MGX Resources Limited (MGX) Earnings Call Transcript & Summary

Thank you for joining today's teleconference for the release of Mount Gibson Iron financial results for the December 2020 half year. Mount Gibson 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 be available via the Mount Gibson website shortly after completion of today's teleconference. Go ahead, please, Peter. Thank you.

Thanks, Bethany. Morning all and thanks for joining us to discuss our half year results. As usual, I'll give a brief overview and then hand back to Bethany for any questions. So as indicated in our recent quarterly report, we delivered a steady operational performance for the half year and notwithstanding that we had some challenging conditions late in the period at Koolan. In particular, we benefited from strong iron ore pricing, particularly that rise in December, which when -- we added to our cash reserves at a time when we are undertaking a substantial overburden removal program at Koolan Island to set that operation up for significant sales and cash flow increases from later this year. At a headline level, our net profit after tax rose by about 2/3 to $74.5 million compared with $44.6 million in the prior corresponding half year period, and that was on the back of the total shipments we made of 2.3 million wet metric tonnes and sales revenues of $240.7 million FOB. All of our revenues and costs we report in Free on Board terms. Our group cash flows totaled $52 million for the half year, and that comprised $38 million from Koolan Island and $20 million from the Mid-west, plus interest income of around $3.5 million, some small development spending on Shine of around $1 million and administration, finance and other costs of $8.8 million. We also, in the half year period, paid the cash component of the 2019/'20 final dividend, which was $16.3 million being the cash component. The rest was paid in DRP shares. And we also had negative working capital movements, including some significant late period quotation period adjustments associated with the run-up in iron ore prices in December, which are now being settled in the current half year period. The sum of these numbers meant that our cash and investment reserves increased over the half year by $12.4 million to $435.7 million at 31 December. So that was a positive outcome given the weather and mining interruptions that we faced at Koolan late in the period and puts us in a good position to complete the elevated stripping phase at Koolan over this year. I'll discuss the outlook and guidance in a little more detail shortly. In relation to COVID-19, before I go into the financials, I should just give a couple of quick comments as to the impacts on our business. And happily, Western Australia's positive record in containing the virus has allowed the state's relaxation of a number of restrictions originally imposed across the business in the initial stages of the pandemic earlier last year. And notably, the important thing for us was we were able to return fairly promptly to standard 2 and 1 FIFO rosters at the start of the period, which was a great improvement over some of the longer rosters that we were forced to do from a safety and fatigue and personnel perspective. Through the period, we continued to maintain a range of general site and travel protocols to reduce the risk of virus transmission, and we have stayed ready to respond promptly should the need arise. This was demonstrated in recent weeks with the Perth region lockdowns and reinstatement of numerous travel and site-related protocols. Although these response measures have come with increased costs and inefficiencies, the response from our personnel, and that includes employees and contractors alike, has been first rate and enabled us to keep operating unlike so many other businesses. Just getting back to the numbers. In relation to pricing, our weighted average realized price for all of the iron ore that we sold in the half year was AUD 104 per tonne FOB, and that was compared with $84 last financial year. Within that, our high-grade Koolan Island fines realized an average price of USD 121 per dry metric tonne FOB, and our low-grade Mid-West fines were USD 30 a tonne and our low-grade lump was USD 43 per tonne. It's worth noting that while our Mid-West low-grade sales were conducted on a fixed price basis, as I mentioned, our Koolan sales generally capture the average price for either the first or second month following shipment. This enabled us to capture the benefit of rising prices in December and January for shipments that were made earlier in the December quarter. Positively, iron ore prices have continued to strengthen into the current half year period, and this is promising for both Koolan and the planned start-up of Shine Mid-West. Regarding our costs, our group unit cash costs averaged AUD 56 per tonne FOB in the half year, and that was before the investment we made in overburden stripping at Koolan and other capital projects at that site and in line with our earlier guidance. And I'll talk more about the outlook of cash flows for each operation shortly. At Koolan Island, so turning there now, we've reported while our shipments were on plan at 1.1 million tonnes. Our mining activity was impacted by several interruptions in the December quarter, firstly, a localized rockfall that occurred on the western end of the footwall in the main pit; and then by some heavy wet season rains leading to Christmas. Our site cash costs averaged AUD 64 per tonne FOB in the period before the waste stripping investment of $63 million and capital projects of just under $5 million. And that meant that site cash flow of $38 million occurred for the half year. So that was a pretty good result at a time when we're undertaking major waste cutback phase. Although the total material movement in the half year rose by about 1/3, we are going to have some impacts from the interruptions we incurred in December. And that will also impact the unit costs. So notably, we expect Koolan sales to be at the lower end of our guidance. So we're not changing our guidance ranges, and that will be around 1.8 million wet metric tonnes. The majority of ore produced in the period from Koolan will be from the upper western end, which is lower grade than the high-grade portions of the main pit. And the average grade of sales in the current half is expected to range between 58% and 61% Fe, which is down from the plus 63% Fe we achieved in the December half. We expect to regain mining access to 65% Fe in the September quarter, and this is based on current schedules and the deployment of additional ground support on certain parts of the upper western footwall following that rockfall experience last year. The work is designed to ensure the safety of people and equipment on the pit floor in that part of the pit and will involve additional rock bolting on the footwall. We presently estimate that, that program will cost about $15 million spread over this financial year and next financial year. And to put it in context, that's the equivalent to the current value of one high-grade shipment. So it's less about money, this issue, and it's more about safety and ensuring that, as we get deeper in the pit, we're very comfortable with people working underneath that footwall. The overburden stripping program at Koolan is to date progressing satisfactorily. And our objective is to substantially complete it in the next 6 or so months and significantly expand the high-grade ore production and cash flows from that point onwards. And for those who've seen the Koolan mine life, that is the key and the real prize for us in that the removal of this overburden this year sees then the mine having following 4 or 5 years, a much lower stripping ratio and higher sales and lower unit cash costs. So that's the prize and the key value creation exercise for us. In the Mid-West, the final half year of the low-grade sales program from Extension Hill was very successful. We sold 1.2 million wet metric tonnes, which was at the top end of our guidance and our unit cash costs of AUD 40 per tonne sold FOB was at the bottom end of our guidance. So the operation generated cash flow of $20 million in the half year, and that included $4 million of the ongoing rail credit refunds that we're receiving. All up the low-grade sales program generated sales of almost 4.1 million tonnes over its 19-month lifespan for a cumulative operating cash flow of just over $30 million. So that was a great effort by the Mid-West team given we're initially targeting sales of just 1 million tonnes. So the Extension Hill site is now in closure mode, and most of the physical rehabilitation work is nearing completion. The rehab provision at 31 December for the site is $9.2 million, and much of this, we expect to incur over the following 12 months. As I mentioned, the historical rail refund contributed $4 million to cash flow in the half year and has, to date, contributed just over $12 million to the company, a general rate of about $2 million per quarter. The refund is linked to third-party rail volumes on parts of the Mid-West rail network and is capped at a cumulative total of $35 million, subject to indexation, which, at current rates, we'd expect to receive over the next 3 years. Now turning to Shine. With Extension Hill heading to closure, we're focused on bringing our Shine project into production. Shine is located approximately 85 kilometers north of Extension Hill and is expected to extend the life of our Mid-West business by at least another 2 years and potentially beyond that, by another 2 years if conditions remain supportive. Site works are well underway at Shine, and following the end of December, we received the final mining approval for the open pit operation from the [ Department of Mines ] in WA. We are on track to commence mining prestripping activities in April on route to first ore sales targeted for early in the September quarter. Spending in the December half was modest on Shine at just over $1 million, with the bulk of the $17 million to $20 million development capital investment to be spent in the next few months. After which, we'll then head into initial mining for the June quarter, so from April, May and June. And during that period, we'll produce ore stockpiles for sales, and we expect to spend about $15 million on preproduction activities through that quarter. We'll provide more details on Shine as we get closer to the start of mining, but as a reminder, we expect it will contribute about 1.5 million tonnes per year of 59% to 60% Fe direct shipping ore, that's hematite, per year at a cash cost of AUD 65 to AUD 70 per tonne FOB before royalties. So at current prices, where iron ore is today, obviously, the project is shaping out as a very attractive incremental extension to our Mid-West business, and we're keen to get into it as promptly as we can. So just before I finish, I wanted to make some comments about our outlook for the rest of this financial year and into next. As we've already noted, from a volume perspective, our sales guidance for the current 2021 financial year remains unchanged at 2.8 million to 3.3 million tonnes of ore. And within this, we expect Koolan Island sales to be around 1.8 million tonnes I mentioned. While group cash costs were AUD 56 FOB for the December half before the capital investments we described, the lower sales from Koolan in the current half year period will mean that group cash costs per tonne of ore sold over the full year will be slightly higher than originally expected. And we expect now those costs to increase to between AUD 65 and AUD 70 per tonne FOB from our previous estimate of $60 to $65. This is based on expected Koolan Island site cash costs of between AUD 70 and AUD 75 per tonne sold FOB. Cash costs exclude the planned capital waste stripping investment for the full year, which we estimate will be around $130 million. And capital improvement projects, including the crusher upgrade and the footwall's ground support program that I described, all of those things will be somewhere between $25 million and $30 million for the year. As we described in detail, this financial year is one of investment in the Koolan Island operation and the start-up of Shine. We expect our cash costs to reduce rapidly once we complete the current peak stripping phase at Koolan later this year, after which all sales and cash flow will obviously increase quite substantially. And that will be complemented by sales and additional cash flows from Shine. So we have a -- have been through a busy period and have a busy period still ahead of us. So in closing, I think we've delivered a steady financial result and a lot of operational things occurring within the business, and that leaves us well placed to capture the benefits of our investment at Koolan as the stripping phase is completed and in particular, at Shine, as it contributes to solid cash flows at current iron ore prices. So on that note, after that summary, I'll hand back to you now, Bethany, for any questions that anyone might have.

[Operator Instructions] We do have a question. Our first question is from Paul McTaggart.

So I mean we're finally getting to that point where we can almost kind of touch the post-stripping cash flows out of Koolan, and it seems to be -- kind of coincide with [ a better ] iron ore price environment. You've obviously been busy with a bunch of operational stuff. Have you started to turn your attention to potential investment opportunities? I mean I know that hasn't been a focus, what you've been doing in Koolan Island rehab, well, fixing the seawall and all the stripping, all that sort of stuff. But are we at a point now where you're starting to kind of come up for air and look at it more broadly because that cash flow just is going to do pretty aggressively over the next 18 months?

Paul, good question. A quick answer is yes because we have obviously had a roving program looking at things that we're interested in across the country. We've had 1 or 2 things overseas as well that we focused on and done due diligence. That's hard for us at the moment with the travel restrictions that exist. So we focused more on Australia and in Western Australia. We have taken some small stakes in a number of junior companies, some of those developers, some of those operators. And so we're getting to know those companies, understand what could occur there in the future and what the opportunities might be. And at the same time, there are a number of larger acquisition DD opportunities that we're working on as well. So I guess short answer is yes, we've spent a lot of time in the last little while focusing on Koolan operationally, as you mentioned, and in particular, also starting Shine, that's been handled all internally, existing people from the Mid-West and our commercial and corporate teams in Perth, who've done a great job on getting that to the position it is now. So that's been a big growth option for us, too. So there we go. There's the answer. And now over the next couple of years, the business development aspects are at the forefront of what we're looking at.

And in terms of -- well, I still got a follow-up. In terms of costs post -- once we put aside the stripping, can you -- is it too early to sort of give us guidance beyond December in terms of how you think those Koolan costs might settle out?

Paul, we'll seek to update that once we know the timing of what our material movement looks like later on this year and in future years. But I think if you take the general rule where we think of our costs on Koolan Island aside from crushing and ship loading, which are pretty low, as a cost per tonne move, and that's a tonne of ore or a tonne of waste, and so we're targeting around $7 to $8 per tonne of material move. Now at the moment, we're running at a strip ratio of plus 10:1. And so when you then run that unit cost through and divide it by the tonnes sold, you can see that kind of number. As we come through that strip rate or that elevated strip period, our strip ratio will fall to more like 3 or 4:1 and then ultimately, 2 and 1 over the following years. So you think there would be a pretty good case for a step down and a pro rata reduction in those costs, although it won't be exactly dollar for dollar because Koolan as an isolated site and as an island does have a level of fixed costs that are there irrespective of the volumes done. So I think what we'll see is our cash costs coming down to well below half where they are now and then even further as those tonnes move through. But we'll put further clarity on that from a mine life perspective as we get through this waste stripping.

Our next question is from Hayden Bairstow.

But just a couple of quick ones from me. Firstly, just on the grade profile in the second half. I mean I had -- we sort of had an indication that was going to get lower sort of [ downward ] benchmark, I would have thought, but certainly not you guys becoming a sub-60% producer out of Koolan. So just keen to understand that a bit more and how that profile looks over the half. And what are the impurity levels? I mean what percentage discount off benchmark should we assume for the second half sales? Can you give us an indication what that might look like? And then, I guess, on the satellite pits that you're talking about up there, I mean, what are the sort of tonnage likelihoods? Are these things meaningful? Are they better grade? Can you bring them in shorter term? Or is this is all sort of longer-term stuff you're looking at?