6 months and the majority of the VAT has already been received as some amount of the -- where -- depending from 2021. So the amount has significantly dropped now -- and as Alberto mentioned, it is slightly -- the volume is slightly higher as a result of higher cost and higher investments. So that's why the total balance has increased a little bit, but there is no issue recovering that the registration takes about 6 months to repay all the VAT.

Okay. Thank you, Cesar. Can you confirm the dividends will be paid without the deduction of local tax? I understand, yes, like...

Yes, exactly the tax was an issue that we have dealt with the [ tax administration ] in Cyprus, and we have now received a letter from them just to avoid having through the hustle for the shareholders to submit their -- the duration of tax residency. So I can confirm that we can pay the dividend across without any deduction and to everyone to all the shareholders, as we don't have any shareholder in Cyprus.