Earnings Call: Q4 2018

Jan 25, 2019

Earnings release

Hello, and welcome to MMG's fourth quarter production report teleconference. Joining us today are Geoffrey Gao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, Suresh Vadnagra, EGM Operations, Americas, Mark Davis, EGM Operations, Africa and Australia, along with other members of the MMG executive team. Thank you for joining us. I would now like to hand over to Jeffrey, who will discuss the highlights in the report, after which there will be an opportunity to ask questions. Thank you, Brent, and hello everyone who has dialed in today. Before discussing the operational performance, I would like to comment first on the profit warning announcement last week. We continue to focus on creating long-term value for our shareholders through maximizing cash generation and accelerating debt repayment. Since commercial production at Las Bambas in July 2016, we have reduced net debt by almost $2.7 billion. This is almost the value of our equity market capitalization today. Notwithstanding the difficult conditions in 2018, we still generated net cash from operations of over $1.7 billion. There is nothing from last week's profit announcement that has structurally impaired the cash-generating ability of MMG. We own and operate world-class assets such as Las Bambas and Dugald River, and our core commodities of copper and zinc share very strong fundamentals. We are confident in the 2019 outlook and beyond. Now turning to the fourth quarter report. I will take the report as read and briefly expand on some of the key points before opening up for questions. At MMG, our first value is safety. In the fourth quarter of 2018, our operations recorded a total recordable injury frequency, TRIF, of 1.35 per million hours worked and one for the full year. This represents a 14.5% reduction on the full year 2017 TRIF. That is a 1.1 term. With continued improvement in TRIF, we remain committed to eliminating all injuries from our workplace and making sure everyone returns home safely each day. I will now run through some highlights for the quarter. MMG produced a total of 466,000 tons of copper in 2018, including 131,000 tons in the fourth quarter. Las Bambas produced 111,865 pounds of copper in copper concentrate, representing a 29% increase on the third quarter. The production is in line with our revised guidance following the geotechnical issues which impacted mining rates and production in the third quarter. We are now focused on advancing the development of mine in 2019. In addition, we will carry out a series of plant upgrades and debottlenecking activities that aim to increase throughput rates by 5%-10% above design capacity over the next few years. Our Kinsevere operation produced 18,463 pounds of copper cathode in the fourth quarter, a reduction of 9% on the September quarter due to some equipment failures in the fourth quarter, resulting in lower feed grade to the mill. This took total annual production to 79,711 tons. Still a very strong operational performance. During the quarter the DRC Government continued its progressive implementation of the 2018 Mining Code. The dialogue between the company and the government has been limited during the national elections. However, we continue to seek negotiations regarding the implementation and application of the 2018 Mining Code. Now to zinc production. The ramp-up of Dugald River continues to advance at an industry-leading pace. The site produced 41,461 tons of zinc in zinc concentrate, up 9% on the previous quarter. Mining and milling rates are now consistently operating above design capacity, which is a great achievement in such a short time since commercial production. At Rosebery, record mining and milling volumes drove record mine production in zinc equivalent terms. 18,444 tons of zinc in zinc concentrate during the December quarter bring total production to 75,721 tons and in line with guidance. The strong annual results at Rosebery highlight the record mining, milling, and zinc equivalent metal production levels in 2018. Finally, during this quarter, MMG completed the sale of the Sepon Mine, helping secure its future as it transitions from copper to gold production. The sale is consistent with our commitment to creating a portfolio of long-life, high-quality, base metal mining assets. MMG finished the year on its strongest production quarter, and we look forward to carrying that momentum into 2019. 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 followed by 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, if you wish to ask a question today, it is star one on your telephone. Your first question today comes from the line of Helen Lau from Argonaut. Please ask your question. Hi, good morning. I think I really want to say just a congratulations on this very good, solid fourth quarter operation data. This is quite encouraging. Most importantly, I can see that the guidance, especially the guidance on cost, is also quite good. So my question basically is what to do to continue to maintain this mild inflation in the cost across your mine portfolios? That is number one. Then number two question is about the grade. It seems that you guys are the ore grade mined or milled in Dugald River and Las Bambas has been rising on a year-on-year basis. Could it be a trend going forward, or it will be stable overall? Also, is there any way to further improve your recovery rate? That is all for me. Thank you. Yes. I will hand over to Ross and Mark and Suresh to comment. Ross? Yeah. I think firstly on the cost, if you look at our cost guidance for 2019, there are some differences in there, particularly with Dugald River, where our actual operating costs are lower on a per pound basis. But we are seeing increasing TC/RCs in the zinc market. Then also last year, just through timing, had very high by-product credit from lead, which was due to a big shipment not long after we went into commercial production. As I said, there are a couple of vagaries in the Dugald number, but our actual operating costs will be lower. At Las Bambas, we are seeing some cost pressure, I guess because particularly in Peru, it is a very strong copper market, notwithstanding that the copper price is a bit lower at the moment. So we have seen wage pressure. Also, we are needing to move more waste there as well. That is a factor at Las Bambas. Kinsevere, very slight increase in cost guidance there, and that largely is a result of the full year's impact of the 2018 Mining Code. Then finally at Rosebery, we have got higher production, but we are seeing our C1 estimates go up there because of, again, lower by-product credits from the area we are mining in. But I guess, yeah, there is inflationary pressure, but the key for us is the number of business improvement programs to try and reduce that. So that is the focus of the group. Obviously, as mines get older, they get deeper, or you need longer hauls, so it is a constant battle. But yeah, we are working very hard to try and reduce the cost across the board. I might just hand over to Mark to talk about Dugald grades and then Suresh to talk about Las Bambas grades. Thanks, Ross. It is Mark Davis here. You will have seen on the Dugald results that we are continuing to develop the mine and deliver very good mine production tons. But the 2018 performance result also includes some consumption of surface stockpiles that was developed during the original early development of the mine. So through this next period, you will see a gradual increase to what our steady state ore grade is for that mine. So no- Okay, great. massive change there, but a slight increase. I guess for the older mines, which is very consistent with previous guidance for Rosebery and for Kinsevere, then effectively, as Ross said, over time, those grades will continue to decline, but following the same trend that you've seen from previous quarters and previous years. Cool. All right. Suresh here, Helen. Thanks for your question. Grade in Las Bambas in 2018, average grade across the entire year, was actually a fraction lower than in 2017. In 2017, the grade was 1.1%, and that supported the production in 2017 compared to 0.9% in 2018. As we note in the release, grades in 2019 are expected to be essentially the same as the grades in 2018. But longer term, after a few years, we do expect to start seeing a declining trend in the grade as we exhaust some of the skarn ores. That grade decline is very much going to be partly offset by some of the actions that we're taking to increase mill throughput rate through some debottlenecking projects. Okay. Cool. That is great. Yeah, thanks. Yep. Yep. Maybe next question. Thank you. Your next question today comes on the line of Jiayan Ping from Citibank. Please ask your question. Yes, sure. Good morning, and congratulations on the Q4 production. I have two questions here. The first question is regarding the 2019 guidance. Why is there an increase in the Rosebery C1 guidance for 2019 versus the revised 2018 version? The number two question is, what should we expect Las Bambas production volume and C1 cost to be after the five years of operation? Thank you. Thank you. Mark Davis here to comment on the Rosebery C1 cost. The key change driver there is the relative proportion of precious metals in the by-products for Rosebery in the mine plan for 2019. Quite simply, slightly higher zinc grade, giving the higher zinc production that you can see in the guidance. Coming with those particular lenses we're taking in the underground mine with the zinc in this year's plan, we'll see a lower contribution from the by-products with gold and silver and the like. Simply the lower contribution from the by-products in the 2019 plan is the driver. In future mine years, that balance reverts back to what you've seen in previous years. Okay. Got it. Thank you. In relation to, I guess, production guidance and C1 guidance for Las Bambas beyond the five-year window. The thing we can reinforce is that we are still quite confident on being able to deliver the 2 million tons in the first five years of operations, as we've previously provided for mid-term guidance. We are taking actions to build on that production profile and to sustain it further, but those actions still need to be delivered to be able to deliver that. Obviously, those actions are designed to offset some of the impact of the declining grade, which could have an impact on the production profile and therefore on the C1 guidance as well. Beyond that, it's difficult to provide more clarity on what that guidance would be. Okay, sure. Can I ask a follow-up on that? We can see that currently the production level is slightly lower than the 400K tons. Do we have confidence that we can maintain these levels through other ways? The production profile for the next few years supports, as you said, 2 million tons in the first 5 years, which is around about that 400,000 ton mark. The actions that we are taking are to improve throughput rates to offset the impacts of lower grades and to provide that production profile, as well as some other actions around developing Las Bambas longer term. Okay, got it. Thank you. Thank you. Your next question today comes to the line of Chris Xu from Bosvale Asset Management. Please ask your question. Hi, good morning. Thank you very much, and congratulations on the solid operating performance. I have three questions, all of them related to CapEx. Maybe one by one. The first question is, could you provide some breakdowns into the different projects, for the 2018 actual CapEx and also for the 2019 guidance? I think, Chris, it is Rob. That detail will come out in March. At the moment, these results are all unaudited, and that will be disclosed on the 6th of March. Got it. Okay, yeah. Thanks. My second question. If we look at the 2017 annual report, it has given some guidance on the CapEx for 2018. Back then, the guidance range was $550 million-$600 million. In the 2018 interim report, that guidance was revised down to $400 million. Most recently, based on the announcement yesterday, it was actually approximately $330 million. Could you explain the delta? You mentioned two reasons in the announcement. Capital efficiency as well as deferral. How much is capital efficiency? How much is deferral? Yeah. Well, Chris, a big chunk of that, I understand from the start of the year, was to do with the Dugald River project. As you know, it has come in ahead of budget. During the ramp-up period, the zinc price was very high. That commissioning revenue, which gets credited against the capital cost, was much more than what we expected as well. That was a significant portion. You will see that we have given a capital estimate next year of $400 million-$500 million. Obviously, with this current low price environment, we are trying to minimize what capital we spend. A portion of this year will be going to next year to be spent then. It is not that we are taking programs away. Obviously, we are just trying to minimize the spend where we can, but without impacting on production profile. Got it. Yeah. Finally, third question. Investors may take different views on the company's production outlook and the corresponding CapEx when they value MMG, right? Could you give us some sort of rough idea of how much the annual CapEx would be under different scenarios? The first scenario is if we run down the currently reported reserves for all the projects and then basically stop production after doing that. The second scenario is basically the same as scenario one, except for Las Bambas and Dugald River, and you let them produce for another 10 to 15 years beyond the reserves that we see right now. The third scenario is how about if we want to achieve some organic growth over the longer term. Will the capital intensity of adding incremental production be as high as the capital intensity from the initial acquisition from Glencore, Xstrata and the CapEx we did in 2014 to 2016? Thanks. Yeah. Thanks, Chris, for covering that. It was very thorough as usual. Yeah, I guess with the CapEx going forward, it's probably just worth recognizing, particularly in Las Bambas, which is the big one, what is in our reserve base. That at the moment includes Chalcobamba and Sulfobamba. So when we bring those two pits into production, that will be treated as sustaining capital because it doesn't add new reserves in. So yeah, but we've given guidance of $400 million to $500 million, and it's fair to say that there's a reasonable chunk if we do spend the $500 million, it's relevant to bringing Chalcobamba towards production. So I think you'll see our ongoing CapEx spend across the business would be around that $400 million. But when we obviously bring Chalcobamba into production, when we bring Sulfobamba into production, when that occurs, you may see it peak up above $500 or $550. But then once that money is spent, then you'd be looking at the capital spend, and this is across the group, dropping back into the $300s. With Rosebery, there's very little capital spend there. Dugald River, from what we can see now with existing reserves, you may be looking at $20 million a year, something like that. Then Kinsevere, moderate capital spend. I guess the decision point for us at Kinsevere is if we go ahead with the potential expansion project that would include cobalt. But we haven't made that decision yet. So I guess that's a long-winded answer saying that if we bring Chalcobamba or Sulfobamba on, we could be up to $550 in sustaining capital. But then once that money is spent, we'd be down in the $300s potentially. But I think over the balance of time, probably $400-$500 is a good figure. Now, if we were to get the generic thoughts or organic growth, which would be a third train at Las Bambas, as we've discussed before, that's going to be dependent on exploration discoveries. And then we'd have to bring new pits into play, which is not super expensive, but we would also need the third train. And we haven't done the scoping work, but I would suspect the third train could cost us about $1 billion. So it would be far less capital intensive than what the initial purchase price was. Got it. Very helpful. Thank you very much. Yeah. Thank you. Once again, 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. Our next question comes on the line of Owen Ling from Q Fund Management. Please ask your question. Hi. Good morning, management. Thanks for taking the question. Just two quick questions. First is your accidents in the middle. Hello? Yes, can you hear me? Yeah, better now. Yeah. Yes. Around the accident of the localized wall instability, may I have your view on the short-term and long-term impact on the strip ratio for the Las Bambas? Second question is that for your ore mined and milled from the Las Bambas, it seems that in the third and the fourth quarter of 2018, you have extra 7 million tons of ore mined, but not milled. From your previous quarter's results, do you think that those parts could sometimes be coming out as output in the next few quarters? Would that be affecting your, would that number already in your production guidance in that number? Thank you. All right. Thank you, Owen, for both of those questions. In relation to your first question about the impact of the localized wall slip that took place in the third quarter of 2018, as we mentioned, that failure was very much localized, and the actions that we took were very local in terms of establishing conditions that would allow us to safely resume mining in that area. Consequently, that failure itself hasn't had an impact on our long-term stripping ratios nor on our long-term mine plan. We mentioned in the release that we expect that the risk of further failures in the short term, specifically in 2019, is lower as a result of us mining further along that wall and in depth in where the geotechnical conditions are more favorable, as well as relying on ore from other parts of the mine pit. We are evaluating further changes to the design of the next cutback in the wall. In a few years time, when we cut that wall again, we might implement some changes to the design of that wall to reduce the risk of any failures if we perceive that the risk still exists based on the work that we're doing. It's too early for us to say if that will have any impact on the mine plan. But as I said, we have a reasonably high degree of confidence that we can manage that. In terms of the difference in the volumes between mined and milled in the fourth quarter of 2018, the majority of those tonnes mined and not milled are low-grade ore tonnes, which were stockpiled and will be processed at a much later stage of the life of the mine. Some of those tonnes, a very small proportion of those tonnes, might be processed in the coming year, the medium grade tonnes. But the large proportion of them, the largest proportion of them is low grade and get processed at a much later stage of the life of the mine. Okay, got it. Thank you. Your next question today comes on the line of Yan Zhang from Shanghai Taicheng Investment. Please ask your question. Hello, this is Yan. You mentioned that you generate $1.7 billion operating cash flow from record loss in second half year. A big part is the non-cash item such as depreciation. Could you give us some light on how much depreciation expense in 2019? Thank you. Yeah. I think we will leave that till March, and as I said, this is more about the operating performance and with the depreciation, we will follow that through. But I would say that the depreciation levels will sort of sustain at this level or perhaps be a bit higher in 2019. So you still have extra activity at Las Bambas, including extra 18 million tonnes of ore being mined, and we expect the volumes to continue at similar sort of levels. So it is not like this half is a one-off, and we are going to go back to lower numbers. Oh, thank you. Once again, ladies and gentlemen, if you wish to ask a question today, hit star one on your telephone. Hi, it seems that we have no further questions on the line today. I would now like to hand the conference back to management for any closing remarks. Yeah. Thank you for your interest and for joining us today. After this, if you have any further questions, please follow up with our investor relations or corporate affairs team. Thank you. Goodbye. Ladies and gentlemen, that concludes our conference for today. We thank you all for your participation. You may now disconnect.