Mastermyne Group Limited (MYE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Metarock Group Limited FY 2022 Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Tony Caruso, Managing Director and CEO. Please go ahead.

Good morning, and thank you for joining Metarock's Financial Year '22 Full-Year Results Call. I'd just like to start by acknowledging 2 of our colleagues, Graham Dawson and Gavin Feltwell who lost their lives this year working in our operations. These accidents were tragic and have deeply impacted families, work colleagues and our business irreversibly. We continue to support their families and all those impacted by these tragic events. This year has been one of the -- one of high-highs and low-lows, but I would like to make special mention of all the team here at Metarock, who have worked together as we've navigated through what has been one of the most difficult years the business has faced. While I'm not dismissing the enormity of the 2 events, we're very proud and pleased with the transformational year we have delivered despite all that's occurred over the last 12 months. We repositioned the business as a leading mining services contractor specializing in providing an extensive suite of underground services across a broad range of commodities. And this year starts the significant scaling up of the business, where this year alone, we've nearly doubled our FY '21 revenue and our order book has us on track to nearly tripling our revenue in FY '23 compared to where we were in FY '21. We remain focused on delivering our Mine Operations strategy, and we strongly believe that this is the right strategy to a more resilient business, delivering increased margins and longer tenure in our order book. Partnering with our clients through this contracting model is increasing our value proposition and significantly positions us as a very specialized and unique contracting organization. Whilst we've had some setbacks with the roof fall on the Crinum project, we now have good visibility to cutting coal on this project. However, we have taken the decision to slow the project to minimize costs and allow us to improve our cash flow position in FY '23 and importantly, also to deleverage our balance sheet. And we'll use this time now to finalize the installation of the life of mine infrastructure and finalize our operational readiness to be ready to start cutting coal in late FY '23 or early FY '24. As part of a slowdown, some labor and equipment will be redeployed to other Mastermyne sites and the full ramp-up at Crinum will recommence again in late FY '23. Importantly, the revenue and margins from this contract remain intact, but just push out into FY '24, and the contract term will remain at the full 6 years. The Cook project is progressing well, and we continue to ramp up as per schedule in the first half of the current financial year. And this project will now also benefit from the redeployment of the equipment and labor that's been displaced from the Crinum project. During the year, we also completed the acquisition of PYBAR Mining Services, which has delivered a material entry into the hard rock sector, bringing Metarock's exposure to a broad range of commodities in a much larger addressable market. The acquisition brought with it a large skilled underground workforce and a large fleet of modern mining equipment. Whilst the first 8 months have been impacted by some operational events and cost impacts, we're still very confident this acquisition will strategically complement the coal business and deliver diversification and strong results over the long term as evidenced by more recent month-on-month improvement in that business. Alongside our strategic growth, we've continued to very successfully operate the coal contracting business and again, this year has delivered a really strong result. We continue to maintain a large market share in the underground coal contracting space, and the acquisition of Wilsons Mining Services 3 years ago has been an excellent contributor to the FY '22 result. We maintain a very strong support from our clients. And with the recent coal prices at record highs, we've seen the demand for services in this part of the business continue to increase with several projects now in late stages of -- several new projects in late stages of negotiation. In delivering the strategy, that will see the business grow to almost tripling in size from where we started, we've invested significantly -- we've invested significant capital largely funded from our own balance sheet. As we now move into more of the execution phase of that strategy, we'll start to see stronger cash generation and a reduction of debt. The full-year result was within the guidance range on a normalized basis, and the normalization is primarily the costs that had been incurred in the remediation of the roof collapse at Crinum. And we have legal advice that these costs are recoverable under the contract. Following the acquisition of PYBAR, we've also worked closely with our bankers to restructure our facilities across the combined Metarock Group, and I'm pleased to say we've continued to be very well supported through a range of facilities that will allow us to execute our strategy and generate strong shareholder returns in the near term. Now just turning to Slide 3 of the pack. I've talked to the profound impact the 2 accidents have had on the business and our internal investigations are now complete, with the actions and learnings well embedded -- are now being well embedded across our business. External investigations are now largely complete, and we work closely with all parties over the course of these investigations. But to date, there's been no information released on the outcomes of the internal investigations. In parallel to those investigations, but at the time, completely separate to the investigations, the Board commissioned an internal review focusing on the company's approach to health and safety with an emphasis on major risk management. The review validated a lot of the very good work that the company does in the area of health and safety and risk management, and it also went on to call out a number of other positives across our business. The review identified a number of recommendations for improvement and these are -- have been adopted and will be actioned across the business. Throughout this very difficult time, our clients have been tremendously supportive and continue to support our business post the accidents. We will stay close to them and work with them as we implement the recommendations from the reviews and the investigations. To talk through the group financial highlights, I'll hand over to Brett.

Thank you, Tony. I'll step through the financial highlights on Slide 4 and then through our CapEx, gearing and acquisition payments for diversification and growth. So pleasingly, our revenue was in line within guidance range and up by 94% from the previous corresponding period at just below $453 million and resulted in EBITDA -- a normalized EBITDA of $38.6 million. And as Tony mentioned previously, the normalization, and I'll discuss on the next slide, is primarily around the Crinum incident costs, but also the one-off costs related to the PYBAR acquisition and the additional safety incident costs involved, legal costs, et cetera. That $38.6 million normalized EBITDA was up 88% on the prior corresponding period, and resulted in an 8.5% EBITDA margin. And that margin was impacted by the Crinum production margin by the delays and impact of the incident, but also lower PYBAR margins we mentioned the performance for the 8 months, not quite as expected, but improving on a month-by-month perspective at the moment. As a result of that, normalized EBITDA, which is in line with prior corresponding period was at $10.1 million. And again, with the acquisition of the PYBAR business, we have additional depreciation. We also had the fair value uplift on the valuation of the PYBAR assets, which also contributed additional depreciation for the period. On a normalized NPAT basis, $6.9 million, which is up by 11% on the prior corresponding period, which we did have an additional $4 million of amortization for the acquisition of the PYBAR business during the period. Overheads for the year at 8%, which we're expecting to decrease somewhere closer to 7% or below for the 2023 period, given the growth of the business and the revenue performance. During the period -- during the year, we also had acquisition payments, which we're investing in our diversification and growth. So, one of those was the Wilson's mining services earn-out payments which was $2 million during the period. We do have one more of those to go, payable in September this year, which is approximately $3.8 million. And the other acquisition payments, which was funded out our own, cash flow was $11 million to PYBAR for the first acquisition payment. We do have a second deferred consideration payment due that is now payable September 23. As mentioned in our financial accounts, that's recently been agreed to be deferred for a further 9 months. Total CapEx for the period, we spent $41.6 million. The majority of that is on the Crinum growth and the Cook growth projects, as well as our sustaining CapEx in Mastermyne and the PYBAR business. As a result of all that, our gearing ratio at the end of 2022 is about 1.9x, and as I mentioned on future slides, looking to get back to our target gearing ratio of around 1x by the end of 2023. Stepping to Slide 5. So, we're just going through the detail. Here, we mentioned previously around the statutory to normalized results. So as we mentioned, the drift recovery cross at Crinum was $18.6 million for the period. As Tony did mention, we do believe we had a contractual position to recover those costs and we'll progress those in the very near future. And the other acquisition -- other costs related to acquisition costs and legal costs for PYBAR and the legal costs for the additional safety incident at Moranbah North during the year. Stepping to the next slide. So focus on our capital management and gearing reduction. So as Tony mentioned, with the slowdown of the Crinum project and looking at capital reduction, there we are looking at recovery of that capital through various mechanisms in the first half of 2023, which will assist to delever the balance sheet and reduce our gearing ratio back to where we want to be at that 1x target ratio. Looking at the graph on the right-hand side, at the end of the first half '22, we're just on 2x, 1.9x at the end of this financial year. With our current guidance that's mentioned in this document, we're looking to get back to just over 1x by the end of '23, which is getting back to our capital management targets of 1x ratio. The CapEx for '22, so as mentioned, it was $41.6 million. Guidance for next year is just on $50 million of CapEx, which, again, the majority of that is the growth projects to be finalized for Crinum and Cook, as well as our sustaining CapEx. We do have $101 million of available facilities through our banking and other facilities in place, of which $58 million is available for equipment funding. And we've also got an additional $10 million of overdraft facilities available as well. The acquisition payments, as I mentioned, so first half, we had $13.6 million in total that were paid out during the year out of our free cash of the business. And for '23, we have a final $3.8 million remaining for Wilsons and '24 million is approximately $8.9 million for the final PYBAR deferred consideration payment. I'll now hand back over to Tony to discuss the divisional outcomes.

So just on Slide 7, talking specifically to the coal contracting business, most of this information I've already been through. But I'll touch on 2 points. The first is around the resourcing, which is, I guess, like a lot of mining services companies, our companies are seeing -- has becoming more difficult as the year has progressed. For us, most of that tension is coming through the area of trades and statutory roles, which are specific and necessary for underground coal mine operations. For the coal contracting business, we are mostly fully resourced across all our projects, and our focus is largely on retention as opposed to recruitment. We have seen some wage pressure, which has resulted in wage cost increases. However, the nature of our contracts allow us to pass these costs through to our clients. The net effect of this has meant that there's been minimal impact to this part of the business from wages increases. With respect to recruitment, we're continuing to support the business by using our traditional training facilities in both Queensland and New South Wales. And that's a strategy that's worked successfully for the business over many years. We're also progressing with international recruitment, which we've also done successfully in the past. With coal prices remaining elevated for the foreseeable future, we aren't expecting skill shortages to ease anytime soon. So, we'll continue to rely on a number of our very well-developed strategies to fill the emerging resources needs for this part of the business. Just the second point I wanted to touch on, on the coal contracting overview is the order book. On Slide 13, you'll see the contract order book laid out and you'll see the long-term history of contracts that periodically roll as the term on those contracts expire. We've got a number of these contracts that expire in FY '23. I'm pleased to say that all of these contracts are now in very late stages of being rolled for further multiyear terms. On completion of these extensions, we'll advise the market accordingly. But as where we sit today, we're very confident that all those expiring contracts will be successfully rolled in the very near term. Just on Slide 8 to talk about the coal contracting -- sorry, the mine services business. As I noted earlier, the company has made the decision to slow the work on the Crinum project, which will see first coal date push back into late '23 or early '24. And the sign of that project really is about reducing our working capital impact and give us time to ramp up other projects before coming back to the full ramp-up at Crinum. As Brett mentioned to date, the company has carried the full cost impact of the drift recovery works and also the holding costs resulting from the delay in reaching production. So now with the drift recovery reaching completion, the company will progress the recovery of those costs and we've got a strong supporting legal advice that the costs are recoverable through the contract. And we'll work with the client to reach a resolution on this as quickly as possible. Obviously, given the material nature of that discussion, we'll keep the market informed as we progress through those negotiations. As also mentioned, we'll progress with discussions to bring forward the capital recovery of mining equipment, which will reduce about $30 million of debt and materially deleverage the balance sheet. So that acceleration of the capital recovery will come through, either an alternative payment arrangement with the client or alternatively a potential sale of the equipment, which will then be supplied back to the project. So, these discussions are well progressed, and we'll look to have this completed in the second quarter of this financial year. As I noted previously, the contract tenure revenue and margins remain unchanged and this revenue and -- sorry, this revenue and margin just now defers into the next financial year. And the client is supporting the slowdown, and we maintain a good working relationship with Sojitz at both the side and corporate offices. Cook is progressing well and has been producing coal now for a few months. And obviously, that project will benefit through the relocation of labor and equipment from Crinum. So, we'll see an immediate financial benefit from the redeployment of those resources. On Slide 9, PYBAR's performance. As Brett mentioned, for the 8 months, was down from what was expected, and this was largely due to some operational delays over the year, and those delays were largely latent conditions from flooding events and geotechnical events, which resulted in lost production, which subsequently had a financial impact to the business. The nature of the PYBAR contracts has also meant that there has been some financial impact from the rising costs, which are affecting the entire sector at this time. And we're systemically working through or systematically working our way through the contracts to have better protections from these impacts, and we've been successful in restructuring several contracts to date. We'll continue with that restructuring exercise on the remaining contract over the coming year, leaving us with a much more balanced commercial position moving forward across all the current contracts. Also through the restructuring of PYBAR and the integration with Mastermyne that has already occurred, we've built a much stronger commercial governance process and the business is definitely benefiting from the experiences in the coal business in the areas of tendering and negotiating services contracts. Like the Wilsons Mining business, PYBAR will benefit quickly from working under the Metarock structure, and we're already seeing significant improvements in the management of those contracts. We're only very early -- in the only very early stages of this acquisition. And we know from experience, it takes some time to transition businesses from private family run operations to where we want them to be. And we certainly saw that recently with the Wilsons Mining acquisition, which was turned from a loss-making business with a diminishing market share to a material margin and revenue contributor, with now a dominant share of the underground consolidation market. And we're confident of replicating that at PYBAR and we are now seeing month-on-month financial improvement that will mean PYBAR will become a very valuable and strategic part of the Metarock Group. To talk sort of high level to the outlook on slides, from pages 11 to the 14 -- to 14, the summary. The summary of this is really around our focus shifting solely to the execution of the very strong order book that we've established in FY '23 -- sorry, in FY '22 and focusing on that execution for FY '23 and the following years. Our focus will be to maximize revenue and margins and deliver what we've already secured. We'll focus on repaying debt and generating strong cash returns and other than some remaining capital required to finish off the mobilization of the Crinum project, our CapEx will return to largely sustaining CapEx. As I mentioned, through the next few months, we'll finalize the rollover of several contracts, which supports the revenue and margins beyond this year and into the next few years. The current commodity cycle is holding up very well, and we're confident that there will be ongoing growth opportunities for Metarock well into the future. And now with the structure as a diversified and specialized underground contractor with a large workforce and a significant fleet of equipment, we believe we're well positioned to take advantage of what will be a strong period for mining services contractors. So just summing up in Slide 15, we're really pleased with how we've set the business up. Whilst this year has had its difficulties, we're confident with the year ahead, and our focus now is squarely on executing successfully. We've taken the action needed to slow Crinum down and reduce debt, which will ensure we build a stronger position that enables us to continue to integrate the PYBAR business and build out its strategic value, as well as ramp up the Cook project and other organic opportunities in the coal contracting business. We have adjusted the guidance for FY '23 to reflect deferral of the Crinum and the new Cobar projects with this revenue and margin pushing into FY '24. And it's worth pointing out that without these projects pushing back, the previous guidance would have remained unchanged. So, our long-term outlook is very strong, supported by a very robust resources cycle. And with the strategic decisions and investments made over this year, we're extremely confident we're creating great value for our shareholders, which will be realized over the coming years. And so I'll pull up there and hand back to the moderator for any questions.

[Operator Instructions] At the moment, there are no questions. Pardon me, we do have a question from John Borges from RAAS Group.

I'm just wondering what you can tell us about the -- for both Cook and Crinum the production cost of those operations at full capacity versus, say, coal prices and sort of, I guess, my question is what coal price might threaten those projects going forward?

Yes. Look, John, to answer the question, I mean, we can only really talk to the ROM price cost. Beyond that, the cost -- we're undecided on as we don't have anything to do with the processing or any cost beyond the ROM stockpile. What I can tell you is these are bord and pillar operations. So in terms of where they sit on the cost curve, they're certainly not in the bottom quartile of the cost curve. But having said that, they're probably sitting around the middle of the cost curve. So the -- yes, it's a difficult question to answer because we're not really sort of positioned, as I say, to talk to the FOB cost and at what cost those projects would be threatened by coal price.

Got you. I mean, your clients would have an idea or a thought?

They certainly do, yes.

Yes. Was there any mine operations revenues in FY '22? And can you give us a feel for what the assumptions are built in for FY '23 in your guidance?

Yes. So, there was a minor revenues built in for '22, really for the capital recoveries in the mine establishment phase. So, we're talking sort of minor revenues probably around about $20 million in total for '22. The mechanisms for next year, again, the contract will change to a different format over the next few months and potentially sort of a cost recovery type model and then changing back to the original contract once we get into production phase and that's built into the '23 numbers.

But can you give us a feel for what that sort of revenue is within -- it's obviously mainly for Cook.

Yes. So Cook is unchanged. It's close to somewhere around about the $70 million, is included in the 2023 numbers.

Okay. And could you just explain the -- I guess the capital recovery. So, obviously, you bought a lot of equipment, you're going to redeploy some to Cook. And then you're going to try and sell some to improve the balance sheet, but then you're going to need some equipment for Crinum when it starts in 12 months. So, can you just talk me through that process? Is it -- are you looking at a different model -- more of a leasing sort of model when you do Crinum rather than an equipment owned model?

Yes, that's right. So looking more at a sale and leaseback type arrangements and utilizing that in the project. So obviously, we don't lose access to the equipment but deleverage our debt position and look at potentially a higher operating cost overall, but reducing our balance sheet exposure.

Yes. Okay. And what was the additional depreciation charge from the valuation uplift at PYBAR for the assets?

So it equates to about $3 million. So, that was due to the fair value acquisition accounting. So when we did the fair value review of the assets of PYBAR, we've come up with additional value, top of my head, I think it was about $14 million was the additional value. And we've had that depreciation flow through to '22, and we'll come through in '23, '24 onwards.

Yes, yes. And just a couple more. I know it will be hard now, maybe you can't really comment. But given guidance for CapEx for '23, what are you feeling for sort of '24? What's like a sustaining level of CapEx once these projects are -- you've geared up for them? Do you have a [ feeling ] for that?

Yes, John, our expectation is somewhere about the $15 million to $20 million mark.

For the total group?

Total group for the PYBAR and Metarock from a sustaining perspective and the growth capital would be on top of that, if there's any additional projects or additional engagements where we need to spend more capital.

Okay. And that's probably it for me for now.

Your next question comes from [ Jonathan Scales ] from [ Matra ].