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 December 2021 half year period. 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 also be available via the Mount Gibson website shortly after completion of today's teleconference. I'd now like to hand over to your host, Peter Kerr. Please go ahead, Peter.

Thanks, Bethany, and good morning all. Thank you for joining us to discuss Mount Gibson's financial results for the December '21 half year. As usual, I'll give a brief overview before handing back to Bethany for any questions from the floor. As the market is aware, Mount Gibson has experienced a reasonably tough half year period given the position within the Koolan Island life of mine plan and the pricing volatility we've experienced, which disappointingly required us to suspend the Mid-West Shine operation to preserve the value of that asset. Importantly, we're now very close to an inflection point where the investments made at Koolan Island are about to deliver increasing volumes of high-grade iron ore with the level of mining movement and the associated waste-to-ore stripping ratio reducing accordingly. We've previously released the details of the cash flows at both operations in our recent quarterly report. And as disclosed, the half year was one in which we drew on our reserves to fund the investments at the Koolan Island operation, in particular, the waste stripping program, the upper footwall ground support activities and the crushing plant upgrade. With these activities all undertaken to enable a significant increase in high-grade ore production and shipping capability for the next 5 years. At a head line level, the above activities and price movements during the half year resulted in Mount Gibson recording a net loss after tax of $65.6 million on minimal sales of 0.7 million wet metric tonnes. The result incorporates a number of carrying value write-downs totaling $41.4 million before tax at the now suspended Shine operation in line with our previous guidance as well as a net write-down of $7.9 million of the carrying value of lower and medium-grade stockpiles at Koolan Island. The group's net cash outflow from operations totaled $53.2 million before interest income of $1.6 million capitalized advanced waste stripping and mine development expenditure of $116.1 million, plant and equipment purchases of $24 million and payment of the $12.2 million cash component of last year's final dividend. Consequently, cash and investment reserves totaled $142.1 million at period end, down from $364 million at the end of June. Turning to the performance and forecasts for Koolan Island in a bit more detail. The half year period was one of continued focus on the major waste stripping effort and the footwall ground support program and also in completing the crusher upgrade. Iron ore sales from the operation were limited to 0.4 million wet metric tonnes of lower and medium grade material, which range between 55% and 58% Fe, mostly from outside the Main Pit ore reserves and also from the Acacia East satellite pit. With the iron ore price volatility experienced in the period, a decision was made to stockpile this material rather than sell it as stand-alone cargoes for minimal value so that the material can be used as a blending stock in future periods for improved realized prices. Given the limited sales, the key investments and the adverse impacts of COVID on the availability of labor and the cost of that labor, the Koolan operation posted a pretax loss of $46.2 million in the half year. Cash draw at the site totaled $157.4 million after $79.3 million invested in advanced waste stripping and a combined total of just over $33 million invested in the upper footwall ground support and crusher upgrade projects. Total mining movement at Koolan for the period was 9.3 million tonnes, and that included 0.7 million tonnes of waste rehandled within the Main Pit, resulting in an average strip ratio of approximately 17:1 in the period. Strip ratio is forecast to fall significantly to average approximately 6:1 in the current June '22 half year period, reflecting the scheduled increase in high-grade iron ore production from the Main Pit as the grades rise towards the ore reserve average of 65% Fe. From mid-2022, the stripping ratio will continue to progressively decline and it's expected to average approximately 1.5:1 over the following 5-year period, resulting in a significant reduction in total mining movement and unit cash costs per tonne shipped along with the anticipated substantial increase in operating cash flows. In relation to our Mid-West operations, the business there recorded a loss before tax and interest of $59 million, and that was after recording impairment and inventory write-down expenses of approximately $41 million following the suspension of the Shine operation. The company continues to receive the historical rail refund with $4.1 million recorded as other income in the half year period. While production performance at Shine was consistent with our plan, the operations suffered from the rapid deterioration in iron ore market conditions, particularly with regard to the widening discounts for iron ore grading under 60% Fe, increased penalties for impurities and a sharp rise in shipping freight costs out of the Geraldton Port in the half year. Consequently, in early October, the decision was made for a stage suspension of operations at Shine to preserve the value of the Shine deposit and provide time to assess the iron ore market outlook for a potential restart. After the planned final shipment of lump ore from Shine in October, the company negotiated the sale of 2 further shipments of fines material from the available stockpiles. Sales from Shine consequently totaled approximately 0.3 million tonnes in the December half year. The cash outflow at Shine for the December half year period was $29.9 million, and this reflected the site development and waste stripping costs in the September quarter and closure costs net of the final revenues in the December quarter. In relation to our sales guidance for the fiscal '22 financial year, Mount Gibson's focus for the second half of our current period now at Koolan Island is to substantially complete the planned open pit waste stripping and upper footwall ground support programs and to resume high-grade ore production, which will obviously significantly increase our shipments. At Shine, we're monitoring market conditions to determine the feasibility of restarting the operation. On a group basis, we're targeting fiscal '22 iron ore sales of 1.8 million to 2 million tonnes, of which Koolan is expected to contribute 1.5 million to 1.7 million tonnes. Our focus is on the upper end of that guidance range. However, we're cautious as this is subject to the impact of the current wet season and the evolving COVID-19 situation in Western Australia. Before we close, I wanted to say a few comments regarding the iron ore price and the potential impacts for Koolan Island going forward. As you're aware, during the half year, the Platts 62 Index more than halved from a peak of around $220 in July to USD 87 per dry metric tonne in November before recovering to around USD 118 or USD 119 by period end, a 58% iron ore, 58% Fe iron ores rather. The average price in the half year was significantly lower at around USD 95 per tonne, reflecting the expanded lower-grade discounts that we're seeing. However, positively, since the start of '22, iron ore prices have been well supported and based on feedback from our customers and market commentators, the general outlook for the next year looks supportive around current price levels. We do, however, still expect periods of volatility given the tussle that is evolving between the fundamental demand from Chinese steelmakers, lower-than-anticipated supply increases from certain other geographies and Chinese political announcements regarding commodity exchange speculation and of note recently potential centralized purchasing platforms. For Koolan Island, our optimism is underpinned by the continued robust outlook for high-grade iron ore feedstocks, especially as steel makers seek to become more efficient and reduce their carbon emission intensity. So in closing, after a half year defined by volatile price movements and heavy expenditure as we progressed important mining and equipment investments at Koolan Island, we're positioned to achieve a significant near term progressive improvement in production and cash flows through the current year 2022. So on that note, I'll hand back to you now, Bethany, for any questions that anyone may have.

[Operator Instructions] Our first question is from Jon Scholtz from Macquarie.

Just thinking about the original mine plan and how that looks now that we're getting close to the end of post stripping. Are we looking at the same sort of production schedule and cost schedule that you had in that mine plan?

Very similar to it, Jon. It's not precisely the same, obviously, because since we've restarted the mine at Koolan, we've also mined outside of the ore reserve at times. So including the Acacia East satellite pit. So some of the tonnages we're reporting are probably a little bit higher than what's in that original mine plan. But what hasn't changed is the profile of the stripping. And we'll update that in due course. But that profile, I think you'll recall from the original plan had the first -- or certainly the second year and part of the third year at an elevated stripping ratio, and then it dropped quite quickly. So that, as we've said, from the middle of this year, we're expecting an average of around 1.5 waste to 1 ore going forward. It won't be immediately that later this year, but it will progressively decline. So that's the average over the remaining life of the 5 years.

Excellent. Thanks. And then just wondering about the capital management programs. I mean I understand you paid the final dividend. Is that going to continue? Are you looking as we head into this higher cash generation period to really look at the capital management program?

That's a discussion that's active at the minute. So the dividend approach for Mount Gibson has been assessment on an annual basis in August each year by the Board. So that will occur again this year, and that will be the Board's decision, depending on results as to what the dividend strategy is. Going forward from that point, there will be consideration to what we do because we are -- based on our forecast, expect it to generate considerable cash. But I don't have any disclosure on that point today.

Okay. And then maybe just one more on the weather you've seen up at Koolan at the moment. I mean how are you seeing that and the impacts on especially this quarter?

So this quarter, the March quarter is always the most difficult at Koolan Island given the wet season weather, which typically runs from December through to early April. So far, touch wood, we've had some rain interruptions, but our systems have dealt with the water inflows very well. We haven't seen, at this point, any cyclonic weather events that have really come very close. So that's good. But we know that as we're experiencing, I think, and as forecast flagging for the north of Australia and the East Coast, the wet season might be a little extended this year. So we're just preparing ourselves as best we can and working as efficiently as we can when enabled outside any rain or lightning interruptions.

Our next question is from Paul McTaggart from Citigroup.

Peter, I just want to get a sense how confident you are about the kind of strip ratios coming back to sort of that lower ratio by end of the year. And then given that it's kind of been a stop-start story with Koolan, some disappointments along the way. And it feels like we're on the cusp of it, a success. But I think we've been burnt once the trust before. So I just want to gauge your level of confidence around that.

Sure. And it's a fair question, Paul. We've had plenty of challenges at Koolan with weather, ground conditions, COVID and obviously, we tried to, in the last 6 months, have shipments when the profile of the waste has meant and it's very difficult to access the high-grade ore. I think we are now -- we're quite confident. We're on the cusp of being able to increase the high-grade ore production. We're seeing the grade in the pit as we're mining already in January and February start to lift. That will be a move towards the 65-type level over the next few months. And just the sheer geometry of that waste movement barring any wet season impact should see our shipments increase progressively month-on-month through to the middle of the year. So at this point, we're confident that we are at that inflection point. And we obviously need to make sure that as we go through this year, we keep those costs under control as we increase that production level.

And if I can follow up, I mean the focus has obviously been on operations now for a little while. And that is the same in the next 12 months, things pan out as anticipated. When do you then actively start looking at alternate assets? I mean, is that kind of -- have you kicked off that process again? Or you're still sort of busy focusing?

Look, we, in the last 6 months, have needed to prioritize the inward focus, particularly at Koolan. We have not stopped the business development initiatives, though we still -- we hold a number of investments in junior companies where we've built relationships and are looking at possible strategies for some of those holdings. We have still undertaken the occasional due diligence site visit and the like and just looking at the potential for us. So we have our, I guess, our short list of things that we'd like to consider, but the key focus for shareholders and for us in the management team is getting Koolan right first because we want to turn that corner with Koolan cash flows. But then I think you'll start to see more activity on the growth front in the coming year or 2 because Koolan has a 5-year mine life, perhaps that can be extended a little bit, but now is the time once we turn the Koolan adhere to focus on what we do longer term.

Peter, I'd like to let you know we have no further questions. I'll now hand back to you. Thank you.

Okay. Thanks, Bethany, and thanks all. Have a good day. And if you do have any further queries, anyone on the call, please feel free to call the contacts listed at the bottom of the announcement. Thank you.

Thank you, everyone. As your host has closed the call, you may leave by disconnecting your phone line. Thank you for attending.