Earnings Call: H1 2021

Feb 25, 2021

I would now like to hand the conference over to Dan Clifford, Managing Director. Please go ahead. Thanks, Travis. Good morning to everyone and thanks for your time this morning. I have Ian Poole, Peter Trout and Adam MacKinnon with me this morning as we run through the results of the interim period for FY 2021. Let me cover off the highlights, and then we're going to run through some detail and go to question and answer time, followed by some wrap up comments from me at the end. In looking directly to highlights for the year for the half year, it's actually been an outstanding result for the company across particularly the 3 stated prongs of our strategy. In terms of sweating our infrastructure and assets, we've had financial results improvements at every level ranging from 15% to 400% improvements over the prior period. That includes a half one production of gold of just short of 46,000 ounces at just over $1,000 an ounce, putting us in a very competitive position against our peers. It includes a total recordable injury frequency rate reduction of 26% and a record interim net profit on an underlying basis of $41,000,000 In terms of directing our dollar to the highest return, it's been a game changing half for Eralia. With the outcomes of Federation and the DAGS acquisition, the company is positioned extremely well for long term growth and value creation. Some key points on Federation, of which Adam will cover later in the presentation. For a fair period of time now, we've been very focused on bringing Kairos online. Peter will also cover that during this presentation today. But in terms of comparison, Federation on the back of the latest MRE has now topped Kairos. Its 3,600,000 ton resource and we've only just started the step out drilling after a significant period of infill drilling to build our confidence in the ore body. And also just noting recently on the publishing of the MRE, noting that we have on the basis of ASX interpretation, we are now no longer able to use NSR in resource reporting for average grade, and we've reverted to a metal equivalent. That metal equivalent is extremely strong at 19 plus percent. And additionally to that, based on an identical basis, it's equivalent to 9 grams a tonne gold. Therefore, my comment that this is a game changer in combination with the existing assets and our growth profile with DOGS. That leads us to creation of long term value. We have a strong balance sheet, dollars 105,000,000 in cash at bank and a net cash position of $52,000,000 after the acquisition and a full year dividend paid during that period as well as the Federation scoping study progressing extremely well. Let's move over to Slide 5 or Page 5 of the presentation deck. Key points to note in the financial results being very reflective of our operational performance and commodity mix within the business. EBITDA up 44 percent to $72,300,000 and on an underlying basis, up 83% to $91,500,000 and a strong underlying impact, in fact, an interim result record for the business of $41,400,000 164 percent up on the prior corresponding period. And with that, I'll hand over to Ian for some further detail on those key drivers. Thanks, Dan. On Slide 6, I really had a 26% increase in revenue in the half to a record $207,000,000 compared to the prior corresponding period. The biggest contributors was the gold price and zinc volumes. The benefit of the peak lead and zinc circuit upgrade is delivering value. This shows the benefit of being gold dominant with a high exposure to high value base metals. If we go to Slide 7, I really had a record underlying income profit after tax for the period of $41,100,000 which after taking into consideration the acquisition costs, of DAGS produced a statutory net profit after tax of $19,800,000 The big contributors to the record underlying profit were the increased revenue as shown on the previous slide, offset by higher operating costs and transport costs due to higher volumes as well as the increased income tax expense. With regard to Slide 8, I'm looking at cash flows. The $62,300,000 net mine cash flow increased by over 400% compared to the prior corresponding period, which allowed the company to direct its to continue to direct funds to its highest returns. With the DOGS acquisition, continued investment in exploration of 6,000,000 dollars as well as returns to shareholders with the final 2020 dividend. So I'd like to hand back to Dan. Thanks, Peter thanks, Ian. In terms of FY 2021 guidance, we remain unchanged as we roll through the quarter. With Kairos near term and the ramping up of DOGS, our guidance remains at 100,000 to 113,000 ounces of gold and Nasdaq range of $14.25 to $15.75 The key to the near term lies with the progression and operations in the Kairos land. So with that, I'll hand over to Peter for an update. Thank you, Dan. I'll talk to the slide on Page 11 of the presentation pack. Clearly, establishment of the high grade Kairos mining area is a major focus of our activities at the Peak Mine. We've processed the 1st development ore from Kairos through the Peak concentrator and we're advancing towards 1st snow production early in June quarter. We've completed 2 of the 3 pre production milestones at Kairos, these being the large diameter return arrays and all drive access development into the 1st stoping block. Work is about to commence on the excavation of a secondary escape way raise, which is an essential requirement for our first stope production. At this point, I'll hand over to Adam, who will give us an update on the Federation Mineral Resource Estimate. Thanks, Peter. So I'd just like to expand on the significance of the updated Mineral Resource Estimate for Federation, which we released on Tuesday. In the 8 months following the maiden release, the company was involved in exploration sorry, we completed an extra 26,000 meters of infill drilling. This work has delivered a 35% increase in resource tonnage to now sit at 3,500,000 tons and a massive 134% increase in contained gold content to 150,000 58,000 ounces. The overall resource represents an impressive zinc equivalent grade of 19.6%, which as Dan mentioned equates to 1.09 grams per tonne gold equivalent when calculated on an identical basis. Importantly, the extra drilling has delivered increased confidence in the estimate, in the upper portions of the deposit with 31% now classified as indicated. The 1,100,000 tons have indicated jumps up to a zinc equivalent grade of 26.3% or nearly 12 grams per ton gold equivalent when calculated on an identical basis. Following positive metallurgical test work, this update has also seen the inclusion of copper into the estimate for the first time adding 10,000 contained tonnes to the resource. Also of note is the inclusion of a small tonneage of shallow high grade oxide material amounting to 15,000 ounces of gold at an attractive average grade of 6 grams per tonne. Shallow drilling will be targeting further extensions to this high potential material in the coming month. Following the update, it's worth putting the scale of the Federation discovery into perspective. Noting the deposit is still in the evaluation and growth phase, the updated resource estimate already has 20% more contained metal at a 40% higher grade than the entire undepleted Hera deposit on an equivalent basis. Hera, as most of you know, has already been seen an 8 year mine life with operations ongoing. Federation is also now the highest grade deposit in the company's resource portfolio in direct competition with the impressive grades of the Kyros deposit at the Peak Mine. The recent high grade gold hits have actually made Federation a significant gold deposit in its own right on par with the entire gold inventory in the company's Perseverance and Kronos loads and slightly above the current gold inventory for Kyros. Given the nuggety nature of the gold mineralization at Federation, the gold tenor of the deposit is expected to grow as drilling density increases. The Federation discoveries of regional significance as well. In metal equivalent terms, the deposit is now on par with the original discovery of the Perseverance deposit adjacent to the Peak Mine. Outside of the existing or historic mines, you'd have to go back 47 years to the discovery of Allura or now called Endeavor in 1974 to beat out Federation. The company continues to host multiple rigs at Federation, engage in ongoing resource upgrade and extensional drilling. The exploration team has also recently commenced evaluation of high potential geophysical targets along strike from Federation. Further follow-up drilling is also planned for the Dominion prospect, which is 1 kilometer Southeast of Federation, where Aurelio discovered shallow high grade gold and base metals in 2018 2019. Moving up to peak, surface drilling continues at Great CohBar with the first stage of resource in field drilling now complete. A significant proportion of the holes we drilled at Great CohBar are still pending final assay results. Turnaround times for assays have actually blown out significantly, reaching up to 2.5 months over the New Year period, reportedly due to the exceptional amount of activity in the region. These results are expected to be included in the next exploration update when they become available. Thanks. And back to you, Peter. Thanks, Adam. I'll continue on from the commentary on the mineral resource with an update on the scoping study at Federation. Clearly, we're very excited by the potential of Federation as a new operating asset in our portfolio, and the scoping study into that development is drawing to a conclusion. The technical and economic analysis into the mine potential mine development has been completed, and these findings are currently being documented in the scoping study report. That report is expected to be completed in March for internal consideration, leading into a decision on the next stage of work. Significantly, permit applications for an extension of the Hera accommodation village and an exploration decline are expected to be lodged in this current quarter. I'd like now to move on to the DAGS gold mine acquisition and provide an update on activities at DAGS on Slide 17 of the presentation pack. The integration of the DAGS mine into O'Reilly's operating portfolio is progressing well, following the change of ownership in mid December. The underground mine is in a production ramp up phase as can be seen in the graphs on Slide 18 of the presentation deck. Our current focus is delivery of 30,000 tonnes of ore per month from the underground mine to utilize the available processing capacity. This production rate is expected to be achieved in the June quarter. We also embarked on a targeted drill program to test extensions to the Dargs deposit, and we now have 1 underground diamond drill and 2 surface drill rigs operating at Daug's. The results of these drilling activities will inform our plans to extend the mine life at Daug's and the necessary permitting modifications required. I'll now hand back to Dan, who will provide our commentary on our strategy drivers. Thanks, Peter. Looking forward now with the company, the strategy the strategy the strategy of the company now has existed for 12 to 18 months with an extension of that into the new assets or looking beyond the current assets. Reflection of the last 12 months and particularly the last 6 months or the period of this reporting date has seen a significant progression in the execution of that strategy across the current operations and further into the progression of that beyond. The strategic asset base in Cobar continues to deliver, and we continue to maximize their returns with those life extensions and operating discipline within the assets. Our growth profile has been executed during that 6 month period as well. And we can now also now clearly see the benefit of our portfolio, inclusive of being gold dominant with the high value base metals and an emergence now of copper through not only Great CohBar and the Peak asset, but also now coming through Confederation. I think with that being said, it's a good time now to go to questions, and I'll make some closing comments at the back of those questions. Thanks, Travis. Thank The first question today comes from Dylan Kelly from Ord Minnett. Please go ahead. Yes. Good morning, Dan and the team and congratulations on the results at Federation, which looked pretty incredible. Just starting on that point around Fed, Adam just made some really interesting benchmarks there against what you've already got in your portfolio and regionally how they compare. Adam, if you're still there, could you just clarify some of those points? So are you saying that this is bigger and better than, say, Hera and Perseverance and perhaps on par with, say, what Endeavor was historically? Hi, Dylan. I'm saying it's on par with Perseverance, that discovery, which was a major discovery around 2 decades ago. And what I was actually saying is that you have to look back to the Endeavour discovery before you get something that beats federation. Obviously, Endeavour is an incredible ore body and is actually the biggest ore body in the Qatar Basin. So it would need to a little bit more success before we eclipse Sandebo. Okay, fair enough. I might just follow-up with just some of the comparison data, if that's okay. Dan, just coming back to cost guidance and why that remains unchanged. I mean, you exited the first half at what's just over $1,000 an ounce. So this implies a pretty steep jump in the second half. Why have you left guidance unchanged for that rate? And how should we be thinking about the inclusion of Kairos in terms of what that's going to do to the cost profile? Dylan, we've been over this a number of times. I think our guidance remains unchanged. We have actually if you remember, we did actually improve the cost guidance at a portfolio level or a group level on the basis of the 2 existing mines performance to the half year. So remember, the guidance was actually improved when we reported the December quarter in January. That's the first point I'll make. Secondly, within that guidance, because it's been well and truly contained within our plan, is the impact of Kairos on our guidance. It's a key part of our plan. That hasn't changed. It has pushed out a number of weeks, but we can contain that within the full year guidance that we've restated or reaffirmed now. To the second limb of your question as to why costs go up, you got to remember here that we're looking at all in sustaining cost here as a business. That's not inclusive of growth capital. A lot of the growth capital that's being expended during the first half of the year has actually been getting to Kairos. As we get there, costs, particularly sustaining costs ramp up as lateral development or rural body development ramps up, not only there, but across the other parts of our business as well. So we'll see an increase in the sustaining levels that go straight into all in sustaining as opposed to the first half. Okay. That's clear. I'll pass it along. Thank you. The next question comes from Ben Crowley from Macquarie. Please go ahead. Yes, afternoon, guys. Thanks for the call. Just wondered if you might be able to flesh out some of the sort of near term, I guess, exploration, but also permitting timelines for both Federation and at DOGS as well. So I guess with Federation, you mentioned some step out drilling that's coming. I'm just wondering about the kind of order of magnitude of that and potential gold targets in there and whether you think that will continue to feed into permitting questions for it? And then I guess similarly with Dimes, the near term plan there exploration wise, but then how much work do you think you need to do before you can you'd be comfortable to progress into modifications for the permit? I'll cover those. Thanks, Ben. To start with Federation in terms of drilling and approvals. We've mentioned a couple of times that step out drilling is commencing now. Those rigs have stepped off or stepped out along strike and at depth. That is always being planned as the second half of the drilling program this year for Federation, first half being intently focused on infill drilling for resource upgrade. We are very optimistic as to what that step out drilling will deliver for us. And that drilling program will extend now for another 2 to 3 months minimum and with the objective of having it well and truly completed before the end of this financial year. What that does then is well, has already pretty much fully informed the scoping study. And with the completion of that scoping study and the envelope on which we plan to progress the asset will dictate what the next steps are with approvals. So what we do know and it should be no surprise to anyone that the size and scale of this project means for EIS ahead of the environmental approval and mining lease granting. The baseline studies or some of the baseline studies have already commenced before we kick into that EIS, but we have to be very clear under New South Wales planning framework that the operating envelope for the asset needs to be pretty much flowed through to the EIS boundaries in which we work. So you can see, unfortunately, some of it is sequential. But in all the areas, we've been able to run-in parallel, which is some of those baseline studies, we've commenced those. They've been commenced now for multiple months, in fact. So all in all, what that means is that we're going through a typical New South Wales development consent from that EIS period, which, as we've talked about a number of times, is several years. So I think that covers off Federation in terms of your question, move our attention to DOGS. As Peter mentioned, we've now got 3 rigs going, 1 underground, 2 on the surface. It's a pretty intensive program that we will run for the rest, the majority anyway the rest of this financial year. That does two things for us. One is we will publish our own Aurelia MRE for the resource, and that will inform our LOM studies and subsequently into budget for internal purposes. That drilling program will go for the balance of the year, as I said. And from that, a fairly similar approach that we need to take with Federation, where we understand the scope and the size of the upside such that the consenting process can be accurate right from the start. So I think it's sometime in the first half of FY twenty twenty two, we'll have a pretty good understanding of what the potential envelope looks like for Federation as well. All right. Thanks, Dan. Thanks for the detail around it. That's all from me. Thank you. The next question comes from Anthony Kavanaugh from Chester Asset Management. Please go ahead. Good day, guys. Thanks for your time. Just with Federation, Dan, I know we've spoken about in the past that you're not really able to give an NSR number. If I divide kind of the zinc equivalent by, I guess, the breakeven, I kind of get to around 5.17 percent. Say, as an investor, if I wanted to refer to NSR, is that kind of the number I'd be thinking about? And does that imply like with the indicated resource, I'm talking about the indicated, not the total resource, Are you able to mine that indicator in the 1st couple of years as in get kind of high margin in the 1st couple of years? And if you break in with $120,000,000 then we're going to get a number almost close to $200,000,000 of free cash flow in the 1st couple of years from that asset? I'm not you're not far off the money, Anthony, I would say. And again, as we talk, you need to do your caps on that front. But I think your logic is correct. Look, there's a lot one of the most exciting benefits of this asset that we saw and we saw it early too, by the way, is the shallow high grades and particularly the emergence of the gold in the shallow high grade. That subsequently has been stretched and pulled at both strike and depth through the I think the current envelope of the stoping area. So that's when we to say we're getting it solid about it is an understatement. I think that's the benefit of that is that as soon as you decline, you're straight into some really healthy grades. And that's an absolute leverage benefit in terms of NPV of the asset for us. So the answer is that there are some great grades early in the operation. And then sorry, just a follow-up, just on the gold comment around here, it's nuggety. Is that do I interpret that to mean that the grade of the gold in the inferred as you mature, you're optimistic that that could, I guess, increase? Hi, Anthony. I'll take that one. Look, when this is pretty typical of cobust mineralization in as much as the gold tends to be as quite coarse grains. And they generally have the gold zones generally have a short strike length and are not overly easy to drill from the surface. When what we find with these deposits is that when we tend to drill them out at a higher density, we tend to see an upgrade in that gold. That doesn't always happen. But more times than not, when we're drilling some of these similar deposits, we do see an upgrade when we do that high density drilling. And on balance of probability, I'd expect that to happen with Federation as well. Okay. Thanks for that. That makes a lot of sense. Appreciate your time. Thank you. The next question comes from Christopher Cahill from Quest Asset Partners. Please go ahead. Good afternoon. Could I just confirm 2 questions? One is your revenue is stated ex quotation hedging costs and royalties. Is that correct? Yes. Sorry, Chris, I was just making sure I wasn't on mute when I answered that question. All right. Okay. I thought there was something more coming. No worries. And also, could you just comment on the Hera mine? I noticed the spend, it's an older operation and the spend is lifting a little bit. And I'm just wondering how you're looking at the sustaining and CapEx equation over the remaining LOM and how you're looking at that in the future? I'll take that one, Chris. Look, I think it's Hera is in the last years of its life. The head grades or gold grades are declining. Therefore, the all in sustaining costs, certainly on the balance of the gold grade, will increase because it's a key in the denominator. That being said, though, base metal grades are increasing and has to has the base metal prices, so our credits grow. The way we're looking at the asset is that with it migrating towards higher base metal grades and lower gold, the margin is in sweating of the mill and maximizing feed to the mill. And that you can see that that's certainly been an improvement for Hera over the last 6 to 8 months. In looking forward, that is exactly our mentality with the running of Hera. There's no silver bullet in life extension. Our horizons are clearly shifting to the dovetailing in of federation. And as a result of that, we are conserving while there's no growth capital, obviously, in the remainder of Hera and making sure that the operating hours and the feed rates into the mill are maximized for that margin. Okay. And a quick question on your hedging. Is there any sort of sweep involved here with the facility? And does the hedging go beyond December 30, 2021? Yes, I'll take that question. Sorry, I'll take that question. Sorry. So the hedging that we have in place goes to we've got some that goes into 2020 calendar 2022, but most of it's in 2021. Okay. Thanks. The next question is a follow-up from Dylan Kelly from Ord Minit. So just another quick one. I noticed that the what is it, the great cobar or the new cobar EIS came out this morning. Just wondering if there's anything incremental there in terms of shifts in mine life or the plans? I noticed there's some mentions here of Gladstone and some further diagrams that indicate maybe a shift in what you're trying to plan there. Look, not really, Dylan. I mean, this planning for that complex has been underway for a long time. So we're obviously more advanced in the approvals of that part of the peak operation than the other assets we've talked about this morning. But fundamentally, in our plans, there's no difference in what we're looking at for that part of the asset. Clearly, during this period, though, the drilling program that Adam's leading in terms of infill and extensional will continue to inform our studies on bringing that on. But in short, to your question, there's no change as a result of that EIS position today. Okay, understood. And in terms of just a time line on all the different moving parts you've got with the exploration portfolio, how are you thinking about updating the market there? It sounds like we've got a lot of information on a lot of different projects. What are you thinking there? Well, it's as I indicated at the end of the with the release to the December quarter, we will do an exploration update in the lead into the end of this March quarter, ahead of the March quarter reporting in April. You can probably understand, Dylan, and hopefully a lot of people on the call there that we are seeing delays in assays coming back of in some circumstances have got up to double digit weeks. So we are wanting and needing to get those results out as soon as we've got them. We'll compile into a fairly wholesome exploration update, particularly across the most recent or the drilling programs that are run-in the second half of the year. Okay, understood. That's clear. Thanks, Dan. Thank you. The next question comes from Bill Murray, Private Investor. Please go ahead. Given the copper and zinc prices at present, would you be targeting more sort of that type of ore? What flexibility do you have actually in that regard? Bill, it's Dan. We I think over if I looked at that on different time horizons, in the short term, we don't really have that flexibility. We're mining polymetallic ore bodies, varying gold, varying base metals. And particularly at peak, we would now have 6 ore sources that are feeding the mill. So in the short term, we really don't. It's driven by development advance and start timing in existing opened areas. We can, in some circumstances, batch different ore bodies through at different times and get some timing at best within a quarter, certainly not within a month. Beyond that though, one of the benefits of the types of ore bodies and particularly the mill peak over a medium to long term, we can pivot to what we just simply call the highest NSR value material in order of priority feed to the mill. So on a long term basis, we will always plan on bringing forward the highest NSR material in priority, and we can sometimes get that flexibility in ore body timing, but it's over multiple years, not months quarters. Follow-up question then. The treatment charges for copper and zinc are well done on where they were last year. I assume you're on term contracts, but I would assume that you'd be getting quite substantial benefit from that this calendar year? That's correct. We do have a benefit at the particularly at the peak operation. So we've got a lower treatment charges there. At our not at the Herrah operation, we have a life of mine contract there. So we're locked in at benchmark rates there. But the spot market for treatment charges is lower, and we've taken advantage of that with our annual contracts. Yes. The benchmark price the benchmark TC would be coming down a fair bit as well, though, wouldn't it? Yes, it does. It has come down, but the spot market is in the lower again. Yes. One final question. At the DOGS sort of acquisition, I would have thought it would be a little bit more sensible. Obviously, you've looked at it, but having a lot more debt on the balance sheet rather than sort of issuing all those shares at a relatively low price. I was wondering if you could put a bit of flavor on why you chose to go with that route. I'll take that one. I think if I just summarize where we are there, I mean, we obviously look very carefully at the capital levers to fund the acquisition. The key point that I'd like to reinforce, and we went to this point at the investor call when we were doing the equity raise, is that we can look at the makeup of the balance sheet at any point in time with any asset in mind, if we have a target in mind. But I think the context behind our decision to raise the amount of equity did compared to cash off the balance sheet compared to debt is that we're actually looking a lot further forward as to what our development exploration load looks like and future potential M and A work well beyond just looking at the DOGS asset. We're investing in the long term here, delivering in the short term and investing for the long term. And it's that mix of debt, equity and cash that drive us for the point in time for DOGS, but also very clearly considering the exploration low. If you look at this year, for example, we're running at $24,000,000 to $25,000,000 in exploration. That's cash straight off. We're looking at early works at Federation. That's declines. That's camp upgrades. They're going to be a similar value. So I think hopefully that answers your question in that we've taken a look beyond DOGS as to the balance sheet structure. Yes, that's fine. Thanks, Dan. Thank you. At this time, I'm showing no further questions. I'll hand the conference back to Mr. Clifford. Okay. Thanks very much, everyone, for your time. I think just in summary, I'd just like to reinforce a couple of key points. And that is that in terms of the first thing of our strategy of running our assets and infrastructure hard, the improvement we've seen in the financial results has occurred at every level. And that's not just the financial results, that's our health and safety and sustainability efforts right across physical production. The next limb of the strategy has been, I would have to say again and reinforce a game changer for the company in the second in the first half of the year With the way Federation is coming on, as I mentioned earlier, you can I hope everyone senses the excitement in our voices with this and the fact that we completed the DOGS acquisition? That's about that tension for the dollar deployed to what we can see as the highest returns for our shareholders. That goes to the creation of the long term value. Their balance sheet is sitting at $105,000,000 post an acquisition. As I mentioned earlier in after the December quarter, we still have some outgoings there, particularly stamp duty. But with a net cash position of $52,000,000 a full year dividend paid in that half and the ongoing progression of federation and the near term nature of Kairos goes right to the heart of long term value and returns growth. And with that, we look forward to the next pieces of information flow, which is the exploration a group exploration update as we start getting some of these assay results back, some early results from extensive drilling programs as well as the quarterly results looming in for mid to late April. So with that, thank you everyone for your time, and we look forward to keeping you updated over the course of the next 2 months. Thank you. Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.