PLS Group Limited (PLS) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening, depending on where you're dialing in from. And thank you all for dialing in to our FY '22 financial results call. Within the room today, I have with me Brian Lynn, our CFO, Alex Eastwood, our Chief Commercial and Legal Officer; David Hann, our Investor Relations adviser; and Kate Bell from Read Corporate. In terms of the call today, I'll be taking you through just some broad opening commentary on the year, which was I'll then be handing to Brian, who will speak to the financial outcomes and offering some more insight there. And then to finish all of some commentary on the FY year ahead guidance and some commentary on the market. And lastly, to finish, we'll open the floor for some questions. So starting with sort of the opening commentary for the year we've had, it's been an absolutely transformational year for Pilbara. And I refer to Slide 6 and the numbers, frankly, speak for themselves. Our revenue, $1.2 billion, a 577% increase on the prior year. An inaugural profit -- operating profit of $561 million, EBITDA of $814 million and cash in the bank of $874 million. So an absolutely incredible year for the business and long may it continue. And really what is behind -- what's behind us is as it shows that some of the strategies the business have had imply are now paying off strategies, which have been in motion for many years, delivered with discipline and been timed well and the fruits of that are starting to be born now on the results I just mentioned. And I'd like to speak to sort of 3 parts of our strategy. Firstly, with our operating performance, we've had a good year, a 34% increase on production from the prior year after 378,000 tonnes made up of the Pilgan operation and, of course, the Ngungaju operation, which has been in ramp-up mode during the financial year. And as it relates to the Ngungaju operation, formerly the Altura operation, FY '22 has really been the year where the benefits of that acquisition has been starting to be born. Obviously, there's been the production, being able to get that production into market quickly if the market turned. And ore reserve, we did a big increase in October last year, a 54% increase in ore reserve to 163 million tonnes, so a key benefit of that acquisition. And the transaction itself, just to remind everyone, only completed in January '21 last year, AUD 240 million. And in the year just been $145 million of gross operating margin was contributed as a function of bringing that asset to life. So absolutely, that Altura acquisition is bearing fruit for the business and by extension, our shareholders. So the life for that management is being able to bring those benefits through for that acquisition. Moving from operating performance to expansion the P680 expansion project was approved by the Board. And so the team is busy underway, progressing that project. And then there's the P1000, which will bring our total production capacity up to 1 million tonnes per annum. That FID is still targeted for December of this year. So looking forward to those next legs of expansion. Moving from expansion then to our other value creation mechanisms. This is essentially around chemicals participation. Well, during the year, the POSCO downstream joint venture was consummated finalizing April 22. And that piece of work has been a long time in motion with discussions, of course, kicking off back in 2018. Well, here we are underway with POSCO for that joint venture downstream plant in South Korea being a 43,000 tonne lithium hydroxide processing plants. So POSCO are busy underway, commencing construction for that project and we look forward to the benefits of being an economic participant in that downstream plant flowing through to the business and to our shareholders. Also in the value creation chemical space was our midstream project during the year working with Calix, we delivered the scoping study for that work. We're also successful in the $20 million grant being approved to contribute towards that demonstration plant care of the federal government. And yes, we progress that project as quickly as we possibly can. And we like what we see. And of course, just to remind everyone, the midstream project is all about producing a value-added lithium salt. Value added and that it concentrates the lithium up leave the aluminum silicate waste on the mine site and does it in such a way to materially drop the carbon footprint. So we're pretty excited about that project. It is R&D, and we're progressing that as quickly as we can. But of course, all of this, yes, was progressed during the year, just been. Lastly, around strategies, which have been paying off was BMX, hard to believe this only kicked off in the year, which has been BMX. Just to remind everyone, when we went into sort of exploring and deploying the Battery Materials Exchange being a version of e-waste battery materials, the hypothesis was we think a live marketplace will go well. We think potentially, it will extract a higher margin through providing a more efficient marketplace. Well, we will certainly prove to be correct in that with -- from the first auction being in July last year, that went well. And then the 7 subsequent auction since have all gone well, extracting it a material premium above the market average. So we are looking forward to continuing to deploy the Battery Materials Exchange in the year ahead. And with stronger and higher production profile through the combined operation, we'll, of course, have some more product we can direct in that direction. So an absolutely phenomenal year, which has been through the strategies I just mentioned, the operating performance expansion, value creation and chemicals and results of all of the above are playing through to a great set of results that we've just reported. So for further ado and offer a bit more detail on those financial outcomes, I'll hand over to Brian.

Great. Thanks, Dale, and hello, everyone, and thanks for joining the call. I probably will start just by offering some high-level commentary on the financials, and then I'll move into a bit more color around the profit and loss and balance sheet outcomes for the FY '22 year. So if I can just start by referencing Slide 9 of the investor pack. And just secure what Dale just said and recognize that the FY '22 year has certainly been a transformational year. It's -- the results reflect not only the positive market conditions for the battery raw material industry, but also the initiatives that we undertook out of the business over the last 2 to 3 years. Some of those initiatives Dale already spoken about, but largely from -- in terms of what generated margin for us in the business, it was clearly the Pilgan Plant improvements where we increased capacity of that plant. We've restarted commissioned and are currently ramping up the Ngungaju plant, the old Altura asset. And we also completed the POSCO transaction. All of those will feature in the discussions around the financial results. So for the year, the company was able to deliver more tonnes than the previous year in a market that was buoyed by strong demand for the raw materials. And particularly, that demand was particularly strong in the second half of the year. And those strong demand conditions, obviously presented a very strong and positive pricing environment, which allowed the company to deliver around about $1.2 billion of revenue and EBITDA of just showed $815 million and inaugural full year profit after tax of $561.8 million. On the back of the strong EBITDA results, we closed the year with cash in the bank of $591.7 million. And if you include the irrevocable letters of credit for shipments that have already sailed. That balance increases to $874.2 million. So very, very strong cash balance and balance sheet at the end of the year. Turning to some commentary on the profit and loss now referring to Slide 11 of the deck. Again, buoyant market conditions clearly meant that we're able to sell more products at a higher price. And the sum of all that means that we ended up with a substantial improvement in gross margin from operations of just slightly higher than $850 million for the year. And it's probably worth noting that about $680 million of that was actually generated in the second half of the year when we obviously saw the significant improvement in pricing conditions. We shipped about 361,000 tonnes of concentrate and average realized price after adjusting for lithia unit of U.S. to $2,382 a tonne of CIF China or in Australian dollar terms, that was AUD 3,295 a tonne, with price significantly improving in the second half of the year where the price for the second half in Australian dollar terms realized is AUD 4,700 compared to the first half, where the price was and AUD 1,700 per dry metric tonne. It's probably worth noting that the pricing that I've just quoted does not include some foreign exchange gains, which we include in our profitable line due to the accounting rules. We -- the exchange rate that we realized for revenue is based on the date of the ship sales. Any movement between that date and when we receive the cash is recorded separately as a foreign currency gain rather than revenue, and that was worth about $21 million for the year, so $21 million of revenue that was recognized as a foreign exchange gain. In terms of just looking at the respective plants, the Pilgan Plant contributed about $708 million of the gross operating margin from 315,000 tonnes of products sold. And as Dale mentioned, the Ngungaju plants contributed $145 million to the gross operating margin from the sale of just shy of 46,000 tonnes of product sold. And that's quite phenomenal, when we think that really that operation was largely in our start-up commissioning and ramp-up mode during the year. And yet, at the end of the year, it's -- as Dale said, almost paid back half of the purchase price. So that is something worth noting. The actual operations of the company were challenging on a number of fronts, and those reflected through in the costs that we achieved. And this was particularly in the second half of the year. So we found that the operations were impacted by COVID-19 when the Board has opened in the second half of the year. Clearly, we were -- our staff and contractors were impacted by COVID-19. And that just meant that we -- the manning levels we had across the sites were lower than we would have liked, which meant that we couldn't optimize our operations and run them as efficiently as we would have wanted to. There's when -- we combine that with just a tight labor market and just general inflationary cost pressures, particularly around diesel fuel and ocean freight and reagents meant our costs were higher than they had been. So Pilgan Plant cost for the year, excluding royalties and freight was AUD 555 a tonne. And then the higher realized selling price and the high cost of freight meant that the cost on a CIF China basis for $844 per tonne. Clearly, the Ngungaju operating cost that we haven't quoted a cost per tonne because it was in start-up and ramp-up mode. But clearly, because of that, the cost for the operating Ngungaju power high, but expectation is that those costs will now come down to a more normalized level once that plant is fully ramped up to sort of 180,000 to 200,000 tonne nameplate capacity. So after accounting for corporate costs around $21 million, exploration and feasibility costs is about $14 million. We generated an EBITDA of $815 million and accounting for depreciation and other asset write-downs of about $46 million, we generated an EBITDA (sic) [ EBIT ] of just shy of $770 million. Now it's probably worth talking through a couple of significant but nonroutine items that did impact the profit and loss account. The first relates to the recognition of prior year tax losses now because we're able to generate such a good operating results for the year. We're able to recognize tax losses from prior years. And that's basically a $66.3 million benefit to the bottom line net of deferred tax balances. On the flip side, we also recorded a noncash cost of $37.2 million that related to the deferred consideration on the Altura acquisition. If you remember, part of that consideration was the agreement to issue shares on a deferred basis, those shares we issued during August and October in the year, and that $37.2 million really represents the movement in our share price between the 1st of July and the date that those shares were actually issued. So after taking those into account, we achieved an inaugural profit after tax of $562 million, which we think is a very good result. Turning to just the cash flows for the year. So now on to Slide 12 of the pack, clearly, the strong operational performance, generated a significant improvement in the cash balance. And as I said before, the cash balance at the end of the year was $591.7 million, which is a $492 million increase over the prior year. And if we increase -- if we include the letters of credit, cash balance is $874 million, which represents a $758 million increase from the prior year. So major cash movements for the year just shy of $650 million of cash flow was generated from operating activities and that number does not include the impact of the letters of credit. We spent about $128 million on capital investments within the business, largely on the Pilgan Plant improvements, the restart commissioning and ramp-up of the Ngungaju operation and also on the capitalized waste development that we've been undertaking to ensure that we deliver the right amount of ore to the ROM. The cash flow is also reflective of a net $3.6 million (sic) [ $3.4 million ] inflow of cash following the completion of the POSCO transaction during the year, which we think was -- which was a very important transaction for us to pay down and it allows us to invest in a downstream chemicals facility in the joint venture with POSCO. So the company was required to pay $76 million for its 18% equity interest into that joint venture, but this was actually funded by a $79.5 million convertible volume provided by POSCO. So because of that, we actually had a net inflow of $3.6 million (sic) [ $3.4 million ]. Turning to just some comments on the balance sheet. So Slide 14 of the deck. Clearly, the cash generated by the business has transformed the company's balance sheet, we're in a significantly healthy position than we were 12 months ago. We've invested $146 million back into the business on all the things I just spoke about. It's the waste movement being capitalized, the restart of Ngungaju and the Pilgan Plant improvements. And as a result, we've ended up in a very healthy cash position. If we look at the net cash position, net of debt, we have a balance of $432 million. And when we include the letter of credit, the net cash position is $714 million. So clearly, a very, very significant improvement in our balance sheet. And certainly, that improvement throughout the year has allowed the decisions around expansions to be made, and we have now committed some of that money to the recent announcement on the expansion of the P680 projects at the Pilgan Plant. So the idea is to generate about 100,000 tonnes of spodumene concentrate from the Pilgan Plant. And as we look to the next 6 months, we still see that the pricing environment is strong. So we are generating further positive cash flows and we'll be looking to that as well when we think about decisions around the P1000 project later on in the year. So that's all the commentary I wanted to offer on the financial results, so I might hand back to Dale now.

That's great. Thanks, Brian. Much appreciated. Just to offer some comments on guidance for the year ahead. Slide 16. From a production perspective, we've detailed a range of 540,000 to 580,000 dry metric tonnes. That, of course, is the combination of those of our 2 processing plants essentially running at nameplate so that as it relates to production volumes. From a unit cost perspective, we've given a range of AUD 635 to AUD 700 per dry metric tonne and also just flag that we've highlighted beyond FY '23, we're anticipating to see some cost decreases as a function of strip ratio decreases, nameplate performance and synergies that we're expecting to be are realizing by the time we move beyond FY '23. So moving from guidance, probably the last thing to add there is we have given some detail on capital expenditure as well on Slide 16. Now moving to Slide 18, some general market commentary. What we see is really positive from all the indicators we have access to as a business, starting with our customers strong demand remains a foot from all corners. If we could produce more, they would take more. As it relates to new customers, inquiry continues thick and fast from all corners. And the most vivid example of this, of course, is our Battery Materials Exchange options, which continue to be heavily contested and long may that continue. So from those data points, strong market support. And then beyond that, what we see is new entrants scrambling. Some of the OEMs, who are obviously in the headlines more and more every day scrambling to knit together their supply chain solutions. But of course, as one of the few operating producers in this space, we get contacted a fair bit. And as you'd expect, we have a bit of insight just to the problem they're trying to solve for here, but it's fair to say activity levels have definitely been increasing in that regard. And lastly, in the market piece, of course, is the pricing. What we observed through the reporting agencies is a strong support, we note the chemicals remain buoyant around that $70 per kilogram and above for the lithium chemicals. And we note that a lot of the market commentators are predicting the short-term to midterm outlook to be very favorable, and we tend to agree, I don't see anything to counter that in the near term. So long may that continue. So that completes my commentary on market-related elements. And so lastly, to finish here, what a transformational year for the business. Absolutely brilliant to see the benefits of some strategies, which were really born from the inception of the project in the business, really starting to bear fruit in our strategies, which have been delivered with discipline and of course, timed well. And what I mean by timed well is here we are quickly ramping up the Altura asset into a market, screaming for lithium units with strong pricing, so very well timed and it's a credit to all involved within the business. And to that end, I'd like to acknowledge the team and the contracting partners involved in our business. It has been a tough year. Of course, everyone's continued with COVID. No one's been immune to that, but it's also particularly tough when you're trying to ramp up an operation, recruit people a lot more activities within our business. So we're just delighted to see that ramp-up going well with the Ngungaju assets and you have a big shout out to the operating team and all involved within the business who made these results happen. And also like to acknowledge our shareholders and particularly those ones who have stuck it out -- who stuck with Pilbara wrote the journey, wrote the downturn and here we are on the other side of that for a particular thank you and shout out to you for having the conviction and the wherewithal to sustain that downturn and stay the journey and delighted to see the benefits of that flowing through to the share price appreciation that Pilbara rightly deserves. So lastly, in the thank yous category here to the Board, contracting partners or the shareholders. Thank you so much. It's been a great year. Business is poised like none other to capitalize on this incredible market that we're stepping into. And that's just an absolute delight and long may continue. And with that, I conclude, and I'd like to hand back to Melanie for questions.

[Operator Instructions] Your first question comes from Mitch Ryan with Jefferies.

Can you give us any color on the grade implied in the guidance? Will it be sort of a 5.5 product?

So the grade we're anticipating will be approximately around 5.5. Mitch, we have widened it slightly in a particular through the June quarter, we had an average of approximately 5.4 as a function of ramping up the Ngungaju operation. But the trend we are exploring is to move down that grade curve purely and simply to maximize lithium units from the operation. But I think for now 5.5 is probably a fair number to utilize.

If you did trend down that grade curve, we should expect increased funds?

Correct. Correct. That's the mission maximize yield. And yes, we would expect some tons the actual quantum, it's hard to estimate that it's a function of the mineralogy and where we're at in the mine plan. So it becomes a bit challenging to guide as to what that benefit will be. But the broad principle of dropping down product grade and yielding more product as a function of that holds true.

So if we thought of it on an LCE basis, it's within a range, the LCE range could potentially increase marginally?

Correct.

Okay. Second question, the capitalized waste. You pulled that out inside the guidance. Can you give us any color as to sort of beyond FY '23? Is it very specific to '23 and then it sort of comes back to a much lower number? Or does it sit at that level beyond FY '23?

I might speak to what the mine plan looks like physically and then offer a chance to Brian to comment on the numbers. From a mine plan perspective, the year we're in is a year of developing the pit further. What that looks like is for our Southern pit, we'll be doing more waste movement and locking that up further and we are also looking to open up what we call the Eastern pit as the name sort of alluded to, it's east of where our central pit is located. So we're looking to develop that that's in the year we are in. And then post this year and into the following year, that development, those bonds will taper off, and we will -- we're looking to see a step back strip ratio. Brian, do you have some comments to make on those numbers?

Yes. Look, the -- I would say, yes, the waste mining beyond FY '23 is going to come down. So I think for FY '24, I would expect that the number would be probably 30% to 40% lower than FY '23 based on the current mine plans that we have.

Okay. That's more to step. I'll come back around.

Your next question comes from Hayden Bairstow with Macquarie.

Just a couple for me. Firstly, on capital management, sort of no mention of that. Cash flow is obviously now really strong. Just we're likely to see something at the AGM or something the Board might talk about in terms of whether there'll be a policy implemented on that front? And just secondly then on CapEx, just outside of your Pilgangoora CapEx, just talk about potential spend on Calix or is there risks of a JV for the call into the POSCO JV to fund the rest of that plant as well in the next couple of years?

Sure. Thanks, Hayden. As it relates to capital management, probably unlikely that we'll be guiding at the AGM, but what we have indicated to the market is certainly December or before we will give some insight into capital management. As it relates to CapEx, what we put in the guidance there is what we're expecting. The Calix JV project will address that on its mirrors. But as you're aware, we're already with the $20 million grant funding slated there, we're not expecting necessarily huge contributions, certainly relative to revenues we've got for the business. And then as it relates to POSCO, we're not anticipating any requirements in the near term for that. Brian, do you have anything you want to add?

No, no, look, that's spot on. Certainly, on POSCO, wouldn't expect anything certainly in the next 12 months. And then on -- in the numbers that we've guided to, that includes the studies that we need to continue to undertake on the midstream project. At that point, we'll then obviously work up a fit on a demo plan assuming that is the next step, which we think it will be. And at that point, I think we'd want to guide to the market in terms of what the CapEx might be.

So the rest of the funding on POSCO has been sort of set up already, and that's all done to completion? Or do you think there might be -- if they can't put more debt into it that there'll be another call next year?

Yes. No, at this stage, our expectation is that there won't be another call. So the only thing that might cause it -- to be able to cause it, if there's a big buy- in CapEx. But even with that, the way -- it has been set up by POSCO with the gearing there is they have allowed for additional debt to cover any sort of CapEx increases. So it would have to be quite a bit capital blowout for there to be a further cash flow on us. So our expectation today is that there shouldn't be another equity contribution from us.

Your next question comes from Al Harvey with JPMorgan.

Just a couple for me. I guess you've got the P1000 FID in December this year. I'm just trying to get a sense of how soon after that FID, you could begin construction in the current environment? And if you've had any concerns around that timing since beginning P680?

Yes. Al, on that one, as it relates to construction, the insight we have has been fairly positive as we've engaged with contracting partners around the P680. And the feedback we're getting is -- in both cases, the P680 project and the P1000 as it relates to capital projects, are not actually that book compared to the major iron ore expansions, for example, you typically get in WA. So because of that, we're actually able to access a bigger pool of medium to small comp construction contractors to get supported. So we feel as a function of the size of the project, we're in surely a good position. But that being said, of course, the WA market outright is short on people. That issue is definitely there. Of course, we'll look to mitigate that through early engagement with the market around developing those plans. Time lines for delivery, for us, we worry less about securing construction personnel, and we worry more about procurement of long lease as a function of supply chain disruptions more broadly and globally and mining generally being fairly buoyant. And of course, we'll look to mitigate those through early orders.

Maybe just one more quick one. I guess you mentioned capital returns, probably going to get a sense of that by December. Will that include potential for other growth opportunities like M&A or other things like that? Or is it -- will that only be around dividends and buybacks?

The full picture of options will get considered by the Board, Al, as you'd expect. And yes, we'll give some insight to what that looks like at the end of the year.

Your next question comes from Kate McCutcheon with Citi.

Previously, you've given some longer-term CIF guidance of around USD 340 to USD 375, I think. Do you have a sense for where your longer-term budget costs fit now? I know you said you expected price cost to come down over the next little while, but where those longer-term costs might sit now?

Yes. Great question, Kate. And we watch with interest as we observed various forecasters sort of grappling with this issue as to the long run pricing. And what we've elected to do as a business is we're typically gravitated towards benchmark minerals, outlooks in this space as a guide to what the long-term pricing looks like. But of course, we certainly take a look at all the various commentators analysis in this space and pleased to see the trend is on the up, which we tend to agree with.

Okay. And -- sorry, in terms of CIF costs for Pilgangoora, so I think at some stage, you told the market longer-term costs would be on that USD 350 a tonne. Is that still fair to think about that effort now? Or have they come up?

Sorry, Kate, gravitating to revenue pricing. As it relates to costs, we will look to -- for the long run outlook for costs. We will guide again on that coincidence with the expansions given that there will be a reset of variables at that time. But we haven't booked to restate that long-run cost guidance recently given the moving parts.

Kate, it's Brian. Probably it's a couple of points to look, it's very hard at the moment in the current market to get a firm hand on where costs are not end in the next sort of 12 to 24 months. The couple of moving bits, I think that we can control is around the amount of waste movement. So in FY '23, we are doing a significant amount of waste movement compared to how we see going forward. So expectation is that we would see somewhere in the order of about $100 reduction in cost per tonne for the level of waste movement, they will need to go beyond FY '23. And I think the other area which we're sort of expecting will eventually come down is around ocean freight, but it's just hard to tell. So right at the moment, ocean freight is somewhere between $50 and $65, but if you look back in history, it's sort of been more around about the $20 to $30 mark. So we expect that to come back. So I think those 2 things will change it all compared to what we forecast for FY '23, but it is just hard to see where sort of all the other costs are going to go right at the moment just given the inflationary pressure.

Yes. That's helpful. And then, Dale, I know you are itching for a pricing question. So you haven't given us pricing expectations for the coming quarter. Usually, you do what's driving that? And can you remind me when your BMX auction is scheduled? Some color on what you're hearing about inventories in the market because spodumene prices have come up a bit recently?

Sure. As it relates to the next BMX auction that's likely to be next month. And we'll likely look to run those options probably on a monthly basis for the next while, depending on how we go. As to pricing, as I mentioned earlier, on the market commentary, we're not seeing anything to struck the current levels, and we watch with interest as everyone else does.

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

So I just had a follow-up question on the mine plan and material movement. Just trying to understand what the net number of tonnes you anticipate moving is in FY '23? And what sort of capacity you actually have to move tonnes?

Yes, sure. Thanks, David. So as it relates to capacity, we have been ramping up an owner-operated fleet utilizing SMS and MBS for drilling. And we have the required fleet to execute the mine plan. We have had challenges around at different points in time around manning that fleet and not so much around truck drivers, but at different points of time, key skills around excavators or doser operators of late, which, of course, we're targeting and resolving. But we're not anticipating to have any issues around delivering those mine plan movements.

Okay. So then should we think of FY '23 is representing fully catching up on those waste tonnes? Or is there more maybe come in '24? And then at current prices, margins, is there any sort of thought to sort of extra stripping to P1000 or just to get ahead in the good times?

There's definitely some thoughts about the P1000 stripping readiness, but largely, that's built into the plan, David. So what we have in the mine plan is essentially more movement for this year and stepping down next year. But of course, it's always subject to change and depending as and when we update the block models depending on what maximizes the economic returns there's always potential that we, of course, change that mine plan. But the outlook at this stage is more movement this year and then stepping down a little bit next year.

Okay. And maybe if I can, just a follow-up with 2 plants running, you're guiding to sustaining capital around that sort of $35 million level or just under, there's sort of a lot going on, on site, and you got the inflation impact. So by the time sort of P680 is in and the new circuit to all running, where do you sort of see that sustaining capital hopefully settling out to?

Dave, it's Brian here. I think my expectation is that once we've done P680, it's not going to add a significant amount to sustaining capital has increased a little bit. So I think that level that we've guided to -- for FY '23, you're probably increase it by -- in the order of 10% to capture P680 as well. So that's sort of our expectation.

Your next question comes from David Zhang with China International Capital.