MMG Limited (1208) Earnings Call Transcript & Summary

Hello, and welcome to MMG's Third Quarter Production Report Teleconference for 2020. This report and today's discussion cover the operational performance of MMG's assets for the September quarter. Joining us today is Chief Executive, Geoffrey Gao, and MMG's executive team. I'll now hand over to Geoffrey, who will discuss the highlights in the report, after which there'll be an opportunity to ask questions.

Thank you, Blake, and hello to everyone who has joined us today. As everyone on the line today would be aware, at MMG, our first priority is safety. In the third quarter, our operations recorded a total recordable injury frequency rate of 1.35 per million hours worked. This was a pleasing result and an improvement on the prior quarter. We continue to benchmark at the lower end of global peers on injury frequency. But along with our peers, the journey to zero harm remains a work in progress. MMG's operations produced over 102,000 tonnes of copper and 61,600 tonnes of zinc during the September quarter. Production volumes, specifically copper at Las Bambas, continued to be impacted by COVID-19. In spite of these challenges, the quarterly production result presents -- represents an increase of 33% and 2%, respectively, for copper and zinc on the June 2020 period. I am pleased again to report that MMG has not recorded a case of COVID-19 at any of our sites. Rigorous procedures to safeguard our people are tailored to the unique challenges in each region and continue to be effective. Nonetheless, cases of COVID-19 in employees and contractors in the DRC and Peru have been detected in advance of travel to site and continue to impact our operational performance through reduced workforce availability, in particular, at Las Bambas. The state of emergency remains in place in Peru, and the shortage of COVID-safe accommodation both at site and in local communities has restricted workforce availability and a return to normal operations. In particular, this impacts our mine plan compliance, maintenance, exploration and community engagement activities. We continue to direct available resources to maximize efficiency and prioritize mining of accessible ore at site as we prepare for a return to full scale operations as soon as possible with ongoing work to expand accommodation options at and around the mine site. Despite ongoing constraints, Las Bambas increased its copper output by 44% during the September quarter compared to the prior period, producing over 84,000 tonnes of metal. Although workforce availability still fluctuated between 65% and 80% during the quarter, these lockdown barriers provided a higher degree of facility than earlier in the year. High ore grades and the recoveries also assisted in achieving this improved result. Turning to community relations. Following the resolution of a blockade at Espinar, which ran from late July until 9th August, the company was able to gradually ramp up the trucking of concentrate along the Southern Road Corridor. Volumes have returned to full capacity of 125 trucks per day by early September, allowing us to again draw down concentrate stock levels at site. Disappointingly, blockage was established in the communities of Tuntuma and Collana, some 200 kilometers from Las Bambas, on 17th October. A peaceful resolution has however since been reached with community members and trucking resumed on Friday, 23rd October. Given the relatively short-term nature of this event, its overall impact was limited. South America, in general, and Peru, in particular, continue to be heavily impacted by COVID-19. Despite the ongoing uncertainty, MMG is confident in the control and risk mitigation procedures we have established to address the situation. As such, we are now in a position to provide full year guidance for Las Bambas. Copper production is expected to be between 305,000 tonnes and 315,000 tonnes with a full year C1 cost of between $0.95 and $1 per pound. Guidance for 2021 for Las Bambas and other MMG operations will be updated in early 2021 with our annual life of mine and budgeting process underway. At Las Bambas, the ongoing impact of COVID-19 on mine development, community engagement and permitting means that many of the transitional activities we had planned for 2020 will now take place in 2021. This includes the development of the Chalcobamba pit while we continue to expect formal government permitting to be obtained by the end of this year. Further community engagement will be required before we can begin significant development. First ore is now anticipated at some stage in the first half of 2021, and this delay can be expected to impact next year's guidance. At Kinsevere, cathode production of over 18,000 tonnes were broadly in line with expectations and consistent with the site's recent performance. The third quarter saw a significant increase in mining volumes. This came in advance of the temporary suspension of mining activity, a decision that was taken to optimize site works during the wet season and to provide for planning flexibility in advance of the potential transition to mining of sulphide ores. It's expected that mining will recommence early in the second quarter of 2021. The temporary suspension of mining will not impact meeting volumes with significant ore stockpiles on-site at Kinsevere. We maintain our 2020 production and cost guidance, but note that production volumes over future years will be impacted by the lower-grade ores from stockpiles and depleting oxide ore reserves in the mine. We anticipate a decision in coming months on the next development phase at Kinsevere, which will potentially see a shift to the mining and processing of sulphide ores and the introduction of a cobalt circuit. Should the development project proceed, we anticipate production volumes retaining to around current levels. I will now move on to our linked operations, Dugald River and Rosebery. At Dugald River, a sustained focus on the opening up of new mining fronts continues to pay dividends with monthly records set for the volume of ore delivered to the surface in both July and August. A steady flow of ore to the mill has allowed for stable metal production with over 46,000 tonnes of zinc delivered during the quarter. This represents a 6% increase on Dugald River's second quarter results and demonstrates the sustained improvement in recoveries flowing from enhancements made to the grinding process earlier this year. Further supporting the September quarter result was a 9% increase in zinc ore grades. While obviously a pleasing outcome, we remain cautious regarding the delivery of this improved grade on a sustainable basis. Stable ore supply and strong operational performance in the mill and the processing plant will assist in offsetting the impacts of any future grade declines. Together with positive early drilling results, which suggests a wider zinc ore body than originally expected, this provides confidence that Dugald River can achieve zinc production approaching 200,000 tonnes by 2022. The this also opens the potential for mine life extension and expansion of the operation should positive drilling results continue to be received. At Rosebery, the third quarter saw a significant uplift in mine flexibility and the number of accessible operating areas. This came after permission was given to reenter lenses impacted by seismic events in 2019. It enabled a material increase in mine output and new throughput compared to the prior 2 quarters of 2020, and ultimately, higher metal production than would otherwise have been achieved. Zinc production for September quarter of just over 15,500 tonnes reflected the deferral of mining of some higher-grade stopes until the fourth quarter, together with anticipated lower-grade ore grades, more generally as mining activity continues to move deeper. Recoveries were also impacted by higher pH levels. Conversely, there was an increase in lead production as a result of improved lead grades and recoveries. Reflecting the strong contribution of precious metal by-product credits and ongoing cost efficiencies, we are revising our 2020 cost guidance for Rosebery downwards with full year C1 cost now expected to come in between $0.10 -- below $0.10 per pound. This is less than half our original expectation. Despite its age and the depth of current mining activity, Rosebery remains a highly cash-generative operation, and I reaffirm our commitment to the investigation of options for the extension of the operating life of these assets. I'm now happy to take your questions. 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 call all questions -- please, can all questions be asked in English and we will arrange for translation for Mr. Wei to be able to address Las Bambas-related matters. I will hand over to the moderator.

[Operator Instructions] Your first question comes from Han Fu with JPMorgan.

May I ask about 3 questions about Las Bambas? The first one is, what is our destocking prospect for rest of this year? I can notice by end of September, there's a 47,000 tonnes. It's about a similar level of beginning of the year. But what do we expect to do within the fourth quarter in terms of the destocking? The second question is what is the latest local government requirements about our labor arrangement for Las Bambas on-site? And do we expect any arrangement change coming into 2021 like either from a policy change perspective or from our labor force management perspective? And the third question is when Chalcobamba got commissioned, how much incremental volume can we expect from that? Does that push the overall Las Bambas' annual production to somewhere north of 400,000 tonnes?

I'll take the question. But just to clarify your second question, is that related to the government requirement regarding the COVID-19 protection for people?

Yes. That's the second question. Like in the past quarter, the labor availability is about 65% to 80%, right? So what's going to be the -- maybe the outlook for next year? Is there any policy change or our human resource management change that we might alter that labor availability?

Okay. Understood. I will ask Mr. Wei to answer these questions, and I will ask Maggie to make the translation.

Thanks, Geoffrey. [Foreign Language]

[Foreign Language]

[Interpreted] So in just answering your first question. So as of the 31st of July, there are around 143,000 tonnes of concentrate on-site with the increase due to the restrictions imposed by the community blockade at Espinar. And then at the end of the September, around 131,000 tonnes of concentrate on-site and then with 125 trucks per day resuming from early September after the Espinar blockade. However, this could be like expected to be increasing again due to the new social community issue at Tuntuma. So at the 30th of September, the size of stock level is, as I just said, 131,000 tonnes of concentrate, which represents around 40% of the total size of storage capacity used. However, on the 28th of September, the logistic transport 100% recovered and the inventories are planned to be reduced through the late -- in the first quarter of 2021.

[Foreign Language]

[Interpreted] Fu Han, in answering your second question, so the Peruvian government decided to restart the economy reactivation in 4 phases. Well, the mining is the first one. And -- however, one of the biggest problems for mining companies is the health of employees who continue to show many cases of COVID-19 infection prior to traveling to the mine operations. And this -- and a lack of COVID-safe accommodation is preventing mining companies from having 100% availability of the personnel on-site.

[Foreign Language]

[Interpreted] Further to the second question, Las Bambas had been able to maintain continuous operations throughout the COVID pandemic and the activity levels have fluctuated. However, during the third quarter continued to be impacted by the availability of workforce and a COVID-safe accommodation on-site and in the surrounding towns. The workforce rate fluctuated on a shift-changed base of 65% to 80% of the average. Currently, the mine is operating at approximately 95% with an average of 85% of the workforce. And then the expectation for the fourth quarter is to operate at near 100% with an increased level of workforce on-site as we develop additional accommodation options.

[Operator Instructions]

Sorry, moderator. I think we still owe the answer to the third question. Probably I can answer that question on Las Bambas, the question around the production contribution from Chalcobamba to Las Bambas. The exact number of production contribution from Chalcobamba will vary year from year. And the key contribution, I would say that is because in the early stage of Chalcobamba, we got some high-grade ore supply, probably above 1%. And with that high-grade ore supply of Chalcobamba, we can compensate the great decline in the existing Chalcobamba pit and maintain the previously communicated production profile around 400,000 tonnes. So it's more like to maintain the desired production level other than we can increase the metal production level significantly by the -- through the ore supply of Chalcobamba. I hope I answered your question.

Your next question is from Jack Shang with Citi.

Hear me okay?

Yes.

Okay. I have 2 questions regarding Las Bambas. The first one is regarding, say, the ore grade and also associated cost levels. The ore grade, based on your production report in the quarter, declined to 0.68. And there has been a declining trend since, say, Q4 last year. So what -- so can you provide us some color on what's the ore grade going to look like roughly getting to 2021? And it actually -- your cost, your C1 cost actually has been maintained and it's around $1 per pound level, which is impressive. And with the declining ore grade, how -- so any color on the potential direction for the C1 getting to 2021 if you continue to have the existing ore grade decline going forward in 2021? And also a related question on the CapEx at Las Bambas, what is the, say, required CapEx to bring up Chalcobamba? That first one on the Chalcobamba pit. And the second one is so what is, say, the CapEx level after Chalcobamba gets online? Beyond 2021, what is the sustainable CapEx level at Las Bambas itself?

Thanks, Jack.

Yes. Maggie, do make the translation of the question.

Sure. [Foreign Language]

[Foreign Language]

[Interpreted] So Jack, in answering the first question around the ore grade, the grades at Ferrobamba are naturally declining as the pit is depleted. Grades are also responding to mine sequence adjustments, which has been material through the COVID-19 impact. Las Bambas team is working to bring the Chalcobamba pit online as quickly as possible. And the higher-grade ore from this pit will supplement Ferrobamba ore over coming years. At this stage, the expectation is the first ore from Chalcobamba will be delivered to the mill in the first half of 2021.

[Foreign Language]

[Interpreted] So the CapEx for the sustained development of Las Bambas is very important. There are some deferred CapEx in 2020 due to the timing issue. However, this year, we're expecting around $450 million for the CapEx level, which $200 million is related to mining CapEx.

Ross, you may have to add some further comments on the CapEx of Las Bambas.

Yes. Thanks, Geoffrey. In regard to our overall CapEx, we're looking at between $500 million and $550 million, which is well down on where we said our guidance would be at the start of the year. And the reason for that is that we haven't been able to execute all our capital because of the shortage of people and the shortage of accommodation on-site. And also, our capitalized mining is lower -- will be lower for that whole year as well because when we have that people on-site, we're obviously focusing on mining ore where we can and potentially sacrificing the waste movement this year. So naturally, next year, that means we're going to have some carryover from this year, both in the pure CapEx and also waste mining itself. We'll give guidance on that in January when we do our Q4 report. But I think you can expect it to be sort of somewhere between $600 million and $700 million, but we're still doing our budgets at the moment. But there will be a significant increase on this year.

Thank you, Ross.

[Operator Instructions]

So just while we're waiting, I could perhaps also add to the previous question that Jack asked if that was okay.

Yes, Ross. You move on.

Yes. Jack, you mentioned about the ore grade dropping to 0.68% in the third quarter. That's -- whilst this is true our grades are dropping over time, that drop in 0.68% was unusual and the reason for that was that we were behind in our waste stripping because of COVID and that stopped us from getting to some high-grade pockets. So it came in well below where we expected as well. But for this quarter -- but with the fourth quarter, you will see that grade coming up again. So you don't see that 0.68% as a normal grade.

Yes. Thanks for that, Ross.

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

Okay. Thank you. 2020 has, for all of us, been a year unlike any other. Also great uncertainty remains. We look forward to a strong fourth quarter and moving forward with optimism into the new year. Underpinned by the fundamental long-term strength of our key commodities, exciting development and exploration opportunities and increased stability in a COVID-normal environment, there is an exciting and bright future for MMG. I thank all of our stakeholders for their continued support. Thank you for joining us today. If you have any further questions, please follow up with our Investor Relations or Corporate Affairs team. Goodbye.