Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aurelia Metals Limited Interim Financial Results for FY '21. [Operator Instructions] I would now like to hand the conference over to Dan Clifford, Managing Director. Please go ahead.

Thanks, Travis. Good morning to everyone and thanks for your time this morning. I have Ian Poole, Peter Trout and Adam McKinnon with me this morning as we run through the results of the interim period for FY '21. I'm going to cover off the highlights, and then we're going to run through some details and go to question-and-answer time followed by some wrap-up comments from me at the end. In looking directly to highlights for the year -- for the half year, it's actually been an outstanding result for the company across particularly the 3 stated prongs of our strategy. In terms of sweating our infrastructure and assets, we've had financial results improvements at every level, ranging from 15% to 400% improvement over the prior period. That includes a half 1 production of gold of just short of 46,000 ounces at just over $1,000 an ounce, putting us in a very competitive position against our peers. It includes a total recordable injury frequency rate reduction at 26% and a record interim net profit on an underlying basis of $41 million. In terms of directing our dollar to the highest return, it's been a game-changing half for Aurelia. With the outcomes of Federation and the Dargues acquisition, the company is positioned extremely well for long-term growth and value creation. Some key points on Federations, which Adam will cover later in the presentation. For a fair period of time now, we've been very focused on bringing Kairos online. Peter will also cover that during his presentation today. But in terms of comparison, Federation, on the back of the latest MRE, has now topped Kairos. It's 3.6 million-tonne resource, and we've only just started the step-out drilling after a significant period of infill drilling to build our confidence in the ore body. And also, just noting recently on the publishing of the MRE, noting that we have -- on the basis of ASX interpretation, we are now no longer able to use NSR in resource reporting for average grade, and we've reverted to a metal equivalent. That metal equivalent is extremely strong at 19-plus percent. And additionally to that, based on an identical basis, it's equivalent to 9 grams a tonne gold. Therefore, my comment that this is a game changer in combination with the existing assets and our growth profile with Dargues. That leads us to creation of long-term value. We have a strong balance sheet, $105 million in cash at bank and a net cash position of $52 million after the acquisition and a full year div paid during that -- dividend paid during that period as well as the Federation scoping study progressing extremely well. Let's move over to Slide 5 or Page 5 of the presentation deck. Key points to note in the financial results being very reflective of our operational performance and commodity mix within the business. EBITDA, up 44% to $72.3 million, and on an underlying basis, up 83% to $91.5 million and a strong underlying NPAT, an interim result record for the business, at $41.4 million, 164% up on the prior corresponding period. And with that, I'll hand over to Ian for some further detail on those key drivers.

Thanks, Dan. On Slide 6, Aurelia had a 26% increase in revenue in the half to a record $207 million compared to the prior corresponding period. The biggest contributor was the gold price and zinc volumes. The benefit of the Peak lead and zinc circuit upgrade is delivering value. This shows the benefit of being gold dominant with a high exposure to high-value base metals. If we go to Slide 7. Aurelia had a record underlying interim profit after tax for the period of $41.1 million, which after taking into consideration the acquisition costs of Dargues produced a statutory net profit after tax of $19.8 million. The big contributors to the record underlying profit were the increased revenue, as shown on the previous slide, offset by higher operating costs and transport costs due to higher volumes as well as the increased income tax expense. If we go to Slide 8. Looking at cash flows. The $62.3 million net mine cash flow increased by over 400% compared to the prior corresponding period, which allowed the company to direct its -- to continue to direct funds to its highest returns. With the Dargues acquisition, continued investment in exploration of $6 million as well as returns to shareholders with the final 2020 dividend. I'd like to hand back to Dan.

Thanks, Peter -- thanks, Ian. In terms of FY '21 guidance, we remain unchanged as we roll through the quarter. With Kairos near term and the ramping up of Dargues, our guidance remains at 113,000 ounces of gold and an AISC range of $1,425 to $1,575. The key to the near term lies with the progression and operations in the Kairos land. So with that, I'll hand over to Peter for an update.

Thank you, Dan. I'll talk to the slide on Page 11 of the presentation pack. Clearly, establishment of the high-grade Kairos mining area is a major focus of our activities at the Peak mine. We processed the first development ore from Kairos through the Peak concentrator, and we're advancing towards first stope production early in the June quarter. We've completed 2 of the 3 preproduction milestones at Kairos, these being the large diameter return air raise and all-drive access development into the first stoping block. Work is about to commence on the excavation of a secondary [ escape ] air raise, which is an essential requirement for our first stope production. At this point, I'll hand over to Adam, who will give us an update on the Federation Mineral Resource estimate.

Thanks, Peter. So I'd just like to expand on the significance of the updated mineral resource estimate for Federation, which we released on Tuesday. In the 8 months following the maiden release, the company was involved in exploration -- sorry, we completed an extra 26,000 meters of infill drilling. This work has delivered a 35% increase in resource tonnage to now sit at 3.5 million tonnes and a massive 134% increase in contained gold content to 158,000 ounces. The overall resource represents an impressive zinc equivalent grade of 19.6%, which, as Dan mentioned, equates to 9 grams per tonne gold equivalent when calculated on an identical basis. Importantly, the extra drilling has delivered increased confidence in the estimate in the upper portions of the deposit with 31% now classified as indicated. The 1.1 million tonnes of indicated jumps up to a zinc equivalent grade of 26.3% or nearly 12 grams per tonne gold equivalent when calculated on an identical basis. Following positive metallurgical test work, this update has also seen the inclusion of copper into the estimate for the first time, adding 10,000 contained tonnes to the resource. Also of note is the inclusion of a small tonnage of shallow high-grade oxide material amounting to 15,000 ounces of gold at an attractive average rate of 6 grams per tonne. Shallow drilling will be targeting further extensions to this high potential material in the coming month. Following the update, it's worth putting the scale of the Federation discovery into perspective. Noting the deposit is still in the evaluation and growth phase, the updated resource estimate already has 20% more contained metal at a 40% higher grade than the entire undepleted Hera deposit on an equivalent basis. Hera, as most of you know, has already seen an 8-year mine life with operations ongoing. Federation is also now the highest-grade deposit in the company's resource portfolio in direct competition with the impressive grades of the Kairos deposit at the Peak Mine. The recent high-grade gold hits have actually made Federation a significant gold deposit in its own right, on par with the entire gold inventory in the company's Perseverance and Chronos loads and slightly above the current gold inventory for Kairos. Given the negative nature of the gold mineralization at Federation, the gold tenor of the deposit is expected to grow as drilling density increases. The Federation discovery is of regional significance as well. In metal equivalent terms, the deposit is now on par with the original discovery of the Perseverance deposit, adjacent to the Peak Mine. Outside of the existing -- sorry, outside of the existing historic mines, you'd have to go back 47 years for the discovery of Elura, or now called Endeavor, in 1974 to be our Federation. The company continues to host multiple rigs at Federation, engaged in ongoing resource upgrade and extensional drilling. The exploration team has also recently commenced evaluation of high potential geophysical targets along strike from Federation. Further follow-up drilling is also planned for the Dominion prospect, which is 1 kilometer southeast of Federation, where Aurelia discovered shallow high-grade gold and base metals in 2018 and 2019. Moving up to Peak. Surface drilling continues at Great Cobar with the first stage of resource infill drilling now complete. A significant proportion of the holes we drilled at Great Cobar are still pending finalize their results. Turnaround times for assays have actually blown out significantly, reaching up to 2.5 months over the new year period, reportedly due to the exceptional amount of activity in the region. These results are expected to be included in the next exploration update when they become available. Thanks, and back to you, Peter.

Thanks, Adam. I'll continue on from the commentary on the mineral resource with an update on the scoping study at Federation. Clearly, we're very excited about the potential of Federation as a new operating asset in our portfolio. And the scoping study into that development is drawing to a conclusion. The technical and economic analysis into potential mine development has been completed, and these findings are currently being documented in the scoping study report. That report is expected to be completed in March for internal consideration, leading to a decision on the next stage of work. Significantly, permit applications for an extension of the Hera accommodation village and an exploration decline are expected to be lodged in this current quarter. I'd like now to move on to the Dargues Gold Mine acquisition and provide an update on activities at Dargues on Slide 17 of the presentation pack. The integration of the Dargues mine into Aurelia's operating portfolio is progressing well, following the change of ownership in mid-December. The underground mine is in a production ramp-up phase, as can be seen in the graphs on Slide 18 of the presentation deck. Our current focus is delivery of 30,000 tonnes of ore per month from the underground mine to utilize the available processing capacity. This production rate is expected to be achieved in the June quarter. We also embarked on a targeted drill program to test extensions to the Dargues deposit, and we now have 1 underground diamond drill and 2 surface drill rigs operating at Dargues. The results of these drilling activities will inform our plans to extend the mine life at Dargues and the necessary permitting modifications required. I'll now hand back to Dan, who will provide our commentary on our strategy drivers.

Thanks, Peter. Looking forward now with the company, the strategy -- the stated strategy for the company now has existed for 12 to 18 months with an extension of that into the new assets or looking beyond the current assets. Reflection of the last 12 months and particularly the last 6 months or the period of this reporting date has seen a significant progression in the execution of that strategy across the current operations and further into the progression of that beyond. The strategic asset base in Cobar continues to deliver, and we continue to maximize our returns with those life extensions and operating discipline within the assets. Our growth profile has been executed during that 6-month period as well. And we can now also now clearly see the benefit of our portfolio, inclusive of being gold dominant with the high-value base metals and an emergence now of copper through not only Great Cobar and the Peak asset, but also now coming through in Federation. I think with that being said, it's a good time now to go to questions, and I'll make some closing comments at the back of those questions. Thanks, Travis.

[Operator Instructions] The first question today comes from Dylan Kelly from Ord Minnett.

Congratulations on the results of Federation, which looked pretty incredible. Just starting on that point around Fed, Adam, despite some really interesting benchmarks there against what you've already got in your portfolio and regionally how they compare, Adam, if you still like -- could you just clarify some of those points? Are you saying that this is bigger and better than, say, Hera and Perseverance and perhaps on par with, say, what Endeavor was historically?

Dylan, I'm saying it's on par with Perseverance, that discovery, which was a major discovery around 2 decades ago. And what I was actually saying is that you have to look back to the Endeavor discovery before you get something to beat Federation. Obviously, Endeavor is an incredible ore body and is actually the biggest ore body in the Cobar basin. So it would need to -- a little bit more success before we eclipse Endeavor.

Okay. Fair enough. I might just follow up with just some of the comparison data, if that's okay. Dan, just coming back to your cost guidance and why that remains unchanged. I mean you exited the first half at what's just over $1,000 an ounce. So this implies a pretty steep jump in the second half. Why have you left guidance unchanged for that rate? And how should we be thinking about the inclusion of Kairos in terms of what that's going to do to the cost profile?

Dylan, we've been over this a number of times, I think.

I know. I know.

Our guidance remains unchanged. We have actually -- if you remember, we did actually improve the cost guidance at a portfolio level or a group level on the basis of the 2 existing mines performance to the half year. So remember, the guidance was actually improved when we reported the December quarter in January. That's the first point I'll make. Secondly, within that guidance, because it's been well and truly contained within our plan, is the impact of Kairos on our guidance. It's a key part of our plan. That hasn't changed. It has pushed out a number of weeks, but we can contain that within the full year guidance that we've restated or reaffirmed now. To the second limb of your question as to why costs go up, remember here that we're looking at all-in sustaining cost here as a business that's not inclusive of growth capital. A lot of the growth capital that's been expended during the first half of the year has actually been getting to Kairos. As we get there, costs, particularly sustaining costs, ramp up as lateral development or ore body development ramps up, not only there, but across the other parts of our business as well. So we'll see an increase in the sustaining levels that go straight into all-in sustaining as opposed to the first half.

[Operator Instructions] The next question comes from Ben Crowley from Macquarie.

Yes. Just wondered if you might be able to flesh out some of the sort of near-term, I guess, exploration, but also permitting timelines for both Federated and at Dargues as well. So I guess at Federation, you mentioned some step-out drilling that's coming. I was just wondering about the kind of order of magnitude of that and potential gold targets in there and whether you think that will continue to feed into permitting questions for it. And then I guess, similarly, with Dargues, the near-term plan there exploration-wise, but then how much work do you think you need to do before you can -- you'd be comfortable to progress into modifications for the permit?

I'll cover those. Thanks, Ben. To start with Federation in terms of drilling and approvals, we've mentioned a couple of times that, that step-out drilling is commencing now. Those rigs have stepped off or stepped out along strike and at depth. That is always being planned as the second half of the drilling program this year for Federation, first half being intently focused on infill drilling for resource upgrade. We are very optimistic as to what that step-out drilling will deliver for us and that drilling program will extend now for another 2 to 3 months minimum and with the objective of having it well and truly completed before the end of this financial year. What that does then is -- well, has already pretty much fully informed the scoping study. And with the completion of that scoping study and the envelope in which we plan to progress the asset will dictate what the next steps are with approvals. So what we do know and it should be no surprise to anyone that the size and scale of this project means fuller EIS ahead of the environmental approval and mining lease granting. The baseline studies or some of the baseline studies have already commenced before we kick into that EIS, but we have to be very clear under New South Wales planning framework that the operating envelope for the asset needs to be pretty much flowed through to the EIS boundaries in which we work. So you can see, unfortunately, some of it is sequential, but in all the areas, we've been able to run in parallel, which is some of those baseline studies, we've commenced those. They've been commenced now for multiple months, in fact. So all in all, what that means is that we're going through a typical New South Wales development consent from the EIS period, which, as we've talked about a number of times, is several years. So I think that covers off Federation in terms of your question. Let's move our attention to Dargues. As Peter mentioned, we've now got 3 rigs going, 1 underground, 2 on the surface. It's a pretty intensive program that we will run for the rest, the majority, anyway, the rest of this financial year. That does 2 things for us: one is, we will publish our own Aurelia MRE for the resource and that will inform our LOM studies and subsequently into budget for internal purposes. That drilling program will go for balance of the year, as I said, and from that, a fairly similar approach that we need to take with Federation where we understand the scope and the size of the upside such that the consenting process can be accurate right from the start. So I think sometime in the first half of FY '22, we'll have a pretty good understanding of what the potential envelope looks like for Federation as well.

The next question comes from Anthony Kavanagh from Chester Asset Management.

Just with Federation, Dan, I know we've spoken about in the past that you're not really able to give NSR number. If I divide the zinc equivalent by, I guess, the breakeven, I kind of get to around 517. Say, as an investor, if I wanted to refer to NSR, is that kind of the number I'd be thinking about? And does that imply like with the indicated resource -- I'm talking about indicated, not the total resource, are you able to mine that indicated in the first couple of years [ as in ] get to kind of higher margin in the first couple of years? And if your breakeven was 120, then we kind of get a number almost close to $200 million of free cash flow in the first couple of years from that asset?

Well, I'm not -- you're not far off the money, Anthony, I would say. And again, as we talked, you need to do your accounts on that front, but I think your logic is correct. Look, there's a lot -- one of the most exciting benefits of this asset that we saw, and we saw it early, too, by the way, is the shallow high grades, and particularly the emergence of the gold in the shallow high grade. That subsequently has been stretched and pulled at both strike and depth through, I think, the current envelope of the stoping area. So that's when we -- to say we're getting excited about it is an understatement. I think the benefit of that is that as soon as [ you decline, you're ] straight into some really healthy grades. And that's an absolute leverage benefit in terms of NPV of the asset for us. So the answer is that there are some great grades early in the operation.

Yes. And then, sorry, just a follow-up, just on the gold comment around [ Magadi ]. Is that -- do I interpret that to mean that the grade of the gold and the inferred, as you mature, you're optimistic that, that could, I guess, increase?

Anthony, I'll take that one. Look, when -- this is pretty typical of Cobar-style mineralization in as much as the gold [ density ] is quite coarse grains. And they generally have -- the gold [ mines ] generally have a short strike length and are not overly easy to drill from the surface. When -- what we find with these deposits is that when we tend to drill them out of the higher density, we tend to see an upgrade in that gold. That doesn't always happen. But more times than not, when we're drilling some of these similar deposits, we do see an upgrade when we do that high-density drilling. And on balance of probability, I'd expect that to happen with Federation as well.

The next question comes from Christopher Cahill from Quest Asset Partners.