Earnings Call: Q3 2017

Oct 19, 2017

Earnings release

Hello, and welcome to MMG's third quarter production report teleconference. This report and today's discussion covers MMG's assets for the three months ending 30 September 2017. Joining us today is Jerry Jiao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, Greg Travers, Acting Chief Operating 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. Thank you, Grant. Hello to everyone who has dialed in today. I would take the report as read and briefly cover some of the deliveries of our third quarter 2017 performance. At MMG, our first value is safety. In the third quarter of 2017, our operations recorded a total recordable injury frequency of 1.56 per million hours worked, which represents a 9.6% annual improvement since 2012. Tragically, two weeks ago, Hilario Castro, an experienced truck driver at our Las Bambas mine, lost his life following an accident at site. I would like to again express my regrets to the family, friends, and workmates of Hilario. I strongly believe that achieving zero fatalities is possible. At MMG, we are committed to ensuring every employee goes home safely at the end of each day. Now to production. In the September quarter, MMG operations produced almost 148,000 tons of copper and 17,000 tons of zinc. Las Bambas delivered its strongest ever production quarter, producing over 114,000 tons of copper in copper concentrate. This strong production quarter was driven by higher average feed grade and a higher throughput in the plant. We continue to drive optimization and efficiency initiatives following a very successful ramp up. Exploration activities are also expanding significantly as we begin to push into the 90% of the tenement that remains highly prospective and unexplored. 2017 production and cost guidance remains unchanged from the previous quarter. Our Kinsevere operation produced 20,758 tons of copper cathode during the September quarter. This was the second strongest production quarter ever recorded for Kinsevere, and was driven by stronger mill throughput rates. We are, however, facing upwards pressure on input costs at Kinsevere due to an acid shortage that is currently impacting the whole DRC. This, combined with changes to the mine plan, has resulted in mining more ore and less waste than originally planned, and caused an increase to our C1 cost guidance range to $1.50-$1.60 per pound in 2017, up from previous guidance of US$1.30-$1.45. Production guidance remains unchanged. Sepon produced just under 13,000 tons of copper cathode in the quarter, a reduction of 19% on the previous quarter, largely due to the extreme weather and heavy rainfall caused by the typhoon Doksuri. Despite this, mining rates have remained strong, and increased waste stripping has exposed the higher-grade ores, which are expected to increase production in the fourth quarter. These higher-grade ores will continue to be mined and processed throughout 2018 and 2019. We continue to actively review future options for the Sepon mine and the associated infrastructure with the depletion of the existing high-grade copper ore reserves expected over the next two to three years. As part of this review, we have commenced an expression of interest process, and an outcome is expected to be determined in the first half of 2018. In Australia, Rosebery produced 17,000 tons of zinc in zinc concentrate. Production was slightly below the second quarter due to some unplanned maintenance activities in the mill. The Dugald River project is now over 89% complete, and is expected to deliver first concentrate production this quarter. Pleasingly, the total capital cost is now expected to be between $550 million-$570 million, plus interest costs. This is considerably below previous expectations of $750 million at the time of the board approval for the project in July 2015, and a revised estimate of $600 million-$620 million in June 2016, at the time of final finance approval. The lower overall development cost is a combination of good timing during the commodities down cycle and excellent work from the project team. Dugald River is now perfectly timed to meet a growing supply-demand gap, with zinc prices currently around decade highs. Investors will note that we have also released our Mineral Resources and Ore Reserves Statement for the year ended June 30, 2017. The full details of the technical report is available on our website. However, I will briefly comment on the key points from the report. The decline in copper Mineral Resources and Ore Reserves is mainly due to Las Bambas, where we have just delivered a very successful first 12 months of commercial production. During this time, the focus has been on mine ramp up payable metal production. Looking forward, we will now accelerate drilling programs to focus on Mineral Resource extension and the conversion of Mineral Resources to Ore Reserves. As mentioned earlier, around 90% of the Las Bambas tenement is highly prospective and remains unexplored. On zinc, we delivered a significant uplift in Ore Reserves, primarily due to the successful drilling program at Dugald River as the company moves toward first production later this year. 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. 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 the request, please press the pound or hash key. Your first question comes from the line of Chris Xu from Bosera Asset Management. Please ask your question. Hi. Thank you very much, and congratulations on the great performance. A couple of questions. The first one, in the last time you gave a 2017 full year CapEx guidance, the range was $850 million-$900 million, including $330 million for Dugald River. Given that you have revised down the CapEx guidance range for Dugald River by about $50 million, that means the 2017 CapEx for Dugald River has been lowered by about 15%, 15, right? It is around 50 divided by 330. Should we also expect the company's actual overall full year 2017 CapEx to be also about 15% below the original guidance range? Also, given that, as well as the presumably stronger than expected cash flow from the stronger than expected copper prices, is there any more debt prepayment opportunity like we have seen on July 31st? That is my first question. Thanks. Yeah. Hi, Chris, it is Ross. Chris, in answer to your first question, yeah, with our overall CapEx, we had given $850 million-$900 million. I think you would find that will be around about $800 million at the end of the year. Obviously, there are still a few variables, but it will be around about that sort of final level. With the further cash flow, we are obviously generating a lot of cash with the strong Las Bambas and Kinsevere production in particular. There is potential for us to do something else in regards to cash flow by the end of the year. But, yeah, we need to look at all the factors and discuss that with our banks as well. But certainly, as you would imagine, at $3 plus copper, we are generating a lot of cash and obviously keen to do something about our debt levels. Got it. Yeah. My second question is, if we look at page 66 of the full version of the reserve statement, it mentioned that for Kinsevere, there is a planned increase in mining rates in 2018 that is considered to be within the capacity of the site mining contractors. Does it mean that we should expect a continued year-on-year copper production volume growth from Kinsevere in 2018 versus 2017? No, I think next year we will be still looking at about 80,000 tons. We are getting to the stage where the grade is dropping a little bit there as well, and we are moving more waste. So with 80,000 tons is basically the full capacity for that plant, give or take probably 500 or 1,000 tons. Yeah. Got it. Thank you very much. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from the line of Ada Gao from Citigroup. Please ask your question. Hi. Thank you, management. Congratulations on another strong quarter. I noticed that the copper recovery rate for Las Bambas has been declining since the first quarter of this year, from 87% to 84% in second quarter. Then we are now at 81% in the third quarter. I'm just wondering if this is something we need to worry about going forward, and how we should looking at the future recovery rate. Thanks. Now, Ada, I think we were getting very high recoveries at the start of the year because we had higher feed grade ore. The ore does change just through the natural development of the mine. You shouldn't expect that trend to continue, and we've got some measures in place now. We're looking at different crushing setups and get the recovery back to 83%-84%. It's not an ongoing trend, but from time to time, it will move up and down. Yeah. Okay. Thank you. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question is a follow-up question from Chris Chiu from Bosera Asset Management. Please ask your question. Hi. Another couple of questions from me, if I may. The first one is, Jerry, in the Melbourne Mining Club luncheon speech last week, you mentioned that you have now repeated the Las Bambas project approach in zinc with construction of Dugald River reaching completion. Looking ahead to our Izok Corridor project in Canada, which offers further opportunities. Could you give us some updates on Izok Corridor, and what has been changed? Also in the same event, you mentioned that you will continue to assess other commodities. So what other commodities that you may find that you consider attractive? Thank you, Chris. First of all, the Canadian asset, it's an asset sitting long time within our book. The main challenge, as we all know, is the infrastructures. Management spend huge efforts to work with the federal government and also the provincial government in Canada, try to help the local government to seek more support from the federal government, making sure we have some good progress. The Canadian government, the federal government already show some support to some remote regions. I think several months ago, they just released the news to have a financial support on some infrastructure initiatives. We work very hard to try to seek the support from the government. If the infrastructure is getting improved, we got a large chance that the whole region will get developed. We will run a very good position since the resources are very high content zinc resources. This, the first question. The second one is, actually, we never changed. We currently still focus on the copper zinc as our top priority commodities. At the same time, for the benefit of generating value for our shareholders, we continue to assess other commodities. I cannot tell specifically, what are the commodities, but basically, we will look at something, China, basically, we will look at China short commodities and which we can feel got a better chance for the company like us. Thank you. Got it. Last question. Page seven of the production report announcement said, surface sampling commenced at the Kakanda project in the Central Copper Belt in the D.R.C. Could you give us more details, and could there be any possible cobalt potential over there? Thank you. Yeah, Chris, that is just a very early stage exploration lease. It is too early to tell if there is any copper there or any cobalt as well. But, obviously, we would be keen to get some cobalt into our portfolio, particularly if we continue to expand in the D.R.C. But it is way too early to tell. Got it. Thank you very much. Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Okay. 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.