Earnings Call: Q3 2019

Oct 18, 2019

Earnings release

Hello, and welcome to MMG's third quarter production report teleconference. This report and today's discussion covers MMG's assets for the last three months ending 30 September 2019. Joining us today are Geoffrey Gao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, Suresh Vadnagra, EGM for Operations, along with other members of MMG's executive team. Thank you for joining us, and I will now hand over to Jeffrey, who will discuss the highlights in the report, after which there will be an opportunity to ask questions. Thank you. Hello to everyone who has dialed in today. At MMG, our first value is safety. In the third quarter of 2019, our operations recorded a total recordable injury frequency, TRIF, of 1.25 per million hours worked. I am also pleased to report that despite continued community-related disruptions at Las Bambas, all our operations delivered improved performance in the third quarter. Dugald River had a record production quarter, and we delivered record mill throughput at Dugald River, Las Bambas, and Kinsevere. Las Bambas produced around 97,000 tonnes of copper in this quarter, an increase of 15% on the second quarter due to continuous operations and improved performance across the mine and the mill. Before discussing the other sites, I will provide an update on the current community situation at Las Bambas. Las Bambas has again been impacted by community protests blocking inbound and outbound logistics since September 27th. Operations have been progressively impacted from late last week. This block follows community protests in March and April this year and the Tía María protest that restricted access to Peru's largest copper port in August. On 16th October and following a series of attempts to establish dialogue, the government of Peru declared a state of emergency along the length of the logistics road. Over the past 24 hours, this has enabled the authorities to commence actions to clear the road. Assuming that full access is established in coming days, we expect that production for 2019 will be only marginally below the 385,000-405,000 ton guidance range. We also expect C1 cost to be at the upper end of the $1.15-$1.25 range. We will provide a further update to the market once the impact of this current disruption can be more accurately quantified. After a difficult 2019 so far, I think it is important to give investors and the media some further background and context to the current community challenges we are facing in Peru. Las Bambas is unique in Peru in terms of its isolation and the large number of impacted communities. The mine is located in Apurímac, previously recognized as Peru's least developed region. Since the development of Las Bambas, it has become Peru's fastest-growing, with an average growth rate of over 30% per annum. Las Bambas alone accounts for over 1% of total Peruvian GDP. Its operations interact with three regions, four provinces, 14 districts, and with more than 70 communities. This includes 17 communities within the direct area of influence and approximately 53 communities along the 450 kilometers road to the rail transfer station. While Las Bambas maintains a positive relationship with most communities, the operations continues to face demand for negotiation of benefit agreements, road compensation, and inclusion within the statutory area of direct influence for the mine. The Las Bambas social team is located in the communities along the transport corridor. Since 2010, Las Bambas has invested more than $360 million in social development programs, $250 million in royalties, and more than $200 million in improving the national road corridor. I want to reassure shareholders that we are working closely with government, communities, and external experts to secure more reliable road access. We are also investigating longer-term alternative options. For the short term, however, we must find a better solution for Peru's newest and second largest mine. Myself, my management team, and the team at Las Bambas are focused on this goal. Now to discuss the remainder of the operation. Our Tintaya operation produced over 18,000 tons of copper cathode, an increase of 12% from the second quarter. As mining in the end of life Mashi pit was completed in August. Record mills throughput was achieved during higher utilization, improved plant process stability, and better management of third-party ore feeds. Now to zinc production. Dugald River delivered a record production quarter, producing 47,000 tons of zinc, demonstrating the ability of the plant to produce well above design capacity. Throughput has now been above design capacity in every quarter since we achieved commercial production over 12 months ago. At Rosebery, mining and milling volumes were above the 1 million ton per annum benchmark set in 2018, and metal production in zinc equivalent terms has remained strong. During the quarter, a seismic event has restricted access to one of the operating areas in the short term, with the site currently exercising alternate sources to meet production goals for the remainder of 2019. This has meant that zinc production is now expected to be at the lower end of the 85,000-95,000 ton range for 2019. Now to discuss our exploration results. You will recall last year we decided to narrow the focus of our geoscience team and wind down our new discovery program. Since then, we have focused our efforts in and around our existing operations. This approach not only gives us the best near-term chance of success to grow our mineral inventory, but also the best chance to create value for shareholders by being able to process any new discoveries at our existing operations. Today's report highlights some further promising results from our program at Las Bambas, where drilling associated with the development of the Chalcobamba continues to define mineralization in the zone within 300 meters southwest of the current pit shell. What this indicates is that the main Chalcobamba mineralization may be continuous and could drive expanded pit design. These drill results are highly encouraging and only serve to validate our original optimism on the exploration potential that exists at Las Bambas. We still view this asset as the best growth opportunity for MMG. Some of the drill results included in our report highlight that the mineralization is relatively high grade, and importantly, it is close to the surface. We look forward to updating you further as we progress our development activities at Las Bambas. I would now like to hand over to the moderator for questions. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Once again, to ask a question, please press star one on your telephone. Our first question comes from Hansoo from JP Morgan. Please go ahead. Hi. Thank you very much for hosting the call and giving us an update on the operations. I actually have two questions. First one is, how effective will this declaration of state of emergency be? Because I remember last time, local government announced similar measures, but because there are women and children sitting in the road blockage, that time, road clearance was not being able to successfully carry out. The second question is a simpler one. How sustainable will current Dugald River, like, current running, production rate be? Are we going to expect similar running production rate or slightly lower? Thanks. I will ask Suresh to answer your questions. Thank you, Jeffrey, and thank you, Hansoo. It is Suresh here, EGM, Operations Americas, and also currently providing some oversight over the other three assets in the group. To answer your first question about the effectiveness of the state of emergency. Since declaring the state of emergency on the evening of October 15, the government has taken actions to clear all of the roadblocks along the section of the road which had roadblocks. The government was able to successfully clear all of those roadblocks and maintaining those roadblocks clear through today, it is effectively two days subsequently to that announcement being made. All of the actions that the government took resulted in the road being cleared peacefully. That is to say that there were not any conflicts with community groups. The presence of police in conjunction with the army, has helped to dissuade community groups from taking any action to prevent the clearing of the road. The sustainability of the state of emergency is a good question, but I think the more important point to highlight is that we're continuing to work very closely with the government to establish a constructive space for dialogue, to seek solutions to some of the issues that led to the most recent roadblock, through dialogue. What's going to make the road being cleared sustainable is continuing to work together with the government and together with the communities to establish some longer-term sustainable solutions to some of the persistent issues that have resulted in roadblocks in the recent past. Moving on to the second question, in terms of how sustainable the current run rate in terms of production of Dugald River is. Yep, absolutely. We had a great quarter in Dugald River achieving record production. That came on the back of higher throughput rates, good grades, and good performance from the mine. That's not necessarily the normalized run rate for Dugald River. It's not reflective of annual sustainable production rates for a number of reasons. In the third quarter, we didn't have any shutdowns. In the first quarter and in the fourth quarter of this year, we will have some shutdowns, or we had in the first and second quarter, and we will have a shutdown in the fourth quarter as well, which will impact the mill availability and therefore throughput rate. We also were able to continue drawing down on run-of-mine stocks throughout the third quarter. We actually drew those down fully now. Going forward, we will be relying more heavily on the mine providing all of the feed for the mill. Whilst we've been able to run particularly high mill feed rates, that was on the back of having high levels of ROM stocks. Going forward, the mill will be constrained by the mine. We had a great ramp-up of the mill in Dugald River, but we are still in the process of ramping up the mine and opening up more and more stope ore faces. Over the next few quarters, we'll continue to deliver strong results out of the mine, ramping up the mine. We'll start reducing our development work in the mine and relying more and more on stope ore to feed the mill. That's when we'll start achieving that normalized run rate from Dugald River. I see. Thanks, Albert. What is maybe expected normalized run rate? We're working towards being able to mine and mill over 2 million tons per annum. Depending on the grade, that will obviously drive the production results. The grade in the medium term is expected to stay largely in line with the grade that we're currently seeing. I see. Thank you very much. Our next question comes from Chris Xu from Postelle and Asset Management. Please go ahead. Yeah, thank you very much, management. I've got two questions. The first one is, according to SMM, it is reported that MMG is considering building new pipelines to transport copper concentrates to deal with the road blockade. My question is, how much CapEx and how long will it take, if it indeed goes ahead? The second question is, for the overall company, how has CapEx been trending so far? Thank you. Ash, would you take the first question? Absolutely. Thank you, Chris, for your question. As part of us looking at establishing a sustainable solution for logistics, in parallel with working very closely with government and the communities to establish a sustainable solution in the short term, we are also evaluating a variety of alternative transport methods for the long term. One of those transport methods that we are evaluating is a pipeline, but we are also evaluating alternative roads, as well as rail options in conjunction with some other interest groups. There are a number of not only options in terms of the method of transport, there are a number of options for each of those methods of transport. For example, if we talk about the pipeline, exactly where that pipeline goes to and where we do the filtering, and from that point, how we transport the concentrate to port is something that we are evaluating as well. So there are a number of different configurations for that particular solution. It is far too early for us to provide you with any indication of the capital associated with those sorts of solutions or particularly a pipeline solution. It is just one of the solutions that we are evaluating in the long term. The timeframe to implement depends, again, on that configuration of that solution, the time to permit that solution, and obviously the time to construct it, including the acquisition of any land that might be required. So it is not a precise answer, which is what you are looking for, but it gives you a bit of a flavor for what we are actually looking at in terms of alternative transport solutions. I think Ross will probably touch on the second question. Yeah. Hi, Chris. Chris, with our CapEx, we have given the guidance of $400 million-$500 million. We are trending right down at the low end of that. A couple of reasons for it is obviously with these roadblocks at Las Bambas, that affects our ability to spend capital up at Las Bambas. And I guess secondly, with the lower commodity prices, with them being lower than where we expected, we are obviously trying to rationalize our cash and therefore we are either stopping or slowing down capital expenditure where we can. Got it. Thank you very much. Yes, please. Once again, if you'd like to ask a question, please press star one on your telephone. Our next question comes from Joy Chang from Goldman Sachs. Please go ahead. Hi. Thanks for arranging this call. I have two questions. First one is, why the Dugald River itself is always a little bit lower than the production volume? The second question is that could you probably explain more on the production report, page three, there was a provision pricing for our inventory that was probably, I think that was a stockpile at Las Bambas. What do you expect the pricing that when those stockpile will be sold in the next few months? I'll have a go at that, Joy. Firstly, Joy, with the Dugald River, we've had some port congestion up at Townsville, so our shipping hasn't been quite as high as what we would have expected normally. We would expect to catch that up in the next quarter. That was the response to the first one. Now, I guess with the goods we've got in stockpile at Las Bambas, they'll be sold at market price at the point in time we can do the sale. We're actually not sure, firstly, exactly when we can sell it, but then obviously we won't know exactly what the market price will be at the time. But it seems like the copper price is pretty stubborn at that $2.60 range at the moment. So our expectation would be probably to be sold at those sort of prices. Can I confirm with you that when we sold the Las Bambas inventory, that the inventory will be sold at the spot market, at the spot price, not when the contract was assigned, when the market price actually- Yeah. All our sales, both zinc and copper, are at spot prices. Okay. Thanks. Once again, if you would like to ask a question, please press star one on your telephone. Our next question comes from James Peng from Zhongtai Finance. Please go ahead. Thank you, management. My question is about the debt obligation and financial leverage. We do understand that MMG currently has a relatively high financial leverage and quite some debt will come to maturity this year, next year. Based on the free cash flow calculation in the previous material, we are wondering whether the company could meet these debt obligations, considering the current copper price and the operation challenges in Las Bambas. So my question is whether the company currently has any additional plan on financing. Thanks. Yeah. Thanks for the question. I think to answer, we have got roughly $300 million of debt that needs repaying in the December month, and we will be able to make that repayment. But if, obviously, if we were in a position where shipments of Las Bambas cannot be sustained on a continual basis, next year's repayments could be difficult. But that is not our expectation. We expect sales to get back to normal. But in that case, with the fact that we have got Chinese banks that have loaned us the debt, we would be able to work out something with them if the debt became a real problem for us. But certainly cash is tight and we have got between $200 million and $300 million worth of inventory sitting at Las Bambas now that we would obviously like to sell and get the proceeds for. But at this stage it is manageable, and we expect it to continue on that basis. Okay. I see. Thank you. Just a final call. If you would like to ask a question, please press star one on your telephone. There appear to be no further questions. I will pass back to management for any closing comments. Okay. Thank you for your interest and for joining us today. If you have further questions, please follow up with our investor relations or corporate affairs team. Goodbye, everyone. Thank you so much. Ladies and gentlemen, that does conclude the conference for today. Thank you so much for your attendance. You may now disconnect.