Sheffield Resources Limited ($SFX)

Welcome everyone now for Sheffield Resources covering the quarter ending March 2026 with Bruce Griffin, the Executive Chairman; and Bruce Franzen, the Company Secretary. Same format as usual, there will be a Q&A. But first, over to you, Bruce.

Great. Thanks a lot, Peter. Thanks, everyone, for dialing in. Basically follow the same format as we have for previous quarters. And as Pete said, we'll -- I'll run through the presentation, and then we'll do Q&A at the end. Starting with the corporate overview. As always, look, I won't spend too much time on this. Most of the presentation will be about Kimberly Mineral Sands as it always is. Just a couple of comments on the other assets. So in this particular slide, we no longer have the Sri Lankan opportunity, the 10% interest in Capital Metals. We exited that position earlier -- well, during the quarter actually and realized $4 million before costs from that, which we've used to top up our corporate balance sheet. So we're no longer involved there. Decision was really about prioritization for us. Do like the project. However, it didn't -- it felt like it was better for us to liquidate that and give ourselves a bit more corporate liquidity. On South Atlantic in Brazil, projects ticking over very -- well, it is ticking over. The company is working on approvals and studies. We reached an agreement with our partners there to suspend further funding from Sheffield in January. So we've retained our option over 20%, but at present, we're not funding. So we've effectively focused all of our cash resources on corporate costs and KMS to the extent it's required. Moving on to talk about Kimberly Mineral Sands, the Thunderbird mine. As I usually do, just a couple of pictures for where things were at. Left-hand side is the mine in late April. This is actually the mining -- the block we were actively mining there. It's the old previously mined areas and here is the sort of in-pit tailings wall. This section finished and then working on that section there. And once that last wall is closed in, this will be the first cell of in-pit tailings disposal, which should commence well, sometime probably in the third quarter of this year, depending on exactly when that cell is ready for use. Right-hand side, process plant, looking over the ilmenite stockpiles towards the process plant. Yes, not a lot more to say there. Just to recap on the revised Thunderbird business plan that was put in place in March 2026. Now I won't go through all of the detail here. I think as everyone knows, the essence of that plan was to increase the mining rate to ultimately achieve design throughput on the process plant, and that would give us around about the original designed concentrate product suite. That was progressing very well through, I think, the September quarter last year. We moved to drill and blast in January of '25, the new mining contract -- new waste mining contractor in June. And that had given us a significant increase in waste mining productivity to the extent that we actually were able to drop, we're actually not drill and blast at the moment. We're in an area -- we're mining areas where we don't need to blast and the productivity of the waste mining contractor combined with the current strip ratio is such that we're only needing to operate 12-hour days. So we have achieved the improvement in waste mining. The disappointing piece in the last quarter, in particular, was having built mine production fairly steadily through to the September quarter, we saw mine production deteriorate both in the December quarter and in the March quarter. I'll talk more about the specifics of that, but that's a key focus of the recovery plan. Ultimately, to deliver the March '25 plan, we need to be building on the prior production rates and actually increasing them. So there's a lot of work going on in terms of improving that production. And again, I'll talk a bit about that as we go through. Overall, that means -- and we haven't provided guidance because we're in the middle of a turnaround. But the original plan was to achieve that higher mining rate by the first quarter of 2027. Given that's less than 3 months away, and we're still in the turnaround. We don't think that's realistic timing. However, there is still a view that, that sort of production should be achievable within -- certainly within FY 2027. And when we have a clearer line of sight on that, we will provide an update. In terms of the specific performance, so mine throughput. So dark blue line is ore mined, the actual ore mined, dotted brown line in the middle is grade and the green line is Rougher Head Feed. So it's fairly clear here that, as I said, having reached a peak of ore mined of just over 3 million tonnes in the first quarter of FY '26, we saw a decline in the December quarter and then a fairly significant drop-off in the March quarter, driven by a number of factors, some perhaps expected, some unexpected. The DMU outages and reliability issues that had been flagged in the previous quarter continued into the current quarter, including at least the one extended shutdown for a piece of equipment failure. The dozer fleet availability and mine contractor productivity. Now we have seen an improvement in that in recent times, but not enough to turn around the March quarter result. We also did have a couple of weather events in the quarter, which did impact production. So this is a big focus for the KMS management. We have a new operating model on site with a -- or a new operating management model. We have Head of Operations based on site 7 days a week, which is increasing -- it provides an increased level of focus and management of the contractors and identification of some of the root causes and taking steps to address them. So we -- there is a plan in place. Some elements have been implemented. Some are still being implemented. However, we don't believe there is any fundamental reason why the mine cannot -- the doses in DMU can't sustain what it has in the past, the 3 million tonnes a quarter and build up towards the original target of up to 4 million tonnes of the quarter as required to keep the plant full. The double -- well, alongside the lower mine productivity, particularly in the last quarter, we did see some evidence of declining recoveries. The content of the products is very similar quarter-on-quarter. Recovery of both zircon and titanium dioxide to the products were lower than previous. Again, a lot of focus here on identifying root causes. Perhaps variable production may not have helped. But fundamentally, we believe we've identified some operating practices that had perhaps drifted in, in recent times that were impacting the recoveries in the plant. And again, here, I think there is -- certainly our current view is there's no fundamental reason why the plant can't operate the way it has previously achieved those recoveries and certainly don't believe there's anything in the ore body or anything like that, that is driving this reduction in recovery. So we would expect these recoveries to recover as KMS implements the changes to -- implements changes to address the underlying root causes that are being identified. So overall ore production, as I said, variation on the same thing, but that September was a record production September quarter, a decline in the December quarter and then that significant drop-off in March. Clearly, need to get back to start with back to where we were in the September quarter and build from there, and that is definitely the plan that is being implemented. In terms of specific products, so concentrates, starting with zircon, March quarter was primarily impacted by lower ore mined, but also by the lower recoveries as well. So a fairly weak production quarter for zircon concentrate. We were able to sell all the concentrate that was produced and all of those sales were to third parties. So generally, we've seen an ability to sell the product in the market to third parties. And I believe that had we produced at similar levels to prior quarters, we would have been able to sell all of that product to third parties. In terms of ilmenite production, again, production impacted by lower ore mined and lower recoveries. The sort of higher shipments than production in the quarter were really primarily due to -- at the very end of the December quarter, there was a shipment deferred over the year-end due to Cyclone Hayley, and that impacted a small amount of zircon, but effectively impacted an entire shipment of ilmenite. So that shipment basically moved from December quarter into the March quarter. In terms of costs, we've seen an increase over the 3 quarters of FY '26 on a unit cost basis, but predominantly driven by lower production volumes, we believe that on a like-for-like basis, we have reduced the cost base on where it was previously and continue to identify options for cost savings across contracts and within KMS' operations itself. So I believe that as the production returns to target levels that we will see these unit costs trend down again and that the absolute cost is definitely coming down on where it was previously. Overall, in terms of cash flow for the quarter, we -- what we see, first of all, is the positive operating cash flow with OpEx about $20 million less in revenue, is really inflated by timing related to payments from customers, but more importantly, outgoing payments. To put it in context, we -- if we've got roughly $50 million to -- somewhere in that $50 million to $60 million a quarter of total cash outgoings, if you have -- even if 1 month's payments are paid 1 day late, you can have a swing of this order of magnitude. So certainly, there's no suggestion that the asset was actually operating cash flow positive on a normalized basis and is probably was running marginally operating cash flow negative given the poor production rate. There were no interest payments. We announced that the lenders had agreed to deferral and waiver again for the March payments. So there were no interest payments and there were no debt payments due at the end of March. The lease payments are as expected, predominantly relating to power plant and the dry mining unit. And we did continue to carry inventory, not necessarily excess inventory in some cases, but we do have inventory hand at the end of the quarter. That sort of -- those were the prepared remarks I had. Happy to take questions now. Thanks, Peter.

Thanks, Bruce. Just a reminder for everyone in the audience, we are having a Q&A session now. So feel free to submit your questions, and we'll get around to them. Just to bring -- to start with Bruce. As you know, every quarter, I do quite like asking an update on the zircon market, especially the concentrate side. Any updates there?

Yes. Look, we talked a little bit about this in the quarterly itself. I think overall, the March quarter, ourselves and other industry participants have reported sort of similar view that there's been planned and unplanned curtailment of zircon supply globally over the past couple of quarters. Iluka, Tronox, in particular, have had planned reductions. We've had some unplanned reductions in other locations, for example, Senegal, which have reduced zircon supply reasonably material if they were sustained over a full year. And that feels like it's probably taken the market from what on a global basis was probably looking at a small surplus in 2026 into a small deficit. Now there is historical stock inventory. So it's not -- the market is not tight yet, but it is definitely tighter than it was. And then when you look at concentrates, in particular in China, there has been a fairly rapid decline in ilmenite prices, at least partly driven by rising cost of sulfur and sulfuric acid as a result of the Straits of Hormuz being closed and a significant portion of Chinese pigment capacity being sulfate based, which means it uses sulfuric acid. And what that means is the demand for ilmenite has come off. Now why that's relevant is that a large portion of concentrates, particularly HMC concentrates into China do contain ilmenite and the processes to make money out of that, they have to find a home for the ilmenite, not just as well as any zircon or rutile or monazite that's contained in those concentrates. And I think that has probably tempered appetite for concentrates a little bit. So overall, what we've seen is that the market is a bit firmer, was firmer through the first quarter. On a like-for-like basis, we were selling each shipment at a marginally higher price or KMS was selling each zircon concentrate shipment at a marginally higher price than the previous shipment. And that sort of momentum seems to have been carrying on into Q2. So I think whereas previously, there was probably a bit of a view that maybe FY '26 was going to be -- might have even seen continued price weakness. At least thus far, it's actually seen a certain amount of small increases in price, which has been reasonably favorable. So how long that lasts and so on, time will tell. But at this stage, certainly felt more positive about the zircon market in Q1 than we had expected.

Yes. Interesting. Just on that, it sounds like we sort of hit the floor then and it's pushing upwards at the moment. Any signs of where other production could come from in the near term to, I guess, swing the balance back the other way? Or is this looking structurally quite good?

Yes. I mean, look, in the short term, some of the supply that I know at least in the case of the asset in Senegal, I believe that they're now talking about restarting there following the fire. Some of the idled capacity in theory could be turned back on if the market supported it, although use an example like Cataby for Iluka, the primary product there is ilmenite and so it will be driven more by the view on synthetic rutile sales, I think, than the zircon market itself. So I think certainly the market will flex some of that supply is available. And then the midterm view about closure of major assets, including Jacinth-Ambrosia for Iluka, which someone said, sound like a broken record on, but it was always forecast for FY '27. So we're not quite there yet. I think that certainly consensus forecast is that we will see declining production out of Jacinth-Ambrosia starting in 2027. And at this stage, there is no like-for-like replacement. Arguably, Iluka would be expecting to replace some of that supply with -- supply from Balranald rather than the other deposits in the Eucla Basin, which haven't been sanctioned yet. The approval for Richards Bay Minerals -- at Richards Bay Minerals of Zulti South is -- does extend the life of Richards Bay if it assuming it's implemented as planned, although it doesn't result in incremental zircon supply. So I think broadly speaking, yes, of course, there can be some supply response in the short term, but the medium term still looks like the question is how do we replace some of that major supply that is closing.

Okay. As a reminder, please do feel free to submit questions. Just another one from my side, Bruce, is in terms of the strategy moving forward, obviously, a lot of the strategy that we were talking about in the past was to do with the new waste mining method and whatnot. Is that still the main plan? Obviously, you've got some shorter-term things that you need to fix. But other than that, is that still the main goal is to get up to that 4 million tonnes?

Yes. And I think as we've said previously, the idea is to be able to mine at 4 million tonnes, so you can flex mine production or 4 million tonnes a quarter, so up to 16 million tonnes a year, not because you need to mine at that rate all day, every day, but there will be times when you need to mine at a higher rate to manage grade variability and so on. But the essential point being that the mine should be -- or the process plant should be running flat out. There's no reason why we shouldn't be able to have the process plant full and the mine being varied to keep that full. So that's still the basic plan. I guess in the short term, there's a bit more of a focus on recovery first back to where we were in the September quarter, but then still the aim to build on that and build towards that ability to mine at the equivalent of 16 million tonnes per annum. Certainly, waste mining clearly can support that. We continue to see that the mine can operate at that rate. It's a question of doing it regularly and reliably. So it's as much an availability maintenance type question rather than a fundamental capacity question.

Okay. Interesting. A question here, Bruce. To what extent can shareholders feel assured that Yansteel will continue to support the JV until a more formal debt restructure agreement can be reached?

Look, I think the best evidence is of what they've done to date. I mean Yansteel has been a fantastic partner. They've really stepped in and supported when the businesses needed that support. I think people need to be realistic. They're commercial. Ultimately, they like anyone who has -- whether you're a lender or a shareholder in the joint venture, what you're all looking for is those operations improvements because that's what fundamentally underpins the business. So Yansteel have been very supportive, very patient and long may that last. But they're not -- it's not a blank check. They're not just going to put money in forever. They, like anyone else, will be looking for the operations to improve. So we -- their past behavior and certainly, we see them as a very supportive shareholder. But there is no -- there can be no guarantee that they will continue to provide support every time it's asked for.

Yes. No, of course. Bruce, that's it on the question side of things. Any final thoughts from you before we wrap up?

No. I mean, look, probably just one, I think I can imagine shareholders like myself, I found the March quarter very frustrating. It's disappointing to see declining performance, particularly when you've got a model that sees you need to improve. That frustration is shared by myself, by the management and the Board of the joint venture. And while it's not always easy to see from the outside, there is a lot happening to improve operations. And certainly, we're not there yet, but it's -- there's a lot of effort and a lot of focus. And I think a reasonable understanding of what's causing some of these problems and plans in place to fix them. So as disappointing as it is, we'll continue to require a bit of patience, but continue to believe in the future of the asset.

Awesome. Bruce, thank you very much for your time, and thank you, everyone, for attending. As always, the contact details are there on the screen. We have recorded this and will be on the Sheffield Resources YouTube channel. I'm sure it will be shared on their socials. But feel free to reach out if anyone has any other questions. Bruce, thank you very much.

Great. Thanks, everyone.