MMG Limited (1208) Earnings Call Transcript & Summary

Hello, and welcome to MMG's 2021 Second Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the June quarter of 2021. Joining us today is Chief Executive, Geoffrey Gao; and MMG's executive team. I will now hand over to Geoffrey who will discuss the highlights of the report. After which there will be opportunity to ask questions. [Operator Instructions] Over to you, Geoffrey.

Thank you, Brent, and hello to everyone who has joined us today. At MMG, our first value, as always, is safety. Our year-to-date operations recorded a total recordable injury frequency rate of 1.17 per million hours worked, which is an improvement on the 2020 result of 1.38. While we will never stop our efforts to eliminate injuries, I am pleased that we continue to benchmark at very bottom end of global peers on injury frequency. I also report that we continue to deliver stable operations at all of our sites, with production in line with our budget in the second quarter despite the ongoing COVID-19 impacts. Pleasingly, this stable operating environment, combined with strong commodity prices over the first half of the year, has resulted in a record profit for the group. As disclosed to the Hong Kong Stock Exchange last week, we currently expect to report a net profit after tax attributable to equity holders of around USD 400 million for the first 6 months of 2021. In addition, our net debt has reduced by around USD 1.2 billion, and our balance sheet is now in a much stronger position to deliver growth and returns for our shareholders. Now to address the operational performance. In the second quarter of 2021, MMG produced over 93,308 tonnes of copper and 58,137 tonnes of zinc. And on a full year basis for 2021, we expect to produce between 360,000 and 370,000 tonnes of copper and 240,000 and 260,000 tonnes of zinc. Las Bambas' copper production in the June quarter was over 80,000 tonnes. This represented an increase of 25% on the first quarter and 37% on the prior year, which was impacted by the onset of the COVID-19 pandemic. Despite escalation of the third wave of COVID in Peru, we continue to effectively manage this situation. Mining volumes improved significantly this quarter due to higher workforce capacity and improved equipment productivity. Regarding Chalcobamba, I wanted to provide updates on the status of this development. As you were aware, Las Bambas had anticipated regulatory approval for the development of the Chalcobamba pit in the first half of 2021, following submission of original application in February 2019. Despite assurances from the outgoing government, this approval has still not been received. With a combination of lengthy community consultations, administrative delays and the 2021 national elections prolonging this process. Looking forward, we will continue to work with the government of Peru and the Huancuire community to advance this critically important project. We welcome the recent confirmation that Pedro Castillo of the Free Peru party will start a 5-year presidential term on July 28, 2021. We look forward to holding constructive dialogue with the new government regarding the future development of Las Bambas and the significant contribution of Las Bambas and the Peru mining industry to the growth of the Peruvian economy. Our project is a significant one for the economy of Peru and will support additional social contribution and financial and business opportunities for local and regional communities. Moving now to Kinsevere. Copper cathode production of around 12,600 tonnes was also in line with expectations. New throughput was stable just like last quarter. The processing of lower-grade ores resulted in production being lower than last year. Following a temporary suspension of mining activity in 2020, the majority of mill feed came from low-grade stockpiles and third-party ore. In terms of outlook, we continue to undertake detailed engineering works in anticipation of the next development phase at Kinsevere over the remainder of 2021 and 2022, which we will see a shift to the mining and the processing of sulphide ores and the introduction of a cobalt circuit. I will now move on to our zinc operations, Dugald River and Rosebery. At Dugald River, zinc production of 40,000 tonnes was 18% below the first quarter due to short-term constraints in the south mine and the planned plant shutdown in June. However, we expect to see improvement in mining performance with better extraction methods to reduce waste as well as strong recoveries over the remaining months of 2021. With ongoing work to debottleneck the mine and optimize the plant, we remain confident that from 2022, we can deliver on our target of over 2 million tonnes of mine ore per year and annual zinc production approaching 200,000 tonnes. At Rosebery, zinc equivalent production of almost 44,000 tonnes was 6% higher than the prior period, consisting of 18,000 tonnes of zinc; 6,800 tonnes of lead; 430 tonnes of copper and 11,900 ounces of gold, displaying the benefits of the [ polymechanic ] nature of the Rosebery orebody. During the quarter, resource extension and near mine exploration drilling continue to indicate further extensions to the resource and the mine life. We are also investigating the potential for short-term capacity increases at existing tailings storage facilities while studying and permitting a proposed site for a new tailing storage facility. We are confident in further extending Rosebery's 85-year-plus mine life. In summary, the overall result of the second quarter is positive, and the record profit performance in the first half demonstrates the underlying strength of our portfolio. With debt reduction of USD 1.2 billion following the strong financial performance and the recent USD 300 million equity raising, MMG looks forward to delivering on its next phase of value accretive growth for shareholders. I am now happy to take your questions. [Operator Instructions] I will hand over to the moderator now.

[Operator Instructions] Your first question comes from Lawrence Lau from BOCI.

Geoff, can you hear me?

Yes.

Okay. Just 2 questions. First of all, what's -- it seems that you have revised down the output target for Las Bambas for this year because of the delayed approval of Chalcobamba. Now you're looking at 310,000 tonnes. So what's your assumption behind the approval time of Chalcobamba? And will this delay affect the output in 2022? And second question is that regarding the hedging. I see that you actually are employing hedging quite a bit in the first half. And can you tell in the first half profit, does it include any floating gain from the hedging contracts?

Okay. So thanks for the question. I will ask Mr. Wei to answer the first question regarding the delay of Chalcobamba approval. Then I will have my CFO, Ross, to answer the second question that is regarding the accounting impact of the hedging activities. So could you -- first question -- please have the first question translated into Chinese.

Geoffrey, I already translated the question to Mr. Wei, and Mr. Wei [indiscernible].

Okay. Then -- yes, if that has been done, then Mr. Wei can answer the questions now.

[Foreign Language]

[Interpreted] So Las Bambas team has [indiscernible] for the Chalcobamba in the first half this year because of already -- suddenly we are [indiscernible] our application in [ February ] in 2019. However, the delayed delivery of the required permit has been delayed because of [indiscernible] community compensation and administrative delays. Also, we have been impacted by the 2021 [indiscernible]. So there is a delay in our [indiscernible] prices. At Las Bambas, we look forward to working with the new government to [indiscernible] Chalcobamba because this [indiscernible] significant project for Las Bambas and also is the significant one for the economy of Peru. So we want to give out additional support through [indiscernible] contribution and give more financial and business opportunities for local and regional communities. Right now, we are changing many [ expectations ] to mitigate the impact for the 2021. Full year production for the 2021 is now expected to be around 310,000 tonnes of copper that is in the low end of the previous guidance range. When approval is received, Las Bambas will move towards significant development of the pit [indiscernible] mine [indiscernible] and the [indiscernible], which will increase the production trend of average of around 400,000 tonnes per year.

I would just like to clarify one point is that if this Chalcobamba is still not get approved within this year, will it affect the 310,000 tonnes of a target for this year?

[indiscernible] can give me a second to translate this question for [indiscernible].

We have interpreted the translation. So to make sure, Mr. Wei, you got the question? I may comment here -- yes, I may comment here, it's because of the coming change of the new government later this week in Peru and right now, it's very uncertain for the management to have a good estimate of when the Chalcobamba approval can be granted. Then at the moment, we cannot give a reliable estimate of the possible impact of the delay. But as Mr. Wei mentioned, in 2021, we are looking for rescheduling the mining sequence and doing some optimization works. So we can still maintain the production guidance given now we see it's probably around the low end of that range. And as to the impact on future years' production, we will work together with the new government to get better understanding of the possible time line of the approval. And then we can give the market updates about the impact on future years. Is that answering your question?

That's probably the best we can do now.

Yes. Something like that, yes. Okay. Yes, now I can have Ross to answer the question about hedging.

Thanks, Geoffrey. Yes, in the half year results, we actually had about a $35 million hedging profit. And that's not the total hedging gain because some of the gains are [ hedging candidate ] so that don't come through to the P&L. But the $35 million was in Las Bambas sort of essentially means based on those numbers that we've circulated around the profit attributable to equity holders that MMG shareholders will get 62% of that.

Your next question comes from Jack Shang from Citi.

Geoffrey, Ross, Hear me okay?

Yes.

Yes. And I would say thanks, and we appreciate your efforts in the first half in changing all the mining sequence and all the efforts on the ground. So good work. And several quick points to follow up on Las Bambas. One is that when new office, the new administration comes in, so -- but when do we expect that they come in? So will the new government be very efficient in appointing the mining minister, all these administrative processes of putting people in place, will that be on time? And when they get into office, which I guess would be end of this month, what are the next procedural requirements? Will they require, say, to start over again? That will be pretty downside scenario, bare-case scenario. And so based on your communication so far, with the incoming administration, will that be a kind of a friendly conversation already being earlier -- already being held already? Or we are uncertain at the moment of how -- what kind of stance that the new government would take? I guess on the procedural-wise, what are required? And so what are the expectations there on the next steps of gaining the approval -- or getting close to get the approval? That's the first thing on the approval front. The second is, I noticed that in the first half, I think Mr. Wei mentioned by changing the mining sequence, right? And I noticed that the average ore grade are actually higher than last year's level. So how long can Ferrobamba -- can you mine relatively higher grade ore at Ferrobamba? So how long that can last? Because earlier in the year, I think in March, in your presentation -- annual results presentation, you had a chart of the split between the contribution of copper output for Las Bambas. And I recall -- I can tell from the chart that Chalcobamba -- your plan is Chalcobamba would contribute 20% of the copper this year at Las Bambas, and it's going up to 40% by 2023. So my question would be that, in the bare case, if without Chalcobamba approval, say, in the rest of the year, and even say a very bare-case scenario that you don't get the approval, what are the backup plans and how long that Ferrobamba can last and at what production scale?

Okay. So I may take the first question regarding the new Peruvian government. And I will leave the second question to Mr. Wei about the production profile from Ferrobamba if the Chalcobamba approval is further delayed. Regarding the Peruvian new government, now the election result has been confirmed. We have the new President-elect. And on the Peru time, July 28, Pedro Castillo will take oath as President. And we were told that probably 1 or 2 days after that, then the new cabinet members will be appointed. So that means the new government will be in place very soon. And then the new cabinets will need to be voted for confidence by the Congress. That will be in about 30 days. So that means around end of August, the Congress will vote for confidence for the new cabinet. So that's one thing that basically the new government will be in place very soon and start to govern. And regarding the possible [ active ] approach towards the permitting, there was little information during the campaign of election from government. So we really don't know. We need to find out by working together with the government. But as I mentioned before, we will try our best to have the approval of Chalcobamba granted. Now I will hand over to Mr. Wei to the question regarding the production profile. [Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Interpreted] So this is the translate -- translation for the answer from Mr. Wei. Because of delay of the Chalcobamba, Las Bambas team is already developing the option for our mining production. First, we will give a priority for the [indiscernible] side [indiscernible] prestripping. And the second one, we will put our focus -- more focus in basically to advance the mining -- mining [ sequence ] in Ferrobamba. So for this year, for this year production, the [ output ] from Chalcobamba will be enough for [ next ] year.

[Operator Instructions] Your next question comes from Chris Shiu from Horizon Asset.

Congratulations on the great results. I've got 2 questions. The first one is, so regarding the first half debt reduction, right? I mean how much of that is actually coming from the sale of the excess inventory during the first half? And how much CapEx has been spent in the first half? That's the first question. And the second question is regarding the next phase of Kinsevere development, we note that the Board approval has been delayed from last year to this year. So it has been already almost 1 year of delay. So I'd like to understand more about the reason behind that. I mean is there something to do with the government's approval? Or is it just more of an issue with the internal studies?

Thanks, Chris. I will ask Ross to answer the first question, and I will take the second one. Ross, over to you.

Thanks, Geoffrey. Chris, we're not really in a position to particularly answer your question yet because we're obviously still financing -- sorry, finalizing our financial accounts. But the debt reduction was really a combination of the equity raise, the much stronger copper prices, in particular, than what we expected plus the sell down of the inventory. But when we come to the half year presentation, we'll make sure that, that's clear for you and we've got precise numbers.

Okay. Chris, regarding the [ KC ] approval, we are -- as I mentioned, we are still optimizing the engineering studies of this project. I think 2 things behind prolonged this process. One, since in the -- this project, we plan to use Chinese factors as much as possible. So in fact, we established a project team mainly comprised of Chinese managers, Chinese engineers. And we are looking for Chinese design, Chinese equipment and even Chinese construction services. But this all Chinese factor to make them fit in MMG's existing system took longer than we expected. So that's one complexity. The second one is during the starting process, in fact, we had rig of the capital expenditure overrun because of the booming commodity prices related steel price, equipment price, other things. Then we took another round of optimization to review the CapEx and make sure we can have the -- as low as profitable CapEx budget to support this project. So we are still in that stage, even though I believe we are very close to the end of this work. And the next step is to look -- seek the approval from the Board and then get this project implemented.

Your final question comes from Hannah Yang from Morgan Stanley.

Geoffrey and Ross, this is Hannah from Morgan Stanley. Just have a quick follow-up question on the policies in Peru. And we have been hearing that the next possible finance minister in Peru has been saying that taxes will go up in a moderate way, no matter the company has a tax stability agreement on hand or not. So just wondering how you see the likelihood of the tax increase. Or if the government -- the new government team breaks the tax stability agreement, what the company can do to mitigate the potential risk from the higher tax?

Thanks, Hannah. I'll pass this question to Ross. Ross?

All right. Yes, thanks, Hannah. I think at this stage, it's obviously quite unclear as to what's going to happen. And we're obviously sort of considering all scenarios, but we really just have to sit back and wait and see what the government announces. But the copper industry is one of the biggest industries in Peru. So it is a big risk for them to -- particularly having a mining-related tax. And certainly, if -- depending on what the taxes are -- If we do have it -- end up having a stability agreement breach, we have options of international arbitration as a potential to break that stalemate. So yes, so it's obviously a concerning situation. We're trying to do what assessment we can. But it's still very early days with the new government not in place. And I don't believe the Finance Minister has been formally appointed yet either. So this is an unpredictable situation at this point.

Sure. Just wondering if we accept the international arbitration, what else we can do about the tax increase, if possible?

Well, yes, international arbitration is the most likely outcome. And it's -- I guess, going back in history, back in 2011, they had a similar situation where there was a bit of like super profits tax that was in place during extremely high prices. So we really have to wait and see what the government proposes. But obviously, with having the stability agreement, we're not going to agree to something that's -- or if anything, that's going to hurt us too much. But the arbitration and then there's bilateral treaties as well which may come into force, too. But at this stage, it's options for us, but it's a little bit too early to tell.

Yes, I just want to clarify that the arbitration, it's all something we can look at, that's options. But right now, as Ross mentioned, because the new government hasn't been in place, and we are waiting for the proposal or the requirements from the government. And then we will decide what will be our next move. So it's, at the moment, too early to be certain on any move or any action, just to clarify.

Your next question is a follow-up from Jack Shang.

A quick one for Ross. I want to clarify the nature of the hedging gain for the company. So that USD 35 million at Las Bambas level, was that as a result of the actual -- say, price of copper is actually lower than the hedged level of copper price? Does that mean that if actually copper price shoots up in the rest of the year, that would potentially in the meantime cause some hedging losses? Just want to understand the nature of this. And also on a separate note, what's the company's overall stance? I noticed that you've hedged 40% of the volumes from February over December. So at what copper price level did you decide to do that? And what level would you potentially open to hedge it even more -- to make even more hedging -- say, your overall view on copper price and your hedging policy going forward?

Yes. Okay, Jack. Jack, those hedging gains that you'll see when we release our half year results, they are actually forward hedges on existing sales that we made in that February to June period. And some of them had like a 4-month QP period, so while we effectively give a support for 4 months back to 1 month at a fixed price. So we did that because we had absolute certainty over those hedged volumes. And then obviously, as I think that some of the hedges were put in place up around $4.50 to $4.70 And then there was all the talk of the Chinese release and strategic reserves. So we thought it was prudent to just lock in those QP periods on the existing sales. So that's what they are. Now the bulk of our hedging are actually collars or caps and collars. And I think you've seen the documentation that we've got quite a broad price range. And the floor price tends to be around [ 14 ] and in some cases, the collar price is above $5. So we probably, in reality, don't expect there to be too much room for hedging gains or losses as it's around about $1 a pound but we swing within the -- in the collars. Now for us to incur significant hedging losses, that would mean that the price would have to be well above $5, which would be an exceptional outcome. And we would still have the other 50% of production that we'd be getting the -- or roughly 50% that we'll be getting the full market proceeds for. So yes. So it was really last year, we did some hedges that obviously incurred a loss. But this year, we -- now we're using forward contracts. This year, we've gone to the cap and collar situation where we're really within quite a broad range. So yes, so we wouldn't expect there'd be significant hedges -- yes, hedging gains or losses for the rest of this year or early next year.

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

Okay. Thank you, everyone, for your time and support to the company. And I look forward to providing further updates when we do our mid-year results announcement. If you have any further questions, please follow up with our Investor Relations or Corporate Affairs teams. 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.]