29Metals Limited (29M) Earnings Call Transcript

Thank you for standing by, and welcome to the 29Metals Limited September quarter report. [Operator Instructions] I would now like to hand the conference over to Mike Slifirski, Group Manager, Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, ladies and gentlemen. My name is Mike Slifirski. Welcome to 29Metals' September quarter 2022 Production Report Conference Call. The call is being recorded and will be available for replay via the 29Metals' website and also the open briefing website. 29Metals Managing Director and CEO, Peter Albert will commence the discussion before handing to Chief Operating Officer, Ed Cooney, who will lead you through the operating performance. Ed will pass to our CFO, Peter Herbert, to discuss financial performance and then pass on to Group Geology Manager, Mark van Heerden. Mark will then hand back to Peter, who will facilitate Q&A. So I'll now hand over to Peter to commence discussion. Thanks, Peter.

Thanks, Mike, and thanks for the introduction, and welcome, everybody, and thank you for joining us this morning. Mike has already done the introductions. I would like to start by reflecting on the 2 tragic fatalities at West Australian mines last week and also the passing of one of the Australian mining industry's most well-known and respected figures, Peter Bradford, a sad week for the mining industry and for all of us. In terms of 29Metals specific safety performance, a very pleasing quarter with our TRIFR, reducing meaningfully. And what is not shown in the quarterly data points is the focus for our site teams on leading indicators such as hazard identification and leadership interactions. They have been doing a great job. COVID impacts have been relatively minor whilst overall absent -- whilst overall absenteeism still an impact has reduced significantly during the quarter. Whilst labor pressures still persist across the industry, especially in some specific technical discipline areas, we have largely held our own. Our mining contractor, Byrnecut has successfully recruited and trained additional personnel. An area of ongoing focus for us is the recruitment of women in all areas of the business. Gender diversity is a key driver in our recruitment and retention activities. Talking about Byrnecut, we were very pleased to sign a new 5-year contract with Byrnecut for Golden Grove, commencing on 1st of October, just gone. Byrnecut has been a good partner to work with. And the new contract is effectively on the same terms as a prior arrangement with additional joint commitments in the sustainability and ESG space to be realized over the term of the contract. Overall production across the business has been pleasing, meeting or exceeding all of our planned metrics. Both copper and zinc production at 12,300 tonnes and 12,500 tonnes, respectively, where the best quarterly production numbers for this year. Copper production from Capricorn Copper at almost 7,700 tonnes was a very strong quarter with good milk tonnes, grade and recovery. Golden Grove copper production at 4,600 tonnes was a solid outcome and zinc at 12,500 tonnes indicates an increasing zinc production profile, which should grow in the fourth quarter as previously advised to the market. The group's copper equivalent production for the quarter at 19,800 tonnes is the best quarter so far this year and the second best quarter in the past 7 quarters. Ed will discuss production outcomes in more detail. Commodity prices have largely remained stable through the quarter with copper between approximately [ USD 3.40 to USD 3.60 a pound ]. Notwithstanding commentators predicting a softening in prices for 2023, 29Metals has a longer-term bullish outlook supported by the inevitable demand requirements for copper to support the decarbonization thematic. Nonetheless, our focus in any price environment is on delivering production and controlling costs. And in relation to costs, whilst absolute costs are higher quarter-on-quarter, this is largely related to higher activity with some higher input costs such as diesel. For some commodity inputs, we are seeing cost increase momentum decreasing and indeed reducing for some inputs. Group C1 and AISC unit cost decreased quarter-on-quarter despite higher absolute costs as a result of higher production outcomes. We continue to commit expenditure to sustainability projects for the long-term operational security and growth of the business. As noted earlier, labor pressures persist across the industry. Although with the review of remuneration, attraction and retention strategies in the first half of the year, our turnover rates have plateaued, and we have been successful in recruiting some of the more challenging technical roles. In relation to my prior comment regarding investing for the future, a number of key projects have been advanced in the September quarter, including the paste fill plant at Golden Grove is now delivering pace to an underground stope at Gossan Hill. Optimization of this facility continues, and we are pleased with the performance to date. The chilling plant and booster fans at Gossan Hill remain on track for delivery by the end of the year, which will further enhance operating conditions at the Xantho Extended ore body. The latest TSF extension at Golden Grove was almost complete by quarter end. And the Cervantes and the Gossan Valley studies were completed during the quarter, and we are now undergoing final review in preparation for a market update in the near future. Exploration results reported during the quarter across all 3 29Metals assets was very encouraging. Further drilling results at Cervantes continues to support the potential for this ore body, and we are now advancing an infill drilling program. At Capricorn, the at-depth drilling at Esperanza South demonstrated at least sustained grades and greater width, reconfirming the thesis of potential increased tonnes per vertical meter as we advance deeper at ESS, Esperanza South. At Redhill, the remaining results from the exploration program earlier in the year were released and demonstrated extensions to vein systems and some very encouraging copper and gold results from the rock and chip samples collected. In terms of financial outcomes, Peter Herbert will discuss in greater detail, but a couple of highlights: Strong revenue of close to $200 million despite the reduction in commodity prices quarter-on-quarter. First debt repayment made and copper hedges now fully closed off from early October. And of course, the payment of our first dividend during the quarter, which should have hit bank accounts sometime in the last few days. I'll now hand over to Ed Cooney, the COO, Chief Operating Officer, on production activities at the 2 operating mines. Ed will then hand over to Peter Herbert to talk about financial and commercial outcomes. And finally, Mark van Heerden will discuss some of the exploration outcomes. So over to you, please, Ed.

Thanks, Peter, and good morning, everyone. Well, the September quarter saw an improvement on both March and June quarters performance with overall group metal production higher. Copper, Zinc and Lead were all higher, while precious metals were lower. At Golden Grove, mining volumes and development advance were both higher relative to the June quarter and principally due to lower absenteeism levels. The extraction of zinc sources from underground increased consistent with the mining schedule. And at quarter's end, there were circa 100,000 tonnes of ROM stocks ahead of the mill, comprising predominantly zinc ore. The September -- sorry, the December quarter mining plan will continue to focus on extraction of zinc ore sources with zinc production expected to be materially higher than the September quarter. Xantho Extended production from the [Audio Gap] was successfully completed with the stope currently being backfilled. Good progress was made with installation of the additional surface cooling plant, which remains on track for commissioning in the December quarter. This will provide further chilled air capacity to improve operating conditions at Xantho Extended during the upcoming summer months. And procurement of underground booster fans, unfortunately, has been delayed with expected delivery moving into the March quarter. The paste fill plant installation and energization were completed with fill being delivered into the first stope, and commissioning will continue in the December quarter to ensure performance criteria associated with both the plant and the fill are being achieved. In terms of the mill, throughput was lower than the [Audio Gap] and completion of a planned 10-day maintenance shutdown and mill rate limitation applied during construction of the TSF lift, which was impacted by rainfall delays. The TSF lift will be completed in the December quarter, and the milling rate limitation was lifted by quarter end. As a result, mined tonnes exceeded milled tonnes increasing surface ROM stockpiles. The zinc regrind mill, which sustained a failure during the March quarter was reinstated, and this combined with high feed grades and lower power levels in the zinc feed contributed to higher recoveries. Unit costs set goal and growth for the quarter were influenced by higher mining activity levels, the maintenance spend associated with the planned shutdown, lower by-product credits, higher sustaining capital costs coinciding with the TSF lift and the cooling plant installation and lower copper sales. Moving on to Capricorn Copper, which had a particularly good quarter with more than 7,600 tonnes of copper produced on the back of significantly higher tonnes milled, improved feed grades and better recoveries. Mining volumes were lower due to reduced drawpoint availability at the sublevel cave Esperanza South orebody, which also incurred some interruption as a result of ongoing commissioning of the recently installed surface fans. The fans are expected to be successfully commissioned during the December quarter. Grades mined were higher from all 3 ore bodies. Higher tonnes milled was the result of a focus to lift run time by the processing and maintenance teams earlier in the year and enabled by the good [ ROM stockpiles ] at the beginning of the quarter. Unit costs at Capricorn Copper were influenced by overall flat site costs and the strong copper savings. In addition to ongoing commissioning of the surface ventilation fans, other project activities included purchase of new high-efficiency evaporators to further reduce the site water inventory due to be commissioned later during the December quarter. In parallel, preparations commenced ahead of the upcoming wet season. Application of the next tailings storage facility lift was submitted during the quarter with construction expected to commence during the December quarter, and we also commenced preliminary studies related to the presence of cobalt within the resource, principally within the Esperanza South orebody, with the objective of better understanding the cobalt mineralization and possible future by-product recovery pathways. I'll now hand over to Peter Herbert to discuss the financial outcomes of the quarter.

Thank you, Ed, and good morning, everyone. Starting with revenue outcomes. 29Metals revenue of $193 million in the September quarter increased 17% on the June quarter result. This higher revenue result quarter-on-quarter reflected materially improved operating results at Capricorn Copper, resulting in higher copper sales and positive QP adjustments in the quarter, which more than offset lower sales volumes at Golden Grove. Consistent with Capricorn's improved contribution, copper revenue for the quarter, excluding QPs was approximately 68%, up from 62% in the June quarter. In terms of costs, group site costs in the September quarter were approximately $8 million or 6% higher than the prior quarter, driven primarily by higher site costs at Golden Grove, reflecting higher activity levels, which Ed discussed, including mined tonnes, operating development and rehabilitation, cost escalation, including diesel prices, and the impact of a planned shutdown during the quarter. Overall, site cost at Capricorn Copper were flat, with higher mining costs offset by lower G&A costs. Group concentrate transport costs were approximately $1 million higher, consistent with higher sales volumes at Capricorn. And TCRC costs were approximately $4 million lower, with higher TCRC costs at Capricorn and increased sales volumes, more than offset by lower sales volumes of Golden Grove and lower prevailing zinc prices during the quarter, which reduced the cost of [ TCRC ] linked to the zinc price. Higher group C1 absolute costs quarter-on-quarter largely reflects higher gold and group site costs as discussed and lower by-product credits. Unit C1 costs reduced, however, in USD terms by 4% in the September quarter due to increased stockpile credits at Golden Grove attributable to a buildup in ROM stockpiles. Flat site cost at Capricorn Copper combined with materially higher production and a reduction in the Australian dollar exchange rate. AISC absolute costs included higher sustaining capital expenditure in the September quarter, attributable to TSF and ventilation projects at Golden Grove. Following the outcome on C1 unit costs, AISC unit cost of [ USD 3.37 a pound ] reduced approximately 6% on the June quarter. Unaudited cash at 30 September was $189 million, reducing on the balance of 30 June of $228 million, reflecting the impact of realized QPs on reported sales in the prior period, which reduced final cash receipts in the September quarter by approximately $21 million. The cash settlement [Technical Difficulty] during the quarter were approximately $8 million and debt service of $14 million, including the first scheduled amortization of 29Metals' term loan facility. Following commencement of that scheduled amortization, drawn debt reduced to USD 144 million. 29Metals will continue to amortize its term loan facility on a quarterly basis. All pre-IPO copper hedges have now been settled, with the final cash payment for these -- out of the main hedges occurring in early October. During the September quarter, 29Metals declared its first dividend, an interim dividend of $0.02 per share, fully franked. Payment of the dividend incurred after the end of the quarter and is therefore not reflected in the unaudited cash balance at 30 September. Finally, stamp duty payable in connection with the acquisition of Golden Grove remains outstanding. 29Metals maintained a $26 million provision in relation to stamp duty. Thank you very much. I'll now hand over to Mark to discuss exploration.

Thanks, Peter. During the quarter, drill testing of prioritized areas continued at both Capricorn Copper and Golden Grove, along with initial drilling at 2 regional prospects on the Capricorn Copper exploration leases. In addition, 29Metals announced drilling results from Esperanza South and Cervantes as well as the exploration results from the Redhill field campaign. At Capricorn Copper, we released the results from the surface drilling on August 1. This drilling is targeting the deeper parts of the Esperanza South orebody and intersected wide zones of copper, silver and cobalt mineralization, with results exceeding what is modelled within the existing Mineral Resources estimates. Some noteworthy highlights include downhole intercepts of 72.9 meters at 2.9% copper, 37 grams silver, 672 ppm cobalt; 86 meters, at 2.8% copper, 32 grams silver, 822 ppm cobalt; and 104 meters, at 2% copper, 22 grams silver, 714 ppm cobalt. Esperanza South remains open down-plunge with plenty more work for us to do there. The success of this drilling has warranted the commitment of an additional $2 million in 2022. This has allowed us to continue drilling this area throughout the September quarter and into the December quarter. All results reported in the August 1 release will be included within the Annual Mineral Resources and Ore Reserves Update. Underground drilling targeting extension and resource conversion also occurred across all active mining areas. On the regional front, drilling was minimal in the quarter with 350 meters drilled across the Eagles Nest and Foschi's East prospects. Regional activities planned to occur in the December quarter include the campaign of induced polarization geophysical surveys over several historic copper occurrences as well as initial testing of the Merlot prospect via 2 short RC holes. At Golden Grove, priority areas for conversion and extension were Cervantes and Xantho Extended. Results from the Cervantes drilling were published as part of the August 1 exploration release. The Cervantes drilling has intersected local zinc, silver, gold, lead and copper mineralization outside of the existing mineral resources estimates above the known mineralization. Results have also been received for the first extensional hall to the north, which is intersected zinc, silver and gold mineralization. Drilling at Cervantes and Xantho Extended will continue in the December quarter. Drilling at Oizon and Xantho Extended North, which was planned for the September quarter, has been deferred to the December quarter and early 2023, respectively. This is to allow for the development of suitable underground drill locations that minimize interactions with planned mining activities. At Redhill, assay results were received to the portable small drill and rock chip samples collected as part of the 2022 field season. These results were announced on August 1 and September 26. All model veins commenced at surface with the current mineral resources estimates predominantly modeled to a depth of 100 meters below surface and a maximum depth of 200 meters. The new results suggest that all mineralized veins that make up the current estimation are open along strike and at depth. Additionally, several veins yet to be drilled were identified and sample results returning as high as 11.9% copper and 164 grams per tonne silver. The results of this year's campaign are being used to inform planning for future exploration activity at Redhill. Now back to Peter Albert for any further remarks and Q&A.

Thanks, Mark, for that update there. And Betsy, we can now go to Q&A, please.

[Operator Instructions] Your first question today comes from Adam Baker with Macquarie.

Just maybe starting with Capricorn. Pretty strong mill throughput this quarter at 493,000 tonnes. Just wondering if this is a level that can be maintained moving forward. Or what do you expect it to come back down to if you can't maintain that level?

Thanks, Adam. Let Ed respond to that.

Yes. Thanks. So during the quarter, we didn't have any planned mill shutdown, so we sort of benefited from additional runtime relative to the prior quarter from that perspective. A lot of focus on throughput rates, sustaining high rates. If you recollect, in 2021 for the second half of the year, we did sustain circa 2 million tonne throughput rate for the second half of the year. So always trying to optimize and maximize mill runtime, and we do have some fairly healthy surface stocks, albeit lower grade, to support ongoing high runtime. So I probably won't put a number on it, but we're obviously trying to maximize it as best we can as long as possible.

What was -- how big is your stock? Sorry. I should probably look at the reserve resources, but it's -- yes, it's quite significant, is it?

So the order of magnitude, it's not dissimilar to the Golden Grove stockpile that we've disclosed, albeit it is lower-grade material at Capricorn Copper.

Yes. Maybe at Golden Grove then, just doing some back-of-the-envelope calculations [ for you ] to meet zinc production guidance in fourth quarter coming up to produce about 98,500 tonnes of zinc. Do you think that's achievable?

Yes. So we're currently mining a multitude of zinc sources underground at the moment. The remaining quarter has a high number of zinc sources through to year-end. We've got 100,000 tonnes predominantly zinc ore in front of the mill at the moment running on zinc campaigns. So the mine plan and the processing schedule all support that.

The next question comes from Alexander Papaioanou with Citi.

Hi Peter and team. Now the copper hedge has been closed out, what's your strategy on hedging going forward? Is it to be unhedged? Would you look at hedging some of the by-products like zinc?

I think, generally speaking, the view is that we'd like to provide as much exposure to commodity prices as possible. It's a position that we did review from time to time, so we'll always have it as an open question. But as we sit here today the position is not too went into any further hedging.

Yes. And with the recently renewed underground mining contracts with Byrnecut and Golden Grove, how does this contract compared to the previous contracts in terms of labor rates?

Yes, I mean, it's on broadly the same commercial terms and conditions. So we have incurred labor cost escalation as we've moved through the period of the prior contract and not expecting to see any material jump as of 1st of October. So very much business as usual for us.

The next question comes from Daniel Morgan with Barrenjoey.

Peter and team, my question relates to Golden Grove. Development rates, as you've highlighted, have been a bit below planned year-to-date. Just wondering if you could update us on when you expect to get into Xantho in a material sense, providing material feed for the mill? And what does -- when do you expect a big lift in zinc grades that I imagine that comes with.

Yes, I'll take that one. So we are -- in Xantho Extended, we've mined our first stope. We've got the next stope scheduled to be mined this quarter. In addition to that, obviously, progressing decline advance and mining orebody development as well. So progressively, the volume of material from Xantho Extended will increase year-on-year as we continue to get into the meat of the orebody.

And when do you expect the meat of the orebody to be achieved? Like is this going to be progressively through 2023 year and then start to become more and more material in 2024? Or is there -- just trying to think through that.