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 year ended 30th of June 2020. Mount Gibson's Chief Executive Officer, Peter Kerr, will be leading the discussion; and is joined by 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. Due to time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via the Mount Gibson website shortly after completion of today's teleconference. Thank you, Peter. Please go ahead.

Thanks, Ellie, and good morning, all. Welcome to Mount Gibson's call to discuss our financial results for the year ended 30 June 2020. As usual, I'll give a short rundown of the results, and then we'll open up for questions. So as indicated in our recent June quarter report, we delivered a reasonable operational performance for the year, in particular, given COVID-19 circumstances that everyone's been dealing with. And at a headline level, our profit before tax rose more than 70% to AUD 121 million, up from $70 million in the prior year on total sales revenue of $445 million, and we sold 4.9 million wet metric tonnes of iron ore. The sales comprised a little over 2.3 million tonnes of high-grade ore from Koolan Island, and 2.6 million tonnes of low-grade material from our Extension Hill operation in the Mid-West. Our net profit after tax totaled just over $84 million compared with $133 million last year, and that $133 million included the one-off recognition of deferred tax assets totaling $63 million. The group's cash and investment reserves totaled $423 million at 30 June 2020, and that was an increase of $39 million from the prior year. If the cash component of last year's final dividend is added back, the cash increase was around $65 million. This reflected operating cash flow of $160 million; capital expenditure on Koolan mine development of $64 million and on equipment purchases of $26 million; lease repayments and other financing costs of $9 million; and other investing activities of $4 million and interest income receipts of $8 million. So delivering the first full year of production from the restarted Koolan Island operation was an important achievement for us, given that mining activities were adversely affected by some pretty bad weather at times across the June half and difficult mining conditions that arose from that and also COVID-related challenges. The high-quality of Koolan's iron ore is of significant value to us, and that has enabled us to attract premium prices for the production in our first restart year. So together with the strong iron ore prices that we have experienced, this helped the business generate the positive cash flow that it did. So on the basis of that performance, the Board of the company has declared a dividend of about half the cash flow generated, and that's a fully franked final dividend of $0.03 per share. The total amount of the dividend is $35 million, which brings us the total fully franked dividends paid since Mount Gibson first started paying dividends back in the '11-'12 financial year to $309 million. Before I go into the financials, I just wanted to briefly touch base again on the impacts of the COVID-19 virus pandemic on the business. And as we've previously reported and I'm sure people are aware, it necessitated some pretty significant responses to limit the risk of transmission, particularly in the Kimberley area, where we were subject to strict national bio-security declarations from March to June. So that means heightened travel restrictions for the workforce in addition to roster changes, pre-flight screening, social distancing, cleaning and hygiene protocols. And although these changes contributed to higher costs, and we think around 10% across the operation, the response from our people was first rate and enabled us to continue operating where other mining businesses in the Kimberley region were unable to do so. Given the success to date of controlling the virus in WA, we've now returned to our normal roster pattern on Koolan Island, which for the workforce is typically a 2-weeks-on and 1-week-off pattern, which is important for well-being and productivity of our people. We have, however, maintained some of the key travel and site protocols to minimize any transmission risk. And all our sites are ready to respond promptly should there be a need, touch wood that there isn't. On that note, the completion of our new airstrip at Koolan Island will not only assist with productivity, but also be a key part of our long-term pandemic-management strategy. It allows our FIFO people to fly directly from Perth to the island. So on the airstrip, all major construction activities are now complete. There's some final works in ancillary activities and regulatory certification that are ongoing. We expect FIFO flights to commence in October, which is in line with the plan we stated earlier this year. So just getting back to the numbers. The stronger iron ore price contributed to our performance. And with almost half of our product sales averaging over 65% iron and the remainder of the low-grade being around 53%, we achieved an average blended realized price of AUD 84 per tonne sold FOB, up from AUD 76 in the previous year. And in that year, almost all our sales comprised Mid-West material grading around 59% to 60%. So we realized an average price of USD 87 per dry metric tonne FOB for our high-grade fines from Koolan Island. And in the Mid-West, our price for low-grade lump and fines was USD 36 per dry metric tonne and $27 per dry metric tonne, respectively, for those products. Positively, prices have strengthened further for all products since the end of June, and there are obviously signs and mark and commentary around that these prices could remain well supported for some time yet. In relation to costs, from an accounting perspective, our cost of sales averaged $60 per tonne sold FOB with a 50 -- compared with $50 in the prior year. And in that prior year, most of that production came from the Mid-West. Our group cash cost to average AUD 72 per tonne FOB. And although we withdrew guidance for the year in March due to the prevailing COVID uncertainty in the Kimberley region at that time, our group ore sales and our cash costs for the year were ultimately within that withdrawn guidance. At a site level, Koolan cash costs, including the elevated waste-stripping investment, averaged AUD 99 per tonne FOB, and that also reflected the weather and COVID-19-related disruptions. And in the Mid-West, our cash costs averaged a fairly consistent AUD 41 per tonne FOB, which is in line with where we've been in the Mid-West for at least 12 months. So on a cash flow basis, Koolan generated total cash flow of approximately $50 million, while the Mid-West business generated a cash flow of around $22 million, and that also included $8 million from the ongoing rail credit refund that comes through. And for those that can't recall, that rail credit refund has been running for about 1 year now. And is capped out at $35 million over time limit of 2031. So based on the rate, which others are railing on the network at the moment, we expect to receive that credit over the next few years. So it was a solid performance from the operation in the Mid-West that was originally planned to close in early 2019. Our low-grade sales from the Mid-West of 2.6 million tonnes exceeded our initial 1 million tonne target, and we've again been able to extend the program a little, this time to later this calendar year based on the remaining material stockpiled at the Iron Hill deposit, which is at the Extension Hill mine site but a few kilometers down the road. Subject to market conditions, we may also be able to recover some further salable material from Extension Hill. So looking ahead, Koolan is, of course, the centerpiece of our business and will generate very robust cash flow over its life, thanks to its high-grade product. So we're now well into the elevated waste-stripping phase in the main pit, which is consistent with our life-of-mine plan. The investment is due to be completed over the next 12 to 18 months, and then we'll establish Koolan will significantly increase sales and lower cash costs during the financial year ended 30 June '22 and thereafter. Total mining volumes in this current year, so the 2021 financial year, are targeted to increase by approximately 50% and so our waste-to-ore strip ratio will rise to about 9.4 compared with the 2019/'20 year. Given the larger volumes, unit mining and logistics costs, including sustaining capital expenditure, are targeted to reduce further to around $9 per tonne of material moved. So that's per tonne of ore or waste moved. Our reported cash cost per tonne of iron ore sold will reflect the elevated strip ratio and the lower ore production during this waste-stripping phase. Our iron ore sales will vary from quarter-to-quarter, with the site targeting 2 to 3 shipments per month on average. Sales will be weighted towards the second half of the financial year. And in particular, the December 2020 quarter will likely be the lowest as the waste movement cycle reaches its peak at this time. We're obviously looking at ways to make sure we can bring forward for access to iron ore. But given the geometry of the pit, that December quarter will be a waste-focused quarter. Koolan Island is expected to contribute between 1.8 million and 2.1 million wet metric tonnes of high-grade iron ore fines sales in the year, and the site operating cash costs are expected to average AUD 60 to AUD 65 per tonne FOB. And that's before the advanced waste-stripping investment of around $100 million and the other Koolan capital improvement projects of approximately $20 million. These projects include a partial upgrade of the existing crushing plant to modernize what is a fairly old facility now and ensure it will be capable of processing the significantly increased ore throughput we're expecting from next financial year onwards. The Mid-West operations are expected to contribute between 1 million and 1.2 million wet metric tonnes, at again, a fairly consistent all-in cash cost of between AUD 40 and AUD 45 per tonne sold FOB, comprising the sale of remnant low-grade material from the Extension Hill site. So on a group basis over the year, Mount Gibson, therefore, expects total sales of 2.8 million to 3.3 million tonnes at a group cash cost of that $60 to $65 per wet metric tonne FOB before the previously mentioned Koolan waste-stripping investment and capital improvement projects. We haven't yet included any contribution from the Shine project in the Mid-West as we expect to make a call on this project very shortly. Our assessment and development planning remain on track and assuming a favorable decision, we'll be aiming to bring that project into production later this financial year. We'll provide more details on that assessment once it's complete, but we're quite optimistic that Shine can provide a further valuable extension of our Mid-West business and enable us to use the infrastructure in that part of the world, that in effect, has already been fully paid for. Summary. So to sum up, we can look to this 2021 financial year with optimism. As we steadily improved the Koolan operations and set it up for significant cash flow generation and also as we extend the life of the Mid-West operations and seek to make a development decision at Shine. So in particular, I thank personally, all the personnel within the Mount Gibson organization for their commitment and efforts in producing the year's results. The fundamental qualities of the high-grade Koolan products, the continuing cash flow from the Mid-West business and the smart work that the team is doing there as well as our strong balance sheet, give us a solid platform on which to build. So we're looking forward to the next stage of the company's evolution. So with that out of the way, Ellie, I'll now hand back to you for any questions that anyone may have.

[Operator Instructions] We have our first question, Peter, and it is from Hayden Bairstow.

Just a couple for me. Firstly, on the divi, I mean, are you happy just to swing to unfranked dividends? If you've run out of franking credits, thought I'd mention, there's been tax, I mean, we're paying this year. So just interested on sort of how that works and then what you're thinking on that front?

Sure. Okay. So on the dividend side of things, the dividend has paid out all of the -- or effectively all of the available franking credits. So when we look at it next year, we'll be looking at the position at that time and how quickly after that point we'll be paying tax. And in particular, franked dividend can still be paid if tax is expected to be incurred in that financial year prior to the time the dividend's paid. So -- for the following year, I should say. So we'll still be evaluating that. From a tax loss perspective, we have losses that protect our taxable income this year. And I think we'll be then exhausting those in the following year. So it's just a question of timing as to how we deal with building the franking credits back up in our franking account.

Okay. And just on Shine, with that sort of investment decision, I mean, it's not a massive amount of tonnes. So I mean, there's potentially a chance that you could actually look at hedging some of this stuff. Well, obviously, the forward curve of iron ore is still pretty state. But if that flattens out, would that be something to consider to get the guarantee at least get the capital back?

Yes, spot on. So we have actually done iron ore hedging previously. And that forward curve has come up so that in about 12 months' time, the price is still high USD 80s, low USD 90s per tonne for 62% material. So we're watching that pretty closely now and we'll probably look to protect some of that revenue.

Okay. Great. I look forward to testing at that new runway at Koolan Island at some point.

So are we.

[Operator Instructions] It would seem that, that is all the questions we have at the moment, Peter.

Okay. Thanks, Ellie. Just a reminder that if anyone does have anything they'd like to ask us, then our contact details are on the bottom. So we look forward to speaking with you, and have a good day. Thank you.

Thank you, everyone. You can simply hang up your lines now.