Earnings Call: Q2 2019

Jul 19, 2019

Earnings release

Hello, and welcome to MMG's second quarter production report teleconference. This report and today's discussion covers the MMG assets for the last three months ending June 30, 2019. Joining us today are Geoffrey Gao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, Suresh Vadnagra, EGM Operations Americas, Mark Davis, EGM Operations Africa, Australia, and Asia, along with other members of the MMG executive team. Thank you for joining us. I'd now like to hand over to Jeffrey, who will discuss the highlights in the report, after which there'll be an opportunity to ask questions. Thank you, Brent, and hello to everyone that has dialed in today. First, let me talk about safety. In the second quarter of 2019, our operations recorded a total recordable injury frequency, a TRIF, of 1.66 for million hours worked. This is up slightly on 2018 trend, and we are working hard to understand the drivers with a current focus on mobile equipment and fall of ground risks. We are also investing in improving safety behavior and leadership, a critical enabler of injury reduction. I'm also pleased to report that despite some logistics and operational disruptions in the first quarter, our operations recovered well and performed in line with expectations for the second quarter. As a result, we have maintained our overall production guidance for 2019. Las Bambas produced over 84,000 pounds of copper in this quarter, a decrease of 17% on the first quarter. This was due to a plant shutdown that took place over the first two weeks of April, following community blockades which restricted inbound and outbound logistics. Unrestricted road access was reestablished in mid-April, and we have progressively resumed normal operating rates and reduced stockpile inventory since then. We've also used the unplanned disruptions as an opportunity to bring forward some scheduled maintenance to prepare Las Bambas for a strong second half of the year. Before discussing the other sites, I will provide a short update on the current community situation at Las Bambas. Since the end of road blocks in April, dialogue processes continue. These processes continue to focus on requests for additional contribution from Las Bambas. While the risk of future road blocks remain, our focus remains working together with government to agree longer-term social development priorities. Our Kinsevere operation produced over 16,000 pounds of copper cathode, an increase of 31% from the first quarter, with strong progress made in managing the complex mining conditions that impacted our first quarter. While total copper cathode production for 2019 is still expected to be between 65,000 and 70,000 pounds, our C1 cost guidance range is increased by around 5% to $2.15-$2.25 per pound due to higher mining and contract costs in the second half. Now to zinc production. The ramp-up of Dugald River continues to advance well. The site produced 36,000 pounds of zinc, with slightly lower production compared to the previous quarter due to a planned maintenance shutdown. Mills 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 remain around the record high levels set in 2018. Whilst metal production in zinc equivalent terms has remained strong. The second quarter production of around 21,000 tons of zinc was up 14% from the prior quarter due to higher zinc grade. 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 the early but very promising results from our programs at Las Bambas and the DRC. At Las Bambas, the drilling associated with the development of the Chalcobamba pit has intersected mineralization within 300 meters of the current pit shell. What this indicates is that the main Chalcobamba mineralization may be continuous and could drive an 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 review 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. In the DRC, we are also pleased to announce the results of our exploration program at Nambulwa, around 30 kilometers away from the Kinsevere mine. The extensive drilling program has identified copper oxide mineralization at sufficient grade and in close enough proximity to the surface to suggest a reasonable prospect of economic exploitation. Next steps from here include a preliminary economic assessment of the project as a source of satellite ore feed for the Kinsevere mill. In addition to this, exploration activities are ongoing at several other prospects within close proximity to Kinsevere that are showing indications of near-surface copper, and in some case, cobalt oxide mineralization, which may also be useful for treatment at Kinsevere in the future. I would now like to hand over to the moderator for questions. 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 a question. Your first question today comes from Joy Zhang, Goldman Sachs. Please go ahead. Hi, management. I have two very quick questions. The first one is about the Kinsevere declining ore grade. Is that situation, will it continue in 2020 or beyond, even though we'll probably have some new progress on the exploration in the area. What is your view on 2020 and beyond? Also we saw that there is still 33,000 tons in the Las Bambas inventory. Will this be liquidated in the second half of 2019? Thank you, Joy. It's Mark Davis here, EGM for Africa, Australia, and Asia. I'll answer the first question on the Kinsevere ore grade. The report outlines the ore grade year to date, which represents the completion of mining in the Mashi satellite pit next to our main central pit at the site. We expect to finish that mining in the next month or so, and then return to the central pit as the remaining life of mine ore feed to the Kinsevere plant. So that's why our ore grade will improve over the back half of this year and then for the 2020 year as well. It's really driven by the return back to the central pit, which will underpin production levels at the same rate as we've seen in previous years. Thank you, Mark. Joy, this is Suresh. I'll respond to your second question about the concentrate volumes currently stockpiled on-site. Yes, the intent is very much to draw down those 33,000 tons of copper in concentrate that are currently on-site through the second half of this year. Once concentrate logistics were resumed in the middle of April, we were able to ramp up to normal levels of operation and have since then reduced the copper in concentrate volumes from around about 60,000 tons to 30,000 tons. And we intend to draw down the remainder of that in the second half of this year. Thank you. Okay, thanks. I just want to follow up. I want to confirm that the Kinsevere is the mining area to use. That's when you're back to the older area. Do you think that the volume will recover, and the C1 costs will come probably back to 2018, 2017 level? Yeah, Joy. The ore feed in our mine plan for the remainder of the year and for the 2020 year will support the copper cathode production, along with other third-party ores that we source at that level, yes. Okay. Thank you. Your next question comes from Chris Xu, Bosera Asset Management. Please go ahead. Hi. Thank you very much management. You gave us a little bit of update on Las Bambas, but could you give us more details on what the remaining bottlenecks are? How do we resolve this situation thoroughly? That's my first question. Thank you. Hi, Chris Xu. It's Suresh here. I'm assuming when you refer to the remaining bottlenecks and how do we resolve this issue, you're referring to the community conflict, just to be clear? Yep. I think we've previously outlined that the company is continuing to work very closely with the communities and the government on implementing more integral solutions that address both specific concerns and some of the broader concerns. As a consequence of the negotiations that took place immediately after the disruption, we've established a number of dialogue spaces with various communities and various community groups. We're currently working our way through those dialogue processes. The common objective that the government, the communities, and we have is to seek longer-term, more sustainable solutions. It's ambitious to say that implementing some of those solutions will remove the risk of further blocks completely, but we're confident that they'll provide the foundation for a more robust, sustainable solution in the longer term. Okay. Thank you very much. The second question is regarding Las Bambas and the DRC. Some details on the drilling results have been given, but could you help us quantify the impact? How much incremental production, at what cost, from what time onward, and how much CapEx will be involved? Well, I'll respond to the question with respect to Las Bambas and then hand over to Mark Davis to respond to the question with respect to the DRC. It's far too early for us to quantify the resources associated with the drilling results we obtained recently. Our focus right now is to continue drilling in that area and other areas where there are indications of mineralization and get a feel for the magnitude of the resource before we start putting any real scale around what it would mean to extract that resource and to process it. So it's far too early for us to be able to put any numbers to it, but we're very focused on understanding that as soon as we can. Thanks, Suresh. Mark here, Chris. Yeah, very much the same answer. It's important that we get these results out. We've had some good intercepts and some good discovery there with our Kintamani program that we've been working on for some years in the 50K radius around the mine. But we're still working on the economic evaluation now of those resources coming into the mine plan. When we've got that completed, then that will be subject to further updates. But it's really about extending the life of the oxide resource there. Got it. Thank you very much. Maybe just one last question since you guys are on the call. What are the succession plans for your respective positions? We also have seen the announcements regarding the changes, right? Chris, this is Jeffrey. Certainly no, that's something in the plan, but certainly we will give the market the updates when we have a real decision on this. Thanks. Understood. Thank you very much. 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 Ada Gao, Citigroup. Please go ahead. Oh, hi. Thank you management. My question is also related to community issue, and it has been answered. Thank you. Suresh? Sorry, I was under the impression that Ada mentioned that the question had already been answered, and that there wasn't any further question. But if there's any further questions for Suresh on Tokko, I'm happy to add some more details. One second. Ada, do you have any Sorry. Sorry, please go ahead. Yeah, I do have. Okay. Maybe, yeah. Thanks a lot, then. Previously my question has been answered, but since we are on the dialogue, so maybe to follow up a little bit on the community issue. So, when do you think we should get a final confirmation that perhaps there is some kind of a once for all solution for the blockage? Because previously our experience is temporarily there is some agreement, then the blockage come again. But I'm just thinking about whether those kind of once for all solution may be possible in the future. Thanks. I think, as I mentioned in my response to Chris Xu's question, we're very much working to try and establish a more integral solution that does address, as I said, the specific concerns of various community groups, as well as some of the broader issues that are common. It's very difficult to say that that integral solution will remove the risk of roadblocks in the medium or longer term. But we believe that it provides a better foundation to address some of the key issues that lead to the roadblocks. But I think that roadblocks are a risk that we need to recognize, and we've implemented strategies to try and minimize the likelihood of those roadblocks, and to try and minimize any impact that those roadblocks have on the operation. Okay, thanks. Your next question comes from Jack Shang, Citi Research. Please go ahead. Hey, morning, guys. Just a quick follow-up on the DRC, the new mining code. What's the latest out there? Thanks. Thanks, Jack. It's Mark here. The update is that through this year, the implementation of aspects of the code has been continuing with the DRC government. One thing I would update is that at the recent DRC Mining Week held in Lubumbashi, we had good connection with the president's office there who was represented. There's good outlook in terms of reestablishment of the tripartite dialogue between government, the civil society, and the industry in the near future. I think that's a key platform that we'll continue to seek to make sure that we can ameliorate as much as possible any of the impacts of some of the more complex aspects of the code that continue to really strive for an implementation mechanism that supports future growth for both the DRC and MMG. So not a significant change in the position, but some signs of progress. Okay, thanks. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Are there any final questions today? Thank you. There are no further questions at this time. I will now hand back to Mr. Gao for closing remarks. Thanks. Thank you for your interest and for joining us today. If no further questions, we will close the session. If you do have any further questions, please follow up with our investor relations or corporate affairs team. Thank you. Goodbye.