Sandfire Resources Limited (SFR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sandfire Resources FY '21 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Ben Crowley, Head of Investor Relations. Please go ahead.

Good morning, good afternoon, everyone. Welcome to Sandfire Resources Earnings Call for the 2021 Financial Year. My name is Ben Crowley. I'm the Head of Investor Relations here at Sandfire. And with me today, I have Karl Simich, our Managing Director and CEO; Matt Fitzgerald, our Chief Financial Officer; and Jason Grace, our Chief Operating Officer. Today, we'll have a short presentation from Karl and Matt, and then we will open for questions. And with that, over to you, Karl.

Thanks very much, Ben, and welcome, everyone, and thank you for joining us on the 2021 financial year-end results. And I'm very proud to be giving -- presenting these results today with our CFO, Matt Fitzgerald, in what has been a record year across many key aspects of our business, record production, record sales, record profits, record dividends and record cash at bank at the end of the year. So congratulations to the business. But also thank you to the CFO, Matt Fitzgerald, and his team for the completion of a wonderful set of accounts and the lodgment here today. If I can just touch on before we get into the detail and pass to Matt just our strategy. We are on purpose. We are on pace. We are on strategy. And our strategy and our purpose is to create value through opportunity for our business. Our vision is to build an international, diversified and sustainable mining company, and we are on strategy to do that. We have 5 key elements: execute delivery in terms of our delivery of operations at DeGrussa and Monty and to build Botswana into -- through that development and expansion of that Motheo hub in Botswana to execute delivery. We plan to continue to look at building a sustainable production profile through our business development initiatives and our inorganic aspect of our business and looking at business opportunities in a global sense. We will continue to be aggressive explorers, having spent in excess of $60 million last year. We have a budget of over AUD 50 million this year, and we will accelerate with intent -- accelerate that discovery with intent, particularly in Botswana, certainly in DeGrussa, around the DeGrussa and Monty projects as well as for the first time since we've been invested in the U.S.A. around the Black Butte project. So that will be a complete plank for our business. And I believe we will see the fruits of the efforts that we are making on our discovery initiatives. We want to ensure always, and we're working very hard to ensure that everyone in this business in a global sense is aligned in terms of values and culture with our business, and we ensure that we use all our resources available to empower our people. And it's a constant work that we do, and we enjoy that. And we do believe that our workforce and our people are aligned with our business. We want to make sure that we continue to do this in the most optimized manner in terms of our capital structure, in terms of our management of our assets, in terms of our balance sheet and ensure that we are engaging with everyone that is involved, our key stakeholders, and that we are clear and transparent to the market and you understand what we are doing. So that is our background and that is our platform. Just in terms of highlights, as I mentioned before, record copper -- well, high copper production and records across the table for Sandfire, a great year of production and still very strong guidance for DeGrussa and Monty next year in terms of copper and gold. We'll also look to see, and likely towards the end of this year, the opportunity for the DeGrussa operations to transition into a gold operation whilst we continue to look for repeat VMS deposits in the Greater Doolgunna region in and around those excellent facilities that we have. And so therefore, towards the end of the year, we'll have an update with respect to our views on that gold transition strategy. We're working very hard in Botswana in terms of, as you know, we've completed the definitive feasibility study and pushed the button on development late last year. And we are full steam ahead in terms of construction and development, having also been granted the mining license recently. And we do believe with the work that is occurring with respect to the A4 resources and we soon will have a reserve released for that satellite deposit that we see the Motheo hub moving likely into a 5.2 million tonne per annum operation from the outset and ramping up to that level. And that would change clearly the scale. And we also believe, ultimately, when that information is to hand in pre-feasibility studies with respect to an expanded operation, it will have a positive outcome on many fronts for that project and really lay the foundations for the next passageway of significant growth and value accretion for our business. We continue with the extensive exploration as well in Botswana. And we're looking forward to update you with that as those results come to bear. In the U.S., at the Black Butte project, we have a completed feasibility study. We do have reserves, and we continue to work through optimizing the Johnny Lee Deposit as well as putting together an inferred mineral resource for the secondary Lowry deposit, an ongoing exploration in the area to enhance the value and the economics of that project and laying it based off the strong foundations that we have got there. And to wrap it all up, we've ended the financial year with some very strong balance sheet at over $570 million in the company. If we just want to just quickly touch on our sense and our view of the base metals market, particularly in copper. We do believe the future and the prognosis for what has been a metal for many, many years is very much a metal for the future. And the demand for this product over the next multiple decades is looking extraordinarily strong. It is the third deepest market in the world in terms of metals at somewhere in the order of -- in excess of $200 billion consumed annually. Underlying demand, obviously, for that -- the primary construction and industrial sectors remains on foot and continuing with what will be an improvement in lifestyle for the globe, for the human race, for the continuation of urbanization in many of the larger countries around the world. And obviously, with the advent of the next push to a 0 carbon emissions and the EV age, the demand prognosis for copper is very strong. And it will continue to accelerate. Some of the major commentators in this area have provided their estimation that we could see a doubling generally of copper requirements in the next 20 to 30 years. Supply is constrained. There are challenges globally. So I think with the advent of the demand compared to the supply issues that, ultimately, we will see and continue to see, a very robust copper price going forward, and we plan to be part of that development in this space. So thanks very much for listening to me. And I'm going to pass over to Matt Fitzgerald, the CFO, to run you through some more specifics regarding our financial results for the last 12 months.

Thanks, Karl. Welcome, everyone. Just firstly, to briefly recap on the '21 financial year key physicals. So around 70% of all feeds came from DeGrussa and around up to 30% coming from Monty in the '21 year, very much on plan. 1.54 million tonnes of mined and just a little bit more than that in terms of mill throughput. In terms of the financial results, that does drive an additional cost in the P&L between the 2 stock -- between that movement in stockpile. 300,000 tonnes of concentrate and sales of just under that, 293,000 tonnes of concentrate. So effectively -- or roughly about one ship short in terms of sales versus concentrate, and that drives a credit in the P&L. Between that cost and credit, between the stockpile and the concentrate is what drives the changes in inventory on the face of the financial statements. As Karl said, very strong production, 71,000 tonnes of copper at nearly 40,000 ounces drove a very strong C1 results between that high production and high gold credits. USD 0.82 in terms of C1, a little higher coming into the 2022 year as guided on slightly lower production and also on lower gold credits. As we noted in the quarterly -- in the June quarterly, we did have a prepaid sales shipment that left in July that was paid for and prepaid in June, and that sits on balance sheet as a payable and is in deferred revenue. So that sits in cash in financial '21 but does not sit in revenue. So those come over into the financial -- '22 financial year in terms of revenue. Sales for the year completed out of both Geraldton and Port Hedland, which continues to be a very strong asset position for us having the 2 ports as options. And we're able to pivot, as we noted, during the year to a number of new customers and new markets as a result of the concentrate issues going into China. So we're very pleased to be able to easily pivot into those markets and maintain strong financial performance. Just on to the Headline Financial Results slide. So those key production numbers have really driven a number of these. We do note that a number of these have been pre-released in July, into the June quarterly, and they're now on an audited basis. So record sales revenue, $813 million is up 24% year-on-year. EBITDA at DeGrussa, $549 million with a group EBITDA of $449 million. Net profit after tax, also a record $171.6 million for the year attributable to the equity holders. That's after, of course, depreciation and amortization of $180 million. Ended the year up $282 million in terms of cash holding of $574 million. Cash flow, $542 million pre-exploration and evaluation expenditure across the group. And on a post basis, cash flow from operating activities up nearly $200 million to $471 million for the year. Very pleased. I'll talk about this short -- more shortly. We're very pleased to have total combined interim and final dividend for the financial year 2021 of $0.34 per share, driven by a full year earnings per share of $0.963. So clearly, very, very strong numbers across the board, balance sheet and P&L-wise. Just breaking up some of those numbers into segment EBITDA contributions. So you'll see on the left, the revenue number, $813 million. DeGrussa's EBITDA from that, $550 million. We do have the impacts, as we always do, in terms of P&L. We expense exploration and evaluation costs. And we also expense study costs up to the point of the final economic assessment. So we do have an impact on P&L from Black Butte of $11 million and, of course, Motheo as well, which are in various stages of feasibility study, drilling, permitting. Motheo clearly worked on A4 and studies and Black Butte in terms of legal challenges and some of that initial project work that we are doing in those jurisdictions. And then some bit of a catch-all in terms of exploration and other, which also includes corporate overhead of $71 million. That is really driven by that global drive across 4 key jurisdictions: 2 in Australia, one in the U.S. and also in Botswana and Namibia. And also of note here is our work on Old Highway, the Old Highway project as well, which is certainly in that evaluation stage, as Karl touched on. And we'll hopefully shortly be issuing our maiden mineral resource on that project. Group EBITDA as a result of all of that drops around $100 million from -- in terms of DeGrussa moving to the group. So $550 million moves to $450 million when you look at group EBITDA contribution. Looking at that year-on-year, as we expect, a significant increase on group EBITDA of around $135 million, almost entirely driven by revenue, which is clearly driven by strong copper production and also, as we know, continued strong copper prices. The revenue royalties and gains also includes $45 million of QP gains during the period. And we guided that certainly after our December results into the March quarter that we were looking at up -- at that stage, looking around projecting up to $50 million of QP gains. That certainly came through. So $45 million of that increase is on the QP side with the rising copper price -- generally speaking, rising copper price during the year. Our operations costs, a bit of a catch-all as well across our exploration as well and operations and supporting our expansion strategy, also supporting some of our retention strategies in terms of our workforce at DeGrussa to make sure that we get maximum efficiency and financial output from DeGrussa right up until the end of that mine life currently projected into the September '22 quarter. Exploration and evaluation, I've touched on, across the various jurisdictions and also across Old Highway. And last year, just to note, we did have the impairment write-down of oxide stockpiles which clearly we didn't have this year. So year-on-year, $315 million last year's group EBITDA, $450 million current year '21 EBITDA. In terms of financial position, really, the balance sheet is dominated by cash and no debt, so $573 million cash. DeGrussa continues clearly to produce strong cash flow, and we plan for that to occur right up until that end date of DeGrussa. And we are really positioned very, very strongly for growth, very much to support that strategy that Karl talked about. The financial management of that is a key pillar to how -- on how we balance that going forward in terms of delivering on our strategy. We also have financial investments of nearing $90 million on balance street. I mentioned the prepayment in terms of what sits there at 30 June and how that will roll into revenue into the new financial year. Of note, with such a strong result, we've clearly been paying tax during the year based on our monthly contribution payments. But given such a strong result, we do have a $57 million estimated income tax payable, which we estimate we'll pay in December 2021, when it's due under the tax return. $6 million of that has been paid in the month of July, but the remainder will fall into that December payment. So it's important for cash flow, internal and also, of course, modeling externally. As we said, we've got a debt-free balance sheet. It sets us up very, very well for particularly the near term and current development of Motheo in Botswana. So we've earmarked USD 160 million as our contribution towards that, with the other USD 160 million coming from a project finance facility, which we are very well progressed on in terms of looking at final term sheets with those banks, putting together a very, very strong set of numbers for those banks and also a very, very strong-looking banking syndicate. So that will be some pleasing news that we could hopefully come out with in the next couple of months to talk -- to confirm that plan for Botswana. Our strong balance sheet certainly supports our ability to develop that project without having to overleverage ourselves. Pushing it clearly across Black Butte and Lowry, moving forward in terms of drilling Lowry into a position that we're able to combine that in terms of project assessment with Johnny Lee. And also, of course, our global exploration push and being able to continue to pay dividends to our shareholders and return this wonderful performance through to our shareholders at the same time. Looking at dividends. We're very, very pleased to record a $0.26 final dividend for the full year -- sorry, for the final dividend, fully franked with a record date of 7 September '21 and a payment date of 22 September. That takes our full year payout to $0.34 per share on a $0.96 per share EPS. And that maintains a history -- particularly a recent history of 35% payout of NPAT after tax, and just to note, continues us as a very strong dividend yield as well at 5%. And so able to do a number of these things. The project developments, as we said, being very, very -- managing very closely the funding mix of the new projects, particularly in Motheo, while maintaining our corporate flexibility in terms of being able to do exploration and really create some of that sort of extreme value that can come from exploration, particularly on existing projects and existing plants in terms of DeGrussa and what we're planning at Motheo and also some of that expansion capital where required. So balancing all of that together, and this year certainly has helped very much in terms of setting us up well to some of that growth trajectory that we are planning for. Just one slide to piece sort of the cash flow story together. $851 million receipts from customers includes that prepayment, which came in, in June, as I talked about. That drives a cash operating margin for DeGrussa around 68%, $580 million, and this just breaks out some of where that sort of cash flow has gone. $282 million has clearly gone into the bank. So that is in terms of increasing our cash balances year-on-year. But also in terms of exploration, the DeGrussa operations is really Australia in total. A lot of that, of course, is DeGrussa. But it also covers the Old Highway drill-out, Eastern states projects as well and really, as I say, covers the jurisdiction. Motheo, $18 million, we've talked about what's going on there in terms of exploration, A4 and other work and other study work to get that project up into -- really, up to DFS level -- or the remainder of that project at the DFS level. And then Black Butte project in the U.S., also the exploration and evaluation works and challenges that we are funding there so that we can hopefully see that come into production in the next few years. Mine property and development, clearly important for us, particularly at DeGrussa. So DeGrussa's orebody development and also at Monty. But Monty is largely complete in terms of development. Motheo project, a very strong start, of course, to the construction of Motheo. And we hope to put out some more news on that and maybe show some progress also of that project over the next few weeks. And we're also planning, as Karl touched on the A4, ore reserve and PFS and we've noted in the announcement -- and looking at combining that with the T3 feasibility study to really support -- we think quite strongly, to support that 5.2 million tonne production hub concept that we've been talking about over the last year or so and really sort of backfilling to that strategy and that vision of what we see happening at Motheo in Botswana. The Black Butte project is a development but also that the CapEx works that we completed at the back end of the last calendar year. Income tax, I've talked about payment of $40 million during the year. We have the remaining tax payable, which we'll make in December, as I said. Very pleased, of course, to pay our dividends during the year. And as I said at the start, really also building the cash position. So $282 million has gone on to our cash balance to set us up for future execution of our strategy. Back to you, Karl.

Thank you very much, Matt, and thank you very much, everyone, for listening. And I think just to highlight off the back of those very strong results in the last financial year, it really -- and with all the hard work that we have done with respect to refining, resetting and resculpting very much an aspirational strategy for our business, we feel very pleased and comfortable that we are on the transformation of our business into an international, diversified and sustainable mining company. And we're very -- I think very strong about that vision that we have and the strategy that we have got, the key pillars, too, and that we are presently executing. So we're well on the way in terms of that strategy. We have the resources and capabilities in terms of the balance sheet, in terms of the people within our organization, the increase and the hard work that we've done in terms of our systems, our structures, the talent pool within the business with a number of key people that have joined our business over the last 24 months, the last 12 months, the last 6 months. And we've made announcements with respect to that. So you can see that we're working very hard to position ourselves. We see very strongly an expansion in the Botswana province. We are a significant footprint holder. Once again, I'll highlight the fact that our neighbor in Botswana who is in production at the Khoemacau project has a resource of some 6 million tonnes of copper. We have significantly a greater footprint, and we believe the geology is just really untouched in terms of this opportunity. So I think there'll be significant ongoing. And we see the prospect for Botswana to being a multi, multi-decade, multiple hub style of operations. So I think it just takes time, but you need to put down the right foundations to build there, and we will continue to do that. So we continue to work very hard. We believe we've got the right and the strong foundations. We have a strong pipeline. We're very much attuned to where we want to go to, and we're very excited and motivated about that. And we do believe it is very much a platform to create value -- or growth and then value for our stakeholders that are aligned with us. So thanks very much, everyone, for dialing in and listening to this year-end financial results. I will throw the floor open to questions. You have myself; you have the CFO, Matt Fitzgerald; and you also have Jason Grace, the COO; as well as Ben Crowley in the room. So I look forward to your questions.

[Operator Instructions] The first question comes from Peter O'Connor from Shaw and Partners.

Karl and Matt and Jason, a couple of questions for me. Firstly, the studies that are coming up that sound quite timely this year, the Old Highway and also A4. When should we expect them? You talked about imminently. Is that this coming quarterly or is it this half? Or when should we expect those 2 announcements?

All right. Thanks, Peter, it's Jason Grace here. So first, let's start with A4. We're at this stage at the moment putting the finishing touches on a pre-feasibility study for A4. So we expect to release that in the coming weeks and probably before the end of September. And then Old Highway, that's well advanced at the moment. We are updating mineral resource estimates and mineral resource models at the moment. We expect to have some announcements potentially going out over the next 2 months on that as well. In terms of completion of a feasibility study for that, that's likely to be, as Karl said, around the end of the year. So probably public reporting on that early in the new year.

And the feas on A4 given that you still have -- the PFS is coming out in September, would it be sometime mid next year for the feasibility to be completed?

No. We're really excited about the prospects of that. Matt touched on it. We are full on -- we are actually fast-tracking that as quickly as possible at the moment. I expect at the moment that we'll finalize that around January and probably looking to get it out in the market the day after that.

Okay. So January calendar year '22 and soon after release of the feasibility?

Correct, yes.

Okay. Any updates? I know we asked this at the last quarterly, but the Botswana government stake. Can you give us any more guide there? Is there any more developments?

No. That's still being evaluated by the government. We've given all the information to the government that they're required to do their evaluation. So we are waiting on that at the moment. So we don't have a specific time line, but we'll provide further updates as it comes to an end.

Okay. And Matt, if I could ask you to think over the next 2 or 3 years as we try and map out your company's balance sheet and your funding, given the different moving parts, net cash now, project facility in Botswana, how does the balance sheet look over the next couple of periods? Do you have a capital management structure where you'd like to stay in net cash to maintain liquidity? Is there any other kind of guidelines or rules of thumb you could give us as to how to sort of massage the cash flow and balance sheet over that period of time you're doing a major spend?

Really, Peter, we're concentrating mainly on impact of Botswana at the moment. So we start with our cash position, no debt, which is obviously an easy place to start. We, as I said, are really looking at a 50-50 contribution for our equity contribution to Botswana and also that project financing. I think as a group, that will still set us up with very low leverage levels and set that project up very well, particularly given that testing is on a T3 basis really. And what we're looking to hopefully add very shortly will be A4 on top of that, which clearly, you'd expect would be superior economics. So really, that's our concentration at the moment. We haven't set our real balance sheet -- future balance sheet type target in that way. That will very much depend on how any other activity goes, whether we have other transactions or other consolidations or other expansionary type capital. But at the moment, we're happy with where we sit in terms of our capital management.

Just 2 follow-ups on timing of that facility. Could you give us a guide? And secondly, as a banker, do I want to wait for A4? And is that why you're fast-tracking it for early next year release, to try and give bankers more confidence, potentially getting better coupon because of that?

So the short answer is no. So we're fast-tracking because we're excited to build a 5.2 million tonne per annum operation. So really the fast track doesn't have anything to do with the banks. And the banks are more than comfortable as they sit on term sheet based on T3. It's got strong economics. They clearly see the upside of A4 in exploration, but no, it's not as a direct result of that. Sorry, I should add, you asked about timing. So the bank term sheet process is over the next couple of months. And then we'd look to draw down over that facility during the first -- during the end of the first half of next year.

[Operator Instructions] The next question comes from Sophie Spartalis from Bank of America.

Karl and team, just a couple for me. Just firstly, on page -- on Slide 9 of the presentation in regards to the higher corporate costs, employee benefits and admin expense. We've seen a nearly $19 million increase in that to support the strategy. So we're at nearly, what, $70 million in FY '21 versus $56 million or so in FY '20. Can you just talk around how that looks as and if DeGrussa extends and what we should be thinking sort of around that 3- to 5-year horizon for your corporate costs, please?

Yes, sure, Sophie. Matt. Really, the operations costs are driven sort of in 2 parts. One is about expanding some of that group and certainly some of the overhead in terms of an international expansion and setting ourselves up for that. And we tend to hold those costs in those areas rather than directly to too many projects. Really, during -- year-on-year, we have seen an increase in employee benefits cost. So year-on-year, it's about $5 million. Part of that is some provisioning, so not in cash flow but provisioning for some retention spend that we have in place at DeGrussa, as I said, to keep that efficiency and financial performance strong right to the end of DeGrussa's life. We've also seen some cost pressures, as many would know, around freight. So the global shipping industry is seeing some market increases in terms of freight rates. That's about another $6 million or $7 million in there. So there really is a bit of a blend in terms of that increase year-on-year. Mine operating costs in terms of direct costs outside of people generally are up fairly consistent though. Over the next few years, I would expect our overhead to increase, our sort of headline overheads to increase by about $4 million or $5 million a year off what is still a pretty low base industry-wise. So if you're thinking, say, $10 million, maybe it becomes about $15 million. Post that over the next sort of year or 2, it really depends on the execution of our strategy and where we operate. But in an overhead sense, it will cost more, of course, to operate globally. But we'll continue to control that as best as we can. As I say, we are coming off a pretty low base in terms of our corporate overhead, which has largely been in support of DeGrussa. We are also running a decentralized operating model at those international centers. So there will -- there is naturally some overhead that sits in each of those areas that we accumulated to the group.

Okay. That's very clear. So just in terms of DeGrussa, just given the uncertainty against the backdrop of labor pressure in WA and the employees wanting certainty. You talked around sort of $5 million in retention costs. Can you just talk about how you're managing the workforce at DeGrussa given you've got potentially Old Highway coming in, and then beyond that, the future is relatively unknown or dependent on further exploration upside?

Sophie, it's Jason here again. So look, we've got a very engaged and really quite a loyal workforce up at DeGrussa. So -- but we're not naive that there is a mining boom and pressure on labor in the industry at the moment. We've done a number of things there. So firstly, if we touch on Old Highway. We are trying to push that as hard as we can. And we expect to finalize that feasibility study very early in the new year, as I said before there to Peter. And what we will have then is a line of sight on what the site will do and our activities levels on that site going beyond mine production at DeGrussa and also at Monty. So that will go a long way to give our workforce certainty. In the meantime, we are doing a lot of work. And particularly with our global expansion, it does provide opportunities for internal employees, and we're trying to do that as much as possible. And at the same time, Matt also have mentioned there as well, we do have a retention scheme that covers all of our direct employees up at DeGrussa that make sure that they will be rewarded to actually be loyal and stay as long as possible towards the end of mine life.

Okay. And then just a final one, any updates at Black Butte?

No Black Butte at the moment, so we are working away on optimizing the feasibility study for Johnny Lee. And at the same time, we're actually in the process of mobilizing 2 diamond drill rigs. So one has currently arrived on site, and we'll be drilling away. We're doing 2 lots of drilling, or if you like, 2 programs. So firstly, we'll be resource drilling at the satellite Lowry deposit that we announced a mineral resource on earlier in the year. And we'll also be doing near-mine exploration in an attempt and also in a concerted effort to actually lift the value of that overall project and certainly boost the business case for us to look at the green light on that at some stage in the near future.