IGO Limited (IGO) Earnings Call Transcript

Thank you for standing by, and welcome to the IGO Limited FY '21 Half Year and December Quarter Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.

Thank you, Ben. Good morning, everyone, and thank you for joining us today as we provide an overview of our operating and financial results for both the December 2020 quarter and for the audit-reviewed financials for the first half of the 2021 financial year, and we released both of those to the market this morning. Joining me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer. Both will be available to answer questions during the Q&A session at the end of the call. Slides 2 and 3 highlight our cautionary statement and disclaimer and competent person's statements. Of note, all currency amounts in the presentation today are in Australian dollars, unless otherwise noted. Moving to Slide 4, where I would like to start with a few words on the safety of our people, which is our absolute priority. It is pleasing to report steady improvements in our key safety indicators over the last year, in particular, the reduction in our serious potential incident frequency rate. We attribute this to our ongoing safety improvement program focused on continuing improvement of our systems, process and most importantly, culture and behaviors. Moving to Slide 5, where we summarize the great December quarter and first half to the 2021 financial year that the team at IGO have delivered. Key highlights include: We continued to deliver very strong operational performance from Nova and Tropicana, with both assets generating strong free cash flow for the business. We maintained our commitment to unlocking organic growth through exploration with a focus on the Fraser Range and Paterson projects. We were proud to maintain our position in the Dow Jones Sustainability Index Australia. We continued to renew and diversify the Board with the appointment of 2 new highly respected nonexecutive directors. And importantly, we announced the milestone investment in Tianqi Lithium's Australian assets through which IGO will broaden its clean energy metals strategy to include lithium with exposure to downstream production of lithium hydroxide. This transaction, which I will talk to in greater detail later in the presentation, transforms IGO into a unique clean energy metals company. Moving to Slide 6, where we present another strong set of financial results, which are largely attributable to the consistent performance of Nova and Tropicana as well as higher metal prices. For the quarter, we have delivered revenue of $236 million, underlying EBITDA of $121 million and underlying free cash flow of $113 million. Revenue for the first half was down slightly at $462 million. Group EBITDA margins for the quarter were strong at 52%, while the group free cash flow margin of 43% clearly demonstrates the cash-generating capacity of both Nova and Tropicana. Net profit after tax for the December quarter was lower quarter-on-quarter at $8.8 million, primarily due to short-term noise related to foreign exchange losses on the U.S. dollar balances held to protect the Australian dollar value of the Tianqi transaction. This similarly impacted the half year profit result of $54 million. In December, we launched a capital raising to part fund our transaction with Tianqi. This was exceptionally well supported, with $696 million net of costs raised in December through the institutional placement and [indiscernible] and a further $53 million raised in January through the retail entitlement offer. In addition, we have secured a new $1.1 billion debt facility. As a consequence of the capital raise, we had just shy of $1.2 billion on our balance sheet at 31st of December. In the absence of the Tianqi transaction and the related capital raise, cash would have otherwise been $611 million. Moving to Slide 7, where we break down the cash movements over the December quarter. As illustrated on this slide, free cash flow from Nova and Tropicana remained very strong. With other costs more or less in line with previous quarters, the group underlying free cash flow increased by 33% quarter-on-quarter to $113 million. To the right on this chart, you will see the net cash inflows following a settlement of the institutional placement and entitlements offer in December and the transaction-related impacts. This includes the $93 million relating to the refundable deposit of USD 70 million required as part of the Tianqi transaction and the $28 million mostly due to revaluation into Australia dollars of U.S. dollar cash balances held at year-end. Moving to Slide 8, where we outline the quarter-on-quarter difference in net profit after tax, which was primarily impacted by foreign exchange losses relating to the Tianqi transaction. I will provide some additional color on this. In order to partly protect the Australian dollar equivalent of the U.S. dollar consideration for the Tianqi transaction, we sought various protection measures to lock in the prevailing Aussie-U.S. dollar exchange rate. This included converting equity proceeds from the placement and entitlement offer to U.S. dollars in mid-December and putting in place hedge instruments, including 0 cost collars. Between the date of announcement of the transaction and 31st of December, the U.S. dollar weakened from approximately $0.74 to $0.77. As a result of taking this prudent action to protect the Aussie dollar exchange rate, we have incurred unrealized ForEx losses to the 31st of December of $39 million on these positions. Also impacting on a lower quarter-on-quarter net profit after tax result was a relatively unchanged mark-to-market value of investments held. This compares to a $14 million positive revaluation that was booked in the September quarter. Turning to Slide 9, where we show the half yearly results for the Nova and Tropicana operations. As the detail for this can be found in the half yearly report, I do not intend dwelling on this slide other than to comment that both operations have performed consistently and strongly over the first half. At Nova, the primary driver of lower EBITDA and free cash flow was lower nickel price. While at Tropicana, lower gold sold was offset by higher prices. Moving to Slide 10 and on to a brief review of the Nova operation. Moving to Slide 11, where I'm pleased to report on the consistent, strong performance from Nova. For the quarter, we produced 7,024 tonnes of nickel and 3,171 tonnes of copper at a cash cost of $2.10 per payable pound of nickel after by-product credits, which puts Nova well on track to deliver into full year guidance. Quarter-on-quarter variances in production were mostly driven by lower milled grades offset by higher tonnes milled, while cash costs benefited from higher copper prices and lower production costs. On a half yearly basis, production was lower than the prior comparable period, which reflects planned lower mined and milled grades in line with the life-of-mine plan. Cash cost performance for the first half benefited from higher copper prices as compared to the first half of the 2020 financial year and which we used to determine our cost guidance for the current financial year. Cash costs also benefited from improved offtake terms that took effect over the course of the 2020 calendar year. Moving to Slide 12, where, as we do each quarter, we set out the last 4 quarters of production and cost data on the left-hand chart. This illustrates the consistent performance of the Nova operation. The table on the right summarizes the Nova financial results for the current and past quarter and the half year. Nickel prices over the quarter were -- which were 8% higher, helped offset marginally lower metal production and boosted Nova's EBITDA and free cash flow margin, both of which were at 65% for the quarter. Free cash flow from Nova for the quarter was $103 million for a half yearly result of $194 million. Looking ahead, nickel production in the second half is expected to be in line with guidance, while cash costs are expected to continue to benefit from favorable by-product credit pricing and to be better than guidance for the full year. Moving to Slide 13 and on to Tropicana. Before I do talk to the Tropicana result in detail, I wanted to comment on the ongoing strategic review process. I note that we continue to engage with various interested third parties regarding a potential sale or demerger. As this process is underway, I am not able to comment much further. However, we do expect to be in a position to update the market on the outcome of the review towards the end of the current quarter. Turning to Slide 14. Quarterly performance from Tropicana benefited from the first full quarter of production from the Boston Shaker Underground, with higher milled grade driving gold production of just over 112,000 ounces, contributing to a half yearly gold production result which is well ahead of pro rata guidance. Cash costs and all-in sustaining costs were also better than guidance but were marginally higher quarter-on-quarter, which is primarily attributable to higher waste stripping costs related to the investment in the cutback at the Havana pit. Turning to Slide 15. Despite higher production quarter-on-quarter, the impact of marginally lower gold prices and rising costs resulted in underlying EBITDA of $41 million, which was in line with the prior quarter. EBITDA for the half year was $83.5 million. Free cash flow was higher quarter-on-quarter at $32 million and for the half year was $54 million. EBITDA margins remained strong at 54% for the quarter and 56% for the first half. As discussed, production for the first half was ahead of pro rata guidance. However, we do expect production in the second half to be lower, resulting in higher all-in sustaining costs in the second half. Directionally, gold production is expected to be approximately 80,000 ounces and 90,000 ounces for the March and June quarters, respectively, before production picks up again in the 2022 financial year. We also expect to conduct more waste stripping during the second half, which will also contribute to higher all-in sustaining costs in the second half. Moving to Slide 16, where we'll briefly talk to our exploration strategy and the highlights from our recent work programs. Turning to Slide 17. Our exploration strategy is designed to unlock transformational value and sustainable growth for the business. The strategy revolves around 3 key imperatives: First, we focus on exploration for metals critical for enabling clean energy with a primary focus on the discovery of high-value nickel and copper deposits. Second, we utilize the best geoscience, geophysics and advanced technology to increase our chance of success. And third, we position ourselves on belt scale land positions over highly prospective terrains that have the potential to deliver multiple discoveries. Our belt scale land positions in Australia are shown on the right-hand side of this slide. The tenement positions are all located on the right sort of geology to host high-value nickel sulfide and sediment-hosted copper deposits. We believe that we have secured the best exploration portfolio in Australia focused on these types of deposits, and our team remains steadfastly confident in unlocking significant value through exploration. Moving to Slide 18. At Nova, positive results were received from drilling at the Orion and Double Dipper prospects, both located on the Nova mining lease, with a highly prospective Orion intrusion to be tested in further drilling over the coming months. On the broader Fraser Range, we have defined a zoned chonolith mafic/ultramafic intrusion with disseminated magmatic sulfides at the Copernicus prospect, which will need follow-up work. While at Skipjack, we are planning further diamond drilling to test an interesting off-hole electromagnetic conductor. Work programs across all our joint venture positions at the Paterson project have progressed. Of note, I would like to highlight the work done at the Metals X JV in particular, which represents the first comprehensive technical review of sediment-hosted copper mineralization in the Paterson in over 4 decades. This serves to highlight the huge potential for discovery waiting to be unlocked. Finally, at the Lake Mackay project, drilling in the quarter, in collaboration with our joint venture partner, identified the Goldbug gold prospect. Moving to Slide 19, where I will summarize our transformative transaction with Tianqi Lithium and provide an update on current status. Moving to Slide 20. The transaction we announced with Tianqi on the 9th of December creates a globally relevant, vertically integrated lithium business in which IGO will be invested alongside Tianqi. Through a holding company, which we currently refer to as Lithium HoldCo, IGO is acquiring an indirect interest of just under 25% in the world-class Greenbushes lithium operation and a 49% interest in the Kwinana lithium hydroxide processing plant. Both of these are located in Western Australia, and the purchase price agreed was USD 1.4 billion. To fund the transaction, we recently completed a $766 million equity raise and have secured $1.1 billion in new debt facilities. The balance of the purchase consideration will be funded from IGO's existing cash reserves. Moving to Slide 21. Both Greenbushes and the Kwinana lithium hydroxide plant are truly world-class lithium assets. Greenbushes is the world's lowest-cost, highest-grade and largest hard rock lithium mine by reserves and production. Production from Greenbushes defines the bottom end of the cost curve, meaning it is effectively cycle-proof. With a mine life of more than 20 years, Greenbushes delivers to IGO an asset of both scale and quality to underpin the business for many years to come. Lithium HoldCo will own 51% of Greenbushes, with the global leader, Albemarle, owning the remaining 49%. Kwinana lithium hydroxide plant, which will be owned 100% by Lithium HoldCo, is the first fully automated lithium hydroxide facility in the world and the first lithium hydroxide refinery in Australia. This refinery is able to upgrade spodumene concentrate sourced from Greenbushes into battery-grade lithium hydroxide. The first production train, Train 1, is complete, and commissioning is being commenced this quarter. Train 2 is partway through construction and is expected to start commissioning in 2024. Offtake partnerships with some of the world's leading battery manufacturers in South Korea and Europe who desire high-quality battery, quality product manufactured with leading ESG credentials. Moving to Slide 22, where we set out some of the highlights of the transaction. This transaction is transformational, compelling and clearly aligned with our clean energy metals strategy, which we have been focused on for several years. Underpinning the transaction are 2 high-quality, long-life assets with palpable brownfields growth potential that underpins a strong cash flow generation growth over the coming years. The transaction transitions IGO into a unique clean energy metals investment and positions IGO for further growth across the clean energy metals universe. Through the collaboration with Tianqi, IGO benefits from a downstream lithium chemicals capability and a market understanding of the lithium chemicals business that Tianqi has developed over many years. We believe that we have transacted at a cyclical bottom for the lithium market on the eve of a potential super cycle for clean energy-related metals as governments, corporates and individuals reposition their priorities to mitigate climate change. Lastly, and most importantly, we have delivered value for our shareholders, with the transaction being NAV-accretive and accretive on an earnings per share and cash flow per share basis from FY '23 and FY '24, respectively. Moving to Slide 23. Going into the transaction and given the minority shareholding position of IGO, an important consideration for us was governance and minority shareholder protections. To address this, IGO will have Board and senior management representation at the Lithium HoldCo level as well as Board representation at the Greenbushes level. This will provide IGO with a strong level of oversight, guidance and assurance while ensuring we can continue to deliver highly transparent financial and nonfinancial disclosures to the market. In collaboration with Tianqi and Albemarle, IGO will pursue opportunities to add values for all parties through its upstream expertise and our local presence. Moving to Slide 24, where we illustrate the timetable to transaction completion. As of today, many of the key events have been completed already, including our successful equity raising and the approval of the transaction by Tianqi's shareholders. Remaining work streams primarily involve the restructure of the Tianqi-controlled holding companies, which currently hold the ownership of Greenbushes and Kwinana assets, which will include various regulatory approvals, including FIRB, ATO and the Office of State Revenue clearances. The new holding company will be a company registered in the U.K., however, will be an Australian tax resident, meaning IGO will be able to generate franking credits for distribution to shareholders in the future. We consider transaction risk to be very low, and we look forward to the completion of the transaction during the June quarter. Moving to Slide 25 and to a summary of today's presentation. Moving to Slide 26. We are excited by the future at IGO. The respective teams at our Nova and Tropicana operations continue to deliver improving safety performance and strong operating performance, which has enabled us to execute on our growth plans, most recently in the shape of the Tianqi transaction. The overwhelming support for the transaction is a strong endorsement for our strategy focused on clean energy metals, our patience and discipline in executing M&A and our laser focus on value for all shareholders. The Tropicana strategic review is ongoing, and we are well progressed with the assessment of our options to deliver value to shareholders, including through a potential sale or demerger. We will keep the market up-to-date over the coming months on this work program. Meanwhile, we continue to progress our organic growth strategy focused on exploration to unlock the mines of the future. Thank you for joining us on the call this morning. We will now open the call for questions. Thank you. Ben?

[Operator Instructions] Your first question on the phones comes from Levi Spry from JPMorgan.

Just on the Tropicana strategic review process. Can you just give us a little bit more detail there? What stage is it actually up to? And this idea of a demerger being considered, that is probably not the movie I had in my head. I thought maybe you'd get some cash to pay down the debt. So can you just sort of talk to me about where you're up to and maybe flush out those options going forward?

Yes. Sure. Through the strategic review, we are looking at all options. And one is to continue to hold the asset and harvest the cash flow going forward, and the other bookend would be the potential sale of the asset, and somewhere in the middle would be the demerger. Given our clean energy metals strategy and focus on those metals going forward, a preferred outcome would be to transact on Tropicana at the right price and then to truly focus on being a clean energy metals business. But we're not locked into doing that. We have a lot of financial flexibility through the debt facilities we've put in place and our cash balance. And therefore, we're not locked into transacting on Tropicana. And if, during a process, we can't get the right price, then we will continue to look at the other options. But certainly, that -- the sale is our preferred option. As we indicated before Christmas, we had run a first-stage process. We are in a second-stage process now. We would expect that to come to a conclusion towards the end of the March quarter.

Okay. And just on Tianqi, I think sort of stepping through the outstanding approvals on Slide 24 there. Is there a chance of reporting any production this year?

It's going to depend on when exactly we close in the June quarter. And at this stage, we don't really have visibility on how long some of those regulatory approvals will take. We don't think any of them are complicated, but they do take some time. And we do have one approval which comes out of the U.K. tax office. And given the impact of COVID in that part of the world, there's a degree of uncertainty on how long the timing of that approval will take.

Your next question comes from Daniel Morgan from UBS.

Just on the Tianqi. I mean there's some question about when exactly it will -- the transaction will be finalized. Do you earn cash? Or is there a makeup payment? Because you've got -- $1.4 billion is the acquisition cost. But does that shift? Or how does that shift if we transact or close in April versus, say, June or if it slips into July? Can you just talk about that -- the transaction closing amounts?

Dan, it's Scott here. Look, I'll take that. And as Peter has mentioned, the purchase price is USD 1.4 billion, and it is locked. And in this sort of an acquisition land, there are 2 mechanisms by which these things can often complete, and there's what's called a locked box mechanism and a traditional completion method. so This completes on a locked box mechanism, and that is you effectively take the books as at the end of September, which have been audited, and that determines then what it is you get thereafter. We take effectively the risks and the rewards of the project going forward. So we have a pretty good understanding of what the spend is going to be like, what the going forward from September, what the dividend payments are going to be. And then ultimately, that all gets balanced up at the completion date.

So if and when this completes, it sounds like you get the financial benefits effectively post-September of last year. Have I got that correct? Or am I wrong on that?

That's correct.

Okay. Another question. Just on dividend, I was trying to see if one had been declared or not. It appears not, which would make sense in light of the big transaction and equity raising. Can you just confirm that's the case?

That is the case, Dan, and we've set that out in our half yearly ASX release and also our 4D. And given we've just raised a bunch of equity, we -- the Board took the view that not paying a dividend at this time would be counterproductive to having just raised the money.

Sure. That makes sense. On -- just moving to Tropicana and operations. What are we going to be looking like when we exit this fiscal year? So into FY '22, we're going to be pretty much post that, pit will push back and the underground fully ramped up so we're going to have a much stronger September quarter of this year.

Yes. Dan, it's Matt here. That's correct. So I mean we're going into 2 quarters, largely driven by grade. Grade decreases over the last 2 quarters, and we'll see grade increase going into FY -- for next financial year quarter-on-quarter. That grade increase is a result of being in ore at Havana, and Havana become -- Havana open pit becoming an important ore source and, ultimately, Boston Shaker Underground becoming strong. So essentially, we'll go into stronger quarters in September and December than what we're seeing over the next 2 quarters.

And then just the last question, I guess, on Tropicana potential sales following on from the Levi question. If you were to go down that demerger route, you could contemplate putting some of -- having that vehicle, have some debt, which would alleviate some of the debt in the remaining IGO vehicle. Is that your thinking? Can you just talk to that?

Yes. If we went down that road, Dan, there would be a number of different ways to do it. And as I indicated to Levi before, it's not our preferred outcome, but it remains an opportunity if we don't see the right price in the sales process.

Your next question comes from Kate McCutcheon from Citi.

Congrats on the quarter. An accounting question. How will you account for the debt in the Greenbushes JV, please, given it's a minority stake? I assume not on your balance sheet. And then can you just flesh out the outstanding items to close the Tianqi deal next quarter? And are there any government approvals required from the [ CPP ]?

Okay. Okay. Look, I'll start and take the debt line at the Greenbushes level. Look, you're absolutely right. Greenbushes does carry debt, and it's currently at about the USD 490 million mark. That stays at the Greenbushes level. And because we're talking about effectively what's called an equity investment, we won't actually see that line item on our balance sheet. What we see is the -- it's effectively the -- a one liner being the investment in the Tianqi acquisition. So it's all buried within the underlying operations effectively. And so we will be taking, from the point of acquisition onwards, the net profits of the combined business as a movement to that balance sheet item.

Yes.

And then on the [ CPs ], Kate, the [ CPs ] fell into 2 main buckets. There were some deliverables in China by Tianqi, which was the refinancing of their debt facilities; and the approval of their shareholders. Both of those have been done. The refinancing was finalized in late December, and the shareholder approval was delivered on the 5th of January, with 99.97% of the Tianqi shareholders voting, voting in favor. And then the second bucket of approvals were regulatory approvals in Australia and the U.K. primarily around the restructure of the assets that we're acquiring to put both assets in the same incorporated structure. So that's largely tax approvals, but there's also a FIRB approval here in Australia. We -- as I indicated earlier, we regard all of those as fairly routine. They're the sort of things that are done every day of the year. We believe, in particular, the Australian site approvals, given the nature of the transaction, we're an Australian company that's buying back part of an Australian asset, we believe there's low risk there. And so it's really about time rather than complexity.

Okay. Got it. And then just on your equity investments in farm-ins, you called out some previously. Are there any that you're most excited about in terms of nickel and any expected new flow there in the next kind of half we can look to?

Sure. We're excited about our whole exploration portfolio, but where we're prioritizing our efforts this year is near-mine around Nova. So anything that will be tracking distance to the Nova operation because that would truly be transformative for that project than delivering step change to mine life. And on the call there, I talked about some of the key targets that we really like. But I think the one that people are most excited about is that Orion chonolith, the channel-light feature that is progressing off the top Northeast corner of the Nova mining lease onto the adjoining Boadicea concession. So the geologists get very excited about that because it's the right sort of structure to host a Nova-style orebody. And then the other area that people in the business are really excited about because of the -- because it's elephant country is what could be delivered from our multiple joint ventures in the Paterson province, where we have the second largest landholding -- or access to the second largest landholding of all people active in the area. And if you look at what ground is explorable, that's arguable that we actually have access to the largest outland position. And we're really excited there, excited for 2 reasons. Number one, it is the elephant country. But once you start peeling back the onion skin, you realize that although there's a perception that the area is well explored, it's really been undercooked in the past. And we see lots of opportunity there to deliver discovery.

[Operator Instructions] Your next question on the phones comes from Sophie Spartalis from Bank of America.