Aurelia Metals Limited (AMI) Earnings Call Transcript & Summary

Good day, and welcome to the Aurelia Metals First Half 2023 Financial Results Call. Today's call is being recorded. [Operator Instructions] Thank you. And I would now like to turn the conference over to Andrew Graham, Interim Chief Executive Officer. Please go ahead, sir.

Thanks, Lisa. And thank you to everyone for joining us today for our discussion on the first half results for FY '23. Before I turn to that, though, I'd like to start by paying the Aurelia team's respects to the 2 miners killed last week at the Dugald River mine and also pass on our condolences to their families and friends. A number of us at Aurelia, including myself, has worked at Dugald River and MMG, making this really close to home. I genuinely believe everyone goes to work should expect to come home safely. And I can assure shareholders as well as our own employees, there is a finding from this incident come to light. We'll look at those in detail and see what we can learn from that to apply to our own operations, which is very, very similar to our mining techniques. It will be part of our ongoing commitment to improving safety. Now today, I'm dialing in from our Hera Mine. So apologies in advance if you're getting background noise. We don't normally get on these calls, but a lot going on, as you'd expect, on site. At Hera, so I'd like to pay respect to past, present and future traditional custodians and elders of the land on which we are working here today at Hera. We do look forward to a very long association with those traditional owners as we develop federation, operate federation, and with good hope to extend federation for many, many years to come. Turning then to our half year results. I expect there weren't too many surprises for people in that result given the level of disclosure we put out in our quarterly, particularly the second quarter result, which we talked about in January. Martin Cummings, though, is on the line today, our CFO, and he will take you through the results in some detail. Peter Trout is also on the call today. He will be available to answer questions when we get to that point. At the outset, I acknowledge the set of results is simply not good enough. As we talked about at the AGM and subsequently, we must and we will be doing better. I'll talk today in a little bit more detail about what we're doing to improve the business after Martin gives us a rundown of the results. But first, I'll hand across to Martin, who will take you through the detail behind those results.

Thanks, Andrew, and good morning, everyone. As Andrew mentioned, these are a disappointing set of results that we've released and headlined by statutory net loss after tax of $29.5 million and an underlying net loss after tax of $20.3 million. As you'll appreciate, these outcomes are significantly lower than the comparison period during the half year to 31 December 2021. I'll walk through the variances in the underlying profit loss before tax between the 2 periods. And to do that, I'll be referencing the waterfall chart in Section 2.1 of the Directors' report. Firstly, the sales revenue, which in total was 18% or $42 million lower. In short, the driver of our lower sales revenue was lower-grade ore from all of our assets. Ore processed was slightly lower, but the impact was not as significant. Our gold revenue was $19 million lower. We sold approximately 10,000 less ounces in the period, and that impact was mainly from Peak due to lower gold grades. Slightly offsetting this was a higher realized gold price of 2,570 per ounce versus the 2,427 in the prior half. The move in our base metals revenue was higher at $23 million, and the main impacts from that were from lower sales of lead and zinc. We sold around 4,500 tonnes less lead in this period. And there was a small benefit from a higher realized price, which was just over $3,300 a tonne. The impact from zinc was a bit higher with sales lower by around 5,500 tonnes. And again, we did have a small price benefit of just -- with a realized price of just under $5,000 a tonne. [ Cobar ] revenue did go the other way. It went up about $3 million in the period, with around 500 tonnes sold over the first half, but some of that benefit was eroded by a lower realized price, which was about 15% lower at just over $11,000 a tonne. Operating costs were unfavorable by $30 million, and this variance does include around $4.5 million in restructuring costs this half, which you'll see as one of the reconciling items between statutory and underlying profit. The majority of our cost increase in this half unsurprisingly is related to mining costs, and the majority of that mining cost was incurred at Peak. We've covered Peak issues in multiple recent releases, but put simply, their costs have been too high as we transition from contract mining to owner mining. In the December quarterly report, we highlighted some of the inroads we've made so far, but there remains plenty of work to do before we're satisfied with Peak's mining costs. Our Working Smarter Program is putting a lot of effort into Peak to lower this cost base to more acceptable levels. The other categories of processing inside [ admin ] were largely in line with the prior half, but that's not to say that there is an opportunity for further cost improvements in this category, particularly around our labor costs. And these are captured within our Working Smarter Program. There is also an impact of inventory costs or inventory revaluation within our operating costs, and that's driven by revaluation of our stockpiles with the lower-grade ore mined through the period. There has been a favorable movement in our depreciation and amortization expense in the waterfall, really driven by 2 items. Firstly, at the end of financial year '22, Aurelia recorded an impairment of Dargues, which resulted in a materially lower book value for this half relative to the book value that would have applied for the comparison period. And in addition to that, our lower overall group production outcome will drive a lower depreciation expense given a large value of our asset base is depreciated based on the units of production basis. Offsetting this favorable move in D&A is the impairment that we've taken for Hera. And this really is the result of the earlier than originally planned closure of the Hera Mine and the transition of service infrastructure to care and maintenance. And finally, just to cover off the other material movement on that chart is the revaluation of the financial liability. Movements on this in relation to the valuation of our Dargues royalty. And that is a net movement between what was booked in the December financial year '22 period and what we've booked in this half. But what is important to note is that in between this in June -- the end of financial year '22 in June, we did revalue this liability down materially as part of the impairment of Dargues. So moving on to cash, which is a focus of most people. And as we know, we started the year at $76.7 million in unrestricted cash and finished the year at $23.7 million. The cash flow is a reduction of $53 million over the half. But just looking at what we -- what went on during the half is we repaid $8.1 million of our term loans, and we cashed back a further $10.2 million of our performance bonds. And important to note that our performance bond cash backing now stands at $41 million. We report that in our balance sheet as restricted cash as an asset. We invested a further $23.6 million on growth capital at Federation and Peak and $6.5 million on exploration. So looking at that, a total of $48 million of our cash reduction this year was either directed to deleveraging our balance sheet or investing for our future growth. But what it does highlight is that the remainder of the business did consume around $5 million for the half, and that is our focus going forward. Whilst the refinance process we're currently undertaking will allow us to recommence development of Federation, ensuring our operating assets are generating good cash at whatever the prevailing commodity prices remains a key priority. And as evidence of that, this is ultimately why we made the decision to cease operations earlier at Hera and announced that in December. So just touching on the refinance process, and I acknowledge the messaging in this release, maybe feels not too different to what we said in the December quarterly report, which was released last month. But the reality is there's been a huge amount of effort and work going on to progress the multiple options that we have available. Pleasingly, we still remain on track to finalize this solution by the end of the quarter, and I look forward to taking you through that when we announce it. And finally, as part of the Hera announcement, we did update our guidance for FY '23 on the 19th of December, and that guidance incorporated all of what we're discussing today in these results. I'm pleased to confirm that we are -- we remain on track to deliver that guidance for both production and costs. Thank you for your time, and I'll just hand back to Andrew now for further remarks.

Thanks, Martin. Now as Martin has gone through on that result, I'm thinking the same thing. As I said at the outset, this result is not good enough, and we are working diligently to improve the position of the business. But with that, it is also easy to lose sight of some significant achievements that occurred through the half. So I thought I'd take a little bit of time just to pick out a few of those that really mean something to the business and also to me. Firstly, we released our updated Mineral Resource and Ore Reserve. You'll recall, [indiscernible] included a very significant conversion of inferred material to indicative consideration, which allowed us to then release the feasibility study that you would have seen in October. [indiscernible] and very pleasingly, we were able to increase the resource -- the copper resource at Great Cobar by 45% this year, and we released that [indiscernible] same time. So having acceleration, much more certain, there's a lot of material now in the indicative category and having a larger and extremely high grade relative to other projects in the pipeline in Australia, Great Cobar project, and we have a very, very strong mix of zinc development and copper development coming down the pipeline, and the work for us is to release that. I mentioned the feasibility study for Federation. It came out in October. It painted a picture of a very, very compelling investment, which is why we're working diligently through the funding process to get that up and running as soon as we can. Other than sort of small quantity, it's the highest NSR material we have in the group, and to be able to realize that into ore and then get that through one of our existing plants and turn it into revenue is a key focus for the business. For those who haven't been tracking the progress of Federation through the last half, the site itself has advanced massively. As I can see out there this morning, there's change houses over the workshop. There's obviously the box cut and now 90 meters of decline development at the end of that box cut. So the preparatory work required to get the development up and going is done. And when we're funded and we remobilized the Redpath, and it's our mining contractor, we'll be straight into that decline and on our way to ore. The exploration front, we believe we have one of the best packages of ground in Australia for base metals exploration. We've invested in that through the half results of the Falcon Airborne Gravity survey that we've talked about previously. And we started using those outputs and integrating those with the other pieces of information we have. So all the geophysical work we've done in our targeting work in that region and the exploration team has been very active on that. While we've had a little bit of a pause and not having as many drills running as we call Federation, we ended up with 5 rigs running concurrently, which takes a lot of management pulling back. That drilling currently has given the team a lot of time to work through all of this data and very, very rich set of data that we have on our tenement package and really prioritizing the work once we get up and going on drilling. The other one that was very interesting you would have seen was the IP survey results on 4 prospects outside of Nymagee, all of which showed strong [indiscernible] and the team's following those up at the moment. We did announce MOD5, the modifications in Dargues permit just before the end of the half, which lists a cap of processing there of 355,000 tonnes per annum of 415,000 tonnes over the calendar year, and we were able to take advantage of that right at the end of December by running the plant beyond that 355,000 tonnes. And the other one that we've reported on as well was the Working Smarter Program. So real bottom up, fully engaged in the entire workforce to look for opportunities to cut costs, to increase margin, and we've got a very, very rich pipeline now of projects that we're prioritizing to make sure we're focusing on the right things. So yes, I think it's important when we look at the result like the one we have, and I'm not going to take anything away from my comments previously about the -- those outcome not being good enough, particularly the operational situation. We can't forget that a lot of the good work has been going on around the business. It's also yielding good results for the company. Now I've spoken since taking on this interim CEO role about activities we've been undertaking to improve, as Martin mentioned of this banner of our Organizational Renewal Project. Just to touch on a few things. Just highlights to come out of that. Hera, as Martin talked about in December, we changed the mine plan, targeting higher-value ore, which did shorten the life, and we're still looking at a life out into March. I think I flagged on the call in December when we talked about the change of plan at Hera, that we would be closely monitoring particularly geotech conditions underground. Touch wood, they're still mining. So I don't want to get ahead of ourselves, but at the moment, it's going well. We're getting some exceptional tonnes out from underground, the highest tonnes that I've seen since during the business. So pleasing to see that new plan working well. [indiscernible] closure of the mine and the transition of the plant to care and maintenance. There's quite a bit of work required to be effective in doing that and efficient. So Rob Walker, our General Manager at Hera, is leading that. You'll be pleased to know that's a well-advanced piece of work with a very detailed understanding of what needs to be done, scheduling that out and resourcing that. Peak Mine is now under the management of Matt Nuttall as our General Manager, who joined us a couple of weeks ago. Matt's a very experienced underground mine operator. I was actually talking to him yesterday, and he's certainly identifying some opportunities to improve our operations, particularly underground, but more broadly than that as well. Federation optimization, we've chatted a little bit about that in the past. So that work is ongoing, particularly the update of the detailed life of mine plan to use a term, operationalize it. So effectively, on a feasibility study, we had a plan which was absolutely executable. But we've been integrating that with some inputs from our operating team, particularly the team at Hera, who are going to take on the development of that mine to ensure that it's the optimum mine development and that we're taking into advantage of all the opportunities, and we're thinking about that ahead of time. So that piece of work is coming together extremely well. We've also engaged a project management consultant to work with us on the execution of the project. We recognize we don't build mines every day of the week. I think it's a good recognition for companies to realize their strength and gaps. So supplementing our team with some very experienced project consultants who will handle the kind of day-to-day schedule and execution of activity with various contractors is what we've put in place at the moment. Getting ready for when they're funded and we can restart the development. That said, work has been ongoing on the site, albeit at a much lower rate. We've connected Federation through to Hera with the pipeline to allow us to then manage water between the 2 sites more efficiently. Also in parallel to work around designing of the intersection upgrades on the road has been ongoing, so that we're ready to go with those and flow ahead of when we need to start tracking material up those roads to [ Peak ]. We'll come out with more information on that in due course. While on Federation, one that's -- we've been talking about a little bit, but I can continue that story is permitting. And it's fair to say we're extremely well advanced now on achieving our development consent with Federation. And obviously, once we do, we'll come out and let you know about it. But we've been very pleased with the support we've had from the New South Wales government, and who can collaborate with us to develop and achieve that development. Finally, as Martin mentioned, we're also well advanced on a funding solution. That work is going well. And again, we're looking to be out in March talking to you about that. So just a little bit on what we expect going forward from us. Obviously, I've mentioned development consent. It's tracking well. Our intent is to have that achieved in this quarter, and we'll be back out talking to you about the details of that once that's done. I've mentioned the Federation optimization work that's ongoing. Again, we'll be looking to come back to you with further details about what we've thought that we yielded and the improvements we've been able to achieve against the feasibility. And then finally in our funding, which Martin talked about, obviously, once we've secured that, we'll be back out talking to you about the details of that. So I'm going to stop at that point and hand it across back to Lisa, who will then handle the questions if anyone has any of those.

[Operator Instructions] We do have Adam Baker from Macquarie.

Andrew and Martin, just a couple of quick ones for me, if I may. Just the group cash balance chart that you kind of had in the quarterly result, which showed an improvement over December, just wondering how that trajectory has been tracking through January and February. I'm imagining that some of the [ cash are ] that's going on at Hera, you're kind of comfortable with cash build situation going on. But do you have any more color you could add around that?

Adam, yes, comfortable with the cash. I mean without spoiling the surprise when we get to the March quarterly, but we talked about the income tax refund that we received in January, $9.8 million. So that's come through. But I guess, yes, we are, in theory, building cash at Hera, but just the way we're staging the shipments at Hera, we are trying to consolidate those shipments to make them cost effective. So the cash flows at Hera are a little bit lumpy in this quarter. Obviously then, we've also got our term loan and cash-backing commitment that we're maintaining as well. So -- but comfortable with where cash is at the moment.

Yes, sure. That's great. And then maybe just a quick one. Just I understand that you seem to be doing well with the development consent, which is great, on track for March [indiscernible]. Though the funding solution, is that something we should expect concurrently with the development consent? Or are you likely to put out the consent first and then think about funding later?

Yes, Adam, look, obviously, we disclose them once we have them, particularly the development consent is outside of our control as far as which particular day that comes through. But obviously, when the deal is done, we'll put it out there. I think as we're seeing things at the moment, it's most likely that development consent will come first and then we'll follow [indiscernible] after with information around funding.

[Operator Instructions] We'll take our next question from Michael Evans with Acova Capital.

Thanks very much for the update. A quick question on Federation. You mentioned in the announcement that -- and in your comments that there's sort of further refinements taking place to optimize the capital needs of the infrastructure. Can you elaborate on that at all? And with regards to the finances, debt finances, I mean there, you should have to draw a line to sort of conduct their [ DD ]. Did they draw that line and[]; last year when you're getting closer to doing your release the feasibility study in October? Or are they sort of looking at these refinements and optimizations with regard to considering whatever facility they can give you?

Michael, Andrew here. I might take that one. Yes. So I suppose the refinements -- so the feasibility study, for example, assumed material went the Hera before it went to Peak. Obviously, we've since indicated we'll be doing the opposite or intending to do the opposite given Hera plant will move to care and maintenance. So the updating picks up some of those things. In fact, a lot of it is driven by the fact that Hera will have shifted to care and maintenance. So for example, as we're moving towards the end of the mine operation at Hera, we're actually pulling equipment in cabling and other things from underground to the surface to be able to take across and use at Federation. So factoring some of those sort of opportunities that come with Hera moving to care and maintenance is part of it. Another great example is the camp. We had assumed we would have to build a temporary construction camp to house construction workers and mine workers for Federation. However, with Hera moving to care and maintenance, then the Hera camp becomes available. So those are the sorts of things we're working through on the physical side. On the mine planning side, there's always opportunity to optimize the mine. We're picking up some of that information, didn't make the cutoff for the feasibility study. We're also thinking about lay out some things underground to be optimized going forward. So that work's ongoing. We've had obviously the potential debt providers or other financiers have put or have access to the feasibility information. We have also shared some preliminary thoughts on the other elements to that. So the items around optimization of the mine in the capital project. However, it's still being worked and talked about and we will add more final information on all of that. Once we finalize that, we'll put that out in the market.

And that does conclude the question-and-answer session. I'd like to turn the call back to Andrew Graham for any additional or closing remarks.

Thanks, Lisa. I won't provide too many remarks to close other than to say, as I flagged, there'll be opportunity to engage with us in the future, fairly near future, as we move through development consent for Federation, the update of the Federation development plan as well as in a funding solution. And our expectation is we'll be back talking to you about all of those through March. Thanks all.

And that does conclude today's presentation. Thank you for your participation, and you may now disconnect.