Ramelius Resources Limited (RMS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ramelius Resource Half-Year FY '23 Financial Results Teleconference. [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. Joining me, as usual, this morning is Chief Financial Officer, Tim Manners. Given that today's focus is on the financial accounts, I'll leave Tim to do most of the talking, especially around the presentation that has been released to the ASX this morning before opening the line up to questions as always. But before handing over, I'll give an overview on how we saw the first half and some of the key issues. By way of an overall assessment, this is a very competitive set of underlying results. The company continues to be in a strong financial position despite the inflationary pressures seen throughout the industry and a drop in first half gold production. As we announced a few weeks ago, production for the 6 months to December 31 came in at 118,000 ounces, down 11% on the previous corresponding period, with reduced contributions from both Mt Magnet and Edna May. At Mt Magnet, we saw a lower head grade across the period as the high-grade Shannon underground is largely completed and replaced with lower-grade feed from the Hill 60 underground mine. The grade profile at Mt Magnet will improve this half with the introduction of more feed from Penny, which is one of the highest-grade gold mines in Australia as has been well telegraphed to the market. At Edna May, production was down mainly due to lower throughput as we work through the historic low-grade stockpiles close to the point of depletion. The lower throughput was offset somewhat by higher-grade material trucking from the Tampia and Marda satellite operations. Based on the half-year production result and the expectation of an improving production profile in the second half as Penny ramps up and haulage rates increase, we remain confident of meeting full year guidance of 240,000 to 280,000 ounces at an all-in sustaining cost of between $1,750 and $1,950 an ounce. If listeners now turn to Slide 3 of the presentation where we see our portfolio of projects across WA that give us a certain amount of production flexibility, especially in times such as COVID. The first half would be best characterized as a period of investment into this portfolio, with almost 100 million tonnes into capital development and exploration over the 6 months. The primary development focus was obviously Penny, with the Galaxy underground at Mt Magnet and the Die Hardy open pit at Marda were other projects that were funded during this period. Exploration expenditure has been maintained slightly above the annual run rate and mainly incurred at Rebecca and Mt Magnet projects such as Bartus. Seemingly, like a lot of our peers, we are very much second half weighted in terms of higher production, lower costs and therefore, higher free cash flow. We recently demonstrated with the deferral of Edna May Stage 3 in January that we remain very disciplined in our approach to delivering returns to shareholders. There is a threshold that must be met, and if it is not, we simple won't go through the investment. This applies equally to organic growth projects, such as Edna May Stage 3 and strategic acquisitions. And I think our track record today on this is doing pretty good. With that, I'll pass the call over to Tim.

Thank you, Mark, and thank you all again for joining us this morning for the presentation of Ramelius' half-year results ending 31 December 2022. As Mark mentioned, we're referring to the short presentation that we released this morning, so hopefully, you have that handy as we will be making some references to it. As Mike mentioned, whilst a challenging period in many respects, Ramelius stuck firm to its business model and its core competencies to deliver a very respectable result for the 6 months to December 2022. Cost pressures are there for all to see now. There is a lot of debate as to whether these costs have peaked, although there is more to come. I guess only time will tell, but I personally believe that there can be some quite lengthy time lags and cost increases becoming visible. And whilst the hope we are near the peak, I don't think we will get through the other side of this just yet. As such, ensuring our business remains resilient by cost reduction programs and high-grade ore sources, I think, will prove a differentiator in the next 12 to 24 months. The other impact, whilst improving slowly has been seen in slight reductions in operating productivities and efficiencies that are still present due to the higher turnover levels than we have seen for some time, plus the absenteeism we still see as a consequence of precautions taken around COVID cases across the operations. So moving firstly to Slide 4, we can see some of the production highlights as they compare to the prior corresponding period. Whilst ore mined was largely comparable to the prior corresponding period, the completion of the Greenfinch pit at Edna May and the shift to developing Die Hardy at Marda were the 2 biggest factors behind the small variants. All tonnes on hand, though, is one thing we are not short of at Ramelius as I will come to. Probably the single biggest impact on the fiscal results this period was, as Mark mentioned, the reduction in contribution of high-grade ore from Shannon and, to a lesser extent, Vivien, that both feed Mt Magnet. We've spoken at length about the significant contributions that both these mines have generated to Ramelius' bottom line. So when that contributions reduce, as they have done, and are not fully replaced, it becomes noticeable as it has done in these last 6 months. We have, those most will know, more than acceptable replacement coming in the high-grade Penny underground. Ideally, this ore would have slotted in nicely as Shannon and Vivien wound down, but sometimes these events don't quite line up. And due to some slight delays at Penny that we flagged in the quarterly report, we won't see this material hit the mill with force until late quarter 3, mainly quarter 4 and beyond. For the short-term reduction in high-grade material feeding Mt Magnet, coupled with the exhaustion of low-grade stocks at Edna May, saw our gold production for the half fall 11% to 180,000 ounces. Coupled with the cost pressures noted previously, our all-in sustaining costs increased to $2,044 per ounce for the 6 months. There was, however, a 7% increase in gold price seen in the first half, which helped reduce the impact of falling ounces, leaving our revenue only 2% down to $304.8 million, as shown now on Slide 5. From an earnings perspective, I will talk to underlying figures due mainly for us at least to the pretax $30 million gain we recognized in the prior corresponding period as a result of the sale of the Kathleen Valley Lithium royalty. So underlying EBITDA of $106.3 million gave us a margin of 35%, which remains very competitive amongst our peer group, indeed, some of our larger peers also. The underlying NPAT of $32.7 million was again an excellent number, particularly when benchmarked across our sector. Pretax cash from operating activities was over $108 million, which was invested on key projects in the group, particularly those feeding our flagship operation at Mt Magnet. The Penny and Galaxy underground through the large portion of the $84 million invested in project development, along with projects like Orion at Magnet and Die Hardy at Marda. We finished the year with $154 million in cash and gold, which I will talk to shortly. Moving to Slide 6. We've provided a simple reconciliation between the underlying EBIT figures for the last 6 months and the prior corresponding period. I think the chart clearly shows that whilst we benefited from a higher gold price, the underlying results were impacted equally between higher costs and lower production levels. Of note, though, approximately $8 million of the higher costs relate to a net noncash NRV provision being made against our ROM stock position, most notably the low-grade portion of the Eridanus stockpile at Mt Magnet, which has largely been allocated now as a noncurrent asset, which requires you to assess its net realizable value using more conservative financial assumptions. Moving to Slide 7. We look at cash flow from 1 July to 31 December 2022. As Mike mentioned, this was a period of investment for Ramelius. Operations generated over $108 million, which after leases and some minor other items reduced to $91.7 million, as shown in this waterfall chart. Note also is that this is approximately after $15 million spent on building ROM stocks at Tampia, Marda and Eridanus. We expect a substantial inherent cash within these large stockpiles to be realized over the next 12 to 36 months. The adjacent bars show this net inflow was invested back into the business, as we've said, whilst sustaining and growth capital of $48.9 million and $38.9 million, respectively. Exploration totaled $13.5 million. Working capital was approximately $3.9 million for the 6 months, leading to an underlying cash outflow for the period of $13.5 million. Favorable movements in asset sales, a tax refund plus the cash component of our FY '20 dividend of $7.2 million gave us a closing cash of $138.5 million. Coupled with bullion on hand, our cash and gold was $154 million at the end of the period. Whilst on the topic of investing in projects, it's thought important to remind everyone that we believe Ramelius has a potential differentiator coming in the case of the high-grade Penny underground. Slide 8 has been released before as it comes from the 3-year outlook we released to the ASX back in November last year. Simple aim of this chart is to provide the extract from the Ramelius mine plan for the next 2 to 3 years. As it shows, production remains consistently between 240,000 and 300,000 ounces, but importantly, the potential impact that Penny will have on the group's physicals, costs, margins and financial results is clear and cannot be understated. At this point, it's worth noting that the cost models behind the data are current. Indeed, it also allows for an element of ongoing wage increases year-on-year. So it's not based on outdated cost information, and we believe it's a realistic forecast of unit costs at this point in time. Lastly, for this slide, it was prepared on the basis that Edna May Stage 3 will be deferred. This has now been confirmed. So the recent release regarding this project has no impact on the 3-year outlook. Moving to Slide 9. This takes this projection a little further. Noting there's no new information in this slide, just presented in a way that demonstrates the turnaround in margins we are expecting in the next few years on the basis, broadly, that the spot gold price holds and that we deliver into our hedge book as it matures and the all-in sustaining cost profile shown on the prior slide should deliver some of the highest all-in sustaining cost margins Ramelius has ever produced. As I mentioned at the outset, companies with a robust forward-looking cost profile and a strong resilient balance sheet will be best placed to ride out this period of inflation we are in right now, and we feel we have that in our portfolio. Moving to Slide 10, my penultimate slide. this Just provides some backup data to support the strength of the RMS balance sheet. We believe we have a number of quality assets in our portfolio, but as CFO, I view our balance sheet as one of the most important of them all. Highlights here, I think, are pretty clear. We've mentioned the $154 million in cash and gold, which we expect to see increase as the second half unfolds, ideally ending somewhere closer to $200 million by 30 June. We have $100 million in available yet undrawn debt. We have 145,000 ounces of contained gold in stocks and in circuits. Our inventories in total are carried at $193 million, but have a net realizable value and cash well in excess of this amount, particularly at current gold prices. We also have a hedge book that sits at 202,000 ounces, which is approximately 25% of the next 3 years' production at an average price of AUD 2,606 per ounce, and this is designed to ensure that we can operate with a high degree of confidence around achievable prices and, ultimately, margins. But importantly, now we have also made minor inroads into securing a ceiling price on a small portion of our diesel usage. Our present quantities are small, but we will update the market if this should change materially. Moving to Slide 11, my final one. It's our usual reflection on the cash returns we've accumulated on all our external acquisitions made over the past years. As flagged in our last quarterly, the Vivien underground is now on care and maintenance, having bolted its last ore in January. It was acquired for just $10 million in 2014 and has generated over $130 million in free cash, its presentational asset for RMS generating over 13x the investment over 8 years of life. Edna May has also been an excellent acquisition, now having generated over $140 million in cash flow compared to the $51 million outlay in the initial cost and the subsequent deferred payments. With Marda and Tampia complementing this acquisition, this trio of assets will, no doubt, generate another very healthy return for RMS. Next is Penny, which we've spoken about already, and this asset will no doubt prove to be a superb investment. And lastly, Rebecca, which is still in its early stages, is one project where we are building an inventory profile which will inform a PFS completion later this year. So before we move to questions, I will hand you back to Mark for some final words.

Thanks, Tim. So to summarize, on Slide 12, while we believe we are so well positioned not only for the second half, but also beyond that, we have been able to retain large parts of the management team that's performed very well for the company over a number of years. We do have, as Tim pointed out, a strong balance sheet and a disciplined approach to any investment decisions and remain ready to act to doable acquisitions that are also accretive. We continue to support both brownfields and greenfields exploration and believe we'll continue to add resources, especially at Mt Magnet and Rebecca, noting that we will recommence explosion at Penny in the June quarter. And lastly, keep an eye out for progress on the production ramp up of both Penny and Galaxy as well as our study update as a technical team continues to deliver in a timely fashion. With that, Lucy, if we can please open the line for questions.

[Operator Instructions] Your first question comes from Andrew Bowler from Macquarie.

Just a couple for me. Firstly, just talking about Vivien care and maintenance, you guys seeing a divestment opportunity there, just happy to have in the portfolio and keeping around the exploration in the meantime.

Andrew, thanks for the question. It's Mark. We'll look at that as an option. Definitely, we think we've depleted the current economic resources, but there will still be some remaining resources on the package. We will look at that option over the next 6 months in terms of the divestment option for us.

And just obviously, you gave us a pretty detailed update, Penny in the quarter. Just wondering for a little bit more color around that, how's the haul load upgrade going. And I think Tim mentioned in his presentation that you're expecting some more tonnage towards the back end of the quarter, but more in the fourth quarter. Is that sort of tracking a little bit ahead or behind the update you got in the quarter?

I think it's pretty much on par with what we've said in the quarterly. We will have the upgrade completed end of Feb. We're currently hauling with double road trains. So there's a likelihood we can get the triple road trains started late this quarter, as Tim's flagged, which gives us a little bit of slack in terms of permitting and main roads approvals in Shire, just signing of agreements and final stance. And obviously, we're going through a tender process as well with haulage contractors. So like to get started in March with some triple road trains, but we'll be going in quarter 4 at the very latest, I believe.

And last one for me, probably more of a Tim question. Just about D&A. Are you expecting D&A to step up in the second half as Penny starts to ramp up? Or -- and sort of how you think about that over the next couple of years with Penny?

Andrew, yes, it's a fair question. We obviously have, at some point, amortize Penny, not just the capital development costs, but obviously, the acquisition costs. So they will start to flow through, obviously, once Penny starts to produce in volume. I think across the rest of the business, it's probably going to come off a bit. Obviously, Vivien's done, and Edna will be pretty minimal. But no, the Penny D&A will kick in, which will affect, obviously, the bottom line earnings, but obviously, no impact on cash flow, which is really what we're focused on from Penny.

And Andrew, sorry, just to add in terms of Penny mining, while we're on the subject, we are in the process of commencing the first stope on the third-level open pit. So it's pretty exciting time to the mine. We've got largely the Vivien management team in place down there and everything is to start stoping, so still staying ahead of Penny.

Your next question comes from Alex Barkley from RBC.

Mark and Tim, only extra question I had was around the tax refund. What sort of are you expecting around cash tax going forward in the next few half?

I think in the -- well, firstly, the tax refund, as you know, you pay in installments. Those installments are really done on a -- if you like, an estimate on where you think you'll end up. We were, as we tend to be, slightly conservative on our assumptions, so we paid a little bit more than we probably needed to so we got a refund back. That's really what reflects in the accounts. Short term, we're not expecting to pay cash tax. I'd imagine that will start to flow when Penny really starts to kick in, in the next sort of 12, 24 months. But short term, we're not expecting any material tax balance.

Is that just around the taxable income you're expecting?

Yes. We get to write off a lot of these acquisition costs, et cetera, and they all start coming through the deduction for tax as well as just for accounting.

Your next question comes from Andrew Hines from Shaw and Partners.

Mark, I'm just interested in your observations around the M&A activity in the gold circuit at the moment. And obviously, you're still out there looking and ambitions to add another 100,000 ounce per annum hub to the portfolio. Obviously, Newmont coming into a Newcrest. We've got [indiscernible] doing around Genesis and around Leonora, just your observations about the environment we're in right now, how easy it is to find assets, and what sort of expectations are you seeing from vendors at the moment.

Thanks, Andrew. I think I can make a couple of comments and then hand over to Tim to add here. Look, I think valuations and prices have come down. Obviously, the gold market has had a bit of a rough time over the last 12 months, so it's made valuations a little more realistic. But as we've been talking about this for probably 12 months, and we haven't been able to achieve our desired outcome in this area. So it hasn't made it any easier necessarily because we've got to tick all the boxes, and we've got to get that return. So for us, it's really about meeting our criteria. We haven't been able to do, but we're still in there looking, and we still think we can achieve what we set out to do.

Yes, Andrew, Tim here. I echo Mark's thoughts, there's still opportunities there. It is a bit tougher, although valuations, as Mark said, has come down a bit. But there's a few companies out there that are in a little bit of financial distress. I think the way we look at it is we're a little bit spoiled in that regard and that we are financially pretty strong, and we have the ability to not so much be selective. We still know what we want to achieve, but what we don't want to do is to destroy our balance sheet by taking on something that's a loss-making company or a cash burning company. So there are certain things that we are on the lookout for, and we need to be wary of through due diligence-type processes. So we're still confident we'll find what we're looking for, and we've got the team working hard on all fronts.

[Operator Instructions] Your next question comes from [ Richard RK Hart ] from [ Topwell ].

Thanks for your time and your presentation. And thanks for the optimism for the next 4 months to say quite excited. Quite a difference for the last 6 months. My question was actually [indiscernible] being where you talk about Rebecca fourth part -- fourth half. I was also going to ask about any parameters on the third that you can share that I suspect -- I'm quite happy you don't forget. It's hard to get it bagged and as the world knows, if you make any comments to that, I'd appreciate it. And if you don't, just thanks for your time.

Richard, it's Tim here. Look, our criteria, I suppose, for the third half remains pretty consistent. That is sort of the circa 100,000 ounce level, something that is close to or in production. So those factors haven't changed. We're still looking for something with the potential to have a 10-year mine life. There's not a huge list. But the list that is there, we are certainly working our way through. And as I mentioned before, the thing is across, we can find a way to a potential opportunity and a consummated deal at some point in time. But it is still a little bit challenging, but we're certainly putting all our efforts towards it.

Thanks that you do, and I will watch with bated breath. Good luck.

Thanks for you, Richard.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thanks, everyone.