Earnings Call: Q2 2017

Jul 28, 2017

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 30 June 2017. Joining us today is Jerry Jiao, Chief Executive Officer, Ross Carroll, Chief Financial Officer, Marcelo Bastos, Chief Operating Officer, along with other members of the MMG executive team. Jerry will discuss highlights of the report, after which the moderator will ask for your questions. We have an interpreter available, so questions can be asked in either English or Chinese. I would now like to hand over to Jerry. Okay. Thank you, Jill, and hello to everyone who has dialed in today. I will take the report as read and briefly cover some of the drivers of our second quarter 2017 performance. I will begin with safety, as always. At MMG, our first value is safety. In the first half of 2017, our operations recorded a total recordable injury frequency of 1.09 per million hours worked, which was a record low half yearly TRIF for MMG. Our investors, you may get more and more familiar with this word, TRIF. It's a total recordable injury frequency. Now to production. In the June quarter, MMG operations produced almost 143,000 tons of copper and 18,000 tons of zinc. Las Bambas continued its outstanding ramp-up, producing over 430,000 tons of copper and copper concentrate in the first 12 months of commercial production. While processing lower feed grades as per plan, Las Bambas produced over 107,000 tons of copper in copper concentrate in the second quarter 2017. Turning to C1 unit costs. In its first full year of operation, Las Bambas expects its C1 costs to be in the range of $0.95 to $1.05 per pound in 2017. Compared to previous guidance of $0.85 to $0.95 per pound, this update reflects the impact of disruptions to concentrate logistics, escalation in people costs, and the current view of key input costs based on 12 months operating at design capacity. Although the revised C1 is an increase to previous guidance, the operation is now firmly established as one of the world's lowest cost copper mines in this scale. To further strengthen this position, Las Bambas has embarked on an efficiency review, identifying cost savings to external spend and productivity improvements. The full benefit of this program is expected to be realized in 2018. Our Kinsevere operation produced 20,000 tons of copper cathode during the June quarter. Sepon produced 16,000 tons of copper cathode in quarter, with improved mining and milling throughput offset by the processing of more complex low-grade ores. As a result of lower production levels, cost pressures from processing low-grade ores, and unplanned maintenance activities in the second half, we have increased our C1 guidance range for Sepon to $1.40 to $1.50 per pound for 2017. We continue to actively review future options for the Sepon mine and associated infrastructure with the depletion of the existing high-grade copper ore reserves expected over the next three to four years. In Australia, Rosebery produced 18,000 tons of zinc in zinc concentrate. Lower treatment charges for zinc concentrate and a continued focus on cost and efficiency has enabled us to lower zinc C1 cost guidance at Rosebery from $0.25-$0.35 per pound to $0.15-$0.25 per pound. The Dugald River project is now over 73% complete and is progressing well against our target to achieve production of first concentrate in early 2018. I would also like to take this opportunity to thank outgoing Chief Operating Officer, Marcelo Bastos. Marcelo is here with us. Marcelo leaves a positive legacy of operational excellence and a strong commitment by all our operations to safety, volume, and cost. On behalf of all at MMG, I express my sincere thanks to Marcelo. Greg Travers, currently Executive General Manager, Business Support, will act in the COO role on an interim basis until a new appointment is made. 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. 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, you may press star one on your telephone and wait for your name to be announced. First question comes from the line of Ada Gao. Go ahead, please ask your question. Hi, management. Good morning. This is Ada from Citi Research. Thanks for the presentation and congratulations on another strong quarter of production. Three questions, if I may. First, about cost. We raised the C1 cost guidance on Las Bambas. I just want to understand why is that and what's the actual cost now, and what's the risk of future cost hike? Secondly, I want to have an understanding about what the status of finding a succession for Marcelo. Last one, recently we see news about this Peru nationwide strike in mining industry. I understand the impact should be very minimal to company operation, but just want to get more senses about what's really going on over there. Thanks a lot. Yes. Yeah. Hi, Ada. It's Ross here. With the C1 cost at Las Bambas, there's a few issues leading to it. One is that we have incurred more disruptions than what we expected for this six months. It hasn't actually impacted on our production levels, but there is additional cost in mitigating the impacts of those public occurrences and disruptions. I think as we've told people in the past, we've got surge capacity that enables us to manage it, but it does cost us money. The other thing is we are starting to see escalating costs across the mining industry, and you would've been aware of the strikes at Escondida, strikes at Cerro Verde. So we've probably changed our assumptions around what we will need to pay in the future. For obvious reasons, we're not going to disclose the assumptions about that. But we are in negotiations with the unions at the moment. So that is an increase. Now, the aim for us is to try and reduce that impact by getting productivity benefits. Thirdly, I guess as just as we settle into the operation, we've had to increase the powder factor with our drill and blast, so we get a better fragmentation of the ore, so that's an additional cost. Also, we've had additional use of reagents. So that's the cost. The other thing I would say is during this half year, and you'll see this when our results come out, we had a period of about three months where we were mining ore that had a grade of between 0.8 and 0.9. So during that time, our costs go up, and obviously our output comes down a little bit. So in a way, that's why the production's perhaps slightly under what people would expect. But it's a result of the grade, and that turns around in the second half. So that's a sort of a sub-issue that's occurred during that six-month period. Now, what I would say is, Jerry did mention the fact that we've got the efficiency or cost review program going at LB. So we're hoping in 2018, we can then use that to pull the cost down somewhere close to the previous guidance, but it's too early for us to give a commitment on that just yet. Okay. May I follow up on the wage negotiation with the labor union? Do we do this on an annual basis or once for several years? Yeah. It is on a three-year basis. Okay. We probably expect we get a resolution in this half, and that would last for three years. Yeah. Okay, thanks. Next one. Also, regarding the question on Marcelo. Marcelo reached his resignation on May, and we got good time to prepare this. MMG as a company, always we have our well-rehearsed transition plan for different roles. We are very proud we have the deep talent pool within the company. Also, Marcelo himself is very supportive. We are now work with the board nomination committee to work out different alternatives. Additionally, Marcelo will be still around for another six months to be at the advising role to myself. Since Marcelo is here, probably Marcelo can give you a bit more color on this. You'd like to? Yeah. I think, as Jerry Jiao said, the company is well prepared for the transition, and I can say we because I'm still linked to the company. Very confident that we have good succession planning. But the decision is a decision not for me. As Jerry Jiao said, I'll still be around and advising him and at hand. So, I'll help as much as I can. But the company is well set up, and you can see the results. Las Bambas is again outstanding. Apart from the cost range variance. But it's one year of commercial operation, and then producing what produce that is the expected rates for the going forward is That's outstanding and different from the average in the market. Sepon improvement under the difficult circumstances, it's also a certainty that we'll keep delivering. Kinsevere, again, delivering for many years without dropping results. So I go, but I think the company is very well set up and very well prepared to keep going, and I will still be around helping. There's some strong confirm. National strike in Peru. Once again, if you wish to ask a question, you may press star one on your telephone and wait for your name to be announced. Sorry, Eido, it's Troy here. Just to pick up on your question around the national strike in Peru. The guild of teachers and the unions are still in negotiation. What we have done is focused on three levels. One, working with the government, and there has been some local state of emergencies declared to help with some of the local areas. The second, working with the communities to make sure we can get our logistics through and keep those roads open. And the third is what's become a very developed and excellent skill on behalf of the operations to use the stocks both at site and at port, and use the logistics planning to make sure that we get minimal disruptions from the small one or two-day disruptions that occurred over the last couple of months. It is an operating reality of Peru and one that we are getting better and better at managing. Your next question comes from the line of Mr. Chris Xu of Boss Vale and Asset. Go ahead, please ask your question. Thank you very much, and congratulations again on the strong performance. I have two questions. The first one is regarding molybdenum. It is very interesting to see the disclosure of the moly production for the very first time. I noticed that it has actually been accelerating. In the first quarter, it is around 140 tons, and then the second quarter it is 332 tons, including 126 tons in June since the start of the commercial production. My question is there any guidance on the full year volume? Also, I mean, not just for 2017, but also for 2018. Also, what is the impact on the financial statements from this commencement of commercial production? Also, will there be potentially some other metals that may also see the commencement of commercial production? That is my first question. Thank you. Yeah, Chris, it is Ross. With the moly, it is a pretty minor input into the whole operation, and the real reason for the moly plant is to make sure that we do not get too much moly in the copper concentrate. The volumes are going to be minimal. It will not have much of an impact, and it is treated as a byproduct against our C1 cost per copper. Really on the whole, it is a pretty immaterial sort of item, and we do not propose to give guidance on it. At the moment, we are already getting gold and silver credits through the concentrate, which also have an impact on the C1 cost. Now, unlike some other mines, our gold and silver credits are pretty, I would not say minimal, but moderate. We are not like some of these mines which will serve the big with a very low C1 cost because they are getting huge gold credits. Ours are fairly moderate. That is all encapsulated into the C1 guidance. We do not- Got it. We don't sell gold and silver as such. It's just we get a credit from the refiners for it once the concentrate is smelted. Got it. Understood. Yes. My second question is regarding Dugald River. We noticed that the wording in the announcement has changed regarding the progress. It used to be the project remains on target for first concentrate production in first half of 2018. Now the wording is it is progressing favorably against the target of first concentrate production by early 2018. Yeah. Indeed, if we look at the data points, right? The company disclosed the percentage completion for the first time in the first quarter 2016 production report. At that time, it's 28%. The end of fourth quarter, it's 45%, end of first quarter this year is 58%, and the end of the second quarter this year, it's 73%. On average, each quarter, the progress is around 15%. If we extrapolate that, actually the project can be complete even by mid-December this year. I'm just wondering, how early can we expect the project to be ready? Also, is there any implication on the expected CapEx and cost for this project? Yeah, Chris, that's quite a perceptive question. Obviously we have changed that wording, and the project is heading favorably against the schedule. We haven't started full-on commissioning yet, and we haven't finished the construction. Once we've got a clearer idea around that, we'll give some revised guidance. But it's not going to have any impact on this year. But if we do finish the project early, I think you can expect this will have a bit of a favorable impact on cost. But as we've indicated, we'll give a further update at the half year results, which is towards the end of August, and we'll have a clearer picture then. But I guess we just wanted to highlight that it is progressing well. Now when you look at the progress curves, you can't quite do a sort of linear calculation because that's a combination of the construction work and then also the work we do in the mines, so the underground development. So it is different activities at different times. But yeah, I guess the message here is that it is going well. But having said that, we don't want to get too carried away until we deliver something that's at commercial production levels. Got it. Thank you very much. Very pleased to hear that. 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. There are no further question at this time. I would now like to hand the conference back to today's presenter. Please continue. Okay. If no further questions, thank you all for your interest in joining us today. If you have any further questions, please follow up with our corporate affairs team. Thank you, everyone. Goodbye. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now all disconnect.