Metro Mining Limited (MMI) Earnings Call Transcript & Summary

Good afternoon, everybody, and thanks for joining us here today for this First Half Results Update for Metro Mining, which will be presented to us by the CEO, Simon Wensley; and the CFO and Nathan Quinlin, who's also joined us here. There'll be opportunity for some questions at the end, and we look forward to delving into the good news. Simon, I'll hand it over to you.

Great. Thanks, Peter, and hello to everybody. Thanks for all of your support and your interest in Metro Mining. So, as you would know, we've just launched our half year results. Obviously, the physicals were quite well flagged in the quarterly results from quarter 1 and quarter 2. And of course, the first half contains a quarter in which there are 0 or very low numbers of sales. So with all that in mind, though, I'm very, very pleased with the results that we've brought back in the first half of this year. And indeed, I think from my point of view and from the team's point of view, we would say that the hard work that's gone into the market -- into the business by all of our team has paid dividends and the turnaround that we've been trying to implement is now largely complete. So the foundation for our expansion is firm and it's ready to -- we are in the process of launching that expansion. So from that perspective, a pleasing set of results in which almost every element from revenue through to our costs in every sense was better than in previous quarters over the last 2 years, previous halves and also bodes well for the future. There's -- this presentation is on the ASX and also on our website, so I'd encourage you to have a look at it there during and post the meeting. There's obviously a standard disclosure statement here, which I'd encourage you all to read. And firstly, we'll actually talk to the results themselves and for this I'll pass across to our CFO, Nathan Quinlin.

Thank you, Simon, and thanks to everyone who's joined. As Simon said, it's obviously been a really pleasing half year for those who have the opportunity to follow our disclosures over the past few months, you'll be well aware that it's been a very pleasing half year from a production perspective. So obviously, from a first quarter perspective, as Simon has touched on, we're in wet season. So there isn't any production to speak of. But otherwise, that 3 months proved to be a very, very productive period for us as we sort of went through some pretty full-on remediation programs on our land infrastructure as we started to cut into some of that maintenance deficit that we spoke about a little bit last year. And so it's pleasing to see as we moved into Q2 to see the fruits of our labor start to come through. So it's been a very pleasing quarter from a production perspective. So naturally, what you're seeing is that manifesting in the financial results for the first half. Very pleasing to see from a gross margin perspective, almost breaking even after 3 months of no production for the first 3 months. I would just point out that -- and it's something that we have flagged a little bit in the last couple of releases around the change in composition between our FOB and Site pricing makes it a little bit difficult on an apples-for-apples basis to compare some of the revenue and cost of sales versus sort of 12 months post. But from a gross loss perspective, you can see, obviously, a much improved position. And then from an underlying perspective, after all the finance costs and corporate costs, almost a [ $13 ] million turnaround net year-on-year. So based on the Q2 production that we're seeing and the margins that we're generating, we're pleased to report that we expect to return to profitability in the second half of 2023. What you'll see, like I mentioned from just given the first 3 months with no production, it can be quite difficult to look at some of these first half results and be able to define exactly what's happened during the quarters, and so I actually find personally that it's a little bit easier to look at these things on a quarter-by-quarter basis, which is what you've got in front of you on these graphs. So looking at, I guess, our key financial markets over the last few quarters being obviously site costs and FOB revenue and the resulting site margin, what you see there is as pleasing set of data in front of you. So from a site cost perspective, year-on-year, we're seeing in that first quarter around $26 a tonne being produced site costs. So versus 12 months ago at $28 a tonne. That's obviously a pleasing improvement. Like any business, we are seeing inflationary pressures on our business, particularly around labor and fuel and those elements. For the most part, particularly for a young operation, the best thing that we can do, particularly around escalations, some of which are more controllable than others is really productivity measures. For what is ultimately still a young operation where there is still some really good pockets of productivity that we can focus on to the extent that we can control our costs. That's really where we expect to be able to, I suppose, respond to some of those inflationary pressures over the remaining part of the year. From an FOB revenue perspective, you can see a pretty dramatic increase 12 months on from where we were at. FOB revenue is obviously from a user perspective of sort of revenue -- gross revenue line, less the freight commitments that we have in delivering. So like I mentioned, we're producing about half FOB basis, half SIC basis at the moment. But from an apples-to-apples basis, 12 months ago, you're seeing a pretty dramatic increase there in our FOB revenue from $25.5 a tonne up to over $40 now. There is a little bit of -- there is a little bit of foreign exchange movement in there, about 10% movement. Obviously, 12 months ago, the Aussie dollar was a little bit stronger than what it is. So there is about 10% of that movement is tied up in foreign exchange. But what we're seeing is versus where we were at 12 months ago in starting to work through some of those contracts that were really crystallized at a point at quite a low point in the market, we've now worked our way through those contracts and we're starting to see the benefit of those increasing bauxite prices that Simon will no doubt touch on. From an ocean freight perspective, like I said, only about half of our production at the moment is exposed to that ocean freight. On a like-for-like basis, we have seen a decrease from around $18.6 on a wet tonne 12 months ago to $16.5 at the moment. Like we've said in a couple of previous announcements from a freight perspective, very little, I suppose, exposure for us as a business. We look to lock those freight positions in well in advance. And I think at the moment, most of our COAs go out well in advance of 2023 out into 2024, so from a volatility perspective, we don't see this as a major area of risk for us just given we've otherwise those positions away. And then what you can see is, obviously, the resulting site margins are a really pleasing site margin realized in Q2 2023 of $9 a tonne, which is really pleasing. So that's where we're starting to see the confluence of managed costs through greater productivity and greater economies of scale and starting to realize some of those pricing benefits that have come through in the last 12 months. So good sign for things ahead.

Great. Thanks, Nathan. Yes, I will touch on the market a little bit. I think we talk about -- we show this graph pretty much at every quarterly or release. And it's an important graph because it's got a lot of history in it. We can see the traded -- the actual delivery prices for traded bauxite into China. So the clearing market on the coast of China effectively. So Guinea price has risen significantly since the start of COVID, there's a lot more spot action in that market. And the Australian price has taken a bit more time, but it's continuing to rise steadily as our contracts and those of the other Australian suppliers rollover. So it takes a bit more time for that -- for the pricing to flow through. But you can see, as in the previous graph, and Nathan touched on that, we are seeing prices run through, and we do have a different styles of contracts linked to different things, but it's linked. This is sort of an average or aggregate view of what's going on in the marketplace. So, I think we'll continue to see that rolling through. The Chinese economy is still in a little bit of an uncertain space. And certainly, from a construction point of view, is not as strong as people might have hoped. But I have to say, having just come back from China that the other aluminum areas such as transportation, particularly EVs, batteries, and indeed, the renewable energy, so solar panels, wind farms, et cetera. As you travel outside the big cities, you start to see whilst construction is weak that you are seeing enormous amounts of development in the sort of -- in these areas for the low-carbon economy. So aluminum is still relatively strong considering the fact that construction is a little bit down on where people might have expected it to be. That's resulting in continued strength in the alumina space, and so Chinese imports of bauxite are up again even though last year was a record in '22, they're up again about 10.6% at the half year. And alumina prices, our customers' prices are rising again as aluminum demand flows through to alumina. Bauxite market prices, as you can see, are firm. They're steady at the Guinea level. Australia prices are still rising and Indonesia's bauxite ban has been confirmed and there are no further shipments in the market from Indonesia. Domestic bauxite prices, so the Chinese bauxite prices that some of our customers also use to blend imported bauxite is also rising considerably. So again, it's a sign that, that demand is strong and bauxite supply is tighter than the demand. So I still see upside in this graph, which is the $20 differential between Guinea and Australian price, which should continue to close to roughly $8 to $10 over the next 6 to 12 months. So where we -- in terms of the half year, we produced about 1.3 million tonnes in that second quarter of this year. That was even at that point of record. We've continued that momentum through July and August, producing about another 1 million tonnes in the 2 months, the 560,000 tonnes produced in August was the first month of our stepping up. And that, again, is a record. And you can see here that, look, we're planning to target roughly $650 million to $700 million or sort of $600 million to $700 million over the next 3 months with a reflection of I guess, increasing sort of weather impacts in December. So that top line will deliver us the 5 million tonne sales, and we will get a real sense of that in September and October. And I think it reflects the incremental expansion strategy that we put in place. So we haven't sort of waited for 1 big bang expansion. So the elements of our supply chain have been expanded in sort of the -- in an order that made sense from a capital expenditure point of view and from a practicality point of view. So right away from -- right now, we're seeing that pretty much all of our mining and haulage equipment is already expanded. The existing screens that we've been relying on have been performing above expectations. So that's a testament to our maintenance and upgrade strategy that we've been putting in place. The BLF has already expanded to that 7 million tonnes. And then from a tugs and barges transhipping perspective, that is steadily rising as well with additional tug arriving this month, which we've charted this new barges is arriving. There's 1 barge we've chartered in August and another 1 arriving at the end of September. And transshipping perspective, the floating crane has been doing pretty good tonnes above the top end of its range, and we're supplementing that now with geared vessels. So that will be our base case as we move towards the end of the year, the new transhipper will arrive at some point in quarter 4, and I'll update the market when we have a more firm view of the drydocking and the mobilization to Australia from China. But certainly, as we sit here with all of the work planned for the quarter, for the first quarter of next year when we are implementing the screens and commissioning all of our equipment, we're going to be ready at the end of March at the 7 million tonne rate for 2024. The next slide. Yes. So just a summary, I think we can get on to questions. So resource and an operating mine. So this is not a -- we're not in a greenfield perspective. We've now been operating for 5 years and have a 15-plus reserve life, but with additional upside from resources. Marketing customers are in place. So contracts in place for this year, 5 million tonnes, plus $6 million tonnes for next year. So the next couple of years already underpinned by baseload customers. We have a low-cost business model. So it's a simple mining operation. The transshipping has now been in operation at the site for almost a year, and we're seeing the benefits of that. And we're shipping into Capesize vessels. So the only Australian operator that can do that. At 7 million tonnes, we do project will be at the bottom end of the cost curve. We've got a very good local dedicated workforce and a very high level of indigenous participation, which we're very proud of. And we've got a good management team and a Board that are capable of implementing projects like this one. So this is the right team to prosecute this expansion. And look, I think we've now had this transformational expansion underway. We're a few months into it, and it will steadily be put into place in time for quarter 2 next year. It's a highly value-accretive expansion. It's relatively low cost. It's brownfield and the technologies we're using are not high risk in any way. And now we have all the funding plus the cash flow that we're generating from this year. So a very secure sort of next 6 months from a funding perspective. So we're very clear that we have the firm pathway to deliver on the expansion. That's really a summary where I probably open up to questions, Peter.

Thanks, Simon. I'm going to take it off. I think that this half has shown a tremendous turnaround, and you and the team, obviously, to be congratulated, and the share price has recovered quite well for a little dip in the last month or so, the market is happy to see that as well. But -- it was sort of struck me as we were walking through this presentation just now that shareholders probably and other people watching should be reminded that this is not a complicated mining operation. It's not a drill and blast and complicated flow sheets. It's really just a screening process and load high-quality bauxite through a simple loading process and shipping it and you're receiving good prices for that product now. So talk us a little bit about the process of going from the ore body that you're mining and that's a long life on it to the barge.

Okay. This business, the business model, the operating model that we have is not that common in Australia, but it's an incredibly common overseas. It's a scalable operating model where -- you've got a near coast or near infrastructure, operating mine close to surface resource, so very little stripping, certainly no geotechnical risk. And we're not doing a great deal to the product. We're using our drilling -- our grade control drilling to plan our production, we then screen and blend to meet customer specifications. But that's a relatively straightforward process. And then we're transshipping it to large vessels. So again, it's a relatively well-known operating model from other parts of the world. It's very scalable. It's relatively easy to monitor. So -- and the technology is involved are all relatively well established. So from both a current operating model, but also from an expansion point of view, it really doesn't offer a great deal of risk. So look, we obviously operate in North Queensland and in a place that's relatively remote. But that's really about organization, planning, logistics, in keeping the mine and our resources flowing and getting people in and out sites and all of those things. So it is a relatively straightforward model. And I think from that perspective, the risk of us being able to sort of deliver on what we've talked about, look, when I say is relatively low.

And Simon, on the bauxite we're mining setting off to China. Tell us a little bit about where we fit in world bauxite supply and what makes your product more attractive for those customers?

So look, on the bauxite that we mine has got a very high alumina content. So alumina is the product that gets made out of our bauxite. And so the most important aspect of our bauxite is how much alumina is in it. And we have a 50% -- roughly a 51% to 52% alumina product that's mined from a very well-established bauxite province. So the weaker bauxite plateau has been mined for bauxite for more than 60 years. So not only is there a well-trodden path of mining there, but also customers have had all over the world have had experience in processing this kind of bauxite. So the high alumina aspect of it is absolutely critical. The second most important aspect is how close we are to the market. So we're within just over a week's sailing from our key markets. So from a logistics planning and logistics cost point of view, from a risk perspective, our customers see us as a highly attractive supplier. And that goes along with, I suppose, the Australian context of a very large, well-established predictable mineral producer and exporter, which has been going on for decades. So not just obviously, bauxite but coal and iron ore and all of those other things. So it's a well-known and low-risk environment. And so from our point of view, as Metro we try to differentiate ourselves in terms of our customer service contract, our contract flexibility, our contract structure, the fact that we are able to deliver in very large vessels, which is sort of unique for bauxite out of Australia and also our customer, our service, technical service, very good local technical team in China that help our customers optimize the products that they -- we're often blended with other bauxites and that takes a bit of knowledge and technique to do so, and we provide that through our team in China. So look, it's a very sort of proposition, and we're increasingly seeing a lot more interest and demand for our products. And as I said, having just been in China, quite recently, there's a lot of interest in contracting out past our current sort of contract length, which goes toward -- goes into 2025, '26, '27.

[indiscernible] That was muted. On that, Simon, is there -- we're commencing the ramp up quite successfully and plantain place and infrastructure seems to be coming smoothly with that. Is there capacity to increase that production beyond 7 million tonnes into the future?

In September -- sorry, in August, we saw about 100,000 tonne step up from the previous months sort of averages. So that was pleasing to see. We should see a similar kind of step up again in September. That will take us into that zone, where we're producing at that sort of roughly around that 6 million tonne rate. The 7 million tonne rate won't be possible until we've got all of the new screens and the second transshiper is commissioned, but we'll be ready to do that. We are already looking at whether we can get beyond 7 million tonne. I think the market is certainly there, Peter, in terms of demand. That's very clear to me. And so we're looking at that at the moment. And certainly, I'd say, look, incremental mining equipment, so a few more trucks and trailers required. And indeed, I think the biggest bottleneck is probably the barge sites. So we're going to look at whether we can increase our average barge site, which is currently around 7,000 tonnes per barge -- we're exploring the design of tailored barges for our system of 10,000 tonnes. That will give us about a sort of 40% uplift on each barge going out of the river. So no need for any further tugs and our transshippers can certainly do that kind of tonnage. So there is -- I think there is a bit of stretch beyond 7 million tonne. We have a mining license approval up to [ 10 ], but we're certainly already -- that to implement this 6 million tonne to 7 million tonne first, but we our engineers are already turning their attention to a bit of creep above that.

Yes. That was a question from an [indiscernible], but happy shareholder. Still saying on the supply-demand story. What do you see happening globally in terms of greenfield, brownfield sites coming on and expanded capacity? And, do you see new players coming to the market. For instance, India is ramping up their industry? Do you see new market participants coming in?

Well, let me address the bauxite supply side. First, so look, there are existing bauxite suppliers in the market. They tend to be in the Atlantic Basin. So they are already challenged by distance, the tearing of distance and therefore, shipping time and shipping costs. So Brazil and Jamaica, for example, our marginal -- potential marginal suppliers into this market. But they require very high prices to even be competitive here. So if the prices are at that level, then I'm not going to be -- and that encourages the very high tail of a cost curve to enter the market then that I'm not going to be too disappointed because it's a sign that market prices are continuing to be very high. More locally, Malaysia and Vietnam have small bauxite resources that can come to market, but again, tend to be in small vessels and again at the margin. So there's not a lot of additional supply other than out of West Africa and out of Australia that I think can really supply this kind of expansion that we're seeing. In terms of aluminum demand, obviously, about 90% of the traded bauxite in the Asia Pacific goes into China. Middle East has a growing alumina refining industry. There's 1 large refinery there, which will probably get duplicated. India is also a growing market. I think they are proceeding with in first less power generation, so they're investing heavily in power generation at the moment, then comes aluminum smelting and they all backward integrate into alumina refining. They do have some bauxite resources, but they're not particularly large or particularly high quality. So we do see, I think, more -- less so in the next 2 to 3 years, but maybe in the 5 plus year time frame we see India as a very prospective customer for our bauxite.

There's a question here about bauxite pricing, and I think I referred to the chart you had there. What do you see is the reason for the $20 differential in LT and HT bauxite, but historically, the difference has been around [ $10 ]?

It's a really great question. Look, I think it's mainly to do with the contract structures that exist. I touched on the fact that Guinea has a much larger sort of spot pricing structure. So the tightness in the market much more quickly reflects into the price. And so you see individual cargoes setting that pricing, that marginal pricing structure. In Australia, the major suppliers tend to be much more fully contracted. And so the rollover that occurs that could be quarterly or half or even 12-month contracts. And we have had and continue to have some of those contracts in our portfolio. So there's a much slower rollover, if you like, of aggregate pricing in those contracts. So as you see, pricing demand and supply result in tightness and pricing go up. It's a smaller proportion of the aggregate shipments that end up getting affected. So over time, it will reflect and you will see that gap closing. But it will take still more -- a few more months to get there as the sort of annual and semiannual sort of type contracts roll over and those prices get a chance to be reset to a much more value in use representative level.

The wet season on site, how wet is too wet to load? And do you have a specific cutoff date? Or will you sort of played by , so to speak, as to how much you can load with the changing weather conditions.

Look, in general, it's not the rain that completely stops us. It slows us down. It tends to be more the prevailing wind and wave conditions that make it effectively unsafe to operate the trans-shipping. And so the rain - what we're doing with the newer trucks and trailers plus the screens, the wobbler screen we're putting in makes us sort of more resilient. So we'll see less productivity decline with wet weather going forward from 2024. And we really mine the conditions. So it's -- if we can mine further, we will mine further into the season, but it's really when we see the trade wins sort of swap around, and we see the monsoon troughs in the northern Indonesia and quite the region starting to drive waves from the North and Northwest, and that creates wave conditions that at the moment make it difficult to do the trans-shipping organization. The new transhipper the offshore floating terminal has operated in monsoon conditions more often. And so we know it does have a greater resilience to wage, but it will still have a -- there's still be an upward cutoff. So look, in general, we work with our -- all of our contractors and all of our teams on site to try to maximize the amount of time that we spend operating, but it has to be safe, and it has to be sort of cost effective, if you like, for us to be able to do that. So that balance is always in our mind. But look, in general, over the next few years, we're certainly looking to reduce the impact of that wet season by investing in these technologies that have more resilience, et cetera. But again, to emphasize it needs to be safe, and it needs to be cost effective.

Getting down just a couple of more here to round off. Labor has remained tight across the industry. Simon can you provide an update on how Metro is coping with the employment situation and if you're comfortable with the expansion plans and your labor market.

Yes, good question. Yes, it is tight and it's tight generally across what you might call the mining sector skills, highly skilled equipment operators and plant fitters and these sorts of things. So look, we put in place -- we're a smaller company. We've got 1 mine site -- it does allow us to be a bit more agile and a bit more responsive. So we tried very hard to be that, to be agile and responsive. We've changed hourly rates. We've also put in bonus schemes in place. And we've also tried to reflect on, I suppose, the work -- on the available workforce that we have a very attractive place to work. It's a small mine site. Everybody knows each other. It's a good culture. We're driving change and productivity. It's a good feeling. It's a good place to work, and we're trying to get that message out there. So that helps retention and also we gain employees a lot from the word of mouth from other employees who talk about working at Metro. So our turnover has been relatively low. We've been sort of below 10%, which is pretty low for a FIFO operation in the mining space, and that's -- we're keeping up with that. From an expansion point of view, pretty much all of the workforce we need to run the expansion other than the crew for the new floating terminal. Other than that, we pretty much have all everybody that we need now on site. So we have the equipment there that we're running already. And so the crews are pretty much at full capacity. So we don't we are not going through a big push for those particular roles. But obviously, there's a new transshippers to staff when she arrives later this year.

Just a couple more around the South. What was your monthly run rate at the end of August in terms of production?

Yes. We're getting close. Well, so our monthly run rate was -- so we hit 560,000 tonnes, I think, Nathan in August. And we're steadily -- that was steadily rising through August in terms of run rate. We're expecting to hit the 6 million tonne run rate, if you like, annualized run rate in September. So we're seeing -- for example, we just did -- I think we [ 25,500 ] tonne a day yesterday. So that's again, indicative of a 6-plus million tonne sort of run rate. So we're steadily seeing -- as we -- we're pushing the envelope in all parts of the supply chain right the way through to the vessel. So we're starting to see that 6 million tonne rate coming through on more and more days.

And the last question is sort of 2 parts. What's your plan for the balance sheet now that you return to profitability? And when does the dividend policy kick in?

Well, plans for the balance sheet. Obviously, we need to get through the expansion will be in place. Obviously, we've got to get through this next wet season. There's still more capital to spend on the wobbler for the dry docking of the floating terminal, it's commissioning and so on and the installation of the screens. We've got that cash in our hand, ready to spend. So we'll do that over the upcoming wet season, and then we'll start next year 7 million tonne rate. So we need to then build up cash and our intention is to start paying down debt around the middle of next year. And so we'll fairly rapidly start to pay down debt over the following sort of 18 to 24 months. So the dividend policy, I guess, if things go swimmingly well, we might consider that next year, but I doubt it -- but look, it all depends on the cash flow generation next year.

Simon, I think that we've answered pretty much all the questions there. And if anybody has any further questions, they like and please send them through to me. Simon will get them, and he's looking forward to making sure everybody has their questions answered. I think we can safely say it was a great result, well described and explain today. Thank you, Simon. Thank you, Nathan, and thank you to everybody who joined in. There will be a recording available at the YouTube site and the website as well for Metro Mining. Thanks, gentlemen.

Thanks.