standing by, and welcome to the Perenti Operational Update Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Mark Norwell, Managing Director and CEO.
Please go ahead.
Good morning, and thank you for joining us today for the Perenti operational update. My name is Mark Millhill, Managing Director and CEO of Perenti, and joining me today is Peter Bryant, our CFO. I'd like to start with the recent changes to the Board. Earlier this week, we announced that Ian Cochran had retired from his role as Chairman of the Board of Directors due to health reasons. Within the party, we welcome current non Executive Director, Rob Cole, as Chairman.
Rob has more than 30 years' experience in the energy and resources industries and has been a valued member of the Board since 2018 and was appointed Deputy Chairman in 2020. We look forward to continuing to work with Groll. And under his chairmanship, we'll remain focused on executing against our 2025 strategy. I'd like to thank Ian for his many years of commitment and dedication, not only to Perenti, but to the broader Earth business community. Over the last 3 decades, Iain has developed a reputation for his integrity, business acumen and down to earth approach.
Iain has been instrumental in the evolution of Perenti and has been involved with the company since first listing in 1994 as OZURO. Since then, the company has grown to become one of the largest and most respected mining service companies globally, and Ian has been a significant part of the Perenti journey. His valued input in the Boardroom will be missed. Our thoughts with Iain and his family as he focuses on working through his health issues over the coming months. Now I'd like to provide an update on recent operational performance and the outlook for the business.
Firstly, I'd like to once again commend all of our people for their commitment and tireless efforts in managing and dealing with the persistent challenges that COVID-nineteen has presented. Over the quarter, we have continued to build up on our 2025 strategy by securing new work in North America, releasing $87,000,000 in cash from West Africa by exiting Yampalilla and Bongo and securing over $700,000,000 of work in hand calendar year to date. These achievements have occurred whilst we navigated a number of broader global and local headwinds. During Q3, the business has continued to face external headwinds similar to those in the first half of FY twenty twenty one, particularly the ongoing impact of COVID-nineteen and the strengthening Australian dollar, plus the recent tightening labor market in Australia. The characteristics and spread of the virus is beyond our control, and as a result, we are still experiencing positive impacts.
These impacts are caused by ongoing underrosses for our ex HAP workforce, reduced ability with our senior staff to travel site and broader logistical challenges. The further exacerbates the emergence of new variants of the virus and hotel quarantine issues in Perth and Melbourne has added to the logistical complexities. While we are navigating the COVID-nineteen landscape, the impact of the business is clear. We've seen ongoing operational impacts. In addition, an asset has been widely reported across the resources sector, a tightening labor market in Australia is becoming increasingly evident.
For Prensi, this is manifested in higher employee turnover rates and wage growth impacting business margins. But we have recognized this and have responded by deploying and continuing to develop targeted attraction and retention initiatives with the aim of maintaining our high quality team. Notwithstanding these types of market conditions, we are confident that printing and our employee value proposition positions us well to source and maintain appropriate personnel levels to deliver on our current and future contract requirements. As I also mentioned, the Australian dollar strengthened further against the U. S.
Dollar, which is negatively impacting our financial performance, given a significant amount of our earnings are U. S. Denominated. Our forecast at the time of the first half FY 'twenty one results were based on an FX rate of $0.76 However, during the Q3, the average daily average FX rate was above $0.77 When combined and with the expectation that these conditions will continue into the Q4 and beyond, we have revised our outlook for the second half of FY 'twenty one, primarily due to the expected softer performance of our underground business. The context at the half year FY 'twenty one results, we forecast that our second half revenue and operating margins will be in line with those reported in the first half.
However, we now expect that consolidated operating margins for the second half will be softer than the first half. Given that we expect that the current backdrop will continue beyond the end of FY 'twenty one, we also expect the forecast growth in revenue and earnings in FY 'twenty two to be delayed. I would now like to expand on the recent achievements of the business I mentioned earlier, as individually and collectively, they represent significant progress towards the delivery of our 2025 strategy. In recent months, we expanded our growth pipeline by more than 20% with a focus on underground gold and nickel projects, working with top tier mining companies in Australia and North America. We successfully converted some of our existing growth pipeline into work in hand, announcing several contracts, contract awards totaling more than $700,000,000 with another $320,000,000 of work related to letters of intent, which we are in the process of finalizing contract terms.
Of particular significance is the Red Chris letter of intent with Newcrest in Canada. While this initial piece of work is relatively small, it represents a far greater opportunity for Ferenti. Firstly, it puts us in a strong position to capture future revenue growth with a global top tier gold mining producer. Secondly, Red Chris represents our 2nd underground project in North America, the largest underground mining market in the world and a key pillar of our strategic trade. And third, our win at Red Chris is recognition from the North American market that the expertise Ferenti has developed over the past 30 plus years is a service offering that is attractive to the North American market, capable of delivering significant value.
Now to our surface business. Since we announced the completion of the strategic review of our African mining service business, I'm really pleased that the African service business is performing 2 expectations, and we have seen a significant improvement in our African service mining risk profile. Our view is that the AMS business has now shifted from a position of net risk to net opportunity. Although the Surface Australia business has been impacted by the tight labor market, we continue to expect that the Surface business as a whole will deliver revenues and operating margins in line with those reported in the first half, if not offering some slight upside potential. To add to this, I'm pleased to advise we have received additional cash payments related to the exit from the Vongu and Yanfil other projects in West Africa.
Today, we have received a total of circa $87,000,000 in cash. We hope to realize some additional payments as we finalize working capital balances. However, dollars 87,000,000 is at the upper end of what we reported in February. So we are very pleased with this result. Lastly, and certainly not least, the investments business.
We expect the investments business to perform similarly to first half of FY 'twenty one as the recovery of BTP is progressing slightly than expected and the operations have been impacted by the Australian labor market. As a result, we expect the investment business will deliver revenues and operating earnings broadly in line with those reported in H1. In summary, I'm very pleased with the efforts of our people and what has been achieved in the last few months given the ongoing challenges. And I truly believe that we are well on the way to successfully delivering on our 2025 strategy. We recognize the headwinds we are facing, and we have strategies in place to manage the effects of these headwinds.
Going forward, we will continue to focus on executing our 2025 strategy, winning new work and delivering projects. In time, we see significant upside in our business, and we are very confident that we will manage the current environment to deliver consistent, high quality operational performance that will generate long term growth and value for our shareholders. Thank you. And now we'll open up the call for questions.
Thank Your first question comes from Michael Aspinall from Jefferies. Please go ahead.
Yes, good morning guys. Thanks for the update. So firstly, can you just characterize the hit to margins in terms of wage inflation versus a hit to productivity due to the turnover or tightness in the market?
Yes. Michael, thanks for the question. I guess if we look at the Australian market, so it's hard to really sort of differentiate between those direct costs, I guess, in terms of wages and turnover. I guess, firstly, on wages, what I would say is, whilst we do have rise and fall protection under our contracts, generally, what we are seeing is the, I guess, the labor rates move at a sort of quicker rate. And we update our indices every 3, 6 or 12 months depending upon the contract.
So what we're seeing is a different sort of impact on the various jobs subject to their rise in port provisions. So Michael, hard to sort of really sort of outline exactly the split, but we're certainly seeing certain pressures there. Bruno, unless you've got anything further to add to that?
No. I think also what we are saying is that if volumes, etcetera, being paid when people are trying to attract staff, and that is something that ordinarily is more difficult to recover through a lot of the formal bonus of, say, dollars 10,000 to sign up.
Okay. That makes sense. Thanks for that. And could you just characterize maybe then your book in terms of how many of your contracts would have a 3, 6, 12 month time lag for recovering rising labor costs?
That is a good question there, Michael. I guess we've got varying sort of contracts from
of the mining, so it's not going to be our contracts to circa 54 of them, I would say a very, very, very like 90% plus, in fact, probably 99% and Horizon 4. We just don't have to stick on the term, the 3, 6, or 5.
Okay. Okay. And then if I'm thinking about the hit to underground, is that labor tightness impacting the Australian operations and turnover there or Africa or is it both?
Yes. Look, it's 2 fold, Michael. Certainly, the I guess, the sort of tightly labor market in Australia is clearly a direct impact to our Australian operations, but it's also having that, I guess, an indirect impact to international operations. And that's sort of magnified, if you like, by COVID as well. So with the ongoing sort of, I guess, delay with sort of vaccination, the ongoing sort of impacting controls around COVID, we are seeing it more challenging to attract people to take them out of the hot Australian labor market to go and sort of work long rosters overseas and experience quarantine periods certainly coming back into Australia and potentially into the country that they operate as well.
So it's definitely a direct impact in Australia and also indirect to international, less interest, I suppose.
Yes. Do you think that that could have a longer term impact in terms of people just deciding they do want to work closer to home? Or there'll always be people who are willing to jump on a plane and go work in Africa given the uplift in earnings?
Yes. I think to that point, Michael, I think there's always going to be people sort of willing to sort of work internationally. They have the ability to sort of have their rossed brakes in sort of other parts of the world and sort of rotate that around, the higher sort of pay that sort of comes with working internationally. So I think once we get back to some level of normality, sort of once the vaccines take hold and also we get more commercial supply, which if you look at sort of Conus and sort of their timing, it's probably going to be next year at some point. I think we'll definitely see people gain on international work.
Okay, cool. And just 2 more. Are new contract signings continuing in the current market?
Yes, they are. So we announced the Red Chris project a few weeks ago. So we're currently mobilizing that work into Canada, and that's in the province of British Columbia. So we're doing that currently at the Newcrest, the Savannah project, letter of intent there that we're finalizing the contract and prepping mode for sort of circa July of this year. And we're still actively tendering jobs as well.
Our pipeline was circa 9 Bill when we reported our half year results. We've seen an increase to some north of 10 given the sort of activity out there at the moment. So certainly seeing contracts still awarded.
Cool. And great. Then last one from me. You've mentioned your 2025 strategy a couple of times. Can you just provide us with some additional details on the main elements of that?
Yes. So a couple of main elements there, Michael. When we first sort of released that to the market, if you like, circa 2 years ago now. And a couple of the key items there is shifting our business into better jurisdictions, for example, Canada. So we're looking to increase our work and our earnings out of North America through the underground service.
We're looking to increase our earnings in Australia, so we continue to bid. And we also see sort of Africa not as sort of one sort of match, if you like, but we see this number of countries. And therefore, we've called out Botswana as a very good country to operate. So we're shifting into what I'd say is better jurisdictions, and we're progressing that very well. The other is about sort of the balance sheet, releasing capital out of West Africa from AMS, improving our cash position, which we've been doing well over the last couple of years.
So we're continuing with that technology, a key focus across the whole mining industry and sort of the world more broadly. We're progressing in that area very well. And we also specifically called out the challenges in AMS, and we are seeing some recovery in some green shoots coming through there. So I guess that's a sort of high level overview of the sort of operational aspects. The other point there, Michael, just quickly is the ongoing investment in our systems and processes to support our global business.
And secondly, investment in our people. And if we think about the tiny labor market at the moment, we're all positioned there and the fact that we have been investing in people pre the market timing. So that's the broad overview of the 2025 strategy.
All right. Thanks very much. That's all for me guys.
Thanks, Michael.
Thank you. There are no further questions. My apologies. Your next question comes from Cameron Bell from Canaccord.
Just coming back to the Ryzen form. So I understand there's a range of metrics within each of the contracts and that can differ. But when you think about labor costs going up, how much of those labor costs specific in your area of work, say, WA, for example, how much of that labor cost increase do you think you can actually recoup, so to speak?
Yes. Sure, Cameron. So I guess 2 part to that one is, let's say we do a pay increase today in a particular contract, may have a update into the next month or maybe an update in 6 months or it might be linked to labor indices and labor indices are generally published sort of quarterly or half yearly and lag. So I guess that timing will sort of dictate sort of what recovery we do get, and that is very contract specific. The sort of second part is sort of in terms of our labor base, it sort of probably varies in the range of 30% to 40% of our cost base across our projects.
So we then have that level of, I guess, cost built into our Horizon Pool formula. So Horizon Pool formula will cover various materials, if we're providing fuel, labor and other consumables. And the fact that we'll be based on our direct cost input. So if we do see a labor change, it will be 40% of our increase linked to labor for our revenue. So other than timing, it should cover the labor cost.
It's just the timing of the issues, Cameron.
Yes. Okay. I guess thinking about it from another way, are you with the new contracts that you tender now, noting that, say, wage inflation is probably going to be much higher in WA than it is, say, Victoria and New South Wales, are you changing the indexes that you use in your contracts to try and better defend yourselves?
We review those each time we tender and also extend any contracts. And I guess on the flip side, there's potential at the back end when you see the pressure sort of come off to then sort of either sort of recover when the sort of wage pressure comes down. So we're mindful of the back end as well rather than just sort of the initial. But in short, based on we look at an extension or a new contract, we always review the T and C based on what we know at the time. So yes, if there's the opportunity, we will reset.
And Cameron, irrespective of labor pressure, we always try and put ourselves in a position that provides us with the best protection possible of any inflationary pressure on our cost base.
Yes. Okay. How's Mako going?
Mako is still challenged. If we think about what we've been working through in AMS, I guess, is the broader aspect of AMS, but the 3 challenging jobs we called out, Bongu, Yanfelilla and Mako, We've addressed 2 of the 3. We're now working on 3rd. That is an EBITDA positive job. EBIT circuit breakeven, I guess, but EBITDA positive.
We're working through the mine plan with the client. That's work in progress, Cameron. And I guess we see that as challenging to sort of reset for the client, but we're working to see what we can do. The positive about the EBITDA, positive is we're continuing to depreciate the assets there, generate cash on the back of that. So we are managing our BB and E in Senegal through depreciating the assets.
Yes. Okay. Sure. I guess, similar question. How's the progress at Zone 5 and Henley?
Yes. Zone 5, yes, that continues to be challenged, I guess, by ongoing COVID impacts. And I guess if I just sort of talk about sort of some specifics, I spoke about logistical impacts sort of when I sort of opened up the call, but maybe just to sort of put some more detail on that. And if you think about the recent sort of birth quarantine sort of hotel issues and then you said the government produced the number of overseas travelers by half, that requires us to look at different ways of bringing our people back in, extending further rosters. We are seeing, for example, Tanzania.
Tanzania had a new president. And the previous president said COVID didn't exist. The new one sort of is a bit more open to reality. And we're looking at some quarantine there at the moment. We're just waiting through.
But specifically coming back to Zone 5, that has been impacted by just the availability of getting people into Botswana. We are, however, working closely with the client and government to look to put on additional crew. So we're looking to put a full panel into Zone 5. That's the early days discussion. So we are looking to actually ramp up that despite COVID impact.
So that's our focus at the moment.
Cameron, I don't really need to a lot of project specific details. But I just might add, in terms of the drivers for the softening of second half revenue and so by the MLO are a significant component of that in terms of the impact that COVID has had and the performance in terms of physicals and that's revenue for us against the targets or forecast we had. Yes.
Okay. And then I guess just last one for me. Obviously, North America is a pretty big part of your future and the quality and the growth of the business etcetera going forward. In regards to your progress to date, are you happy with what you've achieved? Or were you hoping for a bit more or less?
How do you see yourself going so far?
I think to be able to win 2 projects, mobilize 1 and be in the process of mobilizing the second with the global pandemic given the challenges that everyone's saying, including our clients, I think we're doing a fantastic job, to be frank, to sort of take that on. So we could have said, no, we're going to stop growth in North America when COVID hit. So we decided to sort of pull John. We're profitable. Yes, it's challenged, but I think given the headwind of COVID, we'd be building a progressive business in North America, I think, is really well done by the time.
Okay. And I know we said it before. I just want to go back to that time 5 as well. It's important just to note that, that revenue loss or revenue reduction is not a revenue loss. It's effectively a revenue deferral.
We're behind the ramp up schedule. But ultimately, we will deliver the ramp up in a little bit more. So the revenue will come our way. It's just deferred because of the impact of COVID. And I
think sorry, Cameron, just rounding out sort of North America as well. We are seeing clearly more Australian clients sort of looking at North America with activity there sometime. And I think by progressing with our entry in North America through COVID, once the vaccine takes hold across the world globally and we start sort of getting back to whatever the new normal is, I think we'll be far better positioned by the fact that we continue with this expansion. So we're not flat footed back into COVID. So I think it is very positive.
Thanks, Lars. Thanks, gentlemen. Thanks.
Thank you. Your next question comes from Trent Barnett from Hartleys. Please go ahead.
Hi, guys. Just can you just clarify a little bit on the commentary around FY 'twenty two and the delay to revenue and earnings growth? Is that should I assume that means no growth? Or is that sort of sort of your expectation of an absolute level?
Yes. Thanks, Trent. I guess we're still working through our FY 'twenty two budgeting process and business planning process. So I guess at this point in time, we have nothing sort of definitive. But what I would say is, I guess, given the recent government budget, there's sort of comments regarding COVID, sort of restrictions, the hotel quarantine sort of outbreaks.
We were hopeful, like I think most people were, that we're going to see some abatement of the restrictions during calendar year 2021. What we're saying is we don't see those restrictions easing throughout FY 2022, nor do we see the tightening labor market that's been WA coming off in a hurry. We think that's going to be around for a fair portion of 2022 as well. And the strengthening Aussie dollar, look, no economists will know sort of futurist in terms of strengthening dollars, but we expect that will probably continue. So I guess on the backdrop of those sort of 3 macro headwinds, we are saying that's going to continue to impact us throughout FY 'twenty two, and we're currently assessing the level of that impact.
So I guess, Trent, based on that, we are saying we think it will be flat because of the impediments that we've discussed and continue to see. Bert, anything to add then? Yes,
Okay. Thanks. And obviously, you've got some really great people and skill sets and things and they're very, very scarce at the moment. When do we start seeing a premium for that? When do you start adding in the bigger scarcity premiums into contracts that you're tendering on?
So tendering, we are including that in tenders. So with tenders, we are looking at the margins given the sort of hot labor market and also, I guess, the mining industry demand more broadly. So that's flowing through into current tenders. And look, we are looking at sort of, in some cases, capping hands to some clients. So we're putting some retention programs in place for our folks in Africa, and we're talking to our clients given that they benefit from the performance we deliver to them.
So Trent, we are looking at some cap in hand sort of options at the moment.
Okay. Thank you.
Thanks, Trent.
Thank you. Your next question comes from Nick Robinson from Jarden. Please go ahead.
Hi, guys. Thanks for taking the questions. Just firstly on the, I guess, the cycle of the labor market and the way that your pass throughs work. I mean, obviously, we've been here before probably 2,002 through 2012. And from memory, the industry kind of got caught out then on rapidly tightening labor markets as well.
But then you went on to, as a group, make record margins and profits. I mean, how are you feeling about this market? I mean, we've got record high commodity prices across the board, particularly in Aussie dollars. Basically, everyone,
particularly those of
you that are WA based, look like you're getting caught out on labor here. You're not the only one to have said this in more recent times. But historically, you've moved on from these types of problems after 6 or 12 months and then being able to grow margins from there. Is that how you're currently thinking the cycle looks like it would be playing out?
I think so, Nick. Our view and it goes back to a bit about the Point Green North America. Our view is we're well positioned. Yes, we're sort of being impacted by the sort of three broader headwinds that I mentioned before, but the base of the business is strong and stronger than it has been for some time. And our sort of focus is to sort of manage through those headwinds.
And when we come out the other side, that certainly is sort of what we're looking at, Nick, in terms of the opportunities and spring boarding sort of thereafter. So absolutely the focus. As far as I guess being called out, I think we see sort of the broader sort of macro view of sort of Brazil and sort of lower iron ore production and that's flowing back into the Australian iron ore market, which then sort of flows through into the other mining sectors. Clearly, the impact is sort of a global sort of macro shift. We are clearly sort of seeing the impact of that.
I would say though that we do have our senior people that are being stable. We are seeing it at the sort of operator maintenance level, which we're sort of managing there as well. So Nick, in short, agreed. We hope that once we come out of these headwinds, the business continues to go from strength to strength.
Probably worth calling out too, although our senior roles and some senior operational roles outside of Australia are often filled by expats. Our foreign workforce is largely nationals. So our operations in Africa said it's a national business. 95% across the board are employees in nationals. So the pressures that we're seeing here in Western Australia aren't the same global.
Right. And then I guess this is related to this, but I mean across the board, we are seeing all these commodity prices hitting new highs, particularly in Aussie dollars. I mean, we're at all time highs at pretty much every middle, most of the bulks. How is that translating into opportunities? I mean, it seems like the miners are maybe slow to pull the CapEx lever here.
But I mean, it would seem like on a 2 to 3 year view, the pipeline must be getting or looking like it is going to be significantly bigger just by the fact that your miners haven't made these kind of margins basically ever. So that's flush with cash and the market is telling them that they need to drive the supply response, which obviously means they need to spend some CapEx. So you said that your pipeline is largely gold and nickel now. But I mean, compared to where you were in February, I think you mentioned a number of 20% larger here. I'm just trying to understand what you're saying in terms of the opportunity set, albeit that, that opportunity set maybe is coming through into contract awards a bit more slowly than what you were thinking?
Yes. Externally, we are seeing sort of the pipeline sort of increase. And positively, we're seeing the pipeline sort of increase in the jurisdictions that we're targeting, sort of North America and Australia for that matter as well. But you're also right in the fact that we are seeing some of the projects sort of delays in terms of pipeline. And obviously, we sort of have the sort of or the impact of their clients in terms of when they bring the projects online.
So we've definitely seen that increase. We're also seeing an increase sort of skewed towards underground, which is very positive given our earnings underground. So we're seeing that north of 10% build now. And we'll give more detail when we do the full year results, but absolutely increasing. But you're right, there are some delays as we all need.
Okay. So I mean, could you look at what you're seeing today with the obviously disappointing news? But if you looked across 2 or 3 years here and assuming that COVID normalizes and you get the right contract structures in place for labor like you did in the last cycle, it would seem to me that the outlook is actually from a macro perspective is significantly better than what it was even a few months ago. Is that a fair way to characterize the current market dynamics?
Yes, Nick, I definitely like your articulation on that actually. I think that is a fair way and I guess subject to, obviously, as you've already called out, sort of COVID and sort of tight labor market. I think sort of once we sort of work through that and understand sort of a longer term landscape and look, we've navigated the challenges today as well. So whatever occurs in the future, when it gets easier, we'll be well placed. But certainly, our view is down the track.
We see sort of positive on the backside of COVID and the labor sort of shortages. And I guess the other item with our contracts is when we do see commodity prices increase, clearly our clients benefit from that. Our contracts are structured so that we don't actually receive uplift from commodity prices. What I would also say is when you then see commodity prices come down, we're not seeing the impact on our contract rates because again, they're not linked to commodity prices. So it's sort of at times almost sort of countercyclical.
And we also target operating mines. We've shifted our business away from, I guess, the bulk of exploration, which is very cyclical to more operating mines and also targeting sort of mines that sort of are on the lower end of the cost curve. So we continue to sort of operate. So certainly, we see positive outlook once we get through the current challenges.
Right. Well, I mean, look, there's plenty of Australian miners that are trading on 30% plus free cash flow yields at the moment. So I mean, the cash is going to place some of it incrementally needs to go back into growth, you would think, given the margins where they're at. Let me just one last question, which may or may not be able to answer. Just in Botswana, did you tender on Sandfire's new work there for the T3 and A 4 deposits?
Yes, Nick. We used for the Matteo contract. So this contract, yes, we have tenders on that, and we're currently in active tender with Sandpile. Okay.
So you're in the shortlisted I think they've said this shortlisted parties, you're one of those parties?
Yes. Yes, we are. We're still talking to them and working through and answering questions on the tender side. We're one of those parties.
Okay. Awesome. Thanks for my questions. Thanks, guys.
Thanks, Nikita. Thank you.
There are no further questions at this time. I'll now hand back to Mr. Norwell for closing remarks.
Yes. Thank you, everyone, again for joining the call, and thanks for the questions that came through. I guess just wrapping up what I've said already, certainly headwinds. But as a business, we continue to sort of execute the strategic imperatives, which is strengthening the business, albeit we're seeing sort of softer operational impacts on the backdrop of those headwinds. But as I guess Nick particularly outlined, we do see the business will be in a very strong position once we get to the other side of headwinds.
Unfortunately, we're in the same boat as everyone else about understanding the crystal ball nature of the duration and sort of severity of those impacts, but we are well positioned for the future based on what we continue to do and the team we have in place. So thanks again for your time, and look forward to talking soon.
Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.