Mastermyne Group Limited (MYE) Earnings Call Transcript & Summary

Good day, and welcome to the Metarock Group Limited Capital Raising and Strategic Investor Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Today's conference is presented by Managing Director, Paul Green; and Chief Financial Officer, Jeff Whiteman. I'd now like to welcome Paul to begin the conference.

Thanks, Anthony. Welcome to all shareholders and interested parties. No doubt, people have seen the ASX announcement, the H1 FY '23 report and the strategic investor presentation. The first half of FY '23 has been a very tough financial period for the business. We're confident that the information we've provided supports the turnaround plan and also the recapitalization that we will talk through. We understand that people will have questions, and we're happy to answer those at a later time if we don't have time today. The reality is that we're not able to change the past. And for this reason, we will mostly talk about and focus on the future in this presentation. The Board, Jeff and myself have been motivated by a couple of things. One of those is we've got 2 very successful businesses, PYBAR and Mastermyne in spite of the recent troublesome period with strong historical performances. We also have a number of amazing employees, clients and very low shareholders. The purpose of our briefing today is to explain why we are where we are, what our plan has been and also the recapitalization opportunity that is available to us. We will largely talk through the strategic investor presentation and if we could commence on Page 6, please. The business has had 3 investments in a very short time frame, PYBAR, the Crinum Colliery mine and the Cook Colliery mine, which required significant funds, planned financing and also working capital. The business then had a number of one-off events. The Crinum contract being the first where we tragically lost one of our great workmates and following this investment had to invest significant funds into the recovery of the roof fall and the drift, the cost of which were not able to be recovered. This resulted in significant losses. The second is that the Thalanga contract, which went into receivership owing the business over $7 million, which was not recovered. In addition to the above, during the purchasing of PYBAR, the business identified that are 2 contracts that were loss making. And the assumptions made on the timing and the effort to turn them into profitable contracts were not realized resulting in losses over a longer period of time than expected. This includes the Peak contract and the Thalanga contract. The financial impact of the Crinum, Peak and Thalanga situations created gearing and cash flow pressure, necessitating a turnaround plan. Seeing a number of measures to improve our cash flow and also a substantial equity injection. Can we just move to Page 7, please? Stage 1 of our turnaround plan involve numerous elements. The Board engaged new management. The termination of the Crinum contract occurred in October '23 and then had full and final mutual settlement of that contract in October -- in February '23. We exited from the PYBAR loss-making contracts being Thalanga contract, which self-terminated when Crinum resources went into receivership in October '23 and the mutual termination of settlement of the Peak contract in March 2023. If we could just move to Page 8, please. We continue working on our core operations. It was important to keep delivering our baseline revenue and gross margins. We continue to drive efficiencies of our current contracts, delivering on the safety commitments, delivering services on time and on quality. We ramped up the Cook Colliery mine operation within a tough labor market, and we continued growing the Wilson's grant consolidation business across the coal and the hard rock sectors. Further, we sold some idle plants and are still continuing to do so to reduce debt and also obtain cash. The first development panel, which was ex Crinum sold to a third party in February '23, and we're looking to sell the second panel -- development panel as well. Our process has also commenced in selling the idle PYBAR plant. As part of the turnaround plan, it was evident that the magnitude of the impacts from the one-off events and the longer-than-anticipated time in addressing the loss-making contract in PYBAR required a substantial equity injection. This was to stabilize the business and set it up for growth. And by growth, I mean the ongoing working capital needs for new projects to replace expiring contracts. So if we can just move to Page 10 now, and I'll hand over to Jeff, our CEO, who will take us through the recapitalization.

Thanks, Paul. Or should I say, CFO. Good morning, and I'm pleased to advise the strategic investment by company called M Resources. So M Resources is privately held. They're based out of Queensland, and they've got a range of investments across the value chain in the coal industry, including [ 1Rail ], Stanmore Coal, Bowen Coking Coal and the Millennium Mining Complex. We've been in discussions with M Resources for a while and the outcome is that they've agreed to make a placement of $25 million, which is conditional upon shareholder approval at the forthcoming shareholder meeting. The $25 million will acquire a stake of around about 51%. And it's in combination with an entitlement offer for existing shareholders, which will be up to $3.9 million. The -- both the conditional placement and the entitlement offer will come with options, which have the same terms as each other, and those options will be -- have an exercise price of $0.23. The -- and then these options will raise further capital as and when the exercise over the next period of time. In terms of the Board, M Resources will have right to put 2 directors on the board, and they'll also nominate the initial independent Chairman to go on the board. And then Paul Green, the Managing Director and the founders of Mastermyne and PYBAR, Andrew Watts and Paul Rouse also going to remain on the board going forward. From a banking perspective, our bank has been very supportive, and you would have seen the recent announcements that have extended our working capital facilities at this stage through to the end of September. That's been the view to resetting the facilities on a longer-term structure once we've got through the equity raising. M Resources have also come to the table in terms of helping us through the next couple of months until the placement is complete and the offer to provide an interim funding facility of just over $10 million. So turning to Page 11. So the advantage is that we see in the investment by M Resources in circa we've then been a strategic investor and quite an active one of that. They really do bring very deep sector knowledge and a great range of contracts for us as well. So we see potential for us, even though the intention is for Metarock to continue to operate independently and remain as a listed company. We certainly see the opportunity to leverage our relationship that -- and relationships M Resources bring to the table. I mentioned earlier that there will be a shareholder vote. So as M Resources will end up over 50%, we need to go to an extraordinary general meeting and say that will be issuing the notice of meeting and the explanatory memorandum in due course at this stage with our shareholder meeting expected to be held during May. And then I'll just move on to Page 12. Sorry, Page 13. So in terms of we plan going forward, I suppose it's a little bit more of a science side, continuing to manage our working capital closely. The investment certainly helps reset the balance sheet and particularly the -- I suppose, the funding shortfall that we've been facing recently, which was primarily caused by the Crinum and PYBAR issues that Paul referred to. Going forward, we anticipate our working capital to be in much better shape and also plenty of opportunity to further reduce our debt and gearing going forward. We still have some idle assets and surplus assets for the business. So we are continuing the sale processes around those and the intention is that predominantly, those proceeds will be used to reduce debt. We're also looking at a risk-reward balance, which I see is also a topic of across some of the other contractors that have been facing challenges as well. So from our perspective, it's very much about trying to avoid contracts at a really high risk and sitting with contracts that are completely within our capability side and making sure we fully understand the risk and then price that risk appropriately. When we talk about risk, not just financial risk, but also look at the safety and commercial aspects as well. And then as we continue to look at new projects, our return on invested capital is going to be a particular focus for us on new tenders. And then finally on that aspect, probably really seeking to have a better balance within the contract portfolio. So with terminated 3 contracts in the last 4 or 5 months, which we're probably skewing the portfolio towards the high risk and high capital end. So as we go ahead, we'll seek a better balance across the business in that time back of the core strategy on diversification. Then the follow-up point going forward is around having a measured cost out program. So we've already commenced on this and taken out some of the discretionary costs in the business and there is scope for further efficiency to enhance profitability and rebuild cash flow as well going forward and realize the synergies within the group, which -- probably if we haven't hit that opportunity as well as we could have done over the recent months. So that's very much part of the plan going forward. That finishes my part of the presentation and maybe hand over to the facilitator for questions at this point.

[Operator Instructions] And your first question comes from the line of John Burgess from RaaS Group.

Could you give us a guide possibly on -- given the sort of asset sales and stuff of sort of sustainable CapEx going forward?

Sorry, John, can you just be a bit more precise on the question? I just didn't quite hear you.

I guess what sort of CapEx levels do you think the business there? What sort of a sustaining CapEx level for the business into '24 and '25? And maybe if you can break that up between PYBAR, Mastermyne and Cook?

Yes, John, we're still working through some of the detail around that because we're still considering the right gearing level that we need going forward. And also, we need to have the right amount of plan for new projects coming up. So it is a work in progress. However, we are looking at a lower capital level than what we've had over the past couple of years, and that's to make sure that we have the right revenue and margins coming in to be able to cover the refinancing costs across the board.

Okay. And presumably, depreciation will come down with these asset sales. And has there been -- I remember when PYBAR was acquired, they're quite an aggressive depreciating policy. Has there been a review of that policy under new management?

Look, we will review all the accounting policies. Obviously, we've just put out our half year report on Friday as well. So that's got the accounting policies in there, but we will be looking at, again, at the remaining useful asset lives across the business. We have, I suppose, in PYBAR with both the Peak project and the Thalanga project, in particular, both of those sizable projects and both of those coming to an end. We do have a fair amount of idle equipment coming out of that. And so we did still go through the process of looking at which of our equipment we keep and redeploy into new projects, which our equivalent will be looking to sell. And at the same time, that will help determine, I suppose the appropriate fleet size going forward and also, we'll refine our depreciation lives through that -- throughout the period. I suppose just one important to mention on the CapEx side is that we certainly envisage CapEx being materially lower over the next 12 to 18 months with the forecast level that we've anticipating, what we put out in our guidance, there's not really any more significant CapEx required, and we can use to existing fleet to manage out. And then I'll probably see the CapEx returning to a more sort of normal level of sustainable spend in FY '25 unless we see some rapid growth through FY '24.

Great. And I guess the final one, can you just give us an update as you can on Cook and the ramp-up? Because obviously, looks like in '24, you still got the sort of sales revenue forecast that were originally there. And would that represent sort of nameplate 1.2 million tonnes production per annum at that sort of revenue level?

Yes. So the Cook, we continue to ramp up there. We are having some challenges around our labor pool because there's a lot of competition in the market at the moment. And so we're looking at running with 2 units in the Cook portfolio whereas originally, it was 3 units. So that tonnage will be adjusted back to a 2-unit scenario. And both us and the clients see that is quite sustainable going forward at this point in time.

Does that extend the project then?

Yes. Yes, it will potentially. And we also need to perform in that contract. So our efforts right at the moment and making sure that we're performing. And there's lots of opportunity at Cook as well going into the future. So we're hoping to continue doing a good job there. And as long as the coal price stays where it is, which we're pretty confident it will, it will stay quite high. There will be lots of further opportunity at Cook.

Your next question comes from the line of Jonathan Mills, Private Investor.

First one is in relation to the proposed entitlement offer. Is there any reason why it's so low? I mean it's 1 for 5.2 to raise around $4 million, and then you're still going to be highly leveraged even if everyone takes up their entitlements, which I think is going to be pretty unlikely given the terms.

Yes. So I'll pick that up. I suppose the entire equity raise has been based around trying to bring on board a strategic investor [ Krick Credy ], they're looking for a 51% shareholding or slightly higher. So that brings the advantages of having a meaningful investor on board. But at that level rather than a higher level, it's been to say that the consensus for the company to continue operating independently. So we see that as being a good balance between us and the -- I suppose, the ratio between $25 million to provide the -- in terms of the placement. And then the entitlement issue just short of $4 million that really around driving those ratios, but also giving the existing shareholders that a right to participate on the same terms as M Resources if I choose to.

Okay. That makes sense. And am I correct in thinking that Paul Rouse and Anthony Watts will take up their entitlements?

I think they're considering that at this point in time. They have shown interest in that, but that will be what it may have to be at that point in time.

Yes. Obviously, Paul and Andrew, obviously, yes. Both major shareholders and remain major shareholders going forward. And as Paul said, in regard to the entitlement offer, they're both currently contemplating that.

Okay. No worries. And my final question is, are you able to give some indication of, I guess, the value, the book value of the auto assets at PYBAR and Crinum that you're trying to sell?

Look, probably at this stage, I can't. But as part of the notice of meeting and explanatory memorandum that's coming out, there will be an independent expert report for the shareholders to be provided some more information and certainly, the value of the surplus assets or vital assets is expected to be part of that valuation consideration in that report. So I'd encourage you to read that report when it's made available.

[Operator Instructions] There are no further questions at this time. I would like to -- apologies, there is one further question from David Lawrence from Lawrence Cattle Company.

Is that [indiscernible]?

Yes, we can just [indiscernible]

All right. That person is being cleared from the queue. Your next question comes from the line again from Jonathan Mills, Investor.

Sorry, one last question. Turning back to the entitlement offer, have you arranged anyone to underwrite us? And if so, who would that be? I mean, would M Resources consider underwriting into offer as well?

We are considering underwriting the offer. It won't be with M Resources. But again, partly because they're sort of happy in that 50% to 55% range. So if I underwrite the entitlement offer, I suppose it just starts putting a shareholding up a bit and the preference is not to do that, but we certainly do have some other parties that are showing reasonably strong interest in underwriting. So that's a path that will again confirm over the next few weeks.

And one more question from David Lawrence from Lawrence Cattle Company.

Can you hear me?

Yes, Dave, got you.

My question is relating to M Group's entitlements for the company. Taking the 51% share in the company obviously gives them a lot of control. Is there any intention to delist, is there any intention to stay on the ASX? Are you are able to give an answer on that?

Yes. Thanks for the question, Dave. At this stage, the intention of M Resources is really aligned with what the business needs are. So their focus is to support us in continuing the turnaround plan and also to continue to grow the business. They are not looking to take any operational control. They're not bringing their own people in or anything like that. They're more than happy with the capability in the business and we'll meet, I suspect on a monthly basis at a Board meeting where we'll be challenged appropriately and with the good governance that they will offer. In terms of desires for ASX listing or not ASX listing at this stage, M Resources has been very strong in saying that they're appreciating the ASX listing status, and that will remain at this point in time.

One may get the chance to fully declare their position on that. Paul, it's a pretty important thing for me as a shareholder anyway because if any group or M Resources has the ability to delist this company, which watch and see they'll do, then us as to the shareholders have very little ability to trade the stock and benefit right in my opinion. But assuming that they continue to stay listed, what would be the dividend policy moving forward? Is this being discussed? Because dividend policy was quite well known or easy to access. What would M Group's [indiscernible] from a dividend point here?

Look, I think the -- it's too early to talk about dividend policy at the moment. And obviously, we're sort of just coming out of the turnaround plan and still need to execute that and reduce our debt further. But certainly, I think going forward, as an investor M Resources is probably as interesting taking dividends as any other investors. So it certainly will be reconsidered down to track. So I'll just add one further point, David, on the point of liquidity, the options that come with the shares through both the entitlement offer and the placement, the intention is that those options will be quoted as well. So then I suppose some indication there but around M Resources intentions on the benefits of remaining listed and also keeping the options or having options listed in addition to the shares as well.

There are no further questions at this time. I would like to turn the call back over to Paul for closing remarks.

Thank you, and thanks to everyone for the interest in our business. As you're probably aware from reading the material over the weekend, we do have 2 very strong underlying businesses, PYBAR and Mastermyne. We've intentionally taken the hit in H1 FY '23. And we've got a turnaround plan, which we're executing in a very methodical manner. There definitely has been learnings from our recent past, and we understand those and we're already implementing changes to bring effect to those. We're very excited by the opportunity that M Resources provides for our future in a multidimensional way. And as Managing Director and CFO, we fully endorse the recapitalization in its current form and encourage shareholders to consider and support this. And in closing, Jeff and I are more than happy to receive phone calls from anyone at a later date. Thank you very much.

This concludes today's conference call. Thank you for joining us. You may now disconnect.