Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aurelia Metals Full Year 2022 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Dan Clifford, Managing Director and Chief Executive Officer. Please go ahead.

Thanks, Ashley. Good afternoon, everyone, and thank you for your time this afternoon. I have Ian Poole with me as well on the call today. It's by way of opening, I think to summarize it simply for how we view the year's performance, it was definitely a year or two halves. And to be short and concise with it, I think half 1 was quite a solid performance for the business and half 2 was not. And if that impacts half 2, that have impacted our full year results that we will talk through today. So we'll cover those as well as some of the changes that have either been made or that are underway as we were to correct the performance from the second half and also set up to get into the multiyear extensions in front of our Cobar Basin assets. We'll also cover the next steps of information, particularly around the Federation feasibility study towards the end of today's call. So let's move over to Slide 3. In FY '21, we focused very much in the business on the fundamentals across our sustainability performance, covering fatal risk injury rates and our environmental performance. The push through FY '22 has been very much to expand that push and to get our arms around the broader essentials of aspects of running a great business across culture, conduct engagement, diversity, climate and more recently into the psychological safety area. Those fundamentals from FY '21 have remained on track with continued performance over a 2- to 3-year period. And also now I'm comfortable on -- myself and the Board are comfortable we have set the right foundations and base have in place to get the broader aspects of sustainability in the business performing. So move over to Slide 4. Just covering operations. We'll cover a bit more of this in detail as either myself or Ian run through the various aspects of the financial year. But at a group level, it was simply all about volume. And that was where the majority of the issue lay for us. Although total processed tonnes for the business was up about 6% year-on-year. Peak and Hera, did, particularly in the second half, underperformed roughly by 60,000 to 70,000 tonnes each. And on that front, Dargues was okay in that it actually exceeded its nameplate for the year in throughput. Base-metal grade and price was a positive, giving us increasing gold equivalent being just under 200,000 tonnes -- 200,000 ounce equivalent for the year. I think that really shows the benefit of our commodity mix in the business. I'll hand over to you, Ian.

Thanks, Dan. Good afternoon, everybody. I'm on Slide 5, group financial performance. The company made a statutory loss after tax of AUD 85.1 million with an underlying loss of AUD 1.3 million and not the AUD 3.2 million, which is shown on the slide, and we'll put an update out shortly. I'll discuss the key drivers for the last -- when we address Slide 7, and the revenue of [indiscernible] AUD 438 million for the year was a 5% increase compared to the prior year, and I'll cover that on the next slide. The underlying EBITDA for the period was AUD 14.2 billion, which was a 15% decrease compared to the prior year. The decrease in EBITDA was primarily due to including costs which were the underground contractors transitions at both Peak and Hera. Our full year cost at Dargues, which was acquired in December 2020 and the higher freight costs due to higher volumes and increasing rates. There's also high zinc treatment charges for the zinc constraints due to volume and rates. And whilst the cash flow from operations of AUD 154 million was an improvement compared to the prior year, really, as lower EBITDA was offset by tax refunds of AUD 12.5 million received during the year. If we look at Slide 6. As noted earlier, there was an increase in the overall revenue for the -- to AUD 438 million. This slide, this has a bridge between last year's revenue and this year's revenue. You can see that the company benefits from higher prices across all our key commodities, but offset by lower volumes, particularly gold. Peak and Hera production was lower to lower mill throughput and grade. And the lower production of Peak and Hera was partly offset by the higher gold production at Dargues due to higher throughput and grade and the full year's ownership. There was, however, higher zinc volumes due to improved production at both Peak and Hera, because of the higher grades of both operations. And as noted, when Aurelia released its June quarterly report, there has been an increase in zinc treatment charges in calendar '22 compared to calendar '21. To look at profitability on Slide 7. As noted earlier, the company made a statutory loss of AUD 85 million and an underlying loss of the tax of AUD 1.3 million. The slide on this page shows -- this slide shows a bridge between the profit before tax, up before tax of AUD 71 million to the underlying profit after tax of AUD 1.3 million. The changes in revenue and operating costs have already been addressed in the earlier slides. So look at the first item on the D&A expense. There was an increase in the depreciation charge compared to the prior year of AUD 60.7 million. This change is primarily at Dargues because of really as depreciation and amortization is largely determined on a unit of production basis when the gold equivalent production increases as it did in Dargues. The depreciation and amortization change will increase. And gold production at Dargues is just under 3x that in FY '22 with just under 3x that of FY '21. So that was a key driver. In FY -- in the next column is around the acquisition and integration costs. They were the cost that we spent in FY '21 when we acquired Dargues, that's been added back. And the next column regards the impairment expense for Dargues during March '22 -- an upper range post tax impairment of AUD 80 million of its Dargues mine. The following impairment charge was AUD 135 million, which is AUD 95 million post tax, which is above the upper post tax range. In March, management and the Board became aware of this potential impairment and informed the market immediately, based on the best information available and forecast outstanding exploration results. Since then, the exploration results have been softer than expected, and the impairment will increase to AUD 135 million. This impairment has been added back when calculating the underlying performance. The AUD 21 million and the net change in the remeasurement of the financial liability relates to the life of mine royalty at Dargues compared to the prior year. The life of mine royalty at Dargues was remeasured as a result of the impairment and AUD 127.1 million has been added back when calculating the underlying performance. The AUD 114 million in the gold bar is a statutory loss before tax and the company generated a tax benefit of AUD 32 million, which resulted in a statutory loss of AUD 81.7 million. Other than the impairment and the Dargues' royalty, which we've already touched on, we also added back AUD 3.5 million of rehabilitation costs, which related to the historical workings at Nymagee mine to work out the underlying performance. And these changes resulted in an underlying net tax -- net loss after tax of AUD 1.3 million. So it was quite a complex set of results, but I think we can see where we've ended up for the year. I'd like to hand back to Dan.

Thanks, Ian. Just moving on to Slide 8, let's deal with a bit more detail around the operating performance of the sites. As I mentioned earlier, I think performance majority hit by -- across the group, particularly by volume through -- back at Hera impacted with labor availability. Gold grade at Peak was underperforming for us, but particularly the Q4 production interruptions with the shaft and the blast in [indiscernible] and the North mine spreading back into the South mine in terms of a delay. The key move for us at Peak is really focusing now on the improvements we can make to the asset not only now to ensure the short term is corrected, but also to dovetail into the future expansion with Great Cobar and that's transitioning to a business that is majority [ owned ] operators. They still remain contract specialist provision on the site and definitely focusing more on full-time equivalent efficiency. Market is tight, planning on getting everyone we need to business could be a risk, and we are very much focused on getting more efficient operations at that asset. Hera was slightly interestingly, and it was different in terms of the first half to second half. The actual throughput through the Hera mill was constrained in the first half by higher-than-expected base-metal grades resulting in throughput being lower. That's okay because we still get the metal. But at the end, that did impact throughput. And then going into the second half, post the long-term view that we took on transitioning of our contract partner there to dovetail also into the Federation decline development, we did have some reliability issues with the mobile fleet with the new contractor and more exacerbated to the end of the year with some poor ground conditions. That being said, as I mentioned earlier, Dargues hit all its physicals. I think the company and our shareholders well aware of the grade impacts on the asset, but it's physical to have actually either been all on or above expected performance. So move over to Slide 9, talk to cash flow whilst we -- the impact I talked about earlier and that Ian's covered as well, did drop our operating mine cash flow by about 10% to the prior year. But our sustaining capital went up to AUD 70 million -- AUD 22-odd million increase over last year. But the real breakup there is at least 50% of that spend of AUD 70 million was all in development in the business as we have had also a full year of development at Dargues on top of a switch of great capital development at Peak to sustaining and ongoing development at Hera. The balance of that AUD 35 million to the AUD 70 million is across our equipment and our lease charges on our equipment plus their contracted equipment and some TSF work at Dargues. Growth at 19.1%. Federation was AUD 14 million, is that and the balance to Peak and Great Cobar, and on top of that, we continued -- and I'll talk to that in a minute, and we continued funding exceptional exploration across the group up this year to AUD 30 million with the vast majority or the majority of that spend being bringing Federation along to get us into this position with the feasibility. On top of that was debt repayments of approximately AUD 16 million and also cash backing of our bonds and the total of that cash backing and debt repayments just at AUD 38 million, of which we now have about AUD 30 million in restricted cash sitting to back the environmental bonds and liabilities of the business into the future. Let's move over to Slide 10. And just a follow-up on the comments about the level of investment back into the ground, whether it be exploration or the growth capital, what is great to see is the tangible progress from this investment. It's $50 million on top of our sustaining capital in the business, invested back into the civil to which you can see some updated photos in the slide deck. Mobilization of the contractor in preparation for the decline and progress through state consenting, which is a complex task, particularly in New South Wales. And then talking on consenting, it's -- we've already got the Great Cobar there. And the combination of the progress of Federation and the completion of the consenting for Great Cobar significantly derisks the business going forward as 2 key projects are either consented or well down the path. I think added to that, it's actually really valuable to have this size of exposure to zinc and copper in the business and only a few steps away from us on both assets. Just move on to the Federation feasibility. We issued to the market that we will communicate the outcomes of that during September. I'm sure people can understand that it's a sizable investment for our business and the consideration of different milling options for the Federation or just in the light of business conditions at the moment, project risk and capital escalation, I think people will understand that it's very clearly linked to other businesses or other assets in the group and so is [ maiden ] ore. So it wouldn't be appropriate for us right now without the Federation fees to be issuing guidance with it. So when we get to September, and we've got full support from the Board on what we're doing with Federation, we'll communicate that to the market. Okay. With that, actually, I'd like to hand over to questions, please.

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

Thanks very much for some of the additional disclosure that gives us a breakdown to some of the underlying numbers. Just setting off, Ian, with some of the questions around the Dargues write-downs and the size and the scale of it. I didn't quite catch your earlier commentary about what were the moving parts within that and why it end up coming in a bit high. Could you just walk us through those different elements? I heard something about the bonding, the royalty and the exploration. Could you just walk us through?

Broadly, the -- there's the 2 big changes in the pen for the results was that we had the write-down, which is about AUD 135 million. And then we had attached to Dargues is a royalty, which is life of mine because the life of the mine is shorter than when we had the accounts last year, that's why there was a write-back on the remeasurement of that royalty acquired. The 2 -- the AUD 135 million and the AUD 27 million on the -- to get to the underlying. So that's that point. And then from a -- when we do our modeling we just look at the prices, cost assumptions, capital assumptions and the -- and where we think the resources and reserves will be. And that's why -- and that resulted in a slight increase from AUD 120 million to AUD 135 million.

Okay. Fair enough. And just on the topic of Dargues and D&A, you made some commentary around the fact that, that increased quite a lot year-on-year just through the production throughput. Is there any accounting treatment changes there that we should, say, next year that impacts or that changes at that run rate?

No. The -- no. With the impairment, there will be -- obviously there'll be a lower cost base from it. But broadly, then we'll look at the units of production, and that will give that number, calculate that number. So I can take you through that offline.

That would be great. Just on the topic of sustaining CapEx. Dan, you made the commentary before about the fact that this was like a large investment for the year back into Dargues and developments and what you had happening at [ Cobar ] and what's going on at Fed. Look forward into FY '22 -- FY '23, can you give us a sense of that development profile? Are we through the worst of it in terms of a big leg of cash going back into the ground?

Yes, I understand. I think we'll deal with that. We'll be pretty clear through guidance when we settle on Federation doing.

Okay. Fair enough. And just on the topic of additional charges there, environmental bonding for next year. You mentioned you've got AUD 30 million undrawn. Do we just consider that to be unwind periodically from here or post the next MRE update will that revert or is there a chance of a refund there?

I think from cleaner purposes for us, we're living and in restricted, but I think that's a whole funding package discussion Dylan, it sits in overall funding within the business. So that's something we'll address through the course of the year.

Your next question comes from Michael Evans with Acova Capital.

My first question is a follow-up on Dargues. Just in March, if you flagged the impairment at the time, I think you said the contained gold was 195,000 ounces, and you expected it to be about 15% lower. And then there's a note which is 15% lower than 195,000, about 165,000 or something? And then there's a note in your account towards the back that the recoverable gold is 72,000 ounces. If you take the 165,000 and you assume you recover about 90%, I think you get close to 150,000. And the note in the accounts have talked about remaining license line for recoverable gold of 72,000 ounces. Is that as a result of the exploration you've done since you made that announcement in March. And will we get more clarity on that when the reserves and the resources come out? Or is there other things that I'm not reconciling between your announcement in March and those notes in the account on Dargues?

So we're -- that assessment is being done on preliminary information that we have. So that then MO will come out later, but this is based on our assessment with -- exactly with the order from an accounting perspective.

Sorry, what was the last point?