Earnings Call: Q2 2018

Jul 24, 2018

Earnings release

Hello, and welcome to MMG's second quarter production report teleconference. This report and today's discussion covers MMG's assets for the three months ending June 30, 2018. Joining us today is Jerry Jiao, 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. Jerry will discuss the highlights of the report, after which the moderator will ask you for your questions. I would now like to hand it over to Jerry. Thank you, Brent. Thank you, and welcome to everyone who has dialed in today. I will take the report as read and briefly expand upon some of the key points. At MMG, we value safety. However, I am sad to say that during the quarter, our colleague, Mr. Kham Phathithak, was fatally injured on May 31, 2018, after a falling tree struck the car he was driving at Sepon mine. An investigation has been completed, and several actions are underway to improve tree falling activities and MMG's safety and contractor management. In the second quarter of 2018, our operation recorded a total recordable injury frequency of 0.93 per million hours worked and 0.91 for the year to date. We still have a lot of work to do on eliminating injuries from our workplace and making sure everyone returns home safely each day. Now, an update on our operations. Pleasingly, across MMG's operations, we delivered copper equivalent production growth of 3% in the first half of 2018 when compared to the first half of 2017. This continues a period of uninterrupted growth from 2011, and we expect to continue to grow in the second half with Dugald River ramping up well and planned increases at Las Bambas. Focusing on our major commodities. Firstly, copper. The total copper production for the second quarter of 2018 was 137,398 tonnes, which was 7% above the previous quarter, driven by improved production at Las Bambas. Las Bambas copper in copper concentrate production of 99,581 was in line with expectations, reflecting the impact of the planned major maintenance shutdown at the beginning of April. We expect improved production through the second half as a result of higher grades and increased milling volumes. We also expect to continue operating at record recovery levels seen in the first half. Given the expected improvement, we have maintained our 2018 production guidance at 410,000 to 430,000 tons of copper in copper concentrate. This is achievable, requiring second half production rate in line with the second half of 2017. However, we continue to face some production headwinds. Second half production relies on further increases in plant throughput as we debottleneck the plant to offset the impact of lower grades compared to last year. This is made more challenging by ongoing maintenance issues with the overland conveyor, which is showing significant and premature wear. We have a number of work plans in place, but recognize that the risk is towards the lower end of our production guidance range of 410,000 to 430,000 tons of copper. I turn to Kinsevere. Kinsevere delivered 20,570 tonnes of copper cathode for the June quarter, contributing to a record production half of the year, 40,556 tonnes, with excellent operational performance continuing. This strong production result was driven by higher mill throughput and high and stable mill availability, which led to a significant improvement in recovery over the first six months of 2018. The operation remains on track to deliver around 80,000 tonnes in 2018, its fourth consecutive year at these levels. With respect to the DRC Mining Code, MMG remains in active consultation with the DRC government, industry, and civil society groups. We continue to seek recognition of the protections contained for current investors in the 2002 code. We are also working to understand implementation plans and assessments, and that process will continue through the second half. The DRC government has, however, commenced enforcement of elements of the Mining Code Amending Act and the supporting regulations, in particular, increased the royalty rates from mid-June 2018. Overall, the legal, regulatory, and political situation in DRC remains of concern. MMG and other operators in the DRC continue to work together to create a more stable and sustainable mining sector. In Laos, Sepon delivered 16,886 tonnes of copper cathode, which was 17% below the previous corresponding period, primarily due to lower availability of higher grade ore. Average copper feed grade was now 2.3% compared to 3.3% in the first quarter. As announced on June 21st, 2017, MMG has agreed the sale of Announced June 21st, 2018. Is that right? MMG has agreed the sale of our 90% interest in Sepon to Chifeng Jilong Gold Mining for $275 million, assuming financial close is achieved as expected in the second half of this year. MMG will cease to report an economic interest in Sepon from January 1st, 2018. We feel this agreement is a positive outcome for all stakeholders. Chifeng are an experienced and capable gold miner focused on extending the life of Sepon through the transaction to primary gold operations. Now turn to zinc. The total zinc production for the first quarter of 2018 from our Australian operations was 58,090 tonnes, which was 23% above previous quarter. On May 1st, we announced that our Dugald River operation had achieved commercial production. Production at Dugald River for the June quarter was 38,648 tonnes of zinc in zinc concentrate and mill throughput was 103% of design capacity, highlighting the success of the ramp-up to date. Consistent with previous guidance, MMG expects to produce 120,000 tonnes to 140,000 tonnes of zinc in zinc concentrate in 2018 and 170,000 tonnes per annum once at steady-state levels of production. To achieve this, we have a significant focus on ramping up mining rates to design capacity to ensure that the steady annual production of 170,000 tonnes is not constrained from 2019 onwards. MMG expects to achieve C1 cost of $0.68 to $0.78 per pound post commercial production. Our Rosebery operation produced 19,442 tonnes of zinc in zinc concentrate, which is 4% up on the previous quarter. The operation delivered record half-year yearly and quarterly mill throughput as improved mining and efficiency initiatives continue to drive improvement at the site, which is in its 82nd year of operation. The operation remains on track to produce 70,000-80,000 tonnes during 2018, and the C1 cost for zinc are expected to be in the range of $0-$0.15 per pound due to the significant by-product contribution. Before we move on to questions, I would like to recognize that this will be my last quarterly business report to teleconference as CEO. I will hand over to Geoffrey Gao as the new CEO of MMG effective from August 1st. I would like to take this opportunity to thank all our investors, analysts, and the media for your support during my time as CEO. I will continue to be part of the MMG growth story from my new role with our major shareholder, China Minmetals Corporation, and I wish Jeffrey the best of luck. That brings me to the end of my comments. I would now like to hand over to the moderator to open up the line for questions. Thank you, everyone. Thank you. Ladies and gentlemen, we will now begin the question and answer session. 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 the pound or hash key. Once again, ladies and gentlemen, it is star one to ask a question and wait for your name to be announced. Thank you. We have a question queue from Melanie Burton from Reuters. Please ask your question. Good morning, everyone. Thanks, Jerry, for your chat today and wish you all the best going forward. I wanted to ask you about DRC, and the royalties that have come in for mid-month. Is there an option that MMG would consider or may end up lowering production, while the tax code is being renegotiated? That is my first question, please. Thanks. Thank you for the question. Well, taking the operation as it is, we still feel to keep the full production is due for the benefit of the company. We are now, since the royalty increased from 2% to 3.5%, other elements are still not very clear. We do work together with other mining companies, with the D.R. Congo government, to seek the best outcome for the company. By the way, things are stable. Ross just came back from site, I feel probably he can give you more color on this. Melanie, I think just to your initial question, if we were to lower production, we are going to end up increasing our unit costs. There would be no real benefit in lowering production at this point. Now, where it is up to, as Jerry mentioned, we are in discussions with the government. There is also a coalition of mining companies having discussions with the government as well. The regulations have been promulgated back in June. There is one big item that is still unclear, that is the super profits tax and how that would be calculated. We understand now what the royalty rates will be and a few of the other minor taxes, but we still need to get clarity on the super profits tax. I think there is a workshop planned for later in August. Notwithstanding that, we will also be looking at the legal avenues available to us to protect our stability there. Okay, thank you. I had another. I am wondering, New Century are doing what looks to be a great job remediating Century. They say that they are on track to be a top 10 if not a top five zinc producer, and they are looking to be able to sustain production for 10 years. Is there a possibility that MMG might have wound down the mine a bit too early and missed some of the value in that mine? Yeah, Melanie, I think it's a little bit too early to tell how successful New Century will be there. Although we did notice they've just revised their guidance, I think for the next quarter from 13,000 tons down to 4,000 tons. But the actual ore that's being processed is tailings, and it's not actually sort of reserves that were left in the ground as such. We did some numbers. We also got a couple of independent experts to look at it at the time, and we thought it was pretty marginal for us. New Century is a different type of operator, so maybe they can do it marginally better than what we could have or have done it in a different way because they are a tailings remediation specialist. But from our perspective, we don't believe we've left a whole lot of value on the table, and we'd still do the deal tomorrow if we had the opportunity. At the same time, we hope they can achieve success. Actually, their success is also our success because we now still have our liabilities with them. Yeah. If they can reach a good progress, that would be also good for MMG company. Yeah. What Jerry means by that is we have a bank guarantee in place that we are still providing for New Century because they cannot provide it themselves. 40% of their EBITDA comes back to us to extinguish the bank guarantee. As Jerry said, we hope that they will be successful for two or three years anyway. Thank you. Okay. Our next question is from Ben Crowley from Macquarie. Please ask your question, Ben. Yeah, good morning, everyone. I was just wondering whether you could maybe give us a bit more color, pardon me, a bit of clarification around the grade at Las Bambas. As you said, it is lower than it was last year, but just wondering how that compares to plan. Also maybe a bit more color around some of these debottlenecking programs, and also the other work I think around Ferrobamba and sort of timelines for some of the exploration work around there. Thank you. Thank you for the question. I would like to ask Suresh, since he is also here in the group office, to address your question. Thanks, Jerry. I think it is important to remember that the grade profile in Las Bambas is expected to decline throughout the life of mine, and that is associated with the depletion of some of the higher-grade skarn ores and a greater reliance on some of the lower-grade porphyry ores. As a result of that sort of natural tendency, we always expected the average grade in 2018 to be lower than the grade in 2017. Having said that, the grade in the first quarter was impacted by the localized geotechnical instability, which we had reported previously. This localized geotechnical instability had caused us to change the mine sequence, and to defer access to some of the higher-grade ore in this particular part of the pit to future periods. As a consequence, there was a higher content of lower-grade ores that was processed in the first quarter of this year. Looking forward, for the remainder of this year, we still expect to see a lower grade than last year, but significantly better grades than in the first half of this year. In the first half of this year, the average grade was 0.9%, and we expect the grade to be in the range of 1%-1.05%. For the remainder of this year, which will see production rates increasing commensurately as well. We are very much focused on continuing to debottleneck the plant and increasing plant throughput rates to offset not only the impact of these lower grades, but to also offset the changing characteristics of the ore that are becoming harder and more difficult to process. In relation to exploration, I think we are all aware that we are very much actively progressing projects to bring the Chalcobamba and Sulfobamba mines into production in the coming years. In addition to that, we are working to gain more land access to the 35,000-hectare tenement that we have got to be able to explore that more completely than we have to date. Okay, thanks for that. Once again, ladies and gentlemen, to ask a question, please star one. Our next question is from Chris Xu from BosValen Asset Management. Please ask your question. Hi, good morning. Thank you very much. Two questions. The first question is on Dugald River. You mentioned that the mill throughput was more than 100% at around 103% in the second quarter. Also you mentioned that focus for the remainder of this year is to ensure that steady annual production of 170,000 tons of zinc is not constrained from 2019 onwards. Could you clarify what you mean by that statement? Can we actually expect that Dugald River may deliver above capacity like we've seen in the cases of Las Bambas and Kinsevere before? That's our first question. Thank you, Chris. I'd like to ask Mark, EGM of our Australian operations, to respond. In general, the ramp-up is in a good shape, the real performance is above our expectations. Mark will give you more details. Thank you, Jerry, and thank you, Chris. I think we'd all agree that we're very excited about mill throughput achieving 103% in just its second full quarter of operation of the plant. That was an outstanding achievement by the operating team at Dugald River. The comment is in relation to the fact that the plan for the start-up of Dugald River includes the depletion of some surface stockpiles that we had from the early development work. The feed to the plant through this current year is a mix of fresh ore coming out of the mine as we ramp up the mining capacity, supplemented by the drawdown of that stockpile. That impacts the rate at which we designed to ramp up the mine, which was a delayed ramp-up compared to where we're ramping up the mill. We'd expect that at the end of this year, thereabouts, we will have completed the ramp-up from a mining production rate perspective underground and simultaneously effectively reduced the stockpile on the surface such that from the first quarter of 2019, we would expect to be in a balanced state where effectively the predominant feed to the plant is freshly mined ore from underground. As we work through the remainder of this year, we'll take the mining production rates up from an average of about 70% through the second quarter up to 90% effectively we're operating now, and then through to 100% by the end of the year. That'll demonstrate the feed capability to put through to the mill, and then we'll continue to work on debottlenecking both the mine and the plant to, as you say, drive the overall asset utilization beyond the original design like we've done at our other operations. Got it. Thank you. My second question is regarding Rosebery. According to the announcement, the first exam has now been completed, and there was a mention that it could extend the mine life of Rosebery. Could you give us a little bit more color on how long it could extend the mine life for? Yeah, Chris, I think, as we know, the mine's in its 82nd year of operation at the moment, and for many years, it's had around that five-year mine life ahead of it, and it continues to grow that resource incrementally as the life goes on. We've got a resource extension drilling program underway this year, and we'll know once we've completed that program, and we look at our mineral resource and ore reserves in 2019 of what that extension potential is. But at this stage, we're running through the program this year. Got it. Understood. Yeah. Okay. That's all for my questions. Lastly, thank you very much for contribution, the CEO, Jerry. Wish you all the best. Thank you. Thank you. Thank you, Chris. Thank you once again, ladies and gentlemen, it is star 1 to ask your telephone question. But the next question is from Ada Gao from Citigroup. Please ask. Thank you, management team, and all the best to the new endeavor, Gerry. I have two questions here. Firstly is for Dugald River C1. I understand that the long-term steady-state guidance is $0.68-$0.78. But do we expect a similar level for this year because this is the first year of production? My second question is regarding in the report we mentioned there is a tax dispute with Glencore. Have we assessed what kind of gain loss impact to our P&L? Thank you. Thank you. I'll take the Dugald River question first, perhaps on the C1 cost. I'll just sort of reiterate that through the second half of this year, we'll see what we expect stable mill throughput and stable plant operations, which will give us a good indicator of our C1 costs. We're still ramping up the mine through that period. So effectively, when we report our financials at the end of the year, the second half C1 will be a reasonable indicator of our near-term future costs. Ada, it's Ross. In regards to the Glencore tax dispute, it's actually fairly minor in nature. I think the total disputed amount was just under $40 million. The initial sort of reaction was that we would've been successful in getting over $30 million of it. So it's pretty minor. Having said that, we do expect it may well go to appeal by both parties. I think you're aware that there's a number of indemnity issues that Glencore gave us as part of the share sale agreement. So these items will feature for quite a while. Unfortunately, Glencore's quite happy to keep going to pursue legal options when it comes to this rather than having commercial settlements. But in this case, the impact on the accounts is immaterial. Okay. Thank you. Thank you very much. Once again, ladies and gentlemen, to ask a telephone question, it is star one. All right. If no further questions, 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, everyone. Goodbye. Ladies and gentlemen, that does conclude the call for today. Thank you for participating. You may all disconnect.