Sandfire Resources Limited (SFR.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sandfire Resources June 2025 quarterly report. [Operator Instructions] I would now like to hand the conference over to Mr. Brendan Harris, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone, and welcome to our June quarterly call where we provide a preliminary summary of performance for FY '25 in advance of our full year results on 28 August. Our executive team is here with me today for the Q&A, which we'll get to in good time, recognizing we have another call in a few weeks. But before we start, I'd like to acknowledge the traditional custodians of the land on which we stand, the Whadjuk people of the Noongar Nation, as well as the First Nations peoples of the lands on which Sandfire conducts its business. We pay our respects to their elders and leaders past, present and emerging. And can I say it was good to visit Meekatharra again last week to meet with the Yugunga-Nya. The importance of these meetings should not be underestimated as authenticity and consistency is important as we strive to rebuild our relationship and deliver on the commitments we've made to them. To safety, our Group TRIF was 1.7 at the end of the June quarter, a modest but disappointing increase from last year. While our injury frequency remains well below industry benchmarks, we must believe it's possible to have a workplace that is injury free. And that's why we're working hard to raise awareness of the need to report and learn from high potential incidents, which is very much aligned with our efforts to create an inclusive culture that values diversity where everyone feels safe to speak up and empowered to stop work when something doesn't look or feel right. The safety of our people must always come before production. So stepping back and reflecting on the year more broadly, I am particularly proud of our team for the way they've navigated a number of significant challenges beyond their control, including record rainfall and a major power outage in Spain and a generational rain event in Botswana, to still deliver 152,400 tonnes of copper equivalent production, which ended the year only 1% below full year guidance. That, I remind you, was established in June of last year -- June and July. What a truly fantastic result all things considered. At MATSA, copper equipment production of 25,100 tonnes, signified the strongest quarter for the year, bringing total copper equivalent production to 94,100 tonnes across FY '25. Once more, we anticipate another robust year at MATSA in FY '26, and expect to achieve copper equivalent production of approximately 96,000 tonnes for a 2% increase year-on-year. Motheo continues to let its results do the talking, achieving record quarterly copper equivalent production of 16,400 tonnes in Q4, for total copper equivalent production of 58,300 tonnes across FY '25, and year-on-year growth of 29%. This in turn underpinned a 30% increase in sales in Q4 as 5 cargoes departed Walvis Bay during the period. Having just visited the operation and reviewed our flood recovery program, I can again confirm that we're well placed to deliver circa 3% growth rate in copper equivalent production at Motheo in FY '26. And before I move on, I should note that we are moving with the times and have provided production guidance ranges for FY '26, having listened to external feedback and assessed evolving industry practice. But please don't worry. We'll continue to provide single point estimates for our broader operating parameters at the back of our quarterly report as a guideline to help you build your own projections from first principles. As you'd expect, we continue to focus on the things we can control and have enjoyed lower rates of inflation over the last 2 years when compared with much of the industry. Consider, our preliminary estimates for unit costs at MATSA and Motheo of $78 per tonne and $40 per tonne, respectively, across FY '25, still compare well with guidance we provided as far back as August 2023, of $78 and $41 per tonne. As forewarned, however, strength in the euro to U.S. dollar exchange rate has started to bite at MATSA. And while unit costs, and this is important, are expected to remain well controlled in local currency terms in FY '26, sustained strength in the exchange rate would create further upward pressure, recognizing around 90% of MATSA's costs are euro denominated. Similarly, at Motheo, our flood recovery program included an increase in low-grade material feed in Q4, and a release of working capital, which contributed to a $1 per tonne increase in unit costs across the year relative to revised guidance. Our preliminary analysis indicates that unit costs are likely to increase by further 10% at Motheo in FY '26 as the A4 open pit achieves commercial production and a higher proportion of total material movement is expense. Importantly, with limited cash impact and an increasing contribution of A4 material carries additional haulage and handling costs. As a reminder, we will provide our full suite of guidance metrics when we report our full year results. Turning to Black Butte. You will have seen that Sandfire America recently completed its 2024-25 exploration program, where 27.8 kilometers of diamond drilling was undertaken across 76 holes. The successful program has confirmed the extension of high-grade mineralization in the Johnny Lee lower copper zone, which is, after all, the juice that drives the project's economics. Sandfire America is expected to complete a new prefeasibility study for the Black Butte project, including a revised mineral resource and reserve estimate in the December quarter, which will position us to more clearly define the optimal pathway to realize value from the project. Before closing, I should also note that we have transferred accountability for all near mine and regional exploration to Jason, so we can better leverage our strategically valuable operating presence in both the Iberian Pyrite and Kalahari Copper Belts as we seek to bring greater urgency and build momentum in this critically important area. With this change in accountability, Richard Holmes has departed the organization. And we want to thank him for establishing the foundations of our exploration program. So bringing this all together, I hope it's clear to see that we remain focused on the basics and continue to do what we say, while building resilience in our operations and generating plenty of cash. Our strong finish to the year and strong market fundamentals delivered unaudited group sales revenue of $1.2 billion in FY '25, underlying EBITDA of $528 million, and a stunning $273 million reduction in net debt across the year, including $120 million in Q4 alone. While we face some real challenges, this year, our talented team, high-quality operations, preferred commodity exposure and increasingly strong balance sheet leave us well placed to deliver our simple, effective and proven strategy. With that, let's go to questions.

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

My first question just relates to the working capital release in half 2 FY '25, primarily at Motheo where you're treating some of those stockpiles. Just can you quantify the impact of this on the cash flows in the half and then also potentially provide some color on how we should think about that going into FY '26?

Good one, Mitch, and thank you. So a couple of things I'll note, and I'm going to pass over to Megan. Obviously, our cash flow was very strong, and I think it's good for Megan to run through that. We sold the Old Highway project, obviously, in the period, which was additive to cash flow, but it was a very strong period. We had to perform very well in the fourth quarter. I recall on this conference call circa 3 months ago, there were a number of suggestions that potentially, it was aggressive to retain our guidance. And we felt it was achievable, and we're really proud to have got as close as we had. But of course, with strong production and then obviously sales, we've also managed to sell significant tonnages into what have remained very, very good markets and good pricing. Obviously, that has helped cash flow. The 1 thing I'd stress as well, though, is -- just to remember that it doesn't all go 1 way. So when you look at our fourth quarter, particularly at Motheo, with the flood recovery program, the increase in our coarse ore stockpile for future contingency, and obviously, the release of the low-grade stockpiles, that actually has contributed most significantly to the increase in costs in the quarter and why our costs were $1 a tonne on average across the full year for guidance. So it's important to also understand how that's playing to the cost side of the equation. But maybe, Megan, if you can just run through how you think about the cash waterfall and particularly the strength into Q4 and how that is likely to play out through the early part of this current financial year.

Thanks, Brendan. Thanks, Mitch. And building upon what Brendan touched on with the cash generation across the business in Q4, it was a very strong quarter. Net debt reduced by $120 million. We did have a strong production and sales quarter at Motheo. So there was an additional shipment and we completed 5 in the quarter, so some 30% up on previous quarters. And at the same time, MATSA performed very strongly on both the production and the sales front. And so you very much see that in the cash flows. In addition to those operating impacts, there were some, what I would describe more in the one-off category. Brendan touched on the 20 million unit sales proceeds from Old Highway, which we banked in the quarter. In addition to that, off the back of settling treatment and refining charge terms for calendar year 2025, which you'd recall we did that across Q3, so it was reflected in our profit and loss in Q3, and it was reflected in our revised C1 guidance in Q3. We then subsequently finalized the outstanding invoices from the March quarter as well as upgraded treatment and refining charges. So we would have seen about, let's call it, $15 million to $20 million of cash flow coming through in the quarter that was associated with that. So that all comes together with that $120 million reduction that you're seeing in the net debt number.

Maybe if I can just mention and obviously, I mentioned Motheo, circa 3 weeks ago, and they will blend into one. One thing I can tell you is when I went to the concentrate shed, it was swept clean. So as you'd expect at the end of the year, we look to move every piece of material, every ounce almost of concentrate that we can. Now in saying that, Mitch, it is important to note, that doesn't mean it's all sold because we had effectively a fully assembled cargo of concentrates sitting at the port. That was actually sold subsequently, and we received cash very early in the first weeks of July. So again, yes, cash flow is very, very strong, but it's continued nicely into the start of this year.

And my second question relates -- there was a $5 million legal settlement in Motheo during the quarter. Can you provide some color on what that relates to?

Look, I'll pass over to Megan again, but just to be aware, that was disclosed in the first half accounts. So as an adjustment related to land purchases and other matters around and a structure, if you like, of a land purchase around the Motheo mine site. As you know, we like to own the land that we operate on where we can because it gives us much greater control, and it works better in this case for the farmers as well. But Megan, anything to add on that?

Yes, just to close it out, it did occur in half 1, Mitch, you would have seen it coming through as an adjustment to our underlying earnings in the first half. And Brendan's correctly described that it's associated with our land acquisition purchases.

Your next question comes from Rahul Anand from Morgan Stanley.

My first question was around grades at MATSA. So I just wanted to basically visit the zinc grades that you've had this quarter. Obviously, they've helped in terms of your cost performance. Just wanted to get a gauge on what you're thinking about those grades to look like in terms of perhaps next year and medium term? I'll come back with the second.

Great. Look, I know Jason look forward to this question every quarterly and particularly at this time of the year as you look across the next full year, and I know he's done a whole lot of work, so he can help you understand the sort of trajectory of grades, copper equivalent production across the year, sort of first half, second half split and a little bit of a sense of how that's likely to play out in the near term. Jason?

Thanks, Rahul. If you look at it, and particularly with reference to Appendix A, if you look at the grade that we had for Q4 FY '25, we've basically announced that we saw a 4.3% average zinc grade. Now that's up from the prior quarter at 3.4%. Now if you look forward into our guidance and our indication for FY '26, we expect to see an average grade throughout the year at 3.5%. So coming down of that Q4. And going back to prior quarters as well, we had advised that we were expecting higher grades to come through in the second half of FY '25. Originally, that was due to come through in Q3. But due to the rain events that we had there, that slowed that down and brought through that high-grade production from both Magdalena and Aguas Teñidas into Q4. Now looking forward and particularly with reference to that grade profile over FY '26, I do expect a step down in zinc grades in Q1, and we start to see slightly elevated grades in Q2, Q3 and sort of more along the longer-term averages there in Q4. Now particularly with reference to Q2 and Q3, I don't expect to see the average grades up as high as we've seen in Q4 FY '25.

Got it. That's perfect. And what about the medium term beyond '26 or too early to talk about that?

Look, at this stage, too early to talk about that. If you look at our longer-term guidance we provided to the market earlier this year, we're looking to maintain our copper equivalent production around the levels that we've seen in FY '25 and FY '26.

Okay. And the second 1 is also on grades and maybe while I've got you. So obviously, a strong grade for Motheo as well this period at 1.2%. Obviously, that's reserve grade for A4. But a bit about T3 reserve grade. Just wanted to understand, were you able to get a bit of material out of A4? Or is this particularly just come from T3 and you've been able to get higher grades there?

Yes. Look, and maybe I can help there, and then Jason can fill in a few of the dots. Again, having been there literally 3 weeks ago to see what the team has done in their flood recovery program, it is impressive. They acted swiftly, protected people first and foremost, and then really went into understanding their contingencies. You might remember, we said, again, 3 months ago on this call that the critical element was that Stage 2 and the acceleration of Stage 2 previously provided us a whole lot of capacity as we were all bound through the fourth quarter. It was also the case as we said, we knew we had a lot of grade in front of us. And that's not for any other reason than that was the mine plan and really related to how things evolved in the sequencing as a result of some of these factors. So that was a very good news story. What I can also tell you is that they're in the final phases of removing the final water from the T3 open pit. And so that would enable us to get access back to stage 1 imminently. And obviously, we did have, as we said previously, some high grade sitting in there. But really to the heart of your question is that, at T3, we've also taken the opportunity whilst A4 was, if you like, delayed because of water inundation that we've actually continued to accelerate activity there, particularly as it relates to Stage 3. And then beyond that, when you go to A4, the team has also done a lot of work with water storage facilities, evaporation, planning such that we'll have sprinklers operating along all of the haul roads up on the waste piles to day 4, and we're moving into the evaporation season. And so we expect also in the -- relatively near term that we'll regain full access at the A4 open pit, having received limited ore from it to this point, and that will also help as we move through the remainder of the year with Motheo production. And maybe, Jason, filling in that, if you can give us a sense for how we think that production profile will actually play out across the rest of the year.

And building on those themes as well. So if we look at FY '26, so obviously, we've guided an average copper grade of 1.0% copper. If we look at that growth profile quarter-on-quarter throughout that period, we do expect to see that increase as we progress through the year. Now as Brendan touched on there as well and you alluded to, we do have an average -- a higher average reserve grade at A4. So with increasing production levels or increasing ore tonnes from A4 coming into the blend throughout the year, we expect to see a steady increase in copper production on the back of that as well, largely driven by higher grades coming out of higher average grades with A4 coming into that blend.

And as I mentioned -- and just if I can also just stress, and I touched on this earlier, we shouldn't underestimate all the other work that's been done. One of the first things I noted, I'm sure if you had the chance to visit, you'd see the [ static difference ] as well. It's the size of the coarse ore stockpile. You might remember around commissioning. We had a lot of lower-grade material that really, I guess, dominated that coarse ore stockpile. It's now substantially larger, and it is effectively raw material, crushed raw material, which is mid and high grade. And so that also now provides us with a whole lot more contingency in the supply chain, or the processing sequence, particularly if we had another rain event at some point, but also if we had unplanned maintenance in the primary crushers so on and so forth. So as I said in my introductory remarks, we've been focusing on the basics, but we're also continuing to work hard to build contingency and build resilience in our operations.

Your next question comes from Paul Young from Goldman Sachs.

Brendan, a few questions on the operations in FY '26 guidance. And just back to MATSA specifically just looking at the ins and outs on copper head grades and recoveries for '26 versus '25. Are they heading in logically in the right direction, i.e., head grade drops, recovery drops and vice versa for the other copper circuit. But zinc is going the other way. So like, i.e., zinc head grade is expected to be lower, but we're expecting a decent jump in zinc recovery. So first question is around what are you doing in the zinc flotation circuit and the rest of the circuit to boost recoveries considering that Jason stepped through some variability from quarter-to-quarter?

Look, and I think, Paul, you make a really good point. And Jason will cover this in. And obviously, people who are lucky enough to go on the site visit would have also seen a lot of the really, really good work that's being done in that process circuit right through to the float sales and the management of reagents and particularly some of the work we've got underway, which is analyzing real-time grade sites coming out of the mills and also grade and specifications, which is as we're progressively now trialing AI, so machine learning, it's also helping us start to remove some of that variability in the way we manage the float cells. But as you say, Paul, 1 of the most important things at all times when we're looking at this quarter-to-quarter and while we, it's hard because you have to focus on it, but we try and step back and look at the bigger picture and how things play out over a year. As you say, it is heavily influenced, recovery is heavily influenced by the type of ore that we're actually delivering to the primary crusher. Maybe, Jason?

Yes. So there's 2 key things there, Paul. Firstly, Brendan mentioned the geometallurgical characteristics. If you look at our mine plan, particularly at Magdalena and Aguas Teñidas, at Aguas Teñidas, we're moving into the main part of the Western extension ore body. So very metallurgically favorable ore, and at the same time, we're in good quality ore from a geometallurgical point of view at Magdalena for the bulk of the year. And then really just building on Brendan's comments there as well, the remnants or the additional recovery uplift beyond that relates to a lot of the improvement works that we've done in FY '25. And in particular, reagent management and management of our pulp chemistries, which we've already demonstrated in the plant has significant upside and benefits there for the zinc recoveries.

Okay. So Jason, it's more mineralogy and reagents rather than any sort of project -- sorry, operating setting changes in the zinc circuit specifically.

Look, there's elements of that as well. We're continuing to optimize all of our control circuits or our control mechanisms in the plant. And that's mainly around managing that pulp chemistry. So we've seen that that's critical in terms of maximizing zinc recoveries.

Sorry, Paul, if I can. I also go back to 1 of the real learnings, I think, or improvements. And sometimes, as we say, that focus on the basics, so getting right back to basics is critical. One of the things that Rob really instigated with Antonio and Dan over the last 12 to 18 months, it's just this habit that wasn't occurring previously, whereby our mine geologists are actually working around stockyard with our processing technical team. Because, as you know, you're not actually recovering zinc or copper or what have you, you're actually recovering galena, sphalerite, chalcopyrite, et cetera, and you're primarily trying to make sure you suppress pyrite. So that -- it sounds trite, but it's been a really important part of having a better understanding on an almost daily and weekly basis as to what's going to present, what mineralogy is going to present into the mill. And then as Jason said, reacting accordingly.

And then switching to Motheo, Brendan, and again just on the mill and just looking at the guide of 5.6 million tonnes throughput. I mean, the mill is performing really well. You had a good year in FY '25. But there, you have 1 quarter where you ran above 5.6 million tonnes and another 3 quarters you didn't because of wet weather, maintenance and others. But just wanted to explore how conservative the 5.6 million tonnes is? Like is it just based on the typical 92% utilization, is it reflective of software coming from A4. I just want to hear the confidence about hitting the 5.6 million tonnes, and what buffer is sort of being built into the guidance? Or is it everything has to go right to hit that?

Look, so in very simple terms, and Jason can keep me under the table, if you like. We, in many respects, are constraining it at 5.6 million tonnes. And I'm not suggesting significantly, but at the margin. And the reason being is at the moment, we don't have the reserves or resource life in front of us that would really encourage us to run at a faster rate. Now, of course, the mine is still young. The processing circuit is still young. And so there's still a lot to do for us to understand indeed what the true potential is. And 1 of the things we've said is this debottlenecking at the back end of the plant will just give us some extra contingency depending on the grade that presents to the mill and making sure that we can, if you like, optimize performance for ore types. But again, I think our view would be, and you've seen it, we can run it at rates that certainly exceed that throughput target. We haven't sought to really push it hard continually. Ore hardness has played a role, but it doesn't seem at this stage. We're seeing a little bit of harder ore. A4 will be interesting, but not materially so. So I think at the moment, we think that 5.6 million tonnes is just a good optimal rate to run this piece of kit at also in the context, as I mentioned, of the tonnes that we have in front of us in terms of reserve and resource life.

Yes, building on that. If you look at last quarter, we ran at about a 5.4 million tonnes per annum rate. And from our point of view, we did guide towards that back at the last quarterly. So we did expect to have lower throughput rates coming into Q4, and that was on the back of a major planned shutdown. We took that shutdown in April, and that was for a period of 5 days. And then going back beyond that, obviously, we had weather impacts in Q3. We did 5.8 million tonnes roughly there. Annualized rate in Q2, and then prior to that, we were really still in that process of ramping up to the full expanded throughput rate. So from where I sit, not quite as confident as Brendan conveyed. But from my point of view, I think we've got a very robust plan at 5.6 million tonnes. And the debottlenecking work that gives us the optionality to be able to maintain that rate even with higher grades. So that gives us a lot...

Your next question comes from Daniel Morgan from Barrenjoey.