Earnings Call: Q4 2017

Jan 25, 2018

Earnings release

Hello, and welcome to MMG's fourth quarter production report teleconference. This report and today's discussion covers MMG's assets for the 3 months ending 31 December 2017. 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 questions. I would now like to hand over to Jerry. Okay. Thank you, Brent. Thank you, everyone, and welcome to this conference. Before I start the comment on fourth quarter's results, I'd like to use this opportunity to provide you an update on our leadership team. As you know, all the operating performance are the result of people. During the December quarter, the board of directors announced the appointment of two new members to the executive committee of the company. Mr. Mark Davis was appointed as the Executive General Manager, Operations Africa, Australia, and Asia. And Mr. Suresh Vadnagra as the Executive General Manager, Operations Americas. The new roles of Mr. Davis and Mr. Vadnagra will replace the former chief operating officer position, which has been managed in an acting capacity by Mr. Greg Travers since the resignation of Mr. Marcelo Bastos. Mark and Suresh will bring extensive operational experiences and expertise to MMG and also guide regional growth opportunities for MMG. Welcome, Mark and Suresh. Now to the report. I will take the report as read and briefly expand upon some of the key issues. At MMG, our first value is safety, as always. In the fourth quarter of 2017, our operations recorded a total recordable injury frequency of 1.31 per million hours worked and 1.17 for the full year 2017. This represents a 38% reduction on the full year 2016 TRIF of 1.90. This is a pleasing result. However, our most important value is ensuring the safety of our people, and we are committed to continually improving our performance. Now, an update on our operations. MMG's full-year copper production of 598,196 tons, 2017, is a record for the company and an increase of 19% on 2016. Our weighted average C1 cost across all operations was $1.13 per pound, representing a 31% decline in unit C1 costs over the past 5 years. The major driver of this improvement has been Las Bambas, which delivered over 450,000 tons of copper production in 2017 and is now one of the largest copper mines in the world. The delivery and the ramp-up of Las Bambas has been an outstanding success, but it should be noted that Las Bambas is still a new mine. As discussed in the report, we will access some lower grades in early 2018 as we continue to develop the mine. We are also experiencing some pit wall instability that will temporarily lower metal production in the first quarter 2018. These issues do not result in any permanent loss of the production with the deferral of metal into subsequent periods. These actions do, however, reflect our commitment to always placing safety first. Production rates for the final three quarters of 2018 are expected to return to 2017 annualized levels. As a result, we expect to produce between 410,000 and 430,000 tons of copper at Las Bambas in 2018. We remain on track to meet our guidance set over two years ago that Las Bambas will deliver over 2 million tons of copper in its first five years of operation. Las Bambas is one of the lowest cost of copper mines of this scale in the world, and the 2018 C1 guidance is $1-$1.10 per pound. Las Bambas remains our most highly prospective growth opportunity for MMG. Following the very successful ramp-up, our focus has now switched to realizing this opportunity. There are a number of well-advanced work programs, including expanded exploration, plant debottlenecking, and development opportunities. We expect to accelerate the development of Las Bambas in 2018. This mine has the potential to be the world's best, and we are only now realizing the full promise ahead. We look forward to sharing this with you as we go. This is the Las Bambas. Another key highlight for the fourth quarter has been first production at Dugald River. Driving the next leg of MMG's growth, this will be a world top 10 zinc mine once fully ramped up, and is coming to market at the ideal time of tightening zinc supply and decade-high prices. This asset is ahead of schedule and on track to be delivered and the budget as we push towards commercial production in the first half of 2018. Total development capital to completion is still expected to be $550 million-$570 million, with steady state production of 170,000 tons of zinc in zinc concentrate at a C1 cost of $0.68-$0.80 per pound. This is Dugald River. Our Kinsevere operation in the D.R.C. country is to deliver stable and consistent production with its third consecutive year over 80,000 tons of copper cathode. We have developed a strong operational track record since entering the D.R.C. in 2012 and see the country as an attractive region for potential future growth. It is not an easy country, but it has been the geology and the opportunity to return to its position as one of the world's leading producers. We are, however, concerned about proposed changes to the revised mining code currently before the Congolese Senate. We feel that the legislation fails to reflect an appropriate balance between returns and future investment. The changes in their current form are likely to significantly impact the attractiveness of future mining investment and would have a detrimental impact on the economic situation and the future development of the D.R.C. The mining sector contributes 22% of GDP and 28% of government revenue in the D.R.C. MMG, along with other mining companies in the D.R.C., have urged the government towards an outcome that will preserve the investment climate for the mining sector and offer sustainable benefits for all stakeholders. These discussions are continuing. We now move to Sepon. Sepon delivered its strongest production quarter for the year. Operational improvements also enabled record material movement in November and December. Higher-grade ores that are exposed in the December quarter will continue to be mined and milled in 2018 and 2019. This is reflected in our 2018 production guidance for Sepon, which is around 20% higher than 2017. As previously discussed, MMG is conducting an expression of interest process for the Sepon asset with a shortlist of interested parties. An outcome is expected in the first half of 2018. Rosebery in Australia zinc production of over 74,000 tons for 2017 was above the guidance range of 65,000-72,000 tons, with operating improvements and the debottlenecking initiatives largely offsetting grade declines. Finally, our 2018 outlook on a consolidated basis is to deliver 560,000-590,000 tons of copper and 190,000-220,000 tons of zinc. Put copper and zinc together, 2018 is expected to be MMG's seventh consecutive year of production growth. We have delivered average production growth of 15% since 2011, and we continue to look for further opportunities as we progress towards our goal of being valued as one of the world's top mid-tier mining companies by 2020. Before opening up the line for questions, I would now like to pass to our CFO, Ross Carroll, to give a brief financial update. Ross? Thanks, Jerry. You will have noticed that we announced a further debt prepayment of USD 500 million in our Las Bambas project facility, and this is in addition to the USD 500 million prepayment we made back in July 2017, and also the redemption of the USD 338 million of convertible redeemable preference shares that we made earlier in the new year. So combined, this equates to over USD 1.3 billion in voluntary prepayments over the last six months. It will reduce our funding cost in 2018 in excess of USD 60 million per annum. So I think these prepayments reflect the extremely strong cash-generating ability of our business and our commitment to strengthening the balance sheet and increasing returns to our shareholders. We'll have further information and commentary on our balance sheet and the financials at the release of our 2017 annual results on the 7th of March. But for now, I'd like to hand back 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 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, if you wish to ask a question, it is star one. Your first question comes from the line of Ada Gao from Citigroup. Please go ahead. Thank you very much, Jerry and Ross, and the whole management team, and congratulations on this very strong quarterly production result. I have two questions regarding the C1 cost for Las Bambas and also Dugald River. I noticed that we actually revised Las Bambas slightly for twice within the year for the C1 guidance. Just wondering, for this new revised up, is it related to lower grade of the ore, or higher energy costs, or any other factors? What shall we read for this to the longer-term, steady-state C1 production cost? For the Dugald River, I noticed that we have a steady state longer-term C1 guidance. However, do we have a more precise number for 2018, and in terms of what shall we expect on the production cost there? Thanks a lot. Thank you very much. I can start. Probably, we try to reinforce both Las Bambas and Dugald River are the two very new mines, and we are still learning this mine, and also experience a lot of things we will address in the future. Anyway, I would like to ask Ross to give you some detailed information. Yep. Ada, the increase in the C1 guidance is really just a reflection of the reduction in production for next year. We are coming down from 450,000 tons to between 410 and 430, so I guess you have worked that out. Our cost base is where we expected it to be. It is just unfortunately, this wall instability that we encountered in December will push our production down. The costs are where we expected, it is just the production volumes. Obviously over the medium term, we expect production to stabilize at 400,000 tons, in that sort of range. Our cost base, except for our marketing and concentrate logistics costs, will not come down. There will be always a proportionate increase in C1 as our production levels stabilize at the lower levels. I hope that answered your question on Las Bambas. Yes. Very clear. Thank you. Yeah. With Dugald River, as said, we're still in commissioning and I think we've had three shipments, but it is a little bit too early to give some revised guidance on the C1 there. But obviously, we're trying to minimize that cost and lower it as much as we can. But I think we'll be in a better position probably at the half year or the release in July to give an update because we'll understand when commercial production's been achieved, and we'll also understand when the actual project is finished. Okay, thanks. Thanks, Ross Carroll. Your next question comes from the line of Chris Xu from Frost & Sullivan. Please go ahead. Hi. Thank you very much, and congratulations on the great results. I've got a couple of questions. The first one is, I've seen some news regarding the plans to build a railway through Las Bambas, as proposed by the president in Peru. Could you give us more colors on what is the latest update on that plan, or maybe just preliminary thoughts? The second question is, I'm very pleased to see the several very sizable repayments of debt by MMG. At what sort of leverage ratio, or maybe more specifically, the net debt to equity, would you consider more seriously a resumption of dividends? Also, maybe just quickly, what are the plans for CapEx in 2018 versus 2017? Thank you. Okay, thank you, Chris. For the first question, I may like to ask Suresh Vadnagra to give you a bit of background. From me, I think, anyway, that's a good intention from the Peruvian government to help the companies over there and to improve the infrastructure. I think that's a positive position from the government. Really, the railway thing is not a short time solution for us. I'd like to ask Suresh Vadnagra to give you more color. Jerry. As Jerry mentioned, it's a very positive signal from the Peruvian government looking to develop the infrastructure in Peru, and more specifically in the region of Apurímac, where Las Bambas is situated. Apurímac happens to be one of the most prospective regions in the country and has a lot of potential projects that could come online at any point in the future. Consequently, the government's exploring options to connect that region with the port of San Juan de Marcona by railway. This is a long-term study. The government recognizes that this is a long-term option. They're gauging the interests of using such a railway line by the private industry, but that's the stage that it's at right now. As Jerry mentioned, this and other infrastructure options that involve railway lines, et cetera, are what I'd consider to be long-term options. None of them will be a reality in less than four or five or more years away. As a result of that, it's our intent to, whilst continue working with the government on exploring longer term options, making sure that the road remains a sustainable option in the short and medium term, and to continue working with both the government and the communities to enhance the sustainability of that road as a logistics solution. Okay. Thank you, Suresh. I will leave the second and third question to Ross. Yeah. Hi, Chris. Chris, with the debt equity ratio, we still want to probably get down to 40%-50% gearing ratio before we would consider dividends. How quick we get there depends on. Obviously, we're confident in our ability to keep producing at a low cost, but the copper price and the zinc price is obviously going to be instrumental in that. We do feel we need to get down to that lower gearing ratio just to make the company stronger. It's not that we expect copper and zinc prices to come off drastically at all, but we still need to make sure we've got a strong balance sheet so we can cope with any market difficulty. The other issue we face, too, is that obviously Las Bambas is our major cash-generating asset, and although we've negotiated a prepayment with our banking syndicate, we still need to negotiate changes to the cash distribution mechanism. We expect to do that during this six months, and then we'll have a means of actually getting the cash that we generate back into MMG so we can pay dividends. But I wouldn't expect us to pay a dividend this year. I think our primary aim would still be to keep paying down the debt. In relation to your question about CapEx, we'd expect it to be in the range of $400 million-$500 million for the year. Got it. Thank you very much. Once again, if you wish to ask a question, it is star one. Okay. If you have any further questions, please follow up with our investor relations or corporate affairs team. Thank you, everyone.