Thank you for standing by, and welcome to the MMG Limited 2021 Interim Results Presentation. I would now like to hand the conference over to Mr. Brent Walsh, Head of Corporate Development. Please go ahead.
Good afternoon, welcome to MMG's 2021 Interim Results Briefing. I will shortly hand over to MMG CFO, Mr. Ross Carroll, who will provide an overview of the interim results before taking questions. The MMG management team is presenting today from their homes in Melbourne, Australia, where we are currently under COVID-19 lockdown conditions. Please bear with us should there be any technical difficulties. Our CEO, Mr. Geoffrey Gao, is unable to join us today due to travel and quarantine requirements. I'll now hand over to Mr. Carroll.
Thank you, Brent. Good afternoon to everyone, and welcome to MMG's 2021 Interim Results Briefing. I trust you have read through our results materials, which were released to the Hong Kong Stock Exchange yesterday. Today, I will discuss the company's first half results and provide an update on our outlook. After the presentation, we will welcome your questions. The first half of 2021 was a very successful period for MMG, both operationally and financially. Most importantly, we maintained our strong safety record and solid production rates at all our sites, despite the ongoing challenges associated with the COVID-19 pandemic. On the financial front, we delivered a record six-monthly profit performance with net profit attributable to equity holders of $400 million and a very substantial net debt reduction of $1.2 billion. This demonstrates to our shareholders the earnings and cash-generating power of our portfolio during periods of strong metals prices.
We'll take you through the detail behind these numbers shortly. MMG's number one value is safety. MMG's pursuit of an injury-free workplace embeds a safety-first culture at all times. Our Total Recordable Injury Frequency Rate was 1.17 per million hours worked for the six months to 30th June 2021. This represents an improvement on the 1.82 recorded for the same period last year. We continue to rank right at the bottom for injury frequency rates when compared to our global mining peers. To combat the spread of COVID-19, MMG welcomed global vaccine rollout programs alongside our own measures to limit transmission of the virus at all of our sites. The regional sites continue to reinforce enhanced hygiene measures, together with social distancing and health screening for our employees and visitors.
In support of nearby communities, Las Bambas donated life-saving medical supplies, and in partnership with local authorities, assisted social enterprise development projects in Peru. At our Kinsevere mine in the Democratic Republic of the Congo, the COVID-19 vaccination campaign was conducted to protect employees and their families. For more on our sustainability performance, including our 2020 report and a summary of our work in environmental, social, and governance initiatives, please see wemineforprogress.com. Now let me briefly make a few comments on commodity markets. MMG's portfolio is leveraged to what we refer to as megatrends, which are decarbonization, electric vehicles, and the urbanization of developing economies. We believe that these three megatrends will drive rapid demand growth for our core commodities over the next decade, with some data included in the chart in the top right-hand corner of this slide.
To put some context to the numbers behind the projected demand growth to 2030, an expected 5.8 million ton increase in copper demand is 25% of today's market. 2.7 million tons is 21% of the zinc market. 120,000 tons is more than 100% of the current cobalt market. To keep pace with this demand, we're going to need significantly more investment in new mining capacity. Many potential projects face significant uncertainty. This includes technical complexity, escalating sovereign risk, permitting and approval delays, pressures from governments and communities, and employee demands. The new project pipeline is now materially smaller than it has been in the past. As you can see, between 2008 and 2021, this project pipeline has more than halved.
Looking at copper specifically, if you compare the forecast 5.8 million ton growth in demand with this project pipeline of only 2.2 million tons, as well as declining grades and the expectation of net copper mine closures over the coming decade, you can see the emergence of a very challenging supply-demand dynamic over the coming years that will likely generate a period of sustained stronger prices to incentivize new supply. I will now briefly touch on the current situation in Peru. Firstly, in terms of logistics and our interaction with the communities along the haul road at Las Bambas.
During the first half, road availability was relatively uninterrupted, allowing for longer transportation periods and a significant reduction in concentrate inventory levels. At the 30th June 2021, inventory at the mine site had been reduced to approximately 13,000 tonnes of copper and concentrate, compared with a peak of over 65,000 tonnes at the end of 2020. The fact that we were able to sell this inventory into a very strong copper price environment was fortuitous, and one of the drivers behind our strong profit and cash flow result for the half. Regarding the evolving political situation in Peru. Let me first say, these are early days for the new government. The new presidency of Pedro Castillo follows a very tumultuous five-year period for Peru. For all of Peru, we hope the coming period is more politically stable, and the outstanding economic performance of Peru over recent decades can continue.
For the mining industry, the new presidency has made an early commitment to work us through the concept of social profitability and to better understand tax arrangements. While the concept of social profitability is yet to be defined, we have met with the Minister of Mines and welcome the spirit of the early discussions. We will continue to reinforce a significant positive contribution that the Las Bambas mine has on the local and the national Peruvian economy. This includes over 6,000 jobs, 4.4 billion soles of taxes and royalties, accounting for almost 1% of Peru's national GDP. Even more important is the regional impact. Apurímac, which hosts Las Bambas, has been the fastest-growing region in Peru as a direct result of Las Bambas' contribution. Our direct investment in the community has exceeded 1 billion soles, with many times that amount flowing through the mining canon to the regional communities.
I want to reassure investors that the issues we face in the logistics corridor are not anti-mining. At present, it's just too easy for a handful of community members to walk on the road and block our logistics. This is an issue we are working together with the government and communities to improve. Peru is a country that we remain very optimistic about from an investment perspective and has vast and untapped wealth of mineral resources that will be required to meet some of the mining supply challenges I referred to earlier. We look forward to working with the new government and the rest of the mining industry to unlock this potential. Moving on to the numbers. It's certainly a very nice set of numbers to be presenting this time around.
Our revenue has more than doubled on the back of higher commodity prices, higher production rates, and higher sales volumes. This, combined with strong cost control, resulted in profit after tax of $584 million, including $400 million attributable to shareholders. Residual profit to minorities reflects the 37.5% of Las Bambas that is owned by our joint venture partners. Slide 12 sets out the EBITDA bridge between the first half of 2020 and the first half of 2021. I don't intend to spend a lot of time on this slide because the driver of the stronger performance is self-evident. As already mentioned, higher prices, higher sales volumes, and good cost control. To summarize, copper and zinc prices were 59% and 37% higher, respectively. Las Bambas sales volumes contributed to around $200 million of revenue uplift, partly offset by a $60 million reduction at Kinsevere.
Both Dugald River and Rosebery sales volumes were also modestly higher. Finally, the main driver of the $138 million increase in operating costs was Las Bambas, where costs increased commensurate to higher mining and processing volumes and higher transport costs and royalties due to the increased sales volumes. Costs were lower at Kinsevere due to lower mining costs, and the smaller cost increases at both Dugald River and Rosebery were mostly due to the stronger Australian dollar-US dollar exchange rate. This slide gives our investors an indication of our pure earnings leverage for changes in commodity prices and FX. Probably the one thing to note here is that following the strong increase in both copper and zinc prices over the first half of 2021, we executed a series of commodity hedges in recent months.
The hedging program is primarily used as a risk management tool given the company's high gearing levels and is designed to protect the strong free cash flow generation of the business. The majority of these instruments have a collar structure that provides a floor price protection and retains some upside exposure should prices rise further. This analysis assumes that the prices remain within the hedge range for copper and zinc, which is broadly between $4.10 and $5 for copper, and $1.20 and $1.45 for zinc. Obviously, anything below that range, and we have downside protection, and anything above that range, and our price participation in the price increase on hedged tons is capped. Nonetheless, it still remains the case that copper, zinc, and the AUD-USD have the biggest sensitivity. With a $0.10 /lb change in copper leading to an $85 million full-year impact on EBIT.
A 10% change in zinc price leading to a $45 million impact. A 10% movement in the Australian dollar leading to a $36 million impact. Moving on now to our debt reduction. I think all our analysts and investors are aware that this was and needed to be a major focus for MMG. We've continued to progressively reduce our overall debt levels. Focusing on this half, the strong operational cash flow and the $300 million equity issuance in June helped reduce our net debt by a massive $1.2 billion. This is obviously very significant when compared to our current market cap of around $3.7 billion and highlights the value creation delivered to our shareholders in the first half. The $300 million new share placement was also a significant milestone during the half year.
This transaction was very well supported by new and existing long-term global investors, and it also facilitated the modest dilution of our major shareholder, CMC, from just over 72% to around 67%, to enable greater minority shareholder participation and improve share trading liquidity. Importantly, with debt now down from a peak of over $10 billion five years ago, we are now in a much stronger position to move into our next phase of growth. I'll now give you a quick update on CapEx. We now expect the total capital expenditure in 2021 to be between $600 million and $650 million. This is a reduction from guidance earlier in the year of $750 million-$800 million. The reduction is largely due to the delayed development at Chalcobamba as well as a third ball mill project, both at Las Bambas.
To provide a breakdown of the anticipated CapEx, approximately $500 million is attributable to Las Bambas, including around $250 million related to the first stripping activity, with $100 million-$150 million across our remaining three sites. I will now quickly run through a few of the key points in relation to our four operating sites. Las Bambas production was 10% higher than the first half of 2020 due to higher workforce capacity and increased productivity following the COVID-19-related shutdown last year. EBITDA was 260% higher due to higher copper prices and increased sales volumes. C1 costs were $1.08 /lb compared to $1.15 /lb in H1 2020. The lower C1 was due to higher copper production and higher by-product credits from gold and moly sales. As mentioned earlier, we will work with the new government of Peru and the Huancuire community to advance development of Chalcobamba.
Under the previous government, we have moved through all the prior consultation requirements. The final decision was unfortunately handed over to a new government. At this stage, we are now unable to give a clear timetable on this process. We will keep investors updated with all relevant developments. We remain focused on maintaining a COVID-safe workplace. The health of our people and high workplace availability are key. MMG's full-year guidance for copper production at Las Bambas is now expected to be around 310,000 tons in 2021, with cost guidance maintained at $1.10-$1.20 /lb , keeping Las Bambas as one of the lowest cost copper mines of this scale in the world.
Kinsevere copper cathode production fell by 31% compared to the first half of 2020 due to a pause in mining in the fourth quarter of 2020 and the processing of lower grade stockpiles and third-party ores during the current half. However, higher copper prices, stable plant performance, and lower operating costs resulted in EBITDA of $94.7 million compared to $8.2 million in the first half of 2020. C1 costs fell to $1.81 /lb in the first half and $1.86 /lb in the same period last year due to the lack of mining costs during the period. This was partially offset by the lower production volumes. Looking forward, we expect to resume mining of the remaining oxide reserves at Kinsevere in the fourth quarter of this year. This is in anticipation of the next phase of Kinsevere's development.
We expect final approval in the second half for the Kinsevere expansion project, which includes the processing of the mine's sulfide resource and the addition of a cobalt circuit. This project will extend Kinsevere's life by a further 10 years and take annual equivalent production up to around 100,000 tonnes of copper equivalent. Importantly, would make MMG a significant global producer of cobalt. For 2021, MMG's full-year guidance for copper production at Kinsevere is unchanged at 50,000-60,000 tonnes. Cost guidance is lowered to $2.05-$2.15 /lb due to the lower-than-anticipated mining costs in 2021. At Dugald River, operational performance was very strong. During the half, the focus on mining extraction methods to reduce waste and mine sequencing improvements led to an uplift in feed grades to the mill.
This, combined with processing circuit optimization work, resulted in record recovery and higher production volumes during the first half. EBITDA of $101.7 million was significantly higher than the $9.1 million result for the first half of 2020. Significantly lower treatment charges, falling from around $300 a tonne to $159 a tonne of concentrate, as well as higher production volumes, also helped reduce C1 costs to $0.63 /lb , which is 17% lower than last year. We continue to focus on near-mine exploration to better understand the additional zinc and copper opportunities on the lease, with a 20,000-meter surface drilling program kicking off in late May. In the nearer term, continued de-bottlenecking and optimization works are expected to deliver stable mine capacity of 2 million tons per annum, and annual zinc production approaching 200,000 tonnes from 2022 onwards.
For the full year 2021, we expect Dugald River zinc production to be between 180,000 and 190,000 tonnes. C1 cost guidance has been lowered to between AUD 0.65 and AUD 0.70 /lb , factoring in the lower prevailing TCs being partially offset by the stronger Australian dollar. Finally, moving on to Rosebery. Despite the age and depth of the mine, Rosebery produced over 37,000 tonnes of zinc during the first half and 85,000 tonnes in zinc equivalent terms, including lead, copper, gold and silver by-products. This was 23% higher than the first half of 2020, and with by-products contributing more than 50% of revenue in the period, it really shows the benefit of the polymetallic nature of the mine. EBITDA of $106.2 million represented 119% increase on the first half of 2020. This was due to higher metal prices and higher production.
C1 costs for the half benefited from this material contribution from precious metal by-products coming in at -$0.52 a pound, making Rosebery a highly cash-generative operation. Rosebery resource extension drilling is yielding encouraging early results for the extension of the life of this important asset. In the first half, we completed nearly 50,000 meters of surface and underground diamond drilling, and over the remainder of the year, we will continue to evaluate life extension options for Rosebery. This also includes evaluating additional tailings storage options to support this anticipated life extension. These plans face some opposition given the environmentally sensitive location of Rosebery, and we are working very closely with the federal and state regulators and community to find the best solution. We look forward to providing you with a more detailed update on this extensive program in upcoming reporting periods.
MMG's full-year guidance for zinc production at Rosebery is unchanged at 60,000-70,000 tonnes. Given the very strong first half cost performance, C1 guidance is reduced to -$0.20 to $0 /lb . Finally, to finish off, we move to strategy and the outlook. In summary, the first half of the year was a record-breaking period for MMG, with net profit attributable to equity holders of $400 million and a debt reduction of $1.2 billion, dramatically strengthening our balance sheet. For the full year, we expect to produce around 400,000 tonnes in copper equivalent terms, assuming spot commodity prices continue to prevail, this will lead to a free cash flow of around $1.7 billion. We remain confident about our overall market opportunities and outlook.
Copper, zinc and cobalt are critical raw materials and will benefit from the rapidly growing demand for renewable energy investment, electric vehicles and urbanization. We will continue to advance the Las Bambas development plan and Kinsevere expansion project, as well as maximizing Dugald River and Rosebery mine life extension potential. In closing, let me reaffirm that MMG's vision is to build the world's most respected mining company with an ambition to double the size and value of MMG, and then double again by 2030. Together with the support of our major shareholder, we are well-positioned to build wealth through the development of our people and forging strong ties and economic growth in the countries where we operate. On behalf of the MMG management team, I thank our shareholders, host communities, contractors and all MMG employees for their support during these challenging times.
Thank you for your time today. I will now hand back to the moderator who will open the line to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Lawrence Lau from BOCI. Please go ahead.
Hi, Ross. Thank you for the presentation. Just got two minor questions, if I may. First of all, I just want to clarify the current 310,000 tonnes upper target for Las Bambas. You don't include anything from Chalcobamba, right? For this year. Secondly, you mentioned that you plan to resume the mining activity in Kinsevere in fourth quarter this year. To what extent, because, we have been seeing in the past quarterly, ore mine in the region of close to 1 million tonnes in the best quarter. To what extent you expect in the fourth quarter in terms of mining activity? Thank you.
Yep. Well, thanks very much for the questions, Lawrence. Firstly, the 310,000 tonnes does include a small amount of production from Chalcobamba. If we don't get access to Chalcobamba at all during this half year, there will be some weakness around that number. There could potentially be another 5,000-10,000 tonnes lower if there's no access to Chalcobamba at all. As I mentioned during the presentation, we are unable to give a timeframe for that approval. Potentially a minor impact. With Kinsevere, we anticipate production starting again in the fourth quarter. I think a couple of reasons that the volumes won't be massive to start with. Firstly, we have to get the mine back in good working order, because obviously while you're not mining, you're not doing some maintenance around the pit.
It'll be, I think largely in the fourth quarter, setting up the mine for full production next year. You may see about 1 million tons of movement in the mine per month, but it's not going to be really significant volumes until next year.
Okay. Thank you, Ross.
Thank you. Your next question comes from Jack Shang from Citi. Please go ahead.
Hey, Ross. This is Jack from Citi. Thanks for the presentation. First of all, congratulations on great results for the first half of the year. Well done. A couple follow-ups. The first thing, of course, is on Las Bambas. In a downside case, right? If in a bear case, the new government isn't that cooperative and Chalcobamba approval is missing. If that's the case, without Chalcobamba, what would be the say sustainable output level for Ferrobamba going forward? Is it around 300,000 tons annually going forward? It's going to be slightly lower than that? Just in a very, very bear case, if Chalcobamba is missing, say in the foreseeable future. That's the first one. The second one, we heard that on the ground that recently there's another road blockage. Any helpful update on that?
Any update on that, or more details would be helpful, on the recent blockage at Las Bambas? Two more follow-ups regarding Kinsevere. On Kinsevere, regarding the cobalt circuit. The cobalt circuit, potentially, what would be the production run rate going forward for cobalt? You mentioned that it could turn into a meaningful supplier, but how meaningful? Any rough color on that would be helpful. Follow up on the sulfide ore, sulfide resource of Kinsevere. I recall that Kinsevere has been running on SX-EW. If you are going to get more sulfide ore, what you're going to do with the production process? Are you going to sell the concentrates? Do we have a quota for exporting the concentrates at the moment, or are you going to sell more concentrates to the local smelters? Thanks.
Yep. Well done. Yeah, thanks for the questions, Jack. With first with regard to LB, and if Chalcobamba approval isn't granted, we're not planning for that in the medium term, but as I said in response to Lawrence's question, we would be somewhere between 300,000-310,000 tons for this year. I think if it would stay that way for a prolonged period of time, we would probably be able to run Ferrobamba at the 270,000-300,000 ton run rate, whilst we're gaining Chalcobamba approval.
I think when you hear all this talk about what's happening in Peru, part of the deal needs to be that for us to cooperate with the government, we also need the government to open things up, because ultimately it's holding back the country as well as also holding us back. With the blockage, you're right. There's a blockage that's lasted for three or four days. That was after a 60-day truce was declared. That blockage has actually been cleared today, and we have some trucks moving down the haul road already, and then we'll be back to a full complement of trucks as of tomorrow. I think we still got about another 45 days of formal discussions. In regard to your questions on Kinsevere, the cobalt circuit will be, depending on the year and the grade, it'll be about 3,000-4,000 tons a year.
Bearing in mind the total market's about 100,000 tons at the moment, that's 3%-4% of the global productivity. Finally, your question in relation to the sulfide ore plant. We'll be building a roaster and therefore producing our own cathodes. There'll be no need for a concentrate license. I think that answers all your questions.
Yep. Thank you, Ross.
Yep. Thanks, Jack.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Chris Shiu from Horizon Assets. Please go ahead.
Hi, Ross. Thank you very much for the presentation, and congratulations on the great results. I've got three questions. The first one is regarding the free cash flow sensitivity that you have shown on slide 29 in the presentation. If we take the year-to-date average for copper as well as for zinc, which I believe will be around $4.2 for copper and then $1.3 for zinc, the free cash flow generation will be about $1.68 billion, right? If we look back at the presentation you have given in March for the full year results, on page 34, a similar matrix was given. At that time, at $4.2 copper price and $1.3 zinc price, the free cash flow generation expected was only around $1.27 billion. There is a $400 million difference, right?
I understand that's about maybe $150 million can be explained by the lower CapEx guidance, right? How about the rest, the $250? That's my first question. Thank you.
Right. Chris, I think the answer off my top of head there too is that we've also had the rundown of inventory from Las Bambas. That was a pretty significant movement as well. Brent's on the line, and Brent would have prepared those charts. I'm not sure if there's anything you could add off the top of your head, Brent, or whether we need to get back to Chris.
Yeah, no, that's correct, Ross. I suspect the previous chart didn't include the inventory at Las Bambas, so that was probably just on a production basis. This is more indicative, and obviously given we're halfway through the year, I think the current chart is what you should be basing your modeling off.
Yeah. Well, actually in the 2020 results presentation, page 34, it does say it assumes the sale of the Las Bambas 2020 closing copper concentrate balance. I think that has already been assumed, right?
Okay. Yes. Chris, we'll come back to you on the end.
Mm-hmm. Okay.
These ones, please.
Got it. Okay. No problem. Yeah. Okay. Yeah, we'll follow up. Yeah. The second question is, could you give us some color on how we should think about dividends going forward? Because obviously, the balance sheet is becoming de-leveraged very quickly and what sort of metric should we be focusing on when we think about whether dividends should be resumed and at what level and so on? Thank you.
Chris, I think with dividends, we're still some way off there. I guess, firstly, our gross debt's still around $6.5 billion, which is still close enough to twice our market cap. We would still want to focus on getting our net debt down in the short term. I wouldn't think we'd be looking at dividends at least for the next couple of years. Obviously, that's going to depend on what happens with commodity prices. If you sort of think back to 12 months ago, when the, I think the average copper price for the first six months of last year was $2.50, we were really hurting. We would, I think, be a little bit conservative about paying dividends. I wouldn't build anything into your model just yet.
What I probably would just remind you of, though, is in prior years when we have made large prepayments against our debt, our share price has motored along as a result of that. I think you'd still get your TSR through the share price rather than through dividends.
Got it. Thank you. My last question is regarding the production of molybdenum from Las Bambas, because we can see that the revenue from molybdenum has actually gone up by something like 17 times year-on-year. I'd like to understand. In the report, it's mentioned that there was a debottlenecking of the molybdenum plants that has increased the production, right? When was that effective? Since when?
I think from memory that would have come into effect in the sort of the latter part of last year. We didn't really see any significant benefit last year. Again, it's really the first six months of this year where we've seen those benefits and we've had the higher production then also the pricing has been stronger as well. Yeah. I'd say really the six months is the first time we've seen the real full impact of the period.
Got it. Understood. Okay. Well, thank you very much. These are my questions. Thank you.
Yeah. Thanks, Chris.
Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We will now pause a moment to allow for any final questions. Your next question comes from Joy Zhang from Goldman Sachs. Please go ahead.
Hi. This is Joy from Goldman Sachs. Congrats on the great results. I have two questions. First is on the effective interest rate. I saw it has declined a lot in the first half. What do you think of the trend in the second half? The second question is about probably the future M&A, because we already see that the gearing has declined a lot with the core price improvements and the strong cash flow. Suppose our financial stress is not as strong as before. What do you think of the priority over the M&A expansion in the overseas assets versus de-leveraging and how we prioritize the two targets? Are we also considering that our assets is currently quite focused on Peru? Do we have some plans to diversify the asset exposure risk?
Yep. Okay, Joy Zhang, good question. Thank you. Firstly, in relation to the interest rates, we've done some refinancing of our Dugald River debt. We would expect interest rates in the second half to be maybe a 0.2% or 0.3% lower than what they were for the first half, but not significantly lower. Now, regarding your question on M&A, we are still a growth company, whilst we're very keen to reduce our gearing levels, we are still here to grow. It's a bit of a two-edged sort of answer I'll give you, but the idea is we do want to grow, but the M&A markets are very tough with the copper and zinc prices being so high now. Trying to find the right value-adding opportunities is quite difficult. We will continue to look, and we're still being very disciplined in how we look.
In the meantime, we'll be deleveraging. Please don't think that we're just going to continue deleveraging at the expense of the right M&A opportunity because I think clearly over the years, we said we were a growth company, and that's what the expectation of our major shareholder is. I think the last part of your question was just about getting some sovereign risk diversity. I guess the areas we're focusing in are the African Copper Belt and the Andean region in Latin America. Ideally, we would probably like to find something in Chile as well. Chile's had its own sort of political issues recently as well. It really is a matter of trying to find the right project, and we're still confident, whether it be the DRC or Peru or Chile, that we can operate in those areas.
I think unfortunately, there's very little opportunity for us to grow in Australia. As much as we'd like to grow in Australia, which is an easier environment to operate in, there's just not really any growth options for us here in Australia.
Okay. That's very helpful. Thank you, Ross.
Yeah. Thanks, Joy.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Carroll for closing remarks.
Well, I just once again like to thank everybody for taking the time. I think, like we are, I hope you're all very pleased with the financial results this year. I think it marks a big turning point for MMG. We hope to continue with this strong financial performance into the future. Thanks very much.
That does conclude our conference for today. Thank you for participating. You may now disconnect.