Earnings Call: H1 2019

Aug 22, 2019

Good afternoon, ladies and gentlemen. Welcome to MMG Limited 2019 interim results presentations. Hosting today's meeting is the company's Chief Executive Officer, Mr. Geoffrey Gao, and Chief Financial Officer, Mr. Ross Carroll. We will kick off the meeting with an overview of the company's performance by Mr. Gao. This will be followed by an analysis of the company's financial performance by Mr. Carroll. Thank you, Mr. Shu. Good afternoon, and welcome to the 2019 interim results briefing. I trust many of you have read through our results materials. So today, I will discuss the first half results, our outlook, and our strategy going forward. Ross Carroll, our Chief Financial Officer, will also discuss the financial results in detail. You may also have read that we have announced a new executive team member, Mr. Wei Jianxian, will join us in the second half of this year as Executive General Manager, Operations, Americas, taking responsibility for our important Las Bambas asset. Mr. Wei is a mining engineer with over 30 years of mining experience in challenging contexts. He joined us from our major shareholder, China Minmetals. His focus will be on leading the strong Peru management team, and he will play a key role in managing the Las Bambas joint venture on behalf of the owners. I look forward to introducing Mr. Wei to shareholders at the next opportunity. Now, I will start with safety, as it is our most important value. MMG's total recordable injury frequency rate, or TRIF, is the lowest of all 23 companies in the International Council on Mining and Metals. This is something that we are very proud of, as we believe that good safety performance is the foundation of good operational performance. In the first half of this year, however, we have seen a slight increase in our TRIF, which reminds us that we still need to place safety at the forefront of everything we do, and we must continue to improve in this area. Regarding our social and environmental impact, we continue to focus on improving our environmental performance and our contribution to communities. We know that this is key to maintain support for our future growth plans. As CEO, I will continue to drive strong performance in this area. Before Ross takes you into the financial results in detail, I now wanted to quickly discuss the two main drivers that contributed to our disappointing performance in the first half. This includes the volatile macro environment and the impact that it has had on the copper price. Also, the logistics disruptions at Las Bambas. Firstly, the copper market. Investors are clearly concerned that trade tensions and the rising geopolitical risks will lead to a slowdown in global growth. These concerns are being expressed through the copper price, which is seen as a proxy for global growth. Given our strong earnings leverage to copper, this has clearly had a negative impact on our financial results and our share price. The copper price is currently at two-year lows and is 17% below its average in the first half of 2018. Having said that, we still see copper demand as solid, despite the fact that it is not growing as quickly as it has in the past. Furthermore, the physical market is very tight with TC/RCs at seven-year lows. In the medium and longer term, the outlook for copper remains extremely positive. Copper is exposed to three mega trends that will underpin consumption growth over the coming decade. These are the decarbonization of energy, the electrification of the automobile, and continued industrialization and urbanization of developing economies. China is at the forefront of this revolution, and the blue skies of the future will need more copper. On the supply front, we continue to see more setbacks and challenges for copper projects. Technical, environmental, community, and geopolitical risks are all becoming more prevalent. In this difficult market, MMG has a unique perspective as an international operator with support from China's largest resources company, China Minmetals, as major shareholder. We view this as a competitive strength that underpins our strategy to develop our assets to their full potential and to target value adding M&A in copper, particularly at these low points in the cycle. Now to an update on Peru logistics. The Southern mining corridor is currently experiencing heightened community unrest, particularly following the recent approval of the Tia Maria project. Much of this has focused on the Matarani port used by Las Bambas and the three other major producers, making it the world's largest copper port, accounting for 49% of Peru's total copper production. The port and the rail has been open and running normally for the last two weeks. The port and the rail system is currently operating normally, but risks remain. The broad logistics route used by Las Bambas is complex. It traverses remote communities in the Andes on its way to Pillones transfer station and then to Matarani port. It is important to understand that the issues that have periodically blocked this road are largely related to compensation. These are not protests to stop our operations. Following the community blockades in March, April, we have established dialogue tables with the community and government. We continue to engage in dialogue with the objective of finding long-term solutions to community demands. Now I hand over to Ross for the financial results. Okay. Thanks, Jeffrey, and welcome everyone. As slide 9 highlights, our financial performance has deteriorated in comparison to last year, mainly because of lower commodity prices and a temporary plant shutdown at Las Bambas. This was partially offset by a full six-month contribution from Dugald River following its commissioning in May 2018. Expanding upon the detail, revenue was down 27% or $511 million. To give you some indication of the impact of the Las Bambas disruption, we had stockpiled inventory at the period end of around 33,000 tons of copper. This impacted revenue by approximately $230 million. As I mentioned earlier, the other major drag on revenue was lower commodity prices across the board. The detail of this you will see on the following slides. In addition, Kinsevere production was also 12,000 tons lower due to operational challenges in both the mine and the processing plant in the first half of 2019. EBITDA was down by 34% and profit after tax attributable to our shareholders has reduced from $124.2 million profit down to an $81 million loss. I will talk about the operating factors that influenced our results in the next slide, but it's important to mention our depreciation and interest charges. Depreciation increased by approximately $45 million due to the full six-month contribution from Dugald River, an additional ore mined at Las Bambas. Interest expenses were also $21 million higher despite a lower overall gross debt position, largely due to the approximate 1% increase in LIBOR interest rates last year, compared to last year, and the full six-month interest contribution from the Dugald River debt facility. That was because the interest started getting charged to the P&L statement once the project was commissioned. Fortunately, we are starting to see some interest rate relief with U.S. interest rate increases of last year starting to reverse. So LIBOR rate is coming down. Slide 10 looks at the EBITDA bridge between the first half of 2016, 2018, and the first half of 2019. Starting from the left, we have the impact of Dugald River. In the two months post commercial production in 2018, Dugald River's EBITDA was $28.8 million. In the first half of 2019, EBITDA was $52.5 million, with the difference of $23.7 million being reflected in the chart. Next is the impact of price, which drove revenue and EBITDA $154.5 million lower. Compared to last year, the copper price was 11% lower and the zinc price was 16% lower. We then have a $33.2 million impact from lower royalties and selling costs, which was due to lower sales volumes in the first half. They were partially offset by higher royalty rates in the DRC. Movements in foreign exchange had a negligible impact of $0.2 million. Moving to the right, the biggest impact to EBITDA was the lower sales, and mainly at Las Bambas, where copper sales volumes of 140,000 tons were 48,000 tons below the first half of 2018. Similarly, Kinsevere sales were 12,000 tons lower, and Rosebery zinc equivalent production was modestly lower as well. Of the 60,000 ton reduction in copper sales in the first half, we can expect to recover about half of that during the second half of the year, as we gradually draw down and ship stockpiled inventory from Las Bambas. From a revenue and earnings perspective, this stockpiled inventory should generate about $230 million of revenue and $60 million of EBITDA in the second half, assuming the current spot prices. Just moving to the right, the $6 million increase in production expenses was the net impact of higher mining and processing costs at Kinsevere, following a 32% increase in material movement and higher acid costs. This was partially offset by lower maintenance expenditure at Las Bambas in 2019, as 2018 included a major planned shutdown. We also had lower corporate and exploration costs to the tune of $13 million, which has been a consistent theme across recent periods as we continue to deliver on headcount reductions and cost savings. In exploration, we have also seen a modest reduction in costs following the recent decision for a more streamlined focus and the winding down of greenfield projects in Zambia and Northern Australia. We also had a favorable cost variance of $217 million attributable to the stock movement, which is predominantly related to the inventory buildup at Las Bambas that I have already spoken about. Finally, the other category was a negative to the tune of $12.8 million, due largely to the non-recurrence of the gain on the convertible redeemable preference shares in 2018. Now to slide 11, which seeks to explain the profit that ends up being attributable to MMG shareholders. As you will see, the starting point is $13.3 million, which corresponds to our 62.5% interest in Las Bambas. As we already touched on, this number is quite low following operational disruptions and the inventory buildup that took place in the first half. We then had a loss of $22.1 million for the other operations, which includes a net loss of $45 million from Kinsevere that offsets a net profit of $23 million from Rosebery and Dugald combined. We then deduct exploration and corporate overheads of $24.9 million. Our net finance cost, which only includes the shareholder loan of $2.3 billion and our $500 million Dugald River facility, saw a reduction of $11.6 million in total. This was due to substantial interest savings on the shareholder loan following renegotiated terms from the 1st of July 2018. That was partly offset by a full six month of interest costs from Dugald River. Just on this topic, I would like to remind investors that the reason why Group interest cost is so high is that MMG borrowed all of its equity for the LB project from our major shareholder, CMC. So although it is in relation to Las Bambas, it does not actually sit within the Las Bambas joint venture. Now to our earnings sensitivity. This slide gives our shareholders and analysts an indicator of their sensitivity to both commodity prices and exchange rates. Copper, zinc, and the AUD, USD obviously have the biggest sensitivity, with a $0.10 per pound change in the copper price leading to a $94 million full-year impact on EBIT. A $0.10 change in the zinc price leading to a $46 million impact, and a 10% movement in the Australian dollar leading to a $33 million impact. This slide makes it easy for investors to see why a $0.25 fall in both the copper and zinc price from this year to last year has had such a material impact on our profitability. We are working to lower this volatility over time through both cost and debt reduction programs. Slide 13 shows the impact of the movement in copper and zinc prices on our free cash flow. Free cash flow is the operating cash flow from our business, less CapEx, tax payments, and interest costs. This chart, along with some additional information in the appendices, will help our analysts and investors to better understand and model MMG's financials. Currently, we are roughly at a $2.60 and $1 zinc price. So we would be sitting with free cash flow of around $95 million at the end of 2019 if we make production and cost targets. Six months ago, when speaking with you, this number was expected to be around $700 million, such has been the fall in commodity prices over the past few months. Now to slide 14. I think everyone would be aware that debt reduction remains a major focus for MMG. Following the first six months of this year, however, our net debt has temporarily increased by around $100 million. This is due to lower earnings and cash generation in the first half, which we have discussed in detail on the previous slides. As noted in the slides, stockpiles of copper at 30th of June equated to around $215 million, which we expect to draw down and ship in the second half of the year. As a result, and even at today's low commodity prices, we expect to resume our trend of debt reduction in the second half, which has been a feature of Las Bambas since the commissioning in 2016, with $2.6 billion of debt reduction during that period. Another point to note from this slide is that after just having developed the largest copper and zinc mines globally over the last few years, our capital expenditure will start to plateau at around $400 million-$500 million per year, with the bulk to be spent at Las Bambas. Slide 15 highlights our debt maturity profile. 2018 saw us make some prepayments and we are currently ahead of the loan amortization schedule. Despite some short-term commodity price weakness, with our strong asset base and low-cost position of Las Bambas, we remain confident that we can continue to meet our debt commitments in the near term. We've also been very fortunate to have the support of our major shareholder, which has enabled us to fund the development of two world-class assets at favorable times in the cycle. We are confident this support will continue, which is a major benefit to our minority shareholders. Now to discuss some exciting developments that we have recently announced from our drilling and exploration programs. Last year, we announced some changes to our exploration strategy with a more targeted focus in and around our existing operating hubs and the winding down of some of our more speculative and longer-dated greenfield projects. Positively, this targeted approach is already demonstrating some good early success. At Las Bambas, we were drilling for hydrogeological and geotechnical purposes as part of the development of the Chalcobamba pit. But these drill holes have intersected mineralization within 300 meters of the existing Chalcobamba reserve pit. What this tells us is the mineralization is likely to be continuous with the main Chalcobamba mineralization and should drive an expansion of the pit design. These intersections are at high enough grades and show enough depths to validate our long-term belief that the Las Bambas asset has tremendous potential to significantly grow the mineral inventory and extend the life of the asset. What is most pleasing is that these results are the first drill holes that we've been able to drill outside of the main Fuerabamba pit following the challenges we've had with land access. Our drilling program has identified several exciting targets in the second half of 2019 and 2020, and we look forward to updating the market as the program progresses. Our DRC exploration program is also delivering some promising results. As you all know, our focus in the DRC has been targets within a 50-kilometer radius of the Kinsevere mine that have the best opportunity for economic exploitation via trucking and processing at the existing Kinsevere plant. The program is known as RED50 and is critical to adding value to Kinsevere, which is due to deplete its current oxide reserves by 2023. Any new oxide discoveries have the potential to add additional life to Kinsevere and create value and flexibility for the Kinsevere expansion project. Over recent months, an extensive drilling campaign at our Nambulwa project has delineated two prospects, being the Nambulwa Main and the DZ Prospect, that show good chances of economic exploitation of oxide ore for Kinsevere. In addition to this, we have a number of other very exciting prospects at Mwepu and Sikarati within the RED50 program, and we look forward to updating the market on these developments as the results are received. I'd now like to hand you back to Geoffrey. So talk a bit more about MMG outlook. In June this year, we celebrated the 10th birthday since the formation of MMG. Over that time, we have built a great company and transformed ourselves from an Australian-focused business to one with a portfolio of high-quality international assets in the world's most exciting mining regions. We have also shifted our production profile from zinc to copper over this time. As we look ahead to the new decade, we will grow our business and place our focus on maximizing value generation for our shareholders. MMG is pursuing a strategy that we expect will see us valued as one of the world's top miners over time. Of the pure play copper names, we are the fifth largest and the largest copper miner in Asia. On a consolidated basis, our cash cost for copper and zinc are in the bottom half of the global cost curve. As a result, we generate tremendous free cash flow through the cycle. We have a track record of delivery. Growth has been consistent. We have a strong asset base. Despite the strong platform we have built over the first 10 years, we are not satisfied with our current performance. If we want to deliver on our aspirations, we need to make a step change in our performance. That is why we are embarking on the holistic business transformation program. We will target three key areas. First, to reduce overheads and improve efficiency. Second, to optimize the operating business. Third, to strengthen our balance sheet. The key to reducing overheads is to leverage a lean group office while evolving clear responsibility for performance to operational management. The focus at sites is to build competitiveness, maximizing production while driving down costs. There will be significant internal competition for capital, and we will aggressively pursue the best opportunities in our portfolio. Finally, we need to ensure we have the right balance sheet that maximize returns and gives flexibility to fund growth. Our current high debt levels helped us bring growth forward through Las Bambas and Dugald River. But in today's environment, we need to look at ways to improve our funding structure. This includes options to reduce our funding costs and improve the terms on these facilities. We will also look at how and when we approach equity markets to support us in delivering value accretive M&A. With that, I would like to open the floor up to questions. Thank you, Mr. Gao and Mr. Carroll, for the presentations. Now the floor is open to questions. Apart from the persons joining us today at the floor, we also have 23 persons joining us through our dial-in system. So, whenever you have a question, just let our operator know, and then she will inform you how to dial into the floor for questioning. Now the floor is open to questions. Hi, my friend. Many thanks for the sharing. I am Han from JP Morgan. So I have three questions. The first one is, since we have some stockpiling at Las Bambas due to logistic challenges in the first half, does that affect our maybe overhead cost so that in the second half, if we destocking that pile, will that help us on this cost reduction? It is the first question. Second one is for the drilling or exploration progress in the both Las Bambas and the Kinsevere. When can that turn into a feasibility plan, and when can that start to get developed? What scale of CapEx will that require? The third question is, we have heard there are some new mining policy change considered at Peru. Have you heard any news on that front or any insight you can share? Thanks. Thank you. I will let Ross to take the first one. Yep. Thank you. With the first question in regard to stockpiles, it won't lead to any cost reduction as such. In fact, it will cost us money. It's around about $100 a ton to get the concentrate from the mine down to the port. You'll see our transport costs will actually go up in the second half because we'll be getting proportionately more tons to the port. Otherwise, it doesn't have any other impact on costs. Yep. Okay. On the exploration activity or drilling activity, as you see, generally, they are still in the early stage. The progress is a little bit advanced in DRC or Kinsevere than Peru, but we need to do more drilling before we can change that into the resources according to JORC standard. Then we will keep updating to the market about our progress in this regard. Okay. Thank you. Yeah. I think Geoffrey, if I could just add to the exploration successes, both the Chalcobamba Southwest, assuming it is developed, would go through the Chalcobamba pit infrastructure. We're already doing a feasibility on the Chalcobamba pit at the moment. Then the discoveries in Kinsevere would flow through the Kinsevere plant, so there'd be minimal capital cost there. It's not like we'd be opening up new mines. It'd be just some form of trucking to get it to the Kinsevere operation. You also have a question regarding the new mining policies in Peru, right? In fact, we don't have real information on that. Of course, that was firstly mentioned by the Peru President in his speech. After that, no more detail been released. I don't have any clue on that right now. Thank you. The next question. Thank you, Geoffrey and Ross, for your sharing. It's Yen Tung from CICC. A couple of questions here. First one is, have you contracted the selling price for the 30,000 tons of copper concentrate stockpile ending in the first half? That's the first one. Second question is, for the cash cost of roughly $1.12 per pound in the first half, is that based on the sales volume or production volume? The reason why I'm asking this is, what cost should I use for the stockpile cost in the second half, in the calculation? The third question is, what's the situation with the local community there? Are there still any outstanding issues with them? The fourth would be probably a longer-term question. I guess one problem facing the investors is that even though operating leverage of the company is actually quite low, because we are a low-cost producer. The total financial leverage of the company is pretty high, if you include our interest cost and also the actual tax rate that we are paying in Peru. I'm just wondering whether the company's got any longer term plan to reduce the overall financial leverage. Thank you. Probably Ross, you take the first two. I do the third one. Sorry, I didn't write down the first question quick enough. Could you please repeat it? Yeah, it's just that have you contracted any sales price for the- Price, yeah. stockpile? Yeah. Yeah. No, that is all right. We have not, because it is all sold on LME exchange prices at the time of ship sales, and then there is a quotational period that basically gives the time for the copper to get to the smelter. So the price will be determined based on the shipping schedule. Effectively, they are floating prices. So hopefully, the price goes up. The second question around the stockpiles and the calculation of the C1 cost, the C1 is based on production tons, not on sales volumes. So the C1 is based on the higher, the 185,000 tons, not the 140,000 tons that we shipped. Yeah. I may take chance to talk a little more about the logistics of community situation impacting Las Bambas in Peru. What most recently happened, that is the protest against the government's decision to approve the Tia Maria project. That has impacted the operation in Matarani and also the rail system from the transfer station to the port. I think through the dialogue of the government with the community leaders and right now, as I mentioned earlier, the rail system and the port has been back into normal operation. But we should be cautious. We say there are still ongoing protest activities, and the risk still remain. This is about Matarani. Along with our logistics route used by Las Bambas. Definitely, that is more complex because our transportation traverses remote communities all the way down to the transfer station. That is around 500 kilometers long. As I mentioned earlier, it is important to understand that all these activities periodically block the road, that related to the demand for compensation. None of them are really mean to stop our operation. This is a quite important message. Right now, following the blockade happened in the first half of this year, right now, quite a few dialogue tables has been set up with the mediation of the government. We continue to engage the dialogue with the government and also with the communities to work on the long-term solutions to communities' demands. The other one I want to touch about, the more specifically about the Yavi Yavi or Fuerabamba community, because that is the place the blockade happened in the first half of this year. We have given the update about the agreement being striked with the communities. Right now, we are still in the continuous dialogue with communities in implementing the agreement we had with the communities. In the process, the communities, time by time, may raise additional requests. But our management team has been carefully working on, or managing the situation. So in general, we should say, this is an ongoing challenge. But what happened now, we believe all the setting up of all these dialogue tables with involvement by the government, by the company, also by the communities, that is really a good step forward in managing all these relationship things. So we still believe we are now in a better position to manage all these challenges or in meeting the demand of the communities than before. But I should say this will be an ongoing challenge and ongoing focus of the management's effort. Thank you. Next questions. Do we have any questions from the dialing system? Yes, sir. You have one question from the line of Jack Shen from C Research. Please ask your question. Thank you. Hi. Hello. Hey. Can you hear me okay? Yes. Loud and clear. Thank you. Thank you, Geoffrey. Thank you, Ross. A couple of questions here. This is three questions. First one regarding cost. Your first half C1 cash cost is $1.12 U.S. per pound. You didn't change or didn't revise your full year cost guidance. I recall it's $1.25, which is a higher range of your previous guidance. Would that imply that your second half cost would be much higher in terms of C1 at Las Bambas? That's my first question regarding the second half C1 cost implied guidance. Also, a follow-up on this would be in the longer term, what is the current ore grade, the copper grade out of the ore mined at Las Bambas, and how that would trend into next year, 2020 and 2021, because that all matters to the depreciation cost and other C1 cost items. What is the general trend of the outlook for the ore grade going forward? This is first question. The second one is a quick follow-up regarding the processing cost at Las Bambas in the first half. Can you elaborate a little bit more why the processing cost actually declined quite a lot, quite significantly in the first half over the same period last year? I understand the transportation part, but how about the processing part? My last question is actually regarding your long-run strategy regarding M&As, potential acquisitions, because Kinsevere is approaching the end of the mining cycle, mine life. Las Bambas is getting into a stable operational stage. What are the future plans? Are you currently actively looking for assets, or is your focus still primarily focused on debt repayment in the next two years? Thank you. You want me to answer first? Yeah. First, thanks for the question, Jack. First in regard to the cost, it was $1.12 for the first half, and it was a bit of an abnormal cost in that regard because firstly, a lot of the concentrate wasn't actually transported, and the transport cost is around about $0.06 to $0.07 a pound. If that ore had have been transported to the port, the C1 cost would have been up around $1.19 instead of $1.12. Also, we did defer some maintenance and some expenditure while the mine was shut in for the two weeks as well during April. That is why the costs are what they were for the first half. In the second half, we've said we expect the cost to be within guidance of $1.15 to $1.25, but up towards the upper end. I think you can probably interpret that at somewhere between $1.20 to $1.25. It is roughly in line with where it was in the first half if you normalize that for the transport costs. Obviously in this low price environment, too, we are doing everything we can to reduce costs at the mine now, at the time when we are struggling to make money. In regard to your question on the ore grade, it is around about 0.85 for this year, and over time, it will trend down. It won't be significantly lower next year, but it will trend down, and that's why we are making improvements to the processing plant so that we can put more ore through the plant, which will help us compensate for the lower grade over the years. But we will give some guidance on next year's production will be in the January quarterly report. Now, in regard to your question on the processing costs, there are two reasons why it is lower. Firstly, as we highlighted, there was a major plant shutdown in the 2018 half year, so that was quite a significant shutdown. Then also when we closed the mine for the two weeks this year, that meant that the processing plant was not running. Therefore, obviously, the plant costs were actually slightly lower because we were not utilizing power or consumables for the two weeks that the plant was shut down. So that is the reason why the processing costs were lower in this half year. I will take the question about our strategic focus. Is it to focus more on reducing debt or improving the existing operations, or focus more on the future growth opportunities? We should say we have a more balanced approach. Definitely, I mentioned we have embarked Business transformation program. That is definitely we want to improve the operating performance and also to reduce the financial cost that is focused on our existing business and make sure we are in a better position to face the coming challenge, particularly maybe a low commodity price cycle. That is one thing. But at the other side, we do see the low cycle creates some real opportunity for us to look at some high-quality assets, particularly in copper and zinc. Our unique ownership structure that really make that possible because we still can rely on the support of our major shareholder if we can present any real opportunity to have very accretive M&A opportunities. We believe we are in a position to do both to deliver better shareholder return. Thank you. Okay. Thank you. The next questions? Your next question comes from the line of Martin Ritchie from Bloomberg. Please ask your question. Yeah. Hello there. Good afternoon. Just to follow up on the question there about M&A. Are you actively looking at projects or assets, companies at the moment for M&A, and how far along are you in that process? The second question is just about the transformation program, which sounds very ambitious. Are you able to quantify where you're going with that perhaps in terms of how much you can cut costs? Okay. Thank you for your question. The answer to the third question is quite simple. Yes, we keep looking at different opportunities in the market to find the growth opportunity for the business. The second thing about our transformation program. Right now, we are still in the data gathering, design, and analysis stage. Even though in a while we have set ourselves preliminary competitiveness targets. But we will talk further about this once we have worked that through as board and management team got more new information, and then by that time we might declare more information on our target to the market. Thank you. Okay. Thank you. Next questions. Any questions from the floor? Any questions from the member of the media? If there's no further questions for the time being, we'll conclude our Q&A sessions. Thank you very much for coming.