Earnings Call: H2 2019

Mar 17, 2020

Hello, and greetings from Chile. I am Ivan Arriaga, Chief Executive of Antofagasta, and I would like to take you through our 2019 full year preliminary financial results. I will then turn over to our CFO, Alfredo Atucha, who will go through the numbers. I would like to start by saying that the past couple of months since the onset of COVID-nineteen has introduced a global macro challenge, the like of which we have not seen in my lifetime. These are unprecedented times, but as you will see from our results, Antofagata has emerged from 2019, a strong company able to withstand difficult challenges. Our net debt is very low and when shareholder subordinated debt is excluded, we are cash positive. This strong balance sheet coupled with strong operating performance, 5% lower cost and a strong safety culture and performance has carried us well into 2020. As you can appreciate, our number one priority has been the health and safety of our people. We have taken proactive actions from the very beginning, involving everyone who has been potentially impacted so as to contain the risk of contagion at our facilities. This has included strict limitations on travel, working from home and quarantine protocols. To date, we have had no cases of the virus declared at any of our facilities. Alongside the health implications, we have seen high levels of volatility and uncertainty in markets. Despite this, our shipments have been unaffected and our supply chains remain substantially intact. However, the copper price has weakened to levels we have not seen for some time. We think it is at times like this when the resilience of our operating and financial strategies is most distinctive and allows us to look forward from a position of relative strength at a time when it is difficult to forecast with certainty how the situation may evolve in the short term. I would like to start with a brief overview of our performance last year. Alfredo will then take you through our 2019 financial results, and I will then talk about the copper market, our development options with a focus on value creation and return, our priorities for this year. And finally, I will close by summarizing Antofagasta's investment case. Sustainability is integral to our strategy. So I would like to start by talking about our business through the lens of sustainability, which is our long term license to operate and has provided us with a robust platform from which we now operate and will allow us to handle the challenges that may we may encounter this year. People. As I just mentioned, safety remains the group's top priority, and we are convinced that a fatality free environment is achievable. And of course, in the context of COVID-nineteen, the health and well-being of our people is a top priority. At our operations, we had our first strike last year at Antucoia, which was resolved after 18 days. We believe we have good labor relations and have always believed that engaging and working closely with our unions is the best way to build trust and mutual collaboration, but through agreements that preserve the health of the business in the long term. This concept is important, not only at our operations, but for society. Following the social unrest last year, Chile has now entered a new political process, which may require rewriting the constitution as one of the possible outcomes after first forming a constitutional assembly. If this path is chosen, which will depend on the outcome of a national vote scheduled to take place next month, additional levels of social cohesion and collaboration will be required for it to be successful. Moving now to economic performance. We have high quality and long life assets in 2 of the best mining districts in the world. We're focused on value and only producing tonnes that optimize cash and earnings. On social development, we have consolidated the changes made to our community engagement model under the principles of transparency and participation, and this has been a key enabler to the recently approved expansion project, at Los Pelambres, which is now in execution. Regarding the environment, water is a critical challenge for all our mining operations, particularly at Los Pelambres in Central Chile, which is experiencing a severe drought. We're working hard to ensure water availability to fulfill our plans at Pelambres. And we have accelerated the conversion of our operations to renewable energy sources, and we expect to bring this forward from 2026 to 2022. I will talk about water and our carbon emissions some more later in the presentation. Finally, on transparency and corporate governance, we have recently revised our risk management systems to remain in line with all aspects of the U. K. And Chile's best corporate governance practices. And the Board has recently updated our risk appetite assessment to specifically include climate change. Safety is our top priority. And during 2019, we had our best safety performance ever. I'm pleased to tell you that we have had no fatalities and we have improved our safety performance across all our operations at the Mining and the Transport division. The number of serious accidents has continued to decrease, as shown in the graph. This progress reflects the great efforts we have been making over the 5 years since we implemented our safety management system. These results are, of course, positive in themselves. However, we also believe that without a strong safety performance, it is very difficult to achieve sustainable good economic results. And for us, this has been reflected by 2019 being a year of record production, right at the top end of our revised guidance. 2019 was our best year from a safety point of view. We again achieved our production guidance and had a record year of copper production on higher grades and a solid operating performance, producing 770,000 tonnes of copper, 6% more than in 2018. Our EBITDA grew by 9.5 percent to €2,400,000,000 and our EBITDA margin increased to 49%, despite the lower realized copper price. Our net cash cost of $1.22 per pound was down compared to 2018 and below guidance, which reflects the higher production, tight cost control and the weaker Chilean peso. Savings under our cost and competitiveness program were again higher than targeted this year by 32,000,000 We are committed to maintaining our financial discipline and delivering shareholder returns, especially in this period when there's considerable uncertainty and the market is challenging. We have strengthened our already robust balance sheet to 0.23 times net debt to EBITDA. Our total dividend for the year is $0.341 per share, which is equivalent to a payout of 67% of our net earnings from continuing operations, which is fully in line with the dividend policy. On the project side of our business, we have started the construction of the Los Pelambres expansion, and the board has approved the Zaldivar Chloride Leach Project and the opening of a new pit at Centinela, Esperanza Sur. During this period, we achieved a healthy operating cash flow of $2,600,000,000 Cash generated is applied first to maintaining our operation. This includes sustaining CapEx and mine development. We then allocate cash to pay dividends according to our commitment at minimum payout ratio of 35% of underlying net earnings. Finally, we consider capital investment in our development options, strictly focusing on returns with any excess cash being returned to shareholders, typically through the payment of a larger final dividend. This has allowed the Board to recommend a total dividend of €336,000,000 which is equivalent to a 67 percent payout ratio. We are pleased to reward the support of our shareholders and we will continue to review what we regard as excess cash when determining the level of dividends in the future. In line with our plans, we produced 770,000 tonnes of copper at a net cash cost of $1.22 per pound, coming in at the top end of our revised guidance and well below our cost guidance. Los Pelambres performed very well, meeting our production plans and outperforming our cost guidance. We also started the construction of our expansion project. Centinela had a solid operating performance as well and benefited from a higher ore grade. At Pantocoya, we continue to focus on optimizing mine and plant reliability to extract all latent capacity and ensure we perform in line with the full potential of the operation. Sal de Waal also benefited from higher grades and higher throughput and greater operating consistency to achieve its highest level of production since we acquired it in 2015. Our transport division increased its haulage capacity and efficiency, and it is well positioned to serve the new contract it has signed. Our volumes grew 8% in 2019, and we will continue to grow in the coming years with the contracts already in place. This year, copper production will be in a range of 725,000 to 755,000 tonnes, with a slight decrease on last year's, mainly as a sulfide ore grades fall at Centinela. Group cash cost in 2020 after by product credits are expected to be slightly higher at or below $1.30 per pound. Previously, our CapEx guidance is for the year €1,500,000,000 However, in view of the current global situation, the capital expenditure program is being reviewed to identify whether any savings, including those from the favorable exchange rate or deferrals are possible that will reduce the level of expenditure. The review process is underway and the revised estimate is expected to be in the range of €1,300,000,000 to €1,500,000,000 We will provide more details about this in due course. Our operating costs are also expected to be favorably impacted by the exchange rate, but for now we will leave guidance unchanged. However, for every MXN 10 move against the U. S. Dollar, our costs change by 0.01 to 0.015 dollars per pound. We remain very focused on cost improvements. We have rebased our cost over the past years and consider this a strategic imperative going forward, especially at the current copper price. Antofagarta is committed to mitigating and adapting to climate change. On mitigation, we have set a target to reduce our CO2 emissions by 300,000 tons by 2022 through energy savings and efficiency gains, and we are well on track to achieving our target. Our energy consumption source from clean renewable energy will continue to increase as Los Pelambres, Aldivar and Antucoia have already signed contracts and will all be fully on renewable power from 2022, accounting for 65% of our total power consumption. We're also currently working to achieve similar conditions for our other power contracts and expect to be on 100 percent renewable power from 2022, having previously only expected to do this by 2026. This contrast will see the group's all in power costs come down. We are adapting further to the impact of climate change. We already use seawater at Centinela and Antucoia, which account for 46% of the group's total water consumption. And with the construction of the desalination plant at Los Pelambres, the rate of seawater usage will continue to increase. At the same time, at Centinela in the Atacama Desert, in the north of Chile, we are the only site in Chile producing thickened, that is low water content tailings, which increases the amount of water being recirculated. On social development, we continue consolidating the changes we made to our community engagement model. Our goal is to continue working together with communities and local government under a shared vision for social value creation. Our Los Pelambres expansion project is a great opportunity to increase local employment and provide development options for local suppliers, both of which are integral to our project execution strategy. I would like now to pass over to Alfredo, who will give you some more detail on our financial performance. Alfredo? Thank you, Ivan. Let's start with a brief overview before going into more detail. Revenue increased by almost 5%. Our record sales volumes and a strong contribution from gold and moly being partially offset by the lower realized copper price. Net cash costs were $1.22 per pound and outperformed our guidance, mainly due to the expected higher grades at Centinela, sulfide and the success of our cost and competitiveness program. Underlying earnings per share were down slightly at €0.559 on higher EBITDA, offset by higher depreciation amortization and tax. We maintain our strong financial position, and our net debt to EBITDA ratio is 0.23x. And if you exclude subordinate debt, we are in a positive net cash position. Our total dividend for the year is per share, which is equivalent to a payout of 67% of our net earnings from continuing operations. Here, you can see that the increase in production was mainly due to grade and improved recoveries. Cash costs before by product credits decreased by per pound compared to 2018. Non controllable costs, such as exchange rate and input costs, offset themselves. But higher grades and recoveries reduced our unit cost by per pound, and our cost and competitiveness program offset other increases, bringing pre byproduct costs to $1.65 per pound. With our byproduct credit for the year unchanged at $0.43 per pound, our net cash costs for the year were $1.22 per pound, dollars 0.07 per pound or 5.4 percent lower than in 2018. Now returning to our financials. EBITDA was €2,400,000,000 some €210,000,000 higher than 2018. This was driven primarily by our increased sales volume during the year, partially offset by the slightly lower realized copper price of 2.75 dollars per pound. Mining costs increased by €25,000,000 Exploration and evaluation expenditure, which includes expenditure on pre feasibility studies, increased by 14% in 2019 to €111,000,000 compared with 2018. As expenditure at Twin Metals increased and exploration activities in Chile progressed. Corporate costs increased by €12,000,000 Our associate and joint venture have increased their contribution to EBITDA by €27,000,000 mainly as a result of a higher contribution from Sal Diva. Net earnings for the year were €501,000,000 due to higher EBITDA from subsidiaries, offset largely by higher depreciation and amortization, mainly due to IFRS 16 leases and the amortization of capitalized stripping. Net finance costs decreased compared to 2018, mainly as the Chilean peso weakened during 2019 was. On the other hand, tax expenses increased by some €80,000,000 on higher profit and withholding tax charge, increasing our effective tax rate to 37.5 percent as indicated in 2019. Non controlling interest increased by €21,000,000 Total capital expenditure for the year on a cash basis was €1079,000,000 lower than our 1,200,000,000 guidance for the year, with saving mainly due to weaker Chilean peso and some project savings. We previously expected to spend up to €1,500,000,000 on CapEx in 2020, with the increase on last year mainly due to expenditure on the Pelambres expansion project more than doubling the almost €700,000,000 However, in view of the current global situation, the expenditure program is being reviewed to identify possible savings or deferrals. And as a result of this review, we expect capital expenditure will be in the range of €1,300,000,000 1,500,000,000 Mine development is expected to be slightly up compared to 2018. And sustaining CapEx will decrease with our 5 year moving average sustaining CapEx per ton of copper staying in the target range we set in 2014. Here, we look at the movement in our net debt, which has fallen by €33,000,000 although during the year, we secured debt finance for 100 percent of the Pelambres expansion, throwing down €469,000,000 and refinanced the Antucoia project financing. In addition to our strong EBITDA from subsidiaries, we had a positive impact on our working capital due to the VAT repayment at the beginning of 2019. This net debt figure includes some €600,000,000 of shareholder loans, which are shown here as debt. If they were stripped out, we would be in a net cash position. Overall, our net debt to EBITDA ratio has fallen to 0.23x, which reflects our continued solid financial position. Over the years, we have been running our cost and competitiveness program. We have reduced our gross cash cost despite average grade declines and higher input prices during the same period. For 2019, we set a target of €100,000,000 and we exceeded the target achieving €132,000,000 which is equal to €0.07 per pound in saving and productivity improvement. Antofagasta is positioned exactly in the middle of the cash cost curve, and we are committed to continue working to improve our cost position. This program has a target for this year of another €100,000,000 and we remain very focused on cost improvement. Thank you for your attention. I will now pass you back to Ivan. Copper prices last year were impacted by the U. S. And China trade negotiations, which eased with the signing of Phase 1 of the trade agreement. However, this uplift was short lived following the impact of the COVID-nineteen virus. This volatility in prices continues today and prices have already hit levels not seen for several years. However, what we are seeing in China is that our corporate shipments have remained unaffected and we have recently resumed spot sales as activity in China increases. We also know that primary mine production in China was severely affected during the pandemic and we expect it to be lower compared to last year. Given these early signals, we expect that when the global impact of the virus diminishes, combined with a stimulus by the Chinese and other governments, which is developing strongly at the moment, the market will experience a quick recovery, as the fundamentals for demand growth from urbanization, renewables and electromobility remain unchanged. And even without any disruption this year, we expect that to be limited supply growth. As always, we will continue to focus on cost control to protect our margins. Now I'll take you through our growth opportunities. Today, we're executing 3 projects. Last year, we started the expansion of Los Pelambres, and today, it is 31% complete. This is a high return project, which will add an average of 60,000 tonnes of copper when completed. Construction of this 1,300,000,000 project will increase throughput at the plant and includes a 400 liter per second desalination plant. A subsequent Phase 2 expansion may follow, the timing of which will depend on the receipt of the necessary environmental approvals. This phase will extend the mine life of Los Pelambres by 15 years and increase production. Last year, we approved the opening of the Esperanza Sur pit, which will improve Centinela's flexibility to supply its concentrator and over the initial years will increase production by some 10000 to 50,000 tons of copper per year. This greater flexibility will also allow Centinela to smooth and optimize its year on year production profile. 1st production is expected in 2022. At Centinela, we're also finishing the optimized feasibility study of the 2nd concentrator plant, which could see production increase by up to 180,000 tonnes of copper equivalent. The final decision will focus on returns and is not expected to be taken before 2021. At Zaldivar, we have also begun construction of a chlorate leach project that will increase recoveries by more than 10 percentage points. The project requires an upgrade of a solvent extraction plant and the construction of additional washing ponds at the net estimated capital cost of €190,000,000 Regarding our other businesses, last year, we completed 2 important milestones. We increased our transport division's haulage capacity to fulfill 2 new transport contracts, and we submitted the Twin Metals mine plan of operation to the authorities in the USA. In summary, we have attractive organic growth optionality. We will invest over time to bring these to market, but only in accordance with the discipline provided by our capital allocation framework. We have made important progress on innovation. We have large scale strategic initiatives such as developing a way to reach primary sulfides, which we have continued to successfully advance and are now conducting industrial scale tests at Centinela. We have been accelerating the adoption of real time information, management and analytics across our organization. We're working on the design and deployment of our remote operations center for Centinela, located in the city of Antofagasta, which will allow increased productivity and a reduction of on-site manpower numbers and costs, given the high logistic content of Centinela, which runs 5 pits and 2 plants. We're using data analytics for plant throughput and recovery optimization at Los Pelambres and Centinela. We're digitally transforming our support functions and maintenance processes. In Automation and Robotics, we have implemented autonomous drilling operations at Los Pelambres, and we are in the process of tendering for an autonomous fleet for the new Esperanza Sur pit, which will allow higher utilization and average speeds. We expect our investment in this area will start to bear fruit soon and we're targeting specific performance improvements to come from these changes. Looking ahead now to this year, we plan to maintain the strong momentum achieved last year and maintain our operating resilience and flexibility, especially in these challenging times. Safety is always our top priority. In the current situation, we are taking all possible measures to protect the health of our workers and minimize the impact of COVID-nineteen on our operations. The impact of climate change is a challenge for Los Pelambres, and this year and next, we will be very focused on monitoring and ensuring water availability at the mine. We will take actions to mitigate risks of disruption, given the recent social unrest experience in Chile. We will continue managing our cost carefully. We're also very focused on projects as this year we have several projects in execution. We remain focused on their implementation. Innovation will continue to play a key role in transforming a company going forward. Finally, we're committed to maintaining our financial discipline with a focus on value creation and shareholder returns. So let me finish by summarizing why Antofagasta remains a solid investment across cycles and through black swan events like the pandemic we're witnessing now. While we can't predict the shape of the recovery, we have a reliable and resilient strategy and we're heavily exposed to copper as the world transitions to a low carbon economy over the long term. I will start with sustainability as it underpins everything we do: the safe and health of our people, especially now our commitment to reducing the impact to the environment sharing development benefits with our communities and of course, a strong governance and cultural framework that surrounds our business. Our high quality assets hold 70% of our mineral resources, another source of over 80% of our production, and this lie at the heart of our business. These assets are expandable, and we have shown you our growth prospects for the future. From an operating view, we see operating efficiency and reliability as a competitive advantage, and we work day in and day out to achieve this and will continue to improve. The final point is the financial health of our business, which is illustrated by the strength of our balance sheet that is in a net cash position when shareholders subordinated debt is excluded. The strong cash flow is supported by our ongoing cost and competitiveness program, which means that we have levers to use to protect our margins. We are not deterred by challenges, and we'll continue to work hard to protect our people and assets and continue to create value for all our stakeholders. Thank you for your attention and continued support.