MMG Limited (1208) Earnings Call Transcript & Summary

Hello, and welcome to MMG's 2020 Fourth Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the December quarter and full year 2020, together with the outlook for 2021. 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 will be an opportunity to ask questions.

Thank you, Blake, and hello to everyone who has joined us today. At MMG, our first value, as always, is safety. In the fourth quarter, our operations recorded a total recordable injury frequency rate of 0.54 per million hours worked. This was significantly better than the prior quarter result of 1.35. While we will never stop our efforts to eliminate injuries, I am pleased that we continue to benchmark at the very bottom end of global peers our injury frequency. Our full year TRIF of 1.38 per million hours worked, represented a 13% improvement on 2019. I'm also pleased to report that we recovered well from the COVID-19 impact with several operational records set across our operations during the fourth quarter. MMG produced over 113,000 tonnes of copper and 70,000 tonnes of zinc during the period. On a full year basis, copper production of almost 385,000 tonnes and zinc production of just over 245,000 tonnes was achieved with all sites delivering production volumes and C1 costs that were within or slightly better than guidance. We were able to maintain continuous operations throughout the year despite the COVID-19 impact. This was a particularly impressive outcome at Las Bambas. Significant COVID-related restrictions remain in place across Peru. However, [ investment ] of an expanded on-site camp and restore access to accommodation in local communities has enabled Las Bambas' workforce levels to return to over 90% of full capacity. As a result, mining volumes have increased with a new record set during the fourth quarter. We have also been able to gradually recommence most project exploration and maintenance work. Las Bambas' copper production in December quarter was over 95,000 tonnes, a 13% improvement on the prior period. This was supported by higher ore grade and steady mill throughput. On a full year basis, production of 311,000 tonnes of copper was in line with revised guidance. COVID-19-related restrictions was the single largest cause of an estimated 70,000 tonnes adverse impact on outcomes. Despite lower volumes, costs were effectively managed with full year C1 coming in at $1 per tonne. However, some 2020 cost savings will now fall into 2021. Turning to community relations. Las Bambas was subject to 64 days of transport logistics disruption as a result of various community blockades throughout the year. It is important to note several points in relation to this blockade. Firstly, they had only a very minor impact on production. The most significant effect being on our ability to transport and sell finished goods. Secondly, not all of these blockades were directed at Las Bambas. Thirdly, the demand of the communities involved for, in many cases, not something that could be addressed by Las Bambas. Instead, the Southern Road corridor and mining industry more generally has become increasingly easy target for small groups and individuals that were seeking to gain government attention. This is increasingly the case given recent political unrest in Peru and in the lead up to national elections later this year. Most recently, Las Bambas was impacted by community actions from late December until early January by a block at Velille, approximately 200 kilometers from the mine. However, since the second week of January, transport volumes have returned to full capacity of [ 175 ] trucks per day, allowing us to again draw down cost [ feedstocks ] at site. Moving on to Kinsevere, copper cathode production of around 17,500 tonnes was in line with expectations and achieved with a record quarter for new throughput. This assisted in offsetting the impact of lower ore grades as stockpiles are consumed following the temporary suspension of mining activity in the third quarter. On a full year basis, cathode production of 72,000 tonnes was at the upper end of guidance and 6% above prior year levels. This reflected a shift back to mining of the higher grade central pit for most of the year, with reduced waste movement, leading to C1 costs of $1.81 per [ pound ], 19% below 2019. I will now move on to our zinc operation. Dugald River and Rosebery. At Dugald River, new quarterly records have been set over the past 3 months for new throughput recovery and ultimately zinc production with over 52,400 tonnes produced in the period. This performance represents the benefit of ongoing work to debottleneck the mine, optimize plant performance and ultimately ensure we are realizing the full potential of this asset. Full year zinc production of over 177,000 tonnes was at the upper end of Dugald River guidance and set a new annual record for the operation. This strong result assisted in keeping C1 unit cost to $0.70 for the year. At Rosebery, the fourth quarter represented the strongest production period for 2020, with almost 18,000 tonnes of zinc produced. This was a particularly pleasing result, given processing capacity was running at only 50% for around 20 days during the period. A result of scheduled equipment replacement works. Improved grade and stable plant performance supported the outcome. On a full year basis, zinc production in excess of 67,000 tonnes exceeded the upper end of guidance. This was an excellent achievement, which in spite of key areas of the mine having been inaccessible for March of 2020 due to prior year seismic events. This was matched with strong lead, copper and precious metal byproduct output, which contributed to full year zinc C1 cost of $0.01 per tonne, $0.24 below the midpoint of our original 2020 guidance. We will shortly move on to questions. But before doing so, let me make a few comments on the outlook for our operations. The company expects to produce between 360,000 and 390,000 tonnes of copper and between 240,000 and 260,000 tonnes of zinc in 2021. Las Bambas production of between 310,000 and 330,000 tonnes of copper is expected over the coming 12 months before increasing to an average of around 400,000 tonnes per year over 2022 to 2025. As foreshadowed in our third quarter production report, this is a result of ongoing COVID-19 delays to the commencement of mining at Chalcobamba and the deferred completion of other projects that will now progress this year. For example, the [ third gold mill ]. At Chalcobamba, we now anticipate formal permitting to complete during the first quarter. At the same time, we were progressing community discussion and continue to expect mining to commence in the first half. As foreshadowed in earlier updates, production at Kinsevere over future years will be impacted by processing of lower-grade ores from stockpiles and depleting oxide ore reserves in the mine. This is, however, anticipated to improve in the future should the company proceed with the next development phase at Kinsevere, which will see a shift to the mining and processing of sulphide ores and the introduction of a cobalt circuit. We'll continue to assess and optimize this project with a final decision anticipated during the first quarter of 2021. At Dugald River, increasingly consistent mine and new performance leaves us confident that from 2022 we can deliver on our target of over 2 million tonnes of mined ore a year and annual zinc production approaching 200,000 tonnes. This confidence is reflected in 2021 guidance levels, which are above 2020 volumes. As previously advised, this confidence is also supported by positive drilling results, which suggests a wider zinc orebody than originally expected. As a result, there was a 14% increase in the Dugald River primary zinc resources as at 30th of June 2020 as disclosed in our most recent mineral resources and ore reserve statement. At those rate, stable [ zinc ] and cost guidance for 2021 demonstrates MMG's confidence in its ability to continue efficiently operating Rosebery and maximizing its potential, with the mine celebrating its 85th year of continuous operation in coming months. At the same time, we continue to assess options to extend the life of this highly cash-generative asset. In 2021, C1 unit costs will increase slightly at Las Bambas due in large part to the impact of carryover expenditure from 2020 and the pre-stripping work at Chalcobamba. At Kinsevere, increases are largely due to lower production and increased mining volumes. C1 cost at Dugald River and Rosebery will be broadly in line with 2020 levels. I'm now happy to take your questions. [Operator Instructions] We have a team on hand to provide translation for Mr. Wei so he can respond to Las Bambas-related matters. I will hand over to the moderator.

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

Congratulations on the results. I have 2 questions, please. So one is about the potential expansion at Kinsevere, could you outline some of the thinking around what might -- what the issues might be or that the Board is considering, please? And the second one would be about -- well, maybe we could just start with that one, please.

Okay. Thank you, Melanie, for that question. I will take on the question on the Kinsevere expansion project. In fact, we have started the study on this project since 2017. And it's about the development of the next stage deposits because we are entering the end-stage of the oxide reserve. And the new project right now, we are in the final stage to further optimize the investment phase and also seeking the approval from our Board. The -- I have touched some of the key effects of the project during previous communication. So it's going to use the existing plant, but we see additional circuit to process cobalt content from the ore. And at the moment, we are not in a position to provide further details such as the CapEx or future production. But when we have the final approval on this project, then we will provide more information to the market. I hope I understand the question correctly and answered that.

Yes. Thank you. You did. The reason I don't know about it is because the information hasn't been made public yet. So that makes me feel better. And so we will expect to hear about that shortly, and we'll look forward to hearing about that. My second question is, obviously, we've seen quite a strong rally in copper prices. Would you expect that to be sustained given the degree of appetite for copper from your customers, given what you can see out for the next few months?

Okay. Thanks again for that question. In fact, as a miner, we focus on the long-term outlook -- long-term fundamentals of our commodities. And we -- as I repeatedly mentioned to our analysts and investors before, we had and have strong confidence in the fundamentals of our core commodities, particularly in copper. I would say the recent strong rally in the copper price was driven by a few factors, at the same time, including the strong recovery of the Chinese economy as they expected both economic recovery in 2021, particularly when the major economy find a way to fight with the COVID-19 pact. And also the stimulatory fiscal policy from the different countries and also the monetary policy. All that is supportive for the copper prices. So I would say the momentum will continue, particularly in the short term. But as a miner, I said it again, we will just focus on the long-term outlook and make our business decisions, particularly the big decisions based on that long-term fundamentals. Thank you.

[Operator Instructions] Your next question comes from Joy Zhang from Goldman Sachs.

And I have 2 questions. First one is on the community issue that you mentioned about the company has made up some alternative plans to solve the transportation issue. What is the progress on that? And the second question is, what is our long-term target for the debt level? That's before we consider to do any payout or any other actions on that?

Okay. So I will ask Mr. Wei to answer the first question. So I'll ask the interpreter to translate.

[Interpreted] Sorry, I missed the second question, could you repeat that again?

The community issue that's on Las Bambas, that we -- that the management has updated us on the -- put up some alternative plans to solve the commodity or road blockage issue. So I was wondering what is progress, at what stages that we have considering for the alternative plan. [Foreign Language]

[Foreign Language]

[Interpreted] Now from 12 December until the first week of 6th of January, the [indiscernible] near the [ inner ] community was blocked by a small section of the local community, [indiscernible] community. The concerns related to the allegations that the community made by Las Bambas have not been fulfilled by the agreement, which MMG rejected. Particular [ fluctuation ] was that agreement have only recently been reached with the 2 Peruvian communities in September and November of the [indiscernible] year.

[Foreign Language]

[Interpreted] Well, the transportation of the concentrate was [ within ] in the early of January.

[Foreign Language]

[Interpreted] Turning to second question, the community disruptions are an increasing source of the fluctuation with the small groups. We're increasingly using this at the meaning of gaining attention from the central government. I think reliable logistics solution for Las Bambas is critical to current operation and supporting the future expansion as well as the operation. The role and the real options continues to be increased. It will upgrade, better management of the [indiscernible] and the [indiscernible] And the investigation of [indiscernible] role and also the bypass route and studies are ongoing. Regardless, I will grow very exposed to so-called reactions from remote communities as we reach the troubles and including with the actions of the permit educator taking share of the community competition is playing a negative role, which members of the [ arrest ] have read related to the extortion we carried on -- we carried out to end the year of 2019. We continue to work very hard to build the relationships to provide development and business opportunities and also deal quickly with the claim and maintenance of the road access. We maintain also constructive dialogue with the stakeholders, which means the community and also the local government. In [indiscernible] we continue to work and together with the [ government ] and also the third-party transportation options, including [ operator ] role, pipeline, rail options and also the combination of all possibilities. Now of course, they have long-term solutions that are critical to the future of Las Bambas. We have done the study in the area of the pipeline option, but this remains in the -- still early phase of the investments. Thank you.

So Joy, I may add some comments here, Mr. Wei -- yes. As Mr. Wei mentioned, we are working on some alternative solutions. All of them are #1 in the early stage of study. Number two, all of them will take some time. I mean, they are long-term solutions. So for the management, the near-term and medium-term focus is on the existing road. And on that part, a few key things for us to do. Number one, that is a reliable sustainable relationship with the communities, and we have been continuously trying to get the good relationships. One of the demonstrations that [ show ] the constructive dialogue recently, then we got some agreement with the communities in Velille. So that is one area of effort to construct the dialogue to get the good relationship with the community. And then the second thing is to upgrade the road condition and to do all the necessary actions to mitigate the impact brought by our transportation to the community. On that part, the government has started the upgrade of that road and also from the company side, we also got actions, including that prevention or work management along the road. Then the -- I think the third one that is really to promote the economic benefit broadly brought by the Las Bambas operation to the national and also local-level economy, and you can get more information from our production report. And particularly, we've got a website to continuously update the information regarding this. So you can find more information through that website.

Your next question comes from Lawrence Lau from BOCI.

I have 2 questions. First of all, in the -- Mr. Gao's introduction talking about new project at Kinsevere. I would like to know what kind of the long-term copper price assumption you are using when you assess whether you should go ahead with that particular project or your new projects in the future. And secondly, given the current high metal prices, will you consider to use hedging instrument against the lock in the current high metal prices because you have used that before last year? And if yes, to what extent you would do it?

Okay. Thank you for that question. I will address this first one, but maybe Ross can add some comment after me. About our long-term price assumptions, we don't disclose that to the market. But as a reference, you can see in our MROR report, we -- the price we use calculate our copper reserve. The price is $3.24. So that can be -- is a reference, gives you an idea about what is our long-term outlook for price for copper. On the hedging activity, we did some hedge in 2020 but that didn't change the company policy. We got the commodity price exposure as our core exposure. So we don't have a long-term hedging policy. The -- look, the hedging activity done in 2020 was mainly to protect the company from the very volatile markets. You should recall, the low and the high in 2020 was so diverse and so big. And we will not rule out the possibility for a possible hedging program in 2021. But at the moment, there is nothing to be defined. So we will see. We will take copper and zinc price exposure as our core exposure. But time by time, we will review the market situation and also our own financial situation to see what's the best to -- strategy to be taken to protect or to further improve the performance of the company. So that's probably the answer I can hand to you right now. I'm not quite sure, Ross, do you have anything to add?

Actually, no, Geoffrey, I think you've handled that and answer that question about the hedging quite well, so nothing to add.

All right. Thanks.

Your next question comes from Jack Shang from Citi.

So I have -- so you've answered the hedging policy question. I have a follow-up question on your Las Bambas production committed for 2021. So first of all, your fourth quarter 2020 production of copper at Las Bambas was pretty strong, and congratulations to that -- on that. But it seems that your guidance for 2021 has factored in some drop from -- of the output levels versus 4Q 2020. And also in your guidance, you also mentioned that even with that guidance, which is lower than the 4Q run rate -- operating rate, you still need to assume -- or would expect that you could start mining Chalcobamba pit in the first half, I guess, sometime in the second quarter. And you need to process some certain amounts of Chalcobamba ore in the rest of the year to even to maintain the current guidance for 2021 for copper production. So my question is regarding to that. So what's the transition? Could you elaborate a little bit more on what the transition works are being carried out or being planned on the ground? It seems that there is a decent drop of copper output during that transition. Second, what kind of risks given the political issues in Peru and the elections. So what are the risks if you do -- if you, for some reason, cannot get your formal permit in the first quarter, which you mentioned you expected in the first quarter? But what are the risks of that, that you don't get it in the first quarter? And what will you do? And what will be the contingency plan for copper production for the year?

Okay. Thank you, Jack, for that question. I will ask Mr. Wei to address that question. The interpreter cannot translate the question. He's away now. [Foreign Language]

[Foreign Language]

[Interpreted] Well, the year 2020 was a transitional year as we were on a serious periods of initiatives such as accelerate the [indiscernible] at Chalcobamba. The third [ gold mill ] upgrade and also other debottlenecking projects in the front so that we can sustain our production at a relatively high level around 400 kilotons over the half year. Over the medium term, obviously, the key part of this CapEx were the delay by the COVID-19 which has also delayed permitting and also permitting discussion in relationship to the Chalcobamba development. Chalcobamba and its high-grade ore are key to maintain the decline of grades at Ferrobamba pit and delivering higher [indiscernible] copper production in following years. We continue to work closely with the government and are targeting to acquire the permit during the first quarter of this year, 2021. So of course, COVID-19 has also limited our ability to fully progress our own community engagement with the routed community. And this will need to continue to progress as part of our service to develop and the mining of the Chalcobamba. The overall contribution of ore from Chalcobamba in 2020 was always anticipated to be relatively minimal. And it will now take time in 2020 after the work commence towards Ferrobamba. During the first half, we now anticipate first ore for Ferrobamba at some stage in the first half of 2020 with the guidance range reflecting this. Thank you.

Jack, sorry. Yes, the line is not so good, but I hope you get the information.

Yes, I get the information. Thank you. And I have a follow-up on the back of that. The one is assuming everything progresses very smoothly that we get the Chalcobamba permit by first quarter, and we start to perfect the ore in the rest of the year. So what -- you also mentioned that in the next -- in the following 4 years, say, from 2022 onwards. By 2025, the annual output out of Las Bambas should be sustained at 400,000 tonnes per year level annually -- annual level. And does that also have some implication for say, C1 costs? So what would be the cost of color there if you purchase more Chalcobamba ore. I don't need the exact number. But how does that compare with existing orebody or ore grade when Chalcobamba ore gets into the processing plant. That's the first -- that's the follow-up on the general color -- broader color on the cost trend. And the second, I want to clarify that because what happened in 2020, the biggest one was COVID-19. And COVID-19 based on your 4Q production report, you pretty much recovered to 90% of the labor -- your work force or your operating rate at the mine. But your -- which would imply that if this operating rate is sustained, your production level should be much higher than your guidance. So my question is, what are the transition? What other specific transition works required that actually you're factoring in, in your annual production forecast at Las Bambas for 2021. It seems that the ore grade or the ore mills should be a little bit lower based on the current number in 2021. So is that the correct understanding that the existing ore grade is getting lower? And you need some time to process the new ore at Chalcobamba. And also -- yes. So is that a correct understanding?

Jack, let me try to answer the question directly other than through translation. I mean the key driving factor for the production outlook not only for 2021, but also for the future years, that is about Chalcobamba. The big difference is that we expect we can have some high-grade ore supplied from Chalcobamba particularly from the early years of Chalcobamba development. And if without Chalcobamba, just the production from the existing pit, that's the Ferrobamba, then we will see a continuing decline of the ore grade. That's something we are [ hinting ] the market. So the real focus is on this. More specifically on Chalcobamba, it will take about 6 months to do all the pre-stripping work. So that's why Mr. Wei mentioned, in our previous plan, we plan to start the pre-stripping work in the second half of 2020, and then we can enjoy the full production contribution -- ore supply contribution for Chalcobamba for 2021. But now with all the delays, so the pre-stripping activity will happen in 2021. So in fact, we will not have a very substantial ore supply production -- ore supply from Chalcobamba in 2021. Then with that, that contribution will be mainly on the 2022 and forward. So I hope I gave you a better picture on the result.

[Operator Instructions] Your next question is a follow-up question from Joy Zhang from Goldman Sachs.

I have another question is that's about the long-term target for the debt level that we are comfortable with. In other ways, is there any target that we want to put our total debt in the next few years?

Thank you again, Joy. I will ask Ross to answer this question.

Yes. Thanks, Geoff and Joy. Joy, we haven't got a fixed target because at the moment, obviously, our gearing's sort of over 70% and it needs to come down. But really what we're aiming towards is probably a 30% to 40% gearing ratio before we look at paying dividends. So certainly, we would -- our focus over the next few years and particularly if we have a period of higher commodity prices, is paying that debt down. So I'd say, certainly, we would be down in the 30s before we consider a dividend. But obviously, that's something we need to discuss further when we get close to that position.

There are no further questions at this time. I will now hand back to Geoffrey for closing remarks.

Thank you. 2020 has certainly been difficult and 2021 will not be without its challenges. However, we are confident that we are positioned to continue work that will maximize the value of MMG's assets and continue to position the company to take advantage of future opportunities. The continued support of all of our stakeholders is greatly appreciated. Thank you for joining us today. I look forward to speaking with you next at our 2020 annual results presentation, which is scheduled for 4th of March. If you have any further questions, please follow up with our Investor Relations or corporate sales team. Goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]