Metro Mining Limited (MMI) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us. We are here with the CEO and Managing Director of Metro Mining, Wensley; and CFO, Nathan Quinlin, to discuss the September quarterly activities and a little bit more of an outlook for the company for the coming months. I'll hand it over to Simon and Nathan, and we'll have time for some questions at the end.

Great. Thanks, Peter, and thanks, everyone, for spending the time to join us on the webinar. I hope you've had an opportunity to have a skim of the quarterly activities report, which we put out this morning on the ASX. As normal, I'll probably share the screen and we can -- if you haven't seen it, we can then go through it on the screen. Is that coming through, Peter?

It is just loading it now, and there it is, yes.

Great. Okay. Well, look, I think the most important thing to address upfront is the production volumes and the production and shipments in Q3 were, I think, solid at best, but the expectation, of course, was for a much higher volume. And I think obviously the reaction to the September production numbers was quite extreme and frustrating, I think, for investors who've been with us for a while. And I can absolutely say that from a management perspective, we are as frustrated and I guess really focused on turning things around. And I think the frustration, particularly people like myself and Nathan who've been with Metro for 5 years and taken it from where it was just coming out of care and maintenance in 2021 and building the business and investing in it is that on site, and I know that not many of you would have been up there, but it's a fundamentally different business. The amount of investment that's gone in up there in equipment, in people, in setting up the right environment from a weather point of view and so on, there's been an enormous amount of investment. And the frustration is absolutely real about they're not seeing that flow through in a consistent way. And we had very deliberately and cautiously set the initial guidance, and it's a really, I guess, sort of frustrating and difficult time to then have to adjust that. What I would say is that, I mean, every -- the issues that we faced this year have all been quite distinct and some not of our making, particularly around the quarter 1 sort of cyclone and the impact that that had. But absolutely, some that could have been anticipated or where we could have reacted more. And I guess that's been a very deep reflection from the management team around how those things have occurred and what we're going to do with it. And I can absolutely say that from the Board and myself and right the way through the organization, there is a razor-sharp focus on what we've got to do in this last quarter to really demonstrate the potential of this business. I mean there's nothing that's happened this year from a technical or an operational sense that changes my view as to what the potential of this business is. We've certainly seen periods where that 7 million to 8 million tonne capacity is absolutely there and available for us. We saw in the last quarter a period through -- particularly in July, where we had to operate the floating terminal with one crane, and out of adversity comes some silver linings. And I think the single crane operation out of Ikamba was superb, and we were able to get much higher rates than, for example, out of the floating crane just from that single crane, and that's because of her design and because of the equipment that we've got there. We were able to deal with this lingering cylinder issue. It's -- these 4 -- there are very 4 large 4-tonne cylinders that we had to change out. Eventually, that ended up requiring a 1-week shut, and we, again, were able to demonstrate that the geared vessels that we were able to bring in were able to mitigate the output from having her down. So that was again a positive upside to that. Look, since she's come down, we've had a good demonstration of what she can do with all of the things that were done as part of the dry docking plus the changes in the cylinders, we've achieved record rates out of her over the last sort of month or so. So we're getting up to that 2,400 tonnes per hour production, which really sort of shows what she can do. And what that really means when we first get a barge coming in, she's operating close to 3,000 tonnes per hour, which really demonstrates the upside potential that we still got there. Those of us who have -- those of you who have been investors with us for a while understand that we've got a sand bank at the mouth of the river. We maintain that on a regular basis every sort of 6 months or so. And it has -- we've changed our strategy there. And this -- we now have a dedicated tug that we use to bring in with a dedicated bed leveling crew with a much larger plow than we've used in the past to do that. Unfortunately, just prior to that occurring in October, we did have a grounding event for a barge. I mean that's not a serious incident, but it is a reportable incident, and it does mean that the Harbour Master declares lower draft in the channel until we can clear it and provide that survey. So over the last sort of 2 to 3 weeks, we've been enacting on that, and we have now achieved the required depth to be able to operate at the top end of the new guidance that we've put out there. So look, I'd say, look, again, emphasizing that from a production point of view, it has been frustrating. It's been a difficult year on several levels. But each of those issues has been addressed and mitigated. We are now absolutely focused on delivering certainly for the next 3 months, the best possible output that we can. The second half of October has already shown that we can operate once the channel is clear, and we've dealt with some of those productivity issues that affected us in September along with the channel issue that have been dealt with that we're now operating in that sort of 30-plus thousand tonne per day. So October is certainly going to be a month of 2 halves, first half looking a bit more like September and the second half looking, I believe, more like how we're going to be operating. So that is the -- that's certainly the target. I said, at every level in the company, we're focused on getting that productivity and those outputs through. The market is strong or strengthening and getting to a point where we're starting to be able to drive those margins further. So let me just touch on the market a bit, and then I'll hand over to Nathan to talk a bit about the actual financials. Look, I think it's still -- the Gulf War continues to have quite a big influence on the aluminum value chain. It obviously affects not only fuel output and so on, but a number of the large smelters are based in that region. And so there is a significant direct impact on that and also some of the supplies, petcoke and other things into the market come out of that region. So we're seeing quite a volatile LME price. And whilst the aluminum price has come down again to almost pre-war levels, the stock levels of metal around the world are almost at a historical low. So that does suggest to me that there is probably upside in that LME price. And that's certainly good for some of our customers in terms of their ability to make money. In the alumina space, and we've seen increased production out of China over the last sort of year to combat the shortages that were in the market, and we've seen similar -- some increased capacity out of Indonesia at the same time. So there is some more supply coming into the market to supply that demand. Alumina, we're seeing a kind of a split market. The overseas traded market outside China has tightened significantly. And you can see there over the period, there was greater than a 15% increase in the price on the dark line there. In China, even though demand for alumina did go up during the last quarter, there was enough supply coming on to meet that extra demand. And indeed, there's been an increase in exports out of China from a metals point of view. So there was enough supply of alumina. And so you've seen a pretty static alumina price and still relatively low. And that's important because a lot of our customers are long alumina. And so whilst bauxite costs have gone up, and Nathan will talk a bit about the impact of costs where we have and where we haven't seen impact on cost. Certainly, freight has been one area that has continued to stay high. So we've seen since really the Gulf Wars took off that we've seen between USD 40 and USD 50 per tonne freight rates out of Guinea, and it's still hovering in that sort of range at the moment. And that's certainly $15, $20 at least higher than where it was before. And that's just the freight, the mining costs have also gone up there as they have for us in terms of sort of diesel prices and so on. So there's certainly a cost curve driver for pricing going up. And -- but we've already seen the Guinea price has gone up in that period about $10. So it hasn't gone up enough to really drive, I guess, profitability in that sector. And we've seen the latest numbers coming out of Guinea that shipments are certainly down by 15% to 20% from this quarter to the previous quarter. And about half of Guinea's 250 million tonne capacity is currently suspended and not operating. So it will flow through. There will be an impact. Certainly, the government there is -- given that the profitability and the utilization of the capacity there is so low, there needs to be higher prices to incentivize that to come back on. And I know the government there is focusing very hard on that. I know that we've been talking a bit about that for the last sort of 6 months to 9 months, but -- and it hasn't flowed through into legislated action yet, but there has to be a moment in this market where those costs are truly reflected in the delivered pricing into the Asia Pacific region. In terms of our own pricing, we were able to get about a roughly 9% U.S. dollar rise between Q2 and Q3 off a low base, obviously, in Q2, but that was a bit more than where -- how the market moved. Unfortunately, some of that was offset by exchange rate. So we got about a 6.5% increase in the Aussie dollar per wet tonne -- the wet tonne measure of delivered pricing. And that we're going to see a continued strengthening in the market through to Q4. So depending on customers, we've seen a $2 to $4 kind of increase through that through Q3 to Q4. So slowly strengthening, but certainly not sort of busting out of the range that we've seen. So -- and look, in terms of freight, obviously, the impact of freight is significant. If we were exposed to the spot market, we are not, our strategy is not to be exposed to the spot market for freight. So we have had a strategy of locking in contracts. You can see that we've had good contracts that we signed up to in 2025, and that's stood us in good stead for most of the year. We have locked in a few more contracts longer term, and that will push up the freight slightly. But effectively, we're still operating well below where the market is, and that is -- it's our intention to continue to take out long-term positions in freight. So I might pause there and hand over to Nathan, who can talk a bit about more of the costs and margins, financials, et cetera.

Yes, sure. Thanks, Simon. So like I said from the outset, it's obviously been a frustrating quarter, particularly when we look at the controllable around unit costs, around site costs. From a market perspective, it's obviously pleasing to see that extra sort of $3 and more a tonne that the marketing team has been able to achieve out of what, as Simon said, is still a difficult market. So I think that's been a fantastic result. And our strong freight hedging position has then allowed us to maintain a healthy FOB margin and site EBITDA margin. Where we do have a little bit of the impact of some of these escalated freight costs will just be in the demurrage side the demurrage exposure. Obviously, there's going to be an inherent amount of demurrage that we incur as part of our business as we look to have some small amount of overlap between our laycans and our vessels. But those demurrage rates will still be pegged to sort of market conditions. So it will have a little bit of an impact on our FOB margin, as you can see there, where the CIF pricing of the extra $3 to $4 hasn't necessarily flowed straight down to that FOB margin. I'd say from a site cost perspective, that's probably the more frustrating result for us financially. There's naturally the impact of some increased variable costs, particularly around diesel. That's not dissimilar to what we had in the previous quarter. But really, what we want to be seeing there at that level of production, which is not dissimilar to the previous quarter year-on-year is another sort of $3 to $4 a tonne come out of that, if not more. So aside from the diesel, really what we've got in there is fixed structural costs where we've made an investment in the business and the flow sheet. So really, what we've got there is equipment where we know that we can get better utilization and productivity out of. And so when we look to that Q4, we're not necessarily looking at a cost structure that's maxed out. What we're looking at is a cost structure that still has lots of opportunity to be extracting these economies. So not a bad site EBITDA result, but at this time of the year, really, what I wanted to see was something in the double figures and us at least sort of around that AUD 25 a tonne, if not lower mark around site costs. So naturally, that's going to be a razor-sharp focus from us in Q4. We've made these investments into the flow sheet. We've made sure that we've got the gear and now we've got to make sure that we're extracting all of the value out of it. Now from a, I guess, a balance sheet perspective, you'll be able to see that we've taken a really good chunk out of our debt this quarter, which is great. So that leverage ratio continues to improve. From a cash perspective, I would have hoped to have seen a little bit more cash generation at this point of the year. But certainly with what we're predicting in terms of Q4 with the forecast that we've got set up the gear that we've got ready to go and the people ready to operate that gear, I'm expecting a really strong cash generation quarter out of Q4. Outside of that, outside of the actual cash generation from the business, we continue to work on our bonding options around the FPS, and I look forward to making an announcement or providing the market with an update on that in the near term. So as far as it goes, when we look out towards the rest of the year, lots of cash generation opportunity for us. And I would expect at this point, all of our wet season plans are still very ambitious wet season plans, particularly around some of the new screening elements that Simon will be touching on is we're really looking forward to continuing to make investment in those -- in the screening that we've been commissioning in the last quarter. So there or thereabout sort of quarter for us financially with some frustration about the upside that's there, but with obviously a huge focus in Q4 about time to deliver. Thanks, Simon.

Thanks, Nathan. Look, as always, we're pretty detailed and transparent about what's going on in the operation, and you can have a look there. I think we've obviously -- the bed leveling piece we've had a lot of questions about in the past, and you can see a picture of the assets that we deploy there. An interesting thing is now the use of drone technology to do the bathymetric surveys as we do that to get more accurate information that we can then pass on to the authorities to redeclare the channel. So that's a cost saving, certainly a cost saving and is a more accurate outcome. Look, again, safety, a decent safety year. I guess I wouldn't -- if in the time remaining, talk about a couple of things just back to marketing a little bit. Obviously, we spent a fair bit of time. It's a difficult market. There's been oversupply certainly into the first half of the year. And -- but in that environment, we've managed to get 2 significant customers over the line to put in 3-year contracts moving forward. It's a significant part of our sales volumes over the next 3 years. So I think that's a real reflection of our focus on output, product quality, reliability, et cetera, consistency. And these are all direct B2B sales. We don't tend to use trading companies in the business, and that's, I think, resulting in these outcomes. I did want to talk about the screening side of things. We've touched on it in the past, but we've been in a trial mode. I think we've had a double deck or 2-deck screen scalp, what we call scalping screen Metso Scalper that we've had on site for a couple of years. It's really been a backup sort of temporary when we've had sort of maintenance on our screens at the port. So that's really been its function. However, what we've been able to do over the last 6 months is actually trial a very wide range of materials in our -- that comes out of our resource at Bauxite Hills through that. Adjusting, looking at different screen sizes, looking at different throughputs, looking at different kind of results, and we've seen some really excellent outcomes from dry screening. And when I came into this business, I came out of the Rio Tinto I guess, mold of everything has to be washed and you need a big plant to be able to do it and you need big tailings dams and all that sort of stuff, which was the sort of the kind of, I guess, perceived wisdom at the time, and that suits them, and I suppose. But I always felt there was a different way of doing this. And so really looking at more at the kind of quarrying and more flexible, more low capital, low operating cost sort of way. And dry screening obviously, is what it is. It is what it says on the tin. It's a screening without using water. And we've had, frankly, excellent results from those trials. So that came to a head at the end of the last quarter, and we were able to get to a proof of feasibility and then into an execution stage on Phase 1, and we've procured 2 larger capacity screens. One is a dedicated dry screen. So that will -- it is similar -- these are triple deck screens. So they have additional ability to screen at effectively 4 different screen sizes, and we've been -- we've used the work we've done on site to be able to kind of optimize what those screen sizes should be to get the best possible grade at the best possible recovery at the best possible throughput. So we're now implementing that over the next -- of this month. So we're now -- I think we have one of those screens running full time and the second is running at half time. They will sit in the pits. So these will not -- we will not incur mining -- sorry, large transportation costs to transport raw ore to a central location and then transport the reject fines back. So these will sit literally right next to the mining phase, so we minimize mining costs, and then we can also dispose of the finer material. We're currently looking at -- we're currently using a minus 2 million at the bottom end, and that is about sort of 30% to 40% of the volume that goes in. But we're getting a massive increase in quality. So we're putting up to 20% silica into these screens and getting a grade coming out at the bottom end of to 11% to 12.5% silica. So really, the stuff at the top end of that is not salable material. So I mean our reserve grade is around 13%. What this is demonstrating is the ability to take material that is on the edge, on the shoulder of our DSO bauxite horizon and being able to turn and indeed waste product and turn that into a salable product. But this has also a number of other advantages. So the ability for us to obviously derisk those reserves, increase the quality of our product is good to start with. But that has, if we think about it, quite a massive strategic impact on the ability to now look at our resources in a different way and be able to look at a different cutoff grade for those resources, bring them into reserves on the basis of this proof -- this operating proof of concept here. It enables us also to go for higher productivity. So we -- in the past, we have to obviously mine according to each specification on each ship, right? So we don't really have the ability to change or to modify the grade as we're in flight on a particular vessel. Now we have the ability to effectively higher grade our DSO and have the confidence that with the material that sits on the edge, we can then screen and then we can actually feed that in depending on how the grade on each ship is moving. So it gives us an ability to worry less about fine-tuning the grade per ship and actually move through the pits at a rate that suits us and our equipment and our productivity rather than being constrained by grade. The other thing is, I mean, what we're doing here is removing, I guess, the very fine clay that comes with the bauxite. That is what causes the bauxite to become sticky during the wet season. So removing that fine material does enable us to handle this product much more easily during the wet season. One of these screens is capable of operating both in dry mode and wet mode. So it is -- it does have an ability to spray quite aggressively the product as it comes through the screens. That is something that we're going to trial during -- we've done obviously bench tests and so on, and we did a campaign test at a North Queensland quarrying operation, which has very similar screen to the one we bought, which was very positive. So we've done some bulk trials at that quarry, and that enabled us to purchase this other screen. This screen can operate in dry mode during the dry season and wet mode in the wet season, and we're going to trial that over the next -- once we get into the wet season. Now obviously, procuring storing and transporting water is more expensive and indeed, handling the wet fines product -- wet fines reject is also going to be a more difficult proposition than handling a dry reject. But again, that's exactly why we're going to look at all of that over the wet season. So look, I think all in all, this is a really, really fantastic sort of, I guess, increase in the resilience of our business. It is -- it enables us to do more things. It enables us to look at different resources, not just around Bauxite Hills, but in other places and look at them in a different way. It's a very, very cost-effective way of doing this. I mean, these units cost under AUD 1 million per unit. They're very cheap to run. And so -- and they're sort of sized perfectly for the type of equipment that we have there. There, you can see the 4 products coming out of the 4 screen products coming out of the dry screen there on the left-hand side. The one on the right there is the hybrid screen, which is an inclined screen, and that really comes into play when you've got the washing, the sprays coming over the top of the washer there. So look, I think I might pause there, Peter, we're at the half hour. But as always, plenty of opportunity for questions. So yes, please let me know if there's anything that people would like to ask.

Thanks, Simon. Thanks, Nathan. Yes, we've got quite a list of questions there, and I have some other ones that were submitted earlier by shareholders or investors. And we'll be -- perhaps we can summarize some. I'll lead off with these first ones, and then we'll go into some of the more detailed ones. Firstly, regarding production and sales outlook for 2027, would you like to comment on your view there?

Like I said, we have had a frustrating year this year. There's nothing that I've seen or done -- seen or experienced that gives me any real concern over the sort of the inherent capacity that sits within the system here. So as I mentioned earlier, 7 million to 8 million tonnes is still what we believe this flow sheet can do. We're consistently increasing the resilience and debottlenecking through the approach we're taking. So whilst this hasn't been the year where we've hit that 7 million target, I still have that. So look, without preempting guidance too much, that the flow sheet is still capable of that output. And we're certainly seeing the demand for our product in that range or even higher. So look, I think that's probably where I'll leave it at the moment.

Okay. And probably segueing into this, the next question about bauxite pricing, freight and diesel costs. And how is that being affected at the margins in this current market?

Well, I think I touched on pricing. Did you want to say anything more, Nathan, than you've already said on cost and margin?

No, I don't think so. I mean just with respect to diesel, you'll be seeing yourselves at the pump and there's still that sustained price increase, probably not quite as dramatic as what we've seen earlier in the period. But otherwise, outside of that from a supply perspective, yes, we're well set up, well supplied and don't anticipate any supply shocks through our business for the rest of the year.

Thanks, Nathan. We've had quite a few questions regarding the share buyback. Can you comment on the timing and rationale? Where is that sitting right now?

Well, look, we had expected to be able to launch that in the last quarter. Obviously, the production numbers didn't generate the cash flow that we had anticipated. As I've mentioned a couple of times in the past, I mean, we announced that share buyback. And I think the following day, Trump launched the attack of Iran. So the context in which we announced it was pretty -- was quite different to where both the market and I guess, our cost position is today. And I think then having not achieved our expectations on output has just held us back in terms of committing the cash to that. Obviously, the share price, we believe, is significantly undervalued given the value of the business. So from my point of view, it is a good time if we are buying back 5% of our share capital. So the Board is constantly looking at that. If we see some strong output, I think, in the next month or so, I think that does give us then the confidence we get to a point where we're confident that we can do everything we want to do in the wet season, and that gives us that confidence. And as Nathan alluded to, he's working on a couple of other things as well from environmental bonding, the amount of money we've got tied up in that bond about how we release some of that in the business. And that's been -- that work has been ongoing for over a year. So it's been a long-term objective of us to get -- to not have our cash tied up in someone else's bank account. So that would certainly increase the -- I guess, the approach or the -- I guess, the confidence of the Board to launch that. But I won't give an exact time frame, but I certainly would hope we can do some of it this year before the wet season.

Simon, you mentioned the bond liberation. Is that something that you have some control of with the Queensland government? Is there a time line for bringing that -- some of that bond facility back?

Nathan, do you want to answer that?