MMG Limited (1208) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MMG Limited 2021 Interim Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Brent Walsh, Head of Corporate Development. Please go ahead.

Good afternoon, and welcome to MMG's 2021 Interim Results Briefing. I will shortly hand over to MMG CFO, Mr. Ross Carroll, who will provide an overview of the interim results before taking questions. The MMG management team listening today from their homes in Melbourne, Australia, where we are currently under COVID-19 lockdown conditions. Please bear with us should there be any technical difficulties. Our CEO, Mr. Geoffrey Gao is unable to join us today due to travel and quarantine requirements. I will now hand over to Mr. Caroll.

Thank you, Brent, and good afternoon to everyone, and welcome to MMG's 2021 Interim Results Briefing. I trust you have read through our results materials, which were released to the Hong Kong Exchange yesterday. Today, I will discuss the company's first half results and provide an update on our outlook. After the presentation, we will welcome your questions. The first half of 2021 was a very successful period for MMG both operationally and financially. Most importantly, we maintained our strong safety record and solid production rates at all our sites despite the ongoing challenges associated with the COVID-19 pandemic. On the financial front, we delivered a record 6-monthly profit performance, net profit attributable to equity holders of USD 400 million and a very substantial net debt reduction of USD 1.2 billion. This demonstrates to our shareholders the earnings and cash generating power of our portfolio during periods of strong metals prices. I will take you through the detail behind these numbers shortly. MMG's #1 value is safety. MMG's pursuit of an injury-free workplace embeds a safety-first culture at all times. Our total recordable injury frequency rate was 1.17 per million hours worked for the 6 months to 30th of June 2021. This represents an improvement on the 1.82 recorded for the same period last year. We continue to rank right at the bottom for injury frequency rates when compared to our global mining peers. To combat the spread of COVID-19, MMG welcomed global vaccine rollout programs alongside our own measures to limit transmission of the virus at all of our sites. The regional sites continue to reinforce enhanced hygiene measures together with social distancing and health screening for our employees and visitors. In support of nearby communities, as [indiscernible] donated lifesaving medical supplies and in partnership with local authorities assisted social enterprise development projects in Peru. At our Kinsevere mine in the Democratic Republic of the Congo, the COVID-19 vaccination campaign was conducted to protect employees and their families. For more on our sustainability performance, including our 2020 report and a summary of our work in environmental, social and governance initiatives, please see weminefoprogress.com. Now let me briefly make a few comments on commodity markets. MMG's portfolio is leveraged to what we refer to as mega trends, which are decarbonization, electric vehicles and the urbanization of developing economies. We believe that these 3 megatrends will drive rapid demand growth for our core commodities over the next decade with some data included in the chart in the top right-hand corner of this slide. Put in context of the numbers behind the projected demand growth to 2030 and expected 5.8 million tonne increase in copper demand was 25% of today's market, 2.7 million tonnes of 21% the zinc market and 120,000 tonnes is more than 100% of the current cobalt market. To keep pace with this demand, we are going to need significantly more investment in new mining capacity. However, many potential projects facing significant uncertainty. This includes technical complexity, escalating sovereign risk, permitting and approval delays, pressures from governments and communities and employee demands. As a result, the new project pipeline is now materially smaller than it has been in the past. As you can see, between 2008 and 2021, this project pipeline has more than halved. Looking at copper specifically, if you compare the forecast 5.8 million tonne growth in demand with this project pipeline of only 2.2 million tonnes as well as declining grades and the expectation of net copper mine closures over the coming decade, you can see the emergence of a very challenging supply-demand dynamic over the coming years that will likely generate a period of sustained stronger prices to incentivize new supply. I will now briefly touch on the current situation in Peru. Firstly, in terms of logistics and our interaction with communities along the haul road at Las Bambas. During the first half, rate availability was relatively uninterrupted, allowing for longer transportation periods and a significant reduction in concentrate inventory levels. At the 30th of June 2021, inventory at the mine site have been reduced to approximately 13,000 tonnes of copper in concentrate compared with a peak of over 65,000 tonnes at the end of 2020. The fact that we are able to sell this inventory into a very set copper price environment to fortuitous, one of the drivers between -- behind our strong profit and cash flow result for the half. Now regarding the evolving political situation in Peru, let me first say these are early days for the new government. The new Presidency of Pedro Castillo, follows a very tumultuous 5-year period for Peru. For all of Peru, we had the coming periods more politically stable, and the outstanding economic performance of Peru over the recent decade can continue. For the mining industry, the new presidency has made an early commitment to work us through the concept of social profitability and to better understand tax arrangements. While the concept of social profitability is yet to be defined, we have met with the Minister of Mines and welcome the spirit of the early discussions. We will continue to reinforce a significant positive contribution with the Las Bambas mine as on the local and the national Peruvian economy. This includes over 6,000 jobs, PEN 4.4 billion of taxes and royalties and accounting for almost 1% of Peru's national GDP. And even more importantly -- more important is the regional impact Apurimac, which hosts at Las Bambas has been the fastest-growing resin Peru to a direct result of Las Bambas contribution. Our direct investment in the community has exceeded PEN 1 billion with many times that amount flowing through the mining tenant canon for the regional communities. I want to reinsure investors that the issues we face in the logistics corridor are not anti-mining. At present, it is too easy for a handful of community members to walk on the road and block our logistics. This initial year, we're working together with the government and communities to improve. Peru is a country that we remain very optimistic about from an investment perspective and has vast and untapped wealth of mineral resources that will be required to meet some of the mining supply challenges I referred to earlier. We will look forward to working with the new government and the rest of the mining industry to unlock its potential. Moving on to the numbers. There's certainly a very nice set of numbers to be presenting this time around. The revenue has more than doubled on the back of higher commodity prices, higher production rates and higher sales volumes. This combined with strong cost control, resulting in a profit after tax USD 584 million, including $400 million attributable to shareholders. Residual profit to minorities reflects 37.5% of Las Bambas designed by our joint venture partners. Slide 12 sets out the EBITDA bridge between the first half of 2020 and the first half of 2021. I don't intend to spend a lot of time on this slide because the driver of the stronger performance is self-evident. As already mentioned, higher prices, higher sales volumes and good cost control. To summarize, copper and zinc prices were 59% and 37% higher, respectively. Las Bambas sales volumes contributed to around $200 million of revenue uplift, partly offset by a $60 million reduction at Kinsevere, both Dugald River and Rosebery sales volumes were also modestly higher. And finally, the main driver of the $138 million is in operating costs versus Las Bambas, where cost increase commensurate to higher mining and processing volumes and higher transport costs and royalties due to the increased sales volumes. Thus, we're lower at Kinsevere due to lower mining costs and the smaller cost increases at both Dugald River and Rosebery were mostly due to the stronger Australian dollar, U.S. dollar exchange rate. This slide gives our investors an indication of our pure earnings leverage to changes in commodity prices and FX. Probably the one thing to note here is that following the strong increase in both copper and zinc prices over the first half of 2021, we executed a series of commodity hedges in recent months. The hedging program is primarily used as a risk management tool, given the company's high gearing levels and is designed to protect the strong free cash flow generation of the business. The majority of these instruments have a collar structure that provides a floor plus protection and retained some upside exposure should prices rise further. This analysis assumes that the prices remain within the hedge range for copper and zinc, which is broadly between $4.10 and $5 for copper and $1.20 and $1.45 for zinc. Obviously, anything below that range, and we have downside protection amounting above that range and our price participation in the price increase on hedge tonnes as capped. Nonetheless, it still remains the case that copper, zinc and the A dollar-U.S, dollar have the biggest sensitivity with a 10% per pound change in copper leading to an $85 million for a full year impact on EBIT, a 10% change in zinc price leading to a $45 million impact and a [ 10% ] in the Australian dollar leading to a $36 million impact. Moving on now to our debt reduction. I think all our analysts and investors are aware that this was and needed to be a major focus for MMG. We have continued to progressively reduce our overall debt levels. Focusing on this half, the strong operational cash flow and the USD 300 million equity issuance in June helped reduce our net debt by a massive $1.2 billion. This is obviously very significant when compared to our current market cap of around USD 3.7 billion and highlights of value creation delivered to our shareholders in the first half. The $300 million new share placement was also a significant milestone during the half year. This transaction was very well supported by new and existing long-term global investors, and it also facilitated the modest dilution in major shareholders CMC from just over 72% to around 67% to enable greater minority shareholder participation, improve share trading liquidity. Importantly, with debt now down from a peak of over $10 billion 5 years ago, we are now in a much stronger position to move into our next phase of growth. I'll now give you a quick update on CapEx. We now expect the total capital expenditure in 2021 to be between USD 600 million and USD 650 million. This is a reduction from guidance in the year of $750 million to $800 million. The reduction is largely due to the delayed development at Chalcobamba as well as the third ball mill project both at Las Bambas. To provide a breakdown of the anticipated CapEx, approximately $500 million is attributable to Las Bambas including around $250 million related to preferred stripping activity of $100 million to $150 million across our remaining 3 sites. I will now quickly run through a few of the key points in relation to our 4 operating sites. Las Bambas production was 10% higher than the first half of 2020 due to higher workforce capacity and increased productivity following the COVID-related shutdown last year. EBITDA was 260% higher due to higher copper prices and increased sales volumes. And C1 costs were $1.08 per pound compared to $1.15 per pound in H1 of 2020. The lower C1 was due to higher copper production and higher byproduct credits from gold and moly sales. As mentioned earlier, we will work with the new government of Peru and the Huancuire community to advance development of Chalcobamba. Under the previous government, we have moved through all the prior consultation requirements. However, the final decision was unfortunate and handed over to the new government. At this stage, we're unable to give a clear time about this process. We will keep investors updated with all relevant developments. We remain focused on maintaining COVID-safe workplace to help our people on high workplace availability are key. MMG's full year guidance for copper production at Las Bambas is now expected to be around 310,000 tonnes in 2021, with cost guidance maintained at USD 1.10 to USD 1.20 per pound, keeping Las Bambas one of the lowest-cost copper mines of this scale in world. Kinsevere copper production fell by 31% compared to the first half of 2020 due to a pause in mining in the fourth quarter of 2020 and the process low grade stockpiles in third-party ores during the current half. However, higher copper prices, stable plant performance and lower operating costs resulted in EBITDA of USD 94.7 million compared to USD 8.2 million in the first half of 2020. C1 costs fell to USD 1.81 per pound in the first half and USD 1.86 per pound in the same period last year due to the lack of mining costs during the period. This was partially offset by the lower production volumes. Looking forward, we expect to resume mining of the remaining oxide reserves at Kinsevere in the fourth quarter of this year. This is in anticipation of the next phase of Kinsevere's development. We expect final approval in the second half of the Kinsevere expansion project, which includes the processing of the mines, sulfide resource and the addition of the cobalt circuit. This project will extend Kinsevere's life by a further 10 years and take annual equipment production up to around 100,000 tonnes of copper equivalent. And importantly, we make MMG a significant global producer of cobalt. For 2021, MMG's full year guidance for copper production at Kinsevere is unchanged at 50,000 to 60,000 tonnes. Cost guidance is lowered to $2.05 to $2.15 per pound due to the lower-than-anticipated mining costs in 2021. At Dugald River, operational performance was very strong. During the half, the focus on mining extraction methods to reduce waste and mine frequency improvements led to an uplift in feed grades to the mill. This combined with processing circuit optimization work resulting in record recovery and higher production volumes during the first half. EBITDA of USD 101.7 million was significantly higher than the USD 9.1 million result for the first half of 2020. Significantly lower treatment charges falling to around $300 a tonne to $159 a tonne of concentrate as well as higher production volumes also helped reduce C1 cost to $0.63 per pound, which is 17% lower than last year. We continue to focus on near-mine exploration to better understand the additional zinc and copper opportunities on the lease. It's a 20,000 meter surface drilling program kicking off in late May. In the nearer term, continued debottlenecking and optimization works are expected to deliver a stable mine capacity of 2 million tonnes per annum and annual zinc production approaching 200,000 tonnes from 2022 onwards. For the full year 2021, we expect Dugald River zinc production to be between 180,000 and 190,000 tonnes. C1 cost guidance has been lowered to between $0.65 and $0.70 per pound, factoring in the lower prevailing TCs being partially offset by the stronger Australian dollar. And finally, moving on to Rosebery. Despite the age and depth of the mine, Rosebery produced over 37,000 tonnes of zinc during the first half and 85,000 tonnes of zinc equivalent tonnes including lead, copper, gold and silver byproducts. This was 23% higher than the first half of 2020. And with byproducts contributing more than 50% of revenue in the period, it really shows the benefit of the polymetallic nature of the mine. EBITDA of USD 106.2 million represented a 119% increase in the first half of 2020. This was due to higher metal prices and higher production. C1 costs for the half benefited from this material contribution from precious metal byproducts coming at negative $0.52 a pound, making Rosebery a highly cash-generative operation. Rosebery resource extension drilling is yielding encouraging early results for the extension of the life of this important asset. In the first half, we completed nearly 50,000 meters of surface and underground diamond drilling. And over the remainder of the year, we will continue to evaluate life extension options for Rosebery. This also includes evaluating additional tailing storage options to support this anticipated life extension. These plans face some opposition given the environmental incentive location of Rosebery, and we are working very closely with the federal and state regulators and community to find the best solution. We look forward to providing you with a more detailed update on this extensive program in upcoming reporting periods. MMG's full year guidance for zinc production at Rosebery is unchanged at 60,000 to 70,000 tonnes. Given the very strong first half cost performance C1 guidance is reduced to negative $0.20 to $0.00 per pound. Now finally, to finish off, we move to strategy and the outlook. In summary, the first half of the year was a record-breaking period from MMG with net profit attributable to equity holders of $400 million and a debt reduction of USD 1.2 billion, dramatically strengthening our balance sheet. For the full year, we expect to produce around 400,000 tonnes in copper equivalent tonnes and assuming spot commodity prices can continue to prevail. This would lead to a free cash flow of around $1.7 billion. We remain confident about our overall market opportunities and outlook. Copper, zinc and cobalt are critical raw materials, and we'll benefit from the rapidly growing demand for renewable energy investment, electric vehicles and urbanization. We will continue to advance our Las Bambas development plan and Kinsevere expansion project. as well as maximizing Dugald River and Rosebery mine life extension potential. In closing, let me reaffirm that MMG's vision is to build the world's most respected mining company. An ambition to double the size and value of MMG and then double again by 2030. Together with the support of our major shareholder, we are well positioned to build well through the development of our people and forging strong ties in economic growth in the countries where we operate. On behalf of the MMG management team, I thank our shareholders, host communities, contractors and all MMG employees for their support during these challenging times. Thank you for your time today. And I will now hand back to the moderator, who will open the line for questions.

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

Just got 2 minor questions, if I may. First of all, I just want to clarify the current 310,000 tonnes of a target for Las Bambas. You don't include anything from Chalcobamba, for this year? And secondly, you mentioned that you plan to resume the mining activity in Kinsevere in fourth quarter this year. So to what extent because we have been seeing in the past quarterly coal mine in the region of close to 1 million tonnes in the best quarter? So to what extent you expect in the fourth quarter in terms of mining activity?

Yes. Well, thanks very much for the questions, Lawrence. Firstly, the 310,000 tonnes does include a small amount of production from Chalcobamba, So if we don't get access to Chalcobamba at all during this half year, there will be some weakness around that number. So there could potentially be another 5,000 to 10,000 tonnes lower if there's no access to Chalcobamba at all. But as I mentioned during the presentation, we are unable to give a time frame for that approval, but -- so potentially a minor impact. With Kinsevere, we anticipate production study again in the fourth quarter. I think we -- a couple of reasons that the volumes will be massive to start with firstly, we have to get the mine back in sort of good working order because obviously, more you're not mining -- doing some maintenance in the pit. So I think largely in the fourth quarter, setting up the mine for full production next year. So you may see 1 million to 2 million -- sorry, let me get the numbers right. You might see about 1 million tonnes of movement in the mine per month, but it's not going to be really significant volumes until next year.

Your next question comes from Jack Shang from Citi.

This is Jack from Citi. And first of all, congratulations on great results for the first half of the year. Well done. And so a couple of follow-ups. The first thing is call is on Las Bambas. So that's, in a downside case, right? So if in a fair case, the new government isn't that cooperative and Chalcobamba approval is missing. If that's the case, without Chalcobamba, what would be the sustainable output level for Ferrobamba going forward, is around 300,000 tonnes annually going forward? Or is it be slightly lower than that just in a very, very bad case if Chalcobamba is missing, say, in the next -- in the foreseeable future. So that's the first one. And the second one we heard that on the ground that recently, there's another road blockage. Any helpful update -- any update on that or details would be helpful on the recent blockage at Las Bambas. And yes, and also 2 more follow-ups regarding Kinsevere. On Kinsevere, regarding the cobalt circuit, right? The cobalt circuit potentially how -- what would be the production run rate going forward for cobalt? You mentioned that it could turn into a meaningful supplier but how meaningful? Any color or -- any rough color on that would be helpful. And also a follow-up on the sulfide ore -- sulfide resource of Kinsevere. I recall that Kinsevere has been running on SXEW. So if you're going to get more sulfide ore, what you're going to do with the production process? Are you going to sell the concentrate, Do we have a quota for exporting the concentrate at the moment? Or are you going to sell more concentrates to the local smelters?

Yes, thanks for the question, Jack, firstly, with regard to well band if Chalcobamba approval isn't granted, I must, we're not planning for that in the sort of medium term. But as I said in response to Lawrence's question, we would be somewhere between 300,000 and 310,000 tonnes for this year. And then I think if it was stayed that way for a prolonged period of time, we would probably be able to run Ferrobamba at the sort of 270,000 to 300,000 tonne run rate whilst we're gaining Chalcobamba approval. But I think when you hear at just talk about what's happening in Peru, I mean, part of the deal needs to be that for us to cooperate with the government, we also and government to open things up because ultimately, it's holding back the country as well as also holding us back. With the blockage, you're right, there was a blockage that's lasted for 3 or 4 days. That was after a 60-day truce was declared, and that blockage has actually been cleared today, and we have some trucks moving down the hall road already, and then we'll be back to a full complement of trucks as of tomorrow. So I think we're still at about another 45 days of sort of formal discussions. In regard to your questions on Kinsevere cobalt, the cobalt circuit will be depending on the year and the grade will be about 3,000 to 4,000 tonnes a year. So bearing in mind the total market is about 100,000 tonnes at the moment. That's 3% to 4% of the global productivity. And then finally, your question in relation to the sulfide ore plant, we will be building a roaster and therefore, producing our own cathodes, so there will be no need for a concentrate license. I think that answers all your questions. Yes.

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

Congratulations on the great results. I got 3 questions. The first one is regarding the free cash flow sensitivity that you have shown on Slide 29 in the presentation. So if we take the year-to-date average for copper as well as for zinc, which I believe will be around 4.2% for copper and then 1.3 for zinc, the free cash flow generation will be about USD 1.68 billion, right? Now if we look back at the presentation you've given in March for the full year results, right, on Page 34, a similar matrix was given. And at that time, at $4.2 copper price at $1.3 zinc price, the free cash flow generation expected was only around USD 1.27 billion. So there's a $400 million difference, right? Now I understand that about maybe $150 million can be explained by the lower CapEx guidance, right? But how about the rest, say, $250 million? That's my first question.

Yes. Right. Chris, I think the answer off the top of the head there, too, is that we've also had the rundown of inventory from Las Bambas. So that was a pretty significant movement as well. But Brent's on the line, and Brent would have prepared those charts. I'm not sure if there's anything you could add off the top of your head Brent or whether we need to get back to Chris.

Yes. No, that's correct, Ross. I suspect the previous chart didn't include the inventory at Las Bambas. So that was probably just on a production basis. So this is more indicative. And obviously, given we're halfway through the year, I think the current chart is what you should be basing your modeling off?