Central Asia Metals plc (CAML) Earnings Call Transcript & Summary

Good day, and welcome to the Central Asia Metals Full Year Results 2020 Conference Call. At this time, I would like to turn the conference over to Nigel Robinson. Please go ahead.

Thank you very much, and good morning to everybody for -- as we stated, the 2020 results for Central Asia Metals plc, a decade of delivery. Disclaimer, first of all, I'm on Slide 1. And then just moving on to our 2020 results highlights on Slide 2. We had a strong performance last year in what was a very challenging year, as everybody knows, with COVID-19 and also our TSF 4 incident, and I'm delighted this morning to actually announce a 14p full year dividend for 2020. That's an 8p final dividend. And also, we paid out 6p last November. So that's 14p for the full year on the back of, as I say, a strong performance. We had solid production numbers that we've already announced, so 13,855 tonnes of copper, 23,815 tonnes of zinc and just under guidance at 29,742 tonnes of lead in concentrate. 0 LTIs over the course of the year is something we're particularly proud of. On the back of that strong production and good health and safety record, some good financial numbers reflecting a hard first half of the year and improving metal prices in the second half of the year. Our 2020 revenue was $170.3 million, down from $180.8 million the previous year but an EBITDA of $95.7 million, which is a margin of 56%. We continue to delever the balance sheet, demonstrating the strength of the cash flow from the business, and we ended the year with $80.4 million of gross debt, down from $108.8 million in the previous year, and that is a net debt position of $36.2 million. So deleveraging the balance sheet, a strong dividend to payout of 14p for the full year. And that 8p is slightly outside our dividend policy of 30% to 50% and represents 57%. Let's say, good performance on LTIs, 0 LTIs for the year. So those are the highlights. I'll now hand over to Gavin Ferrar to talk you through more details on the financial numbers.

Thanks, Nigel. If we could turn to Slide 4, please. As Nigel said, I'll actually go in further an old football cliché. It's really a game of 2 halves last year, which you can see from the charts on the right-hand side of the page there, where you've got the average price as received on the left-hand side versus the average prices as we received on the right-hand side. You can see the significant improvement in all 3 metals that is demonstrated there. What we also see is that the average copper price received through 2020 was slightly higher than we received in 2019, whereas lead and zinc prices actually were slightly lower on average in 2020 versus 2019. And first half of the year, obviously, we all know, came as a result as COVID lockdowns, which impacted all of the major economies around the world, but we do expect a strong recovery, and that started to be priced in, in the second half of the year. Copper by growing demand and also this transition to green economy. Zinc, we've sort of seen mine supply coming back on after the large-scale shutdowns due to the pandemic. And lead prices underperformed due to weak auto sales, again, pandemic-led but coming back as the auto market turns on again. The other significant impact that we've seen from the market is treatment charges, where we've seen a 63% increase year-on-year at Sasa. The 2021 outlook, I'm pleased to say, is looking a lot more favorable. And then again, a slight currency tailwind with the Kazakh tenge against the dollar averaging KZT 413 for 2020 versus KZT 383 in 2019. If we turn to Slide 5, please. We'll have a look at the income statement. And as Nigel said, the revenue of $170.3 million being down from $180.8 million in 2019 filters through the profit and EBITDA lines that you'll see there with EBITDA coming in at a healthy $95.7 million given where we were at the half year at a margin of 56%. I'd just like to draw your attention to the cost of -- selling and distribution costs. Those have gone up what looks to be a significant number, although in dollar terms, is fairly small, but that is as a result of taking advantage of the Asian market and some spot TCs that were available for us there and reflecting the higher freight costs to China and Korea. The revenue was largely lower than 2019 because of the commodity prices in H1 plus those treatment charges I mentioned earlier, and whereas in Kounrad, what we have seen is gross revenue actually going up due to higher sales volumes. You'll note that we increased our guidance halfway through the year at Kounrad and also a higher copper price received on average through the year with a very healthy EBITDA margin at Kounrad at 75%. Sasa, on the other hand, we've seen lower gross revenues, again, lower zinc and lead prices, but also reduced -- sorry, increased treatment charges. But we did manage to push higher volumes through during the year, which, again, leads to decent EBITDA margin of 51% at that operation, which we're pleased with. We move on to Slide 6, please. I can show you the evolution of EBITDA 2020 versus 2019. You can see the copper revenues being the greatest contributor to the increase in EBITDA we see on a relative basis but then offset by the story around lead and zinc, where we see the revenues down due to prices, plus the increase in treatment charges delta of $8.6 million there. And then as I said, those sales and distribution costs of $800,000 related to the Asian sales that we've kicked off in 2020. Finally EBITDA for the year, $95.7 million, remind you, at the margin of 56%. Slide 7. If you look at the Kounrad C1 copper costs, we've tried a little bit sort of different presentation here to give you the numbers in dollars and the cents per pound in the same chart. But what you can see, really, the story is pretty flat year-on-year, $0.52 a pound in 2019 versus $0.51 a pound this year. And you can see that translates, obviously, into the dollar costs there. You can see where the variations are within those costs as well, but overall flat, I think, a really good result, particularly through the challenging pandemic environment at Kounrad, where we had to make operational changes to shift patents and various other things, so yes, leading to that 75% margin, as I mentioned before. So Slide 8, which is the Sasa C1 zinc equivalent cash cost, which turns out at $0.50 a pound, up from $0.47 a pound in 2019 primarily due to realization costs we can see there. You can see the site-based costs actually went down from $40.30 per tonne to $39.20 per tonne. So again, a fantastic result from the team on-site there, slightly driven by higher throughput at the mine, up around 10,000 tonnes on the year. But you can see those realization costs, the second last line in that table going up by a good -- almost $600 million there that is really driving that increase in the Sasa C1 cost, still a healthy margin of 51%. I don't want to dwell on the group costs for too long, but I think it is a useful comparator across the industry, where we're still sitting at very much in the lower end of the cost curve for both metals. The C1 equivalent cost at group level has gone up 22%, as you can see. Now that is primarily due to the relative commodity prices. Those added $0.07 a pound to that figure, whereas the treatment charges added $0.14 a pound to that figure from going from $0.94 to $1.15 on year-on-year. But we can also see capital expenditures, some. Savings were made there, where we -- there were some genuine savings. We're all about cash preservation in the first half of last year, plus some deferrals into 2021. Higher MET at Kounrad, that was down to the increased copper price and increased revenue that we received there and, of course, loan interest. As that loan balance decreases we're paying less interest. And also, we've managed to reduce the interest margin on that facility. So that is going through on to that line as well. If we, yes, get down to the fully inclusive cash cost, again, just under 10% increase year-on-year but, largely, again, down to treatment charges and the relative moves within in the copper and lead and zinc prices that result in that change. Turning to Slide 10. I mentioned that we've made some savings on CapEx. I think the initial guidance was $12 million to $14 million for 2020. We turned out $8.5 million for the year, again, largely related to a response to the COVID pandemic at the beginning of the year. We did manage to, however, change our underground fleet. We've got 6 new units into the fleet during the year to replace some aging fleet. And then, of course, underground development, we maintained the $2.7 million and again, some other sustaining CapEx around mining equipment and processing equipment at Sasa. CapEx at Kounrad primarily around an anode replacement program, but you'll appreciate that, that is more or less fully developed, and therefore, the CapEx on a sustaining basis remains within our $1 million to $2 million guidance. Guidance for next year on the CapEx is $22 million to $23 million, and Nigel will talk you through why that is a lot higher than our usual $10 million to $12 million. And that is primarily around the copper field project and the transition that we're going to be doing at Sasa over the next 2 to 4 years. Switching to Slide 11, please. Balance sheet, in spite of those cash preservation activities I mentioned, we continue to repay our debt at the usual rate of $3.2 million per month, which led to a gross debt figure of $80.4 million at the end of the year. That is comprised of $70.7 million of the corporate loan facility to Traxys and $9.7 million of overdraft facilities, which we fully drawn at the end of the year, and those were in Macedonia itself. We put those overdraft facilities in place really to give us some financial flexibility within the country to help us manage working capital. And then as the pandemic struck, we decided to draw down on those facilities to ensure that we have the liquidity should we need it. As I mentioned before, we reduced the margin on the debt from 4.75% to 4% from April in the year, and we also expect $38.4 million of debt to be repaid in 2021. So on a net debt basis, we -- I think, a fantastic result, again, at $36.2 million. If you take into account that restricted cash of $3.6 million, net debt is actually $32.5 million for the year. And the reason I like doing that, which the accountants don't like doing, is because that restricted cash is actually set aside to make the next month's debt repayment anyway. So I think it's a fair way to look at it. Lastly, on Slide 12, they're for me. Look at the cash flow for the year, healthy cash flow of $58.9 million. If you remember, at the half, we were at just over $21 million. So you can see that sort of second half benefit there. That has started from a cash balance at the 1st of January of $32.6 million. Cash from ops was $87 million. The major outflow is really repayment of borrowings, $38.4 million. We reinstated the dividend, which we paid in December, a 6p dividend. It was just under $14 million. And then we invested $8.5 million in plant and equipment and development at the operation. So it all -- yes, a pretty good result given the year we had in terms of cash management and then ending the year after those drawdowns of overdrafts at $47.9 million. So as Nigel said, that 8p final dividend reflects 57% of the free cash flow that we generate for the year. But I think that is also a real sort of view of what we, as a management team, have confidence in the business over the next sort of 12 to 18 months as well. So, yes. And I'll hand back to Nigel.

Okay. Thanks, Gavin. Moving on the presentation to Slide 14. I think the first thing I want to say is, we'll thank Gavin for that, and the financial performance really underpins everything we talk about on sustainability. Solid balance sheet and the solid financial performance is the underpinning to having a sustainable business effectively. But we have put a lot of effort and a lot of focus into improving our ESG credentials and being a sustainable business into the future. And just on this slide, you can see on Slide 14, just some of the key activities that we conducted over the course of the year. We were certainly very supportive towards our local community on COVID-19, both at Balkhash and in [ Kamenica zone ] in Macedonia. We did publish our first sustainability report last year in Q2,, and our second sustainability report will be coming out later in April, and that will be to GRI reporting standards as well, so an improvement as we go down this journey of sustainability. We undertook a stakeholder engagement excise as well with a company called ERM, and I'll touch on that a little bit more on the next slide, which shows what the priorities are for the business and what we deem to be important from a sustainability angle. We developed our group human rights policy, and we appointed a group People Manager. For the first time in the business, he's doing a great job looking after the -- in excess of 1,000 people that we now have within the group. We started work, as many of you know, with tailings standards, which came out in August of last year, and we've started work to make sure that we can comply with that in a 3-year, clearly, in terms of reporting how we monitor and how we manage proceeds to the tailings facility at Sasa in North Macedonia. We also completed a scoping study into solar power at Kounrad, and we're looking into similar studies in North Macedonia with the intention that, during the course of this year, we'll look into our climate change strategy. And we're working very closely, as you can see there on the outlook for 2021, with a company called Climate Risk Services to make sure that we have a plan in place and can set some achievable targets to do our bit for greenhouse gas emissions and leading eventually to TCFD disclosure in our sustainability report and in our external reporting. And finally, on the sustainability activities here for the future. I've mentioned the GRI standards for sustainability report out in April. But also we set up a foundation charity in North Macedonia, called the Sasa Foundation charity for the town there, similar to what we've done at Kounrad. So we now have 2 charities in the local areas for the communities. Moving now to Slide 15. I mentioned this materiality matrix. And what I really want to emphasize in is that when we did our first sustainability report back in 2020, we had actually done the desktop review to understand what we thought were the priority areas for us. And what we did for this next report that's coming out in April is we actually went to an external company. Here, we engaged with various stakeholders, both internal and external, to see what their views were with the company and what we should be doing. And you can see there from the actual heat map where the areas of importance are from both an internal angle and an external angle, health and safety, maintaining, looking after the environment, water management, waste management, looking after the communities. And the 5 pillars that we had adopted from the desktop review have now been kind of reconfirmed by that external stakeholder review of it, and we're comfortable that those are the key areas to focus on from our sustainability. Moving on to health and safety, specifically on Slide 16. We had a good year last year. We've got a good track record on safety on site. And last year, we had 0 LTIs, and you can see the statistics there. We've actually gone at the end of December 2020 702 days since the last incident at Sasa and actually 959 days since the last incident at Kounrad. Now we don't become complacent about that. That's something we're proud of and something we'll work towards maintaining and maintaining good safety standards at both operations. Moving on to Slide 17. Again, last September, many of you will know on this call, that we had an incident at our tailings facility at Sasa. I think we've done a good job of actually repairing that particular leakage that we have, maintaining the relationships with the community. But what is outstanding there is our river remediation work. We split it down effectively into 2 phases. The first phase was completed at the end of December, and in that first phase, we estimated that we recovered about 95% of the tailings that have polluted the river going down to the local town of Kamenica or about 12 kilometers away. You can see there some pictures, and the Phase 1, as I say, is complete. Phase 2, which is really, for the rest of this year, we'll be completing the recovery of any remaining 5% of the tailings that we estimate, and I have to say that it's not exact science in many ways, but we estimate 5% remaining. We'll recover that through the implementation of sedimentation traps, through monitoring. And a lot of the focus this year will be on biodiversity work to actually plant trees and shrubs, grass seeds and work with the community to improve the relationships that we have ongoing. And if I just move quickly to Slide 18, sorry, there's a park that we've agreed to commit funds to, which we believe is a fitting community project down in the town to actually -- as a goodwill gesture to the community, putting money back into the community alongside the river there as a kind of remediation aspect of the river on top of what we're doing from a biodiversity angle as well. Finally, on sustainability, just working with the communities, a lot of the money that we commit into every year into the community support. Last year, a lot of that was COVID-related. About 60% of the funds, the $0.5 million we spent at both operations, as you can see on the slide, the $300,000 at Sasa and $200,000 at Kounrad, about $300,000 of that went into COVID-19 support, which is a combination of things, purchasing a PCR machine in Balkhash Central Hospital; helping them working with hospitals; providing PPE and even a donation to the Ministry of Health in Macedonia to help with the fight against COVID-19. That remains ongoing as there are increasing cases in both of those areas as we come into the spring time. We remain vigilant, and we remain working with the communities to help in the fight against this pandemic. And obviously, other community support areas, which were probably less on an annual basis, given a lot of the focus was on supporting the communities against COVID-19. So that's the sustainability aspect of what we do here at CAML. Just moving on to the operations and certainly not last. It's an important part and supports -- strong operations support the strong financial numbers we've reported this morning and allow us to do those sustainability aspects of the business as well. Kounrad, aerial shot, you can see, you've seen this many times, no doubt and just a site on the Eastern Dumps and the Western Dumps. We are gradually transitioning all the production out to the Western Dumps but we are still producing from the Eastern Dumps. And if I go into the production profile for last year, you can see that we met our guidance. In fact, we increased the guidance partway through the year. So we started off, as with 2021, on a guidance of 12,500 to 13,500 tonnes. Partway through the year, we increased up to 13,500 to 14,000 tonnes. And we actually ended the year 13,855 tonnes. Just a reminder of the leach curve and the dumps that we leached there. Eastern Dumps, slightly different metallurgical characteristics to the Western Dumps. Longer lead time out on the Western Dumps. But it's all planned into the planning for the Kounrad operation with a life of mine out to 2034. On the last slide, effectively on the Kounrad operation. It's just the scale of the leaching that we're now doing. We have dripper pipes, which we've estimated would run all the way from London down to Nur-Sultan, which is the capital of Kazakhstan. So about 6,500 kilometers small dripper pipes that we irrigate the dumps with. The amounts vary at any one time at the moment, and the length is 60.9 hectares, which is about 600,000 square meters. So huge areas under leach, small elements of copper that we irrigate to actually get our 50 tonnes of copper per day to produce the annual guidance that we give and that I've already announced this morning for 2021. Last year, 63% of the copper production came from the Western Dumps, which is slightly down on 2019 as we recovered slightly more copper from the Eastern Dumps. So we continue to leach these dumps, as I mentioned before. Slowly but surely over the next 3 to 4 years, we will transition to a point whereby all the copper is coming from the Western Dumps. This particular year, we look to leach to around about 75% of the copper from the Western Dumps. Moving on to Slide 24, which is a Sasa zinc and lead mine. Different operation, a traditional underground zinc and lead mine, has a long life of mine out to 2037. You can see a diagram there of the 3 ore bodies that we have, Svinja Reka, Kozja Reka and Golema Reka. We're currently only operating in the Svinja Reka orebody, as many of you know. And there, we trucked 30% of the ore to the surface, and around about 70% of the ore is actually hoisted through the Golema Reka shaft that you can see on the diagram there. Moving on to the production update for Sasa for 2020. Remind, 826,421 tonnes, as Gavin said before, about 10,000 tonne increase on 2019. The plant feed was slightly less than that as a consequence of the TSF 4 incident, where we lost around about 8 days production in the processing plant. Combined grades of around about 7% and good recoveries at 86% on zinc and 94% are on the lead, producing 23,815 tonnes of zinc in concentrate and just under the 30,000 tonnes guidance for lead at 29,742 tonnes. And just to reiterate, our guidance for this year is 23,000 to 25,000 tonnes of zinc and 30,000 to 32,000 tonnes of lead. Just moving on to Slide 26. Just a quick update on our transition to the cut and fill method of mining. We now have a dedicated capital project team established. The Board approved this transition to cut and fill mining last August. We're now getting on with ordering the equipment, tendering for various elements of the equipment in the backfill building and the reticulation aspects of the operation. We've engaged with local consultants in terms of the designs for the buildings and the service permits from the flotation plant to the backfill plant. And in many ways, we've first started lots of aspects of this project on site, and we're well on track to hit the target end date, which is Q4 2022. The chart at the bottom simply shows what our production is estimated to be as we transition to cut and fill. And then as we get into cut and fill and have a transition away from sub-level caving into 100% cut and fill during the years 2023 to 2024 before eventually getting up to an output of around about 900,000 tonnes of ore per annum in 2025. Our on-site costs, as you can see there and as announced by Gavin this morning, around about the $37 to $39 per tonne of ore mine, and we expect around about a 5% increase in that as we move towards 100% cut and fill to $41 to $43 per tonne. You can see the change in mining method with 2023, 2024 being the transitional period. One thing Gavin mentioned before on the CapEx. We have increased our CapEx guidance for this year as we both brought forward some of the CapEx to -- from 2022 into 2021 for this particular project, around about $5 million to $6 million. And also some of the deferred CapEx from last year where we saved CapEx, still some CapEx to spend. And we've enrolled that into 2021, around about $2 million to $3 million. So an increase in our guidance for CapEx. In terms of the project itself at Sasa, we're looking spending anywhere between $10 million to $11 million this year on this project and $7 million to $8 million before we've completed the CapEx -- the bulk of the CapEx, should I say, by 2022. There will ongoing be a small increase on some of the sustaining CapEx as we made plant modifications to get it up to the $900,000 per tonne -- sorry 900,000 tonnes, not $900,000 per tonne. Just moving on to strategic objectives. And just before I talk to this particular slide, which I think is Slide 28, actually I can't see it in the bottom corner -- but we talked about the financial performance of the business. We've talked about the operational performance, and we talked about the sustainability angle. Those are our 3 key aspects of the operations. What we are doing is looking at the strategy as to what is CAML about, what is our purpose? And our primary purpose is to produce metals, which are for modern living profitably in a sustainable and an environment for all of our stakeholders. And if you move from that as a purpose, and look at what our immediate strategic -- our objectives are, we've already discussed many of them. So focusing on safety and sustainability, which we've got a good record on, and we're moving forward down with our sustainability work and improving our ESG credentials. Targeting low-cost and high margins Gavin has already mentioned, the high margins we have at both of our operations, both of them low-cost and long life. And also one of the third leg of that is to ensure a prudent capital allocation. I'll touch more about that in a minute. The other aspect, which we're looking at very closely, putting more energy into this year, will be our long-term strategic objective. Really, we've got 2 very good assets to build from, but we need to look to the future to actually grow the business, and we're fully cognizant of the fact that we've got to finance assets, and there's a window of opportunity to move the company to the next stage to add value for all of our stakeholders there and manage the risk as we go on this path from an IPO, which was now 10 years ago. So just moving on from that. On the capital allocation, Slide 29, I'm talking to at the moment. Effectively, 4 angles, there's 3 key legs of capital allocation, the first one of which is what we announced this morning, which is the dividends to shareholders. So our 2020 final dividend, I've already mentioned, 14p for the full year, an 8p final dividend, and we paid a 6p interim dividend last November. Now that is slightly outside of our policy range of 30% to 50% free cash flow and actually represents 57% of the free cash flow for 2020. But it's the demonstration of the confidence of the business. As we delever the balance sheet, we're seeing very strong metal prices at the moment and a confidence that we can move forward and maintain good dividends out to our shareholders as we delever the balance sheet. The total dividends we've now paid since 2012 is close to $210 million or 112p per share. The second aspect of capital allocation is obviously deleveraging the balance sheet. And from when we acquired Sasa back in November 2017, we've reduced that debt on the balance sheet from close to $194 million down to a gross debt at the end of December 2020 of $80.4 million, and we continue to pay off the $38.4 million on a regular basis. That's $3.2 million every month. Investing back in the business, the third leg of capital allocation. As I've just mentioned, we're investing money into the cut and fill project at Sasa to deliver a longer life of Sasa and take that life out to 2037 and bring the mine into the 21st century with the up-to-date mining methods, a safer operation, a better extraction or, should I say, a more efficient extraction of the mineral resource, therefore, getting more metal, tonne of ore that we mine. It also improves the tailings story. So we have a far better environmental footprint on surface is up to 40%, if not more, of the tailings will then be stored back in the void that they were mined from in the original instance of mining. Lower CapEx than building another 2 -- potentially 2, should I say, TSF facilities on surface and the last one cost is $16 million. So we estimate a lower CapEx enable to build another 2 traditional tailing storage facilities. And we're guiding, as I say, on the 2021 to 2022 CapEx of this project around $18 million to $19 million. And the final aspect of capital allocation, having dealt with all those aspects is to grow the business effectively. And we are going to, as I said before, put more effort into growing the business, looking at the opportunities as they become available on what is a very strong platform from which we grow the CAML business. We're very cognizant, as I said before, size and liquidity becoming more important in the capital markets. Before we are conscious, we need to do something. Finally, on the outlook for the business. We have a strong, sustainable business. We've just announced a strong operational performance for 2020. We have low cost production. We have life of mine that is effectively out to 2037 and 2034 at Kounrad. I've talked already about our capital allocation priorities, reinstating the dividend last year, and now paying a full year 8p dividend is a positive and confident sign for the future. We continue to delever the balance sheet, and we'll be looking for growth opportunities for the business. And looking out for the rest of this year, our focus and our priority, we remain confident about the metal prices. We will continue to remediate and work with the community on repairing the damage we did from the TSF 4 incident back last September 2020. Employee welfare remains top. We aren't yet through the COVID pandemic at both sites. We do have cases on site. We need to remain vigilant and remain cautious about that as we pull through the pandemic and maintain our production guidance through the year on, as I say, an improving metal price environment. On that note, I think that's the end of the presentation, the formal presentation for me and Gavin. So we'll open it to the floor for any questions.

[Operator Instructions] And our first question comes from Alexander Pearce from BMO.

I have a question just on Sasa. And just if you can turn to maybe Slide 26, where you have the transition timing for the cut and fill projects. Obviously, you've accelerated some of the spending this year, $4 million to $5 million extra CapEx. Maybe you can just talk about how that extra spending now can impact maybe first production from cut and fill and how we should think about the ramp-up or transition rate overall.

Good morning, Alex, we've accelerated -- in many ways, some of that acceleration of the CapEx is just to make sure that we get the equipment on-site earlier than maybe we planned originally. It's not necessarily going to have a major input on the output in terms of production numbers you see there because that is our stated guidance. They're 825,000 to 850,000 for the next 2 years as we do the capital investment and then slowly ramp up to the full cut and fill over 2023 to 2024. So it's more a recognition that we are going to have to place down payments on various pieces of equipment, et cetera, and accept that the cash flow will probably be higher in 2021 to deliver, and we're on track to deliver this one, I want to emphasize that, Q4 2022, the program and, therefore, start making that transition as we've already committed to and pronounced. Does that answer your question, Alex? There is silence on the end of your line.

So well, no, maybe you could just provide -- so should we think first cut and fill production is at the start of 2023? Is that perhaps still fair?

So, yes. Okay. In terms of the specifics of it, in Q4 2022, we are doing an element of cut and fill but it will primarily be rolling through to March 2024. We'll be 100% cut and fill at the end of that year. So it's a slow ramp-up, a bit like Kounrad where we're transitioning away from the Eastern Dumps to Western Dumps. It won't all of a sudden happen overnight where you've got no sublevel caving, purely cut and fill. It will be in the different levels that we operate at. It will be a slow transition.

And our next question comes from Richard Hatch from Berenberg.

Congrats on a good set of numbers. A few questions. Firstly, just picking through the commentary, there was something about Kounrad where you talk about extra recovery of 3,000 to 4,000 tonnes of copper between 2021 and 2024 with some adjustment was mining, some difficult to irrigate areas. Can I just ask, what does that mean to production? Is that on top of the kind of production that we previously would have had, so like an extra 1,000 tonnes a year or so? So instead of it, production profile kind of drifting down towards the mid-12s, but perhaps it kind of stayed higher 12s into the 13s? Or how should we think about that?

I think the safest way to think about it, [ actually ] Richard, is the guidance that we're guiding at the moment will probably stay consistent over the next few years. And what we're looking at is just in some of the sloping areas, in some of the roadways, actually trying to extract more copper is now being irrigated on the Eastern Dumps. So it is just an opportunity that Howard and the team have identified, and it will just bolster the current levels of production. It's not in addition, so we'll go up to 15,000, 16,000 tonnes. You must not think about it in that sense because we'll still be guiding around similar kind of levels that we have done historically. But it's trying to extract us a bit -- extract us much copper from those dumps as we can. I mean, as you know, we only know there's a maximum area of committed to 50% at the Eastern Dumps. In some of those areas, 5, for example, we are going slightly above 50%. We're getting to 51%, 52% in terms of recovery. So I think the best way to think about it is we're just trying to find other opportunities on the roadways, the slopes to actually recover slightly more copper than what we've commercially planned for. Does that answer it, Richard?

Okay. So kind of -- yes. So you kind of keep it sort of flat but maybe with a bit of upside risk to it, I guess, is the way to look at it?

It's just a bit of upside opportunity. We still have the areas and the cells that we intend to leach on the Western Dumps, for example, Eastern Dumps are still in those plans. But we are looking at this, as I said, this slow permeation. We did try it before in the past, and we weren't that successful. But we think we can do it more successfully now by by different types of irrigation, et cetera, et cetera. So it's an upside more or less to the baseline production that we've got from the different cells.

Got you. Okay. Second one, just in the post balance-sheet events section. There's a comment around the Sasa rehab liability potentially being revised down. Would you mind just be able to just remind us what the rehab is at this point and just what kind of revision downwards that might be, too?

Is this the [ ARO ]?

Yes. This is the [ ARO ]. So Richard, I think what we've got there is a study that SRK did in 2017, and the has been based off that study now. As Nigel has just described, the actual operation is going to change significantly with the implementation of cut and fill. And what that means is fewer tailings facilities and also a longer life to the current tailings facility. So we're about to undertake a new study to sort of get all of those aspects into a sort of [ curated ] form that we can put it onto the balance sheet properly at the end of this year. What it means, basically, I think, is that the [ ARO ] should go down. I mean, we don't have any quantification of it, which is why we do in the study. So the -- there's 2 reasons for that. One is that the TSF that we originally had sort of depreciating towards the end of 2026-'27, that'll be pushed out towards the end of the life. And then, of course, you've got the sort of PV, where there will be fewer TSF facilities required as well. And because of that end of life, cost -- the PV of that will be lower. So I don't want to put numbers on it yet because we don't have them. We're trying to avoid the question, but it is something that we've been looking to address and decided to delay just until we've finalized all of the timings on the cut and fill project.

Okay. Okay. And again, while I've got you, just a couple for you. Just that build in receivables, I guess it's because of the higher prices into year-end. So we shouldn't expect to see that kind of trend back unless well -- hopefully, prices can stay higher, so we should expect it to stay quite sticky. But can you just confirm that's the case? And just -- also just on treatment charges, obviously, with copper, I appreciate you don't play TCs copper, but copper TCs come down. Can you just remind us where we are with TCs, zinc and lead and just kind of outlook for 2021, please?

Sure. So on the receivable, there's 2 elements driving that. One is these sales into Asia that I mentioned before, where we sold quite a bit of that at the back end of the year, and they are on an m plus 2, m plus 3 basis. So that means we get paid 2 to 3 months after the shipments are delivered. So there's a little bit of receivable balance building on those. And the other thing is slightly more boring is pay tax on account and we've overpaid tax in North Macedonia. So that receivable sits on the balance sheet now as well. So that will unwind. And hopefully -- but I think if you look at our sales strategy, we are looking to diversify the client base, and you've seen a lot of volatility and appetite for lead concentrates, in particular with the automotive sector sort of being put on pause effectively for 2020 and the lack of, what they call, secondaries, which is recycled lead. And in order to mitigate against that, we're just looking to expand the customer base so that we've always got a home for the lead concentrate, in particular but, also, as I said, taking advantage of some of these lower spot prices that we are seeing in Asia at the moment. And there's not much of an arbitrage. It's quite an efficient market. So any TC benefit we get is very quickly eroded by the freight cost of getting it there. But we are -- we look at everything on an NSR per tonne basis. So all of the tonnes that we do ship outside of the regional smelting system is only if we have a net per tonne benefit to it. So to get to your point on treatment charges, yes, we have seen very low spot treatment charges in both lead and zinc because of the big shutdowns in Peru primarily leading to shortness or tightness in the concentrate market. Now, as you know, these contracts are negotiated on an annual basis. And when we negotiated the 2020 contracts there, it was the other way around. So we ended up with, as I said, 63% higher in treatment charges. We are looking to sort of -- from April 1 of this year, the new contracts will kick in, and we are seeing around a 30% improvement in those charges for both lead and zinc, that will filter all the way through to the 31st of March 2022. Obviously, we're not at liberty to give you the exact numbers, but it's a funny old market, Richard. I think a lot of people are expecting benchmark to sort of reflect the current spot prices, but most sort of sensible analysts are still looking at a $200-plus sort of benchmark. And recall also, that's only one contract between [ Kounrad ] zinc and tech. So everything is sort of -- it's a much more fine grade market than that. And as I mentioned, our regional market is clearly Europe. And currently, our biggest clients are in Bulgaria and Poland, but we are diversifying that base as well to other European customers on both lead and zinc. So I think we've got ourselves fairly well covered. But it is a -- there's an element of market risk here. While we can negotiate all of these TCs directly with the smelters, there is a [ ranging ] macro element to it that we have no control over.

Helpful. So last one, just on your comment on strategy, Nigel and Gavin, I guess. Just can you remind us what your thoughts are around using your shares as a currency? Or would you prefer to kind of use more debt and potentially sort of cash flow and avoid using your shares as a currency to acquire whatever you acquire to take the company to the next level?

There's no easy answer to that, Richard, because it will depend on the opportunity and what we were buying. And -- but as we did with Sasa, we used our own shares and we used some debt. And as we delever the balance sheet, I think we've got more debt capacity. We have a strong treasury cash on the books, and we have a strong share price at the moment. In terms of metal, prices have improved. Our share price has improved significantly from lows last year when COVID-19 kicked in. So I think we'd probably look at a combination. But whatever we do, we would need to make sure that we engineered it such that it was accretive to the shareholders. So you got to bear in mind, dilution, et cetera. But we certainly know no concerns about using our paper through an acquisition. We think it's good paper to hold, and we think it's a strong equity story. So we've no concerns about doing that, but it would probably always be a balance. And we're always going to look as a management team to the prudence of what we're doing from a financial point on the balance sheet, which is up on the screen at the moment, really making sure that, that remains strong and we don't take on too much debt, so we don't become too dilutive for the shareholders. So it's not an easy answer. It probably doesn't answer it specifically because I can't with what I'm looking at necessarily.

Next question comes from Oliver O'Donnell from VSA Capital.

On the overdraft, you may have touched on it, so apologies for that, but it's due back in sort of mid this year. Given you're bringing CapEx forward, is that something you'd look to roll over and give yourselves a bit more flexibility on?

Hi Oli. Yes, look, I think having that financial flexibility is pretty handy. And actually, it's very cheap money relative to where we get debt funding elsewhere. There is a -- as I said, they're fully drawn as at the end of the year. I guess the debate is where that sits at the midyear. Now yes, I think to answer your question, we will roll it. Whether we'll continue to have it fully drawn is up for debate. I think currently, we are seeing a little bit of COVID risk but far diminished from when we first drew those things down. So it's up for discussion, but at the moment, they are fully drawn. And I don't see any issues with rolling them at the beginning of the year. And lastly, I wouldn't actually tie that necessarily into the CapEx. I think, on our forecast just using sort of 31st of December consensus price deck, we well -- it's well within our range to continue the debt repayments and fund the CapEx plus continue with the dividend policy, so yes.

Great. And then in costs at Sasa, with the sort of backfill paste plant coming online, are those considered processing costs? Or will they be part of mining? And so does that move from $37 to $39 to $41 to $43 all come through mining or processing and the way you present it? And secondly, on costs. You -- when you first bought Sasa, you agreed a wage deal. Is that something that's due to be renewed on a sort of rolling basis? Or is it ad hoc?

Maybe I can answer those. The first question about the costs, we've always said we expect a 5% increase. Now that will primarily be money in the backfill plant. So if you look at those numbers that are on the screen there on Slide 26 at the moment, Oli, you'll see the $37 to $39 is basically the mining and the processing and the G&A costs on-site at Sasa divided by the production. So it's that level of increase but it probably come in terms of allocation, I suspect more down to processing and mining costs. The mining will be fairly similar, although as you increase the volumes, we might need a few more. But we said, the bulk of that is on the backfill side and managing the processing side of the business. So that's an answer to that. In terms of the salary negotiations, we have negotiated now for this year, and we are just -- it's work in progress at the moment. We're going through another 3-year collective bargaining agreement with the unions on site. We have a bit of a disparate relationship in some ways on-site at Sasa because there are 2 unions and there are some workers who aren't represented by unions. So it's a bit of a longer process actually rather than just negotiating with one union. And Scott, who's now the General Director there, he's trying to work through that and get to a 3-year deal on-site at Sasa. But we have negotiated at the level of around about 4% salary increase for Sasa on-site for this year.

And our next question comes from Peter Mallin-Jones from Peel Hunt.

Just a couple of questions. Firstly, one around COVID. Obviously, things seem to be dampening down at both sites. I was wondering if you are planning to help out sort of local authorities and local health care with distributing vaccines or whether that is something that is sort of better left to the local authorities to do and have their own program. And then secondly, just thinking around the dividend. Obviously, if these sorts of prices persist, you'll be presumably fairly strongly in a net cash position come year-end. And I was wondering whether that might trigger a bit of a review of the existing dividend payout policy.

Good questions, Peter. I think on the vaccine side of things, we've discussed internally about it's not something we want to get involved in necessarily. I mean, vaccine is a very specific subject, isn't it? And it's really down to the governments in each country. And if I take the 2 countries that we operate in, first of all, in Kazakhstan, they use the Sputnik 5 vaccine over there. There is a degree, I have to say -- really, the general population in Kazakhstan, and certainly amongst our workforce, a bit of paranoia about vaccines. So it's actually freely available to people if they want it in the time of Balkhash, now about 300-plus workers. We only have about 5% voluntarily who wish to take the vaccine and only 6 today have had it. So I think it's an education program as best we can without forcing people to take that vaccine in Kazakhstan. Whereas in Macedonia, for example, I don't think there's a great amount of vaccine available even. So we're talking in the tens of thousands for a population of just over 2 million. And most of the focus of that will be our key workers and health workers. So it's not something we choose to get involved in. I think that will be wrong, actually. So our fight against COVID is certainly working with the local authorities. And as you saw on the slides there, we put a lot of money into helping local authorities. And the Ministry of Health, for example, in Macedonia, we contributed more towards. So I think that will be our focus this year of any further support we need to get for COVID. Plus the vaccines are not necessarily going to help us in those countries at the moment. It doesn't [ seem ]. And so what we have to do is make sure that we maintain our procedures that we've put in place that were effective effectively. Last year, we maintain those on-site to minimize the number of cases that we do get, hopefully. In terms of the risk from shipping products and everything, we do believe that's mitigated, as I think Gavin said before. On the dividend, I think it's too early to say. I mean, our policy remains our policy. Even though it's been a strange couple of years, really, with last year, in particular, and the fact that we've gone from -- effectively this time last year, the full dividend for 2019 was 0% because we didn't pay one because of COVID-19. And then we went to a 66% free cash flow for the interim because we had a poor first half, and now we've gone to 57%. So you could argue that we're all over the place. But we are, I don't think. I think it's fair to say this dividend is really saying, that's our policy, but we're showing confidence. If you were to even it out, Peter, over the 2 years, 2019 and 2020, and take the free cash flow over those 2 years, you would see that what we announced today would indicate a dividend of 37%. So we'll stay within those tramlines at the moment. We'll carry on deleveraging the balance sheet, and then we'll may maybe take another look at it, if we don't manage to find an opportunity to acquire and grow the business with the cash flows.

And one final question. Just obviously, Nigel Hurst-Brown and Robert Cathery are both stepping down, Prentis is being appointed. I was wondering are there plans for another appointment to the Board through this year?

I mean, Nick Clarke is the Chairman and the Board themselves the Nomination committee are looking very strongly at supersession. And Bob and Nigel have served the Board very well. And we -- it's a shame that they will be leaving in an orderly fashion over the next year, but this has been something we've time-tabling for quite some time. Delighted that Mike Prentis has agreed to join the Board. He will be a great addition to the Board. But we haven't got anybody specifically in mind, although we do look at other people to actually strengthen the Board and have a succession plan in place that makes managing through.

Next question comes from Nick Chalmers from Alternative Resource Capital.

Most of my questions have actually been covered off by the other. So perhaps I can just ask you to elaborate a little bit on the M&A strategy. Slide 30 suggests that you're ideally looking for more copper exposure. I mean in the current copper price environment was producing assets, I guess, are commanding quite high valuations, but there does seem to be a disconnect with earlier stage project. So that being the case, are you sort of open to looking at earlier stage sort of projects where you could perhaps bring the balance sheet and the project development expertise in the company to add value? Or is the focus still very much on producing asset acquisitions or the Sasa acquisition?

I'm sure Gavin can add [ his comment ] here, but we're not averse to exploration assets, far from it, Nick. But I think one of the things that we are facing is this size and liquidity issue. You're not going to really address that in particular [ far more ], I don't think in the short term with an exploration asset. So we're not averse to it, and we'd like to think that we would do some of that in the future. But I think if I'm being honest with you, the priority at the moment will be to buy something closer to the development production stage to actually increase our size and also probably give maybe less of a risk to the dividend. We have to be cognizant of the dividend, which is valuable to our shareholders. We recognize that. We know it will fit in the market. We have to balance off being able to still maintain dividends and the cash flows we've got whilst actually making some investments in the future that doesn't lead to a 2-, 3-, 4-year hiatus on any cash flows on that particular opportunity. So it's a balanced year, Nick. So I think, if I'm honest with you, from a personal point of view, the priority will be to get to the next level, which means an asset closer to development [ stroke ] production or maybe in a combination with other companies. I think we can't dismiss that. We have to look at that. That may well happen in the base metals market, I think it's fair to say, as it's done in the gold market. But certainly, if it's an attractive exploration opportunity, we wouldn't dismiss that either, to be perfectly honest. So maybe a slightly difficult question to answer really.

Yes. I suppose by earlier stage. I was kind of thinking development stage, feasibility study stage and something that -- I mean, I guess, would you have the risk appetite to build something yourselves? Or are you more comfortable taking something on that's perhaps in production but where you can see some upside with some further capital allocation?

I mean I'll let Gavin answer this, but I think we would have the risk appetite to do it. And as we delever the balance sheet or we have greater debt capacity so it can have less of an impact potentially on your dividend and other aspects. So it depends on the size of it. It depends on where it is in development stage effectively and the impact it would have on the cash flows of the business, which are important to us in terms of what we set our stall out to be known for and what we deliver.

Yes. And I guess from our perspective, I think as Nigel hinted at, you look at the balance sheet and what we can do and what we can't, it's -- what you're doing with the development asset is effectively deferring the CapEx or the sort of total cost of these things. And when we look at a lot of these development assets, they're pretty keenly priced. If you look at the -- a listed company market cap, plus then the development cost of the asset and where the NPV of that asset is, is we're still finding there's not a huge amount of value available to us and our shareholders. Obviously, it depends on how we refinance these things. But yes, so in the current sort of price environment, we're not seeing a huge arbitrage between producing assets and development assets, frankly. The other thing I would add is there's probably more processes to be run by banks at the moment than I've seen in my life. So...

Our next question comes from Richard Hatch from Berenberg.

Sorry, just one more. Just on lead market. I just wondered whether you might be able just to give us a quick update on the lead market and your thoughts on that one at the moment?

So 3 strikes and you're out, Richard. So you're on 2. The lead market is an interesting one. I think it looks of the 3 metals we're in, probably the sort of next leverage to this energy transition cycle. But what I would say was every EV actually still needs a lead acid battery. So we do see ongoing demand for the metal, perhaps not as robust as sort of for copper and potentially zinc as well. But the other interesting thing about lead market, is while you see -- and this is coming from commodity analysts that we speak to quite regularly, is that the warehouse stocks of these things of a quality that the auto industry doesn't really want. So there's not a huge amount of overhang, if you like, from that side of the market. Where we see more risk to the lead market is the recyclability of it. And as I was mentioning before, you are seeing secondary material coming to the smelters. Now smelters like it. The technical guys at the smelters like it. The commercial guys like it slightly less because they're making less money out of it. But there's a balance to be had within the smelters as to how much secondary they get in, and when they can grab it, they do. So that, to me, is a greater risk to sort of me allocating our assets, allocating the lead concentrate than there is to the lead price, frankly.

And our final question comes from Tyler Broda from RBC.

I have a very similar question to Nick's. But just one final elaboration maybe on that M&A. I guess, with the high-margin structure of your business, what sort of leverage ratios would you be comfortable with if you were to do something that did scale up the business, maybe net debt-to-EBITDA or something along those lines?

Yes. Thanks, Tyler. Most debt packages that you go out and get have a leverage covenant in there that generally sits around 2.5x net debt-to-EBITDA. And I think we'd be comfortable at that level for a very brief period, and we'd be very interested in what the deleverage profile looked like. I think as a business, we probably more -- have a lot more comfort around the 2x mark than we would sort of what the lenders would allow you sort of thing. But it does give us a reasonable amount of dry powder, to somebody's earlier point, as to what the mix would be in terms of debt and equity, I think it depends on the size of the type of acquisitions we'd be looking at. But following through from what I just said, that does look to be an equity element to these things as well. And of course, if you were buying a producing asset, then, clearly, the EBITDA number would be a lot higher than what we've got now on a pro forma basis. So I think this -- without getting overleveraged, there is some really sized acquisitions that we can undertake.

No, that's completely fair. And I guess, at risk of us basically figuring out who you're going to buy with the eighth question on M&A, but what kind of sort of risk appetite do you have geographically? Like is it still going to stay -- I think before you were saying it probably still stay in the same time zone? Any thoughts on that at all?

No. I think -- again, the jurisdictional aspect of these things is difficult because you'd sort of a slave to mother nature in a way. There are, however, jurisdictions that we wouldn't contemplate. So we wouldn't do Russia, for example, DRC, Venezuela, the obvious ones. But I think the other thing we've discounted mainly from a logistical and management sort of bandwidth point of view is the sort of Southeast Asia market and Australasia. I think that's a little bit of too much of a stretch as well. So if you look at where we own things right now -- in Kazakhstan is interesting to us. The EMEA time zone, interesting to us. And we've also looked at things in LatAm and North America as well. So that would be the focus. I mean it's a necessarily vague answer. But the other thing I would add is that there's -- in terms of that diagram that we've got in the presentation of opportunities reviewed, NDAs signed and site visits, I don't -- we're not even -- yes, we've signed a few NDAs in 2021 already. But as I said earlier, these are sort of bank-led processes, which have got a long way to go. So we're not in any way, shape or form in LOI or term sheet stage with anything.

That completes today's Q&A. I will now hand the call back to Nigel Robinson for any closing remarks.

I didn't -- I wasn't expecting that. Yes, I guess, closing remarks, really just emphasize a strong set of results there and emphasize the confidence we're showing in the business with the 8p final dividend, making 14p for the full year. Good performance in difficult circumstances, as everybody has experienced. And though we remain cautious moving forward with still some challenges on COVID outside, we are confident for the future, and we look forward to a successful 2021.