Earnings Call: Q1 2020

Apr 24, 2020

Earnings release

Morning, and welcome to MMG's first quarter production teleconference for 2020. This report and today's discussion cover the operational performance of MMG's assets for the March quarter. We will also provide an update on MMG's response to the COVID-19 outbreak. Joining us today are Geoffrey Gao, Chief Executive Officer, Ross Carroll, MMG's Chief Financial Officer, who also currently has executive accountability for the company's African op The executive committee representative from MMG's Australian operations. Thank you for joining us. 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. We were waiting on him to join us, but I think he got some technical difficulties in communication. I am not quite sure whether he will be able to join us in a while, but if we cannot dial in, I will handle the questions related to Las Bambas. As everyone on the line today will be aware, at MMG, our first value is safety. In the first quarter, our operations recorded a total recordable injury frequency rate of 1.59 million hours worked. This result is consistent with MMG's position as a global leader in the industry when it comes to safety. Before I discuss the operational performance of our mining assets, I would like to make a few remarks regarding COVID-19. MMG, like all companies across the globe, continues to address the challenges presented by this unprecedented event. As of today, I am pleased to confirm that there have been no COVID-19 cases identified at any MMG operation. The company has implemented robust business continuity plans tailored to the specific requirements of each of the regions in which we operate. Our focus has been to support local authorities in their efforts to limit the spread of the virus, provide additional support to our host communities, and minimize the risk to our operations. The ongoing impact of COVID-19 remains highly uncertain. However, we are confident that we have put in place processes and safeguards that assist in protecting our employees and the local communities in which we operate. The health and safety of these people and their families remains our first priority at this time. Now, I will briefly discuss the operational performance of our mining assets, which in the first quarter produced around 92,000 tonnes of copper and 63,000 tonnes of zinc. Las Bambas contributed just over 73,000 tonnes of copper to this quarter's result. This was 26% below the prior period and reflected a number of operational challenges. Three factors in particular impacted the level of mining, milling, and concentrate metal production at Las Bambas during the first quarter. Firstly, for a period of 15 days during January and February, both inbound and outbound logistics were affected by a community blockade along Peru's southern road corridor. This action impacted several mining companies that use this public road for the transport of concentrate and critical supplies. At the same time, repairs were required to the site's overland conveyor, which due to a mechanical fault, was not able to operate for a period of time. This conveyor delivers ore from crusher to the processing plant, and the temporary outage also contributed to the lost production. More recently, the effects of COVID-19 have particularly been felt since mid-March, when a state of national emergency was first declared by the Peruvian government. This declaration has significantly restricted the movement of people and key supplies. It has also resulted in the temporary suspension of concentrate trucking. However, we are working closely with authorities and anticipate that this may resume very soon. Unlike many operations in the region, the remote camp-based nature of Las Bambas has allowed it to maintain a degree of operating activity in the face of COVID-19 restrictions. However, activity levels have fluctuated and obviously diverge from the company's original mine and production plan for 2020. COVID-19 will continue to impact production at Las Bambas during the second quarter. Given the ongoing uncertainty and inability to determine when normal operations will resume, the company has taken the prudent decision to withdraw Las Bambas guidance for 2020. We will, of course, provide revised guidance once there is great clarity around the lifting of restrictions and the timing for a return to full-scale mining and production activity. Staying with our core operations, Kinsevere continues its recovery after a difficult first half performance in 2019. Processing production of over 18,000 tonnes represents a 45% improvement on the first quarter of last year. This result is slightly below production levels in the final quarter of last year, however, largely in line with expectations. Unfavorable ore characteristics limited mill throughput over the period. However, this was offset by high grades that were above expectations. At a corporate level, the company continues work to progress the assessment of a new phase in the Kinsevere project, seeing the processing of sulfide ores and the addition of a cobalt circuit to the operation. Other news is that our Australian-based zinc operations, Dugald River and Rosebery. Dugald River delivered 35,500 tonnes of zinc during the quarter, which was 26% below the fourth quarter 2019 result. This is in large part due to throughput levels, which were around 18% below those achieved in each of the final two quarters of last year. Wet weather typically results in lower activity levels in the first quarter at Dugald River. Milling volumes were also impacted by low surface ore stockpiles, as well as unplanned maintenance requirements, including a weather-related power outage. Also contributing to this result was higher than anticipated dilution, which adversely impacted grade, and recoveries that were below expectation for parts of the period. Changes to the processing circuit resulted in improvements to recovery during March, with this remaining a key area of focus in the plant. Work is also continuing to open up new operating areas in the mine to ensure a steady feed of ore to the mill. At Rosebery, zinc production of just under 17,500 tonnes was 23% below the final quarter in 2019, with zinc production also 17% below the fourth quarter result. This result reflected an expected decline in ore grades compared to prior years, as well as lower than planned mill throughput. Reduced throughput was a result of limited ore stockpiles on the surface, with the ongoing impact of seismic activity limiting mine outputs. Work is progressing to prioritize the development of lower seismic risk mining areas to increase mine flexibility. The impact of lower throughput was offset by ore grades, which although below prior year levels, were nonetheless higher than expected for the quarter. As a result, overall production levels for the period were largely in line with expectations. At MMG, our focus during this time of uncertainty remains firmly on the safety and health of our people and those who live in our host communities. I am proud of the work the team have done to address the immediate challenges presented, and we will continue to work to ensure the company is best placed to capitalize on the opportunities as they arise. As the world emerges from the impacts of COVID-19. I am now happy to take your questions. The social distancing rules mean that we are not all together in the same room. So to assist with coordination, I would ask that all questions be directed to me in the first instance. I will then call on members of the executive team to respond as appropriate. Please, can all questions be asked in English? I will now 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 the handset to ask your question. Your first question comes from Melanie Burton from Reuters. Please go ahead. Hi, everyone. Thank you for making the time to speak with us today and allowing us to ask some questions. My first question is, you mentioned, I couldn't quite catch it, Geoffrey. You mentioned that because at Las Bambas, the Peruvian government and the state of emergency, you said that it resulted in the temporary suspension of concentrate trucking. I think that's what you said. You said that you were working closely with authorities and that it may resume, I think you said very soon. I was wondering if you could elaborate on what very soon might mean, if it might mean in the next few weeks or this quarter, for example. Yeah. Thanks for the question. Before I answer the question, I have good news for everyone. We now have our EGM Americas, Mr. Wei Jianxian online with us now. He will be the best person to answer any questions related to Las Bambas. Given that Mr. Wei needs the language support, probably I will ask my colleague to translate the question into Chinese first, and then I will ask Mr. Wei to answer this question. Thank you very much. Thanks, Melanie. Maggie, could you translate please to Mr. Wei? Melanie, the quick answer from Mr. Wei is we are closely working with the authorities of Peruvian government, and we are expecting as early as next week to resume the concentrate transport. Okay. Thank you. Thanks. Thank you, Rachel. Thank you. The next question comes from Jack Shan, from Citi Research. Please go ahead. Hey. Hello. Can you hear me okay? Yes. Great. Thank you. Thank you, Geoffrey. Thank you, Maggie, for your introduction. Two follow-up questions. One, also on Las Bambas, what is the current situation on the mining operations itself? I know that given the state of emergency in that area, you may have some difficulties in bringing the raw material, like the auxiliary materials which is required for your mill. So, what is the status at the mining site and what is the status at your ore mills? Also, can you resume quickly to normal operation if the state of emergency is removed? That was my first question. My second question, what is the update on Kinsevere? whether there's a potential risk to your guidance given the ongoing COVID-19 我自己说一下吧，Maggie。我想先问一下那个Las Bambas，就是说现在这个停工状态的情况下，铜矿山上主要的这些原物料的供应会不会出现什么问题？如果整个运输都停了，那你的那些采矿和选矿用的一些药剂、钢球，那怎么运呢？那是不是等于说现在是处于一种维护生产的一个状态？这是第一。然后如果这个停工状态持续的话，是否意味着你很快就能恢复正常的生产水平？还是说需要一定时间？这是第一个问题。第二个问题应该就不用翻译了。 I will ask Mr. Wei to answer the question related to Las Bambas. After that, I will have Rob answer the question related to Kinsevere. [Foreign language] 目前产量和工作，每天都处于随时变化的一个状态，影响因素也包括关键消耗品供应量、员工的班制和交通的限制。这一情况每天都会变化，因此很难给出一个产量稳定的预测。过去几周平均来看，我们的采矿和选矿的能力为正常情况的50%到60%。目前没有计划要停产。基于之前给出的2020年的产量指导，若停产大概每个月的损失的产量大概是3万吨铜。如果停产，每个月的成本大约在USD 4,000万。 Thanks. [Foreign language] Jack, I might just translate it for the broader audience. Yeah? Thank you, Maggie. Yeah. Levels of production and daily work of plants fluctuate at the moment based on the availability of critical supplies, employee rosters and people movement restrictions. These make it difficult to give any clear indication of the level of activity and production currently at site. To give some indication, over the last few weeks, mining and processing activity has averaged between 50% and 60% of original expectations. There is no current intention to completely push for maintenance. Based on the original 2020 guidance, it would be reasonable to estimate lost production per month, if this were the case to be approximately 30,000 tonnes of copper. We estimate monthly costs to be around $40 million per month in a care and maintenance scenario. I may add something to answer the question. The impact of the national emergency is depending on the people's transfer and also the upstream transportation. In fact, we got the government permission to maintain the key critical supply to the site. We got a small size of employees inside. That enable us to maintain a limited scale of activities. We are still producing. As Mr. Wei said, it's very hard. The day-to-day fluctuation is high, so it's hard to give a reliable estimate of the percentage about our operation. The message is we are still operating at site, but the upstream transportation has been impacted. As I said earlier, we expect the upstream transportation can be resumed in the next week. Once the national emergency is lifted, then we expect we can bring this operation back to normal very quickly. I hope that answers the question. I now will ask Rob to answer the question. Thank you, Brian. Thanks for your question, Jack. Just to give brief recap what Jack's question was about whether the guidance at Kinsevere could be impacted because of the COVID-19. At this stage, I speak, Kinsevere has had a very strong quarter even though we had mining shut down for 10 days during March. Like all our operations, if there was an outbreak of COVID-19 on the site, that could potentially impact our guidance and ability to operate. At this stage, there's been no recorded COVID-19 cases in the Katanga province, in the DRC, which is the main copper and cobalt mining area. The cases to date have been in Kinshasa, which is the capital, and other parts of the DRC. So far so good in Katanga province. Now, in an attempt to make sure that we don't get that outbreak, particularly in our own mine site, we are having very strict social distancing measures so that people are separated. We're also bringing people in in discrete groups, so if we do get an outbreak or someone tests positive, we can Who may have been exposed to that person. Now, if there is an outbreak in that area close to where we operate, the most likely case is that we would go into a lockdown at the site, which means that we would still keep operating, but that the people would not be able to leave the site. To counter for that, we have got government permissions to keep people on site for longer periods if necessary. And we are also building a temporary camp there, which would house up to 1,200 people, so that we can keep large groups of people on site. To further strengthen our position, we do have significant stockpiles there, which are a slightly lower grade to what we are mining, but we can keep processing the stockpiles even if we get to the situation where we cannot mine, which is very labor-intensive. At this stage, it is looking like we will meet our guidance, but it is somewhat difficult to predict. Thank you, Ross. Very clear. 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. I will now give you a few moments to register your question. The next question is a follow-up question from Melanie Burton from Reuters. Please go ahead. Hi again, everyone. Thanks for the chance to ask another question. I'm sorry, I didn't catch all of that last reply. But I'm wondering, could you give us some color around logistics issues at Kinsevere? We understand that some of the warehouses now in Durban are full of concentrate. So there's not a lot of places to store. I'm wondering, is there a chance we could also see force majeure from there? If you could shed any color on that would be great. Thank you. Yeah. No, I mean, logistics is always a challenge into the DRC because you're sort of going through four borders to get goods there, which primarily come from South Africa. But at the moment, we've got adequate fuel and consumables. We're looking at trying to build up traditional supplies so that we can potentially operate for 90 days without getting fresh consumables in. That will be challenging, but that's what we're working towards. Now, in regards to the product that's coming out of Kinsevere, we actually sell cathode, not concentrate, and that cathode is on a life of mine contract with Trafigura. So we don't have any issues at the moment with having to dispose concentrate from the mine. Yeah, sure. Of course. Thank you. Thank you. The next question comes from Joy Zhang from Goldman Sachs. Please go ahead. Hi. Thanks, and for holding the call. I have a follow-up question to you about the last one, about logistics. I assume that the one week we have expectation that the transport will recover in one week, that was from Las Bambas to the port. Is my understanding right? I also want to check what is about the situation for the port to the shipment to the customers, and what is about the current situation. Also, if the national transportation heads back to normal, do we expect the rise of the transportation cost even though it is come back to normal? Sorry, Mr. Wei got disconnected. I will answer the question. When we say we expect the transportation of the concentrate will be resumed, I mean that is from the site to the port. Is that correct? Right now, I understand the port is running as normal. About our marketing, we have declared the force majeure to our customers due to the suspension of the concentrate transportation. So far, our business, when we can resume the concentrate transportation, then we can deliver the cargo to our customers according to our contracts with them. If there must be a major issue in shipping the goods to our customers, mainly China, in this regard. About our transportation cost, it's hard to forecast due to the uncertainty around COVID-19. Definitely, people should expect some cost uprising related, all the necessary protective measures we have to have to make sure through the transportation, our people and the impact communities keeping safe. That is probably, yes, there will be some additional cost related to this protective measure. I believe that's probably all. The operating cost related to the transportation should be almost the same level, but definitely we will incur additional cost in reaction to COVID-19 situation. I hope I answered your question. Okay, thanks. Very clear. 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. I will now give you a few moments to register your question. There are no further questions at this time. My apologies, there is another one that has just come through. Your next question comes from Chris Xu from Horizon Asset. Please go ahead. Hi. Thank you very much, management. I would like to understand more about the financial situation, mainly because of the operating headwinds, lower copper prices, lower volume. How are we coping with the financing of the company? Also, should we expect refinancing of some of the debt on the balance sheets with lower interest rates? Thank you. Thank you, Chris. Even though QPR is focused on the production, I will ask Ross to add something to your question. Thanks, Chris. Obviously, liquidity is something we are carefully monitoring. At the moment, we still have positive cash balances. Having said that, we are looking at getting extra facilities in place. Obviously, have liquidity in place should we need it. So, our treasury team and our corporate relations team are working on that at the moment. It is obviously something we need to manage, and I am sure you would be aware that at the start of the year, it is a copper price of $2.85 and then dropping down to $20-ish. That is obviously hurting us a lot, and on an annualized basis, equivalent to about $600 million of cash in EBITDA. We are working through that, and I think everyone else would also be aware that we do have the support of our major shareholder and the Chinese banks. Whilst it is an issue we are carefully managing, it is something that is under control. With the newer facilities we are potentially looking at, they will probably come at a lower cost than some of the facilities we have currently got. I think, particularly with the Mayemas Partners facility, that is very difficult to renegotiate, and also in the current situation where we have not been able to ship concentrate and prices are very low. Obviously, we are not in a really strong position to ask for a complete renegotiation of that. Overall, the situation is being managed. All right. Thank you. Thank you. There are no further questions at this time. I will now hand back to Mr. Gao for the closing remarks. Okay. Sorry about the inconvenience caused by the network difficulties. Ishan and most of my colleagues are working from home now. Anyway, thank you for joining us today and your continued support of MMG. If you have any further questions, please follow up with our investor relations or corporate affairs team. Goodbye.