MMG Limited (1208) Earnings Call Transcript & Summary

Good morning, and welcome to MMG's 2021 Third Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the September quarter. Joining us today is MMG's CFO, Ross Carroll, and other members of MMG's executive team. I will now hand over to Ross, who will discuss the highlights of the report, after which there will be an opportunity to ask questions.

Thank you, Brent, and hello to everyone who is joining us today. Firstly, I am saddened to report an accident this quarter, involving a bus transporting employees of our contract partners to Las Bambas, which caused the tragic death of 16 passengers. This tragic event reminds us that we must always put safety at the forefront of everything we do at work and in our daily lives. MMG continues to support the ongoing investigation to this incident, and expresses its deepest sympathies to the families and friends of those involved. For our operations, our Total Recordable Injury Frequency rate for the year-to-date was 1.16 per million hours worked as we continue to try and eliminate all injuries from our workplaces. Before moving to the operational performance of the business, I would also like to mention a very important commitment that we have made towards reducing our emissions footprint. In early October, along with our peer companies of International Council on Mining & Metals, we announced a commitment to target net zero emissions by 2050. As part of this commitment, we are implementing a whole of company climate resilience strategy, which covers energy mix, technologies, efficiencies and mitigation measures that will determine interim 2030 targets and support the 2050 goal. This work is due for completion in early 2022, and we look forward to sharing the results with you. Now to address operational performance; in the third quarter of 2021, MMG produced nearly 91,000 tonnes of copper and 62,000 tonnes of zinc. On a full year basis, our expectation for zinc production remains in the range of 240,000 to 260,000 tonnes. However, we have slightly lowered our expectation for total copper production to between 345,000 and 355,000 tonnes, I will explain the reasons for this adjustment shortly. Las Bambas copper production in the September quarter was 79,000 tonnes. This represented a decrease of 6% on the prior year. During the quarter, production was impacted by community road blockade, with restricted inbounds and outbound logistics and people movement for approximately 20 days, and limited mining operations for 12 days. This caused total mining volumes to be around 5 million tonnes below plan during the quarter. To mitigate this impact with the process stockpiles and maintain plant throughput, will be at lower grades resulting in production levels lower than planned. Total copper production from Las Bambas is now expected to be around 300,000 to 305,000 tonnes of copper and concentrate, compared to the previous guidance of around 310,000 tonnes. Despite the lower production, C1 costs are expected to be around $0.10 lower at $1 to $1.10 per pound. The lower cost base is due to the strength of the moly, gold and silver prices, which increase our by-product credits as well as ongoing Chalcobamba delays. Community road blockade that took place during the quarter in the Chumbivilcas region, some 200 kilometers from Las Bambas, related to community demands for further integration in the Las Bambas value chain, through a large number of service contracts as well as government classifications in these communities, as an area of direct influence. On September 30, an agreement for the temporary removal of the roadblocks has reached and transport operations were able to resume. This agreement revolved around a commitment to establish commercial relationships between Las Bambas and community organizations, discussions are now underway. For roads [ we may include ] in the Chumbivilcas province, in recent days, new roadblocks have been established in Cotabambas and Challhuahuacho, which are both in the same province as Las Bambas. These communities are demanding the attendance of the President, Pedro Castillo, or the Prime Minister to discuss social and economic development of the region, and the fulfillment of commitments from Las Bambas and the government. Again, these roadblocks are extremely frustrating, and we continue to push the dialogue with communities and government to remove the blockades. Another frustration, we feel is the roadblocks cost not only us, but the local and national economies of Peru. Since the commencement of development of Las Bambas, per capita income was more than tripled in our host province, the property rate has halved, [ and both ] health and development outcomes have improved considerably. Las Bambas provides over 1% of Peru's GDP and significant funds are now flowing locally from royalties and soon mining canon payments and profits. All these benefits are put in jeopardy by a single community seeking to leverage transport disruptions, that remains of negotiating. Improvements at [indiscernible] enough to continue production. However, mine development is starting to be impacted, if the roadblocks are not clear by the end of October, we will need to cease all operations and stop production. We have to seek resolution for these blocks as soon as possible. Las Bambas is not alone in facing heightened community process following the recent elections in Peru, and we continue to work constructively with the Peru mining sector and new leaders in the industry of mines and the Council of Ministers to bring more enduring solutions. On stockpiles in site, around 100,000 tonnes of concentrate or about 30,000 to 35,000 tonnes of copper metal. Finally in Las Bambas, following the submission of the original application in February 2019 and the completion of the prior consultation process, Las Bambas continues to seek regulatory approval for the development of the Chalcobamba pit. A combination of lengthy community consultations and administrative delays as well as complications associated with the 2021 national elections continue to delay the receipt of the relevant permits. It's difficult to predict the timing of the permit approvals, is from a Las Bambas perspective, there is no reason why they cannot be awarded tomorrow. We continue to work with the Ministry of Energy and Mines and seek a swift resolution. Moving on to Kinsevere. Copper cathode production of 11,700 tonnes was 8% below the second quarter. Processing plant performance remained strong for a record recovery rate in July and a quarterly average recovery of 97.8%. However, with mining operations still suspended at Kinsevere, the continued depletion of the remaining medium grade stockpiles as well as lower delivery grades from third party ore suppliers, the average copper feed grade fell to 1.9% compared to 2.2% in the prior quarter. Our optimization work continued for the Kinsevere expansion project, mining of the remaining ore reserves are now not expected to resume before the end of 2021. As a result, copper cathode production for the full year is expected to be between 45,000 and 50,000 tonnes. We are expecting investment decision on the Kinsevere expansion project by the end of 2021, which will see a shift to the mining process in the sulfide ores and the introduction of a cobalt circuit, extending the life of the mine for over 10 years and taking copper equivalent production levels back above the historical level of 80,000 tonnes. We will now move on to our zinc operations, Dugald River and Rosebery. Dugald River zinc production of 48,000 tonnes was 21% above the second quarter, which was impacted by a planned maintenance shutdown in June. Both mining and plant throughput rates were strong, so delivering an annual run rate of above 2 million tonnes. During the quarter however, an incident with the agitator truck in the underground mine impacted the delivery of cement, and the backfilling of stopes. The [ carry-on ] impact of this, is that mining rates have been lower in October. However, we are still comping that production guidance of 180,000 to 190,000 tonnes of zinc will be delivered. Meanwhile, recent strength in lead prices as well as the low prevailing TCs in 2021 -- the full year C1 costs should at the lower end of the guidance range of $0.65 and $0.70 per pound. At Rosebery, zinc equivalent production of around 32,000 tonnes is 27% lower than the prior period, due to the combined impact of lower ore mines, lower throughput and reduced oil grades for all metals. Mining and processing volumes and grades were impacted by higher mining dilution, and a rockfall in the Northern exploration decline. This added up to 2 hours to underground haul times, and therefore impacting the delivery of ore of the plant. This issue has now been rectified, and we expect production to increase in the fourth quarter. Zinc production for 2021 is expected to be near the upper end of our 60,000 to 70,000 tonne guidance range, as new larger mining stopes evolve into production and grades recover from the third quarter. Similar to Dugald River, high by-product prices and low TCs will also drive costs towards the lower end of the guidance range of negative $0.20 per pound. I will hand you over to the moderator, to take the questions.

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

Can you hear me?

Yes we can Lawrence.

Just a couple of questions regarding Las Bambas. First of all, in your presentation, you mentioned the roadblock in neighboring regions. Does it impact your operation at all, if it does in what extent? And secondly, we still have not got the approval for Chalcobamba project, and it seems there's no timetable for it. So can you give us some idea, in case, we don't have the approval for the entire year, next year, what will the output of Las Bambas will be for copper next year?

Okay. To your first question, Lawrence, the way the roadblocks impact the operations is that, it was 3 ways, really. Firstly, we can't get our supplies into the mine. So they'll block, I guess the most obvious one is diesel, so we end up eventually running out of diesel, so we can't run the haul trucks in other plants. So we've got the incoming supplies. It also makes it very, very difficult for us to swap our people over, because the vast majority come to site by road. So we can't get them through. And then the reason why our stockpiles are building is, we are unable to get the concentrate stockpiles down the road and on to the railway line into the port. So that's why the impact is on production. And this time around, we didn't really have a chance to get our supplies back to full storage levels, because there was only sort of less than a week between the ending of the previous roadblock and then the commencing of these 2 new ones. So that's [indiscernible] give them a full inventory to start with. So I hope that's clear on your first question. With the Chalcobamba approval, we've expected and been advised by the government that we will get this numerous times during the past 6 to 12 months and even this week, we're hopeful of getting it, but that's an [ eventual rate ]. So it's really hard to predict and obviously, with the new government, that's a complex situation in Peru, and we're already on our second mining minister, even though the government was only elected at the end of July. So it is very difficult to predict and hard to manage. We're still doing some work on this, but if for some reason we weren't able to get Chalcobamba approved and get moving there next year, I think our production will be around about the 300,000 tonnes a year. But we're still working on that, and we will obviously do everything we could, to mitigate the impact from not having those approvals.

I have one follow-up question regarding the roadblock. So your new guidance regarding the output for Las Bambas, 300,000, 305,000 tonnes this year. What's your assumption regarding the current roadblock you see? Are you assuming it to be resolved in certain times, so that you can reach that level or because based on your information, it seems that if the roadblock continues, you may have to stop operation after a certain period of time and that won't be too long. So what's your assumption regarding the current roadblock?

Yes. That's a good question and -- yes, thanks for asking that. The current assumption is predicated on that roadblock being cleared by the end of October. So it could -- if it wasn't clear, there would be more downside risk to our guidance.

Your next question comes from Jack Shang with Citi.

Just actually a similar question on the -- around the Las Bambas. So just -- I want to have an assessment, right? So what are the next effects for us to potentially contact the relevant authorities? And I know there's no timeline right now, but what are the key next steps and what -- how are things on the ground? Do the new -- is the new Minister of Mining appointed already? And have they already been running the offices, are they receiving the opening for these approval requests, and what are the initial color? So anything on the ground would be very helpful. And on top of that, right, so whether the Board or the management team beyond the Las Bambas, what we are looking at and what we're looking for going forward for future growth options.

Okay. Thanks, Jack. I want to just hand over to Troy Hey, who's our Executive General Manager looking after Corporate Affairs to answer your first question, and then I'll come back to the growth question, if that's okay.

Sure.

Thanks, Ross. Jack, big questions. What we're looking at, at the moment is, I guess, 2 problems; one on the roadblock, which is in the Challhuahuacho and Cotabambas region, which really goes back to the 2016 roadblock that we experienced there and the development plan put in place for that region. Groups have returned to the road, claiming more and faster development on that 2016 plan as well as a set of other measures. So we are working really closely with them. There is no doubt that dialog is the best way to control -- work with this. We are on the ground working closely in terms of all of the communities and with a number of social development initiatives underway. Part of the struggle with this one is, the groups have called for both the President and Prime Minister to attend, and delegation headed up there on October 18, of senior vice ministers, but the community weren't happy to see them. So they were sent back and they are now waiting for the President and Prime Minister. The Prime Minister is now up for approval by Congress until next Monday, the 25th and whether that's still an appropriate thing to happen, is what we're working for on the ground. So it's a bit difficult to call ahead. What our next [indiscernible] is making sure we get government as involved as we can, and we are working very closely with the new minister as well as new ministers across other portfolios. And the cooperation is good. They're all fairly new to their portfolios and so there's a bit of learning going on, and we hope to get those meetings and to get a resolution of this, as soon as you possibly can. On the ground itself, these are the communities around the mine, so they know Las Bambas very well. The change that they've experienced over the 5 or 6 years, Las Bambas has been incredible in terms of development, in terms of the wealth of that region, in terms of reductions in property, etcetera. So this is more -- to class it as anti-mining would be completely wrong. It's more how our benefits -- accruing more benefits that assort and many of the promises, especially from government delivery are not coming quick enough. And so just working directly with the communities, as we still have a good relationship with, they are trying to expedite delivery, trying to get government involved, and trying to make sure that roadblocks aren't the chosen way of negotiation, by keeping our dialogue tables working. So it's not a -- it's a -- it's not a position we want to be in, it's frustrating, but it's also not a breakdown of relationships. It's trying to expedite social development together with the company, government and communities and do as best we can. So that's where we're focused. The second part on the AIA as Ross mentioned is, all the processes are complete, and so the previous or the prior consultation process is done, signed and delivered. It is really just getting that AIA signed, and we are working at every level of government. We are working here closely with the community of [indiscernible], which is the impacted community. And again, I think we will get there, and every possible effort has been taken. There is not huge conflict on the ground at all. It is about getting the benefits right, the commercial agreements right, and making sure government community and company together when we negotiate. So as Ross said, it is frustrating, but we're really cooperating well with the new government and I think with the new Prime Minister coming in next week, we're hoping we can get a quick resolution for the current roadblocks.

Okay. Cool. And just a quick follow-up, if I may. What are these roadblocks? We know that these have been happening over the past few years. Sometimes they cause a certain amount of disruption. Are these temporary in nature? How did all these -- most of these roadblocks ended up or ended? Meaning that, what's usually that we do to pacify them or to make them feel better to remove the roadblocks usually? Were they specific demanding for jobs or for like payment or like some sort of subsidy being handed to them? So any further detailed color would be very helpful.

The struggle we face, Jack, is that, it's very easy for -- a very small group from a single community to occupy the road and just turn back all Las Bambas traffic. It is limited -- so they're very temporary, it can be literally a couple of people or a wooden gauge across the road and that stops us until we typically get a joint delegation of government and company, we enter a dialogue process and we sort of convince the communities to sign up to that dialogue process, so we can work through the issues. The frustration for us, is we are working with all communities along the road at all times and there is a very large social development investment underway. There are contracts with many communities for road maintenance, for other areas and agricultural programs, infrastructure programs, but the struggle is a single community or even a part of a single community can block a road and demand additional benefits and we have to balance that conversation with all of the other communities, who if we do one -- conversation with one, it will then play down. And that's why typically, the way to resolve is, get government company community together, to agree on the scope of discussions and in the roadblock, and enter a dialogue process. And that's exactly what they are trying to do in the Cotabambas and Challhuahuacho region at the moment.

Okay. So if I understand it correctly, so there is, of course are multiple communities, and any one of them could be causing this trouble. And -- but there is a certain procedure that we need to work through. We don't -- usually you don't need to really negotiate with each one of them. There is like a high-level mechanism, as you work with the government together with all these communities. But I think by doing that way, you have kind of also slowed down the whole process of getting the issue -- specific issue addressed. Is that the correct understanding?

Yes. And as Ross said, it's not just us. I think the new government, a lot of communities will come back and seek to resolve current grievances or seek greater benefits, and that's happening across Peru at the moment. You will have seen in previous years, sometimes we get to a point where there is a local state of emergency declared, which is when we move in with police and military support to remove protesters, but that again takes time and brings with it, risk. So our preference is always to get a dialog started, agree on the issues and then work closely with the community to resolve.

And thanks, Jack. In relation to your second question about growth. Obviously a little bit of background, before I answer that question. China Minmetals, which is obviously a major shareholder, and who supported MMG through its growth over the last 10 years. This had a change in Chairman, and I guess that change in Chairman, I think will be a positive for MMG. The Chairman has reiterated, that they will continue to support MMG on its growth, and that they see mining and MMG as a core part of the overall growth. So we certainly still have the desire and the support from the major shareholder, to enable us to grow. And again, I think our strategy is fairly clear, that we're looking for copper cobalt and zinc, and that's really in 3 regions, which is Central Africa, the Andes region of Latin America and also Australia, if we can. So there's no change there. But obviously, good opportunities are hard to come by in the present environment. But still looking every day and still very [indiscernible].

Your next question comes from David Radclyffe with Global Mining Research.

Maybe just shifting to the DRC and Kinsevere. Just in terms of the extension project there and the restart of mining that was scheduled and then it's been put back, could you give us maybe a bit more color what's happening there and what sort of pushed that time total back. And then in terms of the stockpiles there, in case the time table continues to slip, how large are they and what is that growth in that medium grade stockpile?

Okay. David. Thanks for the question. With the KP project, we still got our engineering teams, working on optimizing it. And yes, we do expect to get it approved by the end of this year. With the mining, there's a bit of a natural cutoff, because the DRC has a wet season, and it's a very wet season and we both have just run out of time to engage a mining contractor before Christmas. And if we were to engage in that sort of December, January period, you're engaging them right in the middle of the wet season, which is the least productive time, but also the most dangerous. So that's the reason why we've pushed first mining out to April and that, I guess, the delay of the KEP have meant that we're not in a position to sign up the mining contractor and get them sort of started before the wet season starts. So it's -- clearly you've got a natural boundary there. With the stockpiles, we certainly have enough stockpiles that continue through to April. And by that stage, we would definitely be starting mining by then. So there's enough stockpiles. And the stockpiles are around about 2% and then [indiscernible] go up and down depending on which stockpile we're in. And then we've got contracts in place to get third-party ores as well. So yes, I think the average fee grade sort of over the upcoming period, to be around 1.8% to 2%.

That's really helpful. Then just probably on Las Bambas, sort of answers the questions [indiscernible]. But then on the debt side, is there anything you need to consider if there is a full stop in terms of short-term repayments or covenants.

Now we will be fine. Obviously, this period of high copper prices has put us in a strong position at Las Bambas. So we've got -- we've already got enough cash there to make our payments are due in December. And I guess, I'm not sure how long you've been following MMG for, but we've got a very understanding group of bankers being that the Chinese SOE banks as well. So if it did jump rope, apart from a prolonged stop is, there won't be an issue. But as I said, basically enough cash there that we could make those payments already now.

Your next question comes from Chris Shiu with Horizon Assets.

I've got 2 questions. The first one regarding Las Bambas. So for the protesters and also the agitators, right? So it's like the government and also the companies are trying to pacify them, right? But there was actually no cost to them, causing more trouble. So is there any sort of benefit loss to them? I mean if they continue protesting, I mean, will the payments or benefits related to the mine operation given to them being suspended? And also broadly related to that question. I remember the new administration had proposed huge increases in taxes, and also I think I've also talked about building railways, or maybe asking you guys to build railways. But I'm just wondering, I mean, is there any discussion regarding those?

Chris, I might answer question 2 first, and then I'll hand back to Troy to answer your first question about the payments and benefits in those communities. The government did get elected, and [ declared ] its mandate about increasing taxes to the mining industry. So that's something we're obviously on the alert for. Now at this point, we haven't had any proposals from the government, albeit we do know that in the background, they want to increase taxes. So we are, at the moment, just waiting to see what the proposals are. One thing I will point out is, that Las Bambas is the highest sort of -- has the highest tax rate actually in any mining ore at the moment, because the mine tax rates -- tax rates are a bit variable. So yes, so we're just waiting to see how that pans out. Now we do have a stability agreement that runs through to 2029. So obviously, it's better for everyone if we get a friendly resolution to it all, but until we get some idea of what they're asking for, we're unsure what the situation will be. But yes, and at this stage, everything is still reasonably cordial with the new government, it's not like to talk of mass nationalization or anything like that at all, it's relatively calm and I think the major issue for the government is getting themselves just settled in the meantime. And I hand you over to Troy for the first question.

Thanks, Ross. I guess just to take a step back, we do have a very good community team in Las Bambas and over the 6 years -- almost 6 years of operation, we have done very well in terms of entering the region that has never experienced mining and was the poorest region in Peru, and it has fundamentally changed over that period. What -- the situation we have now is that, there are many people in these regions, who have existing contracts with Las Bambas and who are very linked to us in terms of keeping production going and they have either employment with the mine or contracts. But communities are complex, and there are many groups within them. So often those running the roadblock or a different group, than those with contracts or a different group than those who are in leadership, and so it's a complex, ever-changing environment and often those who are running the roadblocks have, as you said, time on their side. There is no direct impact for them for occupying the road and it allows them to use that against Las Bambas or the government to see greater support. So our real approach is to approach the communities as a whole and try to emphasize the benefits that do flow from Las Bambas, and they are significant, and as Ross said, the frustration is -- those benefits are directly related to our production and our ability to deliver both production and profits and the more that these roadblocks effect, the more impact we have on local regions, let alone the impact on individual contracts or employees. So it's working really hard. It's really emphasizing that these are different groups within communities. There are many that are supported and work well with Las Bambas. There are many who have significant grievances with Las Bambas and they are right in the middle and trying to make sure we're working with all of them. But there is no tap we can switch off. There is no sort of benefits we can withdraw for everybody that aligns completely with Las Bambas' interest, and that's why we need government dialogue and ourselves involved. And while we constantly work to deliver the social dividend from having Las Bambas isn't over, and it is significant. But you probably see some of our frustrations that we see these roadblocks, they have been part of operating our mines for the 6 years we've been there, and it is not easy to find an enduring solution.

Got it. And the second question is regarding the financial side. So I'm just wondering whether the management has thought about maybe using potentially A shares for financing? Because recently, we have seen some other companies, including even the red chip companies like CNOOC, to raise capital through the Asian market. So -- and it seems that there have been some reasons or policy changes regarding deference, that may make it easier for us to tap the Asian market. So just wondering whether the government has any thoughts on that?

Chris, at this stage, we've had no discussions on the A shares and I am not going to give you any thoughts. I mean at this stage, we're also fully financed and unless we do something big on the M&A front, there's no need to raise any additional capital. So obviously, doing a little bit of work in the background, but just to keep informed more than [ actually anything ].

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

I just have a quick question about Kinsevere. First question is, do you see any possibility or chance, a further delay of the investment decision? And the second one is, that the RAF schedule of the construction starts and operations start time line?

Okay. Actually Joy, I can't give you 100% ironclad guarantee, but I don't expect there to be any further delay with the Kinsevere approval. So we are expecting that to happen in this last quarter of 2021. So yes, that's the best sort of internal knowledge we've got at the moment. Now in regards to the construction, we're actually still continuing to do a lot of the engineering work. I mean that's part of the optimization process. But we are still moving forward behind the scenes, and going out to tender on different packages of work. So that work is all happening now. Then obviously, once it gets approved, we would speed everything up, but there has been a lot of preparatory work, but obviously, we're not going to let major contracts, until we're 100% sure that the project has been approved.

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

I'd just like to thank everyone for dialing in today, and thanks for the questions, and if there's any further questions, please follow up with Brent or our Corporate Affairs team. Thanks again for dialing in, and goodbye.

That does conclude our conference for today. Thank you for participating. You may now disconnect.