MMG Limited (1208) Earnings Call Transcript & Summary

Good morning, and welcome to MMG's first quarter production teleconference for 2020. This report and today's discussion cover the operational performance of MMG's assets for the March quarter. We will also provide an update on MMG's response to the COVID-19 outbreak. Joining us today are Geoffrey Gao, Chief Executive Officer; Ross Carroll, MMG's Chief Financial Officer; who also currently has executive accountability for the company's African [Audio Gap] Executive Committee representative for MMG's Australian operations. Thank you for joining us. I will now hand over to Geoffrey, who will discuss the highlights in the report, after which there will be an opportunity to ask questions.

Thank you, Blake, and hello to everyone. [Audio Gap] Mr. Jianxian Wei will join us, but since we got some technical difficulties in communication, I'm not quite sure whether he'll be able to join us in a while, but if Mr. Wei cannot dial in, then I will handle the questions related to Las Bambas. So as everyone on the line today would be aware, at MMG, our first value is safety. In the first quarter, our operations recorded a total recordable injury frequency rate of 1.59 per million hours worked. This result is consistent with MMG's position as a global leader in the industry when it comes to safety. Before I discuss the operational performance of our mining assets, I would like to make a few remarks regarding COVID-19. MMG, like all companies across the globe, continues to address the challenges presented by this unprecedented event. As of today, I am pleased to confirm that there have been no COVID-19 cases identified at any MMG operation. The company has implemented robust business continuity plans tailored to the specific requirements of each of the regions in which we operate. Our focus has been to support local authorities in their efforts to limit the spread of the virus, provide additional support to our host community and minimize the risk to our operations. The ongoing impact of COVID-19 remains highly uncertain. However, we are confident that we have put in place processes and safeguards to assist in protecting our employees and the local communities in which we operate. The health and safety of these people and their families remain our first priority at this time. Now I will briefly discuss the operational performance of our mining assets, which in the third quarter produced around 92,000 tonnes of copper and 53,000 tonnes of zinc. Las Bambas contributed just over 73,000 tonnes of copper to this quarter's results. This was 26% below the prior period and reflected a number of operational challenges. Three factors, in particular, impacted by the level of mining, milling and, ultimately, metal production at Las Bambas during the first quarter, especially for a period of 15 days during January and February. Both inbound and outbound logistics were affected by community blockade along Peru's southern road corridor. This action impacted several mining companies that use this public road for the transport of concentrate and critical supply. At this time -- at the same time, repairs were required to the site's overland conveyor, which due to a mechanical fault was not able to operate for a period of time. This conveyor delivers ore from crusher to the processing plant, and this temporary outage also contributed to the lost production. More recently, impacts of COVID-19 have particularly been felt since mid-March when the State of National Emergency was first declared by the Peruvian government. This declaration has significantly restricted the movement of people and key supplies. It has also resulted in the temporary suspension of concentrate trucking. However, we are working closely with the authorities and anticipate that this may resume very soon. Unlike many operations in the region, the remote camp-based nature of Las Bambas has allowed it to maintain a degree of operating activity in the face of COVID-19 restrictions. However, activity levels have fluctuated and, obviously, diverged from the company's original mine and production plans for 2020. COVID-19 will continue to impact production at Las Bambas during the second quarter. Given the ongoing uncertainty and inability to determine when normal operations will resume, the company has taken the prudent decision to withdraw Las Bambas guidance for 2020. We will, of course, provide revised guidance when there is great clarity around the lifting of restrictions and the timing for a return to full-scale mining and production activity. Saving with our copper operations, Kinsevere continues its recovery after difficult first half performance in 2019. Copper cathode production of over 18,000 tonnes represents a 45% improvement on the first quarter last year. This result is slightly below production level in the final quarter of last year, however, largely in line with expectations. Unfavorable ore characteristics limited mill throughput over the period. However, this was offset by feed grades that were above expectations. At the corporate level, the company continues what would progress the assessment of a new phase in the Kinsevere project, being the processing of sulphide ore and the addition of a cobalt circuit to the operation. I will now discuss our Australian-based zinc operations, Dugald River and Rosebery. Dugald River delivered 35,500 tonnes of zinc during the quarter, which was 26% below the fourth quarter 2019 results. This is in large part due to throughput levels, which were around 18% below those achieved in each of the final 2 quarters of last year. Wet weather typically result in lower activity levels in the first quarter at Dugald River. Milling volumes were also impacted by low surface ore stockpiles as well as unplanned maintenance requirements, including a weather-related power outage. Also contributing to this result was higher-than-anticipated dilution, which adversely impacted grades and recoveries that were below expectation for a part of the period. Changes to the processing circuit resulted in improvement to recovery during March, with this remaining a key area of focus in the plant. Work is also continuing to open up new operating areas in the mine to ensure a steady feed of ore to the mill. At Rosebery, zinc production of just under 17,500 tonnes was 23% below the final quarter in 2019, with lead production also 17% below the fourth quarter result. This result reflected the expected decline in ore grades compared to prior years as well as lower-than-planned mill throughput. Reduced throughput was a result of limited ore stockpiles on the surface, with the ongoing impact of seismic activity limiting mine output. Work is progressing to prioritize the development of lower seismic risk mining areas to increase mine flexibility. The impact of lower throughput was offset by ore grades, which, although below prior year levels, were nonetheless higher than expected for the quarter. As a result, overall production levels for the period were largely in line with the expectations. At MMG, our focus during this time of uncertainty remains firmly on the safety and health of our people and those who live in our host community. I am proud of the work the team has done to address the immediate challenges presented, and we will continue to work to ensure the company is best placed to capitalize on the opportunities that arise as the world emerges from the impact of COVID-19. I am now happy to take your questions. And the social distancing rules mean that we are not all together in the same room. So to assist with coordination, I would ask that all questions be directed to me in the first instance. I will then call our members of the executive team to respond as appropriate. Please, can all questions be asked in English? And now I will hand over to the moderator.

[Operator Instructions] Your first question comes from Melanie Burton from Reuters.

My first question is, you mentioned -- I couldn't quite catch it, Geoffrey. You mentioned that because of -- in Las Bambas, the Peru government and the State of Emergency, you said that it's resulted in a temporary suspension of concentrate trucking. I think that's what you said. And you said that you were working closely with authorities and that it may resume, I think you said, very soon. I was wondering if you could elaborate on what very soon might mean, if it might mean in the next few weeks or this quarter, for example.

Yes. Thanks for the question. Before I answer question, I've got good news for everyone. We now have our EGM Americas, Mr. Wei Jianxian, online with us now. So maybe he will be the best person to answer any questions related to Las Bambas. But given Mr. Wei needs the language support, so probably I will ask my colleague to translate the question into Chinese first, and then I will ask Mr. Wei to answer this question.

Thanks, Melanie. Let me just quickly translate this to Mr. Wei. [Foreign Language]

[Foreign Language]

[Interpreted] Melanie, the quick answer from Mr. Wei is, we are closely working with the authorities of Peruvian government. And we are expecting as early as next week to resume the concentrate transport.

Your next question comes from Jack Shang from Citi Research.

Can you hear me okay?

Yes.

Thank you, Maggie, for translation. Two follow-up questions, one also on Las Bambas. What is the current situation on the mining operation itself? I know that given the State of Emergency in that area, you may have some difficulties in bringing the raw materials, like, you need ancillary materials, which is required for your -- for a mill. So what is the status at the mining site? And what is the status at your ore mills? Whether -- and also what is -- can you resume quickly to normal operation if this State of Emergency is removed? That's my first question. The second question, what's the update on Kinsevere? So whether there is a potential risk to your guidance given the ongoing COVID-19? [Foreign Language]

I will ask Mr. Wei to answer the questions related to Las Bambas. And after that, I will have Ross to answer the question related to Kinsevere. [Foreign Language]

[Foreign Language]

Thanks, Wei Jianxian. Jack, I might just translate it for the broader audience. Yes?

Thank you, Maggie.

[Interpreted] Yes, levels of production and daily work plans fluctuate at the moment based on the availability of critical supplies, employee rosters and people movement restrictions. These make it difficult to give any clear indication of the level of activity and production currently at site. To give some indication, over the last few weeks, mining and processing activity has averaged between 50% and 60% of original expectations. And there is no current intention to completely put Las Bambas on care and maintenance. Based on the original 2020 guidance, it would be reasonable to estimate lost production per month, if this were the case, to be approximately 30,000 tonnes of copper. We estimate monthly cost to be around $40 million per month in the care and maintenance scenario.

I may add something to answer the question besides what Mr. Wei said. The impact of the national emergency, mainly on the people transfer and also the concentrate transportation. In fact, we got the government's permission to maintain the key critical supply to the site. And we've got a small size of employees still inside. So that enabled us to maintain a limited scale of activities. So we are still producing, but as Mr. Wei said, it's very hard -- the day-to-day fluctuation is high, so it's hard to give a reliable estimate of the percentage about our operation. But the message is, we are still operating at the site, but that the concentrate transportation has been impacted and, as I said earlier, we expect the concentrate transportation can be resumed in the next week. And once the national emergency is lifted, and we expect we can bring this operation back to normal very quickly. So I hope that answers your question. And I now will ask Ross to answer the questions.

Thanks, Geoffrey, and thanks for your question, Jack. Just to recollect what Jack's question was, it was about whether the guidance at Kinsevere could be in doubt because of COVID-19. Jack, at this stage, Kinsevere has had a very strong quarter even though we had mining sort of shut down for 10 days during March. Now like all our operations, if there was an outbreak of COVID-19 on the site, that could potentially impact our guidance and ability to operate. But at this stage, there's been no reported COVID-19 cases in the Katanga province in the DRC, which is the main copper and cobalt mining area. So the cases to date have been in Kinshasa, which is the capital, and other parts of the DRC. So it's so far so good in Katanga province. Now in an attempt to make sure that we don't get that outbreak, particularly at our own mine site, we are having very strict social distancing measures so that people are separated. We're also bringing people in, in discrete groups so if we do get an outbreak or someone tests positive, we can track down the people who may have been exposed to that person. Now if there is an outbreak in that area close to where we operate, the most likely case is that we would go into a lockdown at the site, which means that we would still keep operating, but that the people wouldn't be able to leave the site. So to counter for that, we've got government permission to keep people on site for longer periods if necessary. And we're also building a temporary camp there, which would house up to 1,200 people so that we could keep large groups of people on site. Now probably to further strengthen our position, we do have significant stockpiles there, which are slightly lower grade to what we're mining. We can keep processing the stockpiles if we get to the situation where we can't mine, which is very labor-intensive. So at this stage, it is looking like we will meet our guidance, but it is somewhat difficult to predict.

[Operator Instructions] Your next question is a follow-up question from Melanie Burton from Reuters.

I'm sorry, I didn't catch all of that last reply. But I'm wondering, could you give us some color around logistics issues at Kinsevere. We understand that some of the warehouses now in [ Durban ] are full of concentrate, and so there's not a lot of places to store. So I'm wondering, is there a chance we could also see force majeure from there? And yes, if you could shed any color on that, that would be great.

No, I mean the logistics is always a challenge into the DRC because you're sort of going through port borders to get goods there, which primarily come from South Africa. But at the moment, we've got adequate fuel and consumables. And we're looking at trying to build up additional supply so that we could potentially operate for 90 days without getting fresh consumables in. But yes, that will be challenging, but that's what we're working towards. Now in regard to the product that's coming out of Kinsevere, we actually sell cathode, not concentrate, and that cathode is on a life of mine contract with Trafigura. So we don't have any issues at the moment having to dispose concentrate from the mine.

Your next question comes from Joy Zhang from Goldman Sachs.

I have a follow-up question still about Las Bambas logistics. I assume that the one week -- we have expectations that the transport will recovery in one week, that was from Las Bambas to the port. Is that -- is my understanding right? And also I want to check what is about the situation for the port to the shipment to the customers? What is about the current situation? And also if the national transportation is back to normal, do we expect the rise of the transportation cost even though it is come back to normal? [Foreign Language]

[Foreign Language] [Technical Difficulty]

Sorry, Mr. Wei got disconnected. So probably I will answer the question. Yes. The first is that, yes, when we say we expect the transportation of concentrates will be resumed, I mean that is from the site to the port. That's correct. And right now, in my understanding, the port is running as normal. And about our marketing, we have declared the force majeure to our customers due to the suspension of the concentrate transportation. But so far, our expectation is, once we can resume the concentrate transportation, then we can deliver the cathode to our customers according to our contracts with them. We do not see a major issue in shipping the goods to our customers, mainly in China in this regard. And about our transportation cost, it's hard to forecast due to the uncertainty around COVID-19. But definitely, people can -- should expect some cost up-writing related to all the necessary protective measures we have, to have to make sure, through the transportation, our people and the impacted communities in keeping safe. So that means probably, yes, there will be some additional costs related to these protective measures. But I believe that's probably all. The operating -- the cost related to the transportation should be almost at the same level, but definitely will incur additional costs in reaction to COVID-19 situation. I hope I answered the question.

[Operator Instructions] There are no further questions at this time. I'll now hand -- my apologies, there is another one that has just come through. Your next question comes from Chris Shiu from Horizon Asset.

So I'd like to understand more about sort of the financial situation. I mean given the operating headwinds, lower copper prices, lower volume, how are we coping with the sort of, like, financing of the company? And also I mean should we expect refinancing of some of the debts on the balance sheet with lower interest rates?

Thank you, Chris. Given your [ qtr ] is focused on the production, I will ask Ross to highlight something to your question.

Yes. Thanks, Chris. Obviously, liquidity is something we're carefully monitoring. At the moment, we still have positive cash balances. But having said that, we are looking at getting extra facilities in place -- obviously, extra liquidity in place should we need it. So our treasury team and our China relations team are working on that at the moment. But it is obviously something we need to manage. And I think you'll be aware that at the start of the year, the copper price was $2.85 and then it dropping down to $2.20-ish, that's obviously hurting us a lot on an annualized basis equivalent to about $600 million of cash and [EBIT ]. But we are working through that. And I think everyone else would also be aware that we do have the support of our major shareholder and the Chinese banks. So whilst it's an issue we are carefully managing, it is also -- it's something that is under control. With the newer facilities we're potentially looking at, they will probably come at a lower cost than some of the facilities we've currently got. But I think, particularly with the main Las Bambas facility, that is very difficult to renegotiate. And also in the current situation, we're not -- we haven't been able to ship concentrate, and prices are very low. Obviously, we're not in a really strong position to ask for a complete renegotiation of that. And I think, overall, the system is -- sorry, the situation is being managed.

There are no further questions at this time. I'll now hand back to Mr. Gao for closing remarks.

Okay. Sorry about the inconvenience caused by the technical difficulties. Most of my colleagues are working from home now. But anyway, thank you for joining us today and your continued support of MMG. And if you have any further questions, please follow up with our Investor Relations or corporate affairs team. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]