Earnings Call: Q1 2018

Apr 24, 2018

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 three months ending 31 March 2018. Joining us today is Jerry Jiao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, 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 over to Jerry. Yep. Good morning, everyone. 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 issues. Again, at MMG, our first value is safety. In the first quarter of 2018, our operation recorded a total recordable injury frequency, recorded TRIF, of 0.88% per million hours worked. This is a tremendous achievement, a record low for MMG. This is a pleasing result and demonstrates the significant focus we place on maintaining a strong safety culture across the company. Now an update on our operations. Start with copper. The total copper production for the first quarter of 2018 was 127,751 pounds, which was 14% below the previous corresponding period. This was due to lower production at Las Bambas. Copper in copper concentrate produced, production for Las Bambas is 87,000 pounds, which was in line with our expectations. As previously reported, we changed the sequencing of the Las Bambas mine in the first quarter to accommodate a localized geotechnical instability. This deferred higher-grade ores to subsequent periods. We have also completed a major planned maintenance shutdown at the beginning of April. We are confident that these issues have been resolved, and we expect to produce between 410,000 and 430,000 pounds of copper at Las Bambas in 2018. C1 unit cost guidance is $1-$1.10 per pound for 2018, despite increasing input cost pressures. At Kinsevere, we produced almost 20,000 pounds, so 19 almost 20,000 pounds of copper cathode for the March quarter, and is on track to deliver around 80,000 pounds in 2018. Its fourth consecutive year at these levels. This will be an outstanding achievement. Power supply initiatives have resulted in low energy costs during the March quarter, consistent with previous guidance. C1 costs are expected to be $1.57-$1.67 per pound in 2018. I know everybody is concerned about the current progress on DRC Mining Code changes. MMG remains in active consultation with DRC government, industry peers, and the civil society groups. As an industry, we continue to pursue recognition of the stability clause in order to address government concerns on contributions from existing mining operators. The industry is proposing a modified sliding scale for royalty payments, providing the DRC government with a guaranteed larger share of revenue at higher commodity prices. Just for your information, if we compare with different countries, the royalty level in DRC is not that high compared with many of others. As we have said before, the DRC is an attractive region for potential future growth, and we hope to see an outcome that will preserve the investment climate for the mining sector and offer sustainable benefits for all shareholders. In Laos, Sepon delivered its strongest production quarter in more than 12 months, producing more than 20,000 pounds of copper cathode, which was a 20% improvement on the previous corresponding period. This improvement was driven by increased availability of higher-grade ores. Following the strong start of the year, 2018 production and cost guidance is maintained at 70,000 to 80,000 pounds of copper cathode at a C1 cost of $1.60 to $1.75 per pound. As previously discussed, the expression of interest process for the Sepon asset continues to progress with a shortlist of interested parties. An outcome is expected in the first half of this year. Let's talk about zinc. The total zinc production for the first quarter of 2018 from our Australian operations was 47,000 tonnes, more than 47,000 tonnes, which was 146% above the previous corresponding period. It's mainly because of Dugald River. Dugald River commissioning and the ramp-up activities accelerated during the first quarter, and the site produced approximately 28,500 tonnes of zinc in zinc concentrate. Mill throughput rates averaged approximately 80% of nameplate capacity, and we expect to achieve commercial production during this current quarter. MMG expects to produce 120,000 to 140,000 tonnes of zinc in zinc concentrate in 2018, and 170,000 tonnes per annum once at steady state levels of production. The asset is ahead of schedule and will be delivered significantly under budget, with total development CapEx now expected around $550 million. We are proud to have delivered a world top 10 zinc mine, MMG's first pure greenfield development. We think it is a great example of the strength of our model and the strategy, which seeks to deliver values-oriented growth in commodities with excellent fundamentals. Delivered by a world-class team and benefiting from strong financial and end market support from our major shareholder, China Minmetals Corporation. Rosebery also produced more than 18,000 tonnes of zinc, and remains on track to produce 70,000 to 80,000 tonnes during 2018. C1 costs for zinc are expected to be in the range of $0.00 to $0.15 per pound due to the significant by-product contribution. This brings me to the end of my comments. I'd now like to hand over to the moderator to open up the line for questions. Thank you. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you want to ask questions on the phone, please press star 1 and wait for your name to be announced. If you would like to cancel your request, you can also press the pound or hash key. Once again, to ask a question, please press star 1. We have the first question coming from the line of Ada Gao from Citigroup. Please ask your question. Thank you, Jerry, and thank you, management. Congratulations on another very strong quarterly production report. I have two questions here. First, regarding the new Mining Code in Congo. We noticed that the mining industry has submitted a new proposal on March 29, proposing a floating rate of royalty, but suggesting the Congo government to remove the super-profits tax and to ensure the 10-year grace period that they have guaranteed in the past. Are there any updates from the Congo government regarding their feedback on this proposal? When do you expect we hear more from the development over there? That's the first question. Mm-hmm. Thank you. Shall I just address that first, and then you can follow with the second one? Yes, please. Okay. For the DRC, as I said just now, we actually quite actively engage with the government together with other mining peer companies. So far, we don't have much more to update. Altogether, the government of DRC promised a 90 days consulting period of time, and we simply completed the first 30 days. The discussion is ongoing. Actually, we try to engage some other diplomatic resources, like the investors in Kinshasa of different countries, also to go to talk to the president and to leverage further resources we can have. Currently, we don't have much more to share with you. But we will continue to keep our investors posted about any of the progress we are going to have. Thank you, Jerry. Just quickly following on that. I remember you mentioned that previously, that usually it takes one year for the Congo government to finalize any changes in major regulations. Are you expecting the timeline of finalizing this new Mining Code to be around one year? Yes. Make it clear, this consultation period, it is not the time we are talking about. It is really because of the dispute between the government and the mining communities. We, together with the government, decided to have this time to talk about this stability clause. What we are mentioning, the year timeframe for the regulation is actually after this consultation. It normally takes that much time to finalize all the policy details. We are basically talking about different things at the moment. Okay. Thanks a lot. My second question is regarding to the Las Bambas. We know that in the first quarter, the production volume has declined a little bit. Do we have C1 costs for the first quarter? Just a rough range will be good enough. We don't. I probably can ask Ross to answer that question. Yeah. Sorry, Ada Gao. Obviously, we do have it internally, but we don't disclose our C1 costs on a quarterly basis. Yeah. But I think you can assume the cost base is pretty constant, so it's just really the lower production. Okay. Thanks a lot. Thank you. Thank you. Thank you for the question. Next question comes from the line of Melanie Berden from Reuters. Please ask your question. Hi there, Jerry and everyone. Thanks for your talk today. Back to DRC. We are interested to know how you view Gécamines's move at the weekend to try and dissolve KCC. Would you have any concerns that might signal a new round of mine expropriations, for example? We actually don't have like many of other companies to have the JV arrangement with Gécamines. Kinsevere is 100% owned by MMG, so we are not in the position to comment on the Gécamines situation. That's Yeah. No concerns then, given the climate of what's going on right now with increased royalties and so on? You think it's a company-specific issue, is what I'm trying to get at, rather than a sort of government control? No, I think, Melanie, this is Ross. I think what is happening there is that Gécamines has got 13 or 14 joint ventures, and rightly or wrongly, they've expressed concern about maybe how much the other joint venture partners are taking out relative to them. I think this is an issue more specific to Gécamines's investment in the joint ventures rather than the overall Mining Code issue. Having said that, it's obviously not a great climate for mining companies in the D.R.C. at the moment. Thank you, Ross. Thank you. I also wanted to ask a question more broadly about the industry and whether you have concerns that we may not have been seeing miners replenish their supply pipelines really too much yet. We haven't seen a big range of M&A in general, and you guys are included in that, although I expect we'll hear something from you soon enough. Do you think we're sowing the seeds of the next boom right now? Do you think we should be seeing more activity in that sector? Thank you for the question. We, MMG, we still keep our strategy and also our growth target by 2020 as we reiterated many times. We still want to develop ourselves as the top tier mining company by 2020. At the same time, we all know the current industry in general, it's a very competitive industry. Many people, many mining companies, they take copper as their top priority, and there are just not much opportunities out there. MMG, as the mining company, we continue to address our growth strategy, not only by the M&A, but also through our internal brownfield expansion, also the active cooperation activities around our operating hubs. Those are our current situations. What I can tell is that we continue to follow our strategy, and we continue very actively to look for different opportunities both inside and outside the group. Thank you, Jerry, and my final question. I noticed that you're looking at cobalt developing Nambulwa project in D.R.C. Could you be looking at having a larger footprint in cobalt, considering it's such a strategic mineral for the years ahead? We didn't involve in that. Yeah. I think, Melanie, the Nambulwa discovery is predominantly a copper discovery that may have a little bit of cobalt there. Okay. It's not a material amount, but I guess like everyone else, we'd like to have some access to cobalt. At the moment, we don't have a lot of cobalt in our portfolio. Okay, that's great. Thank you. Thank you. Thank you for the question. Next question from the line comes from the line of Chris Xu from Bosera Asset Management. Please ask your question. Hi. Thank you very much. I have a few questions. The first one is regarding CapEx. You have revised down the CapEx for Dugald River versus previous guidance. Is there any implication to your total 2018 CapEx guidance? That is my first question, Chris. Thank you. No, Chris, that 550 number was built into our CapEx guidance. Got it. Understood. The second question is, on page three of your announcement, you said the state of emergency along the transport logistics corridor between the Las Bambas operation and rail transfer facility at Pillones has been extended for 60 days from April 12th. What is the implication on your operation, if any? Chris, since we have our EGM in that we have Suresh online, I would like to hand over to Suresh to answer your question. Hi, Chris. Suresh here. Look, this particular condition has existed now for the greater part of six months. What it does is it provides certainty along the concentrate logistics corridor that it will not be disrupted as a result of different project activities, so it just gives us that certainty that there is a much lower likelihood of disruption along that transport corridor. Got it. Understood. My final question is regarding what you have mentioned. On page six of your announcement, you said you remain in active consultation with the DRC government, industry, and civil society groups. Could you elaborate a little bit on the point of civil society groups? What groups are in the discussions? What third parties are involved? Chris, it's Troy Hey. For the almost four years of discussion with the Mining Code, there's been three parties: the government, the industry, and civil society groups. They are a collection of NGOs operating within the DRC and cover off both aid organizations, development organizations, and other kind of human rights groups. They're a very important kind of balance in the debate between both government industries, and our discussions over the last couple of weeks, those groups have been involved in the working groups with the DRC code reform, and have been a good part of that discussion, increasingly aware of the issues that the industry has raised around stability, and the impacts of the super-profits tax, and we welcome their role in the Mining Code debate. At the moment, we still haven't received the kind of traction we wanted. Got it. Understood. Thank you very much. Thank you once again. If you'd like to ask questions, please press star 1 and wait for a name to be announced. Our next question comes from the line of Gary Tan from AustCham. Please ask your question. Hi, management. Thank you for taking my question. I'm just wondering, the last time during the full year results, you guys did not indicate the dividend policy. Given the relatively strong outlook for our copper and zinc prices this year, I'm just wondering, this year, would you guys initiate a dividend policy? Yeah. Gary, it's Ross. At the moment, our debt's still very high and it's close to $8 billion of debt and a gearing ratio of 72%. For the foreseeable future, the dividend's not really a relevant factor and, as we've said, we want to continue paying down debt. I would think a dividend's probably a minimum of 18 months or 2 years away. At this stage, we don't have a formal policy on it. Sorry, may I follow up? What would be your ideal debt ratio? We'd be probably looking at a gearing ratio of around 40%, but that depends what we're doing corporately as well. What I would say is although we haven't been paying dividends, the shareholders have been pretty well looked after through the appreciation of the share price. We'd sort of feel they're getting their returns that way. During last year, every time we made a debt repayment or a debt prepayment was a fairly large spike in the share price. I think it's just a different way of getting value to the shareholders. Thank you, Ross. I appreciate it, and congratulations on the good execution on the Dugald River greenfield project. Thank you, Gary Tan. Thank you, everyone. If you have 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 concludes the conference for today. You may now disconnect the line.