Earnings Call: H1 2017

Aug 23, 2017

Ladies and gentlemen, thank you for standing by, and welcome to the MMG Interim Results 2017. At this time, all participants are in a listen-only mode. We will be taking questions at the later stage of the call, at which time you will need to press star one to ask a question. Now, I would like to hand the conference over to your speaker for the day, Mr. Jerry Zhao. Over to you, sir. Thank you, Mr. Steve. Good afternoon, everyone. Welcome to our 2017 interim results briefing. This is a special day. I cannot meet you in person, but I still appreciate you all participate this briefing meeting. I trust many of you have read through our results materials. Today, I will discuss the following key items. One is key highlights from the first of six months of 2017. Secondly, our outlook, and thirdly, our strategy going forward. Ross Carroll, our CFO, will also discuss financial results in detail. I am also joined by other members of our executive committee who are available to answer your questions. We achieved a number of significant milestones for MMG as we continue our journey to be valued as one of the world's top mid-tier companies by 2020. Most importantly, we delivered improved safety performance and a record low injury rates. We returned to profitability. We generated over $1 billion in operating cash flow, reducing debt by $868 million while funding our Dugald River project. We implemented cost reduction and efficiency initiatives across all our operations and corporate functions. We now expect to deliver first concentrate production from Dugald River in late 2017. The project is perfectly timed to meet a growing supply-demand gap, with zinc prices breaking through $3,000 per ton or $1.40 per pound in recent days. As a world top 10 producer of both copper and zinc, we believe we have the right platform to deliver significant value to our shareholders. We started with safety, as we always. Safety underpins our culture and is our first value. We continually strive to eliminate all injuries and incidents from our workplace. You will note that the first half of 2017 was another record safety performance for MMG, with a total recordable injury frequency rate of 1.14. That benchmarks us among the best performers within the ICMM. ICMM is the International Council on Mining and Metals. We are a proud member of ICMM, committed to the 10 principles of sustainable development and creating wealth for our people, shareholders, and our host communities. I will now briefly discuss the operational highlights for the period. We maintain our production guidance of 560,000 to 615,000 tons of copper and 65,000 to 72,000 tons of zinc. I mentioned earlier that Dugald River is now expected in late 2017, and once fully ramped up, will add another 170,000 tons of zinc to the portfolio. The Las Bambas team has delivered an outstanding 12 months of steady and reliable operation since achieving commercial production. Production of 218,000 tons of copper in concentrate for H1 2017 or 430,000 tons for the last 12 months at a C1 cost of around $1 per pound makes it one of the lowest cost of mines of this scale in the world. Following the successful ramp-up, we have now embarked on a significant efficiency review with the full benefits of this program expected to be realized in 2018. Kinsevere delivered a broadly flat earnings result with the benefits of higher copper prices offset by higher strip ratios and an unfavorable currency movement. Despite these headwinds, however, the team up at Kinsevere continues to raise the bar, delivering the best-ever production months from the mine in July 2017. The challenges we face at Sepon are well understood as we continue to process lower grade and more complex ores. To offset this, the team has delivered a range of efficiency measures resulting in record asset utilization during the first of six months, driving plant throughput 30% above H1 2016. Rosebery continued to deliver for us in its 81st year of operation. We expect strong zinc production from this asset of between 65,000 to 72,000 tons. Lower-than-planned treatment charges as well as efficiency initiatives have resulted in us lowering C1 guidance by $0.10 to $0.15-$0.25 per pound. Finally, while copper and zinc markets have strengthened in recent months, we will continue to drive efficiency opportunities that will enable us to improve safety, low costs, and maximize production. I would now like to hand over to Ross Carroll to take us through the financial results in more detail. Ross, please go ahead. Thanks, Gerry, and welcome everybody. Now to our financial highlights. MMG's continuing strong ramp-up of Las Bambas, our commitment to our strategy, and stronger copper and zinc prices are resulting in a significantly better financial position for the group. Revenue is up by 231% compared to the same period last year. Underlying profit has moved from just under $100 million loss to over $100 million profit. We generated over $1.1 billion of operating cash flow, which shows the potential of the business. Finally, we have reduced our net debt by over $1.3 billion since June 2016, and over $850 million since December 2016, whilst we still continue to fund and build Dugald River. We are now in a far stronger financial position than previously, and with strong commodity prices, Dugald River due to commence production in the second half, we will only get stronger again. Now I will go through the key drivers impacting the year-on-year increase in EBITDA. Moving from the left, the pricing impact was significant with copper prices 22% higher than the previous period and zinc prices 50% higher. Our volume impact, excluding Las Bambas, was a negative due to lower production at Sepon and the sale of Golden Grove, which therefore was excluded from the results. The biggest positive impact was of course Las Bambas, which is a company changer for us, and this is the total EBITDA impact given that Las Bambas had not reached commercial production in H1 2016. Our cash production costs had an unfavorable impact due largely to higher strip ratios and more material being mined at Kinsevere based on the current mine plan, and higher ore mined and processed at Rosebery in an attempt to offset the declining ore grade. The adverse stock movement was primarily at Sepon, driven by lower ore mined and higher processing of stockpiled ores. The lower ore mined was due to increased waste stripping associated with the mining of Sepon's western areas in order to expose high-grade ores during the second half of 2017. We also had adverse FX impacts, mainly due to the DRC VAT, which was impacted by the rapid devaluation of the Congolese franc. Then we also had the provision we hold for the Century sale, which is in Australian dollars, and that had an adverse impact as the Australian dollar strengthened during the period. The divestment of Golden Grove had a 9 million negative impact on profit, although we did receive $200 million in cash. This was offset by the non-recurrent of Century operating costs that were incurred in the first half of 2016. Overall, our discontinued operations provided a US $8 million benefit compared to the previous year. Finally, the other negative 22 million impact relates to the mark-to-market loss on our hedging contracts in the first half. This was all actually offset by the gains on those same contracts in the second half of 2016. Now if you remember, we had a profit in 2016, which turned into a loss in first half of 2017. Although on a net basis, they basically canceled each other out. As I mentioned earlier, our cash generation's been a highlight for the six months. In the last half of 2016, we generated $665 million. This has increased to over $1.1 billion in the first half of 2017, and will only get stronger with Dugald River. To give you an idea of the impact that the copper price might have, if we use the current spot price and implant that into the previous six months revenue or cash flow, that cash flow would've been over $1.3 billion. So on an annual basis, the increment would be nearly $400 million a year. So if we can keep the $2.90 and above copper pricing, it's only going be very advantageous to the company. As I mentioned earlier, our net debt reduced by $868 million for the first half. $726 million of this came from free cash flow, and another $209 million from asset sales. Pushing the debt out, we spent $165 million on Dugald River, but we also received repayment on a loan from a related party. Most importantly, we made a prepayment of $500 million against our Las Bambas project facility at the 31st of July. That was in addition to the $868 that was paid off during the six months. We would hope to make another prepayment later in the year. Our debt, whilst being quite high, is also very manageable. We are fortunate that we have a world-class asset in Las Bambas and another emerging world-class asset in Dugald River to service the debt. I spoke about our prepayment on the previous slide, and on an annualized basis, it will save us more than $25 million a year in interest, which is quite material when compared to our current profitability. There's no hiding from the fact that our debt levels have been extremely high, but I think we can safely say now that we're on the road to normality. Slide 14 focuses on our sensitivities to commodity prices and exchange rates. The standout here is the leverage to the copper price, where a 10% movement has an impact of $135 million. Our sensitivity to the zinc price will also increase significantly once the Dugald River project is ramped up. The Australian dollar has the other major impact, and as we're seeing at the moment, we're getting a stronger Australian dollar with stronger commodity prices. Finally, I'd just like to talk about our cost curve and the efficiency programs. I think this slide is particularly important. Over the past five years, MMG has continually reduced its copper C1 cost by maximizing production, carefully managing costs, and with the addition of Las Bambas. The current ore grades are about 1%. We expect to see some improvement in cost performance at Las Bambas as our efficiency programs have their impact. However, even this won't be easy, as we see rising cost pressures across the mining industry, particularly with labor. At our more mature operations, we have a different story. Sepon and Kinsevere are both facing falling copper grades, increased waste movement, longer hauls, and more difficult ores to process. As a result, it will be very difficult for us to maintain our C1 performance at these mines. Notwithstanding that we have continuous review programs in place. I'll now hand you back to Jerry to continue the presentation. Thanks. Thank you, Ross. MMG has a unique market perspective as an international operator with strong support from China's largest resources company, China Minmetals Corporation, as major shareholder. As a result, we are confident in the long-term fundamentals for copper and zinc, and the insights from our major shareholders support this view. We see copper and zinc supply and demand gaps widening from 2019. Supply constraints continue as a result of labor, political, grade decline, and the general under-investment across the sector. Importantly, we expect the recovery, the U.S. and the European markets, and the Chinese consumption growth to underpin global copper and zinc demand fundamentals. The changes within China acquire a quality and sustainability focus rather than pursuing speed and scale. This is the currently so-called new normal. That's just that China is getting smarter, and China is helping not only itself but also other countries to grow through the One Belt, One Road initiative. This is a major economic strategy that connects 44 countries and seven global regions, stretching from China to Europe, with a major infrastructure focus. This will deliver strong demand for raw materials, base metals in particular. MMG is a world top 10 producer of copper. Of the pure player copper names, we are the fourth largest and the largest copper mine in Asia. Once Dugald River is in production, we will also be the world top 10 zinc miner. On a consolidated basis, C1 cost for copper is in the bottom of the global cost curve. On a copper equivalent basis, we have delivered consistent production growth every year over the past five years. Growth will continue in 2017 from Las Bambas and in 2018 from Dugald River. We have a strong track record of delivery. Growth has been consistent, and low cost position indicates that we have a strong asset base. Las Bambas is a transformational world-class copper asset. Las Bambas' progress to steady state production has been remarkable, and it has already delivered 12 months of production above design capacity. The operation produced over 430,000 tons of copper and copper concentrate in the 12 months to June 30, 2017. MMG is increasingly important to China Minmetals, and our unique model of international experience, backed by a major Chinese stakeholder, is key to our growth. Our strategy has not changed. We are committed to becoming a top mid-tier miner by 2020. Our next growth target is the successful delivery of Dugald River zinc, lead, and silver development in Northwest Queensland, which will provide us with important exposure to zinc at a time of tightening supply. We now expect first concentrate production in late 2017, ahead of previous guidance, and we also expect CapEx to be at the lower end of the $600 million-$620 million range. In summary, once Dugald River is ramped up, we will be a world top 10 miner of both copper and zinc. We have benefited from China-backed debt finance to deliver growth during the down cycle and are now very well-placed to capitalize on improving markets to deliver value for all our shareholders. We believe we are in the right commodities and we have world-class assets. We are extremely positive on the medium and the long-term outlooks for copper and zinc, and we are well-positioned to benefit from this. We have demonstrated operational excellence over a sustained period of time, and our operating philosophy is based around safety and driving continuous improvement. Finally, we are focused on delivering shareholder value. As Ross highlighted, our assets are highly cash generative, and in the short term, we have the capacity to rapidly reduce gearing levels. With that, I'd like to open the floor up to the questions. Thank you, everyone. Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. 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 the pound or the hash key. Once again, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. The first question comes from the line of Chris Xu. Please ask your question. Hi, thank you very much. Congratulations on the great performance as always. I've got two questions. My first question is, to what extent should we expect further debt prepayment in the coming months or quarters? Also, given your company's strong cash flow, deleveraging of balance sheet, disposal of non-core assets, finishing of CapEx projects, as well as the rebound of metal prices in general, it is reasonable to say that your company's credit profile has improved quite significantly. So is there any room to refinance your debt at a lower interest rate? That's my first question. Thank you. You want me to go? Yeah. Chris, yeah, we'll be looking to make more prepayments in this six months if we can, but the only issue we have is with our banking syndicate, we have an amortization schedule, and we will face issues if we keep going faster than what that schedule allows us to. So that's something we have to negotiate. If we can make a prepayment against the Las Bambas debt, we would seek to get some cash out of the Las Bambas JV and potentially use that to pay down some of the other debt within Minmetals. Chris, I guess to follow up on your point, I think there is no doubt that MMG's position has strengthened a lot, albeit our gearing having $8.8 billion of debt is still very high. So it is possible to renegotiate the funding agreements. I think to get long-term agreements at that level would be very difficult, and I think the banks would see that there's still the possibility the copper price could go down to $2 again. So I think you'd find banks would be very reluctant to refinance a company with our gearing levels, and the copper price has only been up at these $2.80, $2.90 for a very short period. Obviously, we'll be looking at options all the time to try and reduce our cost of debt if we can. Also, when I took the position of the CEO of this company, I feel the biggest priority to unlock the value of this company is actually to pay down the debt as much as possible and as soon as possible. You see our efforts in the past months to prepay the debt and also to have the very much focus on the cash generation. Again, this is another flexibility we enjoyed, with the support of our major shareholder and also the influence between China Minmetals and also the leading banks in China. That allow us to negotiate a good outcome to prepay the debt. Going forward, we can adopt a similar approach and to see the best outcome for all our shareholders. Got it. Thank you very much. My second question is, even though now you expect to deliver to start operation in late 2017 instead of the first half of 2018, you have actually not revised your zinc production guidance range for 2017. Why is that the case? How quickly- Ross do you expect it to ramp up? Thank you. Yeah, Chris, the issue there is we probably have the first concentrate shipment in December, but we won't be in commercial production. The first shipment might be 10 or 15,000 tons. It won't be big. At that sort of levels, which we would've probably taken a couple of months to produce, we'd be actually at a loss. So that keeps CapEx into the project until we hit commercial production. Essentially, when you hit commercial production's when you're sort of close to nameplate capacity and got a steady state, reasonably steady state operation. So, I'm guessing that'll probably be February or March before we get to that, but Got it. Understood. Thank you. Thank you. Thank you. The next question comes from the line of David Stringer from Bloomberg News. Please ask your question. Hi, all. Look, thanks for making some time. I appreciate it. Two questions on specific assets, if I may. Firstly, on Las Bambas. You obviously detail in the statement earlier that Las Bambas has embarked on an efficiency review. I just wonder if you could kind of talk us through the issues you're seeking to resolve there, because obviously things seem to have been ramping up incredibly well there. So what is it that you're looking to improve upon? Separately with Sepon, can you just give us some indication of where the sort of review of options on Sepon sits, if that is an asset that you'll now look to divest, and if you see as there being sort of good potential appetite among buyers for that asset? Yeah. It's Ross here. I guess firstly with Las Bambas, it's been in production for just over 12 months, and our initial aim was to really just optimize production, which I think we've done very, very successfully. To probably be honest, we weren't quite as cost-conscious as we could have been because we were just so focused on getting the production and the revenue. We've also learned a lot over the last 12 months. I guess it's really putting those learnings into practice. We have reduced people numbers at the site. We've also reduced contractor spend. That's really just, I think a simple way to put it is just optimizing operations now that we're very confident that we've hit steady state production. Of course, we're always looking to try and make ourselves better as we keep going too. We're getting great throughput through the plant, but we'll try and actually improve that even further. It's really, as I said, we're in the optimization phase now after being in the build phase for the last couple of years. Secondly, with Sepon, there's no decision been made on Sepon yet, but we're obviously looking at what we do with Sepon. It's got about four years of copper life to go, and then there's potential for a gold operation. Now, we're probably unlikely to be the gold operator, so we are just considering our position there. We're in the middle of our annual update of mine plan. Once that's finalized, then we'll be in a position to make a decision one way or another how we mine out the copper there. But yeah, we're looking at all our options at the moment. Thanks, Ross. Just so I understand that, so about four years left of copper mine life, and then essentially transitions to being a predominantly gold mine, about four years time. Is that right? About three and a half, yeah. three and a half. It needs some plant modifications, so there will be, depending on how it works out, but it could be having the plant shut for six months while it moves over to a gold plant. Great. Thanks. Thank you, sir. Shall we move to the next question? Yes, please. Thank you. The next question comes from the line of Brett Hecker from Deutsche Bank. Please ask your question. Gentlemen. Hello. Thank you for the call. I am just curious about your final comments at the end of the briefing, just on the state of the zinc market. I am just curious about what your marketing guys are seeing right now in the market. In particular, around confidence levels, around sustainability of the rebound that we are seeing. Any color around that would be helpful. Okay. Thank you. This is Jerry. Actually, zinc, for a long time, MMG, it is very positive on zinc. It is actually several years ago when we talk about the Dugald River development, we go to talk to our investors who feel zinc got a good potential, simply because we know after Century Mine closed and also other operations suspension, we do not see any bigger development or bigger outcome come to the stream. This is one point. The other one is, China always play a great role on zinc price. We always say it very much depending on how serious Chinese government is toward the environmental things because some of the zinc mines in China is really small size and not really environmentally friendly. Currently, as we all know, China is adopting a kind of environmental equivalent auditing. That is very serious. We believe that kind of environmental auditing will play a substantial role and got a big impact towards the small and even mid-size mining activities in China. That's all the very supportive factor toward the zinc market. We feel very confident and very positive toward the future of zinc. I might just add to that, too. I think this also shows the strength of our business model, because we actually had the final approval and also funding obtained for Dugald River about April last year, April through to June. We're sitting at the zinc price of $0.80 to $0.90. As you know, we had a lot of gearing associated with Las Bambas, but at least the major shareholder and the Chinese banks supported us with the Dugald River project to get the final financing at the end of June. I don't think there's many other companies with our balance sheet and with the uncertainty how to look about zinc, that would've got that approval. But we had that conviction in the longer-term zinc price, as did our major shareholder. Yeah. Okay. Thanks very much, guys. Thank you. Thank you. The next question comes from the line of Ada Gao from Citigroup. Please ask your question. Thank you, management, for the presentation, and congratulations on another strong quarter of results. Just two questions. First of all, company has only retired around $100 million in the first half, which is a great thing, I think, because we are in the right track to deliver a durable balance sheet. Just want to understand, is there any penalty or finance charge related to prepayment if prepayment on a long-term debt? The second question is about, I noticed that in the first half, our zinc production volume is at around 58,000 tons, but sale volume is only 35,000 tons. Just want to understand why is the lower sales volume than production volume. Thank you. Firstly, Ada, with the prepayment, there was no financial penalty involved. It was just a straight payment off the principal. But, as I said, if we keep making prepayments like that, it's going to get harder and harder to work through that. I'm sure we'll find a way, but yeah. Really, I think with Rosebery and the zinc production, I think it was just the timing of a ship that slipped from end of June into July. There's no specific reason for it. That just happens, and it's also a matter of getting enough stock so you can load the whole ship. Okay. Thank you very much. Thanks. Thank you. Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. The next question comes from the line of Chris Xu. Please ask a question. Hi. Thank you. Two more questions from me, both are regarding zinc. The first question is, regarding Izok Lake, what is the latest thoughts on that? With higher zinc prices now, is the Canadian government becoming more willing to consider funding the infrastructure investments there so that we may be able to unlock the value of the zinc resources there? That's my first question. I would like to ask probably Troy, our EGM for the stakeholder relations, to respond to this question. Thanks, Chris. We've been working with the Canadian government and more particularly the government of Nunavut and particularly the Kitikmeot Inuit Association, which is the provincial government and the First Nations owners up there. They are now taking that application themselves to the Canadian government. At the same time, the Canadian government has significantly expanded its allocation of infrastructure funds through both infrastructure banks and through a northern development approach. So it's a long-term investment we've made. We are working really closely with the local stakeholders and the federal government in Canada. It's very promising and we are continuing to work closely with them. We'd love to see that asset being unlocked, but it really takes an infrastructure investment to get it going. Got it. Thank you very much. My second question is, there was an impairment of $784 million booked in 2015, mainly for Dugald River, as well as some other projects because of low commodity prices. That has made our book value look very small. Is there any chance for writeback given the rebound in commodity prices and also the better than expected CapEx as well as the schedule for the Dugald River project? Thank you. Yeah. Chris, you're right. The NPV of Dugald is lifting all the time because it's coming in early. The cost is favorable compared to the initial case we had. So that is something we'd look at probably at the end of this six months. We toyed with it now, but we thought we hadn't started commissioning at the end of June and thought it was too early. But that will definitely be reviewed at the end of December. I think writing up assets goes a little bit against the grain, but the accounting standards require us to do it if the additional value is there, and I think in this case it will be. Understood. Thank you very much. Thank you. No problem. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. There are no further questions at this time. I would like to hand the conference over to the speakers. Please go ahead, sir. Okay. Thank you, everyone, and we will continue to drive values as we mentioned. Hopefully, it can be happened at the right time of the good copper and zinc price. Yeah, thank you very much for joining us for today. Thank you. Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may all disconnect your lines now. Thank you.