IGO Limited (IGO) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the IGO Limited FY '20 Financial Results Investor Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.

Thank you, Ben. Good morning, everyone, and thank you for joining our call this morning as we present our audited financial results for the 2020 financial year, which were released to the ASX this morning. You will recall that we released our unaudited financial results a few weeks ago as part of our June quarter results. Given that there are no material differences between those and today's audited results, I intend to speak briefly to the results and spend more time discussing our strategy and our outlook for the 2021 financial year. Joining me on the call today is Scott Steinkrug, our Chief Financial Officer, who will be available to answer questions during the Q&A session at the end of the call. Moving to Slide 2. Slides 2 and 3 highlight our cautionary statement and disclaimer and competent person's statements. Of note, all currency amounts in the presentation today are in Australian dollars unless otherwise noted. Moving to Slide 4. To kick off, I will make a few comments about our most valuable asset, our people. Most of us had never experienced a year like 2020 or the ongoing impact that the COVID-19 pandemic continues to have on our lives, communities and how we work. Based on what we know today, we have to expect that this will be the case for some time to come. While restrictions have eased somewhat here in Western Australia, we do retain a high level of vigilance and preparedness to respond to COVID-19 in order to protect the well-being of our people, safeguard our host communities and ensure business continuity. Elsewhere, I am pleased with the high levels of engagement our people continue to have with the business and the progress that is being made to improve our safety performance. I am incredibly proud of the way our people have adapted during 2020 and for the continued high level of care and support that they all demonstrate for each other. Individually and collectively, our people are making a difference. Moving to Slide 5. Across the globe, during the COVID-19 pandemic, we have witnessed less industrial activity, less power generation and less traffic, although the latter has returned with a vengeance here in Perth. The net effect was a reduction in emissions. This glimpse of clean energy or clean air and the prospect for a better planet has reinvigorated calls for greater decarbonization through increased use of renewable energy and the electrification of transport. And already, we have seen significant government stimulus directed to new renewable energy generation infrastructure. This is at the heart of our purpose and our strategic focus. Strategically, we are focused on metals required to enable a green energy future, and our aspiration is to become a globally relevant supplier of those metals, which are critical to enabling increased renewable energy generation, increased use of grid scale energy storage and the electrification of transport. We also aspire to do this while also making a difference to how it is done: by producing high-quality products desired by our customers and by being safe, ethical, sustainable, efficient and reliable. We also aspire to be proactively green. Finally, we want to be more than miners to go downstream to convert our raw materials into the specialty metal products required for clean energy. Underpinning all of this are our people. Our people are the key enabler to our success, and we have a team who are bold, passionate, fearless and fun, a smarter, kinder, more innovative team. This is how we will generate returns for all stakeholders and how we, at IGO, will make a difference. Moving to Slide 6, where we set out some of the highlights from the 2020 financial year. As discussed in the June quarterly results presentation, operational performance from Nova and Tropicana was consistently strong throughout the year. Nova ended the year ahead of production guidance for all metals, while our Tropicana production was within the guided range. Despite some swings in commodity prices over the year, this consistent operational performance at Nova and Tropicana combined to deliver a strong set of financial results. Let me talk through the key numbers. Record group revenue and other income of $892 million, record underlying free cash flow of $311 million and record net profit after tax of $155 million. These great financial results have delivered a stronger balance sheet, which I will talk to further on the next slide. Moving to Slide 7, where we highlight the sustained improvement in key financial metrics over the last 5 years. The step change in our key financial metrics for the 2020 financial year, including a more than doubling of the net profit after tax year-on-year were the result of a number of factors. These included higher metal sales year-on-year from Nova, together with higher average nickel prices, higher gold prices, offset partially by lower gold sales year-on-year from Tropicana and mark-to-market gains on our strategic investments in listed companies, which resulted in a contribution to net profit after tax of $33 million compared to a $7 million mark-to-market loss in the 2019 financial year. As a result of the continuing free cash flow generation through the year, our net cash position grew by 72% to a record $453 million, providing us with a strong platform to maintain our operations, deliver cash returns for shareholders and fund our growth ambitions. This is in addition to the $108 million of strategic investments in listed companies as at the 30th of June 2020. Moving to Slide 8, where we show the movement in cash over the course of the year in greater detail. As expected, Nova and Tropicana were the key drivers for the increase in cash. Continued investments in exploration and evaluation as well as strategic investments equated to cash outflows of $65 million, $9 million and $56 million, respectively. Total dividend payments in the 2020 financial year equated to $83 million, which is comprised of our $0.08 per share final dividend declared for the 2019 financial year, which was paid in September 2019, and our $0.06 per share interim dividend with respect to the 2020 financial year, which was paid in February 2020. Moving to Slide 9, speaking of dividends. On the back of the strong performance in the 2020 financial year, the Board has declared a $0.05 per share unfranked final dividend for FY '20, which will be paid on the 25th of September 2020. This final dividend will bring total dividend payments in respect of the 2020 financial year to $65 million, a 10% increase relative to the previous financial year. The $65 million of dividends in respect to 2020 financial year represents approximately 23% of our free cash flow for the 2020 financial year, which is in line with our capital management framework. Turning to Slide 10, where we outline IGO's capital management framework, which was adopted by the Board in January 2019. As detailed, this framework contemplates the allocation of group free cash flows into 3 core areas: firstly, 15% to 25% of free cash flow is allocated to exploration and discovery to fund the long-term organic growth of the business; second, an equal amount, 15% to 25% of free cash flow is allocated to cash returns to shareholders; for the 2020 financial year, the $65 million that will be returned to shareholders as dividends represents 23% of our 2020 free cash flow and is aligned to the $65 million spent on exploration during the year. Our capital management framework considers cash returns to shareholders in the form of both dividends and share buybacks. The remaining free cash flow is retained on the balance sheet, providing the capital to sustain and optimize the business as well as to invest in disciplined M&A to deliver growth in the near to medium term. The capital management framework is due for review in January 2021, and the outcome of that review is expected to be announced as part of the 2021 half year results. Moving to Slide 11 and a short discussion on the highlights from our operating activities. As mentioned earlier, Nova delivered a strong result for the 2020 financial year with production ahead of the top end of guidance for all metals and cash costs within our guidance range as set out on this slide. This was a great outcome by the Nova team. Importantly, Nova's margins continued to impress with a free cash flow margin of 54% and an EBITDA margin of 59%, both of which are improvements relative to the prior financial year. Moving to Slide 12, where we illustrate the consistency of the Nova operation through the course of the year on the left-hand chart and the increasing improvement in financial performance from Nova over the 3 years of commercial production to date on the right-hand chart. This has delivered in the 2020 financial year record revenue, record underlying EBITDA, record operating cash flow and record underlying free cash flow from the Nova operation. The consistent improvement across all key measures is testament to both the quality of the asset and our outstanding team at Nova. Moving to Slide 13, where we again set out our guidance for Nova for the 2021 financial year as well as directional guidance through to FY '23. Because we discussed this in detail during the June quarterly, I do not propose to spend time on this slide. I do, however, note that the 2021 financial year guidance is broadly consistent with our FY '20 guidance thereafter. And in accordance with our long-term plans, production is guided to stabilize at a lower rate in FY '22 and FY '23, as we transition into mining and processing run-of-mine grades that are more consistent with the average reserve grade at Nova. Turning to Slide 14. Tropicana continues to be a solid performer with 2020 financial year production and all-in sustaining costs within guidance. This, together with strong gold prices through the year, resulted in EBITDA margins of 60%. Importantly, the development of the Boston Shaker underground mine was progressed on time and on budget, and we expect commercial production to be achieved during this September quarter. We look forward to updating the market on this important milestone in the near future. Moving to Slide 15, where, on the left-hand chart, we set out the Tropicana production and cost metrics for the 2020 financial year on a quarter-by-quarter basis. Of note, production was lower and costs were higher in the second half of the year as we commenced supplementing process plant feed with lower grade stockpiled ore as we transitioned into and progressed a series of open pit and underground investments to unlock future ore sources. Despite this year of 2 halves, financial performance from Tropicana was consistent with the prior year. On the right-hand chart, we highlight the higher year-on-year financial metrics with record revenue, underlying EBITDA and underlying -- and operating cash flow. I also note that underlying free cash flow of $85 million, without the investment in Boston Shaker through the year, would have also been higher year-on-year and would have also been a record result. Moving to Slide 16. As discussed in the June quarterly results materials and as highlighted on the previous slide, we will be supplementing the process plant feed at Tropicana with lower grade stockpiles during the 2021 financial year as we ramp up the Boston Shaker open pit and underground mines and progress a cutback for the Havana pit in accordance with our long-term mine plans. These activities have been planned for some time and will benefit future year gold production. However, as we invest in the Havana cutback in the 2021 financial year, the dependence on low-grade stockpiles will result in gold production of between 380,000 and 430,000 ounces on a 100% basis. The lower gold production will have a knock-on impact on all-in sustaining costs per ounce for the year, which are further exacerbated by the commencement of underground mining, which results in a consequent increase in total site expenditure. In addition, historical costs of mining the low-grade stockpiles will be transferred from the balance sheet to the P&L. The noncash impact of this in the 2021 financial year is about $120 per ounce, which creates an approximate $270 per ounce year-on-year swing in all-in sustaining costs. This is because we had a net increase in stockpiles in the 2020 financial year and expect a net decrease in stockpiles in the 2021 financial year. Looking beyond FY '21, we expect the Boston Shaker underground to make an increasing contribution and for all production to recommence from the Havana pit, resulting in gold production being back to the 450,000 to 500,000 ounce per year range by the 2022 financial year. All-in sustaining costs are also expected to progressively decrease. Turning to Slide 17, where I will shift gears to discuss our growth strategy. As discussed on the earlier slide, our conviction for metals critical to enabling a green energy future remains strong. Although many metals are important enablers to renewable energy generation, energy storage and the electrification of transport, our commodity focus remains primarily on nickel and copper. We also have an appetite to consider select opportunities in the lithium and rare earths space. We are pursuing multiple pathways to grow the business. These include disciplined M&A to grow the business inorganically in the short to medium term, downstream opportunities to grow the business organically in the medium term and exploration and discovery to grow the business organically in the long term. Key criteria for all of our growth options are scale, quality, risk profile and ESG credentials. Most importantly, we have a laser focus on continuing to deliver strong returns to our shareholders as we grow the business. We progressed a number of inorganic growth opportunities during the 2020 financial year, and this work continues with a focus on both development stage or operating assets that have the potential to deliver near-term earnings and shareholder returns. In addition, and in an alignment with our strategic imperative to be vertically integrated, we continue to assess and develop opportunities to convert our quality nickel sulfide concentrates into the metal compounds required for the electric vehicle battery industry. This is an evolving opportunity, which we continue to progress in partnership with potential offshore partners. Turning to Slide 18. Exploration and discovery had the potential to transform the business. And over the last few years to load the dice, we have focused on identifying the geological terrains, which has the potential to deliver multiple discoveries. Then through a process of ground pegging and joint venture deals, we have consolidated land positions on these belts. In parallel, we have built a best-in-class team with a focus on the key geoscience skills, experience and capability to drive discovery. And importantly, we have backed our team with the funding necessary. In line with this commitment, we have allocated $65 million to exploration in the 2021 financial year, the majority of which will be spent on drilling near Nova and on the Fraser range. On the Fraser range and around Nova, we have largely completed the regional geochemical and geophysical assessment of the Fraser Range to generate targets and have transitioned into a drilling phase to test these targets. The 2021 financial year promises to be an exciting year for IGO as we continue to unlock the unrealized potential of the Fraser Range. Turning to Slide 19, where we set out IGO's balanced portfolio of belt-scale nickel and copper projects primarily located in the western half of Australia. Our focus is on high-value projects that have the potential for scale. Therefore, our portfolio is comprised of terranes prospective for magmatic nickel copper sulfides and sedimentary-hosted copper. An area of increasing activity for IGO is our expanded Paterson project in Western Australia, where we are targeting Tier 1 copper discoveries in an area which has proven prospectivity to host large minable systems. We have been in the Paterson since 2018 and have successfully tested a number of new methodologies. This success has motivated recent joint ventures to consolidate a larger land holding in this highly prospective terrane, while balancing the IGO portfolio with additional copper exposure. Moving to Slide 20. Ladies and gentlemen, we have delivered a great operating and financial result for the 2020 financial year. For this, I thank the many men and women at IGO, both direct employees and contractors who have contributed to this outcome. Before we open the line to questions, I wanted to finish with a short summary of our focus for the 2021 financial year. Fundamentally, we aim to deliver value for all of our stakeholders, and we will do this via 3 key areas: continued focus on our people to manage the well-being implications of COVID-19, improved safety performance and further strengthen culture; accelerating growth through our continued parallel focus on growing the business through discovery and disciplined M&A; and operational excellence and business improvement to deliver value by being better and by leveraging technology to operate more efficiently, sustainably and safely. Thank you for joining us on the call this morning. We will now open the call for questions. Thank you, Ben, if you can lead us through this.

[Operator Instructions] Your first question comes from Rahul Anand from Morgan Stanley, Australia.

Look, the first question is really around the growth strategy. If we think about the sort of inorganic growth strategy that you've talked about in terms of green energy metals. If you could touch a bit more on that, perhaps from the viewpoint of whether you want majority in these potential opportunities and be an operator? And how should we view your recent New Century shareholding really, how you're thinking about that?

Yes, sure. Great question. We covered off a number of the metrics that are important to us on the slide. And obviously, there's a [ vanille ] below that, that we also look at. One aspect is control and specifically management control. And I would think that relative to many of our peers, we would probably have a more relaxed perspective on that. We do desire to greater control and certainly to manage, but we have demonstrated an outstanding relationship with Tropicana and AGA over many years, and that, therefore, gives us the comfort that we would be able to effectively manage such an arrangement again in the future. As for New Century, we continue to hold the shares there. We acquired the shares as part of a -- effectively an option payment to have a look at potential due diligence on the Goro acquisition. We decided that wasn't our cup of tea, and we no longer have an interest in that particular asset.

Okay. Excellent. And I guess the second one is more around Tropicana. So if you could just remind us, how does that fit into the strategy? And does it still? And if divestment was perhaps on the cards, wouldn't now be a good time for that?

Yes. This is another great question, but certainly a recurring question. And in the past, I've tended to answer this by saying that by talking out of both sides of my mouth, if you like, and saying that although Tropicana is not aligned with strategy, it's still core to the portfolio, simply because of the high-quality nature of the asset and the outstanding free cash flows that it still delivers to IGO. Certainly, the level of external interest in that asset, at least higher gold prices has gone up, and we have been batting back a number of unsolicited incoming calls. But at this stage, the Board has not taken any view on Tropicana.

Okay. So there's -- is there any sort of, I guess, order of preference here in terms of potentially first being able to find that inorganic growth and then potentially considering a divestment? Or are they both independent of each other?

They could go either way, Rahul. It could be independent of each other or it could be a significant inorganic opportunity, could be a catalyst to contemplate a process.

Your next question comes from Levi Spry from JPMorgan.

Just on Slide 16 and back to the Tropicana costs. Can you just confirm that in '22 and '23, there are no cash costs running through that all-in sustaining costs?

Say that again?

So in the FY '22 and '23, all-in sustaining cost guidance of $1,400, is there a noncash component to that cost?

Yes, there is a continuing noncash element, because we would be continuing to put to -- to utilize stockpile material into the process plant.

Yes. Can you tell me what it is? So I think you gave us $120 for FY '21. What is it longer term? And what does the cost profile look like at Tropicana longer term?

It certainly starts to shrink in FY '22 and FY '23. And so I think in the June quarterly conference call, we talked about [ 4 and a bit ] million tonnes of low-grade stockpiles is utilized in FY '21, and then we see that dropping progressively. FY '22 is going to be order of magnitude, 1.5 million tonnes. And FY '23, approximately 1.2 million, 1.3 million tonnes.

Okay. All right. That helps. And just in terms of -- so Tropicana, 3 million ounce reserves, 7 million ounce resource. I kind of still feel like there's a lot of optionality here that's not valued.

Absolutely. And to go back -- absolutely. And to go back to the previous question from Rahul, the sort of Venn diagram for Tropicana and what we do with it strategically going forward. One part of that Venn diagram is the really high levels for gold prices at the moment, which would be an incentive to potentially consider something. The second part of the Venn diagram is really understanding our value at Tropicana, and we're only just in the process of bringing the first underground mine into commercial production. We envisage a future where they could be 2, 3 or more underground mines at Tropicana, and that could result in stronger production for longer from that asset. In addition, we continue to explore regionally in the area around Tropicana and have turned up the dial on that exploration in the 2020 calendar year. And again, that could deliver further opportunity. So it's -- the 2 of those pull us strategically in different directions.

Yes. So maybe just to round that off, could you just step me through what work is ongoing in terms of unlocking the rest of that resource over the next 12 or so months between you and Anglo? So when are the other underground studies due? Are you considering a high gold price sort of scenario?

Yes, sure. Yes. So the 2 key studies that are underway at the moment or 2 work programs are Tropicana underground. And to progress that, we have been running a spur, a decline spur off the Boston Shaker decline, which creates an exploration drill program to cost effectively drill off those potential resources underneath the Tropicana pit. That decline is progressing, and we expect to do the bulk of the drilling in the December quarter, and then that will allow us to progress our studies in -- and the decision to go ahead or not in calendar '21. If we do decide to go ahead, the fact that we have exploration decline in place potentially shortens the lead time between decision and reality. In parallel with that, there's work ongoing with the Havana pit, and we've been informing that with our deeper drilling from surface. The key part -- the first part of that work program is trying to work through the trade-off studies to work out how deep the open pit would go versus when exactly we start the underground. Those trade-off studies are nearing completion, and that will then inform the more detailed feasibility studies. And again, we would expect those to be well progressed by calendar '21.

Your next question comes from Daniel Morgan from UBS.

My question is on the M&A side of the strategy. On Slide 20, you do put down transformational M&A. Just wondering if you could spell out the scale of opportunities you might be looking at. That sounds like large opportunities relative to the company in consideration.

Yes. I think an earlier version of that slide was probably a little bit more holistic, because it talked to sort of bolt-on M&A and transformative, and I think we run out of character spaces to fit it in the box. But the reality is we look broadly across the opportunity set, particularly in the nickel and copper space. And for something that's in our own backyard, as evidenced by our approach to Panoramic last year, we are prepared to consider bolt-on opportunities. And in parallel, we continue to look for those transformative opportunities, akin to what Nova was to the company back in 2015 that then could drive significant value for shareholders going forward.

And you did call out the downstream nickel opportunity as still part of the strategy, and it sounds like there's an ongoing commitment to the nickel sulfate project. I'm just wondering how you're thinking about getting feed for that, how you might monetize that asset. What is your edge here in this industry relative to other potential competitors?

Yes, it's where we landed when we did the pre-feasibility study for a nickel sulfide -- sulfate project here in Western Australia. The 2 challenges were around the cost of -- the capital and operating costs of doing that business here as well as the sort of mine life that we would need to demonstrate from Nova to be able to do that on a standalone basis. We've then taken that work. And as a result of inbound interest from offshore third parties, we have been, together with offshore party progressing a new pre-feasibility study, which would contemplate our participation in a project and potentially in a minority form, which would then give ourselves the exposure and leverage some of the work we've done to date, while extracting more value potentially from our nickel sulfide concentrates. And then because it's done in a relationship or a collaboration with other parties, then there's not a singular focus on what the mine life for Nova is today. If we deliver more mine life in the future, that's additive to that project. Otherwise, the partners would look to buy more nickel sulfide concentrate from elsewhere. The work in process, and certainly, the capital and operating costs offshore are -- look far more interesting than what we saw in Western Australia.

Okay. And the -- you've called out rare earth as something that might be considered. Is there anything in your tenement portfolio that is in rare earth? Or is there something that might be a JV with people who already have tenements?

Yes. The rare earths crop up everywhere. And we do know that on the Albany Fraser origin, there are rare earth deposits held by others and currently private companies. And so therefore, there is that opportunity, while we're exploring for nickel copper sulfides to potentially also be exploring for the likes of rare earths, but also copper VMS type deposits as well. I also note that on the Fraser Range, we have a number of gold targets, so it's a bona fide jewelry box of opportunities.

Your next question comes from Sophie Spartalis from Bank of America.

Peter, just wanted to further explore some of the questions that have already been asked, just in terms of this transformative M&A that you were talking about. I know that you addressed it in Dan's question. But I guess for me, Nova was pretty much betting the…

So the line for Sophie has dropped off. We will just move to our next question, Alex Wallis from Polymer Capital.

Congrats on the results. I just wanted to speak to Slide 10 quickly. I've said this to you guys before, you do a wonderful job of putting cash on the balance sheet a lot better than some of your peers. But unfortunately, you seem to also do a pretty good job of spending it. I just wanted to get some insight from you as to how you ended up at the final dividend. I note you had a little bit of extra room to go to the top of that free cash flow yield payout range. Just wondering why you didn't take that to the top end, given where cash is and whether we can elaborate a little bit more on the options that are being considered at this stage in January 2021. I assume that it's come up at Board meetings. Is it buyback related? Would you look at on-market buybacks versus off-market buybacks? Where do you sit with special dividends?

Yes. Yes, certainly. And in coming to a landing on that final dividend, the Board looked at a range of alternatives, and we ended up soaring off at the $65 million total dividend for the year, which what was the $0.05 final and representing 23% of free cash flow. And we also saw that as being aligned with the commitment we've made to exploration during the year. So we looked right across the range, whether it be from the bottom end, 15%, which I think people would have sticker shock if we came out with a $0.01 final dividend at the bottom end of the range. And we also looked at the top end of the range, which would have been a $0.06 final dividend, delivering an overall 25%. Against the balance of the discussion, we ended up at the $0.05.

Yes. And just on the comment you made there, the 2021 policy review. Can you give us some foresight as to what might be being considered at the moment?

Yes. When we put the 2019 policy in place, that was -- we put a time line on that of 2 years, because we could see, based on our projections that cash would build quickly on the balance sheet. And very quickly, we would be at the sort of $500 million to $600 million range. And if we didn't have a use of proceeds for that cash, then we would need to revisit the capital allocation formula. And so as we go into January 2021, the discussions are going to be underpinned by where we are in the journey to either make the next discovery and therefore, have a need for use of proceeds off the balance sheet to build the next project or where we are in the journey to identify the next inorganic opportunity, which would again have our use of proceeds. So although we're at the very early stages of formulating that policy, at the moment, it's got a number of bookends attached to it, depending on what happens between now and January.

Your next question is the one from Sophie Spartalis from Bank of America.

Sorry about that. I'm not sure what happened there. But just wanted to -- just in terms of the balance sheet then and this whole policy review that's expected in '21, what type of cash buffer does IGO want to hold going forward, just given that you've got a number of aspirations to grow organically and inorganically?

Yes. We -- the original policy was conceived to generate a cash balance of $500 million to $600 million, which we saw as the level of balance sheet capacity that would be need to respond nimbly to both organic and inorganic opportunities. And then the rework of the policy that we were doing in 2021 would be to come up with a formula that, in the absence of any use of proceeds, allows us to maintain the balance sheet at a certain level, while increasing cash returns to shareholders. So instead of continuing on an upwards trajectory with the cash on the balance sheet, we would level that off.

Okay. All right. And then just in terms of exploration, the spend seems to be driven by a top-down approach rather than bottom up, just given the whole allocation of free cash flow, as we've sort of spoken about in today's call. Just questioning how you see IGO delivering the appropriate returns based on this strategy?

Yes, sure. The -- our budgeting for exploration is a combination of bottom up and top down. And going into each budget year, we get our exploration people to come up with a number of bookends for their budgets. And I can assure you that the top book end of that bottom-up budget is a lot higher than $65 million there. There's an accelerated level of activity the guys would like to do, but we have to consider, at a Board level, what's sustainable and what level of expenditure we can efficiently and effectively manage, which brought us back to the $65 million level, which is aligned with the cash allocation policy that we put in place in January '21.

Okay. So would we expect to see…

And with the projects we've got, we stack them up. So right now today, the focus from a dollars point of view is on the Fraser Range and Nova, with much less focus at the other end of the bookend on places like Copper Coast and Raptor. There, we're progressing the projects, but it's very low expenditures, and we're also leveraging some government funding in future years. We would potentially see some of those other projects starting to attract more of the dollars as we reach a level of maturity with our exploration on the Fraser Range.

Okay. But we would probably come to expect this level of spending going forward beyond '21?

Assuming our overall free cash flow for the group stays at the same sort of levels.

Okay. And then just in terms of the downstream strategy, thanks for the additional color there. You talked earlier that you had no interest in Goro. I'm assuming that as a direct investment, but does the opportunity still hold to potentially put that feed through the downstream unit?

Like with a downstream project, you could have 2 sources of feed. You could have nickel sulfide concentrate or you could also put MHP-type products, which could commonly come from a HPAL like Goro. You could also put those into a nickel sulfate plant.

Okay. And then just going back to, I think it was Dan's question around the transformative M&A. So is the Board willing to bet the farm like it did back when it bought Sirius in 2015?

Well, what the opportunity the Board saw with Nova was a project that met all of our metrics, delivered our bump in scale relative to the Venn portfolio, and it delivered a high-quality asset. And the results that we put out for the 2020 financial year are testament to that sort of scale and quality that the Board envisaged back when we made the decision. And I wouldn't call it betting the farm, it was a determined and well thought out plan that has been delivered. And we would approach other future inorganic growth the same way. We will look for that transformative scale, and we'd look for that same sort of high-quality project that is able to deliver returns at every stage of the commodity price cycle.

Okay. And then just a quick one for Scott, if I can. Just in terms of the tax rate, it seems to be a little bit lower in '20. Is there any guidance for '21?

Sorry, Sophie, the cash, what did you say?

The tax rate, the effective tax rate?

Oh, the tax rate, the effective tax rate. Look, the effective tax rate will be steady year-on-year. However, we will see continuing utilization of our carryforward tax losses, if that's where you're heading as well. So it's entirely possible that within the next 12, 18 months, we'll start making our first tax payment in a long time. But effective tax rate should be fairly steady.

Your next question comes from Nick Herbert from Crédit Suisse.

Just a couple on strategy for me as well, please. The downstream that you've talked to, do you mind just giving a bit more detail around that in terms of timing? You mentioned medium term. Just keen to sort of understand what medium term means on a timing sense. So when might you also be in a position to provide us with some more detail around what a project there could look like? And then I've got one follow up after that.

Yes. So it's 2 stages, like it's an assessment. And then if that proved attractive, then there'd be an investment decision and then there'll be a build period. So delivery of a downstream product would be in the medium term, but subject to assessments, a decision could be near term. The caveat to that is that COVID-19 pandemic has thrown a spanner in the works for anything outside our bubble here in WA. So some of the workflows we have been doing on the downstream have been significantly delayed by COVID-19, and I would expect would continue to be delayed.

Okay. Sure. So I mean, just to help us a bit more on timing. If there was no COVID this year, would you have got to a decision this year in terms of the work that you had planned?

[indiscernible]

Just trying to get a sense of -- you would? Okay. And then the other one, just the comment that you're also potentially interested in lithium. Could you just expand on that as well, please? Just what you're thinking there, if that is greenfield development type opportunity or M&A? And then if M&A, just how you're thinking about those opportunities in the current climate, given where the lithium industry is finding itself in at the moment?

Yes, sure. Yes, great question. So if I ask -- if you had to ask me the same question 2, 3 years ago, we would have just responded on the organic sort of aspect. And for the last couple of years, we've been doing the early work to understand what makes great lithium projects. And we've gone out there to do the work, study the deposits and then start doing some of the -- some real exploration work to find the -- to try and identify the terranes that would deliver those great lithium projects of the future and to use a bit of science in that. And we continue that work today. At that time, 2, 3 years ago, we thought the whole lithium market was frothy. And time and time again, we said we had no interest in M&A in the lithium sector. But the tables have turned. Lithium has been in the doldrums. We've seen a significant devaluation of lithium assets, but we believe the future for lithium remains very strong. And I talked to the whole green energy thematic and our conviction around that. And underpinning all that is going to -- a key enabler is going to be more and more lithium supply. So we will be constructive around potential lithium inorganic opportunities in parallel to the work we're doing on the exploration side.

Your next question comes from Martin Kronborg from Torq Capital Management.

It's a simple question, but it's probably not the simple answer. So you've just delivered record results, and yet your share price is year-to-date lows, while nickel prices and gold prices are year-to-date highs. I'm just trying to understand, what do you think has gone wrong? Do your shareholders perhaps not believe your growth strategy will generate value? And why are you so confident that it will?

Yes. The -- look, if we look back at the market performance since the -- since we provided our guidance for FY '21, back with the June quarterly results, the share price has drifted lower on the back of lower expected gold production for Tropicana for FY '21 and for the expectation for higher all-in sustaining costs. But if you think about the value destruction from a market capitalization point of view, that seems disproportionate relative to that 1 year hit to gold production and all-in sustaining costs in an investment year when we're doing a cutback. And the reality is, we bounced back very quickly in FY '22 and FY '23 with higher production and lower all-in sustaining costs. And that bounce back, I believe, is currently being ignored in the current market capitalization. So the opportunity for me, opportunity for IGO and its investors is to better understand what that profile for Tropicana looks like going forward and get that value for Tropicana back into the market capitalization.

So you think it's a misunderstanding of the guidance you gave on Tropicana on cost rather than anything larger, larger than M&A?

I think people understand the guidance. I think there's a risk there that the cookie-cutter approach has been applied from FY '21 to future periods. And that's the only way to explain the delta or the market cap destruction we've seen subsequent to that June quarterly results.

Okay. I mean there's been a few questions on the call about shareholder returns. And I think there is some tension, at least among shareholders, about M&A versus buybacks, and you have shared the year-to-date lows. Why would you not be buying shares now?

Again, that's a discussion we continue to have with the Board, and we'll continue to do so. At the moment, our focus has been doing the work to make sure the market is better informed, fully informed on the future profile for Tropicana. And we see the upcoming announcement of the Boston Shaker commercial production to be a great catalyst to provide the next layer of detail around that -- our Tropicana guidance going forward and the palpable opportunity that exists to add more value at Tropicana.

Okay. I mean I'm assuming management would agree that the share prices are currently undervalued relative to where commodity prices sit, right? If we were to suggest that it would be ideal if you're more aligned with shareholders by management and Board, probably taking larger positions in the stock. Do you think that's unreasonable? And why is there so little management shareholding or Board shareholding?

Yes. The Management Board continue to buy shares. We do have a policy where all directors are required to acquire the equivalent of a -- or encouraged to acquire the equivalent of a year's remuneration. I, as CEO, have been a perennial buyer of stock since I joined the company, and I would expect to continue to do so.

But -- so they're encouraged to do it, but they don't appear to be doing it. So where is the misunderstanding on the value proposition?

I don't believe there's a misunderstanding on the value proposition and -- but -- and I don't think we'll be able to come to a landing on that on the call. And in the interest of time, potentially, we should move on to the next set of questions.

Your next question comes from Peter O'Connor from Shaw and Partners.

A range of questions. Some of them just short list of answers. Firstly, an observation, which goes to the last question. Nickel equities peaked since late June and July have underperformed the Aussie dollar nickel price, so it's not a Tropicana per se, in my opinion, again [ just based on my ] existing observation. My questions are as follows. You mentioned offshore CapEx, OpEx was lower for the downstream plant. Does that imply China is the source of that lower CapEx, OpEx?

We've looked at a number of jurisdictions, Southeast Asia and China and all with lower sort of CapEx, OpEx profile than what we have here in Western Australia.

And then you mentioned the life of mine of Nova was potentially the impediment when you were doing the study for yourselves. Does that suggest lessening of confidence in the region and Nova in terms of life of mine?

No, no. It's really about timing. So if we made a decision on a nickel sulfate plant in Western Australia last year, we then would have had a process of permitting and building, which could have taken anything up to 3 years and which would have then taken us through to about FY '22, FY '23. We would have then had to make that decision to spend that CapEx based solely on the reserves we had at Nova on that day. And although we -- and those reserves weren't enough to deliver the -- to recoup the capital investment. And although we believe strongly in the upside at Nova and that we will deliver demonstrable extension of mine life, we can't bank that belief into a capital investment decision.

So next question, is that where Goro fitted in the MHP product being a dovetailing with that 3-year period, 4-year period?

That would have been -- the primary goal would have been the asset itself. And from the outside looking in, this is a significant source, significant scale of nickel and cobalt, potentially 40,000 tonnes a year of nickel, 3,000 tonne a year of cobalt. And for an incredible mine life, your grandchildren and my grandchildren could still be working on it. And so that was attractive. What was unattractive was the historical cost profile. And it was -- and our decision to step out of the process was related to costs. We perennially talk about high-quality assets. Tropicana and Nova are high-quality assets with high free cash flow and EBITDA margins, and we just struggled to see how Goro could become the same style of asset.

So given the option that you've bought with -- an investment in NCZ, does that mean you still had a marketing offtake as part of that option?

I'm not able to answer that question at this stage, Peter.

Okay. And well then just moving on from that one, is NCZ a keeper or asset for sale?

I'm not able to answer that question, Peter.

My last one is the balance sheet comments you made about the capital -- current capital allocation strategy. And you've mapped out this $500 million to $600 million build over the 2 years which you've done, and you said that was needed to fund and make you able to nimbly approach acquisitions if they came up opportunities. Is that still the right number? So do we think of it as you maintain $500 million to $600 million cash balance and then you give back what's above that? Is that broadly how you're thinking?

Yes, it's really going to depend on line of sight to use of proceeds for cash. And as we go into that review of the capital allocation framework, we'll be thinking about what level of cash we should be holding on the balance sheet. We'll also be considering what that then implies for immediate returns to shareholders and enduring returns to shareholders. The next 4, 5 months is all about developing that framework, and then the Board will review it and make a decision in January 2021.

Thank you. As there are no further questions, I will now hand the conference back to Mr. Bradford for any closing remarks.

Thanks, Ben. Ladies and gentlemen, once again, we appreciate your participation through the presentation and Q&A, and we look forward to engaging with you again soon. Stay safe, and have a good day.

And that does conclude our conference for today. Thank you for participating. You may now disconnect.