MMG Limited (1208) Earnings Call Transcript & Summary

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

Hello, and welcome to MMG's 2021 Fourth Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the fourth quarter of 2021 and the outlook for 2022. Joining us today is MMG's Interim CEO and Mr. Li Liangang; CFO, Mr. Ross Carroll; and EGM - Corporate Relations, Mr. Troy Hey. I will now hand over to Liangang, 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. I would like to start with a brief introduction of myself and our recent management changes. On 6th January, I have started the role of interim CEO following Geoffrey Gao's resignation to take up a role with our major shareholder, China Minmetals Corporation. I'm excited and honored to have the opportunity to lead the MMG team having had a long history with the company as both a director on the Board from 2009 to 2012 and more recently on the Executive Committee since 2020. Geoffrey and the executive team have handed over a business in very good health with a solid platform for growth. I look forward to working with our Board, including Jerry Jiao, who returns to the [indiscernible] to deliver value to all our shareholders. Now moving on to the quarterly production report. At MMG, our first value, as always, is safety. Our operations recorded a Total Recordable Injury Frequency rate of 0.88 per million hours worked for the fourth quarter of 2021 and 1.09 for the full year of 2021, which is a 21% improvement on 2020. We will never stop our efforts to eliminate injuries, and I'm very pleased that we continue to benchmark at the very bottom end of global peers on injury frequency. In 2021, MMG produced around 340,000 tonnes of copper and 250,000 tonnes of zinc. We delivered strong operational performance despite facing considerable challenges, including ongoing management of the COVID-19 pandemic and also community disruptions at Las Bambas. Las Bambas' copper production in the fourth quarter was 65,000 tonnes and 290,000 tonnes for the full year of 2021. Operational performance was strong with mining and milling 3% and 7% higher than 2020. Ultimately, however, production levels were quite below plan with the initial guidance to the market of 310,000 to 330,000 tonnes of copper provided at the very beginning of last year. There were 2 main factors that led to lower production. Firstly, ongoing permitting delays for Chalcobamba development has restricted access to higher grade ores. Following submission of the original application in February 2019, and the completion of the prior concentration process, we continue to seek regulatory approval from development of Chalcobamba pit. The combination of lengthy community consultation and administrative delays as well as complications associated with the 2021 national elections after date prevented the receipt of permits. We continue to work closely with the government on this critical issue and now expect approvals to occur in this current year, with first production in the second half of 2022. The other main factor affecting 2021 production was community roadblocks that restricted access to critical supplies for over 100 days during the year and eventually led to a complete plant shutdown in mid-December. The most recent road blocks in the last quarter of the year took place on a public road in the Chumbivilcas province, about 200 kilometers from Las Bambas. These blockades were in relation to demands for a large number of logistics and transportation contracts as well as demands for the government's classification of these communities as an area of direct influence. Road blocks were removed at the end of the year with an agreement for ongoing dialogue and the mine and the concentrate transport has since returned to full capacity. At a meeting on 20th January 2022, agreement was reached with a number of communities in Chumbivilcas for integration into the Las Bambas value chain and discussion continues to create zones of special interest for social development investment. The most recent disruptions bring total days of transport lost since the commencement of concentrate transport in early 2016 to over 400 days. While MMG remains committed to pursuing constructive dialogue, the actions of external agents' disproportionate demands on the company and an inability to reach enduring agreements continue to limit Las Bambas’ operations, future investment and economic contribution to regional communities and the Peruvian economy. Now turning to the outlook for 2022. Las Bambas production is expected to increase to a range of 300,000 and 320,000 tonnes of copper in concentrate. As mentioned earlier, this is partly subject to government permits and development of the Chalcobamba pit from mid-2022. The current budget assumes around 20,000 tonnes of production from Chalcobamba ore in the second half. Regarding costs, Las Bambas is expecting C1 cost to increase to a range of USD 1.3 to USD 1.4 per pound. The cost escalation is due to a combination of one-off factors, deferred development spending since 2020 and inflationary pressures. I will now address some of these issues in more detail. 2022 will hopefully see higher product development expenses including pre-stripping at Chalcobamba that has been delayed since 2020. The delay in this spending has meant lower C1 cost in the past 2 years, 2020 and 2021. And while we now expect to incur these additional expenses in 2022, the benefit of this will be realized with higher production levels in subsequent years. Another one-off factor impacting C1 costs in 2022 is the fact that the 3-year labor agreement with our Las Bambas' employees is subject to renegotiation in 2022. After benchmarking industry trends, it is likely that we will pay a significant bonus upon the signing of a new agreement and the size of this bonus payment will be linked to the length of the agreement as well as other market factors as farmers will have lower levels of capitalized mining costs in 2022. To remind our investors, this relates to the amount of waste and ore that is mined and waste removal provides better access to ore that can be extracted in later years. That excess waste removal is capitalized and is, therefore, not captured in C1 costs for that year. In Las Bambas' earlier years, it has benefited from higher levels of capitalized mining costs. These trends for lower capitalized mining costs in 2022 will continue over the next few years. This does not impact cash, but does recognize it's deferred capitalized mining from prior periods. In 2022, Las Bambas will also see higher cash production expenses from the increased material movements, longer-haul distance and higher consumable usage as is typical in open pit mining operations as they are developed. Higher energy prices, contractor rates, and consumable prices are also being seen across the industry. We are forecasting a lower contribution from byproduct credits in 2022, although this will be partly subject to market prices for moly, gold and silver, which are very difficult to predict. And finally, TC/RCs will be higher in 2022 as well as selling costs, partially due to increased shipment volumes and partly due to higher freight and energy costs. From 2023, Las Bambas will benefit from development of Chalcobamba investment in the new mine fleet and the third ball mill, resulting in higher production rates than the 2020 and the 2022 period. This is expected to partly offset the impact of the higher C1 costs expected in 2022. Moving to Kinsevere, a copper cathode production over 11,000 tonnes in the fourth quarter was 4% below the third quarter. On a full year basis, production of 48,000 tonnes represented a drop of 33% from the year of 2021. Mining activities at Kinsevere have been suspended since the fourth quarter of 2020, while the site undertakes preparatory works for the mining and processing of sulphide ores. In the meantime, plant feed grades have been reliant on the remaining medium and low-grade ore stockpiles as well as the supply of third-party ore. This resulted in average feed grade falling to 2.00% in 2021 compared to 3.08% in 2020. However, processing plant performance remained very strong with an average recovery rate of 96.6% compared with 95.4% in 2020. This resulted in a reduction of C1 cost to USD 1.95 per pound, below the guidance range. Copper cathode production for 2022 is again expected to be in the range of 45,000 to 50,000 tonnes. Mining of the remaining oxide reserves is expected to resume in April this year, following the wet season. This will also improve the average plant feed grade over the year. Due to the mining resumed during the year 2022, C1 costs are expected to be between USD 2.50 and USD 2.80 per pound. Kinsevere expansion project is progressing with the team currently undertaking early site works and detailed engineering in anticipation of project approval. We now expect an investment decision in the first quarter of 2022. It will include a shift to the mining and processing of sulphide ores and the introduction of a cobalt circuit, expanding the life of the mine for further 10 years and taking copper equivalent production levels above 100,000 tonnes. I will now move on to our zinc operations, Dugald River and Rosebery. We are very pleased to report that Dugald River had a record production year with 180,000 tonnes of zinc or over 200,000 tonnes of zinc equivalent production. Dugald River's 2021 full year C1 cost was USD 0.67 per pound, lower than 2020, driven by low prevailing TCs, higher production rates, cost controls and higher lead prices. In 2022, Dugald River is expected to produce between 170,000 tonnes and 190,000 tonnes of zinc in zinc concentrate, with C1 cost in the range of USD 0.70 to USD 0.80 per pound. At Rosebery, the mine produced 19,000 tonnes of zinc and 6,000 tonnes of lead during the fourth quarter of 2021, which was a 38% and 21% improvement on the third quarter respectively. The increase reflected higher ore grades and a return to normal mining activity after a rockfall impacted the third quarter. On a full year basis of 2021, Rosebery's zinc equivalent production was 157,000 tonnes, 11% higher than 2020 due to higher recoveries and increased mining and plant throughput. Similar to Dugald River, high by-product prices and low TCs drove C1 cost to negative USD 0.34. Zinc production for 2022 is expected to be between 55,000 and 65,000 tonnes with a C1 cost of USD 0 to USD 0.15 per pound. This guidance range reflects longer-term grade declines, lower by-product credits and higher costs associated with operating at depth as well as increasing energy costs. Rosebery will start its 86th year of continuous operation in the first half of 2022. Positively, we see no signs of this coming to an end in the near future with recent encouraging drill results, providing support to our ongoing work to further extend the mine life. Before concluding, I will just make a brief comment on the ongoing COVID-19 situation. The recent level of infection from the omicron variant is currently impacting the availability of employees and contractors at all sites. While hospitalization rates remain very low and hygiene, access, and testing protocols have been adopted, it is possible that production could be impacted over the coming weeks and months. I'm now happy to take your questions with my team. Thank you very much.

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

I have 2 questions regarding Las Bambas. First of all, in your 2022 guidance, you are assuming the approval of Chalcobamba will be happening sometime in first half this year. I just wonder how confident are you at this time because this approval has been delayed for a bit of time. So what kind of confidence level you have this time that you'll be approved in the first half of this year? And secondly, in your announcement, you mentioned that in the meeting last week, there's reached an agreement that you'll integrate some of the communities into the Las Bambas value chain. I just wonder what does it mean for the company by including them as a part of your value chain? Does it mean that you have to pay them some money? Or do you make them part of your operations? Can the management explain more on that?

Thank you for your questions. I'd like to take your first question. And regarding the Chalcobamba approval, we all understand that this approval has been delayed for quite some time. And at present stage, we are quite confident that the approval -- we've got some information from the government's approval office that the process has been going pretty good, and we are quite confident that the approval can be granted in the first half of this year. And regarding your second question, Las Bambas has always been trying to help the communities to grow together. And by saying that we put the relevant, or more communities into our value chain, it doesn't mean that we pay cash to the communities, but rather we have different arrangements like we can have more contractors or employees from local communities. And also, we have agreements with like the transportation and also service providing, all different kinds of agreements, so that to make the relevant communities to be involved in our value chain or part of our mining business.

Your next question comes from Chris Shiu with Balyasny Asset Management.

I've got 2 questions. The first one is, is there any update to the medium-term guidance of annual copper production of 400,000 tonnes per year for Las Bambas?

Sorry, Chris. I understand that you are asking for the interim production forecast. I think this...

Yes, for Las Bambas. Yes.

Yes. I think, for this meeting, we are only talking about the fourth quarter's production.

Okay. No problem. Yes. Understood. Yes. And maybe the second question then regarding the Las Bambas' C1 cost guidance. So what would the cost be if we exclude those one-off factors that you have mentioned? In the announcement, it mentions that from 2023, hopefully, the C1 cost should come down, right? So I mean, about what level would that be? I mean what level should we expect? And then does it assume that the production volume will be back to something more like 400,000 tonnes or it would be something below that?

Thank you, Chris. I think I should pass this question to our CFO, Ross. Ross, would you like to answer this question, please?

Yes. Yes. Thanks, Liangang. Thanks for the question, Chris. We expect that the C1 will probably steady to sort of somewhere in the USD 1.30 range in sort of the medium term. And that would be based on production sort of between 350,000 and 400,000 tonnes. And whilst we have got some one-offs in this period, which is the project development expenses and the sort of industry bonus we've spoken about, what we are seeing is rising costs across the board generally. And I'm not sure what other mining companies you've looked at, but even Fortescue mining released today that their C1 cost has gone up 20% year-on-year. So we are seeing cost pressures through energy, in particular, and consumables. And the other factor that's going to be impacting on us too is that in sort of 2023 to 2024, we expect the capitalized mining to be about USD 100 million less than what it was this year. And the USD 100 million of capitalized mining is roughly about a 12% impact on C1. But I would just caution on that as well. There's no cash flow impact. What that does mean is that the capitalized mining will move from sustaining capital effectively into the cash production expenses. So the cash flow is still very similar, but just the categorization, we'll see that extension move from sort of sustaining capital to operating costs. Does that answer your question?

Yes, yes. And I just wanted to follow up. So if we compare Chalcobamba with Urubamba, I mean, is there any material difference in terms of the C1 cost?

No. It wouldn't really impact on the overall cost. The benefit we see from Chalcobamba is that it will be higher grade to start with, so it'll be up around of 0.9%, but it does have longer hauls because we have to haul it from Chalcobamba over to where the crusher is at Urubamba. But yes, so we sort of gain production based on grade, but then probably raise a little bit on cost because of the longer hauls. Overall, you're not really going to see much of a difference. But what you will hopefully see is once Chalcobamba is approved, production lifting up towards 400,000 tonnes once it's approved and fully developed.

Understood, yes. And lastly, what sort of by-product prices have we assumed in the C1 cost guidance? I mean, for things like moly, gold, silver, and so on?

Yes. Pulling up price list would give you specific details, but they're generally a little bit lower than what the current prices are. And you know actually gold is strong and the moly price is very strong. So we tend to stick to more long-term averages. So there is probably a little bit of upside and maybe up to USD 0.05 per pound upside next year for 2022 as the current spot prices are maintained throughout the year.

[Operator Instructions] Your next question comes from [ David Way ] with Balyasny Asset Management.

So my question is, recently, I read the news that 2 communities from the district of [indiscernible] walked out of the meeting in the negotiation. So I want to know in Las Bambas like how many communities do we need to deal with now? And in your judgment, how do you think about the possibility of another road blockade?

Yes. Thank you, David. I'll have Troy answer your question, please. Troy?

Thanks for the question, David. We have, at the moment, I think, around 20 different dialogue processes underway with a large number of communities. So when you say what's the likelihood of further interruptions, there is always that likelihood. What we're seeing, I think, and particularly with the Chumbivilcas agreement from very late last year, we are trying to get a much more consistent approach and to build concepts together with government. That means that once we get a deal with one community, we can then apply that across all communities. And that's why, in some ways, the block in December led to a shutdown of the site for 2 weeks because the offer we made in early December was a very good commercial offer and we didn't shift from it, and it was almost exactly the offer that was finally accepted. And I think it's given us a platform now for all of those dialogue processes to be very consistent to do what we say and to work with all the communities to their benefit, but also be very clear that we aren't going to make special deals for each community, which hopefully discourages single communities leaving the process to try and get any other advantage. So as at the moment, the road is open throughout its length, but at the moment, we are in a number of dialogue processes and all of them have the risk of what could be a 1- or 2-day stoppage from a couple of individuals breaking off. But the focus for us is to get as many possible days as we can with the traffic working [indiscernible] along that road corridor, which has been a challenge for many years, as you know.

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

Thank you very much for your time. And I think that just before we finish this meeting, considering we are going to have the Chinese New Year festival coming next week, so I wish all of you a prosperous, healthy and good Happy New Year, and thank you. Thank you very much.

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