Ramelius Resources Limited (RMS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ramelius Resources Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Zeptner, Managing Director. Please go ahead.

Good morning, everyone. Thank you for taking the time to dial in to our half year results call. As always, joining me this morning is Chief Financial Officer, Tim Manners. Given that today's focus is on the numbers, I'll leave Tim to do most of the talking and to run through the brief presentation that's been released to the ASX. But before handing over, I'll give a quick overview of how we saw the first half and the key issues. As we announced a few weeks ago, production for the 6 months to 31 December came in at 132,605 ounces, down 8% on the previous corresponding period, primarily due to lower head grade at Mt Magnet. Whilst the grade was essentially in line with our internal expectations, we did not have the benefit of the very high-grade material from Shannon and Stellar at Mt Magnet that we had in the 6 months to December 2020. The half year production result has us on track to meet full year guidance of 260,000 to 300,000 ounces at an all-in sustaining cost of between AUD $1,425 and AUD $1,525 an ounce, albeit that we now expect production to come in at the lower end of that range. And we have cautioned that factors such as a worsening labor shortage, if that does happen, could still have an impact. More on that shortly. In most financial measures, the first half performance this financial year did not quite live up to last year, a reflection mainly of lower head grades and a higher cost profile as seen across industry recently. But it was still a very robust, and the business continues to be in very good shape. EBITDA came in at $187.7 million, and net profit after tax was $73.4 million, with these figures favorably affected by the sale of the Kathleen Valley Lithium royalty in August. After accounting for the effects of the sale of the royalty and minor impairments to the exploration portfolio, underlying net profit after tax was $53.5 million. One of the more pleasing aspects of these set of numbers from my perspective was that, even in the face of a number of challenges, the underlying EBITDA margin held up well at 51.4%. Our performance in this area has long been a source of pride for me and the team, and they continue to be a leader compared to our peers on this measure. The successful acquisition of the Rebecca Gold Project through the takeover of Apollo Consolidated was another highlight for the period with the combined script and cash consideration for the company totaling $160 million after allowing for the $33 million in cash that was acquired as part of the transaction. Ramelius ended up paying a net $67 million in cash, combined with $20.4 million paid in dividends and $39.9 million in income tax payments. This saw the company's cash and bullion holdings fall to $164.5 million. On the quarterly call, we discussed the issue of the shortage of truck drivers in Western Australia and how that led to a buildup of the inventories at Tampia and Marda to the point where we finished the half with $147.1 million of gold in stockpiles at various operations. It was pleasing to see WA Premier institute some changes to the rules around quarantine, reducing the time frames for people entering the state, and then make what appears to be a firmer commitment to opening the borders on the 3rd of March. We are optimistic that these steps will go some way to easing the truck driver shortage, and we'll be able to work our way through these stockpiles and release the cash flow associated as the year unfolds. Development at Tampia is now largely complete and the cutback at Penny West to establish a portal position for the Penny North underground is well advanced, meaning the first ore from one of Australia's highest grade gold mines remains on track for early in financial year '23. With that, I'll now pass over to Tim.

Thank you, Mark, and thank you all again for joining us this morning for the presentation of our half year results. I will -- as Mark mentioned, I will be referring to the short presentation that we released this morning, so hopefully, you have that handy. Before I do, I was flipping through what we discussed this time last year, and it's interesting how COVID-19 and consequential impacts to our business were almost hardly mentioned. I guess a lot can happen in a 12-month period. We're all now learning to live and operate with COVID. And if you read our results or indeed those of our peers, the direct and indirect impacts are there to be seen. For Ramelius, one of the main impacts on our business was around logistics, as Mark has mentioned. The ability of our hub-and-spoke model to operate efficiently, as it has been now for a number of years, was put to the test with road haulage constraints, meaning we could not haul high-grade ore for some of our satellite operations at the rates we had planned for. Whilst the impact particularly on gold production is clear, the one saving grace, if you like, is that the majority of the financial impact that this shortfall in haulage has had is largely only an issue of timing. As you will see, we have built up large quantities of run-of-mine ore at a few satellite sites, which has meant, at times, the mills, particularly at Edna May, are to replace high-grade feed with lower grade historical stockpiles. But these high-grade stockpiles clearly haven't gone anywhere, and the inherent cash flow they contain will be converted in due course. Moving to Slide 4. We can see some of the financial highlights as they compare to the prior corresponding period. As Mark noted, with production down around 8% on that of the prior period, our gold sales revenue fell by a similar amount to AUD 310 million. This was seen more so of Mt Magnet due to a lower amount of high-grade feed from Shannon and Stellar, both of which were a key part of the blend last year. So although down on the prior corresponding period, the Mt Magnet performance was down only slightly against our internal expectations. Edna May, on the other hand, showed a decent uplift in gold sales compared to prior year. Contrary to the Magnet story, whilst Edna May beat last year's physical and financial performance, it fell slightly short of internal forecast due largely to the haulage constraints we discussed. And this was discussed in more detail in our December quarterly report. Moving to EBITDA. One of the positive one-offs, as Mark mentioned, during the half year was the gain on the sale of the Kathleen Valley Lithium royalty to Liontown for $30.25 million. This asset had no carrying value, and as such, the full sales value was recognized as a gain in the income statement. Removing this amount and a small exploration impairment, our underlying EBITDA was $159.3 million. Despite this being lower than the prior year, it remains a very solid result. And when looking at the underlying EBITDA margin of 51.4%, we believe this result puts us right up there as one of the leaders in our peer group for that important financial metric. Our statutory profit of $73.4 million was another great result, which confirms our ability to generate some excellent profits year-on-year. In the same vein as last year, our earnings per share for the 6 months was $0.089 per share. Doubling this gives you a notional full year earnings per share of just under $0.18 per share, meaning at present, RMS is trading at less than 8.5x earnings, which when you compare to our peers, is -- well, I'll let you work that out and you can draw your own conclusions. But I will say that my personal view is that the earnings capability of our business is not always appropriately reflected in the market, particularly this morning where the initial market reaction has a few of us scratching heads. When we come to cash flow, I need to remind you of the inventory buildup I spoke of earlier. Movements in ROM stocks are all smooth and normalized when you review metrics like EBITDA and NPAT. Building up a large ROM stockpile will show up in your cash flow statement, which is exactly what it has done for RMS in the last 6 months. Pretax, our operating cash flow was $118.4 million. However, this needs to be looked at in the context of the future cash flows as well with the embedded value of the inventory buildup, which increased by nearly $50 million. This should give you a sense of the impact that this has on the operating cash flow. If all of this has been processed rather than stockpiled, then our operating cash flow clearly would have been a lot higher. Net mine cash flow was just over $40 million during the 6-month period. It too was impacted by the inventory buildup. However, it is fair to say that our investments into our projects remain strong with the Tampia operations shifting from development phase into an operating phase prior to Christmas and the development of Penny, which is progressing very well. Lastly, as Mark touched upon, the movement in our cash and gold balance was impacted by a combination of the final dividend, income tax payments and the cash component of the Apollo takeover. Moving to Slide 5. The waterfall chart reconciles at a basic level what's driven the movement in earnings before interest and tax from $118.3 million in the first half of 2020 to $106.3 million for this corresponding reporting period. Key takeaways from this chart is that we did sell less gold than the prior corresponding period, albeit at a reasonably similar cost. But that was mitigated by an increase in noncore asset sales being the KV royalty of $30 million compared to a smaller number of projects last year, which led to the $24 million increase shown in the chart. Whilst lower grade at Mt Magnet combined with the higher grade from Edna May were the main drivers of the EBIT variance, the underlying cost of the business measured on a per tonne basis did not escape the inflationary pressures the industry is feeling. People, transport and logistics and energy costs in particular were all slightly higher period-on-period. If we move now to Slide 6, you can see how these cost increases have impacted on our all-in sustaining cost. Ramelius has had a track record of keeping its strong hold on these costs. However, with the inflationary pressures now creeping in, coupled with a slight drop in average grade through the mills, our projected all-in sustaining costs for FY '22 is likely to continue the slight rise we saw in FY '21. Whilst the rate of increase in the gold price during FY '20 and '21 outpaced those cost pressures, we are expecting that to cool off a little, and the margin of sales versus all-in sustaining cost is expected to come down to around 38% based on the achievement of midpoint of guidance in both production and costs. Slide 7 provides a little bit more detail on the cash flow of the business. The underlying operating cash flow was $30.7 million taking into account operating capital development and lease costs into the business. Furthermore, the nonoperating cash flows, as we have mentioned, like the Apollo acquisition, led us to a closing cash and gold position of $164.5 million. Moving to Slide 8. This reinforces the strength of the balance sheet and liquidity in the business that exists beyond just the cash and gold position. In total, there is over $319 million in what I've labeled as liquid assets, cash, gold, inventories and financial investments. It serves to highlight the ability of the business to generate short-term and medium-term cash flow both in the ordinary course but also in an environment where we are constrained operationally in any way, be that through COVID-19 or other events that can temporarily impact the ordinary course of operations. Lastly for me, at least moving to Slide 9, which you will be mostly familiar with. As part of the finance and the business development functions we have, we constantly monitor the cash flows for the major business decisions and investments that we have made over the past few years. I'm pleased to be able to add now, to the far right-hand side, the Apollo acquisition to this chart, and we look forward to spending the next 6 or so months drilling the Rebecca project and hopefully announce an RMS resource for this project later in the year. Also encouraging is the continued positive performance of Edna May and Vivien. Both have now broken above the $100 million return mark. For Tampia and Marda, I wanted to also ensure that this chart captured the value of those buildup in the stockpiles that we've spoken about. Notionally, assuming this ore was treated, we can see Marda now showing 171% return on our initial investment and Tampia turning the corner and becoming a contributor to the cash of the business. Lastly but definitely not least is Penny where we expect to commence mining in one of the highest grade mines in Australia early next financial year. Before we move to questions, I will hand you back to Mark for a few words on our latest project acquisition, being Rebecca.

Thanks, Tim. We're obviously delighted to have completed the Apollo transaction in relatively quick time. The Rebecca Gold project is in a fantastic location, 150 kilometers from Kalgoorlie and at the southern end of the prolific Laverton belt. We have acquired over 1 million ounces of near surface resources with quite a high percentage in indicated category. Tellingly, there is plenty of exploration upside with new discoveries such as Cleo to supplement the existing Rebecca, Duchess and Duke deposits, which have growth potential of their own. They're just about to start an extensive infill and extensional drill program, which is designed to keep the drill rig busy for the next 6 to 12 months. With that, Matt, can we please open the line for questions?

[Operator Instructions] Currently, we have no questions sitting in the queue. [Operator Instructions] Your first question comes from Andrew Bowler from Macquarie.

I was just interested in the inventory movements that you reported as part of the result. Just looking through your quarterly report in the sort of first half today. You've got negative $33 million in inventory movements, and you're reporting a fairly higher number than that in your first half cost result. Just wondering what the differences there, please.

Andrew, Tim here. Generally, the -- well, the inventory movements, as you know, comprise bullion, gold in circuit, crushed ore stockpiles, ROM stockpiles and inventory movement in relation to stores on hand. Not all of the numbers you'll see in the quarterly report get captured above the all-in sustaining cost line. Some affect different areas of the balance sheet. It's difficult to reconcile the 2 off the top of my head at least. But I can assure you that both numbers will align. It's just different aspects of what gets buried in that inventory line as to where they appear in both the quarterly and in the financials.

[Operator Instructions] There are no current questions in the queue. [Operator Instructions] Your next question comes from [ Peter Chu ] from [indiscernible].

Question for Tim, please, and it continues on the inventory issue. What sort of tonnage are you holding in the stockpiles, which you've classified as noncurrent, Tim?

Okay. Thanks, [ Peter ] to your question. In essence, what we looked at as part of our audit was the forecast treatment profile of those stockpiles. I'll answer it in reverse in a way in that the material that we have left in current quite simply is the high-grade run-of-mine stocks. So all the material at Marda, all the material at Tampia and some of the material at Mt Magnet is all expected to still be processed within the next 12-month period. What's left and hence reclassified as noncurrent is the low-grade stockpiles at Mt Magnet, which generally comprise Eridanus material. So the bulk of that is low-grade Eridanus material. There's about 1.6 million, 1.7 million tonnes worth in there.

Your next question comes from [ Richard Hart ] from [ Top Wheel ].

Just to let you know, I haven't deserted you. I don't really have much to ask except trucking. You've mentioned trucking. You stressed what a problem it was last conference or teleconference. I'm just wondering, do you see any change in that short time? Or are you still just treading water and seeing how the event shapes? Because that does affect our cash flow quite dramatically, doesn't it?

Yes. We're hopeful, [ Richard ]. Thanks. I was worried you weren't going to ask your question. We're hopeful that the opening of the borders will access more Eastern States drivers. We're led to believe there was a proportion who weren't willing to commit whilst there was any kinds of restrictions and quarantine requirements on the border. We will be bringing people in through March who were previously required to quarantine and they don't, but we hope to build on that from there and to go not only to planned haulage levels but to go beyond. Obviously, we've got considerable stocks, and we've got the ability to do that. I suppose the unknown everybody's going to have to deal with is you might gain some people, but you lose some at the same time once the borders open. And that's a little bit of an uncertainty that we're all going to have to deal with. Hopefully, we get a net benefit.

[Operator Instructions] Currently, there are no questions in the queue. [Operator Instructions] There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you.