Sandfire Resources Limited (SFR) Earnings Call Transcript & Summary

Welcome, everybody, to the Sandfire Resources December 2020 Half Year Financial Results Update. [Operator Instructions] Thank you again for joining us today. I'll now hand over to Nicholas Read to introduce the Sandfire team.

Thanks very much, Josh. On behalf of Sandfire, a very warm welcome to everyone, and thank you for your time today. With the copper price recently surging to its highest level in 9 years, it's certainly a great pleasure to be introducing today's investor call and webcast on the company's financial results for the 6 months to the 31st of December 2020. To run you through the financial results presentation, I'd like to introduce Sandfire's Managing Director, Karl Simich; and Chief Operating Officer, Matt Fitzgerald, who will provide a brief strategic and operational update and run you through the detail of today's results. Also present in the room here in Perth, we have the company's Chief Operating Officer, Jason Grace, who is available for questions. I'd like to refer you to several disclosures released on the ASX platform this morning, including the December 2020 half year financial report and appendix 4D, an ASX release on the company's interim financial results and the half year results presentation. A live webcast of this Sandfire conference and synchronized slide show can be accessed through the link on the front cover of the presentation. A recording of the webcast will also be available following the conclusion of the call. I'd now like to hand over to Karl Simich to introduce today's presentation. Please go ahead, Karl.

Thank you very much, Nicholas, and welcome, everyone, to our first half December '20 financial results presentation. It's certainly been for Sandfire a very strong first half year, and it sets us up well for an even stronger potentially second half of the financial year. We also believe, certainly where we are, it creates some very solid foundations for this business and our significant growth opportunities and prospectivity going forward. In particular, our 5 key strategic imperatives that we've talked about in the past as we have reset our strategy as of 1 July last year, which we updated to the market in 2 December of last year. We have those 5 key prongs. Execute delivery, and that is about optimization of DeGrussa and the Monty complex. Number two, it is about bringing online the development of the T3 Motheo hub in Botswana, together with expansions with A4 during the course over the next couple of years and expanding through that part of that project. It is to bring online the Black Butte project and other potential associated resources in that region that are owned by our 87% subsidiary with Sandfire America. And for a project which we have got a mining license issued for during the course of last year. And it is also to look at end of mine life extensions, if they are possible, for example, at DeGrussa. So that is in our execute delivery strategy. Under sustainable production, we're really looking at building on what we have got in the pipeline, we have got, but potentially with inorganic growth and corporate development. We believe we have the resources, the capacity, the internal experience and competence to [indiscernible] -- to buy other opportunities, development or operating scenarios that we could blend into Sandfire as the corporate entity and take forward. So sustainable production is about getting us to a level, and we have made targeted internal [ trying ] to get them somewhere close to 150,000 tonnes of copper production or have vision on that inside the next 5 years or by 2025 [indiscernible]. Under accelerate discovery, we have an extensive exploration program in highly prospective areas in Western Australia where we control about 7,000 square kilometers of highly prospective ground in and around the DeGrussa and Monty area, New South Wales as well. And we're a large tenement holder in Australia in the top 10. We are the largest tenement holder in Botswana, where we continue to have an extensive exploration program. Along with [ that ], that is some 400 kilometers in length and about 150 to 200 kilometers in breadth and highly prospective. And we'll continue with that exploration push as well. An estimated budget of somewhere in the order of $50-odd million in this financial year. We want to make sure our people are aligned and empowered, and we have the systems, we have for the communications that enable our business to operate through these 3 business units in Europe, Middle East and Africa, EMEA, APAC, also on Americas. And ensuring that, that works in the system. So we work very hard with our systems, our people and our communication to ensure that we can operate in those jurisdictions. And in all of this, we are a business and we want to ensure that we're commercial in what we do, that we optimize the application of our capital structure, the combination of debt and equity, and strike an appropriate balance between those and also returns to our supportive shareholders. So that's the key strategy for the business. If I just want to touch on some of the elements. DeGrussa's production for this year was a very solid production in copper at nearly 36,000 tonnes of copper for the half and good gold at very, very pleasing C1 [ positive ] $0.72. Guidance for this year will be at the upper end of our guidance. So approaching 70,000 tonnes of copper, a high gold of 40,000 ounces for the year and targeting that range of C1 at $0.85 to $0.90 a pound. We're continuing to do work on our Old Highway gold Project. And we hope even if it's a modest operation that it provides for an end of mine life extension and essentially just pushes out and gives us optionality in the DeGrussa Monty region, really, as we continue to search for repeat or additional VMS opportunities. In Botswana, and we are pushing ahead with a significant impetus there is we really do see a 5.2 million tonne Motheo copper silver production hub emerging as being a pathway where we'll end up at in very short order. That is going to be based off the initial board approved of 3.2 million tonne T3 deposit being fed into those facilities. And those facilities effectively will be established with minimal changes that will be required to be 1 additional crusher, another tank and some extensions to the [ car ship ] to move from 3.2 million tonnes to a 5.2 million tonne capacity. So we are establishing it for expansion from the very beginning. But initially, through the study, the 3.2 million tonne operations is for 12.5 year mine at 30,000 tonnes per annum, that we expect that to change within the first 12 to 18 months. And additional information will be made available on that and through the course of this calendar year. Also, we established late last year the first inferred resource and it's still to be updated but for A4 deposit. And post the completion of that resource statement of 100,000 tonnes of copper at a grade that is almost 50% higher than the T3 resource grade and the copper equivalent of probably in excess of 1.5% copper. We saw some exceptional grades of up to 16% copper. We're still trying to work out what is happening with the geology there. But nonetheless, to say, those are some of the highest copper grades ever seen in the Kalahari Copper Belt, of which we have an exceptional dominant position of some 28,000 -- 26,000 square kilometers in predominantly Botswana and then leaning over into Namibia on the Southwestern side. But really the strategy for us to secure that position over a number of transactions I think, will be significant for us in the future. In the U.S.A., the Black Butte copper project down by 87% subsidiary, Sandfire America, we have completed the DFS. We're looking at working through some enhancements and improvements to that feasibility study. And we have a maiden Ore Reserve for Johnny Lee deposit, and we have an updated resource for the Lowry Deposit that is not included in that feasibility study. And we are also, for the first time in 6 or 7 years since we've had that as an investment, embarking upon exploration in the region. We are targeting extensions to the Johnny Lee Deposit, we're targeting extensions to the Lowry Deposit, and we're also looking at opportunities in between those 2 deposits or resources where there has been no exploration previously. And we're optimistic about that growing as a resource base, and we think there is significant geological potential in that region. We finished the half year at $335 million in the bank, no debt. And what is also the cadence is [indiscernible] to a very, very strong January and the beginning of the first half -- or the second half of 2021 financial year. So that's all going well. I just wanted to quickly touch on copper price before I hand over to Matt Fitzgerald, the CFO, to present the -- all the data. But clearly, at the moment, we're in a very interesting scenario. And certainly, post Chinese New Year, it seems to have come out, the bears are being led out of the cage and the world has taken off in terms of copper and copper pricing and people's prognosis and assessment. And I think this has been manifesting itself for a long period of time, and the drums have been beating. However, maybe it's taken some time to resonate through and for it to grab some traction. But essentially, we do see a situation of a copper scenario where the red metal is in emerging deficit driven -- and there's multiple factors. But there is -- the emerging deficit is being driven by supply issues. But on the flip side, there are significant [indiscernible] on the demand side of the equation that really will pull this forward to another level. And it seems unabated and it seems to be something that is going to be there, given the sentiment traveling around the world, for many decades to come. We see copper overnight having raised through $4 a pound. You must remember, by the middle of March of this time last year, effectively middle of March, I think copper traded $2 a pound. It's trading $4 a pound since [indiscernible]. The trading volumes arise on the LME, but [indiscernible] we're seeing incredibly low in all the inventory levels of the Shanghai LME, the lowest inventory levels they have had since '05. And this surge has really been driven by a number of things, and it's continuing to get exacerbated. We certainly are believing there's a post COVID economic recovery. There's a significant amount of infrastructure focus stimulus. There is a weakening of the U.S. dollar. This gets further magnified by the supply-demand fundamentals, declining copper grades around the world, harder to produce in some of these remote locations that [indiscernible] levels et cetera, [indiscernible] I think [indiscernible] I think really a lack of [indiscernible] shallow. When we look at these structural factors with what we all associate is potentially colliding with that once in a generation push should the [indiscernible] the global economies, embracing a low-carbon future, and I think it's going to stay with us. We feel this is really quite typical of what is a bull market. There has been a speculative positioning as we [indiscernible] fundamental demand. The demand for the product and the supply trying to catch up. Copper consumption, we're expecting [indiscernible] synchronized [indiscernible] growth for the first time in [indiscernible] years. We've got tight supply. We've got strong demand. It gets super charged recently by President Biden's almost $2 trillion stimulus package from [indiscernible] [ 9,500 ] [indiscernible] banks around the world, a [indiscernible] pound. [indiscernible] and it continues through the back end of this year and through early 2022. At $12,000 a tonne, it's USD 5.44 a pound, and that's 26% rise from where we are today, and that's going -- not something beyond us. We're also seeing the incentive price for new copper production given this backdrop has been probably somewhere in the order of at least $3.50 a pound to $4 a pound of copper to incentivize people to take projects into production. And also [indiscernible] for decarbonization. Significant quantities of copper are going to be required from renewable power factory storage electric vehicles, charging station of a [indiscernible] infrastructure, the continuation of the [indiscernible] the future. [ In this ] target and the world looking for net 0 emissions by 2050. And to continue to move forward in terms of slowing down climate change and its associated global security risk with climate change that we've been seeing over the last period of time. If you look at Glencore's recent press presentation, they were suggesting that more than a doubling in copper production from what is under 30 million tonnes per annum, probably somewhere in the order of 23 million or 24 million tonnes per annum. That is in the secondary market, but we needed copper, if you believe of their speculation that the market makes 60 million tonnes of copper production and [indiscernible] copper by 2050 [indiscernible] year. And that has not been done before. So we are guiding -- we're still looking at the beginning of the super cycle. And there really is difficulty for supply growth coming from greenfield. So we really just need to keep exploration [indiscernible], in addition, there's going to be, we believe, significant pressure on the upside of pricing. And at the end of the day, just leaving on that slide in terms of decarbonization, [indiscernible] growth, policy stimulus, [indiscernible] and it's creating a perfect storm in the copper price in our view over the next decade. So with that in mind and as a backdrop and to talk about our results, and really just to reflect on some of the other opportunities that we have got as a business globally and control around the world, I think we're well positioned to leverage off that as we go forward. But I look forward now to pass you over to Matt Fitzgerald, the CFO, to give you some detail and more information on our half year results. Thank you very much.

Thanks, Karl. Just looking at the DeGrussa operations and a quick recap, this is the same slide that we had in the December '20 quarterly presentation. So I'll concentrate mainly on the impacts on P&L in the half. So a balanced mining operation between DeGrussa and Monty, producing 722,000 tonnes of ore. That's 70,000 tonnes below the processing rate. That's just short of 800,000, which gives us partly an additional expense in the P&L through change in inventories. That -- as we produced 152,000 tonnes of concentrate, which is about 15 ships, and we sold during the period as we've previously announced around the sort of 13 ship level. So we have a high concentrate -- we had a high concentrate holding at the end of December at 32,000 tonnes of concentrate. And net-net, that increased around 15,000 tonnes of concentrate between June and December. And that ends up with a larger credit into the P&L than the expensive [ cycles ] on the ROM stocks movement. So you'll notice net-net, we'll talk about a little bit later, is a credit to the P&L in terms of operating costs for those movements. As Karl touched on, over 35,000 tonnes of copper and over 21,000 ounces of gold is above half of the upper end of both copper and gold production guidance for the year. So a very, very pleasing start, which, as you know, with the carbon price running strong, has delivered a very strong financial result. So moving to those headline financial results. Revenue of $355 million includes broadly QP gains with a rising copper price of around $29 million and is [ 14% ] up period-on-period. 84% of revenues come from copper, 14% from gold and 2% from contained silver all in the same concentrate. That's driven DeGrussa EBITDA of $238 million and a group EBITDA of $192 million. I'll show a bit more about that in a couple of slides down. And the bottom line NPAT, 78% higher than period-on-period from December '19 half at $60 million. We have, as Karl also said, started the second half of the year particularly strongly, not only with those 2 sales coming over effectively from December into January. So 4 sales completed in January. But also with the additional QP settlement at higher prices and then those sales coming through at a higher copper price. We are certainly very, very well positioned in the P&L sense to start the second half of the year. Cash, $335 million. I'll present a little bit more on that in a minute, an increase of $44 million between June and December. $237 million from cash flow from operating activities at DeGrussa, clearly driven by that increased revenue and copper price and pleasingly as well an increased interim dividend from $0.05 in the prior period to $0.08 for the interim period, which is once again a fully franked basis. Looking at the group EBITDA result. For revenue of $355 million, DeGrussa's EBITDA margin around 67%, that's $138 million, and then it moves its way, as you can see with the waterfall to $192 million. Just touching on some of those areas. Black Butte with the work that we're talking about in terms of feasibility studies and it's commencing some additional drilling and permitting at Black Butte. Tshukudu, clearly a large drive around the exploration efforts around Tshukudu and some of the expenditure leading into the start of the project development. In the second half, most of what we're doing at T3 will end up coming through mine properties, it won't come through the P&L anymore. But we still do have the exploration efforts at A4 to come through the P&L in the second half. And in terms of exploration, very clearly around the exploration drive across those 3 jurisdictions. DeGrussa, as we guided for the year, DeGrussa, Tshukudu and -- which is drilling and feasibility study [indiscernible] in the Eastern states and also the studies and finalization of the feasibility in ore reserve at Black Butte drives that -- impacts in terms of exploration and [indiscernible] for a total $192 million group EBITDA result for the half. Comparing period-on-period for the group. For the first half of 2020 versus the first half of 2021, up around $50 million. The vast majority of that as you expect has come from the revenue side with the increased copper price and also the sales -- and also, we had the sales carrying over from December into January, so that would have, in fact, been even higher had we sold the same sort of numbers that we had produced for the first half. Also pleasingly, around 30% lower treatment refining costs coming through our revenue numbers as well. So that's impacted there. Otherwise, in terms of materiality, really, it's around that change in inventory, as I talked about, the higher concentrate stocks in terms of credits, offset in part by lower ROM stocks. And those lower ROM stocks at June were largely driven by partly by our response to COVID and our desire to have as high a ROM stock holding as possible during the -- particularly during that mid- period of 2020, which softened somewhat, of course, back into the back end of the year given DeGrussa is in Western Australia. Moving across to the financial position. As you expect, also strong at $335 million of cash, it's up $45 million. Increased concentrate inventory, as I talked about with 4 shipments in total coming through in January. So our cash balance has pushed up at about $400 million as we speak. Financial investments, importantly, including our investment in Adriatic around $83 million, increases, obviously, the ability of our balance sheet to fulfill the sort of plans that we have. From the tax side, receivable, $23 million received in January, which relates to the financial year to June '20. And a payable book on the other side, $21 million, which really represents the half year to December. So up to June, really impacted by COVID, and that's the reason for the receivable. And then the high and driving copper price in the second half has driven that tax payable on the other side and effectively offsetting each other across the 2 different periods. We have a debt-free balance sheet, and we are well positioned for our project development and getting that right mix between those developments as well. Total assets just shy of $1 billion, up $78 million and net assets of $806 million on balance sheet. Looking at dividends. We're very pleased to continue strong returns to dividends with an $0.08 fully franked interim dividend for 2021, 23% of EPS paid out. Regular dates and payment dates are listed there. And really, as you expected, to round up continuing to balance our return to shareholders and our commitments towards the project development, particularly the Tshukudu -- ever-improving Tshukudu project. The project debt that we've guided around looking around USD 150 million in terms of project debt on that, and we're well progressed now. I mean so that's in line with the release of the feasibility study and working towards getting some results in that funding mix towards the middle of this year. We clearly have a great holding corporate cash, low debt, [ valuation ] development and the production assets at DeGrussa as well as continuing to return funds to shareholders. On the cash flow side, just presenting it here in terms of sort of left to right. Degrussa's receipts, as we know, from around 31 -- just under 31,000 tonnes of payable copper and just over 20,000 ounces of payable gold. An operating margin and cash flow stands at 56% of DeGrussa. Really, we've broken that out in terms of understanding into 3 main areas. So our exploration and evaluation, which is drilling and studies and approvals all come into that business fit. They're around $42 million split between DeGrussa and [indiscernible] Tshukudu and the [indiscernible] projects at the top of the page there. The other side to look at it is real mine development and mine properties area. DeGrussa's underground development to continue that stoping efforts at DeGrussa and continue to extract more in copper from there. Tshukudu in terms of development of that project. And also into Black Butte, which is predominantly in the early works program and environmental rehab assets that come in as a result of some of that as well. And then to the right is around $99 million, which is just showing a split between income tax paid during the period, dividends paid during the period, which was the final dividend from financial year 2020 paid in the the half. And as I said before, an increase of [ $44 ] million in terms of our cash assets. We build cash to commit to what we would like to do in terms of development at Tshukudu. Some of those cash assets are also held in U.S. dollars and as well as some of the -- the monetary assets in the [indiscernible] operations. In terms of subsidiary at Sandfire America between [indiscernible] predominantly [indiscernible] that drives some foreign currency losses in our investment expense on the P&L. Really, the up -- [indiscernible] side of that [ you have ] a strong U.S. dollar. Of course, at the same time, there's been a strong copper and as well and truly offset the revaluation differences in terms of any of our U.S. holdings. As I say, we are starting to collect [indiscernible] through our commitments into Tshukudu in Botswana, where a large chunk of that capital expense will come from U.S. dollar ,[ to me that's ] in terms of construction.

Thank you, Matt. And look, just to summarize and ease and look at the outlook for us. Thank you for participating. And obviously, shortly, we'll open up to some questions. And we look forward to answering those. But from where we sit at the moment, clearly, with the performance year-on-year and half year on half year, we have these very strong foundations from -- coming out of DeGrussa Monty and we continue to generate significant cash. In between our cash at treasury at the moment and the liquids, we would be sitting in excess of AUD 500 million in that component. As we went into January, essentially, we -- I think we shipped 4 shipments in January. And those results for the rising copper price saw revenue well in excess of $100 million unaudited for the month of January and the margins that would be associated with that on an impact and an EBITDA would be even better than the first half on ratios because we've got a copper price that has continued to go up. So you can get a sense of where this thing is leading as we continue to optimize those results out of the very good project at DeGrussa Monty. And where that leaves us and effectively our market capitalization today even at $6 a share is effectively underwritten essentially by cash and liquids in our cash flow coming from DeGrussa Monty. So we really do have no value in our business or any of these other wonderful assets that are coming to bear as we speak in this super site commencement of the super cycle. New, long life production hub, we would be surprised while we have T3 under the feasibility study under all the requirements and as required by the standard, et cetera, the 12.5 year mine life starting at 30,000 tonnes of copper per annum with good silver. In our expectations, we have a multi-decade opportunity from -- and an expansionary platform to build off in Botswana from T3 in due course and in A4 as we know it today at a better grade, an enhanced grade. But when we really start to look at the geological prospectivity in the region as a significant plethora of target results. And it's just a matter of time for us to work our way through to get access to embark upon sensible exploration. It just takes a little bit of time, as we all know. But essentially, the opportunity they're having commanding position of some 26,000 square kilometers. And bear in mind, as I've mentioned before, our neighbour has about 1/7 or 1/8 of the ground holding that we've got in geology, that has had more exploration work over the last few decades, has some 6 million or 7 million, 7.5 million tonnes of contained copper in their assets. That's the Cupric Canyon and the Khoemacau assets. So we see our geological prospectivity and the significant footprint we've got as having great potential in that region, it's just going to take a little bit of time. In addition, we also believe that the work that we've done over the extended period of time at Black Butte in Montana. And having completed now being issued a mining permit after 22 years, being the first new issued permit in that region will start to bear fruit not only from that feasibility study being prepared and robust, hopefully, being able to include other resources that were excluded previously, exploration as well and really laying the foundation for a development project there going forward. So we do see that becoming a very much a viable and profitable operation with significant potential as well. In addition to that, we've talked about this global exploration portfolio in West Australia, in New South Wales. I mentioned Botswana and also some stuff we're doing in the U.S. We will continue, as I also mentioned, to look at inorganic opportunities. We do believe we have the team, and we continue to build on our team, a very capable team that is able to execute and has the discipline, has the resources, has the physical sets and has the experience to execute internationally, exploration, development, also mining. So we're very confident about that, and we've done it before. And I do believe we do have a fantastic platform to build off and to take forward Sandfire to its next chapter in growth, and we're really excited about, and that for all of our stakeholders and the people that are involved. And from -- back of the envelope from the models that we've got, the DFS' that we've got, if we were to run a spot copper through all of those models, we'd probably find the underlying value of our business together with our assets that we hold is well and truly more than double of the share price as we sit here today. And that's just based on stuff we know, not on stuff -- we're not speculating on any of the sort of exploration upside or potential. So we leave it in that place at the moment. Thank you very much for listening to us today. And we look forward, and we open the floor now to questions.

Thank you, and welcome to the Q&A session. First of all, apologies to any viewers that we're unable to view the online content. We will be sending out a sync recording of the audio and slides as soon as possible. [Operator Instructions] The first question we have is from Lyndon Fagan from JPMorgan.

Look, just hoping to get some guidance figures. Firstly, on exploration spend, almost $30 million in the half. Should we be sort of annualizing that at $60-odd million a year for the foreseeable future?

Probably not quite double. I would expect probably more in that sort of $50 million to $55 million range, I think, for the 12 months.

And that's sort of representative over the next few years as well, do you think?

We'll give the guidance probably mid-year, looking into what we're looking to do next year, I think it's safe to say we're committed into Tshukudu's exploration program. And we will have to give some further guidance to other programs as we get further on.

Great. And then the other line is CapEx. Any sort of color on full year guidance for CapEx? And also, how to think about scheduling CapEx in Botswana over the next few years?

Lyndon, it's Jason Grace here. Look, in terms of -- we are starting construction over in Botswana at the moment at low levels. We'll see the bulk of the spend for the project come in FY '22, and we'll start to see a bit of a steady ramp-up going through to the second half of this year. But really, overall spend won't really start to pick up until by early stages of FY '22.

Great. And so what's this year's budget for CapEx?

This year for CapEx for the remainder of the year have been in the order of about $20 million to $30 million.