Regis Resources Limited (RRL) Earnings Call Transcript & Summary

Thanks, Rochelle, and thanks, everybody, for joining us this morning on our half year results for the year ended 31 December 2020. I'll just draw your attention to the presentation pack that was issued to the market earlier this morning and we'll be referring to that as we go along. Look, I'll just talk through the highlights and then hand over to Jon, who will spend a bit of time going through some more of the detail around the P&L and the cash flows. All right. Just looking at our highlights. A net profit after tax of $84.8 million. We see a solid year's performance, and a net profit margin of our half year's performance, and a net profit margin of 21% reflects the ongoing strong profitability of our Duketon operations. EBITDA was just under $199 million and with a very solid margin of 50%. The cash and bullion over the half year increased up to $220 million, that was up from $209 million. And that's after payments of $34 million for fully franked cash dividends. Now we did pay a dividend of $41 million but around about $6.5 million was reinvested as shareholders elected to reinvest. So the cash out was only about $34 million in fully franked cash dividends. $40.3 million in income tax, $22.5 million in exploration and feasibility costs, $60.5 million on capitalized mining costs and $20.3 million on other capital, including underground infrastructure, land acquisitions -- and land acquisitions in New South Wales. During the half, we also acquired the valuable resource and tenement package that included the Ben Hur resource. And we also approved the development of the Garden Well underground mine, which will become the second underground operation at the Duketon site, which is only a week or so away from its first cut. We've pinned up and geotech-ed all around the portal and we're not far away from the first cut there, which is very exciting. So it's certainly been a busy and rewarding half year. On the subject of rewarding, in dividend payments, the Board considered the solid financial performance of the business and its capacity to pay a dividend. This including assessing the financial requirements of the business in the event of an approval of McPhillamys and the associated capital expenditure that will be required for the development of this project. Consequently, the Board felt it was still appropriate to pay a dividend, and the decision was made to pay an interim dividend of $0.04 a share, fully franked. This delivered a gross yield for the first half of 1.7% on yesterday's share price, which is a solid yield in the current overall financial environment. And this brings the total dividend payments declared by Regis to over $0.5 billion in cash since 2013, and this doesn't include the franking benefits as well. So what I'd like to do now after touching on those highlights is hand over to Jon, who will walk you through it in a little bit more detail. Thanks, Jon.

Thanks, Jim. If we turn to Slide 4, we see a summary of our financial results for H1, and I note the following: Our output was very slightly down, slightly lower than the corresponding prior period at approximately 173 (sic) [ 173,000 ] ounces. And we previously said that we expect our production to be more strongly weighted towards H2 than H1 and that our production guidance remains on track. We generated revenue of approximately $401 million for the half, which is up about 8% on the corresponding prior year period, and that revenue was generated at an average realized price of approximately $2,317 after allowing for the impact of selling into our hedges, and I'll go into that in a bit more detail in a moment. We had strong gross profit for H1 of $135 million. That's slightly down on the corresponding prior year period result of $144 million, and I'll address the reason behind this shortly. As Jim mentioned, we saw a strong net profit after tax of $84.8 million for the half, down slightly from $93.4 million that we reported in H1 FY '19 (sic) [ H1 FY '20 ]. And there's essentially 3 drivers behind that. So firstly, we've doubled the number of ounces that we're selling to the hedge book from 20,000 ounces in the half year ended 31 December 2019, to 40,000 ounces in the half year ended 31 December '20. For the half year ended 31 December '20, the impact of selling into the hedge book has been approximately 11.5% against revenue based on the average spot price for H1. Secondly, we've seen a significant rise in noncash costs for amortization from $27 million for the 6 months ended December 31 December '19 to $44 million for the 6 months ended 31 December '20. And there's essentially 3 factors that are driving that: firstly, our increased strip ratio in recent years, which has led to an increase in capitalization of deferred waste costs, which have to be amortized; secondly, the commencement of the Rosemont Underground in May 2020. And essentially, what we're now doing is we've now recognized amortization charges for the first full half year period in this current period; and thirdly, we now have 2 new open pits in operation at Petra and Baneygo, which were not in commercial production in the corresponding prior year period. And the preproduction costs associated with those pits now have to be amortized. I'd also note that we have an increase in our depreciation charges of approximately $11.9 million, and this has also been driven by 3 main factors: firstly, assets associated with new pits coming online, particularly Petra and Baneygo, with assets like haul roads and other infrastructure; secondly, we've got assets associated with the Rosemont Underground, such as offices, training rooms, substation and other assets of a similar nature; and thirdly, and in general, the capital-intensive nature over the last couple of years where we've invested significantly in site-based assets. For example, we've put in place a new runway to increase plane sizes and reduce our operating costs, and we've also expanded the village to accommodate underground personnel. If we move now across to Slide 5, what we see is 4 charts covering revenue, EBITDA, net profit after tax and our earnings and dividends per share. I won't make any comments on these charts other than to note that as a general comment, it's pleasing to note that we continue to see strong performance across all of the 4 graphs. I'll move across on to Slide 6 now. And what we've got -- what we see here is a cash flow waterfall, which includes bullion on hand. Looking at the various categories, we can see there's a strong cash flow from operations. I should note that's before income tax and corporate costs, which are shown separately on the waterfall. So we see a strong cash flow from operations of approximately $195 million. We see capitalized mining costs for H1 of approximately $60.5 million, and that primarily relates to capitalized underground mining costs at the Rosemont Underground, pre-strip activity at Baneygo, Dogbolter and Moolart Well, and deferred waste costs primarily at Tooheys Well and Garden Well. So moving on through the cash flow waterfall. We have our exploration costs and our feasibility study costs at McPhillamys, which together total approximately $22.5 million for H1. We see other CapEx costs further into the waterfall of $20 million, and this includes assets such as underground infrastructure, including a substation, pumps and refuse chambers, mill lifters and liners, land acquisition costs in New South Wales of approximately $3.5 million. And the largest component actually of the other assets is the lease payments on the right-of-use assets of approximately $9.1 million. Next in the waterfall, we see other costs of $6.3 million (sic) [ $ 6.4 million ], and that's primarily the cost of running the head office and a few other bits and pieces. So you can see, as you move further into the waterfall again, that pre-dividend payments and income tax payments, our cash balances increased from $209 million at the 1st of July '20, to $295 million at the 31st of December '20. And then subsequent to that, we see our income tax payments of $40 million during H1, as Jim mentioned, and our cash dividend payments of $34.3 million based on the dividend that was paid back in October 2020. It's worth noting, I think, again, as Jim mentioned, that our total dividend payment was circa $41 million back in October, of which $34.3 million was paid in cash and the balance was in shares issued to those shareholders who chose to take part in the company's dividend reinvestment scheme that we launched last year. So after all of those various payments that you see in the cash flow waterfall, we had cash and bullion on hand of $220 million as at 31 December '20 when you value the bullion on hand at spot as at 31 December '20. Moving on to Slide 7, I know that Jim's already spoke dividend so I won't repeat that here other than to note that we will continue to assess and review dividends against factors such as operational requirements, planned capital expenditure and obviously, the gold price. And having said all that, I'll now hand back to Jim for a summary.

Thanks, Jon. Look, I'll just cover off on the guidance for an update on the guidance for the rest of this year. Our gold production, which was guided between 355,000 and 380,000, we're still comfortable with that. As we have mentioned before, the -- we are expecting a stronger second half. Primarily a key driver of that is getting into the main zone of Rosemont Underground, which we are right on the edge of now. We have stopes drilled out and we're quite excited about how the grade control drilling in those stopes are shaping up. So we're looking forward to see that becoming a contributor over the coming weeks. We've been in and run some batches through of the development, and we've been quite happy with what we've seen so far. So we consider the guidance still appropriate. C1 cash costs and also the all-in sustaining costs of the guidance range remains unchanged there. We have made some adjustments in the growth-related expenditure. One, in the growth capital area, we've increased that by $10 million. Now of that, probably about 50% or 60% is coming from the Moolart Well area, where we actually did see a genuine cost increase. The amount of cap rock that we had there was more than initially predicted. And cap rock was hard. It requires drilling and blasting, so we actually incurred some higher costs for doing the work that we had planned. The other adjustments to the growth capital was really a timing change as a result of changing our schedule at Rosemont to go towards the main zone a bit earlier has actually brought forward some of the growth capital. So that's not so much as an increase, it's more of a timing change but it is an increase this year, obviously. And also through earlier -- a couple of months ago, the Board approved the Garden Well underground project, which has resulted in some additional growth capital being included there. So again, not an overrun or an increase on that front. It's more a new project that we've now added in which wasn't there before. Exploration -- on our exploration projection for this year we had initially guided, I think, it was around about $35 million. We've had to drop that back. We have seen -- and it's actually a coincidence that it's the same as McPhillamys, the increase there. Really, the decrease that's been driven in exploration is not through a want of -- wanting to get out and do the work. We actually found that through the COVID restrictions, particularly around the heritage engagement with the traditional owners, those COVID restrictions in the first half of the financial year just slowed us down in being able to get clearances to go and do the work that we wanted to. We've now sort of got over the hump there and that's back working reasonably smoothly now. Of course, the issue that we've got is that -- is getting access to drill rigs or more specifically, getting access to crews to run drill rigs. My -- what we've seen is there's quite a lot of rigs available in WA but COVID travel restrictions have caused a significant shortage of drillers to operate those rigs, certainly, in some sectors. And that has, as a result, we've made a decision to recognize that we won't get everything done that we really wanted to, which is a shame. But we'll still drive hard for that but we think that there just isn't enough time and rigs to get that spend done. So we pulled back on that outlook. At McPhillamys, we have increased the projected growth. The reality is we haven't increased it. What we've done is we've brought forward the expenditure from next year. Specifically, the $7 million is partly to complete and undertake a series of preparation works that we needed for permitting, things like preparing, management, operating protocols. Our -- as part of the IPC process, we understand that they, rather than saying that we've done this work, they like to see that we've commenced it. So we've brought that work forward to get a lot of those protocols underway. And there's another element of that $7 million that's involved in bringing forward the engineering and the detail. The preliminary engineering works and getting our project down to DFS stage by the end of -- we brought it forward. We want that to be ready by the end of June so that in the event that we get IPC approval, we're ready to make the final investment decision. And that required us to bring forward some funding. You may recall, if you look at the previous releases that we put out on growth, that we had -- we initially had about $15 million approved for McPhillamys, but with long lead items and the like, we could have increased that up to $50 million or $60 million as part of the work that we have been doing. We recognize that we don't need to bring forward some of those long lead items so we've been able to leave them in next year, but we have brought forward the engineering works so that we can get a jump on that. So that's really what's driven the growth capital increases. As I said, a lot of it is timing, not -- apart from the impact of the Moolart Well of the higher drill and blast costs for the cap rock, which we've now worked our way through, and we see that dropping back to normal levels. Look, in summary, net profit, $85 million or just under, an interim dividend of $0.04 a share, a solid EBITDA margin of 50%, our cash and bullion up to $220 million from $209 million. And on the growth front, we're very pleased to have been able to approve the development of Garden Well underground. We've increased our tenure and brought on board the Ben Hur resource, which we're now working through to see what we can convert there, both extend and convert to reserves, which is underway at the moment. And of course, the McPhillamys development application is working its way through and is under final assessment by DPIE, Department of Planning, Industry and Environment in New South Wales. So it's been a busy, busy half and certainly, more busyness still to come. All right. So I might pass it back to Rochelle now and open it up for questions. Thanks, Rochelle.

[Operator Instructions] Your first question comes from the line of Daniel Morgan from UBS.

First question relates to the, I guess, the dividend and interrelated is the financing decision for McPhillamys. So just want to know a bit more about why you've cut the dividend, especially given that you did activate the DRP, which will reduce the amount of cash outflow from it. And also in light of, well, if -- I presume you've still got franking credits available. And lastly, you have always the option of if you can't get project financing, and McPhillamys is a fantastic project, you can always come to the market and say, "We've got this great project. Please fund us." Can you just talk through that decision, please?

Yes. Look, these things -- there's multiple moving parts in these conversations and these decisions. We definitely looked at what the outlook is for gold price because, obviously, that has a significant impact on what we believe to be our capacity to generate internal funds. If the gold price lifted back and stayed strong, then I think we'd be able to take perhaps a different view on what we do with dividends. We're looking -- we're certainly also looking to see how we could put our balance sheet to work a little bit harder, and that forms part of that equation as well. We've tried to do what we see ourselves doing is a sort of reasonable balance between holding on some of the cash, continuing to return some in the form of a dividend. It is an interim dividend. It's not final. So that's not to say that it would change and we've got a policy or a view on what that would do. But we haven't cut it back to 0 and we haven't lift it where it's at $0.08. In the end, we just sat down, looked through it at our forecast, at our outlook cash flows, where we saw the cash balance is sitting in for various pricing scenarios and how much we wanted to put our -- how much debt we'd be prepared to take on. As you say, there's also the potential for an equity raising, too. But we just decided in terms of running the business that the thing that we -- the prudent thing for us to do now is to pull back on the dividend a little bit and look to see how the price and the market goes in terms of the gold price and the cash generation from there.

Yes, sure. And somewhat interrelated to, I guess, your expected cash inflows over the next few years. I mean, obviously, you've highlighted the gold price, but another part of that is going to be your CapEx outlook. Just wondering if you could talk through broadly what CapEx looks like at Duketon over the next few years. So sustaining plus growth, what needs to be spent on an annual basis in rough terms or direction terms? I just want to get a handle of the capital intensity of the business.

Yes. We don't give guidance out beyond where we've already done it. But what I can say and we have spoken about, I mean probably the single biggest driver of CapEx certainly at any open-cut mine is what the strip ratio is doing. And as people would have seen and noted that probably over the last 2.5 years, the company has gone from mining less than the average strip ratio to higher than the average life of mine strip ratio. And Jon alluded to that earlier on when he mentioned that the D&A has come up or, specifically, I think the amortization because of the -- of that elevated strip ratio is starting to come through on the cost of goods sold. We've indicated that we expect the strip ratio to stay elevated certainly this year and into part of -- and into next year and then it would drop off. That has an immediate impact on the cash draw and improves our ability to generate cash. Of course, the timing for us is trying to work out specifically around McPhillamys is, well, when do we need to start paying money into the CapEx at McPhillamys? And is it while we're still sort of waiting to trail off on the higher strip ratio? Or will the timing mean that we actually -- the moons align and we start to go into cash harvesting mode more significantly at Duketon. So bottom line is the strip ratio, we do anticipate, will start to drop over the next year or so. And -- but that's notwithstanding the fact that we may bring some other underground operations in, but they don't tend to be quite so capital cash consuming as the higher strip. So the best guidance I can give you for now is just indicating that over the coming year or so, we'll see the strip ratio starting to drop, and that will reduce significantly our capital.

And last question, just the McPhillamys project. I mean, you mentioned that the recent fall in the Australian dollar gold price has given you a little bit of pause on the dividend front. Just wondering if that poses issues regarding project approval at all? Like, is there an issue with the gold price coming down where you might go, "Well, the economics of this project now look challenged or not." Can you talk to that issue?

Well, if the gold price falls far enough, I get it, every gold project will probably stop, but where it is at the moment is still -- I guess, there's still a very robust project. The -- at a high level, the life of mine average all-in sustaining cost for that project is a bit over $1,100 an ounce or thereabout. So it's still pretty robust. Would we prefer to be approving it in a price environment of $2,200 an ounce versus $1,900? Of course, we would. But we certainly, where it is now and where it's -- if it slips a little bit further, it's still a robust project.

Next question comes from the line of Nick Herbert from Crédit Suisse.

A couple from me, please. Just firstly in McPhillamys, bringing forward the CapEx, just wondering if anything has changed in your dialogue with the government agencies that gives you greater confidence that that permit will be forthcoming relative to sort of the comments that you've given recently in the December quarter. And whether they've come back with any additional questions or suggestions that there's sort of more progress of that approval process?

Look, I think it's safe to say there's always questions and referrals and discussions and proposals and then more discussions. And as we -- what we're doing at the moment is we're working our way through with DPIE to answer the last -- to finalize and resolve the last of the outstanding questions and plans. I don't think there's anything that's changed in our view. It's taking -- these things just take time to work their way through. The really, the decision to bring forward that spend was, we -- originally, we had that and quite a bit more in our budget for this year, and then we made the decision to just carve that back a bit to wait until we got a little bit more confident in the process. We probably are. Just the fact that it's continuing to move and we haven't received a letter that says it's a flat no or anything like that, which we don't expect to. But what we've decided to do is rather than for a fairly modest amount of increase in spend this year. And as I said, some of that is, in part, getting ourselves ready for the IPC review in the event that we -- when we get there. And we realized that we could bring some spend forward to make that a more constructive and present a better and clearer picture as to how we propose to operate. So that's part of what we've done. And the other part is, let's get our -- let's make sure that we've got ourselves to a more knowledgeable position and just close out the DFS. So that's -- the plan is that that's done and dusted and ready by the end of this financial year. And hopefully, we get to use it straight away. And that's -- we just want to make sure we're ready. We don't -- we're trying to avoid -- trying to get that balance between spending too much money upfront and then having to wait versus minimizing how much we spend now and then find ourselves flat-footed and not ready in the event that we get the approval.

Okay. And then, Jon, maybe just one for you on the D&A. The explanation was helpful on that. And just thinking about the go-forward rate, is that sort of the best basis that we have at the moment for a similar D&A number next half?

Yes, it's a good question. Yes, look, I think the answer to that is yes. I wouldn't necessarily be anticipating too much adjustment in the second half. I'd expect to continue at current rates.