Earnings Call: Q1 2019

Apr 18, 2019

Earnings release

Hello, and welcome to MMG's first quarter production report teleconference. This report and today's discussion covers MMG's assets for the first three months ending 31 March 2019. Joining us today are Jeffrey Gao, Chief Executive Officer. Ross Carroll, Chief Financial Officer. Suresh Vadnagra, the EGM for Operations Americas. Mark Davis, the EGM for Operations Africa, Australia, and Asia, along with other members of the MMG executive team. Thank you for joining us, and I would now like to hand you over to Jeffrey, who will discuss the highlights in the report. After which, there will be an opportunity to ask questions. Thank you, Chris, and hello to everyone who has dialed in today. I would like to briefly expand on some of the key points from the report before opening up for questions. At MMG, our first value is safety. In the first quarter of 2019, our operations recorded a total recordable injury frequency, TRIF, of 1.33 million hours worked. Over the past six years, we have continued to improve our TRIF, and we remain committed to eliminating all injuries from our workplace and making sure everyone returns home safely each day. I am very pleased to report that Las Bambas produced over 101,000 tons of copper in the quarter, increase of 17% on the first quarter of 2018. Mining grade improved, and the mill throughput was sustained at close to record levels, reflecting some early benefits from improvement programs implemented last year. While operational performance was strong, you will be aware that Las Bambas concentrate logistics was stopped by community road blocks from 4 February, initially by the Fuerabamba community at Yavi Yavi, and later by other communities near the mine entrance. As a result, all inbound and outbound logistics were completely blocked from 26 March to 10 April. During this time, critical supplies on-site were exhausted, and we were forced to operate at significantly reduced rates. In a series of meetings with the community, government, ombudsman, and the church, agreements were reached to remove all roadblocks and allow Las Bambas unrestricted use of the road. This has allowed the resumption of a dialogue process that has been established to resolve the community's concerns. Unrestricted road access was restored on 13 April, allowing the operations to progressively ramp up to normal levels. We will need to continue to work hard, and we need support from our communities, particularly those who live along the road corridor. For Las Bambas management, it is important that we resolve the current concern with an eye to the long-term. These issues are not unique to Las Bambas, and we believe that we have a better foundation for the future following this difficult period. We currently have around 59,000 tons of copper in concentrate stockpiled at the mine and expect that this will take around three to four months to draw down and ship to customers. The disruption has meant that Las Bambas production is now expected to be at the lower end of the guidance range of 385,000-405,000 tons of copper in 2019, and C1 at the high end of the range, around $1.35 a pound. Our Kinsevere operation had a challenging quarter, producing 12,539 tons of copper cathode, a reduction of 32% due to challenging mining conditions in the satellite Mashi pit. Plant throughput was also down 15% in the quarter due to lower mill availability. To mitigate the full-year impact of the lower mine ore grade during the first quarter, development works have been accelerated to bring forward mining from the main life of mine Central pit. Due to production disruptions during the quarter, total copper cathode production for 2019 is now expected to be between 65,000 and 70,000 tons, with a C1 cost between $2.05 and $2.15 a pound. MMG continues to seek negotiation with the D.R.C. government regarding the 2018 mining code pursuant to the Bilateral Investment Treaty between the D.R.C. and China. The dialogue between the company and the government has been limited during the national elections. However, we recognize the positive messaging of newly elected president that is supportive of a resumption in dialogue regarding the application of the code. Now to zinc production. The ramp-up of Dugald River continues to advance at an industry-leading pace. The site produced 39,000 tons of zinc, up 17% on the same quarter 12 months ago. The strong quarter was delivered despite the devastating flooding in North Queensland during February, which temporarily impacted mining, milling, and logistics. I am pleased to advise that the rapid response from our management team during this difficult period has enabled Dugald River to maintain its annual production guidance at 165,000-175,000 tonnes of zinc. C1 costs are now expected to be $0.70-$0.75 per pound. The higher C1 costs have been caused by higher transport costs associated with trucking concentrates to the Port of Townsville, with the rail line temporarily out of action. This has added around $0.04 per pound to our annual operating cost. It should be noted that some of these additional costs may be recovered through our business continuity insurance policy. The recently negotiated annual treatment charges for zinc have also increased the C1 cost by around $0.06 per pound. The impact of higher TC is, however, being offset by the strong zinc price currently. At Rosebery, mining and milling volumes remain around the record high levels set in 2018, and metal production in zinc equivalent terms has been strong. First quarter production of around 18,000 tons of zinc was flat on the prior quarter. Operating performance is being supported by the recent investment in new mobile fleet, which is leading to increased productivity and significantly improved equipment availability. As Rosebery enters its eighty-third year, we are investing in resource extension drilling. With ore grades expected to continue to decline in coming years, delivery of resource extension success and maximizing throughput rates will continue to be important to the operation. I would now like to hand over to the moderator for questions. Thank you. Ladies and gentlemen, if you wish to ask a question today, 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 hash key. Once again, it's star one if you wish to ask a question today. Once again, if you wish to ask a question today, it's star one on your telephone. Your first question comes from the line of Chris Xu from Bossey Valeant Asset Management. Please ask your question. Hi. Good morning management team. Thank you very much for the review of the first quarter performance. I've got two questions, both related to Las Bambas. The first question is, you mentioned that the copper stockpile is around 59,000 tons. What is usually the normal level for that stockpile? The second question is, regarding the agreements with the communities. I remember from the news that the community actually demanded the release of the lawyers as one of the conditions for removing the blockade. As I can see, it seems that the lawyer has not been released. Is there any risk that the blockade may resume? Thank you. Ash and Joe can jump onto that. Yes, absolutely. I'm Jeffrey. Good morning, Chris. In response to your first question in relation to the copper stockpile volumes on site normally, our operating strategy is to have no copper stocks on site. To effectively ship them virtually immediately as soon as they're produced or transport them virtually immediately as they're produced down to the port. We have a normal operating volume that can get as high as 3,000-4,000 tons of concentrate, which is about 1,000 tons of copper. That's within the normal working volumes. We would only get to the volumes that we've quoted in the release when we have situations where we can't transport concentrate as a result of road blockages. In relation to your second question about the specific agreement with the Fuerabamba community, yes, a big part of their request subsequent to the arrest by the Peruvian authorities was that their lawyers would be released. That is a request that they have made to the government, and obviously we have reached an an agreement that does not address that particular issue because that is not an issue that is within the power of the government or within the power of the company to resolve. The arrests were the subject of an investigation by the police that was initiated in 2017, and was eventually concluded by the judiciary, which is a separate branch of government to the executive branch. You would have noted in the release that a large part of the agreements relates to ongoing dialogue, not just with the Fuerabamba community, but with other communities as well, through dialogue tables that will have the participation of government, communities, and the company. The intent of those dialogue tables is to reach a more sustainable, integral solution that addresses some of the specific concerns, as well as some of the broader concerns that exist amongst some of the communities. It is possible that through that dialogue process, that the dialogue is broken and that the communities choose to resume some of their protest activities. But we are working very closely with both the government and the communities to make sure that the dialogue is constructive and to avoid that kind of possibility. Thank you. Got it. Thank you very much. Once again, ladies and gentlemen, if you wish to ask a question today, hit star one on your telephone. Your next question comes on the line of James Tang from Zhongqi Finance. Please ask your question. Hi, management. Thanks for the delivery. My question is still regarding Las Bambas, because it is very glad to know that the production was not influenced by the block events in the first quarter. My question is, how much volume of sales would be impacted by the block event? Thanks. Okay. Thanks, James, for the question. As we noted in the release, production wasn't impacted in the first quarter, but obviously once our supplies on site were depleted, production was progressively reduced to lower production rates. Once the blockages had been lifted, we progressively resumed production at normal production rates. In relation to the sales volumes, as we mentioned earlier, as a result of the blockages, we had 59,000 tonnes of copper that were stockpiled on site rather than being transported to port and then shipped. That is the impact of the disruptions we had on sales over the period of the blockage from the 4th of February and right up until a few days ago in April. Can I understand it in this way, that the company still thinks that the sales volume would be comparable to the production level, so it won't be affected in the whole year? No, our sales volumes will reflect our production for the year, essentially, with obviously the exception of closing stocks at the end of the year, which will be of a minor volume. We expect that that stock- Okay sales volume will affect. Okay. Thank you. Your next question today comes to the line of Martin Ritchie from Bloomberg. Please ask your question. Yeah, good morning and thanks for the update. Just on Las Bambas, the last speaker, can I just confirm that's Ross Carroll speaking, first of all? The question is, in those negotiations with the community, you referred to broader issues and specific issues. Without going into too much detail, can you just describe or give some more background on what are the major sticking points, the areas that may cause problems again in future when it comes to those dialogues? The last speaker was Suresh Venugopal, not Ross Carroll. Okay. In relation to the broader issues, technically as a result of the protests that were initially focused very much on the Fuerabamba community and were very much related to the use of a public road and the land that the public road traverses through. Those protests escalated to protest activity at the access points to the mine, when the community leaders and the legal advisors for the Fuerabamba community were arrested. The initial protest at the access point to the mine was very much related to the arrests, but then became broader, and started to seek broader commitments from both the government and the company towards social development within the area of the mine and along the transport corridor, and to seek some commitment towards the improvement of the road. Those are the sorts of broader issues that I'm talking about. As I mentioned earlier, there's been some dialogue tables that have been established to address those issues and specific issues that sit under those broad categories, and to seek a more integral and complete solution to those issues. Okay. Just confirm, those dialogue tables, have they formally met so far or that's in preparation? No, there's been an initial meeting this week, which was more of an implementation meeting, and the meetings will continue in the following weeks. Those dialogue tables are expected to take place over a period of weeks and months. Okay, thank you. Once again, if you wish to ask a question today, hit star one on your telephone. Our next question today comes on the line of Felix Lam from CCBI. Please ask your question. Hi, thanks for the report. I think one of the major questions I have is on the Rosebery. If the cost I know right now has not been increased, the guidance has maintained it compared to what you gave out again when doing March. Given that the treatment charges for the zinc has increased, basically, it looks to me that the cost for Rosebery is still the same in the guidance. Is there a chance, or how do you see the cost pressure from Rosebery? At the same time for the Kinsevere, because of the lower grade and the throughput cost guidance has increased. Do you see the chance that actually the cost will further inflate going down the road by the end of the year? Thanks, Felix. It's Mark Davis here, EGM Operations for Africa, Australia, Asia. The cost pressures at Rosebery from TC are largely offset by a production profile that we're seeing year to date and through the rest of the year, where we will get some additional by-product credit. So effectively, we're seeing we're still in that guidance range as a result of that. Okay. Thank you. What about the Kinsevere? How do you see the cost going down the road? I know it's probably maybe just a temporary issue with the flooding and the lower grade for the pit, but how do you see this going forward? Because it's quite a very mature mine anyway, so. Yeah. Thanks, Felix. The increase in the cost guidance for Kinsevere is largely the result of the lower volume for the full year. So, that drives C1 cost up, obviously. Then, the other major sort of driver in there was the additional cost bringing forward some of the development of the central mine to get back to that main pit sooner than what we had in our existing mine plan. Once we're back on that central mine in the second half of this year, that's the pit that we follow through for the rest of the life of mine of the asset. So it should stabilize. All right. Thank you very much. Once again, if you wish to ask a question today, hit star one on your telephone. Your next question comes on the line of Helen Lau from Argonaut. Please ask your question. Hi, good morning. Just a very small question about the gold and silver sales at Las Bambas. I am curious why the sales of gold and silver was much lower in the first quarter comparing to the same period last year and also the last quarter. Thanks. I will answer that. Thank you, Helen. Suresh here. The sales volumes, obviously gold and silver are by-products that are contained in the copper concentrate. As a result of the blockages where we couldn't ship any of the concentrate and realize the copper sales, we also weren't able to realize the sales of the by-products that are contained in that copper concentrate. Okay. Got it. That's the main driver for the significantly lower sales across the board for Las Bambas products, so copper, moly, gold, and silver. Okay, got it. Thanks. Your next question comes from the line of Joy Zhang from Goldman Sachs. Please ask the question. Hi, management. Thanks for the call. My only question is actually, do you see any risk of the reverse back of the situation in the Las Bambas road blockage? Or do you see there is a very little risk that it will go back again? Thanks, Joy. Suresh again. As I mentioned in one of my responses earlier, a large part of the agreement that has been reached relies on ongoing dialogue that will be had between government, communities, and the company relating to a number of issues. There is a possibility that through that dialogue process, that the dialogue stops and that the communities choose to adopt some protest actions and block the road. We are working very hard with both the government and the communities to make sure that the dialogue process is constructive and to avoid that kind of eventuality, and that is in the short to medium term. While we are confident we can manage that situation, there is a risk that there will be further blockages. Longer term, we are continuing to work with the government on implementing a more integral and holistic solution to the road that reduces the likelihood of blockages longer term. How long do you expect the dialogue to be ongoing, or will it just probably be 3, 6 months time, or just will probably end up well probably in a very short time? The dialogue will span over a period of 2 to 3 months at the very outmost to address these specific issues. But the point I'd like to make is that the concept of dialogue tables is quite a common concept in Peru and is used quite extensively, not just in the context of Las Bambas, but also in the context of other mining operations and other industries as well. These are things that are quite common and are happening all the time in relation to mining issues. But in relation to the agreements that have been reached now to address those issues, we expect that dialogue to continue for a 2 to 3-month period. Okay, thanks. Once again, if you wish to ask a question, hit star 1 on your telephone. I see we have no further questions on the line today. Actually, we do have one just come through from the line of Yuxiu Xin from DBS Bank. Please ask your question. Hello. Just elaborating on the question about the sales of silver. Actually, I think the biggest decline came from both Kelly mines where the silver sales came down from 720,000 last year to 2,000. Is this going to be the normal quarterly sales that you're going to see going forward? Another question that I have is regarding Kinsevere mine. It was mentioned that you are sourcing for third-party ore feed to demonstrate Kinsevere's ability to create value as a processing hub. Could you just elaborate a bit more on this, like how much of the copper cathode production may come from third-party ore going forward? Thank you. Mark Davis here. The mine plan that we're running through for the life of mine at Rosebery sees the ore, parts of the ore body taken this year, which have a lower overall by-product contribution than last year's. So we'd expect to see the by-products continue at about the same rate that we've seen in the first quarter for the rest of the year. In terms of the second part of your question on Kinsevere, can you just repeat that for me, please? Yeah. So I see in your announcement that Kinsevere mine is actually sourcing for more third-party ore feed. Okay, thank you. We've had a very good experience of processing the Kelly Mines ore over the last few years. It represents less than 20% of the production for the operation. This additional third-party ore parcel that we've managed to negotiate in the last month is a parcel that's on an ongoing basis, a lower contributor than what Kelly Mines is. It will bring us probably to a position where about 25%-30% of the potential feedstock to the mine can come from third-party ores. Okay, thank you. There are no further questions on the line today. I will now return the conference back to management for closing remarks. All right. Thank you for your interest and for joining us today. If you have any further questions, please follow up with our investor relations or corporate affairs team. Thank you. Goodbye. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect.