Sandfire Resources Limited (SFR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Sandfire Resources December 2021 Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Nicholas Read. Please go ahead.

Thanks very much, Melanie. On behalf of Sandfire, a very warm welcome to everyone, and thank you for your time today on this final day of reporting season. It's my great pleasure to introduce today's investor call and webcast on Sandfire's financial results for the 6 months to 31 December 2021. Reflecting the significant changes which have occurred in Sandfire's business over the past 6 months, today, I'm introducing the senior executive team from different locations around the world. Firstly, in Miami, Florida, we have Sandfire's Managing Director and CEO, Karl Simich; and Head of Investor Relations, Ben Crowley, who are attending the BMO Global Metals & Mining Conference. Secondly, from the MATSA operations in Southwestern Spain, we have the company's Chief Operating Officer, Jason Grace. And finally, here in Sandfire's Perth head office, we have the company's Chief Financial Officer, Matt Fitzgerald; and David Wilson, Head of Technical Services and Business Development. The order of proceedings today: Karl, Jason and Matt will firstly run through the December 2021 half year financial results presentation, which is available on the ASX platform and as a synchronized slide show via the BRR Media service using the link on the front of the presentation. When we get to question time, Karl will hand over to Melanie from Chorus Call, and we'll deal with telephone questions first. In the interest of efficiency and given everyone's location, I will direct questions appropriately as we move through the question queue. Once we have completed the telephone questions, I will deal with any online questions submitted via the webcast browser before handing back to Karl for closing remarks. A recording of the entire webcast will be available following the conclusion of the call. Post preliminary logistical remarks out of the way, it's now my pleasure to hand over to Karl over in Florida to introduce today's presentation. Karl, please go ahead.

Thank you very much, Nicholas. And welcome, everyone, to the call. And I look forward to presenting the half year results and other key matters that have been occurring in the business over the last 6 months. So great pleasure to be talking to you today. In terms of the business and Sandfire and where we operate, clearly, over the last period of time, we have been doing a lot of work to progress our strategy and to find ourselves now very much in a transformational stage of our business. And we have had a -- the last 6 months of excellent operating performance, just continuing excellent performance from DeGrussa; aggressively moving forward in the development of the Motheo project in Botswana; as mentioned and where Jason Grace is located at the moment, the acquisition of the transformational transaction to acquire the MATSA complex in Spain. And we continue with an extraordinary strong push in terms of the key element of our business, our organic exploration globally. In terms of strategy, we are well and truly continuing to move forward and execute our business based on the strategic plan that we set out some 2 years ago and continuing to: one, execute delivery; continue to sustain and grow our production profile, certainly through the acquisition of MATSA; aggressively moving to accelerate discovery. We have a very substantial exploration budget on foot in Western Australia, in Spain, in Botswana. And also, we're exploring for the first time now in Montana, U.S.A. And we ensure on the strategy that all of our people around the globe are aligned and empowered and have all the resources and tools that they need to execute their work. And as well, from a business perspective, ensure that we are optimizing our capital structure in terms of debt and equity and engagement. Our values as a business are absolutely core. They really are the DNA behind the business, and they drive our behaviors and allow us to bring our international operations together to drive value through growth. And what is critical to us is honesty, respect, collaboration, accountability and ultimately also performance. In terms of headline results for the half year, and I will just bring your attention that we have changed our reporting currency into U.S. dollars. And everything we are quoting today will be in U.S. dollars, rather than one item being the dividend. But sales performance for the half year, once again, an outstanding result of almost USD 312 million and a very strong EBITDA for the half year of $161 million. This resulted in a net profit attributable to the equity holders after tax of USD 55 million. So a very strong performance for the period, a very strong cash flow of almost $200 million from operating activities. And as well, just to mention after raising a substantial amount of equity, Matt will go through the detail in due course regarding the financing of the business over the last 6 months, but certainly up until where we sit today, we still sit at the end of -- after the MATSA transaction has been completed with USD 321 million in the bank with drawn facilities, but we're in a very strong financial position on the balance sheet. In terms of key operating highlights for the 6 months. Outstanding results once again from DeGrussa at nearly 35,000 tonnes of copper production and over 16,000 ounces of gold in the period and still, in all circumstances considered with the various input cost pressures, a pleasing C1 operating cost of $1.10 per pound. And clearly, as we know with the copper pricing at $4 -- well, almost mid-$4 a pound, it provides us very good margins. Production guidance for DeGrussa for the period will be at the higher end of guidance of 64,000 to 68,000 tonnes of copper and 30,000 to 34,000 ounces of gold for the year. And cost guidance for DeGrussa still remains at $1.10 to $1.20 for the half year. In relation to other key elements, we are pushing very hard on the Motheo copper mine and its construction. Substantial number of people on the ground and in fact, well over 1,000 at the moment. New mining equipment has been arriving on site, being assembled. Everything on-site is brand new, world-class, state-of-the-art. So there will be no shortcuts taken there, and progress is really quite excellent. Feasibility study for the expanded operation will be completed in June. It's a fait accompli as far as we're concerned in terms of what the results of that will be. And effectively, where we see at the moment, we are driving hard as we sit to proceed to a construction of a 5.2 million tonne per annum operations. We also have somewhere in the order of 12 drill rigs on the ground in Botswana, and we are significantly pushing hard in terms of that continuation of organic exploration. And we do believe that province and that substantial footprint that we've got in Botswana will yield other significant results and probably far more significant than we've seen to date. And just touching -- during the half year, we entered into the agreement for the acquisition of MATSA. That was completed on the 1st of February, and we have done an extraordinary amount of work, which the team will go through, through the balance of this call, in terms of integration and preplanning for that transaction to complete. And I'm very happy to say that we've put an enormous amount of effort in -- for its smooth completion and also a very engaged implementation of that into our business. And I must say, that is going very well. So we're putting a huge amount of effort in -- to making sure that there's a smooth transition and a smooth integration. It is a world-class asset, without a question of a doubt, 3 underground mines, a very solid processing facility. And we just need to make sure that we optimize that operationally, and Jason will touch on that. But also, we believe with the limited amount of exploration and security in the Iberian Pyrite Belt that is under our control now, there is exceptional exploration opportunity. And we'll be spending heavy on exploration to look at greater high-quality grade opportunities and also mine life extensions potentially out of there. But what I would say is that where we sit at the moment, Sandfire is in command of 2 world-class mineral belts, particularly for base metals and for copper in the Kalahari Copper Belt in Botswana and also in the Iberian Pyrite Belt in Spain and Portugal. So we're in a wonderful position to leverage off those situations and look forward to getting a reward for the value inside the business as we continue to disseminate that information and deliver on our strategy. I'll just pass over now to Matt Fitzgerald.

Thanks, Karl. Starting with DeGrussa, clearly, it's driving, as Karl mentioned, our P&L results for the half year. So we'll step through firstly starting with DeGrussa physicals and really just to recap some of the half year physicals that we disclosed in the December quarterly. $1.10 C1 costs, impacted predominantly by energy and shipping and port costs. And to the full year guidance, $1.10 to $1.20. Very solid half year performance, around 3/4 of ore coming from DeGrussa and just over 1/4 of ore coming from Monty and some very solid throughput -- mill throughput rates, just above 1.6 million tonnes on an annualized basis. Looking at how that translated through to segment EBITDA contribution. So as you can see, the DeGrussa EBITDA, around 65% EBITDA margin against the headline revenue of $312 million of revenue. And then our other segments as we report them, we expense exploration and studies up to the point of definition. So definitive feasibility, so Black Butte and Motheo have both negatively impacted group EBITDA in terms of the feasibility studies, drilling and permitting costs. And then exploration, of course, as we know, across the different areas of our business, we are strong believers in exploration and its value opportunities. And there's also some costs in there in terms of $4.6 million of the $26.9 million relates to MATSA's acquisition costs incurred up to the end of December. So on a group basis, $161 million group EBITDA, coming off a base of $204 million from DeGrussa. Moving now to a period-on-period group EBITDA comparison. So from USD 138 million of EBITDA in the corresponding prior period, EBITDA for this period is some $23 million higher than that. We've broken that out into a waterfall. That strong production and copper price from DeGrussa has, of course, led that strong EBITDA results, as we talked about in the previous slide. And particularly sales price and some volume contributing just under $55 million directly to that comparative EBITDA number. On the negative side, as we guided and have guided through the couple of quarters, September and December are really being impacted by freight costs. Global freight rates, not surprisingly for all, I'm sure, are higher than -- significantly higher than they've been in prior periods and have come off historical lows really over the last 3 or 4 years. And this is really the flip side of that. And also, port congestion and costs associated with that have impacted us during this half year. Really across the page, only some minor movements, up to the right and then that $4.6 million to the P&L that we see from the MATSA acquisition costs. So I'll talk about that a little bit more when we get to the MATSA slide as well. For an EBITDA for the group, $161 million. Moving across to financial position, and we have a very strong balance sheet. It is strengthened, of course, somewhat by the equity raising and the monies held and funds held at the end of December in preparation for the end of January MATSA acquisition. So certainly very cash heavy. Looking at that, we've also added some detail across, and I'll get to the waterfall in a minute, some detail across some of the other movements in cash. And also, just to recap that during that period, USD 145 million, it is denominated in Australian dollars as a facility, but we're stating it here in U.S. dollars, USD 145 million or AUD 200 million drawn down during the period also in preparation for the MATSA acquisition. And that has allowed us to come off what was previously a debt-free balance sheet, excluding lease liabilities, really allows us, as Karl mentioned, to leverage our balance sheet into being able to take something as impressive as an operation as MATSA into the group. Post balance date in terms of balance sheet, we took on, as everyone, I'm sure, is aware, USD 650 million MATSA acquisition facility, which is drawn in Spain and is separate to the parent. So it is effectively ring-fenced at the MATSA level. Moving to the cash flow waterfall for the half and really breaking into a couple of sections. Starting at $431 million at the starting position at the start of July, you'll notice that there's the operating cash flow, $193 million positive, and then really the rest, which relates predominantly to DeGrussa, income tax and also the full year dividend. Moving to the right, there's a section between equity raising, ANZ corporate facility and MATSA deposits, which is really prior the cash flow movement up to the end of December, and those 3 items are all MATSA acquisition-related. So prior to that point, prior to the equity raising, you can see $887 million. Up to that point, our cash would have been at that time around USD 469 million. Those MATSA-related cash flows, of course, happened up to where you can see closing cash 31 December 2021 of the USD 1.2 billion. Then the MATSA transaction itself, so the $650 million drawdown of debt on a gross basis, and then the actual MATSA acquisition of $1.565 billion, which in addition to the $300 million deposit paid prior to 31 -- deposits paid prior to 31 December makes up the headline, $1.865 billion acquisition price for MATSA. Tacking on to that, some cash flow for January due to -- partly due to -- there was a prepaid sale in December that related to a January shipment. And so in net cash and also with CapEx at Motheo, there's a net cash drop of $15 million to get us to end of January or 1st of February position, if you like, $271 million in terms of the waterfall. And then tacking on to that, USD 50 million, which was the cash acquired on the acquisition date of MATSA, so as at 1 February 2022 of $321 million of cash holdings. Moving now to dividends. We're very pleased to continue our strong record of returns to shareholders. We have acquired in MATSA a cash-generating asset. It's also a low CapEx asset in terms of upfront CapEx. It has, of course, mine development and ongoing and a fairly low burn rate of sustained -- of sort of sustainable CapEx levels -- sustaining CapEx levels. We, of course, have Botswana lining up well in terms of we're funding it from our balance sheet. And then around -- from around mid this year, this mid-calendar year, we expect to be finalizing the debt facilities for around $160 million of debt financing into Motheo. So very much a period of change for Sandfire, but very, very pleased to have, as on an interim basis, to declare a strong -- a dividend and continue that strong record of return to shareholders. So AUD 0.03 per share dividend for the interim period. As I said, fully franked. And the record date, 16 March. Payment date, 30 March. We are, of course, as Karl mentioned, very, very closely optimizing and watching our capital structures as we go. We have taken some debt, of course, and some leverage onto the balance sheet, which we believe is very, very manageable based on the quality of the cash-generating assets that we hold. And future dividends, of course, will come out as the Board determines in the future. But as I say, we'll balance our project development funding mix, exploration and growth. And then as we move into, again, a more sort of, I guess, stable operating environment in terms of having 2 -- at least 2 producing and cash flow-generating assets, then we'll, of course, and the Board will, of course, revisit our dividend position over time. Moving across to our new operation at MATSA, and we'll cover this in 3 parts between Jason and myself: So firstly, the transaction; then a bit of a discussion around optimization pre and post the transaction date; and then finally, the guidance for this sort of interim 5-month period up until the end of the financial year and the point where we'll then be issuing MATSA guidance in line with group guidance. So firstly, to the acquisition. Just a bit of a recap on some of these items. Of course, well known, and we've put out announcements covering these -- most of these details before. In terms of the transaction, completed on 1st of February with equity, the MATSA debt corporate facility and also our build of cash holdings, which really came from our DeGrussa operations over the last couple of years. And the debt-free DeGrussa operations certainly helped in being able to leverage our balance sheet. The financing facility for MATSA at USD 650 million is a 5-year facility. We have completed the syndication of banks, and we have a very high-quality collection of international banks both through Europe and very, very pleasingly, specifically in Spain. Some very, very strong support from Spanish banks but also U.S. banks, Australian banks and other European banks. So we're very, very pleased with the quality of that banking group, and we look forward to working with them on the success of MATSA over time and Sandfire more broadly. We laid out the finalized repayment profile. The first repayment, $118 million for that facility, due at the end of September this year and $198 million scheduled for the financial year of 2023 in total. We'll provide more detail around these as we go. This is just in financial years. But generally speaking, there's a payment around July and January of each year as we roll through the repayment schedule. Hedging. Also, as previous advised, hedging is in place across 3 years of copper and zinc for MATSA, just under 74,000 tonnes of copper at $4.19. Starts in the 2022 year, so in the next 5 months, around $4.32. And by the time we get out to financial year '25, it's $4.04. Zinc, just over 84,000 tonnes of zinc forwards. And that also has a range starting around $1.46 in the financial '22 year and sliding on -- a sliding scale down to $1.13 in the '25 -- what is picked up in the '25 financial year. So there's 3 complete calendar years of hedging between February of this year and February -- and January in 3 years' time. Now there's more detail for that for anyone who needs it in the completion announcement that we put out on the 1st of February of this year.

All right. If we now look at MATSA optimization. Operational integration is now well underway with the Sandfire integration team on site and working very well with the Sandfire-MATSA team. Initial work for integration extends across the key areas of operational excellence, alignment of policies and standards and reporting systems and governance. Near-term key projects have focused on the period to June 2022 and supporting the issuing of interim guidance, as Matt touched on before, for the remainder of this financial year. The key work in this area has included the confirmation of near-term operational plans and budgets; review and commencement of updates of mineral resources, which in turn will support updates of the life of mine plan and ore reserves; significant work on plant readiness, recovery and concentrate product optimization; and mining production and delivery. Looking out longer term, and following the completion of this initial and important work, we expect to issue financial year 2023 guidance in the middle of this calendar year and, at the same time, continuing to establish a strong base at MATSA for multi-decade operations that will be underpinned by a strong safety culture at MATSA, alignment with Sandfire's values, an in-depth understanding of the key drivers of value and a commitment to operational excellence, our focus on ongoing growth of mineral resources and ore reserves and in line with Sandfire's DNA as an explorer, a commitment to long-term investment in exploration right across the Iberian Pyrite Belt. Circling back to the current financial year and looking at MATSA interim guidance. We are very pleased to be able to issue production guidance for the 5 months to June 2022. And this includes approximately 26,000 tonnes of copper, approximately 37,000 tonnes of zinc, approximately 1,000 tonnes of lead and approximately 820,000 ounces of silver. Please note that we've also included guidance on the payable percentages for all elements. Finally, noting the complexity associated with the production of both copper ore and polymetallic ore across the mining operation, we have included a breakdown of production tonnes and grades for each of the 3 underground mines. And when combined, the guidance is copper ore production of approximately 450,000 tonnes at a grade of 1.8% copper and polymetallic ore production of approximately 1.45 million tonnes at a grade of 1.9% copper and 3.4% zinc and with total production expected to be approximately 1.9 million tonnes for the period. Now moving to base metals concentrate production guidance. We note that MATSA produces 4 concentrate products that includes acute poriferous copper concentrate, a polymetallic copper concentrate, a zinc concentrate and a lead concentrate. You will note the breakdown of expected concentrate production and grades for each of these products with the combined concentrate production expected to total between 200,000 and 220,000 tonnes for the period. The expected revenue split is also shown. And unsurprisingly, the lion's share of value is driven by copper and zinc.

Looking now at MATSA unit cost guidance. And as we mentioned before, strong margins have commenced from day 1 of ownership. So at an indicative level, around USD 3.40 per pound of direct copper margin against C1 predevelopment CapEx. Headline C1 costs for the 5 months we expect to land around $0.94 per pound, and they are higher, driven by global cost pressures. Just to point out, one of those -- so from around mid last year up until now, on a processing basis, costs are up around $0.25 per pound. I'm guessing no surprise to anyone around higher energy costs and global inflation, which includes labor inflation costs and pressures in Europe. So certainly, on a margin basis, much stronger than any of our prior analysis that we had worked through. Looking at group guidance, so combining the 2 together, DeGrussa across the 12 months of the financial year and MATSA for the guidance that we've just put out today in terms of 5 months to June 2022 and pulling them together, we're approaching 300 million pounds of copper production for the full year. Regarding for the second half costs of the -- so the second half combining DeGrussa and MATSA together of around $1.05 to $1.15, so the midpoint of that is around the same number as we looked around the first half, which was just DeGrussa. So similar first -- similar second half to the first half. Acquisition costs, importantly, total around $50 million. Around 1/3 of that, we expect to finally go through the P&L for the full financial year, so around $17 million to the P&L. And around 2/3 of that $50 million of MATSA acquisition costs go to the balance sheet against the debt and equity numbers. So headline production, 90,000 to 95,000 tonnes of copper and then around -- from MATSA -- so that will be combined MATSA and DeGrussa. And then just for MATSA is the zinc and lead numbers shown there and also the silver numbers. And then DeGrussa contributing on the gold side, 30,000 to 34,000 ounces of gold expected for the full year. CapEx across DeGrussa and MATSA, around $80 million in terms of mine development. For the full year, around $145 million expected. And we'll get to that in a minute around Motheo, around $145 million for the full year. And around $17 million in the group as quite a low sustaining CapEx type burn rate. Exploration, evaluation and studies, to wrap those together, around $55 million expected for the group for the full financial year.

If we now move to the Kalahari region and, in particular, the development of the Motheo copper mine. With reference to our recent pictorial update released to the market on the 14th of February, we're very pleased to advise that construction and development continues to proceed on schedule and on budget with first production expected in the first half of calendar year 2023. Some of the key recent developments for the project include a substantial ramp-up in the on-site workforce to now be well over 1,000 people; significant progress with the development of access roads to the Motheo site; pouring of the foundations for the crusher, the reclaim tunnel and mill with over 1,500 cubic meters of concrete poured to date. Construction of the 750-room permanent accommodation facility is now advancing well. The mining contractor has also mobilized to site and constructing key facilities and assembling mining equipment, and foundations for the 132 kV power line have also commenced. And finally, the mine operations team continues to build up in preparation for the commencement of mining. In addition to this, Sandfire intends to fund the development of the Motheo copper mine through a combination of cash and project debt. Credit committee-approved offers for debt financing of the USD 160 million required for base case development have now been received from the company's short list of potential international lenders. The selection of the syndicate of banks and finalization of terms will be completed in the coming weeks. If we now look at the development time line for Motheo. Construction of the permanent accommodation facility, power infrastructure and process plant will continue into the next quarter with the next key project milestones coming in -- over the coming period being the commencement of pre-strip mining at the T3 open pit in April and also the commissioning of the permanent accommodation facility in June. And finally, moving on to an update on the Motheo -- on mine construction and development capital. Given the substantial ramp-up in activity in recent months and with pre-strip mining operations to begin early in the next quarter, we are entering the phase of the project where we will be executing across all areas. And as a consequence, we will also be entering the peak spend phase of the project, which is forecast to extend over the next 3 quarters. The graph shown provides a breakdown of spend in all key areas of the project for each quarterly period. It should be noted that the costs shown relate to the 3.2 million tonne per annum T3-only base case, which totals USD 319 million. We are continuing to move forward with the 5.2 million tonne per annum expansion feasibility study, which is expected to add approximately USD 47 million in capital costs but also substantially increasing the overall value of the project.

Karl? Have we got Karl on the line just to wrap up?

Sorry. Just key takeaways for where we are at the moment. Clearly -- well, we've been doing a lot of work, and it's been a very busy 6 months for us. We continue to deliver on all elements of our strategy. We have continued to be well and truly on pace. And our team, our global team, is delivering results that really are into this global base metals sustainable mining company. So it's a wonderful scenario that we see. So very strong cash flow platform, a cash flow platform we're working off. We continue to look for great opportunities around the globe. We're not constrained by that. We're very excited about what's happening in Botswana in that production hub. And the opportunity for a great further expansion in that part of the world, having effectively -- controlling that Kalahari Copper Belt and a copper belt that has got an accelerating rate of discovery and with a strong pipeline, with the acquisition of MATSA into our business and a very long life and a potential to extend that substantially puts us in a very good position. So we are very excited. The team is very refreshed. The team is very focused. The team is working very, very hard, and we're very excited about what we can achieve over the next period of time. So with that, we're going to call the conference to a close, and we're going to open the floor to questions. And I thank you very much for your attendance and your listening today. And I think we're in a wonderful position to springboard and transform and transition this business over the next many decades to come. So thank you very much for listening, and the floor is now open to questions.

[Operator Instructions] Your first question comes from Rahul Anand with Morgan Stanley.

Two questions from me. First one is on MATSA. Look, if I take the 5-month production guidance and then annualize the number, it drops out at circa 10% below the presentation at the time of the acquisition. Am I thinking about this number correctly? I mean, your by-product credit estimates for commodity prices are also higher. So I would have thought there's probably a positive impact from that on a copper equivalent basis. So just if you can talk to that a bit and how we should be thinking about production and grades sort of progressing forward and what's changed from the time of the presentation in terms of the production side. That's the first one.

Thanks very much, Rahul. We're going to throw that one over to Jason in Spain. Jason, please go ahead.

Thanks, Nicholas. So Rahul, you're absolutely right. So annualized, we certainly land at that number there as well. So what has happened since the transaction is, obviously, there's been a lot of movement in pricing over there. And what we have seen for the team over here in Spain is that they have been doing some more work on particularly optimizing and using an NSR cutoff for mine planning. And what we've seen for that, it has brought in some lower-grade material into the mining inventory. So we've gone forward on that basis for the 5 months until we can get through and do a lot of work to actually optimize the longer-term mine plan. But overall, the metals are all still there. The grade is all still there. What we need to do over the next 5 months is really optimize that mine plan and make sure that we're doing the best thing for the asset going forward.

Okay. Just one quick follow-up there. In terms of the cost impacts then, is it fair to say that the cost differentials from the time of the acquisition to now are broadly all related to this change in terms of that grade profile and NSR cutoff? Or are you seeing some other material increases in terms of your cost base as well?

Thanks, Rahul. We're going to throw that one to Matt Fitzgerald.

So I'll have a first go on that one, Rahul. So certainly, partly because of the product mix, and as Jason mentioned, we're talking about a 5-month period, which is really our sort of interim almost GAAP guidance before we make some changes and see some of those programs sort of come to fruition, the -- I would comment on costs, there are global cost pressures, as I'm sure you're all aware. There are pressures on energy costs and inflationary pressure. So yes, there's underlying period-on-period cost increases. I would also point out that C1, particularly the headline level C1, is and will be very sensitive, of course, to not only to headline cost but also to the balance between copper and zinc production and also the relative pricing between copper and zinc production for that by-product credit. It's quite a material by-product credit at $1.72 compared to a copper price of $4.34. So multiple factors that impact that, but I would certainly say partly cost and partly production mix.

Okay. Perfect. Look, second one is a quick one. 35% NPAT payout as a policy for the dividend, is that something you want to continue going forward? Obviously, net debt on the balance sheet now and also, you've got some project builds going on and perhaps a bit of CapEx coming up at MATSA if you do choose to expand there. Is there an ability here to reset that dividend to a level perhaps that protects the balance sheet a bit more? Or are you happy with that 35% NPAT?

Throw that to Matt Fitzgerald.

Yes. Thanks, Rahul. Really, the 35% is what we've sort of been doing over history. We certainly don't have a formal policy in terms of dividend policy, but we've been very proud to be able to pay that sort of level out. Really, the dividend concept here is a little bit like the production guidance concept. It's a bit of -- a little bit of an interim period, a little bit of a holding pattern for the next few months. As I've mentioned before, we have taken on more debt. But we do have, in operations, 2 operations that are producing significant cash flow. So the executive team, the Board will think towards that, probably the middle of this calendar year and into the next financial year around setting, almost resetting in some ways, some of that. But I certainly wouldn't take it as a major signal for or against our 35% payout ratio. I think we're just in a transitional time for the business. So we've declared that as an interim dividend on this basis, and we'll reconsider as we go.

Your next question comes from James Redfern with Bank of America.

Yes, two questions, please. The first one is just in relation to the power supply agreement for MATSA. Just wondering if you could please disclose what proportion of electricity is purchased under long-term contracts first on a spot basis from the grid. And then I've got one more, please.

Thanks, James. We're going to pass that one to David Wilson here in Perth.

Yes. Thanks, James. So presently, MATSA's power is purchased under contract from [ Endesa ], including the local state utility over there. And it's currently at spot price. Certainly, some of the things we'll be looking at going forward is what's the right strategy there. I will note, though, that the MATSA team already have in place some other projects to diversify supply, I guess, by installing solar farms and the like, currently due to come in first half of calendar year 2023. But the MATSA team are working very hard to bring that forward as much as we can. So hopefully, that answers your question. But certainly, the focus there is to really get a handle on that and the exposure.

So just confirming, 100% spot at the moment until 2023.

Right.

Okay. Second question is just in relation to the resource to reserve conversion. So MATSA mine life is 6 years based on reserves and 12 years, including resources, which is not new news. But -- so I'm just sort of wondering, what are the steps to convert these resources into reserves? I mean, obviously, reserves -- the ore, which is economic at current prices. But I'm just sort of wondering how you see that playing out. I mean, should we expect a large degree of exploration and drilling to take in the next couple of years to convert those resources to reserves? Or are there some other factors at play?

Thanks, James. We're going to take that one over to Jason in Spain. Please go ahead, Jason.

Right. Thanks, Nicholas, and thanks, James. Look, from our point of view, so there's a 2-tier approach to this. So we are currently doing an update of the resources at the moment, and that is based on infill drilling and also extensional drilling around all of the existing mines over there. So we expect that work to be completed probably sometime next month, and then we'll move straight into a full life of mine plan update. And that will support then all reserve updates. So we expect to be in a position to provide updated resources and reserves by midyear. So that's step one. Step two is we've already got also our geology teams and also our exploration terms mobilized over here to look at longer-term drilling, which will inform future updates. But it's certainly, for us, resource growth, and reserve -- resource to reserve conversion is going to be a major focus for us over the next 2 years.

Your next question comes from Hayden Bairstow with Macquarie.

Just a question on Motheo, just interested in your sort of initial thoughts. You've been there for a few weeks. And how quickly you think you can potentially modify things, particularly with these higher power prices impacting processing costs at the moment? There's sort of -- is there much you can do on softer ore or anything like that on the mix to sort of ease the pressure on that front? And the second one is just on Botswana. This is in the schedule. It's in the presso. Are we starting to see a little bit of slippage to first production just in that second half of '23? Or is it just my eyes deceiving me?

Thanks, Hayden. Over to Jason for both of those.

Thanks, Nicholas, and thanks, Hayden. Yes, it's very, very early in Spain here at the moment. So I might get to eat breakfast in about 3 or 4 hours apparently. So look, firstly, on just offsetting some of the impact of those power costs, we are looking to add some things at the moment, particularly to optimize some of that feed. So with zinc prices going up significantly, what it does particularly is bring into play Sotiel at a much higher value ore source at the moment. So we are particularly trying to optimize that and try and bring forward some of that zinc production probably into FY '23 as well. In terms of softer ore, there's not a great deal of differential between the ores there in terms of power consumption. But Dave touched on it a bit before, the team is looking at -- basically, they're well advanced with development of dedicated solar facilities over here. We expect that the first stage of that could be brought down sometime in 2023, but we're just trying to push that as hard as we can and try and offset some of these cost issues. In terms of Motheo, look, in our -- in terms of project development, we see no slippage at this point in time. The project team is doing an excellent job. We expect to start mining next month. And all is going in line, particularly with schedule but also on budget.

Your next question comes from Lyndon Fagan with JPMorgan.

I just wanted to concentrate on Slide 19 that looks at the cost guidance. Am I right in deducing that the TC/RCs or selling costs as they're talked about on that slide for both copper and the by-product credits amount to around about $125 million a year annualized?

Thanks, Lyndon. We'll pass to Matt for that one.

Yes. Thanks, Lyndon. So we do present it here on a net basis. So any copper costs are certainly copper above the line in terms of C1 gross. And any TC/RCs and other selling costs certainly sit below the line in terms of going against the zinc/lead or silver credit. So you can deduce, of course, from effectively the zinc price because that makes up most of the by-product credit, what the costs are against that headline zinc price to get back to $1.72. And yes, there are, of course, the costs in terms of TC/RCs. And also, just remembering what we're delivering in terms of MATSA to the port is the concentrate to that point. And then there's also, of course, rollbacks and other deductions for things like shipping. So it does then take on effectively those costs to -- all the way through to customer. But yes, you should be able to deduct those from those numbers, not necessarily in a dollar sense but certainly in a per pound sense. And if you have any issues, obviously, let us know.

But just to confirm the order of magnitude. So if I take the by-product at $1.72 and recreate the revenue based on the footnote and those prices, and the gap I've got is TC/RCs, if I turn that into dollar million based on your guidance, I guess, basically $60-odd million annualized. And then I can work it out from the copper TC/RC that's in there. So I just wanted to confirm because this is a big number, and it's also gone up relative to the previous disclosure. So yes, I just wanted -- yes or no, is it around about $125 annualized? Or is there something else in there that's considered selling costs that is kind of polluting that?

Yes. I'm not sure about going up in terms of your comment about previous -- the previous numbers. But certainly, yes, your number is reasonably close, I would think, but you can also deduct it from what we have put out in terms of gross and net costs. So on a basis, just for example, during last year, where on a gross basis, the by-product credit was, say, $2.50 and now the by-product credit is $1.70, the difference between those 2 numbers is $0.80. So you can certainly deduct that back to what a zinc by-product dollar credit is, a similar thing for copper.

Okay. And look, the other question I had was just that comment around more lower-grade material in the mine plan. I just wanted to explore that a bit. Obviously, you've only just got the keys, and this is a plan you've inherited. But in terms of thinking about the grade profile, and I know I've already asked this, and you're not really ready to talk about it in detail, but what's actually changed there relative to the previous discussions around the mine plan? Do we need to be thinking about more lower-grade material over the medium term as well?

Thanks, Lyndon. We'll pass that one to Jason over in Spain.

Yes. Lyndon, you're absolutely right. We are working through this at the moment, and it is a relatively complex mine plan given you've got 3 mines. And it's basically got different contributions in terms of copper ore versus polymetallic ore there as well. So look, we are working through that and particularly that cutoff grade strategy and the impact at the moment. If you look at our production at the moment, it's pretty much in line with the average grade from the ore reserve at the moment. So a safe thing would be to basically project that forward over the near term. Obviously, we'll be working on optimizing that, and we'll be able to provide further information sort of around the middle of the year.

Your next question comes from Levi Spry with UBS.

Good questions there from Lyndon. So just exploring them a little bit further, so lower grades before we get the reserves. Does zinc return back to sort of the 4.5% of -- it has been and silver, I guess, nearly half?

Thanks, Levi. I will pass that to Jason.

Short answer is, yes, that's what we're getting out of mine plan at the moment, and that's what we're working towards through the midyear. As I kind of said to Lyndon there as well, the information that we have at hand at the moment, looking forward on the mine plan, there's a lot of work that needs to be done, particularly looking out at FY '23 and beyond. We'll definitely be doing that work at the moment. But if you like, where we're projecting at the moment for the next 5 months is in line with that ore reserve. So we'll be -- we'll provide a further update there around the middle of the year once we've got that resource update, and we're able to update the life of mine plan.

Yes. Okay. And so just back to the costs, just reconciling the $0.94 with the $0.40 to $0.50 range initially. So I think you said $0.25 was due to the higher processing costs. Does that mean the other $0.25 is all to do with the reduced credits? And what's the prospect for that $0.25 staying higher?

Thanks, Levi. I will pass to Matt Fitzgerald for that one.

Yes. Levi, you're right. So really, if you're doing a comparison to that period, you're talking about processing probably around $0.25 higher, of course, driven by energy costs. You're also right, there's a -- in a direct comparison sense, zinc production, a little on the lighter side. Zinc price, a little on the higher side. So there is a contribution there from the C1 credit as well. There's also a bit of an impact in terms of mining. There is some inflationary pressures in terms of salaries. But of course, that is also then moved around in terms of what actual copper production and what actual zinc production happens in a period. And then when you're looking at a 5-month period, of course, you're coming more and more narrow into a more and more narrow mine plan across the 3 mines. So all of that mixed together, then yes, that sort of creates a reconciliation back to last year's numbers.

Okay. And just last one sort of on the D&A question. Is there any reason we don't just to take the price, divide it by 30 million tonnes or what the new reserve will be? What are the other price allocation considerations when you think about that?

Yes. So we're going through the process at the moment in terms of price allocation. It's not hugely -- as you probably know, it's not a hugely complex mining operations that tend to -- the price tends to end up, apart from the assets that are obviously clearly identified with the price, acquisition price end up in mine properties. I think the -- probably, the biggest sort of high-level lever in our heads that we -- means we need to certainly wait for that process to finish is over how many tonnes are you talking. As I think James mentioned, a 12-year resource, a 6-year reserve with a resource that's around the same grade as the reserve, and it's just subject to drilling entities and those sorts of things, that does get a little bit complicated in purchase price allocation in terms of the impact of purchase price allocation, what it then has on depreciation and amortization rates. So a little reluctant to give too much until we've actually completed that process. It's not complete at this stage. But the biggest decision in that really in terms of D&A sort of burn rate becomes -- you're talking about our resource, our reserve or something in between.

Your next question comes from Kaan Peker with Royal Bank of Canada.

A few questions, if that's okay, mostly relating to MATSA. We've heard a number of zinc smelters are looking to reduce production recently. Maybe if you can talk through your outlook or expectations around TC/RCs. And I'll circle back with a cost question.

Thanks, Kaan. We'll hand that one to David Wilson.

Yes. Perhaps rather than -- perhaps a market outlook where TC/RCs are going. We're just about to go into the process of resetting the TC/RCs under the offtake agreement. At this stage, our forecast going forward is for that to stay pretty consistent to what we -- was baked into our numbers announcement. But I guess that's something we'll need to look more closely at.

Sure. And second one is on costs. You've talked about it quite a lot. But can you give an indication of how much costs have increased year-on-year on a per tonne processed basis? And that polymetallic nature of the ore body, and there's quite a bit of variability in the grade process. So it's difficult to get a handle on what costs have done on a per tonne of processed basis. So could you give an idea of that? And what's been factored into the cost or the power costs into guidance and whether that's going to increase?

David again.

Yes. Look, thanks, Kaan. On a pure cost per tonne process, so incorporating mining and processing costs, it's in the order of 20-odd percent. The vast majority of that, probably 2/3 or 3/4 of that, probably does relate to the power price. And the remainder is, I think Matt mentioned earlier, the general inflation. Now I think the inflation number for part of Europe for 2021 was in the order 6% to 7% in that range. So some of that's probably due to labor and some of the other mining contract. So that will give you a sort of a guide as to -- on that cost per tonne, how it's moved.

And is there any cost hedges entered into as part of that project finance facility?

No. There isn't, Kaan. It's only on the copper and zinc side. And then as we mentioned before, the -- on the energy side, that is currently running at spot.

Sure. And just to squeeze last one in. With the targeting of low-grade ore, as far as I understand, that's a function of higher commodity prices. Is that correct?

I'll pass that one to Jason in Spain. Please go ahead, Jason.

Yes. So Kaan, just to be clear, we're not targeting a low-grade ore at the moment. So what the team do is they do optimize cutoff rates, depending on the outlook for metal prices. So when those metal prices do increase, what it does, it brings low-grade material into the schedule. So we are seeing some impact of that at the moment. As I said, all of the material there that we expected from a resource and reserve point of view, that's all intact. What we need to do is make sure that we're optimizing in terms of delivery of value for the company rather than maximizing resources and reserves at this point in time. And that's the piece that we'll be working through basically in the coming months.

Sure. And so the flexibility within that sort of short-term mine plan, I think Hayden's question touched on, you said you could probably target more zinc in the next 3-odd months?

Yes. Look, there's an opportunity to do that given the pricing at the moment. So if you go back to comparing to when we actually submitted the bid and entered into the transaction, those pricing -- that pricing environment is significantly different. So there is an opportunity to be able to do that and bring forward some value.

Last one, sorry. In terms of silver, the recoveries there, have they changed? Or is that mainly a function of grade?

I'll pass that one to David here in Perth.

Yes. Kaan, for this period, the next 5 months, you'll note the lead concentrate is a fairly modest volume. Typically, the lead recovery is in the order of 35%. So this period, the lead grade drops below 1% for a couple of periods where actually, there's some periods where head grades are too low to produce a lead concentrate. So that has impacted the silver production in this next few months. We see that in the subsequent periods. And we see that starting to return at a much more consistent lead recovery, we expect, in the second half of this calendar year. And that will bring with it more silver. But that's something that we've been into pretty closely with the met team. And the [indiscernible] team there at MATSA, we need to get a better handle on to really understand how we can do that. Because clearly, it's not -- zinc and copper are the key drivers of value, but we want to make sure we're optimizing right across the spectrum.

Your next question comes from Daniel Morgan with Barrenjoey.

Perhaps a follow-up on all the grade and -- questions. At MATSA, you appear to be mining a lot more polymetallic ore in the 6-month guidance, so perhaps 20% of ore, which compares to reserves resources of 38%, 39%. So is that a choice to go after the poly or to get the zinc? Or is that mine scheduling or a bit of both?

Thanks, Daniel. We'll pass that one to David Wilson.

Thanks, Daniel. It's about -- just in terms of the split between copper ore and poly ore, it's about 25-75 in this period, the next 5 months. And yes, that is perhaps more poly ore than what we had -- what we spoke about in September. And I think the answer to your question is, you probably answered your own question. What we have found, and following on from Jason's comments, is that with the current, I guess, price outlook across all the different commodities, the NSR of the poly ore is sort of much higher than what it was previously. And so yes, the mine is going to take a bit more poly ore where it can.

Particularly, it brings -- as Jason said earlier, it brings Sotiel in as a really good option, really increases the value of that material, even that has the extra tracking distance associated.

Okay. And I guess a follow-up question to that is your 5-month guidance for the poly ore particularly, which you're targeting. It's 3.4% on the zinc, which appears to be below the reserve grade of about 4%. Is that bringing in this low grade, I guess, the net smelter issue we've talked about is doing? And I guess I'm trying to think, does that zinc grade lift back to reserve grade? Should I be thinking about it in FY '23 and '24?

David again.

Yes. You'll see on Slide 17 the differential between the Magdalena and Aguas Teñidas. Obviously, the Magdalena zinc grade is performing pretty close to, I think, reserve, maybe a little below. We see that going forward as maintaining that, perhaps strengthening through the rest of the calendar year. Aguas Teñidas is the one that's perhaps a little lower at the moment. That -- as Jason said earlier, as we work through this next life of mine plan, we'll really look at how we can optimize that. But there are a couple of new mining areas that are just coming to production there that we need to understand better on when we can start to improve that grade.

And then maybe turning to the CapEx guidance. And I know you're giving us 5-month guidance, which can be -- things could be lumpy and not necessarily a sustainable basis to guide on. But simplistically, what would you see as sustaining and development CapEx on a yearly basis on average, year in, year out, for this operation? Is this a good guide? Or is there a different number we should use?

Thanks, Daniel. Over to Matt Fitzgerald for that one.

Yes. Thanks, Daniel. As I've -- obviously, be a little bit careful -- I have to be little bit careful in my answer in terms of we haven't put out future, obviously, resource reserves, mine plans and future guidance. But just as a general indication, about USD 100 million per annum, so on an annualized basis, between mine development and sustaining. So the mine development for this 5 months is probably on the slightly lighter side of the range. And then the sustaining CapEx is probably on the slightly upper side of a general -- of an ongoing range, of course, subject to other things like solar projects and other things that may come up from time to time. But on annualized basis, put them together, about USD 100 per annum.

Okay. And your -- lastly, you've taken on some debt to do this acquisition. Can you just guide us on roughly the finance cost or the interest cost on the debt?

Over to Matt Fitzgerald again.

Yes. Thanks, Daniel. We've obviously got to be a little careful in terms of disclosure in terms of specific rates. But certainly, competitive at an international sort of banking level, you're in the sort of 3%, 4% type ranges in total.

Your next question comes from Timothy Hoff with Canaccord.

Most questions are answered, so just one quick one for me, which is the $17 million guidance for the acquisition costs. I see $4.6 million in the first half numbers. Does that imply, what, $12.4 million expense coming through in the second half?

Thanks, Tim. We'll pass to Matt Fitzgerald.

Yes. Correct, Tim. That's correct.

Your next question comes from Peter O'Connor with Shaw and Partners.

Matt, just a housekeeping. U.S. dollar accounts now, when will you be in a position to give some pro forma backward-looking stuff beyond just the 2 halves you put in the presentation?

Peter, June, we'll also have the June comparative back to the prior year. And we can -- in -- part of that process, of course, as you might understand, is actually going back a fair way. So any other gaps that you have in sort of historical models or anything else you want, when we do that June numbers, we'll be able to share some of those. We've disclosed those. For the full year, we'll go to share some of that historical with you as well.

Okay. And Jase, it sounds like by the Q&A so far, there haven't been a lot of positive surprises in MATSA. Have there been any? And can you recap, are we missing any of the negative surprises which haven't come out yet?

No. Look, I wouldn't say there's really any negative surprises at all. I think what we're seeing is a lot of opportunity. The mine operation has run well over here. There is opportunity to improve. So we see that as a significant upside in terms of additional production and costs. Dave kind of touched on it there before as well. We think that the potential at Sotiel is higher than previously thought, both from a resource and reserve upside, but particularly utilizing that. And the benefit is coming from zinc pricing on an increased NSR. But overall, we're really optimistic and really think that it's got a very bright future, this operation.

Your next question comes from Stuart McKinnon with The West Australian.

Karl and team, I was just wondering if there was any sort of impact on the business other than higher energy prices from the conflict in the Ukraine at the moment, not just the conflict itself, but the sanctions by the West against Russia. Does that impact the company in any way or the copper market in any way? Can you give us some color or commentary around that, please?

Thanks, Stuart. We'll pass it to Karl over in Miami. Karl, please go ahead.

Thanks, Stuart. Look, at this point in time, Stuart, we're not seeing any impacts specifically as a consequence of that conflict. So not at this stage, and we don't -- we're not quite sure where that conflict will get to, but certainly not having an impact on us. So look, obviously, we're not terribly -- like the rest of the world, we're unhappy with what's going on. But it's not a real impact on our operations. It doesn't have any impact on those costs.

Your next question comes from Matt Greene with Credit Suisse.

Sorry, just to go back on the unit costs here. On my calc, it's just over $1 a pound in selling costs, and about $0.50 is on the credits there. So I mean, is that all TC/RCs? Because that seems pretty high. Or are there marketing costs subtracted or involved -- included in that number?

Thanks, Matt. We'll pass that to Matt Fitzgerald.

Yes. Thanks, Matt. So I think I would look at it on an all-inclusive basis. So you are correct in that there's a split for copper, which is effectively above the line in terms of selling costs. And there's a split, as I said, for the credit, the by-product credit for predominantly zinc. But think about it as a mine that's delivering 4 concentrates. Remember, it's delivering a constant -- those concentrates to a shed in Huelva under the sales agreement. So any cost, whether it's up to that shed, which is obviously transport, and anything post that shed, so TC/RCs, shipping, what you would normally incur all the way up to the customer is effectively incurred back in terms of what you, on a net basis, sell that ore -- that concentrate through to the blending facility in Huelva. So all inclusive, TC/RCs, shipping and road transport.

Okay. That's great. So if we take that $1 a pound then, are you able give us a rough split then as to what -- how much of that is transport and TC/RC?

I don't have any precise numbers in front of me, but let me get back to you.

Okay. That's great. And just one follow-up on MATSA. I guess in the next few months, one of your key near-term projects is the long-term mine plan. So are you expecting to complete this by midyear? And if so, when do you think you'll be in a position to provide some medium-term outlook on MATSA to the market?

I might pass that one over to Jason in Spain. Jason?

Right. Thanks, Matt. You're right, that is a big focus over the coming months. We expect to finish that work around the middle of the year and then inform budgets going into the new financial year. So at this stage, we plan to be able to update the market early in the new financial year.

Your next question comes from [ Alexander Papanow ] with Citi.

On Motheo, I just wanted to confirm that there hasn't been a change on the Botswana government's decision to not take up their stake in the project.

Pass that to Matt Fitzgerald.

Yes. Correct, [ Alexander ]. The government of Botswana has advised they won't be taking up their potential 15% ownership stake.

Your next question is a follow-up from Levi Spry with UBS.

Just sort of, Jason, NSR calculations. So can you just confirm what prices you're using for those? How short term are they versus what you use for the reserves? I guess I'm trying to tie that in to Dan's question around what is the actual medium- to longer-term blend between copper and poly ore.

Levi, look, in terms -- I don't have those numbers in front of me at the moment. But if we look at going forward, really beyond the 5 months that we've guided, it will be really a piece of work that will be done over the coming months, so over the next 5 months going into the new financial year. So in terms of that -- look, in terms of looking forward longer term, I'll be working on the current reserve numbers.

There are no further phone questions at this time. I'll now hand back the conference to Mr. Simich.

Thank you very much, everyone, for listening in today and to this half year to 31 December financial results and update. And what I'll just say in closing is that we have been working very hard executing our strategy. We are transforming our business into a global base metals future-facing company. There have been a number of elements that are putting us in a very good position going forward. DeGrussa has continued to operate exemplary, and it's been a wonderful mine that continues to do extraordinarily well. Motheo is full steam ahead as we've been talking about today and is on time and on budget in terms of moving into production by the middle of 2023. And the transformational acquisition of the MATSA mining complex in Spain, in the Andalusia region, and whilst we're talking about some specifics here today, I think the opportunity is immense. There have been very limited exploration that's occurred there. There are 3 underground mines. There is a big robust processing facility. And whilst there's a bit of granularity that we're working through at the moment and if you all ask that question, we appreciate those, I think the actual opportunity for that to achieve a stable operation at nameplate is the #1 priority. #2 is then to look at opportunities where that could be enhanced in terms of the production profile beyond the current nameplate. And I think there's possibilities there. But more so, the potential in that belt where there's been limited exploration over the last 15 years, I think, is enormous. So to be in a position where we control that belt to a large extent with 2,500 square kilometers in that Iberian Pyrite Belt, to have the commanding position that we do have in the Kalahari Copper Belt and to also have substantial exploration opportunities in and around DeGrussa and Western Australia and the eastern seaboard as well as a project that we continue to work on and look forward to making positive economic decisions to proceed on in Montana, probably in the future once we've worked through a few things, has put the business in a very strong footing to go forward and clearly in the commodity space and in a particular commodity where I think that's going to be very robust. So we have accumulated in the system now order of magnitude that must be approaching, if not in excess of, 5 million tonnes of contained copper in resources. And it's our job to go and extract maximum value from that, find more into that maximum value. So I think it looks good. It's been a great half year, and we look forward to embracing everything that we've got in our business and really moving forward in a very positive manner over the next 12 months. It's going to be an exciting period for us. So once again, thanks very much, everyone, for listening in, and I hope you all have a great day. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.