Fenix Resources Limited (FEX) Earnings Call Transcript & Summary

Well, welcome, everybody, to today's webinar with Fenix Resources. I'm Dannika Warburton, the Investor Relations representative for Fenix. And as always, I'm delighted to be joined by your Executive Chairman, John Welborn. Today, we're going to run through the December quarter results, and importantly, lay out what's ahead for Fenix in 2024.

Dannika, and thanks for everyone joining the webinar. I know we've got a lot of questions, and I've been asked to keep the summary short, which is difficult because it was, as described, a transformational quarter for Fenix Resources. We made substantial progress, and there's a lot to talk about in the quarterly. Focusing initially on a quick summary of our Iron Ridge performance. We had stronger iron ore prices and took advantage of them with our operating margin increasing above $100 a tonne. That's obviously very pleasing. We sold 353,000 wet metric tonnes of iron ore and we averaged a price for our products during the quarter of AUD 212 a tonne. That equates to around USD 138. Very pleasingly, that's a $10 margin above what the 62% spot price index averaged over the quarter, which was around USD 128. So that was largely attributable to the high quality byproducts, but also the fact that we sold a lot of lump during the quarter. We actually sold more than 200,000 tonnes of lump with the balance being fine and that flowed through into our prices. And at those sort of margins, we're making a lot of money. So the quarterly also shows what we've used it for, which is to fund some growth transactions. So we generated about $35 million of operating cash flow due to the performance of Iron Ridge, and we've reconciled where we've invested that in the transactions described at Beebyn, the work we're doing on Shine and also we paid some taxes and royalties and made other investments during the quarter. Beyond Iron Ridge, very important quarter, most obviously at our Fenix Ports business, where we exported almost 900,000 tonnes of iron ore Obviously, that includes the 350-odd thousand tonnes from Iron Ridge as well as approximately 550,000 tonnes to third-party customers. So that demonstrates that we're currently at a run rate through the port of more than 3.5 million tonnes. We believe the sheds that we control there and the on-wharf storage and loading facilities have a capacity of more than 5 million tonnes, perhaps up to 10. So very pleasingly, we are on our way there. And our challenge now is to make as much of that material as we possibly can, our own material, a great start to what's going to be a big engine for Fenix at the port. In our Logistics business, we continue to do well. We obviously disclosed a stable performance in our C1 cash cost during the quarter and very stable on shipping. So our increase in margin of 45% is largely attributable to the iron ore price rising as well as our production of lump. We did actually see higher mining costs during the quarter. We did quite a lot of stripping. And obviously, we're not immune from the inflationary pressures you see across the marketplace. They were offset by ongoing efficiencies in what is a state-of-the-art leading business in our logistics functions as well as the synergies of the volumes we're now moving through the port. And that's what's kept our costs stable. So great performance from the Fenix-Newhaul team. We disclosed in the quarterly, we've completed the consolidation of that business. It's now 100% owned. As part of the acquisition of Fenix-Newhaul, we disclosed that we've made transition arrangements with Newhaul. Newhaul a privately owned business founded by Craig Mitchell in 2019 and managed the joint venture now acquired by Fenix. So Newhaul is providing the strategic and operational management, to the finance, administration, HR, IT, procurement and all the other functions of Fenix Newhaul under services arrangement, and people have seen in the annual report, we disclosed the related party payments that are being made to Newhaul. I'm really pleased that immediately following the quarter on the 1st of January as part of the integration of Fenix-Newhaul, Fenix has now acquired Newhaul. And so we've now have total control over that cost center. It's part of the business. It's no longer a related party transaction. It's an internal transaction. We excluded assets unrelated to Fenix as part of our deal. And we're now one team working across our business on great outcomes, and you can see those flowing through in the quarterly reports. I'm sure we're going to get a lot of questions about the growth transactions. Fundamental game changer is the Beebyn-W11 right to mine agreement, 10 million tonnes. Beebyn is a 20 million tonne deposit at 61% iron ore. So it's a very similar mining opportunity to Iron Ridge. It's 20 kilometers away. We're aiming to get that mining by the end of the year, and that is a wonderful opportunity as we expand operations in the Weld Range using our infrastructure. We acquired 500,000 tonnes of ore from Twin Peaks, and we've already started trucking that material. It's also high-grade ore. It will immediately add to our production in the current calendar year. Then we're also obviously working on a recommissioning decision on Shine, 15 million tonnes. So we've got a number of new mining opportunities we're looking to bring online. And you can see how profitable and the rewards of Iron Ridge, and we're looking to add to those. We know we've got the infrastructure and transport, both haulage and port and also rail access if and when that's required for those expansion plans. Plans are obviously moved from a very successful one mine operation to -- with a limited life to multi-mines with a long life and a sustainable operation in the Mid-West, and that's very exciting. So stay tuned for more information as we develop those mines. Very pleasingly, we added significantly to the team during the quarter. Scott Pileggi joined us in a mine management role at Iron Ridge. Jamie Jones joined us as our Port Manager in Geraldton. People in Geraldton will be aware, Jamie has been working for us for a long time through our contracting relationship with Champion Bay Electrics, and we're delighted with the progress he's making at the port. And Goran Seat has joined us here in Perth in a corporate role as General Manager of Projects because you can see we've got a lot of projects on the go. But with that summary of what's in the quarterly, and hopefully, it's a good read for everyone out there, I'm very happy to answer questions there.

Thanks very much, John. And congratulations on the very strong performance, the operational performance in the quarter and also on those transformational transactions, it's great, as you said, to see the Fenix grow from the single mine operator into, I guess, you're seeing your intention that is to grow Fenix into a really material scale, integrated Mining and Logistics and Port Services business. I mean I won't bang on too much. I'm keen to unpack everything you said some more, so we'll jump straight into the investor questions. The first one that I got was through on Iron Ridge actually from Bob. And he's asked with regard to the December quarter, which saw stronger iron ore prices. This obviously resulted in a huge increase in the operating margin for Iron Ridge. Do you think this performance can continue?

Bob, absolutely. We obviously had great iron ore prices. I mentioned they averaged USD 128. Today, the price is $135. It's actually come off a little bit, but we're seeing higher spot prices than we enjoyed during the quarter. The cash flow generation, the performance of the mine continues. Longer term, looking since inception, we've seen the iron ore price dip below USD 100. And we may well again, what we've shown is that we can be profitable. We've obviously got hedging protection that cost us during the December quarter, but sustains our business. Obviously, the answer is we are here for the long term, and we're going to make sure that it continues. In terms of the short-term outlook for the iron ore price, it looks very strong. And so we're -- as you saw by prioritizing lump during the December quarter, we've maximized our returns and our margins, and we'll continue to look to do that. The short-term outlook looks very good. Long-term outlook, the best hedge we can do is reduce our costs and the easiest way for bulk commodity miners to do that is increase the denominator of the tonnes. So you're seeing cost benefits generated by us doing that at the port, and we're about to do that across our business. So we're definitely focused on and confident that we're going to maintain a very strong margin. And look, if you add together our C1 costs of USD 51 a tonne, with our current shipping cost of $17 a tonne, you get a below USD 70 CFR number, which equates to that iron ore price currently $135. So there's a lot of room in our margin. The biggest companies in Australia and the richest people in Australia are iron ore miners, and it's something that we recognize at Fenix. It's a big market. Obviously, you're seeing in some of the battery metals, the price dynamics within the commodity markets change, most obviously in lithium. People are surprised that copper miners, obviously, the nickel miners are going to care and maintenance -- that's not our future in iron ore. It's a huge market. We know there are engines and long-term price dynamics of that market that Fenix can be profitable in. So Bob, stay tuned. We're building a big comeback.

Okay. I do have a follow-up question on the iron ore piece for you. But I wanted to move to the new projects, particularly the Beebyn-W11 deposit. You mentioned that work streams have commenced there with environmental assessments and the Native Title approval, initial talks with the traditional landowners. When do you expect those approvals to come through and mining to start at Beebyn? And what will it mean for Fenix?

We've indicated that we're ambitiously hoping to mine during 2024. So obviously, we've got 11 months until we expect to be mining at W11. Within the Fenix team, obviously, we have the reference point of what was achieved at Iron Ridge, where we commissioned the mine in a very short time frame. And we have the advantage, obviously, that W11 is only 20 kilometers away. And also the Sinosteel Midwest team are partners in that project and the owners of Beebyn and the whole Weld Range deposits have done a lot of work that we're including Native Title agreements and previous environmental approvals and obviously, a great deal of geological work on the resource. So I mentioned Goran's joined us. He's running that project. We'll obviously update the market with more specific time lines. But we're using all the work that's been completed and the work that we disclosed in the quarterly. And I think by the end of the current quarter, we'll have more guidelines around the capital cost and the time line. But the key milestone is we want to be producing from W11, augmenting our production from Iron Ridge by the end of this calendar year.

Okay. Brilliant. And I guess continuing the theme of the new mining agreements that you outlined at Twin Peak. So you mentioned there that you were going to start producing ore and this would contribute to some considerable economies of scale for Fenix. Can you expand on the economics behind the right to mine agreements? We had a couple of questions through from investors. So I've tried to consolidate that one.

Yes, sure. The ore purchase agreement with 10M is quite simple. They've established a mine. We're acquiring the ore often at the mine gate, and then we're using Fenix's unique infrastructure capabilities in haulage and port services. There's a cost component for the mining that 10M, the owners of the Twin Peaks mine are allocated and then there's a cost component that we're allocated for the transport and shipping component, then both parties expect to make a margin on that and then we split the profit, 30% to Fenix and 70% to 10M after that split. That's going to be an additional 500,000 tonnes of production for Fenix, and we're going to make a good margin on that business. In relation to the right to mine, the structure there is we've acquired the 10 million tonnes for an equivalent acquisition cost of $1 a tonne. We're paying a small base royalty of $2 a tonne, and then we're sharing the profits evenly with Sinosteel Midwest on the margins generated from that project. So Iron Ridge is obviously 100% owned operation, and you're seeing the huge margins we're making there. We're very confident in these partnership agreements that we generate strong margins due to the utilization of our infrastructure as well as accessing the margin on the material.

Love talking revenue, as you know. So moving along on to the third-party revenue model and tying into the infrastructure advantage that you just mentioned, the Fenix Port Services business. You mentioned that you signed iron ore producer CuFe during the last quarter, and that's fantastic. So congratulations. Don and a couple of other investors have asked for more detail around the utilization of your Geraldton Port facilities and how that's going to generate cash for the business? And maybe some details around toll treating of minerals other than iron ore, given that different commodities have different requirements around impurities, if you could?

So the facilities that we now own and control of Geraldton Port include our existing on-wharf storage facility that we've been using for Iron Ridge, which was previously owned by Sinosteel. Two much larger on-wharf storage facilities previously owned and operated by Mount Gibson, who have exported 50 million tonnes from Geraldton through their mining operations in the Mid-West. So you can see the scale and the potential of those facilities. I mentioned we're at a run rate of more than 3.5 million tonnes. We're on track for a larger number, and we'd like to use those facilities to export iron ore from Iron Ridge, from Beebyn-W11 from Twin Peaks, from Shine and potentially from other Fenix-owned or Fenix partnered mines in the region. But we're also very pleased to access those on a profitable basis for third parties to unlock value in other projects in the Mid-West. And you've seen that with the very early deal we've done with CuFe. They're obviously commercially confident arrangements. We're confident that we're going to generate significant revenue and profits out of those. If you go back to the CuFe arrangement and contract that we announced in the December quarter, we disclosed that, that has a take-or-pay element of 1.1 million tonnes per annum. And that from that take-or-pay element, we expected to generate more than $10 million in revenue. So that's giving you the market an idea that there's roughly $10 a tonne of revenue in it under that arrangement. Now if you also look at the quarter, we actually did 550,000 tonnes of third-party tonnes through the port. So therefore, we're on a run rate currently of third-party tonnes of more than 2 million, and you can work out what that might be doing to revenue. Obviously, from a cost basis, our cost of the port are changing. As we expand, we're investing and we're looking at how we use those facilities in the best possible way. And that links into the question of at the moment, we're exporting iron ore. As we refine and increase our capabilities at the port, we do see opportunities to expand and potentially use those facilities for either our own or other people's third-party bulk commodity products, whether that's lithium concentrate, could be fly ash, silica sands, garnet, talc, all sorts of things. There's lots of interesting projects in the Mid-West. That works ahead. At the moment, we're focused on iron ore and maximizing throughput, but we've got lots of optionality going forward.

Okay. And Don actually asked a follow-up question on the spare capacity at the port side. You've got a number of sheds. Is there quite a bit of spare capacity there for this Port Services business?

Look, when we acquired those sheds, I think we had some photographs in that announcement. If the shareholders might be familiar with them, I used the expression at the time for my own benefit, just to demonstrate scale that in Shed 5, one of our facilities, you can fit 2 rugby fields. I mean they're absolutely enormous facilities, and they were -- the photo demonstrated just how empty they were in the little tiny high views, [ myself ], you could see in the distance. I'm very pleased that if you went back to Geraldton today, those sheds are full or they look full. We've still got lots of capacity. But across the third-party tonnes that we're facilitating and the lump product and the fines product and 10M, all of those sheds have been used currently. And we've now operationally tested the ability to store material and load material out of all of them. There is still significant capacity. And Mount Gibson, who only controlled 2 of the 3 sheds we controlled, I think at various points, we were exporting more than 5 million tonnes a year from [ Terra ] and Peak and Extension Hill. We know that across our 3 sheds, we can significantly exceed those volumes. So there's lots of capacity challenge and our opportunity is to unlock it.

Okay. So you did just under 550 wet metric tonnes in the previous quarter. How do you intend to build and scale the Port Services business -- is there a target amount of customers? And I guess, do you see it as a growth driver for Fenix as a whole -- as a company?

Obviously, the 550 is third party. We did 900 from the facility. I see it as a total because obviously, we want to capture as much of the value chain as we can. We've got a Port business. We've got a Logistics business, and we've got a Mining business. Best application of that business is when we're mining the material and we're hauling it and we're potentially putting on the rail and we're putting it into our sheds and we're loading it on to ships because we're really good at it, and we want to capture value out of that whole chain. Focusing just on the Ports business, yes, we can do Port Services for people. We've got available capacity at the moment. We're doing as much as we can as well as many other people in developing their projects in the Mid-West to use all of that capacity. So yes, it's a huge growth opportunity as there is in our Logistics business. And we're working with the key stakeholders in the region, Aurizon, Arc and others about getting on the rail and building tonnes that way as well. So all of these opportunities are going to be revenue drivers and profitability drivers for us.

Okay. I'll move on to logistics now because there's been a lot of questions through on the haulage business and the acquisition that you announced of Newhaul. To consolidate all of the questions, would you be able to provide a bit of a rationale behind the acquisition? I know that you touched on that in your intro and sort of explain, I mean, previously, Fenix, Newhaul and Newhaul had divided the contracts. What does this acquisition mean for Fenix going forward? Will Fenix receive 100% of the new contracts even outside of the Mid-West? And Bill has asked if you can comment on specifically the recent announcement by RareX Limited regarding the haulage agreement with Newhaul.

Great. Let's me start. So one of the great strengths of Fenix is our partnership, whether it's with Wajarri Yamaji people or with the Mid West Port Authority. And a great example of that was the joint venture between Fenix and Newhaul, which created a 50-50 owned haulage joint venture company. And if you go back and shareholders who have been there from the start of the journey, would recognize just how important it's been in our success. The consolidation of that business was very logical, and it's allowed us to significantly reduce cash costs -- and we disclosed at the time of that acquisition that it was immediately value accretive to Fenix. It has actually ended up being far more value accretive, something that Craig Mitchell reminds me of every day of how good a deal that Fenix has done. Part of those arrangements, though, were recognizing that in the joint venture, Newhaul provided services pretty much runs that business and has enormous expertise. So we went from having a 50-50 joint venture where a lot of the management expertise, skills, functionality, support was provided by Newhaul under services agreement, to 100% owned business, Fenix-Newhaul, but it still had management services provided by Newhaul. And if you're a keen follower or an auditor or a chartered accountant and you actually read the annual report, you'll see that in our disclosure of related parties for the year ended 30 June 2023, we disclosed that $2.1 million had been paid to a related party, Craig Mitchell and Newhaul in relation to those services. And in the December quarterly that we're talking about today, we disclosed related party payments as companies are required to do $900,000. Most of those payments are related to those very important services provided by Newhaul. I am absolutely delighted that we have been able to secure 100% ownership of Newhaul. It's absolutely critical to the strength of the company. So not only do we now have the Fenix-Newhaul business and all the trucks and the drivers and the IP, we've now got the management services that actually are the engine of that business. And we've been able to do that in a way that leverages off the value in the Fenix-Newhaul transaction. So obviously, it excludes the performance rights and other milestone payments that related to the Fenix-Newhaul acquisition that's at in Newhaul. And it also excludes contracts that are outside the Mid-West. Now really pleasingly, for Fenix, we've got the option to acquire those in the future. So the answer to the question of are we looking to expand beyond the Mid-West, is clearly clear answer. As you can hear, we've got a lot to do in the Mid-West. And I think our most obvious value opportunity, whether that's within 100% owned Newhaul, Fenix-Newhaul or Fenix Port Services or Fenix Mining is to focus in the Mid-West. But obviously, we look at a lot of different things. And the opportunities that Newhaul is developing with a range of companies and most recently with RareX, represent wonderful springboard opportunities now for Fenix. We have 100% control of the services function that would provide those contracts, and we now have the option to buy them at the point that they become real. Obviously, that decision will be made about what we're focusing on at the time and whether Fenix wants to stay in the Mid-West or whether we want to expand, but we've got that option. And we now control the key cost center and provider of excellent management services to that business. So it's a very logical transaction. And you're going -- like you have previously, you're going to see the benefits of that transaction as we deliver these projects.

Okay. Mid-West is best, but you're leaving the door open for other REIT like the Pilbara, for instance, in the medium term?