MGX Resources Limited (MGX) Earnings Call Transcript & Summary

Thank you for joining today's teleconference for the release of Mount Gibson Iron's September Quarter Activities Report. 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 a question at that time. A recording of the call will also be available via the Mount Gibson's website shortly after completion of today's teleconference. Thank you, and go ahead, Peter.

Thanks, Lisa. Good morning, everyone, and thank you for joining us to discuss Mount Gibson's September '24 quarterly activities report. As usual, I'll give a brief overview before handing back to Lisa for any questions. And just as a reminder, all currency we mention on this call is denominated in Australian dollars unless otherwise stated. So as you will have seen from this morning's report, Mount Gibson's shipping volumes, grade and revenue were temporarily lower in the September quarter as expected, as we completed the reconfiguration of the primary in-pit haul ramp at Koolan Island in accordance with the mine plan. This work encompasses the transition of iron ore mining from the depleted western end of the pit to the shallower eastern end, which will now be the source of our high-grade iron ore production over the remaining 2- to 3-year life of the operation. The reconfigured haul ramp and the new tertiary crushing circuit were both successfully commissioned in the quarter with iron ore production already increasing, while iron ore grades have also returned to the usual high level of 65% Fe from the end of the quarter. Accordingly, the operation remains on track to achieve the company's sales guidance for fiscal '25. Now touching in a little more detail on the operations. Firstly, in relation to safety, we have continued our 2-year improvement trend. The rolling 12-month LTI frequency rate remained at 0 incidents per 1 million man-hours worked, which is a very good achievement. And significantly, our rolling 12-month total recordable injury frequency rate, which reflects LTIs as well as other injuries, again, reduced, and it declined from 4.4 incidents per 1 million man-hours worked to 2.9 at period end. Safety is highly correlated with production performance, as many of you will know, and we and our site team are focused on achieving further improvements for what is a remote and challenging operating site at Koolan Island at times. In relation to shipping, we completed 7 shipments in the quarter, totaling just under 0.6 million wet metric tonnes at an average grade of 63.7% Fe. Our sales revenue totaled AUD 61 million free on board, which reflected an average realized price of USD 74 per dry metric tonne FOB equivalent to AUD 110. And just a reminder that we report on FOB terms at Koolan Island, which is after we've deducted shipping freight costs. This was after our downward provisional pricing adjustments of AUD 6 million or approximately USD 7 per tonne due to weakening iron ore prices in the quarter, of which you would all be familiar. As a reminder, Koolan Island's revenues are subject to provisional pricing movements, both positive and negative, as the contracted revenues are based on average monthly prices occurring 1 to 2 months after the month of shipment. In relation to costs, cash operating costs for the quarter totaled AUD 55 million, equivalent to AUD 99 per tonne shipped FOB before capitalized mining costs of AUD 18 million, which were primarily for the haul ramp-related work, capital projects of AUD 4 million and state and third-party mineral royalties of AUD 6 million. With the expected rise in shipping rates and grades for the remainder of the '24-'25 financial year, we remain on track for our unit cash cost guidance, which is AUD 95 to AUD 100 per wet metric tonne shipped, and that's inclusive of our capitalized mining costs, but before royalties, which, of course, are a function of sales price. Iron ore production totaled 0.5 million wet metric tonnes, down from 0.7 million tonnes in the prior quarter due to ramp reconfiguration work that was completed in the period. This has involved construction of a ramp switchback in the center of the pit, the establishment of an upgraded dewatering system and commencement of the removal of the former eastern haul ramp. A lot of work is necessary to widen the eastern half of the pit to provide future access to the deeper levels of the high-grade ore body. Removal of the eastern haul ramp is scheduled to be completed progressively through the '24-'25 financial year. As a consequence of the above work, total material movement increased substantially to 2.6 million tonnes, temporarily lifting the short-term waste-to-ore stripping ratio to 4.7:1 from 0.5:1 in the prior quarter. The stripping ratio is a key cost driver at Koolan Island. And although it will vary in line with the waste extraction cycles in the main pit going forward, the stripping ratio is anticipated to progressively reduce through the current financial year and future periods and is expected to average less than 2:1 from the remaining mine life from this point forward. Ground support work also progressed as scheduled in the central footwall area above the August 2023 rockfall zone. This involves a program of on-wall anchor drilling, grouting and installation of protective mesh and a safety barrier fence, and it's necessary for safe access to the high-grade ore zones directly beneath this area. The on-wall drilling program is now 50% complete, actually a little above that now and is expected to be finished in mid-2025, although we are planning for the usual interruptions during the coming Northern Australian wet season months. Also in the quarter, we released our updated statement of mineral resources and ore reserves as at 30 June '24, with the remaining ore reserves in the main pit estimated at 7.2 million dry metric tonnes grading 65.1% Fe. And for conversion to wet metric tonnes, it's worth noting that the typical moisture rate is around 3% to 4%. In relation to processing, processing in the quarter was generally aligned with ore extraction from the main pit and totaled 0.4 million tonnes. The tertiary crushing circuit was successfully commissioned, reducing rehandling requirements and enabling more efficient and cost-effective processing now of the harder material being sourced from certain eastern sections of the main pit ore body. Contract crushing personnel and equipment were demobilized in the quarter as a result. Koolan Island's cash flow for the quarter totaled AUD 5 million, and that comprised an outflow from operations of AUD 22 million while we completed the various mining setup works in the pit, but that was fully offset and more by the receipt of the final AUD 27 million insurance proceeds relating to the business interruption component of the August 2022 processing plant fire. From a group perspective, cash flow also totaled AUD 5 million with interest income of AUD 5 million covering all of the corporate administration and exploration costs. And in addition, just over AUD 3 million was invested in the exercise of one of the tranches of equity options that we hold in Midwest iron ore producer, Fenix Resources, and that lifted Mount Gibson's shareholding in Fenix to a little over 10%. Cash and investment reserves totaled AUD 412 million at 30 September, and that's excluding the investment in Fenix, which had a market value of approximately AUD 22 million at quarter end. Including the value of this holding, the company's period end cash and investment reserves, therefore, totaled AUD 434 million, and that's equivalent to approximately AUD 0.36 per share. At this level of cash backing and given the expectations of what we hope to generate from Koolan Island, we commenced an on-market share buyback late in the quarter, which will be for up -- of up to 5% of the company's issued shares. To date, a total of 3.5 million shares have been bought back at an average price of AUD 0.317 per share, and we expect to continue with that program going forward. In relation to realized pricing, as noted earlier, iron ore prices were substantially weaker in the period with the benchmark 62% Fe CFR fines index dipping below USD 90 a tonne in September and averaging USD 100 per tonne for the quarter, which was 11% lower than in the preceding quarter. But importantly, the high-grade 65% Fe price continues to trade at a solid premium to the 62% benchmark, with that premium increasing marginally from 8% to 9% per contained iron unit. And that premium is obviously very important for us for Koolan Island. At today's spot prices, which have weakened since the end of the quarter, the price for 65% Fe material maintains an overall premium to the benchmark index of around USD 15 per tonne. During the quarter, while shipped volumes and grades were temporarily lower, Koolan fines still realized an average free onboard price after shipping freight of AUD 74 per dry metric tonne, as I mentioned earlier. Now this was after adverse provisional pricing adjustments totaling AUD 6 million, and that's the equivalent to USD 7 a tonne. In Australian dollars, the total realized free onboard price equated to approximately AUD 110 per tonne, as mentioned earlier. Shipping freight charges from Koolan Island to China reduced slightly from the previous quarter and ranged between USD 13 and USD 14 per tonne that we shipped. While the outlook for iron ore is heavily linked to monetary and fiscal initiatives for the Chinese property, construction and manufacturing sectors, demand is also strong from other countries. And we note that there's been significant improvement in the proportion of profitable Chinese steel mills, and we're seeing steady demand for Koolan Island's high-grade and low-impurity cargoes. Now that we finished with Koolan Island, just stepping back, I wanted to reiterate our previous statements regarding the company's strategy, which is effectively twofold. Firstly, the management team is focused on safely maximizing production and cash flow from the remaining life of the Koolan Island operation. It's well set up to achieve most from the remaining ore reserves and other potential value creation activities at site. Achieving this first objective will work to set the business up for being well positioned with substantial cash reserves to pursue investments and acquisitions to recreate a larger and more profitable company. To date, following the strong cash generation achieved last financial year, we've commenced this work with a handful of initial investments in junior resources companies where we believe that future financing or strategic opportunities may arise and where we're seeking to utilize our skills and experience from our organization. So to finish in relation to our outlook, while the September quarter was impacted by weaker iron ore prices and the phase of our Koolan main pit mining schedule, we expect an improved and consistent shipping rate over the remainder of this financial year and seek to further increase this rate in future periods. We've made a steady start to fiscal '25 and look forward to generating improved cash flow from the Koolan operation and to advance some of the new investment opportunities for the business. And finally, we also look forward to providing an update at our upcoming AGM on the 20th of November in Perth. That can be attended in person or online. And we encourage all shareholders to check the Notice of Meeting for details on how to participate. So with that, Lisa, I'll hand back to you for any questions that any listeners may have. Thank you.

[Operator Instructions] We do have a question, and it's from Glyn Lawcock from Barrenjoey.

Maybe just -- you touched on it a little bit, but I'm always curious, too, because you have obviously a large shareholder who is in China. What are they saying to you about the recent stimulus measures that have been introduced? Is it too early? Or is there anything they're sharing with you on what they think is going on and what it could mean for the industry in terms of steel and iron ore?

Look, I think it's still pretty early, Glyn. The feedback that I've received is this is the start of a range of announcements, but that's across manufacturing, construction and infrastructure and property. So it's a broad brush. I think there's an expectation from our major shareholders that there will be more in the property sector, but it's pretty early to say. So I don't have anything specific to give you at this point.

Okay. But you called out that you said demand is still strong. I mean, obviously, they just buy everything they can, and it's been going on to inventory, I guess, some people would say this year. But just the premium for your product, like you sold a little bit substandard product, as you said, you're going back to 65%. One of your peers -- I mean, it's not a peer, but they sell a high-grade product, Iron Bridge, and they said they were getting less than the 65% index. Has there been some problems in the quarter as well? They called out concentrate was in excess supply, so your high-grade product was getting discounts to 65%. Is that what you've seen as well?

We haven't seen that. And the reason, Glyn, is that our contracts, if we are selling 65% cargo, our contractual mechanisms work such that it links to the Platts 65 index. There are adjustments for penalties, and our main penalty is silica. So we do wear between sort of USD 5 and USD 7 a tonne for silica. But that's really it. And we haven't picked up that there are issues with that high-grade material that we've already started to sell in October. Now maybe it's a volume-related issue in that we are a niche and small producer, and so there are particular mills that will buy from us just from a small blending perspective. But we haven't heard any specifics about problems with that, our 65% product at all.

Okay. And that's $5 to $7 a tonne penalty for silica, that's fairly fixed, is it? Or does that move around, I guess, with volume of concentrate in the market as well?