Moxico Resources plc (ECOR) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us on the Ecora Resources' call to discuss our acquisition of a copper stream over the Mimbula mine. My name is Geoff Callow. I'm the Head of Investor Relations at Ecora. I'm joined here today by Marc Bishop Lafleche, our Chief Executive Officer; and Kevin Flynn, our CFO. We'll take you through some slides, and then there'll be time for some questions at the end. [Operator Instructions] I'd just like to draw your attention to the disclaimers at the back of the presentation, all the usual disclaimers that apply regarding forward-looking information. And the presentation is available on the home page of the website. With that, I'll pass over to Marc to kick off the presentation.

Okay. Thank you, Geoff, and good morning, all. Thank you for joining us for our call today. So as we announced earlier, Ecora has entered into an agreement to acquire a copper stream on Moxico Resources' Mimbula copper mine. The upfront consideration will be $50 million. And we're frankly excited to announce this transaction. We really do believe on all metrics. It's the perfect next deal for Ecora. First of all, Mimbula is a low-cost mine, which is in production, a track record of historical production. Brownfield expansion is currently underway to increase production capacity by approximately 4. And the acquisition will also significantly increase copper as a percentage of Ecora's revenue mix. Furthermore, it will also enhance the front end of Ecora's royalty sector-leading organic copper growth pipeline. Moxico is led by an exceptional management team, who have seen this project from conceptual stage into production and now underseeing the Phase 2 expansion of the operation. And these folks have experience at the blue-chip mining companies you'd expect. The stream is expected to drive immediate earnings and free cash flow accretion from year 1, and in combination with our wider producing portfolio, contribute to material deleveraging in the next 12 to 18 months. And last, the acquisition is bang on in terms of our strategy to target an acquisition as our next deal that would be in production that would immediately contribute or in the very short term contribute to diversifying and growing our short- and medium-term income profile. Turning now to look at the transaction in a bit more detail, starting with Mimbula. First, Mimbula, as I mentioned, is a producing open-pit copper mine. It's located in the Copperbelt Province in Zambia. The operation ranks very well on global cost curves, currently within the lower half of the second quartile and following Phase 2, expected to be within the lowest quartile of global copper operations. The operation, as I mentioned, has the track record of production. The operation last year produced 14,000 tonnes of copper, and this is done by a heap leach and SX/EW circuit. And the Phase 2 expansion will lead to production capacity of approximately 56,000 tonnes a year. Ecora will acquire the stream for $50 million, and the stream entitlement is tiered based on calendar year production levels. So on the first 15,000 tonnes of copper production, Ecora is entitled to 4.7% of the copper units. And that equates to EBITDA of approximately $5 million. And incrementally above that, on the next 15,000 to 30,000 tonnes of copper production, Ecora's entitlement is 2.5%. That equates to stream EBITDA of approximately $2.5 million. And then finally, on any production in a calendar year in excess of 30,000 tonnes, Ecora's entitlement is 1%. So in total, once fully ramped up, the stream EBITDA will be expected to be just under $10 million up until the step-down date, whereafter Ecora would be entitled to 1% of any cathode production. I think there are 2 real key takeaways on the stream structure. I think, number one, this effectively frontloads the stream cash flows to the initial 6 to 7 years. And number two, the structure, while on a blended basis, equivalent to a stream entitlement of 2.3% copper production, it actually reduces the expected volatility of the copper units in any given year, and thus the expected volatility of the stream EBITDA and the contribution to our overall earnings profile. I'll now hand over to Kevin to discuss the transaction funding in more detail.

Thanks, Marc, and hi, everybody. As Marc mentioned, this transaction ticks so many boxes for us. The cash flow profile that we're acquiring, especially as it's front-weighted to the formative years, ensures that the financing of the transaction and the leverage that we're taking on is both affordable and given the ramp-up that we expect to see from the rest of our portfolio, which began at the beginning of the year, provides a clear deleveraging pathway, which I'll touch on in a minute. In terms of the financing, once again, delighted to receive the support of our existing lenders, evidenced by the upsizing of our facility from $30 million -- by $30 million to $180 million. And this really reflects the additional revenue that we're acquiring and the diversification that this provides to our income profile. This ensures that we continue to retain good financing flexibility for future opportunities. In addition to the upsizing to the facility, we've also taken the opportunity to extend the term of our facility by 12 months, which was an option which we had in our existing facility. And over the course of this time, there are no fixed amortizations or step-downs associated with our facility, which again provides further financial flexibility to us going forward. In terms of pricing, this has increased slightly at the higher end of the ratchet but still very competitive, beginning at 2.25% to 4.5% over SOFR. As part of the acquisition, we've made some slight tweaks to our borrowing facility, which mainly reflects the volatility we expect to see in terms of Kestrel production when it's either within or outside of our private royalty area. So this calculation allows us to normalize the Kestrel income at any one particular covenant testing period by effectively taking the average of the previous 6 quarters and annualizing this. And this should ensure a much smoother leverage covenant calculation at any one given quarter end. In addition to this, we have agreed with our lenders a reduction in our interest cover ratio from 4x to 3x, reflecting really the new higher base rate interest environment that we currently are in. Looking at the impact of the acquisition on our balance sheet. We've included an illustrative table at the bottom of the slide to kind of show our net debt profile at the end of the next 2 financial years based on latest consensus pricing when applied to the expected volumes from our portfolio. So on a pro forma basis after the transaction, we anticipate net debt to be around $126 million. And this, based on consensus pricing, could reduce to $100 million by the end of this year and by a further $30 million or so the year after. Given the upsizing of our facility to $180 million, this should ensure that we retain good financial flexibility to continue our focus on further accretive acquisitions in the coming periods. Back to Marc.

Okay. Great. Thanks, Kevin. I think we've touched on a number of the key points describing and outlining the Mimbula mine, so I won't dwell too long on this slide. I think a few key takeaways, as I mentioned, first of all, I think whenever we look at our investment opportunities, cost curve positioning, it's really at the front end of our due diligence. This asset is very well located and should have -- be very well positioned to generate strong cash flows throughout the commodity price cycle. The operation is located in a very well-established copper mining area in the Copperbelt Province in Zambia. It's in the name. And the operation, as I mentioned, saw first production in 2022. We have and -- behind us a great track record of production and operation capability. And Phase 2, which is currently underway, is expected to lead to approximately a fourfold increase in production capacity, which would take the production capacity to around 56,000 tonnes per annum. Turning now to the copper market outlook. I think for most of the folks on this call or in and around the mining sector, the basis for a really strong fundamental copper outlook is generally well understood. And while we won't belabor this slide, one point that we really think is worth mentioning is that despite the fact that everyone in this sector seems to know that a lot more copper will be required in the future, what we see is a lot of M&A or consolidation. And the reality is that doesn't actually bring about more incremental copper production, which in and of itself, in many ways, further strengthens the outlook for copper. Turning now to the next slide. When we step back and look at this, first, we've outlined here a slide demonstrating our copper pipeline. And we think that this acquisition really enhances the front end of that sector -- royalty sector-leading organic growth profile. I think the Mimbula piece adds immediate growth, medium-term growth. And that really contributes in the next couple of years, in particular, in the context of the West Musgrave royalty now being pushed back. I think the second point to note here is that over the next decade, we just have this consistent growth pipeline that is expected to take our attributable copper Eq units from approximately 2 million pounds in 2024, up by almost a factor of 10 to 20 million pounds. And then turning to the last slide. What does this mean in the wider context of Ecora? I think there's a number of really key takeaways here. First, we believe that on the back of this transaction, this acquisition really cements copper at the core of our portfolio with copper now exposure representing just under 50% of our estimated NAV. And beyond that, base metal is just under 80%. I think our portfolio remains very heavily weighed to OECD jurisdictions or jurisdictions generally with histories of mining and mining cultures. Our portfolio is very heavily weighted towards assets or projects that are located in the first and second global cost quartile. I think what that means is the assets that are in production should -- are expected -- are far more likely to stay in production and generate the royalty cash flows we anticipate or for the development projects, far more likely to be brought into production. And last, our stage of development remains very heavily weighed to assets that are already in production, and thus the portfolio in itself, there's a relatively more derisked weighting in the context of our asset base. So with that, we'll probably turn it over to any questions that may -- to a Q&A session. Thank you.

Thank you. [Operator Instructions] We have a number already. First couple from -- one from Marina at RBC. The deal has a very attractive IRR at current spot prices. Could you give us a bit more color on how competitive the process was? And as another individual has asked, what the IRR of the transaction is?

Okay. So I think the first question here, I mean any IRR calculation will, of course, be subject to a number of assumptions, the most obvious being copper price. On a consensus outlook, the IRR estimate as we have it is in the range of 8% to 9%. And then depending on someone that's more aggressive on copper, then it's more likely slightly above 9%. In terms of competition, I think on this one, our key competitors were not actually from the royalty and streaming sector but from alternative sources of financing, whether they be equity, debt, equity-linked products. And I think ultimately, this transaction really demonstrates the merits of the royalty model. The royalty -- Moxico, more generally, is a rapidly growing business. Moxico is one aspect -- Mimbula, excuse me, is one aspect of Moxico. But Moxico is also developing in partnership with the Ajlan $ Bros the flagship mining project in Saudi Arabia. And therefore, this funding, really by limiting it to Mimbula, is a really accretive way of growing, and as I mentioned already is -- just it hammers in the merits and the attractiveness of royalty financing.

Thanks. Another follow-on question from Marina. What do you think are the main challenges Moxico will be facing in ramping up production to the 56,000 tonnes per annum?

So this -- the project is now already well underway, and the project in the scheme of mining brownfield expansions is on a relatively simpler side. I mean, ultimately, this is an open-pit operation and an SX/EW circuit. The project is expected to complete in mid-2026, and the project is materially advancing towards that time line as of today. So there's nothing that imminently jumps on to us as a immediate source of concern for delays. I think in the event of delays, ultimately, we should consider the stream structure, where the stream structure is very heavily weighed towards the lower end of production. And for the more -- the lowest stream ratchet is effectively production that's already been achieved historically.

And that segues into the question from Richard Hatch at Berenberg. What level of conservatism do you think is being built into the ramp-up schedule for Mimbula?

I think the way that we -- the figures for 2025 and '26 certainly have an element of conservatism in them. There is certainly potential to see actuals beat these levels of the 15,000 to 20,000 tonnes, for example, that's expected in 2025.

Another question from Richard Hatch. What level of price weakness -- probably one for you, Kevin. What level of price weakness would you need to see before covenants become a concern?

Yes. I think our base case is reasonably well protected, certainly on consensus and even below that. I think 10% below consensus is -- still shows good covenant compliance. I think -- more importantly, I think what really gets us comfortable with this transaction and being able to fund it from the balance sheet really is what we've been talking about for the last 2 or 3 weeks with very positive -- with a lot of positive momentum across the rest of the portfolio in terms of expected volume growth at Mantos and Voisey's Bay. And I think if you look at where commodity prices are currently trading generally, those commodities that impact the group, I think there's probably more risk of upside to those commodity prices than downside, especially when you see what's happened recently with announcements from the DRC in terms of cobalt. So I think, yes, you're always susceptible to shocks in the portfolio when you've got a level of leverage, but that's why we've tried to restructure some of the covenant calculations, especially around the Kestrel calculation to kind of deal with this. So we're comfortable on our base case, and there's reasonable protection on the downside. And especially then, Richard, when you take into account the fact that the cash flows from the stream are reasonably front-loaded, the payback on the investments is short in the context of the royalty and streaming sector. I think that in of its own right gives us a lot of assurance as we look forward.

And Kevin, while we've got you, another question on the debt. How does the acquisition affect the reduction of the net debt, especially bearing in mind that the contribution from Kestrel is clearly falling off probably from next year?

Yes. Absolutely. And that's a key reason for the acquisition is to acquire different sources of cash flow. I think when you look at acquiring assets, if they're income-producing and have got a reasonably quick payback period, then that naturally lends to being able to leverage those acquisitions. The Kestrel mine life within Ecora's private royalty area is very well known. We were very -- we've got very good visibility over what that is, what volumes we expect. And that obviously supports our deleveraging profile as we've illustrated in the table.

Thanks, Kevin. A couple of questions here, which I'll kind of aggregate because there's a few of them on a similar theme, and we partly touched on this in the presentation. But what's the general outlook for copper, in our minds, in the next 12 to 18 months? Seems to be copper price being very near to an all-time high. Do you think you're buying at the top of the market instead of the bottom? And are commodities such as lithium and manganese more at the bottom of the cycle and potentially more attractive?

There's probably 2 parts to that question. So the first on the copper outlook more generally, I think the copper has performed relatively well on a relative basis to commodity complex, but the fundamental drivers for copper in absolute terms at these price levels appear to remain very compelling. I think the second question around relative commodity prices, there's also a question of momentum. I think at this point in time, it's a bit unclear, frankly, as to when lithium prices or manganese prices are expected to recover. We've seen some supply curtailments, but what we've also seen is a number of integrated producers of those commodities, in particular, lithium, perhaps capture less margin upstream on the mine but capture the margin downstream on the battery pack sales or even further on the EVs, which raises questions as to how long prices may go on lithium, for example, before they recover. So we're absolutely very comfortable on copper. And between the 2, at this time, in fact, with a high degree of conviction, believe that copper is the right place to allocate capital on a relative commodity selection basis.

Thanks, Marc. I got a couple of questions on a similar subject we'll aggregate. Piauí, does this transaction mean that we -- that the time line on Piauí is moving further to the right? Do we still plan to finance Piauí? And if so, how? And I'll bundle that with a question which is on a different asset or we'll look at other assets in the portfolio. Is there any indication from BHP where West Musgrave is likely to be featured in their plans again?

So first on Piauí. I think on Piauí, it's not a decision that is necessarily required to be taken immediately. And it's not a decision that would be incremental leverage today. So there's an expectation on -- that our balance sheet should fairly rapidly delever until such time that the decision on Piauí would be one based on the merits of Piauí. I think we've been pretty consistent in the past that in any acquisition, we'd be very reluctant to add substantial leverage to the degree we didn't see a path deleveraging in fairly short order. I think that same logic would apply at the time in the Piauí transaction if and when it came to us for a decision point.

West Musgrave?

In terms of West Musgrave, BHP today has not provided any updates beyond public disclosure that a restart date will be considered and reevaluated by early 2027.

A couple sort of capital allocation points. Would buybacks at these prices be a better use of capital than this transaction? And what are our priorities for the cash flows generated from this investment?

Yes. I think there's always a trade-off, of course, between the relative merits of per share growth on the buyback or achieving a diversification and reducing the expected volatility of income. In this instance, on this specific transaction, we felt the merits of the royalty in the stream acquisition were superior.

Second question was...

The use of the cash flows?

Use of the cash flows. What are the priorities for the cash flows?

Thank you, Geoff. And in terms of the priorities for use of the cash flows, I think Kevin's touched on that. I think the base case, as we sit here today, is to utilize these cash flows in combination with the cash flows generated from the wider portfolio and seek to delever the balance sheet. Historically, within Ecora, taking on leverage to acquire royalties is something we've done a few times in the past. In and of itself, it's not new. And again, it's always been done on the basis where we felt there was a fairly rapid path to taking down debt in the short term.

And is there still a plan to backfill other metals that we don't currently own, such as lithium, for example, just as an example?

Yes. Absolutely. And by no means are we seeking to become a royalty company in a single commodity. What we've continued to seek to achieve is a royalty vehicle that provides exposure to the critical minerals suite, whether those critical minerals are driven off of urbanization, electrification, digital infrastructure, energy transition. The outlook is still positive on a holistic basis. It just so happens at this time, the most attractive opportunity in front of us was a copper addition. Having copper at the core of our portfolio is attractive just given copper is such a large market. It's historically been prone to less volatility than some of the more niche commodities. But by no means are we ignoring opportunities that may arise in the other commodity set.

[Operator Instructions] Just to come back to Mimbula more specifically, any expectations when the transaction will close? And which quarter do we expect to see revenues from?

Transaction is expected to close in the next days, and we anticipate seeing contribution from Mimbula from Q1 2025 onwards.

Thanks. And final question at the moment, which I'll again aggregate with a number of questions on this theme. Could we give a sense of what the exploration upside program is from Moxico at the Mimbula mine, potentials there for extending the life of mine further, which would obviously give us some upside exposure?

Yes. At this time, the Moxico team is primarily focused on executing the Phase 2 expansion. That being said, the property certainly demonstrate the prospectivity that we always look for when we acquire royalties and streams. The royalty today and the mine life is contemplated solely on the oxide ore body and SX/EW circuit. Is there potential in the future for a sulfide ore body to be processed and sold as a copper concentrate? Potentially. I think that will become clear in the coming years as Mimbula considers further exploration drilling.

Will increased free cash flow level flow through to dividends in line with our capital allocation framework?

Absolutely. I think the free cash flow will be determined and the capital allocation framework, as we've previously communicated it. With regards to dividends, there'll be distributions within a range of 25% to 35% of free cash flow.

Thanks. With that, there are no further questions at this time. So with that, Marc, perhaps I'll hand over to you for some final comments.

Well, I think in brief, thank you very much for joining us today. I think this is a fantastic acquisition for Ecora. I think it really builds on a lot of the strong momentum we've seen starting in Q4 last year, but also the momentum we've seen to date this year that's expected to continue more widely on the back of our producing royalty base.

Thank you, everybody.