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 year ended 30 June 2023. 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. Thank you, and go ahead, please, Peter.

Thanks, Lisa. Good morning all, and thanks for joining us to discuss Mount Gibson Iron financial results for the '23 financial year. As usual, I'll give a brief overview and then hand back to Lisa for any questions that may come from the floor. From an overall perspective, it was satisfying to see the significant underlying financial improvement we achieved over the course of the year. And while sales in the first half were restricted following the fire incident in the crushing plant, once repairs were completed, Koolan Island commenced delivering the benefits of prior investments that we've made in overburden removal, ground support and the crusher upgrade. As noted in our last call in July, the June quarter was a record in terms of high-grade shipments and sales, delivering 17 shipments, which totaled 1.25 million wet metric tonnes in the quarter, double the rate of the prior quarter. Consequently, we beat our revised full year sales guidance of just over 3 million tonnes and more than tripled sales revenue to just over $452 million free on board, FOB. Full year cash flow after all capital expenditure and corporate costs totaled $84 million, underpinned by reduced unit costs as sales lifted in the second half of the year, and the waste-to-ore stripping ratio continued to decline as we planned. I'll talk more about Koolan operations and unit costs in a bit more detail shortly. On a group basis, this translated into a gross profit result of $114.2 million compared with a gross loss in the prior year of $72.8 million. Following noncash impairments of $75.4 million and the derecognition of deferred tax assets for accounting purposes of $16.5 million, both of which are required under the accounting standards as well as our usual other income and administrative costs, our net profit after tax was $5.2 million. And although this is modest given the gross profit level, it is a substantial turnaround from the $174 million loss after tax recorded in the prior year. The impairment resulted from our normal period end obligations to review the carrying value of the assets in the context of prevailing conditions, including conservative iron ore price and foreign exchange outlooks, inflationary pressures and higher prevailing interest rates. The key metric to keep in mind is our cash and investment reserves balance, however, which totaled $162.4 million at 30 June '23, and that was an increase of $120 million over the second half of the financial year, which was also after repayment of the $25 million that we drew down from our standby credit facility late last year. So turning to Koolan Island's financial performance. Sales tonnage has doubled from the previous year to just over 3 million wet metric tonnes at a high average grade of 65.3% Fe, and cash operating costs averaged AUD 77 per wet metric tonne FOB that we sold, and that was before inventory build, project capital costs and royalties. And that was down from $119 per wet metric tonne in the prior year. That reflected the higher sales and the markedly reduced mine stripping ratio, which averaged 2.2 tonnes of waste for every tonne of ore for the full year and was down to 1.1:1 for the June half year period. And of course, the stripping ratio is a key driver of cost at Koolan Island. Consequently, the site generated operating cash flow of $95.3 million in the year on sales revenue of $450.6 million and a profit before interest and tax of $44.1 million. That compared with a loss of $191 million and the cash outflow of $188 million in the prior year. The key cash outflow items in the fiscal '23 year just gone with cash operating costs of $228 million, royalties of $42.5 million, crusher repair and the interim processing arrangements that we put in place following the fire of $20.7 million, waste stripping investment of $11 million and sustaining and project capital costs totaling $53.4 million. We expect union cash -- sorry, unit cash cost to reduce further over the remaining mine life based on a higher average level of sales and a lower average mine strip ratio of about 1.2:1 from here on, although this will vary at times according to normal ore and waste cycles within the Main Pit. We talked about the mine's operational performance in detail at our quarterly call in July, so I won't say much more than that other than to repeat that mining has been consistent over the last year, and we averaged about 1 million tonnes of high-grade iron ore extracted from the Main Pit each quarter, while our crushing capacity has enabled us to consistently shift between 5 and 6 cargoes per month during the northern dry season. And we're targeting to achieve at least 4 shipments per month in the December to March wet season period. And of course, that depends entirely on the kind of weather we face. That shipping profile is sufficient to support sales of around 4 million tonnes per year, which is the approximate run rate we expect to maintain going forward. Finally, as reported after period end, we recently incurred a localized rock fall in a section on the eastern footwall on the island side that is of the pit. The event was detected in advance by the site's continuous radar monitoring systems and no injuries or equipment damage occurred. The area impacted is not currently being mined and ore production is not scheduled to occur in that particular location until the March quarter next year. But in good news, based on the initial geotechnical evaluation, it's currently expected that remedial measures can be implemented to enable mining to recommence in that impacted zone with minimal impact on the current mine plan. A detailed geotechnical assessment is now underway to further define these measures, which are likely to include the use of additional strengthened avalanche mesh material as well as cable bolting and shotcreting typical for ground support activities at the Koolan Island operation. In relation to the Mid-West business, while our focus has obviously been on the turnaround at Koolan Island, the Mid-West business still generated a positive $6.5 million pretax profit for the group. Our ongoing rail credit refund brought in just over $9 million in the year for proceeds to date since that started of $33.5 million out of a total cap entitlement of $35 million. So obviously, we expect to receive the final proceeds of that entitlement this current financial year. The business also generated modest income from third-party use of our available storage capacity at Geraldton Port. The more significant development, however, was our transaction announced in late June to divest the company's Mid-West iron ore mining interests at Shine and Extension Hill, and the Geraldton storage shared assets to fellow regional iron ore producer Fenix Resources. And we did that for $10 million in cash, $60 million shares, currently worth around $18 million, and 25 million 5-year options in Fenix. These are exercisable in 2 tranches of 12.5 million options each at $0.25 and $0.30, respectively. So Mount Gibson is now Fenix' largest shareholder with an interest of approximately 8.6%, and with the option, there is scope to increase this. As part of the transaction, Fenix has also assumed the remaining rehabilitation obligations across the various asset sites, which we had provisioned at 30 June '23 at approximately $8.2 million. As recently announced, this transaction was successfully completed on the 21st of July. So for Mount Gibson, the deal crystallize value for assets that is not yet reflected in its share price as well, as giving ongoing exposure to Fenix' growth-focused iron ore mining and integrated logistics business in the Mid-West. We consider the transaction as a win for both companies as well as for the Geraldton Port and Mid-West community in which we've operated for many years. The sale now also frees us up to focus on maximizing cash flow from Koolan and the pursuit of new investment opportunities in other commodities, notably base metals to provide longer-term operating cash flows. In relation to our exploration activities, we've also recently, and this is after a number of years, recommenced our regional exploration efforts in the Mid-West, focusing initially on prospective base metals targets near our Tallering Peak site and to the north of the Butcher's Track project in the Murchison. Further farm-in and joint venture opportunities are also being reviewed. I'd just now like to touch on market conditions and outlook. So iron ore prices were slightly lower in the '23 financial year, albeit still at attractive levels, and this was driven by the weaker-than-anticipated rate of post-COVID recovery in China and global economic uncertainty which translated into general inflation and higher interest rates across the globe. I'm sure everyone is familiar with monitoring the Chinese economy, in particular, its construction demand and property sector, which are key drivers for iron ore exports from Australia. The benchmark Platts 62% index averaged USD 110 per dry metric tonne CFR. So that's the price delivered in Northern China for the year, and that was a decline of around 20% from the previous financial year. While importantly for us, the 65% Fe index price, and that is the price at which the Koolan high-grade fines contracts are pegged, averaged USD 124 per dry metric tonne CFR for the year. 65% Fe index average premium above the 62% index remain reasonably steady at about 7% per contained metal unit, and this is a premium that is captured under our high-grade sales agreements and is important for us. Despite the lower market prices, Mount Gibson's average realized price increased almost 30% to USD 103 per dry metric tonne FOB, so that's the price out of Koolan Island, compared with the prior year, and that was reflective of the fact that a significantly increased volume of high-grade 65% Fe funds accounted for all of our sales in this last financial year. We also enjoyed another boost from the weaker Australian dollar, which averaged just over USD 0.67 for the year compared with USD 0.72 in the prior year. So we continue to see good demand from our customers for the high grade and low impurity iron ore products from Koolan Island, and we're anticipating a strong year ahead. In relation to production and cost guidance for this '23-'24 financial year, we're targeting high-grade iron ore sales from Koolan Island of between 3.8 million and 4.2 million wet metric tonnes at an average unit cash cost of AUD 65 to AUD 70 per tonne FOB sold, and that's before royalties. In relation to dividends, you will have seen in the earnings announcement that a final dividend has not been declared for the '23 financial year given the continuing focus on increasing shipments and profitability from Koolan Island. However, the Board has clearly stated its intention to resume paying dividends going forward and will review dividend capacity, including the expected generation of franking credits at future interim and full year periods. And just remind people that Mount Gibson has historically, over the last 11 or 12 years, paid about $330-odd million fully franked in dividends. So before I wrap up, one final matter. I just want to express my thanks to Russell Barwick for his valued input and contribution to the company as a Non-Executive Director over the last almost 12 years. He has stepped off the Board today due to his increased personal business commitments. And in addition, I welcome Ms. Evian Delfabbro to the company. When she takes up the role of Independent Non-Executive Director next week. And Evian brings key business, commercial and legal experience with her, including in mining and construction, and we look forward to working with her going forward. So with that, I'll finish up and hand back to you, Lisa, for any questions you may have.

[Operator Instructions] Peter, we don't have any questions.

Okay. Thanks, Lisa. Thank you all for listening. If you do have questions or you want to ask us something off-line, then please feel free to phone either John Phaceas or myself on the numbers listed, and please have a good day. Thank you.

Thank you, Peter.