Hillgrove Resources Limited (HGO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Hillgrove Resources Limited December 2024 Quarterly Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Bob Fulker, CEO and Managing Director. Please go ahead.

Thanks, Melanie. Good morning, everyone, and welcome to the Hillgrove Resources December 2024 Quarterly Report. I'd like to start by thanking everyone who made it to the site visit at Kanmantoo in November. It was well attended, and I appreciate the opportunity to showcase the progress we have made on site over the last 12 months. Today, I'm joined on the call by Joe Sutanto, CFO and Company Secretary; and Brian O'Hara, Investor Relations. December quarter was a period where we continue to make good progress in setting up the mine to deliver steady-state production over the coming year and beyond. A number of record operational metrics were achieved, which highlight the capability of our site team and the potential of the Kanmantoo copper mine to produce consistent cash flows for shareholders. I'm also excited by the outstanding drill results returned from Nugent drilling, which included an [indiscernible] of 18.6 meters at 5% copper and over 1 gram per tonne of gold. The outlook for our copper mines remains very positive with the commodity cycle delivering continued strong prices, especially in Australian dollar terms, with the current price over $15,000 per tonne, not far from record highs. I believe this is a great opportunity. Apart from a very small number of large ASX-listed copper producers, Aussie copper miners remain undervalued relative to the robust copper price. Hillgrove is well placed to capitalize on this opportunity and to create value for our shareholders if we continue to focus on our 3 clear priorities: that's deliver on our promises, demonstrate sound capital management and actively pursue growth only when the opportunity is right. If I turn to the report, I'm pleased to report that the December quarter, our continued focus on safety saw our total recordable injury frequency declined to 13.1. We also achieved a number of production records, including record development meters or tonnes mined or tonnes processed and recoveries since underground operations commenced. The strong positive momentum in all these metrics puts us in a great position to deliver our CY '25 copper production guidance of 12,000 tonnes to 14,000 tonnes. This will be our first year of full production. Copper production was lower in December quarter due to the mining of lower grade than the prior quarters, which was in line with the block model. This adversely affected our unit costs. However, total site costs continue to track lower with all-in costs declining from $34.5 million -- sorry, declining to $34.5 million during the quarter, down from $35.7 million in the September quarter. This is a strong outcome given the combined -- sorry, the continued ramp-up in the activity highlighted by the record physicals and highlights the progress we are making on improving productivity. As access to high-grade stopes is regained, we expect unit cost per pound to reduce. We are transitioning past the lower-grade zones and the increased development rates are resulting in additional mining fronts being opened up. We also expect stope tonnes to increase as mining efficiency continues to improve. Our 3.6 million tonne plant continues to perform well and benefits from being -- from operational improvements implemented during the quarter. Processed tonnes increased by 24% to 329,000 tonnes and recoveries reached a new record of 93.5%. On the exploration front, exceptional results were achieved at the eastern end of the Nugent system with high-grade copper and gold intercepts we returned in a number of holes. The 2 most significant intercepts were 18.55 meters at 5.69% copper and 1.02 grams per tonne of gold and 16 meters at 2.96% copper at 0.42 grams per tonne of gold. These holes represent a zone of 30 vertical meters between the 960 and 930 RL. Drilling targeting the strike extension of this zone is ongoing. Following up drilling will be conducted, and we expect to have a better understanding of these results in the coming quarter. Overall, I'm happy with the continued progress we're making at Kanmantoo. We now have a strong team in place on site. Our physical metrics continue to improve, and we have set ourselves up for a strong year ahead in 2025. I'd now like to hand over to our CFO, Joe Sutanto, and he will update you on the financials.

Thanks, Bob, and good morning, everyone. In just our second quarter of commercial production, we continue to make good progress in achieving greater productivity and improving efficiencies at Kanmantoo. Cost per ore tonne mined reduced by 11% quarter-on-quarter while cost per ore tonne processed fell by 28%. As Bob mentioned, the total all-in cost for the December quarter actually decreased from $35.7 million to $34.5 million despite the uplift in activity. Due to the lower grades mined, unit cost per pound increased with all-in costs in the December quarter of USD 3.97 per pound. As highlighted in our guidance, these unit costs are expected to improve substantially from this quarter as we access more mining fronts to give us more optionality around mining higher grades as well as improved efficiencies in the mine. On top of this, with a high fixed cost percentage of operating our 3.6 million tonne per annum plant, additional ramp-up in tonnes processed at higher grades, we'll also see substantial shift lower in unit costs. For example, labor constitutes around 35% of our plant costs, and this component will remain roughly the same, whether we are processing 1.2 million tonnes per annum or 1.5 million tonnes per annum. In addition to this, it is also worth mentioning that we're observing a number of other tailwinds on the cost front, including offtake charges, which has seen a substantial drop for 2025 shipments, with Japanese benchmarks reducing from [ 80 and 8 to 21.25 and 2.125 ]. This will see a circa $5 million to $6 million reduction to our cost base this year. In addition, we have seen a softening freight market going out of Adelaide with the cost of our last shipment being circa 20% to 25% lower than what we experienced earlier in 2024. Moving to the balance sheet. As a direct result of the lower grades leading to lower production, net revenue fell 6% to $34.6 million, and total cash receivables and unsold concentrate declined from $12.2 million to $9.7 million. With the expected uplift in grades and copper production commencing this quarter, we expect to be adding cash and liquidity to the balance sheet moving forward and have no current intention to draw down on our $10 million standby debt facility. Turning to our guidance for calendar year 2025, which we released this morning, production is expected to be between 12,000 to 14,000 tonnes this year, and we are guiding to be in the range of USD 3.40 to USD 3.90 a pound. In conclusion, the combination of a strong A dollar copper price and higher production at lower cost plant from Kanmantoo going forward, it gives us the confidence we can deliver a strong financial performance for our shareholders in 2025. Thanks for listening into the call, and I will now hand back to the operator to open the lines for questions.

[Operator Instructions] Your first question comes from Chris Drew with MST.

Just a couple of questions, if I can, please. First one just on the guidance. Production rates look like they're sort of in line with the studies that were released sort of prior to going into production, but the all-in costs look like they're quite a bit of a step-up. I think from memory, the all-in sustaining costs were expected to be around $2.60, something like that. And you've talked through a few tailwinds that you're experiencing in things right now. So just wondering what's driving that all-in cost position, whether it's sort of grades are a little bit lower or there's some capital coming through or something like that, just something that we should be aware of underpinning that cost guidance.

Thanks for the question, Chris. Look, it's purely from a denominator point of view from an all-in costs. So as you can see from our -- I guess, our total cost perspective, it actually did reduce quarter-on-quarter. So we spent $34.5 million last quarter versus $35.7 million in the December quarter. But because of the copper production, that obviously skews the AIC to a higher figure. From our forecast going forward, those numbers you quoted sort of in line with what we're expecting for next year and going forward. So I think it is slightly deceiving because that higher unit cost is driven very much by copper production rather than the all-in costs been actually flowing out all along those lines.

Sorry, I understand you might have been talking about the current quarter there, Joe. I'm not sure I was just wondering about the guidance range for the all-in cost of $3.40 to $3.90, thing's pretty high relative to I think it was all-in sustaining costs at least were expected to be around $2.60 with the studies a little while ago. I understand there might be a little bit out of date, but just a bit of a gap there.

Yes. Look, I guess, for us, we're aiming to improve on that. I mean last quarter it was obviously $3.80, $3.90, but we are continuing to improve our efficiencies, and we are looking to sort of get to the lower end of the range if we could.

Yes. Okay. Okay. And maybe one more, if I can. Just on the debt, you mentioned no sort of intention to draw down on that facility. I'm just wondering now that you've got a reserve established whether you might be looking at actually replacing that with a more vanilla kind of working cap facility with one of the banks out there or something like that, that's sort of on the cards? Should we be thinking about that?

Chris, I'll take that one. At this stage, we've got the facility with Freepoint. As it draws to the end of its time, we will start to look at replacing these other facilities, but it's actually in place for another few months yet. So we'll start looking as it gets towards the end of the time.

Your next question comes from Paul Hissey with Moelis.

Just on -- remind me, Bob, the end date of that current facility. You said a couple of months. Is it at the end of April or something? What's the exact date?

It's April, May, Paul. Right at the end of April, I think it is.

Okay. Can I ask you as well the -- just to break down, I guess, some of the -- we don't obviously have a balance sheet this time of year. But the change in cash is obviously a little bit concerning. I think that's -- it doesn't feel like enough money to have in the bank, and I appreciate you've got the facility in place as well that you've stated you don't intend to use. I'm just trying to work through how the balance sheet might have moved around. You've got unsold con there. What was the actual copper sales number for the quarter and the realized price, if you can provide that for us, please?

I don't have that in front of me, but I will give you a call on that after that just to confirm. Yes, there was quite a fair bit of concentrate unsold at the end of the quarter. I think it was in the order of 1,200 metric tons of concentrate. So about 400 tonnes of -- 300 tonnes or so of copper that was unsold at quarter end. So it was quite a large amount.

End of December, Paul, was obviously the Christmas period as well, but we also had a period of public holidays and all the rest of it that didn't allow us to get rid of or sell that concentrate at the very end of December.

No, that's fine. I just -- if we have those numbers, I think it's a bit easier to sort of work back through the change in cash, et cetera. I mean I appreciate that you do not know, but the people aren't always operating at full capacity at that time of the year for various reasons. And then just -- if I could just, I guess, a bit more of a follow-up on the decline in grade. And -- is this a -- how do we get comfort that's going to improve over time? What was the key driver of the drop off this quarter? If we could just sort of go to, I guess, the second order explanation there. What was -- had you hit all the good stopes early and then you're always reliant upon sort of bringing the next crop of higher-grade stopes online? I'm just trying to get my head around, I guess, what is a pretty meaningful drop in grade, however, temporary it is. And clearly, it's had a big impact on the share price today. And I think that reduction in cash is somewhat concerning.

Yes, I'm going to agree with you on many of your points. We've obviously been focused on it fairly heavily in the last 6-odd weeks to get our grade profile right. The mining itself, we hit 3 tail of the stopes at the same time during the quarter. So we did the reconciliation, and the reconciliation on the long term against the [indiscernible] OK, so for the entire year last year for 2024, the [indiscernible] OK reconciled by a plus 30%. The OK that we did the new resource -- reserve around is still reconciling at a plus 15% to 20%. So it's actually delivering a better result for a closer result. So the mining of the lower zones or lower grade zones during the quarter was a combination of the higher grade areas running out, us going into those tails of the stopes and having multiples of those at the same time. The reconciliation of that back end of the stopes was plus or minus 5%. So it's pretty close to what the actual block model was saying. So we're pretty comfortable the block model has it right. We're pretty comfortable with that going forward. We can adjust the sequencing, so we don't have 3 tails at the same time. That's the real -- they're all learning out of the last couple of months for us to make sure that we've got the development in front of ourselves, so we can open up different stopes at different stages. And obviously, we had a huge lift in development meters, and that's allowing some of that to occur.

Just on that transition to you say, adjust the sequencing there, Bob. I mean that's not something typically you can do in a single quarter if you have to sort of reorient the order in which you're bringing these stopes out. I mean how quickly do you think you can implement that change or that adjustment, if you like, to ensure you don't have that same coincidental stope sequence again?

We're doing it now, Paul, we're pretty confident we can get it sorted this quarter. We've got -- at the beginning of this month, we had the lower grade continuing. We had some sample periods of the stope that we're mining now, and it was going 1.2 million to 1.3 million. So we're pretty confident that we're back into that higher rate. That's not the average grade of the stope. That's just that [ center ] zone. So we're pretty confident that we're back into a little bit more of an even keel from a sequencing perspective.

[Operator Instructions] Your next question comes from Sam Catalano with Wilsons Advisory.

I've got a few questions actually. Firstly, if I could just push you a bit harder on Hissey's question actually about the cash balance because he's right. It is a bit of a concern. Our sort of -- again, I hear all the things about some unsold concentrates and the other. But at the end of the day, you've declared an all-in cost of $3.97, the copper price during the quarter was somewhere around $4.20, $4.25, and your cash balance is down by $5 million. So I'm sort of struggling to understand where the money is going.

Thanks for the question, Sam. Look, I think the average price for us because we sold more earlier in the month -- in the quarter was something in the order of USD 4 a pound. And I guess we're -- I guess on top of that, we do -- that's the site cost, something we do have some group costs as well as expiration of lease. So that might sort of make up the difference. But regarding the cash balance itself, whilst it did drop 5% -- by $5 million or so, I think the true barometer is liquidity, which decreased from 4-point something closer to 9.5, I think it was. I think that $3 million is more of a closer barometer to sort of the drop because that receivable and concentrate sales, we actually realized most of that in the first week of January. So it's very much a timing difference. And that's why we use liquidity as a metric rather than looking at pure cash balance because it's slightly deceiving the timing differences. So I guess from our perspective, the $3 million difference is, as you say, the copper price is great. We only break even at site, but there were other costs in the business also.

Okay. All right. Understood. And then just with regards to the cost guidance. So again, Joe, you sort of outlined a number of things, tailwinds for cost decline into this year, volumes, grades, offtake. However, your guidance range, certainly the top end of it isn't materially below where your costs are, so I just want to understand what you sort of -- and it's a very big range, $3.40 to $3.90 suggests quite a lot of movement potential in the cost base. So what's the key swing factors that you've baked into that to come up with that range? Is it the grade? Is it your drilling meters? What sort of -- what's behind that guidance range, I suppose.

Look, for us, we've been operating for 6 months, we got to always just bear that in mind. So I think we're just trying to be more at the conservative end of the scale where we are going to meet our guidance. I recognize, look, it's a 50% range, which is quite large, but we could also be cognizant that we've only been in commercial production for a number of months. Our costs continued to decrease, and we expect it to continue to decrease again further next year from the main metrics, we look at dollar per tonne mine as well as to per tonne processed. But until we bid that out completely, and we're fully ramped up, I'm just a bit hesitant to have a smaller range. And what I can say is that halfway through the year once we have a better feel on all of that, and I'm pretty comfortable that in the next sort of 3 to 4 months, we'll get to a point where we have a much better feel for costs. We will narrow that range probably in sort of the -- hopefully, the mid this year sometime.

I'm just going to start -- just to add one or stress one thing that Joe said. It's got to be -- remember that we've only really been operating towards a steady state over the last 6 months. The first 6 months of the year were heavy spend, heavy profile of ramping up. And we have to be cognizant of the fact that we've got to get that cash being stable, so we can actually bring that range down. I don't want to give false hopes that we're going to be at a level that we could bounce around in the middle a little bit during the year. Our aim and our target is, as Joe said, to actually, a, over the next couple of months, start demonstrating repeatability in the costs, and then we can come out with a narrow range towards the middle of the year, is the plan.

Okay. I think if I just push you, Joe, in particular, a little bit more on this cost guidance, sorry. But again, because the top end isn't wildly dissimilar to what you already declared in fourth quarter, let's say your grade stays the same, but your volumes go up and you get the offtake benefit. If you get those 2 things, which are sort of you would think are more reliable than perhaps grade variability, then surely you should see a material knockdown in the cost base. Is that a fair comment?

Yes. I think you're spot on there, Sam. Look for us, we believe that the costs are relatively stemming from a total cost perspective. So you could see like quarter-on-quarter, I mean, it was 35.7% versus 34.5%. Like for us, that's awesome because as Bob said, we're trying to repeat what we're achieving and what we're doing. So on the cost front, we're achieving that. So I think from that perspective, you could see that if a denominator improves and there are the other tailwinds that I mentioned on the call, then you would think it would be at -- the lower end of the range is kind of what we're targeting, but we want to make sure that we are achieving our guidance ranges. I guess, yes, we don't want to -- we want to deliver what we promised as Bob said.

There are no further questions at this time. I'll now hand back to Mr. Fulker for closing remarks.

Thanks, Melanie. And look, just to close, Hillgrove is well placed to benefit from a strong A dollar copper price and the opportunity to fill the investment void and to build on our genuine mid-tier ASX-listed copper producer. We have made some good progress in the last 6 months since commercial production was declared, and we will continue to focus on achieving safe and reliable and predictable copper production from Kanmantoo. Thanks again for everyone for taking the time today, and we look forward to continuing to talk to you and updating you in months and quarters ahead.