MGX Resources Limited (MGX) Earnings Call Transcript & Summary

Thank you for joining today's teleconference for the release of Mount Gibson Iron's financial results for the half year ended the 31st of December 2019. Mount Gibson Chief Executive Officer, Peter Kerr; Chief Financial Officer, Gill Dobson; and External Relations Manager, John Phaceas. Mr. Kerr will provide a brief overview, after which there will be an opportunity to ask questions. [Operator Instructions] A recording of the call will also be available via the Mount Gibson website shortly after completion of today's teleconference. Go ahead please, Peter.

Thanks, Allie, and good morning all. Thank you all for joining us to discuss Mount Gibson's financial results for the half year ended 31 December '19. As usual, I'll give a brief rundown of the results, and then we'll open up for any questions. So on a group basis, as indicated in our December quarter activities report, we delivered a pretty good operational performance for the half year, which reflected the Koolan Island ramp-up, and I'll talk about that in a bit more detail in a minute, and the continuation of low-grade sales in the Mid-West. The financial results that we've released today reflect that performance. At a headline level, pretax profit from our continuing operations, which is basically Extension Hill, Koolan Island and the corporate office, rose 42% to AUD 64.2 million compared with the same half in 2018, and cash flow from operations, which was after capital expenditure and corporate costs totaled just over $35 million, which was well above the prior half year when, back then, our focus was on preproduction activities at Koolan Island. Our net profit after tax at the bottom line number for the half year was $44.6 million, and that was on total FOB sales revenue of just above AUD 230 million, derived from the sale of 2.8 million wet metric tonnes of iron ore, split roughly evenly between the 2 operating sites. Some of you may have also noted that we had an accounting tax expense for the first time in a few years, and this reflects the recognition of the deferred tax balances that we had to do at 30 June and also the anticipated return to a tax-paying position within the next couple of years. Our total cash and investments increased by just over AUD 13 million over the half year and would total $398 million at 31 December. That was also after the payment of the cash component of $26-and-a-bit million for the fully franked dividend related to last financial year. So the key focus of operations during the period was on the ramp-up of Koolan and the extension of our low-grade sales program from the Mid-West business. Of the total 2.4 million tonnes of iron ore that we sold, as I mentioned, half was high-grade material from Koolan, and that averaged just under 66% iron, which is in line with our long-term plans, and the other half of the sales was from low-grade material from the Mid-West, which for lump material, averaged around 54% iron and for fines at 51% iron. So the high-grade Koolan material, which was all fines, realized an average price of USD 83 FOB out of the port at Koolan, and that was for the half year, and equated to about AUD 120 a tonne, so a price that was very good for us. The low-grade lump from the Mid-West averaged USD 35 per tonne out of Geraldton and the fines USD 28 per tonne also FOB out of Geraldton. So the overall weighted average price spread over all the cargoes that we sold was AUD 83 per tonne FOB, and that was up almost $20 a tonne from the prior corresponding half year period. And back then, all of our sales were standard-grade material from the Mid-West. We hadn't yet sold any Koolan material. So the increased realized price reflected not only the change in the mix of our sales but also the benchmark, 62% index, which was USD 95 CFR delivered in China for the half year just gone. And that was about 37% higher than what it was a year before. On the cost side, our total group cash costs for the half year averaged AUD 72 per tonne sold FOB, in line with our guidance. And within that, Koolan's site cash costs averaged $86 before some capital equipment purchases, and that reflected the ramp-up and the elevated waste movement at this time as well as the conveyor belt-related shipping interruption that we had in October that we talked about in our quarterly report. Extension Hill in the Mid-West, the site cash costs there were consistent across the period and averaged AUD 42 per tonne sold FOB out of the Geraldton Port, which was well in line with our guidance. So in relation to operations, at Koolan, the ramp-up over the half year period has been satisfactory. The Main Pit seawall has performed well and within the design expectations. And the island-side footwall geotechnical works have also progressed favorably. However, as some will be aware, the mining volume movements and productivities in this initial ramp-up and elevated waste stripping phase of the mine life haven't quite reached our targeted levels. So that manifested in our mining unit costs being a little higher than we had hoped. But these matters are now the key focus of our operational work going forward, so mining volume movement, productivities and unit cost improvements. We were, nevertheless, able to generate a positive operating cash flow from Koolan of AUD 35 million in the half year, something that clearly wasn't expected when we made the restart development plan decision back in 2017. As we've noted before, the first 2 years of the Koolan operation of the mine life, and both this is based on our feasibility study estimates, when the waste movement and the costs are at their highest and production is at its most variable and we'd seek to smooth some of that through our sales and stockpile management. But within the first 2 years, it's the focus on waste stripping that really is important. In line with the published mine plan for the feasibility study, it's expected that all sales volumes will likely reduce next financial year from this year, and we'll provide further detailed guidance on that in due course. And finally, on Koolan, during the half year, we also committed to construct a new $20 million sealed runway in the center of the island. That's shown on some of the pictures in the investor presentation we released this morning as well. So this new piece of infrastructure, which will enable direct flights to and from Perth, is expected to deliver substantial safety, productivity and cost benefits for us over the remainder of the Koolan mine life. In the Mid-West, our business here really now revolves around the sale of stockpile and other remnant low-grade material from the Extension Hill mine site. Cash flow from the operation was $10 million in the half year, and that was before the $4 million rail credit, so the refund of historical rail charges, which, overall, was a great result for an operation that we originally expected to close almost a year ago. As indicated, we exceeded our initial target of selling 1 million tonnes of low-grade material, and we did that well in the half year and by the end of December, had sold 1.4 million tonnes. We've also now extended the program into the June quarter with further sales beyond that being subject to market conditions, and I'll talk about the market in a second. So the Mid-West business, just to finish up on that, is also benefiting from our entitlement to a partial refund of historical rail access charges. I mentioned that was $4 million in the half year. So it's accruing at about -- a rate of about $2 million per quarter, and it's based on third-party use of certain sections of the Mid-West rail network, into which Mount Gibson's access charges over many years went to upgrade the network in the initial days. Payment is received 6 monthly, and the next one is due at the end of the March quarter. At the current railing rates of other parties on that network, we would expect to recover the full capped amount of the refund of $35 million, which is subject to some indexation over about the next 4 years. So in terms of outlook, just wanted to say a few words before we close. We have lifted the total group sales guidance for the business by 30% for this current financial year to between 4.8 million and 5.3 million tonnes at an unchanged all-in group cash cost of AUD 70 to AUD 75 per tonne sold free on board. The guidance reflects the increased Mid-West low-grade sales of 2.1 million to 2.3 million tonnes and the cost there of AUD 40 to AUD 45 per tonne sold FOB. And also at Koolan, unchanged sales guidance of 2.7 million to 3 million tonnes but at a slightly higher cash cost range, which we announced in our quarterly report a few weeks ago, of AUD 77 to AUD 82 per tonne FOB. And the cost guidance reflects the ramp-up to date and the interruptions that we experienced at Koolan in October. And also, more recently, we did have 2 heavy rain-related incidents with 2 passing cyclones in early January. But the site did perform well and was back in full operational mode by the middle of that month. So our expectations at Koolan obviously remained subject to no further major weather interruptions as we move through the wet season, but we think we've put ourselves on a pretty solid footing for this year. I also wanted to make a couple of comments from our perspective regarding the impacts of the Wuhan coronavirus epidemic in China and really 2 main points. The first is that, although we received feedback from our customers and various other sources in China, we probably don't have a significantly greater insight than most of you on how the situation will play out this year, in particular, from steel producers and iron ore buyers in that part of the world. So at this stage, we are hearing feedback and seeing reports that iron ore prices do look well supported. And that's primarily at the moment on the back of reported restocking by steel mills as well as a function of some supply disruptions, weather-related and otherwise from both Brazil and also in the Pilbara. The second point to make is that, although our customers are obviously very concerned and cautious at this time, and why wouldn't they be, they've continued to take and -- our cargoes and either consume them or trade them on a consistent basis. The Australian government has recently introduced quarantine rules for vessels that have been in China in the 14-day period prior to arriving at an Australian port. And so going forward, there may be some shipment timing and potential demurrage implications, but we'll obviously closely monitor the situation with our customers. Suffice to say that the shipping protocols that we've put in place and that we use to adhere to the Australian requirements are designed to minimize the risk to our personnel and our contractors, including pilots that are associated with the ship berthing and loading activities in both our ports. On the assumption that iron ore market dynamics aren't materially interrupted and the Chinese steel sector steadily resumes its output, we expect this second half of this financial year to again be positive in terms of sales and cash generation for Mount Gibson. So with that, I'll now hand back to you, Allie, should there be any questions.

[Operator Instructions] Okay. We have our first question from Hayden from Macquarie.

Just a couple for me. Just firstly on Koolan. Just interested in the price realizations that you've been getting. I assume you're doing everything off benchmark as opposed to the 65% price. So how you're thinking about those 2 indexes and whether you just keep running your own marketing business effectively and getting those sort of prices and how varied they are shipment to shipment? Is there much of a range? Are you sort of getting pretty consistent realization? And then just in the Mid-West, I mean it obviously does make a lot of money, but what's the benefit of running this stuff other than the modest cash flow? Are you sort of removing closure provisions effectively as you go through? Or is there sort of other benefits to run that Mid-West sort of marginal tonnes? And if you did turn it off, is there an immediate sort of cost to the business to turn it off?

Yes, no problem. Okay. So just dealing, Hayden, with the first question. The Koolan contracts are linked to the Platts Indices, and for the grades we're selling, the reference price is the 65% Platts Index (sic) [ Platts 65% Fe Index ]. Our contracts are with 2 main customers. So one customer takes 20% and one, 80%. They're broadly similar in the way pricing works, but they can have different quotation periods for pricing. So our pricing which is -- presents a little bit of a difficulty in the way we're presenting. So the provisional pricing estimates that we make is on an -- sometimes the month of shipment basis, sometimes the month after shipment and sometimes 2 months after shipment. So as long as we are referencing the Platts 65% Index, then we're obviously getting the market price at that time. But to the extent that index moves up and down, then we can have provisional pricing adjustments, which you'll see in some of our quarterly reporting that impacts that. So if we then look at the reference to the Platts 65% Index, the way it works is we have a great adjustment. We have a deduction for market-related shipping freight costs. And in the half year gone, the average shipping freight cost was about USD 12 a tonne shipped, but it does vary, and it's actually come down a fair bit in the last little while in response to the Wuhan virus issues. And then we have adjustments for some minor penalty type issues relating to the sizing of the cargo, and the cargo at Koolan is quite fine for a portion of it. So there's an adjustment there. And we also have silica and alumina adjustments. So alumina is really triggered because we have a low alumina content, which makes the ore attractive. Silica is quite often triggered. Our average silica level for this product is about 4.5% silica. So when you take those penalties into account, that can often result in a $3 to $5 type deduction for -- against the price that's geared on the index. So hopefully, that gives you a flavor of how that works. And we try and provide the best guidance we can in terms of how that works and then the proportion of provisional pricing adjustment from period to period. Obviously, the shorter the period we're talking about, the bigger those adjustments could be if the market has moved a bit. And the longer the period, the less relevant because it washes out from month to month. In relation to the Mid-West, a good question. The benefit that we said is, yes, the cash flow is modest, but Mount Gibson has effectively, over 15 years there, paid for a range of infrastructure, and that ranges from assets in the Port of Geraldton right back through the Extension Hill railway siding and the Extension Hill mine site. So in our view, anything we can do that actually uses that infrastructure for longer, whilst making positive cash flow, should be done. And the team there is a very small team with some key contractors operating very well. So that's the reason why we do it. We think we can still make money from it. It does, as you mentioned, have a little bit of an impact in terms of a reduction on rehabilitation costs because we are selling stockpiles of material that we would otherwise have to profile and put topsoil on and seed. So there's a little bit of a reduction there. But otherwise, it's basically, a cash flow generating business that we will run for as long as we can see the potential to do that. The closure cost provision for the site is sitting around $10 million and coming down a little bit as we do the work and we clean up the site. So if we stop immediately, there's not a lot of employee entitlements because the site is fairly lean, and a lot were paid out when the full mining operations ended over a year ago now. But the rest is really due to final rehabilitation and just normal closure type work. I hope that helps.

Our next question is from Paul McTaggart from Citi.

So just to follow up on Hayden's issue, so I mean to the extent that you can keep selling low-grade material out of Extension Hill, there is a sort of a benefit because you're kind of saving on some rehab cost. But I guess in the scheme of things, it's a small number. I guess that's how we should think about it given the scale of the rehab provisions. But I mean I know you're out looking for acquisitions, and you probably can't say a lot about that. But it kind of presents a problem for us in the sense that we can do that this year if we can come up with a value for the company. It's a function of iron ore price, et cetera. Does this acquisition risk issue in the sense that the longer it goes, the closer you get to the point at which you need to make an acquisition, there's just this risk that we don't know really what we're getting. And we invest in a company today and we know what we're getting, we might be investing in something else. How -- what comfort can we give to investors around this topic?

Okay. Paul, so firstly, just to deal with the Mid-West question, yes, you're spot on. So it is a modest cash flow business. We have a fairly short life there. We'll continue it for as long as we can see the ability to make money from the sales of that low-grade material. But it is small, so you shouldn't look at it as being super extended in life or cash flows above what it is already. In terms of the acquisition side, yes, look, it's a really good point. We obviously have built up a substantial cash reserve. We've paid out dividends on an annual basis fairly consistently when we can. And I know there is a call for further consideration of dividends going forward. So that's clearly with the Board and Board decision. But at the same time, we do know that Koolan has a mine life of 5 to 6 years. And so the question is, well, what do we want to do as a company and what are we looking for? Our preference is for bulk materials and base metals. They are the 2 areas we've been looking at, preferably in Australia, but we have also looked at a number of things overseas. So I don't have any specific comments at this time to make other than with the ramp-up of Koolan, that's been the #1 focus. And we do know that we need to improve there on mining productivities and costs and put that into the position that we wanted to be in. So that will take a little while yet, but we are basically over the hump of rebuilding the seawall, restarting the site, and now we're doing the finishing of making sure it's operating properly in the first couple of years of the heavier waste stripping period. So we don't want to take our eyes off that, but at the same time, we are now starting to be more active in looking elsewhere. And all I can say is we haven't invested our big sums of money in things that have lost funds for us. We are looking carefully. We're cautious. And you probably gauge that by the number of years that the cash just sat there. But clearly, the Board discusses this all the time because, eventually, there will come a time where the Koolan mine life will be shorter, and we'll either need to return the cash or do something proper. But I don't think you can say that we've acted rationally in the past, and hopefully, that's not a risk going forward.

You can kind of see the conundrum for investors because they're not exactly sure what they're buying because they're probably going to be buying into something else. And it's hard for them to take a view whether you'll make a good or a bad acquisition. So...

Sure. No, no, I understand that, Paul. I guess we would point to the way we sensibly run the iron ore businesses and to the work we're trying to do at Koolan. So we're not being silly with that, but we're going to adopt the same kind of approach on the acquisition front should we find something.

Peter, at this stage, there are no further questions on the queue. Actually, beg my pardon. One moment, I'll be back with you.