MGX Resources Limited (MGX) Earnings Call Transcript & Summary

It seems that there are no further questions on the financial accounts or other resolutions. With this in mind, I would ask shareholders to please finalize any outstanding votes. Once counted and reviewed, the results of the poll will be announced on the ASX via the ASX announcement. Ladies and gentlemen, I now declare voting closed, and this concludes the proceedings of today's Annual General Meeting. I would now like to invite our CEO, Mr. Kerr to present you with an operational update. Mr. Kerr?

Okay. Thank you, Seng-Hui. I now have a presentation to give regarding an operational update of Mount Gibson. It picks up a number of issues and achievements in the financial year completed to the year ended June 30, '20 and also some updates since then. So welcome, everyone, to the meeting. I reiterate Seng-Hui's comments earlier about a thank you from Board and senior management team for all of the efforts of Mount Gibson's personnel, staff and contractors over the year. We faced a number of challenges. COVID-19 included, but the results, we think, are with a positive view. I also have a number of questions that have been asked ahead of the meeting in relation to business items -- matters rather, including items such as capital management and insurance of the seawall. So I will deal with those afterwards and just let people know that, that questioning feature remains open during this presentation. The usual disclaimer sits at the front of the presentation. And this presentation has been filed on the ASX prior to the start of the AGM. So to those, I think, in this meeting, you'd be fully aware that Mount Gibson has 2 key operations, the Koolan Island operation in the Kimberley region in the north of Western Australia. And the Mid-West operation in land from Geraldton in the Mid-West. So just dealing with Koolan Island first. It is Australia's highest grade direct shipping ore -- iron ore operation. We've recently announced an ore reserve estimate as at June 30, 2020, of just under 19 million tonnes, and the grade there is a little over 65% iron. So a very valuable resource that will see us mining at Koolan Island for the next circa 5 years. Our guidance for the coming financial year. So that's the 12 months ended 30 June '21. The year we're in now, is for sales of between 1.8 million and 2.1 million tonnes. It's a little lower than where we were last year. And the reason for that is because we have the schedule, and this has been a long time schedule, waste stripping investment phase in the main pit at Koolan. And that will occur this year and a little bit into the following financial year as well. Following that, sales and cash flow at Koolan will increase substantially. And that's the prize for us. So I'll show you some pictures later in the presentation as to the key things we're doing on the island. In the Mid-West, we are coming towards the end of the Extension Hill mine, which commenced initially in 2011. That's been a great contributor for Mount Gibson. And we have been running a low-grade program from Extension Hill over the last plus 12 months. And in this financial year, we're able to extend that. So our guidance for the '21 financial year is between 1 million and 1.2 million tonnes, and we're well on track for that. In addition, we have the Shine Iron Ore project, which was purchased some years ago, and we are well commenced on a whole range of development activities there and have also announced an ore reserve estimate that will support us for an initial 2-year mine life from around the middle of next year. In addition, there is a rail refund income stream that we are receiving, which is in effect, the refund of rail costs we have paid in previous years. And because we were able to meet certain thresholds in our rail agreements, based on the volume of other parties on sections of that Mid-West rail network, we received a refund of some of the costs that we paid. In terms of the company corporately, on this slide, corporate overview slide, you can see that market capitalization at the moment is around AUD 830 million. We have cash and investments at the last reporting date of $445 million, and we're obviously looking to use some of that in our investment in Koolan Island this year as we move that waste material and set the mine up for the future. We have no bank borrowings at this stage. We're in the ASX 300 Index. And since the first dividend was paid back in late 2011, Mount Gibson has paid fully franked dividends of $309 million. The makeup of the shareholder base of the company remains fairly consistent, although we have seen an increase in institutional presence over the last 12 months, which has been good. APAC resources from Hong Kong, a listed mining investment fund has approximately 36%. Then we have institutions from Australia, U.K., New Zealand and also the U.S. now, making almost 30% of the register. And another Hong Kong listed company called Shougang Fushan, which is within the broad Shougang state-owned enterprise business has 13.8%. The Board and management are listed on the right-hand side of that slide. And I would say from a management or from both Board and management perspective, it's been very consistent over the last 6 or 7 years. With -- in particular, in the management team, a number of changes, but otherwise, the core group, relatively stable. In terms of the financial year just gone, so the 2019, '20 year, we sold 4.9 million tonnes, and that comprised 2.3 million tonnes from Koolan and 2.6 million tonnes from the Mid-West. It was our first year of high-grade sales since the restart of Koolan Island, and that went quite well. Profit before tax from all our continuing operations was $121 million. And our net profit after tax was $84 million. The cash flow from operations was good at $160 million. And then we used that cash flow for a number of investments, including mine development purchases of property, plant and equipment, various leases and a number of other financing activities. So that meant at the end of the year, we had cash and liquid investments of $423 million. And as we've reported since then, that increased slightly during the September quarter, which I'll cover in a minute. At Koolan Island, we completed the construction of a new air strip. So a 2.1 kilometer air strip on the island. That, I will show you some pictures shortly, is a terrific asset for us in terms of production efficiency and just reducing the travel time and the lost time on travel as well for our people getting to and from Koolan Island that come from Perth. We still employ a large proportion of our people from the local Kimberley region and they still fly onto the island out of Broome and Derby on smaller planes. In the Mid-West, our low-grade sales program was successfully extended to late this year. And we also have the Shine project, which I'll cover shortly. The dividend down there, I have mentioned, it was a $0.03 fully franked dividend for the year completed. In relation to the September quarter, just following on from there, and we issued our September quarterly report in early October prior to our presentation at the Diggers and Dealers conference. We sold 1.4 million wet metric tonnes, and that was roughly half-half from each of the 2 sites. Our group cash flow was $32 million. And our unit cash costs AUD 56 per tonne FOB. And that was before the capitalized waste investment that we're making at Koolan, which was $24 million. So that meant our cash and investments as at September 30 rose to $445 million. And obviously, I mentioned the Koolan Airstrip was operational. Our first FIFO flight occurred from Perth on the 14th of October. In relation to iron ore pricing on this Slide #7 here, for those not familiar with these charts, the black line in the top left chart is the benchmark iron ore price for 62% Fe product, and that is reported typically in newspapers and on the news each night. The other lines, the red is the high-grade index with 65% product, and the yellow is the lower grade index with 58% Fe product. And what you can see here is over the last 4 or so years, and that chart starts from the beginning of 2016, when prices have increased, the differential between those 3 indices has tended to compress, and that's the scenario we see now. So for Koolan Island, this is particularly important for us because we can take advantage of higher prices when they're higher, but should they fall and go under USD 100 per tonne. Then you can see that historically, the differential between the benchmark indices has opened up. And so that red line has enabled sellers of 65% material to still realize good prices. And that's obviously clearly a benefit for Koolan Island going forward. The chart on the bottom left is simply a percentage discount and percentage premium of the red and the yellow lines relative to the black line, just to make it easy to see. So at the moment, that premium is relatively low. It's about 4% to 5% right now. And so we're looking at perhaps reducing the grade a little bit at Koolan as we go through this mine waste stripping phase, but that's not of concern to us because we wish to participate in that higher pricing as much as we can. For those who are following the fundamentals of the iron ore market, it continues to look well supported. I think some analysts were expecting some weakness to show around now with supply increasing, but demand in China is very strong. And although stockpiles in China might be increasing in terms of days cover for steel mills, for raw materials, those numbers are actually still looking very supportive for the iron ore price. Moving on then to a picture just to show you here on Slide 8 for Koolan Island. This is a picture looking from the island towards the east over the main pit. And you can see in the background the wharf and ship loading facilities and a vessel that was at berth at that point in August. In terms of product quality at Koolan Island on Slide 9. The reserve statement that we've issued effective 30 June '20, is shown in the top left for the main pit at Koolan. And you can see the top part relates to resources. So that's 38 million tonnes in resource. And the reserves, about half of that, 18.7 million tonnes. So resources here are reported inclusive of reserves. And the key point to note is a high-grade, the modest silica and in particular, the very attractive low grades of alumina and phosphorus, which are of benefit for end users who make steel. The chart on the right is a diagram showing in the gray dots, a number of mines, iron ore mines in Western Australia. And grade on the left-hand axis, rising and phosphorus levels, which is a key impurity that incurs penalties on the horizontal axis. And what you can see here is our Mid-West business and in particular, Shine in the yellow dot in the middle is really in a cluster of a number of WA operations, but Koolan really does sit as an outlier, given its high-grade and its low phosphorus levels. And if we were to do this chart based on alumina, which is another key penalty, we would see a similar presentation. Koolan Island itself on this next slide is roughly about 10 kilometers long by 3 or 4 kilometers wide. There is no community on the island. The mining operations have exclusive position at the moment. But we work closely with our traditional owners, the Dambimangari for looking at a number of employment opportunities, training opportunities and other things on the island, going forward. The Koolan Island is part of their traditional land holding. You can see labeled on the slide, an existing air strip on the top right and a new air strip in the central spine of the island. The main pit just south of the new air strip and the seawall. And then the ship loader down to the bottom center of the diagram. So basically, it's fully self-contained. Everything that's required is brought to the island either by barge or airplane and our people fly in, as I mentioned before. In relation to a few pictures, maybe just to show you what's happening on the island at the moment. This is a picture -- recent picture in the last few days of the main pit. So the sea channel is on the left, we're looking west here. And the activity in this eastern end of the main pit is focused on moving the waste levels down progressively over the next year. And also in the very far distance, you might see some mining equipment up the top of the western end, that material is being mined down as well and there is an ore supply from up there. Moving to the following slide. This is a picture from the other end of the pit. The left-hand side is the footwall zone, and it's difficult to see in this picture. But that is draped all the way along by avalanche mesh all the way through, to stop rubble if it falls out of the footwall and then just cascading straight through and out uncontrolled into the pit. For those who've seen, early in November, we did have a rock slip that incurred on part of the footwall, about halfway up on the left-hand side there. And that was all contained within the mesh, so very constructive from that point of view. But we are reviewing the geotechnical aspects in that part to make sure that when we are scheduled to get back into the pit at the end -- or this end of the pit, I should say, at the end of the wet season at the end of March next year, we are comfortable to do so and have the right geotechnical approaches and controls. Elsewhere, further along, you can see that there is some production drills set up in the central zone there, and we're looking to bring down that waste level. And right at the far end of the pit, you can see the mining, which will occur against the footwall, later this year. Final picture here is of the crushing facility and the stockyard. So the mined material appears on the right-hand side, is then crushed and stockpiled in the stockyard and then loaded on to a conveyor system, which takes the material out to the ship loader, where vessels, which anchor further to the right, are brought in and then loaded and shipped directly off to China. It's about a 10 or 11-day steaming voyage time to China. So as I mentioned, the island had a good start to this current financial year. We are focusing on our material movement. It's an investment phase this financial year as we set the operation up. And we're then expecting after that's done, the production and obviously, the cash flows to increase significantly. This year, we're looking at 1.8 million to 2.1 million tonnes, and we're on track for that. And our cash cost of between 60 and 65 free on board, which means as loaded on the ship. In addition to that, we will be spending approximately $100 million on advanced waste movement and approximately $20 million on various capital projects, the key one being an upgrade to the quite old crushing facility that we have here. So we sold 9 shipments in the September quarter. That was for about 700,000 tonnes, and our cash costs were in line with our overall guidance. Our average realized price was USD 104 FOB. The shipping cost that you would add to that cost for material going through -- so I beg your pardon, that you would take off from that cost is about $10 a tonne to go from Koolan Island to China. It does vary between about $8 and $14, but we're seeing that level of around USD 10 at the moment. So shipments will reduce in the coming few months as we go through our waste cycle. And we'll be focusing on our crushing upgrade as well. We also have a number of areas that we're now starting to focus more on because we have had our first full year of production. And those areas show the potential for some mine life extensions. So there are 2, in particular, I just wanted to flag here. On the bottom left of this slide is a picture of -- in the brown color, the mine design, looking north of the main pit. And then the red blocks that are shown below that are the resource blocks that sit outside the mine design or the reserve estimate. So we know that we've got a reasonable quantity of high grade ore, both at deeper levels, but in particular, a long strike to the west, that's to the left and to the east, to the right. So we are looking at options, in particular, in the west to see whether we can move the mine design down and create some additional tonnes. We know that the quality in the West is not quite as good as in the center, so that will form part of our analysis. We're also looking on the island at some of the older satellite deposits, some that have been mined previously and some that have not. And there's one in particular called Mangrove that you might see there on the center bottom of that aerial photograph, and that's located very near the crusher. And we're having a look at the historic drilling there and seeing when we might be able to bring that into our mine plan. So to finish up on Koolan. A couple of pictures here. This is the airstrip that was completed. That was in August. And as I mentioned, our first flight occurred, and that's a picture of one of the first crews arriving in on the direct Perth to Koolan Island flight in October. We're already seeing benefits in terms of safety improvements, in particular, but also productivity improvements in terms of less travel time for people and more prompt arrival into the operating roles when people start their rosters. So it's starting to have a very positive impact for us. Now just turning to the Mid-West. You may have seen this map before. Geraldton is on the coast on the left-hand side, and down towards the bottom right is Extension Hill. We have a few more months worth of low-grade material ahead of us, and that will be probably early next year completed as a site, and we will start to consider movement of infrastructure and people just to the north to Shine, which is shown also in a red dotted line there. And Shine has a number of possibilities for us for transport. The mine design work is being done. And that's our focus now for project generation in the Mid-West. So in terms of low-grade sales program at Extension Hill for the year, was completed. We sold 2.6 million tonnes. That was well in excess of the plan that we had at the start of the year. The operating cash flow was very good, $22 million, and that included $8 million of that rail credit refund that I mentioned before. Low-grade sales now extended, as I mentioned. And our guidance for this current financial year is between 1 million and 1.2 million tonnes, and the site cash cost, very similar to the last year, and we're well on track with that at the moment. In the September quarter, we sold 700,000 tonnes at a cash cost of $40. So whilst it's not a high-grade business like Koolan, so the margins are lower, the costs are also very economic for us. And our cash flow in the September quarter was $8 million, including the rail refund. That rail refund is accruing at about $2 million per quarter, as we mentioned before. So now just to finish up on Shine. You can see on that map on the right-hand side, Shine's located a few hundred kilometers inland. By truck, it's about a 300-kilometer road haul through to Geraldton port, to our existing infrastructure in the port. We have announced an ore reserve estimate, which would support an initial 2 year mine life of 2.8 million tonnes at 59.4% iron. We're targeting first shipments sometime in the middle of next year. And the reason for the fact that we're moving ahead promptly now, but shipments aren't until then is because it requires about a 3-month waste stripping period in order to build the stockpiles for the iron ore deliveries. And then once that period is done, the iron ore delivery profile is very consistent. So we're looking to produce about a 1.5 million tonne per annum volume. Our CapEx somewhere between $17 million and $20 million, and that will vary a little according to the transport route that we choose. Our cash cost somewhere between AUD 65 and AUD 70 per tonne FOB. The options for transport involve truck and also some rail options at various points along the way. There are sidings that may be available for us. And so they are commercial arrangements that we're working at the moment, but we've justified the work so far based on a trucking route all the way to Geraldton. In addition, there is a second stage of Shine, which looks like another 2 years at a similar production rate. And we will make a call on that in the second year of the Shine mine life. We've phased it deliberately just to ensure that we can assess it based on iron ore pricing conditions at the time. And you can see there in the final bullet point, the resource for the project is sitting at 10.8 million tonnes. That's the hematite resource. So there is other material there that can form part of that stage too. The mine site on the left for Shine is a simple mine site. You can see in the center there's a relatively narrow 1 kilometer long open pit a cross-section through that, which is just shown on the right-hand side. And the design we have is for the crushing facility in the bottom right-hand corner of that yellow area, and then waste dump and low-grade stockpiles over to the bottom left. So a number of approvals have been obtained. Some others are still being worked through, and we would hope to be able to commence mining sometime early in the June quarter and then first shipments middle of the year. Then just to finish up. Last thing I wanted to comment on just some of the metrics that are obviously important for us and becoming very important for investors these days. Across our business in terms of local employment, we seek, as a good business decision, to increase and maximize the employment from the local areas in which we operate. That certainly happened in the Mid-West, where many of our employees and contractors are sourced from Geraldton and surrounds. But in particular, up at Koolan Island, over 20% of our workforce reside in Broome or Derby or surrounding areas there as well. An actual fact, at the moment, it's a little bit above 20%. And so that's a good proportion of people that we like to see coming from that area. In terms of gender diversity, women account for 18% of our employee base. And then within the management group, right across the business, so Perth office and the 2 sites, about 30% of our executive and senior management roles. So that's a pretty good percentage relative to industry benchmarks, and this is something that we want to continue. Traditional owners are a good proportion of our workforce, in particular, in Kimberley, about 17% of our employees are indigenous. And we're actively working with Dambimangari, but also other traditional owners to increase that percentage. It's a very good position to be in. And to encourage, particularly the youth out of those traditional ownership groups to join us. We also have a whole range, as you would expect, in terms of good business and good thinking for relationships with local shires and community organizations. You can see at the bottom, there's a box of a range of a number of them. We do support as frequently as we can, the Royal Flying Doctor Service, because we do call on their services from time to time. They also call on us to use some of our site facilities up at Koolan from time to time. So our focus has been on a number of those programs plus generally on youth and education in those areas. So to summarize. We are a producer of Australia's highest grade direct shipping ore. And albeit we may have a little lower grade this year as we go through the Koolan Island waste phase, we will be returning to that 65% level in due course as the mine life continues. We're profitable. You can see from our historical statistics that we are disciplined with our financials. And we do have a good pathway to significant sales and financial increases at Koolan Island. In the Mid-West, the team has done a terrific job with eking out a continued sales regime of low grade. And so we'll try and continue that as best we can. And then as we turn to Shine next year, that will add some additional life for our Mid-West operations and the infrastructure that we own and operate there. We obviously have a strong cash and liquid investment backing, and that's the subject of a question I'll deal with in a minute. But that does provide protection and also a competitive advantage in looking at a number of growth options to which we're now starting to examine in more detail. Our desired areas are unsurprisingly bulk materials, but also in base metals and a focus on Australia at this point. And as I mentioned earlier, our management team relatively stable and experienced with the operations here at Mount Gibson. So with that, that brings the operational update to a close. And I would ask you, if you do have questions please use the question feature. I've got 2 that I'm just going to cover now whilst you may care to do that. And then, David, if you could please let me know if there are any that come through.

The 2 questions we have received. One relates to capital management in terms of our views on share price and would the company consider a share buyback given the level of its cash reserves? Or what is it looking to do with its cash reserves? The way to answer that is we've obviously paid out reasonable dividends along the way. So not everything that's been created has just been hoarded in the business. But the cash that is left in the business is there deliberately for future growth opportunities. And also, we knew that we would be needing to do this investment in waste movement in the coming year at Koolan. And so some of that cash will be used for that work as well, depending on what iron ore prices are. But that was in our planning when we sat down for the Koolan project. And so whilst we do look continuously at things like dividend plans or share buyback opportunities, the view from the Board as expressed to the management team at this point has been a strong desire to grow the business, make sure our operations are properly capitalized and therefore, that's the intention for the use of the cash reserves that have been created from the operations. In relation to second question came through was, does the company continue to maintain insurance cover on the seawall at Koolan Island? And the answer is yes. For those who recall the seawall part of it anyway, slumped in 2014, and with the higher title move, which is a plus or minus 10-meter tide move here, the seawall slunk caused the pit to flood. So in 2017, the decision was made to rebuild the seawall, and that was done over 2018, and the first shipment occurred from the restarted operation in April 2019, so last year. The insurance program has been carefully constructed and has been managed very well with a whole range of insurers. And this is both on property damage and also business interruption cover. So whilst some of the terms and conditions of that cover has changed, the company does still maintain insurance cover over the seawall. I'm hoping that those answers then sufficiently cover those 2 questions. David, was there anything else?

Thanks, Peter. The only question that has been asked is whether or not this meeting is actually being recorded. And the answer to that is it's not this time around. However, the presentation slides are available on the company website as well as the ASX.

Okay. Thank you, David. Thank you all for your attendance, and thank you again to the Mount Gibson team, that's employees and contractors, for some great work over the last year and continuing into this financial year. We've got some terrific things to do ahead of us. And so I appreciate your support and appreciate very much the support of our shareholders as well. So with that, I'll bring the presentation to a close. David, is there anything further that needs to be covered? Or can we finish the meeting or this part of the meeting now?

That's fine, we can finish the meeting now.

Okay. Thank you all.

Thank you very much. Bye.