Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

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

Thank you, Melanie. Good morning, everyone, and thank you for your time this morning. I have Ian Poole and Peter Trout with me this morning. This morning, we'll run through our FY '21 results and achievements and cover off guidance, but more importantly, make a direct link to our strategy by way of some clear expectations on our growth projects, milestones and schedules. I'll be referring to the presentation posted this morning titled FY '21 Financial Results and Outlook and make a start on Slide 4. We covered many of the tactical achievements at the June quarter and full year update, we conducted in July this year, including the significant improvement in our ESG performance, operational outcomes guidance and achievements with the hugely successful exploration program, resulting in a remarkable lift in our resource base across the assets. To boil it down to a simple statement for the year, it was all about the delivery in the short term and investing in for the long term. New records in EBITDA and gold production equivalent, significant lifts in our NPAT second only to a very strong half 2 in FY '18. The portfolio has been boosted with the acquisition of Dargues to 3 operating assets. The mills run harder than ever before and this, combined with an increase or a large increase in our resources has put the company in a great position for funding our growth plans across all 3 assets and making prudent capital allocation decisions of which one includes not declaring a dividend this year, so that we can create resilience in the light of COVID-19 and direct capital to the highly attractive returns, our growth projects offer our shareholders. If we move to Slide 5. This hasn't been an overnight story. These sets of results, the results of prior investment into exploration, plant upgrades at Peak development and our commodity mix and prices achieved have driven improvement across the board. All-in sustaining cost margin up to 41% at $1,140 and on a percentage lift even higher on an all-in cost basis. Earnings and profit all lifting, including recent exploration at approximately $20 million, a Dargues investment and growth across growth capital across all the sites. And additionally, and this is $8 million in debt repayments and an additional $8 million going to the cash backing of our environmental bonds. I'll now hand over to Ian for a further detailed analysis.

Thanks, Dan. So moving on to Slide 6. So Aurelia generated a record $416 million in revenue during the year, a 26% increase over the prior year. This was driven by a 50% increase in volumes and a 48% increase in prices achieved. During the year, Aurelia also benefited from a reduction in treatment charges as competition for concentrates remained strong due to supply disruptions in South America and global demand. Aurelia's revenue is gold dominant with 61% derived from gold sales, complemented by significant base metal bar products. Now to Slide 7, our net profit. Aurelia more than doubled its underlying NPAT to $57 million, with a statutory NPAT of $43 million for the year, which included a one-off Dargues acquisition cost of $20 million. The primary changes in NPAT from the prior year are the [ 26% ] uplift in revenue as described on the previous slide, an increase in operating costs at Peak and Hera was volume driven with an increase of ore throughput and increased concentrate produced. The inclusion of the operating cost at Dargues, which was added to the portfolio of assets in December, also contributed to increased costs. There was also an increase in depreciation and amortization due to the addition of Dargues to the portfolio. Interest and taxes increased by [ $17 million. ] The taxes were higher in the current year due to higher profits and the permanent difference in respect of the Dargues acquisition costs. Interest costs were higher due to the establishment of the finance facility for the Dargues acquisition and interest arising from the term loan and the guaranteed facilities. If we go to Slide 8, cash flows. Mine -- operating mine cash flows generated $185 million for the year, which funded sustaining capital, which was made up of the sustaining capital, sustaining leases and cash cover on our guarantees of rehabilitation of $8.2 million. Growth capital of $26 million was focused on the mine development at Kairos and Dargues. And then FY '22, mine development for those 2 operations will be sustaining capital. In December 21, we acquired Dargues operations for a cash outlay of $165 million to the vendor and also incurred -- we also incurred associated acquisition costs of $20 million. The acquisition, the cost was funded by an equity raise of $125 million and term debt of $45 million. The exploration costs of $21 million included underground exploration at Federation, Great Cobar and Dargues as well as the scoping study and the feasibility study for Federation and the associated EIS studies required to enable the consuming of these projects. During the year, we incurred debt servicing costs, which included interest as well as $8.1 million in debt repayments on the term loan. The tax paid during the year relates to the tax installments we acquired during they year. And the dividend of $8.7 million relates to the final dividend from FY '20, which was paid in October last year. All in all, a pretty good set of numbers. I'd like to hand back to Dan.

Thanks, Ian. So I'll move over to Slide 10, please. We covered group guidance in detail in July. So I'm not going to dwell on it this morning. But where I do want to take the presentation and the discussion is it's really important to draw out the link of this guidance to our growth and the investments in front of us. Our metal production Dargues on average across the board led by approximately 10%. Our all-in sustaining cost does rise, predominantly with the reallocation of growth capital to sustaining. And subsequently, there has been further sustaining lists, including the acquisition of Dargues and some reinvestment into infrastructure at peak based on our views of a longer mine life. One of the key differences this year looking forward is that in the growth capital of $16 million to $18 million, the vast majority of that is aimed at Federation and including in exploration valuation, a 20% lift in exploration, all targeted across the 3 projects and regions that I'll cover shortly. Another key difference this year, if we look at the bottom of Slide 10 is the smoother nature of the gold production on a quarter-on-quarter basis in comparison to prior years. This is due to the inclusion of Dargues, its continued ramp-up of head grade and the Kairos orebody at Peak settling in after the commencement of it in June 2021. Moving to Slide 11. The results of the prior investments and our current plans see all the metals rising across the board with the exception in the short term of copper. Further double-digit growth in the gold equivalent production to north of -- to approximately 200,000 ounces for FY '22. The achieved growth, investment and balance sheet strength all come together, driving our strategy for long-term value and returns growth. And then moving to Slides 13 to 15, we'll run through the actual activity on the ground right in front of us and our expectations on the delivery. Focus on Slide 13 now with Federation. This is a remarkable organic growth story, and we have now had it said clearly on a set of path to -- or set of rails to delivery. Its history is actually very short, it's quick and is testament to the agility of a company like Aurelia and the value of the orebody. 4 years from discovery to a planned first production for an underground is quick delivery of cash flow. This year, namely FY '22, the focus is on the continuation of the EIS and the approvals process enabling works for the underground that covers camp expansion at Hera and the civil and surface works required for the preparation of the Decline. This is all contained within the $16 million to $18 million growth bracket in the forecast. Gives us 2 things, and these are really important points Exploration Decline is really are about drilling. But what it does for us here at the moment is it gives us early access to the orebody starting very soon. FY '23 then becomes about the continuation of that Decline and the commencement of the plant, either being an upgrade or new depending on the feasibility outcomes through the balance of this financial year. It's important to note here that the Exploration Decline can commence before the full EIS preparation and approvals processes commenced by way of the Exploration Decline [ risk ]. It's important to note that the plants and development and early production can't commence until those approvals are achieved somewhere in the period of Half 1 calendar year '23 or late in FY '23. The real advantage here for us is the early access to the orebody, the early commencement of the Decline and the enabling works on the surface, give us the ability to smooth out the capital from now and be well contained within our operating cash flows to ready the asset to full production, post completion of the mill. This, and added to this is our advantage with our mills. Shareholders to be well aware, we've got Peak 100 kilometers up the road and in the region that the opportunity for us to bring on early production, particularly when the heavier loads of capital come on. There is significant advantage we have in the region and over greenfield sites and from our perspective goes to the heart of funding of our growth plans for the business. If I move to Slide 14. Peak has been a similar story. Great Cobar is well advanced down the regulatory approval path and the Exploration Decline is already approved. Although the Exploration Decline kicks away in Half 2 calendar year '22, that does coincide with the full approval for the asset, but that Decline can commence earlier as it is already approved. This gives us a 2- to 3-year horizon to a real organic copper exposure for the company. Moving over to Slide 15 for Dargues. The absolute priority for us here is the continuation and completion of Phase 1 and the subsequent planning of Phase 2 drilling. In parallel with that is the environmental assessments and regulatory approval [ parts ] for an extension of the mine life and incremental capacity increases of the asset all well within the current mine life position. So with that, please, Melanie, I'd like to hand over to question-and-answer time, please.

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

Two questions for me, just to start, and I'll probably circle back. Could you just talk, Dan, firstly, about the dividend. Has the Board sort of edged towards a policy or a fixed policy at this point? Or could you just give us more color around what considerations were made in light of the decision to not to declare one in this instance?

Sure, I'll take that one. Dylan, the -- in answer to your first question, no, we don't have a formalized dividend policy. What we are -- what considerations we went through are pretty much twofold here. One being, we have significant growth trajectory in front of the company. And when we can now with extended mine lives, the development load coming at the business and the returns on offer from those growth opportunities, it enables us to make what we think is much more prudent capital allocation decisions. And it's not without consideration of the COVID-19 environment in New South Wales at the moment. For Aurelia Metals, we have 3 assets, all concentrated in Western and Southern New South Wales. And the COVID threat is real. It is real to regional New South Wales, and we can't ignore that. So our decision is basically twofold on investment back into the business and ensuring the resilience of our balance sheet in the business in the event of any implications of COVID-19.

The next question, just on the balance sheet. How do we think about the current debt position that you've got, preferred gearing levels looking forward, will we take what we have done in the past in terms of just paying down debt as quickly as you can? I'm thinking about it being 0 and just generating cash, how do we think about it from here?

Let me talk about the assets here. I think through the course of FY '21, we did pull the available levers for capital for the business being across cash off the balance sheet, equity and debt within the company to set ourselves on the platform that we've established over this last year or 2. In fact, it's over the last 3 years, 4 years. And looking forward, on the basis of our producing assets and cash flows, we are planning on repaying the debt. Well, we are repaying the debt on a quarter-on-quarter basis right through for the term of that facility. So that equals -- that's roughly $4 million a quarter. So we paid $8 million to date. We'll pay another $24 million-odd over the course of FY '22 on that facility. Sitting next to that is the cash backing of our environmental bonds that we require for our license to operate with the businesses. There's 2 different angles that this needs to be looked at, and I'll just draw into this answer, the large growth we've had in our resource base as we go through feasibility studies over the course of this year, our ability to have large conversion of resource to reserve and therefore, mine life extensions significantly mitigates the cash backing requirement on the business for our bonds once those reserves are placed and the mine lives extended. So what that does for us is allows further cash within the business to handle the growth opportunities. In addition to that, the debt facility, whilst it is being paid down now, we've got a great relationship with our banking syndicate. It's a corporate debt facility and it's in place now for the existing mine lives. So we would naturally be took booking to the banking syndicate about what flexibility looks like on that existing facility as it stands now to be one of the key attributes of where our funding solutions are looking forward. I think, Dylan, what's really important to note here is that this year, grade and value of Federation from our perspective, we shouldn't be scared or nervous about taking on a debt with such a great growth project in front of the business. It warrants us being able to ensure the most effective and lowest cost way to fund the growth to that and bringing on that project in the future.

Fair enough. That makes a lot of sense. I'll just take just one final question just to let off from the final point there about funding Fed. I mean it seems as if we can do this quite cost effect -- or quite cheaply. And it's a question of how much modifications you want to make to the existing Hera mill. I mean in light of the time line that you put out here, do you have anything further to update in terms of how we should think about size or incremental CapEx to expand and put this into production?

It would be -- considering we've just gone scoping into feasibility, we have penciled circa 600,000 tonne capacity for the facility. The option as to whether it's an upgrade of the existing facility or constructing next to it is really for feasibility. I think what's really important here to note is that the flexibility within our business because of the availability of the Peak mill as well, enables us to bring on that early production. Whilst when we were seeking consent or while we are seeking consent for Federation, it does include the flexibility to track north to Peak such that we can prioritize the highest NSR into our available milling capacity. So if we've got a mill shutdown because we're giving it an upgrade to handle the full value of Federation, we've got the opportunity to displace much lower NSR material out of peak and bring Federation early to get much better cash outcome for the business while we've got the lumpy capital. So -- and that alleviates the issues around the larger capital in and around the time that, that mill is needed to be constructed. In terms of capital cost of that mill, we haven't released that to the market yet. I feel that's too early on the basis of the feasibility to being completed over the course of this financial year. But I think there's plenty of benchmarks out there, Dylan, that you can work from on that front, considering it's not a greenfield site. We have existing tailings facilities we have existing MIA areas. All our environmental structures are in place. Camps getting upgraded now, not in a year or 2's time. So it really isn't from a mill perspective. It's not all of the capital cost that's going into that project.

[Operator Instructions] Your next question comes from Michael Evans with Acova Capital.

Thanks very much for the update and extra Information on the guidance, that's really helpful. I guess, a pretty simple one, I think, on acceleration. So you've got the approval for the Exploration Decline at Great Cobar, but you don't have the approval for the Federation yet? And are you expecting that imminently? And I'm assuming that growth capital you did mention at the beginning that most of that vast majority of that federation I'm assuming that is the Exploration Decline. And so what are you assuming on when you get the approval? And how quickly can you get the equipment or the contractor just sort of get cracking on that because assuming it's all planned, et cetera?

Yes. There's a couple of things with that, Michael. The approval for the Exploration Decline and its associated secondary type approvals that are required to put boots on the ground is quite imminent. So that application was made some time ago. So I think that answers the first one. Secondly, to put a decline in is all the civil and surface works and construction of the MIA required the mine infrastructure area required to that, that the civil works and the packages associated with camps, civil works, box cuts are all well and truly advanced. And we're actually not far off the capability of having ourselves in a position where we're ready to execute. You can see that nothing will happen on the ground until the environmental draft and associated secondary approvals are granted. So that is right in front of us and all contained within that $16 million to $18 million. So those surplus works will start. And it's really -- it's also important to note here, too, that the biodiversity offset requirements for a business and a development like this have also coincided in a very similar time frame. And that is also a very clear regulatory gate for us to commence activity on the ground. And we're also in a very good position with those biodiversity offsets due to where the company has been doing on Hera and associated properties for many years now. So that's all good. Days works and civil works will commence during the course of this -- the remainder of this calendar year with ambitions of being ready for the Decline commencement in Half 1 calendar year '22. So some point in the next 9 months.

Okay. Got you, right. That's Half 1 calendar '22. Okay.

Noting those timetables, the bars, the [indiscernible] at the bottom are in calendar year and the years above are articulated both ways.

Got that. And last I've got you, you sort of mentioned that you penciled in around 600,000 tonnes for the facility here and last time I think we spoke. It's obviously a triple flotation plant you're looking at, given Federation's got copper, lead, zinc. But you just made a comment then if the NSR is that compelling and you've got your -- there's a potential to displace or at Peak and Truck or to Peak from Federation. Can you sort of give us a bit more color in thinking around that, why you would do that?

Yes, I think the key with it is, Michael, is that there's absolutely no doubt that Federation on its own justifies its own mill in and around that capacity. There's no doubt in that. That is not at any way shape or doubt for us. If we'll take that through the feasibility study to lockdown its degree of accuracy and make sure that whilst we are -- you've got to remember here, we are continuing to drill as well. We haven't found the extensive Federation yet. So while we do that in parallel, we've got to draw a line at some point as to what our capital decision is. But please don't take the fact that we are tracking -- we may track up the road for early production as any sign of their views on the value of Federation. That's not at all the case. What we are trying to achieve here is that if, for example, we were going to do a significant upgrade to the existing Hera mill, flotation and filtration at the back end but also grinding at the front end because we're going to the 3 separate tonnes means you're all over that plant. The reality is the plant is going to be down, and we can't be producing through it. So we look at it then as a company and say, well, we have in the region then only one mill operating at 800,000 tonnes a year capacity. It would -- it makes sense from a better cash outcome to the business, so for the business, not necessarily just Hera or just Peak but for the business, it makes it get a much -- you get a much better cash outcome if you are prioritizing at that point of time when you've only got the one mill, the highest NSR material to those mills. And what we would logically look at there is that there is an average NSR across peak, which is a mixture of higher NSR, particularly from the likes of Kairos, Chronos, Perseverance Deeps, et cetera. And there's also a mix of the lower NSR material in the northern mine. In my -- there's no doubt in my mind that the early material from Federation would, including its trucking costs, clearly outstrip that the NSR, that Peak material. So for that period of time until we have -- whichever way the new mill, updated mill is configured while it's in construction, we have the ability for a better cash outcome for the business that really smooths out our requirements and particularly assist in funding. So that's what it is. I wouldn't at all reflect that sort of decision on our view on Federation's value. It's purely about making sure that we're in really good shape to bring that asset on as soon as possible.

No, I wasn't trying to infer anything in view of Federation. In fact, I was wondering if you had -- you mentioned the 600,000 tonnes at Hera, and you do have to draw a line and to do your studies at some point in time and I understand that. But I suppose I would look at here, the Federation resource and actually I'm trying to guess something higher. I was just wondering whether you had a situation where you adjusted the Hera mill to do the triple flotation at 600,000 tonnes and then Federation got bigger, as you said it possibly good no one knows at this point. And then you find a way to get 800,000 tonnes of acceleration, but you expect here the 600,000 tonnes. I mean -- and then you might track 300,000 tonnes to Peak, I don't know. But your point about -- I think I'd sort of -- now I think about -- clearly, there's a bit of work to be done at Hera and what you're saying is if we have to shut it down for 3 to 6 months so the group was the highest NSR material and I totally get the trucking costs given the NSR of the material at Federation so high is negligible in the scheme of things. And I get that. So that actually makes -- that makes perfect sense.

I think it's an age old problem, Michael, is here for us. We are moving quickly on this asset from discovery to first production as well as approval and first production employees for an underground. That's good going. And we can clearly see the value in it. We would be remiss not finding the fastest way to monetize the highest value orebodies we have in the group. And I think that's what this plan lays out and the consequential benefits of doing that is that it smooths out our capital requirements and our operating cash flow inputs to the funding solutions for the business going forward.

Yes. No, no, I totally agree on Federation. And that's why I think that extra color you've given in those back-end slides is fantastic. Appreciate it. I'll hand it back.

Your next question is a follow-up from Dylan Kelly at Ord Minnett.

Dan, sorry, just a quick follow-up here. You're talking before about just the original lockdowns and potential impacts on the business. Could you just talk through how it's impacting the operations [indiscernible]? I assume that the workforce is exempt, but supply lines are all sorts of flavors in place I'd assume had some degree of interest. Any color you could give there would be appreciated.

No problem. I think, Dylan, and any of the listeners, it won't be a surprise that we didn't highlight with our assets and our communities. It has -- Canberra is an hour's drive from Dargues. It's been in lockdown the regional LGAs around [indiscernible] and to the North, Northwest have also seen spread of the delta strain. We have added additional precautions to entry to our sites, whereby we are requiring full tests and the return of negative results before people will actually be allowed through the front gate on our sites. That's an additional precaution above and beyond what New South Wales Health is requiring for movement within those LGAs for, as you say, for exempt workers of which we are. So we've gone the extra steps. There's 2 key reasons. Obviously, there is a protection of our communities and because we have people in and out of those communities, and that is of utmost importance to us that we protect that. And also additionally, absolutely minimizing. I can't say we can definitely eliminate but absolutely minimizing the chances of delta coming on to the sites. The impact of that is, particularly in Western New South Wales, probably more until more recently, where the ADF is being deployed into the region to help has been the turnaround on testing does cause people to not be able to come back to their normal trusted swing or shifts. So we have been suffering a little bit on labor availability, and therefore, productivity of the sites. But as I've said before, I think we've dealt with this in most quarters since March 2020 is that it ebbs and flows depending on where the pinch points are on border crossings or testing and results return. So we're most certainly continuing to produce through this quarter, but we are on high alert, and that does introduce some inefficiencies in our business without being able to get labor into the operations.