Earnings Call: Q2 2021

Jul 27, 2021

Earnings release

Hello, and welcome to MMG's 2021 Second Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the June quarter of 2021. Joining us today is Chief Executive, Jeffrey Gao and MMG's executive team. I will now hand over to Jeffrey, who will discuss the highlights of the report, after which there will be opportunity to ask questions. If you wish to ask a question, you'll need to dial star and then one and wait for the operator. Over to you, Jeffrey. Thank you, Brent, and hello to everyone who has joined us today. At MNG, our first value, as always, is 60. Our year to date operations recorded a total recordable injury frequency rate of 1.17 per 1000000 hours worked, which is an improvement on the 2020 results of 1.38. While we will never stop our efforts to eliminate injuries, I am pleased that we continue to benchmark at very bottom end of global peers on injury frequency. I also report that we continue to deliver stable operations at all of our sites, with production in line with our budget in the second quarter despite the ongoing COVID-nineteen impacts. Pleasingly, this stable operating environment combined with strong commodity prices over the first half of the year has resulted in a record profit for the group. As disclosed to the Hong Kong Stock Exchange last week, we currently expect to report a net profit up steps attributable to equity holders of around US400 $1,000,000 for the 1st 6 months of 2021. In addition, our net debt has reduced by around US1.2 billion dollars and our balance sheet is now in a much stronger position to deliver growth and returns for our shareholders. Now to address the operational performance. In the Q2 of 2021, MMG produced over 93,308 tons of copper and 58,137 tons of zinc. And on a full year basis for 2021, we expect to produce between 360,000 tons of copper and 240,000 and 260,000 tons of zinc. Las Palmas copper production in the June quarter was over 80,000 tons. This represented an increase of 25% on the Q1 and 37% on the prior year, which was impacted by the onset of the COVID-nineteen pandemic. Despite escalation of the 3rd wave of COVID in Peru, we continue to effectively manage this situation. Mining volumes improved significantly this quarter due to higher workforce capacity and improved equipment productivity. Regarding Chacobamba, I wanted to provide update on the status of this development. As you would be aware, the Bombas had anticipated regulatory approval for the development of the charcoal ban market in the first half of twenty twenty one, following submission of original application in February 2019. Despite assurances from the outgoing government, this approval has still not been received. With a combination of lengthy community consultations, administrative delays and the 2021 national elections prolonging this process. Looking forward, we will continue to work with the government of Peru and the Huang Kure community to advance this critically important project. We welcome the recent confirmation that Pedro Castillo of the Free Blue Party will start a 5 year presidential term on July 28, 2021. We look forward to holding constructive dialogue with the new government regarding the future development of Las Palmas and the significant contribution of Las Pampas and the Peru mining industry to the growth of the improving economy. Our project is a significant one for the economy of Peru and will support additional social contribution and financial and business opportunities for local and regional communities. Moving on to Kingsville. Copper Castle production of around 12,600 tons was also in line with expectations. New throughput was stable, but like last quarter, the processing of lower grade ore resulted in production being lower than last year. Following a temporary suspension of mining activity in 2020, the majority of new feed came from low grade stockpiles and third party ore. In terms of outlook, we continue to undertake detailed engineering works in anticipation of the next development phase at King's Area over the remains of 2021 2022, which will see a shift to the mining and the processing of sulfide ore and the introduction of a cobalt circuit. I will now move on to our zinc operations, Gilgal River and Roseberry. At Gilgal River, zinc production of 40,000 tons was 18% below the Q1 due to short term constraints in the south mine and a planned plant shutdown in June. However, we expect to see improvements in mining performance with better extraction methods to reduce waste as well as strong recoveries over the remaining months of 2021. With ongoing work to debottleneck the mine and optimize the plant, we remain confident that from 2022, we can deliver on our target of over 2,000,000 tons of mine ore per year and annual zinc production approaching 200,000 tons. At Rosebury, zinc equivalent production of almost 44,000 tons was 6% higher than the prior period, consisting of 18,000 tons of zinc, 6,800 tons of lead, 430 tons of copper and 11900 ounces of gold displaying the benefits of the polymetallic nature of the Rosebery ore body. During the quarter, resource extension and near mine exploration drilling continue to indicate further extensions to the resource and the mine life. We are also investigating the potential for short term capacity increases at existing tailings storage facilities, while studying and permitting a proposed site for a new tailing storage facility. We are confident in further extending Roseberry's 85 year plus mine life. In summary, the overall results of the Q2 is positive and the record profit performance in the first half demonstrates the underlying strength of our portfolio. With debt reduction of US1.2 billion dollars following the strong financial performance and the recent US300 million dollars equity raising, MMG looks forward to delivering on its next phase of value accretive growth for shareholders. I am now happy to take your questions. Please can all questions be directed to me in the first instance. I will then call members of the executive team to respond. I will hand over to the moderator now. Thank Your first question comes from Laurence Lau from BOCI. Please go ahead. Hi, Jeff. Can you hear me? Yes. Hello. Hi. Okay. Just a two questions. First of all, it seems that you have revised down your target for last members for this year because of the delayed approval of Charcot Bamba. Now you are looking at 310,000 tons. So what's your assumption behind the approval time of charcoal bamboo? And will this delay affect the output in 2022? And second question is that regarding the hedging, I see that you are actually employing hedging quite a bit in the first half. And can you tell in the first half profit, does it include any floating gain from the hedging contracts? Thank you. Okay. So thanks for question. I will ask Mr. Wei to answer the first question regarding the delay of chacobamba approval. Then I will have my CFO, Lars, to answer the second question that is regarding the account impact of the hedging activities. So would you first question please have the first question translated into Chinese? Okay. Then yes, if that has been done, then Mr. Lee can answer the question. However, the delivery of the JAKAR family has been delayed because of the community consultation, administrative delays. And also, we have been impacted by the 2021 2019. So there is a delay in our slide to work process. At Natura, we look forward to working with the new government to announce the work in terms of the tribal government because this is a significant project for Latvamat and Latvamat and also is a significant one for the economic environment. So we want to give our operational support to a digital contribution and give more financial and business opportunities for those who have regional communities. Right now, we are changing minor segments to mitigate the impact for the 2021. Full year production for the 2021 is now expected to be around £320,000 of copper that is in the middle of the previous guidance range. When approval is received, autonomous will move forward significant development of the pit investment in the mine claim and the 3rd volume, which will increase the production trend, a range of around 400,000 tons per year. I would just like to clarify one point is that if this truckload number still not get approved within this year, will it affect the 310,000 tons of our target for this year? We have been interpreted to do the translation. So make sure, Mr. Wei, you got the question? I made comment here. Yes, I made comment here is because of the coming change of the new government later this week in Peru and right now, it's very uncertain for the management to have a good estimate of when the chagobamba approval can be granted. Then at the moment, we cannot give a reliable estimate of the possible impact of the delay. But as Mr. Wei mentioned, in 2021, we are looking for re scouting the mining sequence and doing some optimization works. So we can still maintain the production guidance, given now we see it's probably around the low end of that range. And as to the impact on future year's production, we will work together with the new government to get better understanding of the possible timeline of the approval and then we can give them market updates about the impact on future years. Did that answer your question? That's totally the best you can do now. Yes. Yes. Something like that. Thank you. Your next question? Okay. Yes. And now I can have Ross to answer the question about hedging. Thanks, Jeffrey. In the half year results, we actually had about a $35,000,000 hedging profit. And that's not the total hedging gain because some of the gains are hedging candidates, so that don't come through to the P and L. But the $35,000,000 was in Los Bambos. So essentially means based on those numbers that we've circulated around the profit attributable to equity holders that the MMG shareholders will get 62% of that. Okay. Thank you. Your next question comes from Jack Cheng from Citi. Please go ahead. Hey, Jeffrey, Ross. Hey, hear me okay? Yes. Yes. And I would say thanks and we appreciate your efforts in the first half in changing all the mining sequence and all the efforts on the ground. So good work. And several quick points to follow-up on Las Pampers. One is that when the new office, the new administration comes in, so when do you expect they come in? So are will the new government be very efficient in appointing the mining minister, all these administrative processes of putting people in place? Will that be on time? And when they get into office, which I guess would be end of this month, what are the next procedural requirements? Will they require, say to start all over again? That will be pretty downside scenario, barricade scenario. And so based on your communication so far with the incoming administration, will that be a kind of a friendly conversation already being earlier already being held already? Or we are uncertain at the moment, how what kind of stance that the new government would take? I guess on the procedural wise, what are required? And so what are the expectations there on the next steps of gaining the approval or getting close to get the approval? That's the first thing on the approval front. The second is I noticed that in the first half, I think Mr. Wei mentioned by changing the mining sequence, right? And I noticed that the average ore grade are actually higher than last year's level. So how long can Ferro Bamba can you mine relatively higher grade ore at Ferro Bamba? So how long that can last? Because earlier in the year, I think in March, in your presentation annual results presentation, you had a chart of the split between the contribution of copper output for Las Bamba's. And I recall I can tell from the chart that Chaco Bamba your plan is Chaco Bamba would contribute 20% of the copper this year as Bamba's and it's going up to 40% by 2023. So my question would be that in the bear case, if without Chaco Bamba approval, say, in the rest of the year and even say a very bear case scenario that you don't get the approval, what are the backup plans and how long that Ferro Bomba can last and at what production scale? Thanks. Okay. So I may take the first question regarding the new Peruvian government and I will leave the second question to Mr. Wei about the production profile from Faribamba if the Chacobamba approval is further delayed. Regarding the approving new government, now the election result has been confirmed. We have the new President-elect. And on the Peru time, July 28, Pedro Castillo will take oath as President. And we were told that probably 1 or 2 days after that, then the new cabinet members will be appointed. So that means the new government will be in place very soon. And then the new cabinet will need to be voted for confidence by the Congress. That will be in about 30 days. So that means around end of August, the Congress will vote for confidence for the new cabinet. So that's one thing that basically the new government will be in place very soon and start to govern. And regarding the possible attitude approach towards the permitting, there was legal information during the campaign of election from government. So we really don't know. We need to find out by working together with the government. But as I mentioned before, we will try our best to have the approval of chaglobamba granted. Now I will hand over to Mr. Wei to the question regarding the production profile. So with the translation for the answer from Mr. Wick, because of the delay of we will give a priority for the ferromatosis side to the press stripping. And the second one, we will put our focus more focus in Phase III to advance the many segments in Filavana. So for this year, for the lithium production, the hybrid from Filavana will be enough for this year. Okay. Thank you, Jack. Maybe for next question. Thank you. Your next question comes from Chris Hsu from Horizon Asset. I've got two questions. The first one is, so regarding the first half debt reduction, right, I mean, how much of that is actually coming from the sale of the excess inventory during the first half? And how much CapEx has been spent in the first half? That's the first question. And the second question is regarding the next phase of Kansavir development. We note that the board approval has been delayed from last year to this year. So it has been already almost one year of delay. So I'd like to understand more about the reason behind that. I mean, is there something to do with the government approval or is it just more of an issue with the internal studies? Thank you. Thanks, Chris. I will ask Lars to answer the first question and I will take the second one. Lars, over to you. Yes. Thanks, Jatin. Yes, hi, Chris. Chris, we're not really in a position to particularly answer your question yet because we're obviously still financing sorry, finalizing our financial accounts. But the debt reduction was really a combination of the equity raise, the much stronger copper prices in particular than what we expected plus the sell down of the inventory. But when we come to the half year presentation, we'll make sure that that's clear for you and we've got precise numbers. Okay. Chris, regarding the KEP approval, we are as I mentioned, we are still optimizing the engineering studies of this project. I think 2 things behind prolong this process. One thing is in this project, we plan to use Chinese factories as much as possible. So in fact, we established a project team mainly comprised of Chinese managers, Chinese engineers, and we are looking for Chinese design, Chinese equipment and even Chinese construction services. But this all Chinese factor to make them fit in MMG's existing system took longer than we expected. So that's one complexity. The second one is, during the starting process, in fact, we had a risk of the capital expenditure overrun because of the booming commodity prices related, steel price, equipment price, all the things. Then we took another round of optimization to review the CapEx and make sure we can have as low as possible CapEx budget to support this project. So we are still in that stage, even though I believe we are very close to the end of this work. And then next step is to seek the approval from the Board and then get this project implemented. Thanks. Understood. Thank you very much, Jeffrey and Ross. Thank you. Thank you. Your final question comes from Hannah Yang from Morgan Stanley. Please go ahead. Hi, Jeffrey and hi, Ross. This is Hannah from Morgan Stanley. Just have a quick follow-up question on the policies in Peru. And we have been hearing that the next finance the next possible finance minister in Peru had been saying that taxes will go up in a moderate way, no matter the company has the tax stability agreement on hand or not. So just wondering how you see the likelihood of the tax increase or if the government the new government team breaks the tax stability agreement, what the company can do to mitigate the potential risk from the higher tax? Thanks. Thanks, Hanna. I'll pass this question to Ross. All right. Yes. Thanks, Hanna. I think at this stage, it's obviously quite unclear as to what's going to happen. And we're obviously sort of considering all scenarios, but we really just have to sit back and wait and see what the government announces. But the copper industry is one of the biggest industries in Peru. So there's a big risk to them that particularly have a mining related tax. And certainly, depending on what the taxes are, if we do end up having a stability agreement breached, we have options of international arbitration as a potential to break that stalemate. So yes, it's obviously a concerning situation. We're trying to do what assessment we can, but it's still very early days with the new government not in place. And I don't believe the finance minister has been formally appointed yet either. So it is just an unpredictable situation at this point. Sure. Thanks. Just wondering if the international arbitration, what else we can do about the tax increase if possible? Well, international arbitration did the most likely outcome. And it's I guess going back in history back in 2011, they had a similar situation where there was a bit of like a super profits tax that was in place during extremely high prices. So we really have to wait and see what the government proposes. But obviously, with having the stability agreement, we're not going to agree to something that's or if anything, that it's going to hurt us too much. But arbitration and then there's bilateral trade is as well, which may come into force too. But at this stage, it's options for us, but a little bit too early to tell. Yes. I just want to clarify that the arbitration, it's all something we can look at that part of options. But right now, as Ross mentioned, because the new government hasn't been in place and we are waiting for the proposal or the requirement from the government and then we will decide what will be our next move. So it's at the moment too early to be certain on any move or any action. Just to clarify. Thanks. Okay. Thank you. Thank you. Your next question is a follow-up from Jack Sheng. Please go ahead. Hey, thanks. Thanks, Jeffrey and Ross. A quick one for Ross. I want to clarify the nature of the hedging gain for the company. So that $35,000,000 at last bumpers level, was that as a result of the actual, say, price of copper is actually lower than the hedged level of copper price? Does that mean that if actually copper price shoots up in the rest of the year, that would potentially in the meantime cause some hedging losses? Just want to understand the nature of this. And also on a separate note, what's the company's overall stance? I noticed that you've hedged 40% of the volumes from February over December. So at what copper price level did you decide to do that? And at what level would you potentially open to hedge even more to make even more hedging, say, your overall view on copper price and your hedging policy going forward? Thanks, Ross. Yes. Okay, Jack. Jack, those hedging gains that you'll see when we release our half year results, they're actually forward hedges on existing sales that we made in that February to June period. And some of them had like a 4 month QP period. So what we effectively give us brought the 4 months back to 1 month at a fixed price. So we did that because we had absolute certainty over those hedged volumes. And then obviously, I think that some of the hedges were put in place up around $4.50 to $4.70 And then there was all the talk of the Chinese releasing strategic reserves. So we thought it was prudent to just lock in those QP periods on the existing sales. So that's what they are. The bulk of our hedging are actually COLAs or caps and COLAs. And I think you'll see in the documentation that we've got quite a broad price range. And the floor price seems to be around $4.10 and in some cases, the color price is above $5 So we probably, in reality, don't expect there to be too much room for hedging gains or losses because it's around about $1 or a pound that we swing within the collars. Now so for us to incur significant hedging losses, that would mean that the price would have to be well above $5 which would be an exceptional outcome. And we would still have the other 50% of production that we'll be getting the roughly 50% that we'll be getting the full market proceeds for. So yes, so it was really last year, we did some hedges that obviously incurred a loss. But this year, we're now using forward contracts. This year, we've gone to the cap and collar situation where we're really looking quite a broad range. So yes, so we wouldn't expect there'd be significant hedges, hedging gains or losses for the rest of this year or early next year. There are no further questions at this time. I'll now hand back for closing remarks. Okay. Thank you everyone for your time and support to the company and I look forward to providing further updates when we do our mid year results announcement. If you have any further questions, please follow-up with our Investor Relations or Corporate Affairs top teams. Goodbye.