Resolute Mining Limited (RSG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Resolute Mining Limited Half Year Financial Results conference call. [Operator Instructions] I would now like to hand the conference over to Mr. John Welborn, Managing Director and CEO. Please go ahead.

Thanks very much, Cameron, and thanks, everyone, for joining us for this half year financial results presentation from Resolute. A reminder to people who've been following Resolute that we've changed to December 31 year-end relatively recently, and we've also changed to reporting in U.S. dollars. And that needs to be considered in the announcements we've put out this morning on the ASX and London Stock Exchange platforms which consists of our half year accounts as well as a summary announcement and the presentation presenting those accounts. We headlined the summary announcement with the fact that the earnings before interest, tax, depreciation and amortization was up 96% to USD 107 million. That was on the back of revenue up 33% to USD 305 million. And those 2 numbers drove a net profit after tax up 32% of USD 36 million. So some strong financial numbers on the back of a turnaround in performance at Syama and continued strong performance from Mako. Another key highlight for the 6-month period was the successful sale of our Ravenswood Gold mine. It participated in gold production for the last time. It's been a great asset for Resolute, and we've sold that asset for up to AUD 300 million as well as completing our finance activities. And to talk through the accounts in more detail. I'm joined on this call by Resolute's Chief Financial Officer, Stuart Gale. And I'll pass it over to Stuart to run through the presentation we published this morning before we both are available for questions and answers. But before I do so, I wanted to add 2 other things that were in this summary announcement. The first one was my congratulations and appreciation to the staff of Resolute in the way that we've handled both this 6-month period and, more recently, the response to challenging circumstances, be those the recent political events in Mali or the global pandemic. And I have said that this particular period will be remembered as a test of our capability and resilience. And the strong financial results we put out today are really on the back of their excellent work. And I particularly wanted to call out in amongst the financial numbers that we published today the key number being a total recordable injury frequency rate, or TRIFR, which fell from the start of the period at 2.09 to 1.07. And in the background of the extra effort requirement and protocols that all of our teams across the company are being required to follow, it's very pleasing to see that we've also been able to improve our safety performance during the same period. Very happy to talk about political events in Mali as part of Q&A, but to cover the more important aspect of today's announcements being our financial results, I'll pass across to Stuart, who will take us through the presentation.

Thanks, John, and good morning, everyone. I'll kick things off by looking at our corporate presentation, which is the glossy presentation published today on Page 3, which just really highlights those operational and physical metrics that ultimately drive the financials. So clearly, looking at that, we produced 218,000 ounces of gold for the first half. At an all-in sustaining cost of $1,020. And from that, we poured 212,000, 213,000 ounces of gold at an average price of -- and received an average price of $1,427. You'll appreciate that we had a number of Aussie dollar hedges that rolled off during this half, and those Aussie dollar hedges were sitting at somewhere around $1,700 to $1,800 per ounce. So it's nice to see the back of those and move into a more U.S. dollar, higher-priced hedging program, which we can talk about a little bit later on. Turning the page, John's mentioned a number of the financial highlights there, but perhaps just to call out our underlying EBITDA of $107 million for the quarter -- sorry, for the half includes the Ravenswood gain. And we flow through -- we flow that through to our net profit after tax, which sat at $36 million. And that was inclusive of Ravenswood also, the D&A refinancing and other tax impacts associated with the Ravenswood sale. I'll come back to the more detailed financial pieces in a second, but also just wanted to highlight that we generated $91 million worth of operating cash flows before any working capital, tax and VAT adjustments. And from that, the ending cash and bullion balance was $87 million with a net debt position of $220-odd million. So I'll just hand back to John for a couple of operational performance comments.

I think the important point about that 218,000 ounces of production is that, obviously, is very much tracking towards our full year guidance of 430,000 ounces of production, which is pleasing. The operational summary, Slide #5, will -- and I mentioned our response to the pandemic. That is ongoing. I am pleased that we're keeping our people safe and keeping our mills running. And that's the order of our priorities. We've also been able to support the governments in which we operate in a comprehensive response, not only among our staff, but in the local communities in which we operate. We're very pleased with the progress on our solar hybrid power station at Syama, a key part of our cost reduction strategy there, and pleased that, that project is on track despite the challenges. We are on track to update the market with the pre-feasibility study. We're working on at Tabakoroni, a future, long-term ore source for the Syama processing complex. And I've also accelerated in recent time our exploration assets both in our own account as well as through some of our subsidiary companies and investments. And those results are important for our near-term oxide production at Syama as well as our growth ambitions. And that balance sheet we mentioned earlier supports that activity. The slide on Slide 6 is really pleasing showing half yearly production over the last 4 halves. And you can see a good progression there from the 130,000 ounces we produced in the second half of 2018 through 176,000, 208,000 to this half's 218,000. And you can also see the progression of the inclusion of the Mako production and the restabilization of Syama production. And those 2 will continue out into the future. To talk about cost on the next slide, I'll pass back to Stuart.

Yes, thanks, John. As we mentioned, all-in sustaining costs for the half of $1,020, which included Ravenswood for that short period of time that we held it through the end of March, we can see the impact of removing Ravenswood from the portfolio there and the sort of highlight on Page 7, when we just look at the production from Syama and Mako on a stand-alone basis, that all-in sustaining cost comes out at $955, which puts us in a good position to deliver our $980 worth of guidance from an all-in sustaining cost perspective. But clearly showing the right direction from a cost perspective as we come out of that second half of 2019, which was clearly impacted by the roaster challenges, which the company had during that period of time. So now if I turn to Page 8, and we look at our profit and loss analysis, what we've done, again, because of the way that we have needed to put our financial statements together, is just put a summary, which actually combines our continuing operations in Syama and Mako together with our discontinued operations, which, for accounting purposes, we have to report on separately when we pull our financials together to give a combined group number, which is where you see that $305 million worth of revenue flow-through. So from that $305 million, we can see we generate an EBITDA of $101 million. We've then taken into account the impact of what we call one-off type costs in COVID -- additional COVID-19-related impacts and some one-off, legal-type fees that bring us to our underlying EBITDA number of $107 million. Depreciation and amortization of $92 million was significantly higher than the first half of 2019, but the increase in D&A really reflects the fact that we now have the Syama underground mine operating in totality. That wasn't the case in 2019. And we obviously acquired Mako, and that came into the portfolio during July of 2019 as well. So both of those assets coming in have the impact of increasing our D&A over this period. And there's a chart, which we have on Slide 12, which just bridges the gap between 2019 first half and the first half of 2020. You'll also note that it's a bit higher than what our second half of 2019 was. And again, that reflects a write-off of some Tabakoroni rehabilitation assets that were put in place late in the piece. The full Mako assets and Syama underground as well operating fully, and, therefore, depreciation flowing through on both of those on a units of production basis. Happy to go into more detail on that as required. Net finance costs, it was obviously a period of significant change in our balance sheet with equity raisings, debt repayment and the new syndicated finance facility that was put in place. As a result of that, we had interest charges, some penalties and some borrowing costs that flowed through. And they're all reflected in that $13 million net financing charge. The other is a gain of $15.5 million. This is where it gets a little bit tricky because that $15.5 million is essentially a noncash adjustments that reflect the net realizable value adjustments to our inventory together with some foreign exchange movements in our intercompany loan accounts, which are denominated in West African CFA, Aussie and U.S. dollars. So there's a bit going on there in that other space, but the reality is that $15 million is all noncash. Taking into account the write-offs of non-repeatable borrowing costs and financing costs. We have another $8.8 million. So if you make an adjustment for that, we end up with an underlying net profit before tax from continuing operations of $25.7 million. The tax expense associated with that, which is essentially the tax on our operations from the oxide business in Mali, $5.9 million, delivers what I'd say is a true reflection of the ongoing position from a net profit perspective of the business at $19.8 million. So that's titled underlying net profit after tax. And then lastly, the last point I'd like to make is that we also had a tax impact of just over $10 million which is the third from last line in that table. That deferred tax is essentially related to our divestment of the Ravenswood asset. Again, not a cash tax. It's a book entry from a tax perspective that flows through there. So that's a one-off thing that sits in the group. The other thing, of course, was the disposal of Ravenswood during the first quarter of the year. We've booked a profit on that disposal of almost $42 million. And thinking about that at a high level, that was calculated based on the AUD 50 million that we received in cash, the $50 million promissory note, which you can see in Aussie dollars that is in our balance sheet. And then we've also valued a portion of the upside payments to the tune of around USD 20 million. So adding those 3 components together, and then taking away the carrying value of the Ravenswood assets, generates a $42 million profit from Ravenswood, which is obviously the discontinued operations piece. So all in all generating $36 million worth of net profit after tax. We've spoken a bit on -- about the next couple of pages, Page 9. And so I'll just turn to Page 10, which is a useful analysis, I think, of our cash flows, and reflects the movement in our cash and bullion balances at the start of the year to our position at the end of the year at $87 million, as I mentioned. I think the important thing to recognize here is that the cash we generated from revenue, less our operating costs, so mining, processing haulage, a bit of admin on-site and in the Perth office, was $91 million. We specifically identified royalties, VAT and taxes as something that -- whilst it forms part of our operating cash flows when you look at our financials, the reality is we ought to be able to get a significant portion of that recovered as we start to resolve our position with the Mali government around the tax matters that have been the subject of discussion at the last couple of quarters. So we're still in a holding position in regards to the finalization of those tax positions, and we're probably expecting to be in that place for a little while yet as the Mali government resolves itself. The other point just to make on this is working capital, $38 million worth of outflow. The vast majority of that $38 million relates to our elevated accounts payable position at 31 December, post the roaster failure. So we were carrying elevated accounts payable. I'd say we're back to a pretty normalized level at the 30th of June from accounts payable perspective. So I'm not expecting any changes to be made in relation to that, and I'm not expecting too much of a working capital move on that front either. There's also a bit of an inventory move and a bit -- sorry, a build in inventory that sits within that working capital. And you'd pick that up just looking at the difference between the gold produced or gold pulled and the gold that we sold. So there's about a 6,000-ounce differential there. Obviously, there was a lot of refinancing activity that occurred during the period. You can see the equity raise, the Mako royalty acquisition, Ravenswood and the repayment of the old debt. We're now in a good position from a debt perspective as we turn to the Page 11. We've just set that out so that you can now see the maturity levels of our debt. The first thing to note there is our Mali overdraft facility of $40-odd million we just rolled out on a regular basis, and that's how we operate in Mali's through an overdraft. And we always hold an overdraft position on that. The blue bars there, if you add them up, add to $150 million. That's our syndicated loan facility, and the $25 million bars represent the amortization that is required on those. So you can see that the first debt maturity as far as that goes sits in September 2021, and then it's 6 monthly after that. And the orange bar there is the revolving credit facility. So we've got an RCF in place for $150 million. We've drawn it to $105 million. So we've got $45 million worth of RCF available to us at the 30th of June. So all in all, we've got a gross debt position of $307 million, less our cash and bullion balance of $87 million, leaves a net debt position of $220 million at the 30th of June. The other point to note, and you'll see it in the balance sheet is that we've also got the gold price promissory note that's being booked. We have the promissory note, which we earned 6% on, AUD 50 million. And we've got liquid assets of USD 35 million and the Mali VAT, which is owed to us at $57 million as well. So there are things that we consider broadly liquid. You can see also on this page our hedging position, and that's set out on a quarter-by-quarter basis, pretty well front-ended on that front and is in line with our hedging policy which requires 30% over the next 18 months' worth of forecast gold production to be hedged. So we are in that place at the moment. So I think with that, that was a quick wrap-up on the financials. John, I'll hand over to you.

Thanks, Stuart. There's obviously -- the back end of this presentation goes through our assets and looks at our outlook, all of which support our achievement of guidance for the full year of 2020 of 430,000 ounces of gold production at USD 980 an ounce. We're looking forward to that and covers off on our sustainability objectives. This is the half year . I will mention that we're intending to publish a full sustainability report along with the 2020 annual report, and that work is underway, and is part of our framework having adopted the World Gold Council's Responsible Gold Mining Principles. But Cameron, I'm interested to see if there's any questions in relation to the financials. So I'll pass back to you.

[Operator Instructions] Your first question comes from Richard Hatch from Berenberg.

Just 2 questions then. First one, Stu, just on the D&A, would you be able to give us a steer on what a sensible kind of go-forward number is for depreciation? Is that kind of $50 million number at Mako sort of fair per annum? And then would you be able to give sort of some form of steer on what the view is on Syama? And then secondly, John, just on Mali, you sort of alluded that you could touch on it a bit more in the Q&A, so perhaps could you just give us a little bit of an update on what's going on, what your discussions have been with government? And then -- and obviously, operations continue as normal, but are you seeing any form of disruption at all to your sort of operations in country?

Yes. Thanks, Rich. From a D&A perspective and our outlook around that, I think that $90 million for this first half, I think you can pretty much roll that into the second half as well. It should be pretty consistent. Our production level should be pretty consistent. So we operate and depreciate on a units of production basis. So our costs now are fixed. All the PPA adjustments around Mako have now been sorted out. So I think we're in a pretty good position to say $90 million half-on-half or, if you want to call it, $180 million for the year, then that's where we're at. And we'll let you know if that changes.

Okay. On the Mali government situation, we've put out 2 announcements. And actually, one of them was referred to as virtuous due to its brevity, I think. So I'm happy to expand a little bit more on what we're seeing on the ground. We see the recent events is actually part of the solution rather than part of the problem. We've been watching for several months, increasing projects in Bamako. And that has accelerated really from the elections of last year with an increasing dissatisfaction from not only the opposition, but broader sections of the Mali political and community sectors. And that has resulted in ultimately the resignation of the president, the dissolution of the government and now the formation of some form of transition government. The specific nature of that transition government is yet to be clarified. And anyone following closely will know that the -- there's currently debate going on as to whether the transitional government will be in power for 9 months, 12 months or 3 years. The international stakeholders seem quite fixed on the idea that 12 months is the right sort of arrangement. And that's what we'd be looking for. In terms of answering your question, we shut our Bamako office last Tuesday, and we reopened it on Wednesday. On Friday, we received a court case outcome that we've been pursuing for some time in relation to a minor civil dispute indicating that the courts are working. And that's consistent with my discussions with investors, where I've pointed out that although this is a significant event, and it's very disappointing particularly to see the significant change in our market capitalization and share price, the reality on the ground is that our operations haven't been affected, although there is uncertainty at the highest levels of government. The fabric of the political system in Mali continues. The processing of importation permits, the processing of royalty payments and supplier lines and the court process and the political structure of the country is actually in place. And that's what we saw in previous, similar events in 2012. So our statements publicly that our operations are unaffected and supported by the fact that fuel suppliers are arriving at Syama. The airport is open. Our supply lines are secure. And the day-to-day operation of our company hasn't changed from 2 weeks ago.

Your next question comes from Hunter Hillcoat from Investec.

You have touched on the questions, but just a couple of extra ones. The payment of the revolving credit facility in March 23 is -- how much flexibility is in that if you should need it? And do you continue to see -- do you expect to see a continuing buildup in your VAT owed given the situation that you've just mentioned in Mali?

I'll jump in and pass to Stuart. On the VAT issue, we have had arrangements in the past of being offset -- being able to offset our VAT against royalties. And that's something that we've been investigating with the government as part of a more comprehensive solution to those taxation issues. Clearly, when you look at our cash flow, you can see that there's a negative impact on our VAT balances. And that's something that we need to address with the Mali government. They're our main partner in country, and it's a priority. And notwithstanding the real proof of the pudding in my comment around the fact that while the person who's actually filling the president's or the prime minister's chair might be uncertain, we believe that it's still possible to advance business in Mali. And that's something that we are looking to resolve before the end of the year. And there may actually be opportunities for us in a refresh of government as much as there are risks. So -- but to add some more color on the RCF, which does have some flexibility and also to talk about VAT, I'll pass it on to Stuart.

Yes, thanks, John. Hunter, yes, just to carry on the VAT piece. And I guess it amplifies John's points around the workings of the government in Mali is that over the last couple of weeks, we've continued dialogue with the counterparties around VAT, around the tax demands and all the rest of it in Mali. So look, we've complied with all of our obligations in relation to that demand that popped up around February this year. So we've responded to them, and we've refuted our position and we think we have a very strong position in relation to all of that, albeit we've raised a provision, which, at the time, was about AUD 58 million. And that still sits in the accounts. So -- but, yes, you are right. We have continued to build our VAT receivable balance up. And our plan as we move forward is we'll always have to pay that VAT. It's the same as the way VAT works in the U.K. or as GST works in Australia. We have to pay it on invoices, and that's what it relates to. But we will -- we plan to use that VAT to offset our royalty payments, other taxes and things like that. So that's how ultimately we will recoup that VAT, and that's exactly what we were doing through towards the end of last year. So that's the plan broadly from a tax perspective and how we will ultimately consume that VAT receivable.

And I think the relevance in the accounts is that our auditor agreed to that position. So that receivable balance that you're referring to is supported -- obviously, our auditor investigates our confidence that we will actually receive that back, and that's something that we're hoping to address before the end of the year. In relation to the syndicated loan facility...

Yes. So the RCF, certainly, we have capacity to extend that. And look, we'd be looking to be extending that RCF well and truly before we ever have to bring it on as a current liability in the balance sheet. So we've got -- that's 12 months before that maturity date. And as you know, and you can see from the slide, we've drawn it to $105 million at the 30th of June. So we've got $45 million worth of capacity that's available to us. And that's had a good interest rate. It's a LIBOR plus a margin. So we actually took advantage of that and used a portion of that, which we noted in subsequent events. We drew down on the RCF and repaid a portion of the Bank of Mali loan. So we still -- and that was in July because the Bank of Mali loan has a significantly higher interest rate. So we continue to work through what the -- ultimately the best structure is from a balance sheet perspective, and we have the flexibility to be able to continue to do that, Hunter. We won't let anything get current, I can promise you that.

[Operator Instructions] Your next question is a follow-up question from Richard Hatch at Berenberg.

Sorry, I'll go again. Two questions just on the quarter-to-date progress, I appreciate you sort of getting our way through Q3. And I just wonder whether you might be able to give us a little bit of an update, firstly, just on recoveries, and just how they're going along versus plan at Syama so far. And then secondly, just I know you kind of -- you like to hedge sort of as the months and the quarters go on as part of the sort of banking and sort of financial policy. So can you just perhaps give us a little bit of a flavor on sort of what hedges have been put in place since the end of June, and kind of what the -- just remind us on the outlook on that.

Well, first of all, congratulations, Hatchie, for going beyond the 2-question limit. So on the hedging front, you're right that we have rolled on hedges for sort of 30,000-ounce positions, which has allowed us to ratchet up with the gold price. That requirement that Stuart refers to under our syndicated loan facility of 30% of 18-months production, we have traditionally met that with forward delivery contracts. And you see that in the presentation of our 4 deliveries that's in the relevant slide. We can also look at other instruments, such as puts, particularly given the running gold prices. So we are adapting our hedging policy in an environment where the current spot price is so far and above our budgeted gold price and the gold price that supports our bank's credit arrangements. So there's a number of aspects to answer your question. One is we're negotiating that hedging obligation with the banks, and it's also dropped away if and when we repay a certain level of debt. And we also don't see the need at current spot prices to have the forward delivery hedging in place that we have had in the past. Given as you saw in Slide 9, the explosion of our EBITDA margin gives us a lot more flexibility to use other instruments. And effectively, you'll see that committed forward hedging that we'll deliver into over the next 3 or 4 months will reduce the level of hedging, and our exposure to spot prices will increase. Sorry, and the first part of your question was in relation to how we're going at Syama. We're looking at it on a daily basis. We're pleased to see that, that 80% recovery that we forecast and delivered in June has formed the new benchmark that we're building off. Increasingly, what you're going to see from us in the second half of the year is the work we're doing to find the right sustainable balance for Syama that allows the asset to produce 40,000 to 45,000 ounces every quarter and allows us to enjoy the structural benefits of the sublevel cave in increasing overdraw and the power costs coming down and all of the outcomes that we forecast in DFS. In relation to recoveries, obviously, there's always a balance with throughput in relation to how the circuit operates at a very high level. Our numbers have always been driven around 2.4 million tonnes per annum at 85% recoveries. That remains our ambition. Pleasingly, during the current quarter, we're seeing the ability to actually push that throughput up. And that's something we're investigating in terms of whether the long-term, most profitable outcome for Syama is actually to push the throughput, potentially the expense of recovery and actually get more gold at a lower cost. That's not to step away from our commitment. We're seeing recoveries plus 80% in the current quarter, Hatchie, and we're confident that they will continue to build during the second half of the year as we've envisaged. But the real progress we are making is efficiencies around seeing the genuine throughput of 200,000 tonnes a month through the circuit and potentially higher.

So very helpful, and congrats and good luck for the rest of the year. Cheers.

That does conclude our question-and-answer session. I'll now hand back to Mr. Welborn for some closing remarks.

Thanks very much, Cameron. Thanks very much for listening. An important half year for us, some good numbers. We are focused on the second half of the year improving in those, particularly in terms of our operating cash flow, improving our margin and sustaining that performance from Syama. I did want to confirm the comments that I started with of commending, congratulating and supporting our teams on site: David Kelly, our Chief Operating Officer; Brett Ascot; and John Wheeler, who support him here in our Perth office; and particularly the general managers of all of our mines, Jon Gaunt at Syama, [ Andreas Hucke ] at Mako and Dean Bertram at Bibiani and all of their teams for the great work they're doing in keeping our people safe and generating the numbers that we've seen today. We look forward to updating you in the future. We've got some exciting things coming in the current quarter with the PFS for Tabakoroni, ongoing exploration across the company as well as a life of mine update for Syama. And we look forward to publishing those as well as our ongoing production. Have a great day for all of you joining us from London. Good luck, and thank you very much.

Ladies and gentlemen, that concludes this evening's teleconference. Thank you for participating. You may now disconnect.