Earnings Call: Q4 2020

Jan 22, 2021

Earnings release

Hello, and welcome to MMG's 2020 fourth quarter production report teleconference. This report and today's discussion cover the operational performance of MMG's assets for the December quarter and full year 2020, together with the outlook for 2021. Joining us today is Chief Executive, Geoffrey Gao, and MMG's executive team. I will now hand over to Geoffrey, who will discuss the highlights in the report. After which, there will be an opportunity to ask questions. Thank you, Blake, and hello to everyone who has joined us today. At MMG, our first value, as always, is safety. In the fourth quarter, our operations recorded a total recordable injury frequency rate of 0.54 per million hours worked. This was significantly better than the prior quarter result of 1.35. While we will never stop our efforts to eliminate injuries, I am pleased that we continue to benchmark at the very bottom end of global peers on injury frequency. Our full year TRIF of 1.38 per million hours worked represented a 13% improvement on 2019. I am also pleased to report that we recovered well from the COVID-19 impact, with several operational records set across our operations during the fourth quarter. MMG produced over 113,000 tonnes of copper and 70,000 tonnes of zinc during the period. On a full year basis, copper production of almost 385,000 tonnes and zinc production of just over 245,000 tonnes was achieved, with all sites delivering production volumes and C1 costs that were within or slightly better than guidance. We were able to maintain continuous operations throughout the year despite the COVID-19 impact. This was a particularly impressive outcome at Las Bambas. Significant COVID-19 related restrictions remain in place across Peru. However, establishment of an expanded on-site camp and restored access to accommodation in local communities has enabled Las Bambas workforce levels to return to over 90% of full capacity. As a result, mining volumes have increased, with a new record set during the fourth quarter. We have also been able to gradually recommence most projects, exploration, and maintenance works. Las Bambas copper production in December quarter was over 95,000 tonnes, a 13% improvement on the prior period. This was supported by higher ore grades and steady mill throughput. On a full year basis, production of 311,000 tonnes of copper was in line with revised guidance. COVID-19 related restrictions was the single largest cause of an estimated 70,000 tonnes adverse impact on the outcome. Despite lower volumes, costs were effectively managed, with full year C1 coming in at $1 per pound. However, some 2020 cost savings will now fall into 2021. Turning to community relations, Las Bambas was subject to 64 days of transport logistics disruption as a result of various community blockades throughout the year. It is important to note several points in relation to these blockades. Firstly, they had only a very minor impact on production. The most significant effect being on our ability to transport and sell finished goods. Secondly, not all of these blockades were directed at Las Bambas. Thirdly, the demands of the communities involved were, in many cases, not something that could be addressed by Las Bambas. Instead, the Southern Road corridor and mining industry more generally has become an increasingly easy target for small groups and individuals that were seeking to gain government attention. This is increasingly the case given recent political unrest in Peru and in the lead up to national elections later this year. Most recently, Las Bambas was impacted by community actions from late December until early January by a block at Velille, approximately 200 kilometers from the mine. However, since the second week of January, transport volumes have returned to full capacity of 175 trucks per day, allowing us to again draw down concentrate stocks at site. Moving on to Kinsevere. Kinsevere's production of around 17,500 tonnes was in line with expectations and achieved with a record quarter for mill throughput. This assisted in offsetting the impact of lower ore grade as stockpiles are consumed following the temporary suspension of mining activity in the third quarter. On a full year basis, Kinsevere's production of 72,000 tonnes was at the upper end of guidance and 6% above prior year levels. This reflected a shift back to mining of the higher grade central pit for most of the year, with reduced waste movement, leading to C1 costs of $1.81 per pound, 19% below 2019. I will now move on to our zinc operations, Dugald River and Rosebery. At Dugald River, new quarterly records have been set over the past three months for mill throughput recovery and ultimately zinc production, with over 52,400 tonnes produced in the period. This performance represents the benefit of ongoing work to debottleneck the mine, optimize plant performance, and ultimately ensure we are realizing the full potential of this asset. Full year zinc production of over 157,000 tonnes was at the upper end of Dugald River guidance and set a new annual record for the operation. This strong result assisted in keeping C1 unit cost to $0.70 for the year. At Rosebery, the fourth quarter represented the strongest production period for 2020, with almost 18,000 tonnes of zinc produced. This was a particularly pleasing result, given processing capacity was running at only 50% for around 20 days during the period, a result of scheduled equipment replacement works. Improved grade and stable plant performance supported the outcome. On a full year basis, zinc production in excess of 67,000 tonnes exceeded the upper end of guidance. This was an excellent achievement, reached in spite of key areas of the mine having been inaccessible for much of 2020 due to prior year seismic events. This was matched with strong lead, copper, and precious metal by-product output, which contributed to full year zinc C1 costs of $0.01 per pound, $0.24 below the midpoint of our original 2020 guidance. We will shortly move on to questions, but before doing so, let me make a few comments on the outlook for our operations. The company expects to produce between 360,000 and 390,000 tonnes of copper, and between 240,000 and 260,000 tonnes of zinc in 2021. A stable production of between 310,000 and 330,000 tonnes of copper is expected over the coming 12 months before increasing to an average of around 400,000 tonnes per year over 2022 to 2025. As foreshadowed in our third quarter production report, this is a result of ongoing COVID-19 delays to the commencement of mining at Chalcobamba and the deferred completion of other projects that will now progress this year. For example, the third ball mill. At Chalcobamba, we now anticipate formal permitting to complete during the first quarter. At the same time, we were progressing community discussions and continue to expect mining to commence in the first half. As foreshadowed in earlier updates, production at Kinsevere over future years will be impacted by processing of lower-grade ores from stockpiles and depleting oxide ore reserves in the mine. This is, however, anticipated to improve in the future should the company proceed with the next development phase at Kinsevere, which will see a shift to the mining and processing of sulphide ore and the introduction of a cobalt circuit. Work continues to assess and optimize this project, with a final decision anticipated during the first quarter of 2021. At Dugald River, increasingly consistent mine and mill performance leaves us confident that from 2022, we can deliver on our target of over 2 million tons of mined ore a year and annual zinc production approaching 200,000 tons. This confidence is reflected in 2021 guidance levels, which are above 2020 volumes. As previously advised, this confidence is also supported by positive drilling results, which suggest a wider zinc ore body than originally expected. As a result, there was a 14% increase in the Dugald River primary zinc resources as at 30th of June 2020, as disclosed in our most recent Mineral Resources and Ore Reserves Statement. At Rosebery, stable zinc and cost guidance for 2021 demonstrates MMG's confidence in its ability to continue efficiently operating Rosebery and maximizing its potential. With the mine celebrating its 85th year of continuous operation in coming months. At the same time, we continue to assess options to extend the life of this highly cash-generative asset. In 2021, C1 unit costs will increase slightly at Luanshya, due in large part to the impact of carry-over expenditure from 2020 and the pre-stripping work at Ferrobamba. At Kinsevere, increases are largely due to lower production and increased mining volumes. C1 costs at Dugald River and Rosebery will be broadly in line with 2020 levels. I am now happy to take your questions. Please call all questions to be directed to me in the first instance. I will then call on members of the executive team to respond. We would ask for questions to be asked in English. We have a team on hand to provide translation for Wei so he can respond to Luanshya's related matters. I will hand over to the moderator. 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 are on a speakerphone, please pick up your handset to ask your question. Your first question comes from Melanie Burton from Reuters. Please go ahead. Hi there, everyone. Thanks for making the time to speak to us today as always, and congratulations on the results. I have two questions, please. One is about the potential extension at Kinsevere. Could you outline some of the thinking around what the issues might be or that the board is considering, please? The second one would be about. Maybe we could just start with that one, please. Okay. Thank you, Melanie, for that question. I will take on the question on the Kinsevere expansion project. In fact, we have started the study on this project since 2017, and it is about the development of the next stage deposit, because we are entering the end stage of the oxide reserve. The new project, right now, we are in the final stage to further optimize the investment case and also seeking the approval from our board. I have touched some of the key effects of the project during previous communications. It is going to use the existing plant, but with the additional circuit to process cobalt content from the ore. At the moment, we are not in a position to provide further details such as the CapEx or future production. When we have the final approval on this project, then we will provide more information to the market. I hope I understand your question correctly and answer that. Yeah, thank you. The reason I didn't know about it is because the information hasn't been made public yet, so that makes me feel better. We will expect to hear about that shortly, and we'll look forward to hearing about that. My second question is, obviously, we've seen quite a strong rally in copper prices. Would you expect that to be sustained given the degree of appetite for copper from your customers, given what you can see out for the next few months? Okay, thanks again for that question. In fact, as a miner, we focus on the long-term outlook or long-term fundamentals of our commodities. As I repeatedly mentioned to our analysts, investors before, we have strong confidence in the fundamentals of our core commodities, particularly in copper. I would say the recent strong rally in the copper price was driven by a few factors at the same time, including the strong recovery of the Chinese economy. They expected world economic recovery in 2021, particularly when the major economy finds a way to fight with the COVID-19 impact and also the monetary fiscal policy from the different countries, and also the monetary policy. All that is supportive for the copper prices. I would say the momentum will continue, particularly in the short term. As a miner, I say this again, we will just focus on the long-term outlook and make our business decisions, particularly the big decisions based on that long-term fundamentals. Thank you. Thank you very much. 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 Joy Zhang from Goldman Sachs. Please go ahead. Thank you very much for holding the call and giving us so much guidance today. I have two questions. First one is on the community issue that you mentioned about the company has made up some alternative plans to solve the transportation issue. What is the progress on that? The second question is, what is our long-term target for the debt level? That is before we consider the dividend payout or any other actions on that. Thank you. Okay. I will ask Wei to answer the first question. I will ask the interpreter to translate. Sorry, I missed the second question. Could you repeat that again? The community issue that is on Las Bambas. The management has updated and put up some alternative plans to solve the community or road blockage issue. I was wondering what is the progress? What stages that we have considering for the alternative plan? From December 12 until the first week of January 6. The heavy haul road near the Iyo community was blocked by a small section of the local community, a low-level community. Our concerns related to the allegations that the community made by Las Bambas had not been approved by the agreement, which MMG rejected. A particular frustration was that agreement had only recently been reached with the two Iyo communities in September and November of the very same year. The first convoy of the concentrate was resumed in the early of January. To inform the second question, the community disruptions are an increasing source of the frustration with the small groups increasingly using this as a means of gaining attention from the provincial government. A safe, reliable logistic solution for Las Bambas is critical to current operation and supporting the future expansion as well as upkeep operation. The road and the rail options continue to be improved with road upgrade, better management of the dust and the vibration, and the investigation of the alternate road by the alternative bypass route studies are ongoing. Regardless, part of the road is very exposed to social reactions from the remote communities through which the path travels, and improving the actions of the permanent agitators seeking a share of the community compensation is playing a negative role with members of the AST. Arrest related to the extortion was carried out in the year of 2019. We continue to work very hard to build the relationships, to provide the revenue and the business opportunities, and also deal quickly with the claims and maintaining of the road access. We maintain also constructive dialogue with the stakeholder, between the community and also the local government. In the meantime, we continue to work together with the government, communities, and also the third party on transportation options, including alternate road, pipeline, rail options, and also the combination of all possibilities. Of course, we have long-term solutions that are critical to the future of Las Bambas. We have done a study in In the area of the pipeline option, this remains in the still early stage of the development. Thank you. Joy, I may add some comment here. Okay, thank you. As we mentioned, we are working on some alternative solutions, but all of them are, number 1, in the early stage of study. Number 2, all of them will take some time. They are long-term solutions. For the management, the near-term and the medium-term focus is on the existing road. On that part, a few key things for us to do. Number 1, that is a reliable, sustainable relationship with the communities. We have been continuously trying to get the good relationships. One of the demonstrations that through the constructive dialogue recently, we got some agreement with the communities in Velille. That is one area of effort, through constructive dialogue to get the good relationship with the community. The second thing is to upgrade the road condition and to do all the necessary actions to mitigate the impact brought by our transportation to the community. On that part, the government has started the upgrade of that road, and also from the company side, we also got actions, including the fact, prevention of what's mentioned along the road. I think the third one, that is really to promote the economic benefit broadly brought by the Las Bambas operation to the national and also local level economy. You can get more information from our production report. Particularly, we've got a website to continuously update the information regarding this. You can find more information through that website. Thanks. Thank you. Your next question comes from Lawrence Lau from BofAML. Please go ahead. Hi. Thank you, management. I have 2 questions. First of all, in Mr. Gao's introduction, talking about a new project at Kinsevere. I would like to know what kind of long-term copper price assumption you are using when you assess whether you should go ahead with that particular project or your new project in future. Secondly, given the current high metal prices, will you consider to use hedging instrument again to lock in the current high metal prices? Because you have used that before last year. If yes, to what extent you will do it? Thank you. Okay, thank you for that question. I will address the first one, but maybe Ross can add some comment after me. About our long-term price assumptions, we do not disclose. That is the market. But as a reference, you can see in our MROR report, the price we use to calculate our copper reserve. The price is $3.24. So that can be used as a reference, give you idea about what is our long-term outlook for price for copper. On the hedging activity, we did some hedge in 2020. But that did not change the company's policy. We regard the commodity price exposure as our core exposure. So, we do not have a long-term hedging policy. The hedging activity done in 2020 was mainly to protect the company from the very volatile market. You should recall, the low and the high in 2020 was so diverse and so big. And, we We will not rule out the possibility for a possible hedging program in 2021. But at the moment, there is nothing to be decided. So we will see. We will take copper and zinc price exposure as our core exposure. But time by time, we will review either the market situation and also our own financial situation to see what is the best strategy to be taken to protect or to further improve the performance of the company. So that is probably the answer I can have to you right now. I am not quite sure. Ross, do you have anything to add? Actually, no, Jeffrey. I think you have handled that or answered that question about the hedging quite well, so no, nothing to add. All right. Thanks. Thank you. Thank you. Your next question comes from Jack Shang from Citi. Please go ahead. Good morning, Geoffrey. Hey, Ross. Thanks for this call and happy New Year. You have answered the hedging policy question. Thanks for that. I have a follow-up question on your Las Bambas production guidance for 2021. First of all, your fourth quarter 2020 production of copper at Las Bambas was pretty strong, and congratulations on that. But it seems that your guidance for 2021 has factored in some drop of the output levels versus full year 2020. Also in your guidance, you also mentioned that even with that guidance, which is lower than the Q4 run rate, operating rate, you still need to assume or would expect that you could start mining Chalcobamba pit in the first half, I guess sometime in the second quarter. You need to process a certain amount of Chalcobamba ore in the rest of the year to even to maintain the current guidance for 2021 for copper production. My question is regarding to that. What is the transitions? Could you elaborate a little bit more on what the transition works are being carried out or being planned on the ground? It seems that there is a decent drop of copper output during that transition. Second, what are the risks, given the political issues in Peru and the elections? What are the risks if you, for some reason, cannot get your formal permit in the first quarter, which you mentioned you expected in the first quarter? What are the risks that if you don't get it in the first quarter, and what will you do, and what will be the contingency plan for copper production for the year? Thank you. Okay. Thank you, Jack, for that question. I will ask Wei to address that question. The interpreter can translate the question, if Wei is on. The year 2020 was a transitional year as we worked on a series of initiatives such as accelerating the development of Chalcobamba, the third ball mill, Minclin upgrade, and also other debottlenecking projects in the plant. The program can sustain our production at a largely high level around 400K tons over the half year, over the medium term. Obviously, the key part of this CapEx was delayed by the COVID-19, which has also delayed the permitting and also currently the discussion in relationship to the Chalcobamba development. Chalcobamba and its high-grade ore are key to maintaining the declining ore grade at Ferrobamba pit, and delivering higher tonnage of the copper production in coming years. We continue to work closely with the government, and I'm targeting to acquire the permit during the fourth quarter of this year, 2021. Of course, COVID-19 has also limited our ability to fully progress our own engagement with the local community. This will need to continue to progress as part of our shift to develop and the mining of the Chalcobamba. The overall contribution of ore from Chalcobamba in 2020 was always anticipated to be relatively minimal, and it will now take time in 2021 after the ore commence to ramp up Chalcobamba during the first half. We now anticipate first ore for Chalcobamba some days in the first half of 2021. We released the guidance, which reflecting this. Thank you. Jack, sorry. The line is not so good. I hope you get the information. Yes, I get the information. Thank you, Geoffrey. I have a follow-up on the back of that. The one is, assuming everything progresses very smoothly, that we get the Chalcobamba permit by first quarter and we start to process the ore in the rest of the year. You've also mentioned that in the following four years, say, from 2022 onwards, by 2025, the annual output out of Las Bambas should be sitting at 400,000 tonnes per year level annually, annual level. Does that also have some implication for, say, C1 cost? So what would be the cost color there if you process more Chalcobamba ore? I don't need an exact number, but how does that compare with the existing ore body or ore grade, when Chalcobamba ore gets into the processing plant? That's the first follow-up on the general color, broader color on the cost trend. The second, I want to clarify that because what happened in 2020, the biggest one was COVID-19. COVID-19, based on your full year production report, you've pretty much recovered to 90% of your workforce or your operating rate as a mine. Which would imply that if this operating rate is sustained, your production level should be much higher than your guidance. My question is, what are the specific transition works required that actually you are factoring in your annual production forecast at Las Bambas for 2021? It seems that the ore grade or the ore milled should be a little bit lower based on the current number in 2021. Is that the correct understanding that existing ore grade is getting lower and you need some time to process the new ore at Chalcobamba? Is that a correct understanding? Thanks. Jack, let me try to answer your question directly other than- Yeah through translation. The key driving factor for the production outlook, not only for 2021 but also for the future years, that is about Chalcobamba. Yes. The biggest difference is that, with that we can have some high-grade ore supply from Chalcobamba, particularly from the early years of Chalcobamba development. If without Chalcobamba, just the production from the existing pit, that's the Ferrobamba, then we will see continuing decline of the ore grade. That's something we already told the market. The real focus is on this. Most basically on the Chalcobamba, it will take about six months to do all the pre-stripping work. That's why Wei mentioned, in our previous plan, we planned to start the pre-stripping work in the second half of 2020, and then we can enjoy The full production contribution or supply contribution for Chalcobamba for 2021. But now with all the delays, the pre-stripping activity will happen in 2021. In fact, we will not have a very substantial ore supply from Chalcobamba in 2021. Instead, that contribution will be mainly on 2022 and forward. I hope I gave you a better picture on that one. Yes. Thank you. Thank you, Geoffrey. All the best with that. Thanks. 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 is a follow-up question from Joy Zhang from Goldman Sachs. Please go ahead. Hi. Hello. Hi. I have another question, is that about the long-term target for the debt level that we are comfortable with. In other ways, is there any target that we want to cut our total debt in the next few years? Thank you again, Joy. I will ask Ross to answer this question. Yeah. Thanks, Jeffrey and Joy. Joy, we haven't got a fixed target, because at the moment obviously our gearing sort of over 70% and it needs to come down. But yeah, really what we're aiming towards is at probably a 30%-40% gearing ratio before we look at paying dividends. Certainly our focus over the next few years, and particularly if we have a period of higher commodity prices, is paying that debt down. So I'd say certainly we'd be down in the 30s before we consider a dividend. But obviously, that's something we need to discuss further when we get close to that position. Okay. Thank you. Thank you, Ross. Thank you. There are no further questions at this time. I will now hand back to Geoffrey for closing remarks. Thank you. 2020 has certainly been difficult, and 2021 will not be without its challenges. However, we are confident that we are positioned to continue work that will maximize the value of MMG's assets and continue to position the company to take advantage of future opportunities. The continuous support of all of our stakeholders is greatly appreciated. Thank you for joining us today. I look forward to speaking with you next at our 2020 annual results presentation, which is scheduled for 4th of March. If you have any further questions, please follow up with our investor relations or corporate affairs team. Goodbye. That does conclude our conference for today. Thank you for participating. You may now disconnect.