MMG Limited (1208) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MMG Limited Investor Webcast. For those following on the webcast, presentation slides can be progressed on the right-hand side of the player. [Operator Instructions] I would now like to hand the conference over to the MMG management team. Please go ahead.

Thank you, and thank you for joining us. Today, we'll be discussing our agreed acquisition of Anglo American's Brazilian nickel business. Joining us are Mr. Liang Cao, our CEO, and Sandra Guan, the Interim Executive General Manager of Commercial and Development; along with Brent Walsh, our General Manager of Strategy, Development and projects. I will now hand over to Cao Liang. At the conclusion of the presentation, we will open the call for questions. Thank you.

Thank you, Andrea. Good morning and good afternoon. As you know, our announcement of our MMG acquisition was released yesterday. We will take it as read, and I only cover the transaction's key highlights. The team and I will be happy to answer any questions at the end of the presentation. Sandra and Brent will cover the agreement in more details. However, I would like to provide some opening comments. Our acquisition of Anglo American's nickel business or Nickel Brazil is exciting news for MMG and is a great example of our growth strategy in action. It provides important diversification for our business and strengthen our presence in Latin America. Nickel Brazil is a leading ferronickel business that is well managed and operated by a highly talented and a long-standing management team, with a lot of growth potential and demonstrated excellence in sustainability performance. A positive legacy, we look forward to continuing. MMG and Anglo American have a long track record of close collaboration and shared values as demonstrated by our commitments to ICMM principles. In terms of why this asset? Actually, nickel has been under consideration by our team going back a number of years, many years. In fact, our geology and M&A teams has identified this opportunity, this asset in 2009 as a high-quality target. While nickel prices are currently low, however, the consensus expectations are for them to rise by 20% -- 25% over the next 3 to 5 years. Positively, this business generates robust cash flows and earnings even at low points in the cycle and also can withstand the current market better than its competitors. This, combined with the medium and long-term growth potential driven by the energy transition and the essential role for the nickel in batteries provide us a positive outlook. And of course, the timing of this transaction means we are capitalizing on countercyclical investment opportunity in Tier 1 mining jurisdictions. We believe that Nickel Brazil presents considerable upside, and we look forward to working with Anglo American on completing this transaction, this acquisition in a timely manner. Now I'll hand over to Sandra. Thank you.

Thank you, Cao Liang. Good morning, and good afternoon, everyone. MMG has entered into a binding agreement to acquire Nickel Brazil for total cash consideration of up to USD 500 million. The agreement structure is detailed on the screen. It is worth highlighting that we have in place a phased contingent payment structure that comprises upfront cash consideration of USD 350 million and up to USD 150 million in contingent consideration. MMG will fund the acquisition with existing liquidity sources, and there's no funding condition associated with this transaction. We continue to work to deliver our strategy, and as Cao Liang stated, the agreed acquisition of Nickel Brazil demonstrates our positive progress. It also aligns with our vision to become a leading international player in the mining sector, providing materials essential for the transition to a low carbon future. As a team, we remain focused on maximizing value and competitiveness of our existing assets. While it's also expanding or stepping out into new regions and other future-facing commodities. Here, we have detailed key operating asset statistics. You can see that Nickel Brazil is a world-class and stable operation producing approximately 40,000 tonnes per annum of nickel in ferronickel across 2 operating assets, Barro Alto and Codemin. Barro Alto is the flagship operation producing approximately 32,000 tonnes per annum of nickel with ore sourced from Barro Alto and truck to the Codemin plant, which produces approximately 8,000 tonnes per annum of nickel. The operations have an expected mine life of 18 years on a combined basis. I'll swing now at the investment highlights and strategic rationale behind our agreed acquisition of Nickel Brazil. I will now hand it over to Brent who will take you through each of these on the following slides.

Thank you, Sandra. On Slide 9. Firstly, Nickel Brazil allows MMG to strengthen our presence in South America, an existing regional jurisdiction, while diversifying into a new commodity in nickel. We anticipate being able to leverage MMG's internal capabilities and experience gained from our flagship asset in South America, Las Bambas, to support operations at Nickel Brazil and to realize potential operational synergies. As mentioned by Cao Liang, the acquisition of Nickel Brazil represents what we see as a genuine countercyclical investment opportunity, where these assets have generated on average annual EBITDA of around $250 million over the past 5 years. And as you can see from this graphic, the implied acquisition multiple is somewhere between 1x and 3x earnings is very attractive on a trailing basis, while still obviously considering what we see is very positive medium and longer-term outlook for nickel on the horizon. On to Slide 10. Secondly, Brazil is widely recognized as a world-class mining jurisdiction, rich in resources from nickel to copper to lithium and others. With Nickel Brazil providing the platform to pursue future organic and inorganic growth opportunities for MMG. Mining is a key industry for Brazil, given the approximate 5% contribution to Brazil's GDP. The industry benefits from a well-established and streamlined mining regulatory framework and attractive tax incentives as well. MMG is pleased to not only be acquiring one of the largest ferronickel producers in the world but one that has impressive ESG credentials as well. On the screen, there are a number of examples of this. Given the significance that MMG places on safety, it's our #1 priority. It was reassuring to see Nickel Brazil's commitment in this critical area. It is also worth highlighting the operation's strong environmental and social performance with a community office at Barro Alto to actively engage with local communities. In terms of energy supply, Nickel Brazil has stable supply of 100% renewable energy for its electricity needs. It's also very notable that Barro Alto is the first nickel-producing mine globally to achieve the Initiative for Responsible Mining Assurance or IRMA 75 standard back in 2024. Finally, this environment has a limited environment -- this operation has a limited environmental footprint given there are no tailings dams or slurry pipelines associated with this site. Slide 12. Moving on to operating and financial performance. You can see that Nickel Brazil has a history of stable production of around 40,000 tonnes per annum of nickel contained in ferronickel. Indeed, the team that went to site have been highly impressed with how well managed these operations are, which is not a surprise to us given the average tenure of the management team is around 15 years. We look forward to welcoming these professionals to the MMG family. As a result, Nickel Brazil constantly produces a high-quality ferronickel product that has typically received better pricing in the market than other ferronickel competitors. Looking ahead, MMG expects the operations to continue delivering strong, stable operational performance whilst remaining a low-cost nickel producer. This takes me to the next slide. As mentioned, the fact that Nickel Brazil currently has the lowest cash cost amongst global ferronickel producers and sits in the first nickel -- first quartile of the global nickel cost curve was a key acquisition rationale for MMG. The cost curve positioning ensures Nickel Brazil is well positioned in a weaker nickel price environment while benefiting strongly from the expected future increase in the nickel price in the medium to long term. The operations' combined remaining mine life of 18 years ensures that MMG should have the opportunity to benefit from multiple nickel cycles over this period. Finally, as you can see on the next slide, Nickel Brazil has one of the world's largest portfolios of nickel deposits with a resource endowment of approximately 5.2 million tonnes of contained nickel. So as you can understand, when we look at diversifying into a new commodity, the opportunity to acquire a nickel endowment this large is an incredibly unique proposition at the price and the value that we've been able to secure it for, which takes us to the next point. This provides MMG with significant growth optionality through the greenfield projects in Jacaré and Morro Sem Boné or MSB. Both projects have very well understood geology, have the high-grade deposits and they have solid infrastructure and development options on foot. Whilst Jacare and MSB may require a higher nickel price environment in the future to be developed, the expansion potential presented by these projects could very well transform MMG into one of the world's leading global nickel producers, which aligns very strongly to our vision to become a leading global base metals producer that is leveraged to a decarbonized future. Now the next 2 slides, we'll just take a brief moment to touch on the nickel market for those unfamiliar with both nickel and ferronickel market dynamics. Nickel has long been a critical component in industrial applications with stainless steel as its primary demand driver. Additional demand and increasing demand now comes from products like cathodes for electric vehicle batteries and energy storage systems. In recent years, Indonesian supply has created a short- to medium-term surplus that's affected nickel prices. This is well understood. However, as resource depletion accelerates, environmental concerns over new supply become more pronounced and demand from stainless steel and electric vehicles continues to grow, the nickel market is expected to shift back into deficit post 2030. A shift to MMG and Nickel Brazil will be well placed to capitalize on. In terms of ferronickel, it competes directly with nickel pig iron, or NPI, to supply the stainless steel industry. There are a number of advantages that ferronickel has over NPI. Briefly, these include higher nickel content, a lower carbon footprint and also lower impurities. The rapid increase in NPI supply has significantly widened the price discount at which ferronickel trades relative to the LME price. However, what we can say here is that Nickel Brazil has maintained a stronger pricing position, achieving lower discounts when compared to other global ferronickel producers. We believe Nickel Brazil's production of a low-carbon content via environmentally sustainable production processes will be desired and continue to be desired by international stainless steel producers seeking sources of nickel supply outside of Indonesia. This concludes our presentation. My colleagues and I are now happy to take your questions, and I'll hand back to the moderator. Thank you.

[Operator Instructions] Your first question today comes from Jimmy Feng from Citi.

Happy to see this acquisition. My first question is regarding the valuation part. I noticed that by calculation, the average EBITDA is around [ USD 110 million ] for this operating project. So I want to check what's the average nickel price assumption for this valuation in the following 18 years? What's the average level?

Certainly. So look, I would just make a couple of comments. The average EBITDA forecast in our valuation announcement is a requirement and a new requirement from the Hong Kong Stock Exchange. It doesn't paint, I think, a particularly insightful picture to investors because earnings volatility is so subject to nickel price forecasts as you point out. However, what I can tell you without telling you what our nickel price assumptions are is that in the short term, our nickel price assumptions for this acquisition are below consensus. And in the longer term, obviously, we expect a recovery in nickel prices towards that consensus price level. But we are genuinely optimistic on the long-term fundamentals of nickel. And that's what's attracted us to this opportunity. So you can be assured that we haven't factored in an aggressive hockey stick recovery in the nickel price, and that's well and truly factored into our forecasts going forward.

Okay. Got it. And another question is that in addition to this current operating project, there are also 2 greenfield mines. From the previous presentation, you mentioned that we might need a higher price to develop this to greenfield mines. I want to check at what price level it will be attractive to develop the 2 greenfield mines. And do you have any plan about these 2 greenfield mines' development?

Yes, certainly. And that may be a premature comment because we haven't been able to get in and study those projects in the detail we'd like. So obviously, our first priority will be to study them in depth. We think that they presented a very attractive opportunity just given the size of the nickel endowment that we've highlighted. The other unique proposition that our group brings is the expertise of our parent company and our related companies in nickel processing technology in Indonesia through both HPAL technologies and other pyrometallurgical processing technology. So we love the opportunity to study these projects and bring out our experts from China into these studies to review and see what opportunities there are. So we think there's a lot of optionality, but we're not in a position to tell you what nickel price they will be developed at. But we think that we can bring a lot of value to those projects through our unique model.

Got it. Got it. And my final question is regarding the strategic level. We know that there are lots of nickel projects in Indonesia, the MSP, the hydro method, has a cost advantage. So what's the rationale to enter this industry in Brazil? And what do you think the competitive advantage of this project versus the nickel project in Indonesia?

Okay. Thanks, Jimmy. I'll take that again. Look, there are a few points that I'd like to draw your attention to. I think the first one is that having this ex Indonesian supply is a significant advantage. We've demonstrated the pricing premium that the product gets because of the -- I mean, there are a number of value factors here that this operation delivers lower carbon footprint, end-to-end supply chain, lower impurities. So it's got a strategic advantage from, I think, a pricing perspective. The second point is to talk more about the nickel market generally. And the influx of supply into Indonesia is certainly of no surprise to anyone. And we've well and truly factored that into our analysis. But one thing that probably gets lost in all of this is that nickel as a base metal has the highest demand growth profile of all base metals. It's expected to grow by 6% a year between now and 2030. You've got a real differentiation here between Class 1 and Class 2 nickel supply. And Class 2 nickel supply is actually tighter than, I think, the market appreciates. You've got ferronickel global production that's gone from 375,000 tonnes a year in 2021 down to around 110,000 tonnes a year right now. So there's always going to be very strong demand from stainless steel producers in Europe, in the U.S. for a premium ferronickel product, which is what this asset brings. The other thing I'd say around the supply is whilst there is an influx of supply, there is potential risk and volatility attached to that supply when you consider things like Indonesian mining restrictions, you consider things like Philippines' export or export bans. So we see enough risk and volatility in that supply side as well but see ample protection to our margins from our cost position and our premium product offering. So we've taken all those things into account when assessing whether acquiring this asset in ferronickel in Brazil is the right thing to do for the business.

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

Congratulations on the acquisition. My question is on CapEx. So what sort of additional recurring and as well as growth CapEx should we expect due to this acquisition? Any incremental CapEx?

Okay. Thanks, Chris. Yes. So look, sustaining capital will probably hover around that $20 million to $30 million per annum range. We obviously need to take a much closer look at that with the benefit of being behind the wheel. But certainly, that's our forecast. And it obviously fluctuates from year to year because you do have high capital years when things like kiln relines needs to take place. We've done a capital-intensive biomedical metallurgical process like this. But I think the average of $20 million to $30 million is what you can expect. There are no major growth capital projects attached to the assets at the moment. But obviously, we'll be looking to optimize and drive efficiencies where we can. But they are very -- I mentioned before, very well-maintained, well-run assets with a really stable operational track record.

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

I have quite a few questions. First of all, I would like to know that your consideration part of it is attached to the 2 greenfield mines. I just wonder, is there any time limit that contingent -- consideration attached to the greenfield development because you have 4 years time limit for the consideration related to product prices. So I just wonder is there any time limit for that -- for -- attached to the 2 greenfield projects. And my second question is about the historical financial of this -- the target asset. Just realized this, the target asset actually making quite a big loss in 2023. And I just wonder what really happened because if you look at the relevant information from Anglo American, actually, the EBIT of the net corporation was [ USD 652 million ] in 2023. I just want to know what happened in between the EBIT and the profit before tax.

Thank you, Lau. Just a quick answer to your question. The first one for the 2 greenfield projects continues in payment up to now according to the design. There is no time, like 4 years, 5 years. It's more -- it depends on the timing of the decision when we decided to construct to make the investment decision. The second point in terms of 2023, there is a big impairment. If I remember correctly, it should be around [ $800 million ], something like that. So if exclude the $800 million impairment, the profit -- is still profitable.

No, that's correct. So obviously, that impairment reflected the carrying value of those assets at the time for Anglo. Now we clearly haven't paid anywhere near $800 million for those assets. So it's a historical legacy issue rather than an ongoing issue for the assets.

[Operator Instructions] As there are no further questions at this time, I'll now hand back to the MMG management team for any closing remarks.

Thank you for joining us. If you have any additional questions, please reach out to our Investor Relations or corporate affairs team. Bye for now.

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

Thank you.