Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aurelia Metals Limited Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Dan Clifford, Managing Director. Please go ahead.

Thanks, Rachel. Good morning, everyone, and thank you for your time. I have Peter Trout and Adam McKinnon with me on the call this morning. We'd like to take some time to put some color and context behind our production performance most recently and our exploration successes, but importantly, draw out the key points in the milestone of the release of our maiden resource on Federation. June quarter was one committed as delivering general improvement across production, and we're well on our way to that, underpinned by a strong month of May and a quarter-to-date production, particularly in gold, of just over 16,000 ounces. I'll hand over to Peter shortly to take us through some of the key points. Exploration continued to deliver some compelling results for the business, particularly near mine and regionally. And as a key pillar in our strategy, the investment in the drill bit has delivered an exceptional maiden resource for Federation. The progressive work over the last 12 months has generated a platform for what we believe creates significant potential value for shareholders. And on that note, I'd like to hand over to Adam McKinnon to take us through the key points.

Thanks, Dan. So our exploration team discovered Federation in April last year. And since that time, we have completed close to 30,000 meters of drilling, defining a significant mineral system, extending from near surface to at least 550 meters vertically. Geologically, Federation and Hera are in the same highly prospective corridor. They're hosted in similar rocks, and they have very similar economic minerals. The standout feature of Federation is the presence of broad zones of massive and semi-massive lead and zinc mineralization. And this often exceeds 40% or 50% combined lead/zinc. Like Hera, the older Federation tends to be coarse grained and irregular and is only visible in the core. So the culmination of the discovery and the subsequent evaluation work is a maiden mineral resource estimate of 2.6 million tonnes at plus 21% lead/zinc and 0.8 grams per tonne gold, equating to an NSR of more than AUD 370 per tonne. The maiden estimate has been reported at $120 per tonne cutoff, which is consistent with the resource estimates for the company's other deposits, including Hera and Peak. With the assumption that this material from Federation could be treated through the Hera plant, the NSR for Federation has been calculated on a similar basis, albeit with a slightly reduced gold recovery assumption. The maiden estimate is currently 96% incurred with an indicated portion near the top of the deposit that includes higher density drilling. Interestingly, this upper area has a significantly higher gold grade at 2.2 grams. Given the exceptional grades, Federation is shaping up as one of the most significant discoveries in the region over the last 2 decades. After only a year of drilling, the value of the metal endowment at Federation is already approaching the original undepleted resource base at Hera. It's similar in metal value to the as-yet undeveloped Great Cobar discovery and has eclipsed the reported resources for more recent regional discoveries. Federation is still a relatively new discovery with considerable outside potential, both near the deposit and in the immediate region. The massive sulfide mineralization, especially in the northeast, remains completely open at depth, with additional potential along strike in both directions. Initial resource inflow drilling also targets the gold potential in the upper portion of the deposit. In my opinion, the presence of high-grade, steeply plunging gold shoots within Federation are also a significant profitability. Target generation in the broader Federation-Hera corridor using geophysical and geochemical techniques have been ongoing throughout the year, with a number of promising targets -- new targets identified for [ fall off ] work. Moving on to Peak. Geologically, we continue to be highly encouraged by the tenor of the gold mineralization in drilling at both Kairos and Peak North, with the progress of the upper and lower declines at Kairos soon to be providing opportunities and drill platforms to target extensions to both areas.

Great. Thanks, Adam. I'll make some closing comments in there shortly. But Peter, if you could take us through the operational results, please?

Yes. Sure, Dan. Talking to the operational results for May and quarter-to-date, it's pleasing to report improved production outcome from both the sites. May's performance was delivered from a platform of more consistent operational performance, and at Hera, higher gold grades and recovery. Considering each operation at Hera, we saw store through the month from stoping areas with a higher gold grade and lower base metal grades. And when that all went through the plant, we achieved some very good gold recoveries. Moving on to Peak. The underground mine delivered a higher and more reliable output through the month. And there's probably 2 areas I'd draw people's attention to. The first of those is the debottlenecking work we've been doing around the ore handling system by our maintenance and mining teams. This work has delivered a 15% reduction in our skip-hoisting cycle times. And it's also allowed our planned maintenance activities to complete -- to be completed with less crusher, winder and shaft downtime, giving us more time to hoist ore. We've also placed greater emphasis on our mine scheduling and our execution, especially around the preparation and cycling of activities required for production stoping. The prove -- improved production from the mine has also allowed us to achieve higher processing rates through the expanded process plant. And with that, we've delivered a more stable ore feed. Through the month of May, the majority of our ore feed to the process plant was from copper/gold ores, and we changed over to lead/zinc/gold later in the month, and that contributed to the lower lead/zinc production certainly compared to the prior quarter when we focused on commissioning the process plant with stockpiled lead/zinc ore. The performance of the process plant is going very well. We're very satisfied with that. And we're continuing to optimize the circuit conditions as we gain experience in treating the various polymetallic ore types in the underground mines. I might now move on to the Federation project and just provide an update on how we're looking to take that project forward on the back of the excellent mineral resource estimate. So at Federation, we're progressing 3 parallel and integrated work streams. The first of those is the exploration and resource definition program that Adam's outlined. We've also initiated the permitting and regulatory approval processes. And thirdly, a scoping study. And the purpose of the scoping study is to examine potential development scenarios for the project, and we're looking to identify the best value and risk profile to take that forward. What we're looking for from the study is a subset of project configurations that we can take to more detailed definition and evaluation during a prefeasibility study and provide the confidence necessary to commit to a development. The scoping study will continue -- consider a range of options and topics, and some of the things we're looking at include the mining methods, the minerals processing flow sheet and product streams, the infrastructure and services and an exploration decline to provide early access to the deposit and also improved drilling platform, the definition work. The time frame around the scoping study is in the order of 12 months, but with actual timing will depend on the findings during the course of this study. So Dan, I'll hand back to you.

Thanks, Peter and Adam, for those. Just I'll make some comments, and then we're going to hand over to, importantly, to the Q&A for investors. It's pretty clear to see, operationally, our focus has been centered right at the heart of predictability and reliability within the business. In essence, I cut that pretty simply to getting control. I think we can see that flowing through with the quarter-to-date results and the significant improvement on tonnage and throughput through both assets in particular. Just drawing back on to a couple of comments made during the quarter. I'll outline some of the look forward for the business now. The long review that I mentioned in the prior quarterly report has now drawn through pretty much to completion. For us, in looking at why we set out to do that, it's driven the required testing and clarity on the best. And when I say the best now, that's including Federation and the recent exploration results, particularly at Peak, what we believe is the highest value operating configuration of our mines, mills and the projects. And they're now clearly informing the detail required to complete our budget for the next -- for FY '21 through '23. And looking forward -- and we are looking forward to this is the release of our June quarter production numbers similar to what we've done through April and May in the absence of full year guidance, but also followed up by the full quarterly report in mid- to late July, combined in a similar time frame with the resource and reserve update on an annual basis. Now shortly after that period, we'll be coming and giving clarity to investors on the strategy and the outlook for the company, in particular, FY '21 guidance in the normal course in and around our full year results. Just in closing, I'd like to close some comments on Federation before I hand back to Q&A. From my perspective, there's 5 key points to the material value of this asset in our portfolio. And in high-level terms, from my perspective, it's got a gold equivalent of 8 to 9 grams per tonne across 2.6 million tonnes at the current spot pricing. That is driven by the significant base metal contents in the reserve -- in the resource. From an IRR perspective, the projects, it's capital light. It's a simple bolt-on to Hera with the upside for us of optimization of the Hera mill. But in essence, the ore type matches the Hera plant. It has shallow early gold. And from an NPV perspective, to us, that's low risk, fairly valued in a resource, and that's important. And on a comparative basis, considering it's a logical life extension to Hera, but it's more than that from what we're seeing. It's only early days, it's 12 months old. But on an undepleted basis, there's a 30% improvement on the NSR over Hera, and it's primarily driven by its grade. So a very exciting project for us. We will be taking the time to build that into our valuation, and that's happened now. And I look forward to being able to give some clarity on the future -- well, early into the new year. So on that, I'd like to, please, Rachel, if I can open up to question-and-answer time.

[Operator Instructions] Your first question comes from Dylan Kelly with Ord Minnett.

It's obviously quite an exciting time with these sorts of hits and these sorts of results coming out. Two questions from me. Just in relation to the maiden resource statements. It sounds like you've actually done quite a lot of test work, but to date, that seems to focus on the sulfide, a little bit lower down and perhaps not the oxides at the top. Just in light of your mention -- and Peter mentioning this notion of putting in, say, an exploration decline, are we being -- I guess where are your thoughts right now in terms of the mining method? It still looks relatively shallow. What sort of method? And how are you thinking about the metallurgy in terms of what you can get into first and fast?

Yes. Dylan, Peter Trout here. I'll take your question. In terms of mining method, to me, there are a lot of similarities to what we're doing at Hera at the moment in the geometry of the deposit. And so that's a natural place for us to start in our valuation. I can let Adam comment to the prospectivity of near-surface mineralization. In terms of flow sheet, we've initiated work around the mineralogy there. And we'll be taking that work through the scoping study to work at the best flow sheet and products for the project.

Okay. Fair enough. So in terms of -- you've laid a simple time frame around, what, 12 months for a scoping study. How do you think about permitting in terms of the process? And what are your expectations there? I mean you've got an EL transfer to -- from ML. What are the sort of rough estimates that are you putting together there?

So we're looking at approximately a 2-year time frame for permitting, Dylan, but there are a number of elements of that process, which are beyond our control. So we've initiated the work within our control, the baseline surveys, setting out the type of work requirements we think are necessary. We also met that through the appropriate regulatory processes, and we're looking to proceed at a due pace around that.

Dylan, it's Dan. I'd just like to add a couple of comments to there. For several years, the estimate, Peter says 2 years, depending what's in our control. It lines up quite well with the technical and financial studies that are required on us. Our view is it's quite low risk in that it is, from our perspective, it's brownfields. Now that's not a major infrastructure build. It's simply a haul road back to the central hub of the Hera mill. Although that consenting process, whilst we're saying several years, is not without risk. But we believe it's on the low end of its scale, purely on the basis that it's a reasonably small increase in the environmental footprint of an existing operation.

Okay. That's quite clear. Just one final question, if I may. At the last week's exploration update, you had a nice little cross-section there showing progress on the 2 declines going into Kairos. I just wanted to get an understanding of what the current mine plan there is in terms of is there high-grade development ore that might be coming in as you start prior to production or [ stopes ] actually being put in? Could you guys also just give us a bit of an understanding about what we can expect at the next reserve update in terms of how much material you're having to pull forward from pretty [ recent ] drilling programs and things like that?

Dylan, Peter here again. I'll answer your question in 2 parts. You're correct, there's 2 declines we're progressing towards at Kairos. The lower decline, we expect to reach the ore zone or mineralized zone in July, and that will give us our first ore exposure there. The upper decline will take a longer period of time, as you can probably tell from that long section. Once we've got the lower decline through, we're going through a processing of setting up that mining block for extraction. So we're doing things like excavating a significant internal ventilation raise. We'll be putting power and the watering systems in place, stope definition drilling and getting ore development. So we will see ore development come through in the first half of the next financial year, leading through to stoping activities in the back-end quarter 3 of the financial year. We're not in a position at the moment to give you an information on reserve updates. That will be provided through the normal course of business in July.

Our next question comes from Mike Millikan with Hartleys.

Just firstly, just on resource conversion. How much more drilling -- maybe this one for you, Adam, how much more drilling should we expect and what sort of conversion rate? Should we assume a similar to Hera kind of conversion? Is that what we should be expecting clearly on?

Mike, at this stage, I wouldn't like to comment on the conversion rate. But certainly, we are planning to do significant additional infill drilling, obviously, at this stage, mostly inferred. But we'll be looking to infill it to a similar level as Hera, but no firm numbers at this stage.

Have you budgeted the meterage yet? Is it -- what should we expect lead to another 30,000? Or is that still yet to be budgeted after the reserves and resource update?

Yes. Mike, I think the key there is that we've actually ramped up drilling there as we speak. Really, in the last 2 weeks, we've stepped up to 3 rigs now there full time, 2 diamond and an RC rig, intent being infill and step out. So similar -- we'll go through the final budgeting of what that exploration program looks like and prioritization of that, particularly regionally. But I'd be expecting similar amounts.

Yes, got you. Obviously, talking about some of the regional targets. We've got Dominion with a bit -- fair bit of copper in it. Will the scoping study be looking to adding a potentially copper circuit to the Hera plant? Is that one thing the scoping study will be looking into?

It's a little bit early for that. I think, Mike, at the moment, we're focusing primarily on the key and early value of Federation, which is ore, very much suited to the current Hera plant. And we'll obviously assess as exploration success unfolds in front of us as to what that looks like for copper. But at this stage, we're primarily focused on gold/lead/zinc.

Your next question comes from Mark Fichera with Foster Stockbroking.

Just on the permitting side, will water be a key issue in that? Would you see a material corner for more water? Or is that really part of that Hera plant and you probably might expect that?

That will be one of the areas we'll be looking at during the course of our study, Mark. So at the moment, we're sourcing water from our bores in the region. But clearly, there's some groundwater investigations we'll be doing around the Federation deposit itself.

Probably to add, I think the estimate at this time, certainly in terms of mining intensity, Mark, is that it's a similar annual volumes, particularly in mining and throughput to what we're achieving at Hera now. Given that with the grades, we're going to see a lot more actual metal output as a result. But we're not expecting a large step change in the requirement. That's simply an extension of life on that sort of footprint.

Okay. And just in terms of mining the deposit at Federation, given that shallow area with gold, is open-cut mining a consideration? Or are you just purely going to focus on underground?

I think the way we're approaching this one is that we'll let the studies deal with that. But what I would say is that with the early economic -- well, the early value we can see with gold at shallow depths, we've got to do the trade-off between open-cut and decline assets. But one of the benefits is sooner decline asset is a real estate underground closer to target. So my gut would tell me at the moment, it's an early decline, but we will see how that picks it up in the early stages.

And also, is it easier to permit in New South Wales just going straight to an underground rather than considering an open cut would make the permitting easier?

Within reason, I think it does, yes. I really think the key to permitting is not only that, but it's out-of-mine impacts: tailings, environmental disturbance, waste dumps. I can see a clear advantage in early assets underground. But as we mentioned earlier, we think we're on the low end of the risk scale, but it's not without risk.

And just a final question, just on the metallurgic consideration. When do you expect to have some sort of [ pit work ] data out?

Well, it's work that will happen over the course of the coming months, Mark. We've done some site attest work, which gave us some encouraging results under the Hera plant conditions. But there's more work we need to do around that. And that will take time in terms of getting the core samples prepared, going through the analysis and actually doing the lab work.

[Operator Instructions] Our next question comes from Karina Bader with Acorn Capital.

It's Karina from Acorn here. Congratulations on a good resource update. What I'd like you to talk to, I know it's still early days, but Hera deposit itself had a major undercall in the core grade that was eventually put through versus the resource. You've already spoken about the indicated having a higher grade than the inferred. Can you talk about how you think you're going to see that given that its core is gold, how you feel that, that play out over the resource upgrades over time?

Karina, you might have to -- you broke up in the early stage of that question. Can you just restate it, please?

Yes. I've got bad reception here. Looking at the ore growth near surface at Federation, there was an issue with Hera of undercall of the gold grades. Are you likely to see the same thing at Federation?

It's Adam, here. Look, I don't think, at this stage, we have enough data to say anything tangible about that comparison. We'll get an understanding as we continue drilling and get more confidence in the actual estimates themselves.

The next question comes from Brett McKay with Petra Capital.

Just on the drill program for Federation. You mentioned quite a significant infill program that you're going to do. Are you going to do any further step-out drilling to continue growing the deposit?

Brett, yes, so the plan at the moment is to do both infill drilling initially in the upper parts of the deposit with the idea of conversion of some of those inferred resources up indicated. But we also have a rig that we'll be doing step-out drilling as well, particularly down and along strike.

What do you expect the drilling depths to be able to achieve from surface before you need to go underground? Like, how much further do you think you can extend that depth potential?

Well, we can drill -- we've demonstrated at Hera, we can drill up to 1,500 meters if we need to. But it becomes an exercise in what is cost effective. And that's something we'll be looking at as well during this process.

Okay. Great. And Dan, just a quick one for you. You mentioned earlier, from a production standpoint, predictability and reliability, and we certainly saw that delivered under your guidance at Stanmore. Do you think that you're far away from being in a position to say that you are at that predictable and reliable position from a production point of view? And if not, sort of how far away do you think you would be from you're saying that with a high degree of certainty?

Thanks, Brett. I suspected you might ask me that question. I think the focus for us, when I talk about reliability is, and Peter alluded to in his section there, the detailed planning and scheduling, repeatability around stoping. I think we've taken some large steps in the last 3 months, 4 months in achieving that, and we're seeing that benefit now. When I talk about reliability, from our perspective, that is tonnes, throughput, cost. The nature of the polymetallic ore bodies is that we have different grades or different NSR material coming out as -- on a monthly, quarterly and annual basis. And that's the nature of our ore body. I think in terms of particularly throughput, the work that the team has done on focusing on stability now, now we go to effectively squeezing blood out of the rock on throughput and maximization. I think we're getting there really quite well over this last 3 months. I think by the time we're looking at the certainty of guidance for FY '21 and the budget we'll be committing internally for 3 years, I think we'll be there in terms of our confidence and the certainty on delivering that improvement.

Your next question comes from Dylan Kelly with Ord Minnett.

Just one quick follow-up. Expected timing around the release of, say, the FY '21 outlook or is it still too hard to say based on recent operational disruptions?

I think I alluded to it earlier, Dylan, I'll reinforce that. During June, early June -- sorry, early July, I should say, we'll put out our metal production numbers that we have for the last 2 months. In mid-July, mid -- I think that's sort of second half of July will be the quarterly report and the resource and reserve update. And not far off the back of that will be a strategic outlook for the business to lay out the direction of the company. Actual guidance will be -- pretty much, we'll be aiming for that, the defined guidance for FY '21 in the normal course in and around the release of our full year results or potentially earlier. But at this point in time, we're looking at it being in the normal course.

Your next question comes from Mike Munro with Hartleys.

Just a quick question. I know that your current gold hedging runs out at the end of June. And obviously, part of the plan going forward as to what you do there. Can you give me any indication of when you're likely to make some sort of commentary as whether you're going to do any hedging given the current high gold prices or whether you just go roll the dice on the gold price?

Yes. We've got a pretty clear view on this one, Mike. From our perspective, when it comes to hedging, we'll only really take those depths if we think we need it. At the moment, I can't see an absolute reason for why we do need to hedge. When it comes to hedging, if people are looking for gold exposure, that's why we may get invested in, there's other reasons why people invest in us. But at this point in time, we don't feel the need that there is for hedging, but we'll obviously update if there was.

So given that, that would generate quite a substantial additional cash flow, given the difference between the hedge position that you had in the current spot gold price, would you be in a position to sort of comment on returning dividends on that later in the year? Or you just sort of wait and see how things go there? Or is that sort of something to come out in the update from the Board later?

The announcement of a dividend will be clearly sitting with the Board, including hedging decisions over the next quarter. But at this point in time, capital -- I guess capital management within the business is a key focus for us now that we've done the LOMs. We're into now the first cut of delivering of a budget that will lead to guidance in the year. We'll make those decisions as those outlooks get rolled out.

There are no other questions at this time. I'll now hand back to Mr. Clifford for closing remarks.

Thanks. Thanks, everyone, for your time this morning. We've had 3 pieces of important information out to investors over the last 2 to 3 weeks. I certainly will be scheduling a further investor call time for the release or shortly after the release of the quarterly production report in July. So there will be certainly other release of information in that time, but I think that will be the next call. Okay. Thank you, everybody, for your time. Appreciate it, and we'll talk to you in July.