Metro Mining Limited (MMI) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us, everybody. We have here today the CEO of Metro Mining; and the CFO, Nathan Quinlin; and CEO, Simon Wensley, of course, to walk us through the December quarterly and give us an outlook on progress at the operation in North Queensland. I'm going to hand it over now to Simon Wensley to take over. Thank you.

Hello, everybody. Thanks very much for joining us. I really appreciate the time and effort you take to follow the company. So please be assured that we don't underestimate that. So thank you very much for spending the time. And as Peter said, earlier this week, we released our quarterly report for the October, November, December months for 2024. I'll share the screen so that those of you who don't have it at hand can see it. So we can then sort of go through the document as we move forward. So look, all in all, a strong quarter, a very solid set of outcomes we achieved. So look, the main aspect of it, as we've been talking about all year has been the ramp-up of our expansion. And we continued to push through and deliver record shipments through this last quarter of the year, again, over and above the record shipments that we've had in all of the previous quarters. So the record Q4 this year was just under 2.1 million wet metric tonnes, so that's about 22% up year-on-year. And look, that's taken us to a total for the year of 5.7 million wet metric tonnes. So again, 24% up year-on-year from last year's total. And I think from a volume perspective, we are a bit late getting off the mark with the commissioning in Q2 this year. So really, the ramp-up only started at the end of that quarter. And so in the last 6 months, we've managed to pull the production levels up. And there's a chart. We've been showing this chart sort of quite regularly through the year, which sort of shows the ramp-up through the year. And again, you can see through October and November, we actually achieved at times, not just on single days, but with this 3-day rolling average, you can see there in October. And in November, we had weeks where we had significantly above the 27,000, 28,000 tonne per day target that we had set previously in the year. So we've demonstrated that the system can push through to the 30,000-tonne level. And I think what's interesting is as we start to optimize the process, what we see is the bottleneck sort of move through that -- through the year as we push through those expansion elements and we improve. And so we saw, particularly in this last quarter, improvements in the tug and barging aspects of the business and also in the transshipment side of things. And so the bottleneck was really then has pushed back to the barge loading facility, which is obviously fed by our screens and -- but it's the place where we load the barges. And so we had expanded that in 2023. We put a fair bit of effort into speeding that up, widening belts, putting motors in, et cetera. And so that impacted, but we haven't done really much work in 2024 on the barge loader, and that will be then now an ongoing focus of incremental expansion and debottlenecking from here on. I guess of note, we also still had a couple of days of downtime during October. We sort of had some weather events, some maintenance events that occurred October and November. And then in about the middle -- we had a belt failure in the beginning of December on Ikamba, ramped back up to our plan. But then around the middle of December, we saw the first sort of serious weather, the weather impacts into the operation. That mainly consisted of a bit of rain, but the main issues were wave heights and wind. And we saw about sort of, I guess, 10 to 12 days of production being affected during that period. But pleasingly, we were able to see the Ikamba, so our Offshore Floating Terminal operate for significantly more time during that period than the floating crane, the single floating crane was able to do safely. So we're seeing some of that investment in larger, more resilient pieces of kit come to fruition in that period. And so that bodes well. And indeed, we continue to operate into January past the end of this chart because the weather remained reasonable, we shut down on the 6th of January to then go into our maintenance shut. And that was preordained pretty much because of a bunch of commitments that we had with respect to some of our transshipment assets like the tugs and the barges and also in terms of our barge loading facility being taken down for maintenance. And so we've completely disassembled our barge loading facility. So the stacker and the stinger, so the extendable conveyor at the end of the stacker have been completely disassembled and removed from the pontoon. The pontoon is going through a bunch of inspections and maintenance, and we have mobilized the stacker to Weipa, where we are going through a sort of a full breakdown and rebuild of that and replacing the whole of the extendable stinger unit is going to be replaced with a new unit. So -- and again, all the motors, belts, rollers, et cetera, all getting a full [ birthday ]. So that's already done and done in operation in Weipa with our contracting partners there, and we should have that back in the beginning of March. The other notable -- look, in terms of outcomes then in terms of financials, we saw pricing improved from Q3 by about 16%. I haven't gone back to 2023 on that, but obviously, a strongly increasing price from 2023 as well. And that resulted in site EBITDA margins of 17 -- just over $17 per tonne. So we were guiding, I think, through the year at the back end of this year, we were looking to try and achieve around that $15 per tonne for the second half, and we were a bit under that for last quarter, but a bit over that for this quarter. And I might ask Nathan in a minute to just talk you through some of the financials. But before I do that, I will just cover the market side of things. So that pricing is a result of continued growth in demand from the Asia Pacific in particular. So we're seeing incremental gains out of the Middle East, out of India. But the main market, as you all know, is in China. And so we've seen continued growth, as you can see in that top line. So that's the total demand for bauxite consumption, and that's been growing steadily over the last few years. And you can see the difference between imports are still increasing share. So you can see now that imports are taking over 80% of the share in consumption of bauxite in China. And that's still being driven by increased demand from aluminum, increased onshore production in the value chain there and increasingly improved -- the consumption occurring at the coast is driving that imported demand for the imported demand for bauxite, which we're benefiting from. So we did just about get the calendar year results for this year. So a total of 159 million tonnes of imported bauxite into China. That's another successive record. It was -- last year was a 13% increase on 2022, and this year has been another 12% increase in '24 over 2023. So double-digit growth in the main market. And we're seeing that broadly continue certainly over the next sort of 12 to -- 12 to 24 months. Nothing to say that's going to stop. The market for alumina, so our customers, our bauxite goes into alumina refineries. And you can see at the back end of last year, that price started to rise through the end of 2023. And then all the way through 2024, we saw sort of steadily increasing pricing. And then in that sort of last quarter of the year, we started to see even more tightness. Some of that was demand driven, but also there were some supply issues in that, both from Australian alumina refineries from Brazilian alumina refinery and also domestic tightness in China due to bauxite constraints in China. So you saw quite rapidly the price for bauxite -- sorry, for alumina rise. So when that -- our customers' price rises, then the demand for bauxite, that marginal tonne of bauxite becomes even more valuable to produce a very profitable tonne of alumina. So you saw record prices for alumina in that sort of last quarter of last year. That then, as I said, that does drive the marginal tonne of bauxite in terms of its demand. So the spot -- this is the spot price, so sort of single cargo pricing from the CM Group for bauxite through -- since the beginning of 2023. And you can see steady rises through 2023 and through the bulk of 2024. And then again, in that last quarter, so in that sort of October, November period for -- and into December sharp rises for both the Guinea prices, which is -- makes up a large amount of that spot volume, but also there were some price rises for the Australian cargoes as well going up towards that sort of $100 per tonne. So this chart extends pretty much up until the current -- sort of I think this last week's price. And so we're seeing Guinea price at about $110 to $120 and the Aussie price at about USD 90 to USD 95 per tonne delivered. So that is the spot -- that's the spot price. Now the Q4 price that's in our quarterly wasn't negotiated in -- when these prices were around. So they were negotiated just before these prices came into effect. And so that was the result that you saw broadly flowing through into our Q4 pricing. Look, I think that shows -- obviously, the contract prices are lower when we're dealing with larger customers over quarterly periods, but it does suggest where the trend is going. It has come off a bit, as you can see, a little bit. Those prices rose very sharply and have just come off a little bit in the last sort of month or so. We'll be entering into the market to negotiate the Q2 2025 price in about a month's time. So we'll be looking at these indicator pricing, alumina price, alumina demand, bauxite price, caustic soda price, logistics costs, et cetera. These all factor into the negotiation for open volume. And this year, we've got about -- that we're targeting 6.5 million to 7 million tonnes of sales this year in production. So about 5.5 million to 6 million depending on the volume, 5.5 million to 6 million that is open depending on what our total volume looks like. So that's where we're at, at the moment. We did also, during the quarter, announced a number of new contract partners as part of our extended or new contracts and new partners. So Lubei Chemical signed an additional contract. Chalco, the largest aluminum and alumina producer in the world, has also become a substantial customer and EGA, the Emirates Global Aluminium, who has a large refinery in Abu Dhabi has also signed a contract for us for a number of cargoes. So that's a really, I think, good indication of customers' risk assessment of Metro and our ability to supply and the quality of our product and also our financial strength, which has sort of obviously grown significantly over the last couple of years. So very pleased to have those very strong customers. And that's also in addition to our baseload customer, Xinfa have been an amazing support to us over the last few years as we've been going through this turnaround and the expansion. So I might hand over to Nathan just to sort of talk us through the financial side of the business.

Yes, sure thing. Thanks, Simon. So obviously, as you've just seen from some of the market information that Simon has just provided, we're very pleased to have seen that flow through to the site EBITDA margin, which as mentioned, is a record for Metro Mining. So that's been very pleasing. I mean, aside from the margin, which we're obviously great beneficiaries of with the price increase, really the focus for us has continued to be on the site costs to ensure that from a flow sheet perspective, we're realizing all of the gains as part of the economies of scale that was the original thesis. So pleasingly, although what we saw was an incremental increase over Q3 2024, within the individual months during this period, we are very pleased to see site costs of getting as close down to $20 a tonne. So if not for some reduced loading in December after being [ curled ] by the weather, I'm confident that we would have seen an improvement on Q3 2024. So look, that's going to continue to be the focus and will be very much a big focus for 2025 is as we better understand our flow sheet and get greater consistency and ultimately reduce the variability in the operation, which is, as you can imagine, far more expensive versus a sort of more consistent throughput. We're very confident that we're going to see even greater economies of scale come through in 2025 as we get a little bit more disciplined, a little bit more consistent and get a greater understanding of the flow sheet overall. Just while I've got the floor, I might just touch on some of the other corporate elements. So we were pleased to finish the year in a strong position in terms of cash flow. Obviously, one of the things that we've spoken about before was around the senior debt refinance. So very pleased to have gotten that done before the end of the year and very pleased with the restructuring and our continuing relationship with Nebari. The other key highlight for us that we're very pleased with is the final junior debt repayment for the year. So that's a bit of a seminal moment for Metro Mining and one that we're very pleased to have accomplished during this period and very pleased to -- beyond that with the repayment, have Ingatatus and Lambhill, they still continue to be very strong supporters of the business, and we're very pleased to have them remaining on as significant shareholders.

Great. Thanks. Thanks, Nathan. I guess what we've both touched on a little bit is, look, we can review Q4, and I guess it's right to do so, but it's gone. It's in the past. And look, what I'm very pleased about in Q4, particularly was these elements that we've used -- we've put in place now that really set Metro up. It's about -- yes, there's -- we've got to deliver on sort of short-term outcomes, and there's always room for improvement there. But really, this last 6 months has been really about setting ourselves up again for next year. So from a top line perspective, the market will be what the market will be, but we've got in place now a very, very strong customer portfolio. So we will need to negotiate prices around what the sort of contract market looks like, but that is a first-class offtake portfolio for us, diversified different types of companies, different sizes of companies, different companies that operate in different parts of the value chain. So really, really, really a good diverse and strong customer portfolio. Look, the production chain, all the elements are in place. I'm very pleased to announce that we -- our own [ tug Mandan ] finally arrived. I mean that's been a little bit of a difficult project, the refurbishment of that tug, which we purchased beginning of last year. It hasn't quite gone according to plan, but -- and also it means that we didn't see the cost/benefits of having that in our operation and had to hire an additional tug for the fleet, which has gone towards some of this cost inflation. But we've seen that now. We've got our marine fleet in a very, very good position to take on the next year. The expansion of the upstream part. So all of our prime movers and trucks and trailers are all in place there, the 2 992, the big wheel loaders, there demonstrated operating the screening plants really seeing -- really showing what they're worth there. So look, I think we've -- all of that now has been demonstrated up to that 30,000 tonne per day operating rate, which is exactly where we want it to be by the end of the year. Balance sheet, again, credit to Nathan and his team running a good process, a competitive process there. And we've seen cost of funds come down significantly, which is great and put ourselves in a good position again for -- from a cash perspective for this wet season to be able to go and do the things that we need to do. So still we -- focusing on that reliability on that, reducing the variability and being ready to try and hit that sort of 7 million tonne rate for the whole of next year. So extremely pleased that all of that has been set up. And over and above that, freight contracts for our delivered freight. So we're now moving into a new phase of our contract book for those freight contracts, and that will also deliver cost savings to us from a delivered price perspective. So that will also flow through to that. The differential between CIF and FOB next year will be several dollars better than what we've seen through 2023 and 2024. So these are all the things that really put a lot of effort into. You don't see the immediate benefits. And as we go down -- as we start to see those economies of scale, as Nathan said, we will be heading down towards that sort of $20 per tonne sort of FOB site cost. And that really does place us at the bottom of the cost curve and in a great position to withstand pretty much anything that this market can throw at us. So yes, very solid, good result for quarter 4, but all -- a lot of activity has gone into repositioning us for 2025 and beyond. So Peter, look, happy to, as always, take some questions. We can stay on a little bit longer after the nominated time to cover as many as we can.

Thanks, Simon. Delivery of another good report. Just one of the questions that we've got here today and which does keep coming up through us here is the question of the spot price. Can you perhaps just discuss the tightness of the market and the representation of the spot price and versus what your contracted prices are?

Yes. Look, I think like most markets, there are often 2 or 3 different types of pricing that occur in the market. A spot price literally is what it says. It's a sort of -- it's an instantaneous price. In this case, it's usually for a single cargo, that cargo could be 50,000 tonnes, could be 75,000 tonnes, could be 110,000 tonnes, could be 180,000 tonnes of the sort of cargoes that we ship. So it's just really a representation of that marginal supply and demand aspect at that particular time and what one particular buyer and one particular seller are willing to agree. And there is no, I guess, true representation of that in an over-the-counter index or anything else. So this represents CM Group's best view of what that -- based on their intelligence, based on what they can see in the shipping stats, in the export stats or import stats depending on the country, what they can see and how they calculate that. So it's a representation of what that marginal tonne. Now obviously, you can -- from a sales strategy, we are a long-term player. Markets can go up and go down and they can go up and down relatively quickly. So we try and build in longer-term contracting. So they tend to be frame contracts that we have -- they can be -- with our customers, they can be 1, 2, 3 or even up to, say, 5-year contract lengths. And so within that, there can be different forms of pricing. Consciously, I brought most of that contract pricing down to quarterly pricing over the last couple of years. That's been partly around the fact that I've suspected that prices were going to rise. I didn't quite expect them to go as fast and as high. I sort of expected them to go as high as this, but I thought they might -- it might take maybe 18 months or so to get there. It sort of happened over the last sort of 6 months, relatively quickly. I'm not surprised by the level given the demand in the market, I think the supply constraints that we're seeing and the structural cost of bringing more bauxite on and bringing projects on stream and indeed, the logistics costs of shipping, particularly Guinea product halfway around the world. So I'm not particularly surprised by the general level of the pricing. But when we negotiate contract pricing, and as I said, the quarterly price, there will be a lot of different factors. A longer term, someone who's got a 2- or 3-year contract, they are a longer term, they won't be looking to experience the volatile highs. And by the same token, we wouldn't be expected to take the volatile lows. And so there's a more, I guess, sustained level of pricing that goes into that. And it's based around a bunch of different factors. Like I said earlier, the alumina price. So my customers' price, what are they selling their product for. Their product might be aluminum, it might be aluminum, it might be downstream wheels, et cetera. That would be part of the thinking. The caustic soda price, the coal price, the energy prices generally coming into the manufacture of the product, what they can buy from competition from a product mix point of view. And so all of these -- the spot price plays a role, but it's not the only factor that we will use in a negotiation. So a whole bunch of factors. And what we tend to see with contract pricing is a smoother, less volatile set of outcomes. But in general, what this does indicate is the trend in which the market is going. And as I said, at the moment, bauxite is very tight. It's in strong demand. Demand is still increasing. Supply is increasing more slowly. And -- but there are other factors that are driving that on a daily, weekly basis. And so we will start to see -- we will see this -- if this price was to stay the same for the next, say, 3 to 6 months, then the majority of the spot price would then factor into the contract price. But it just takes some time for that to occur. But of course, during that time, prices may go higher or they may go lower. So look, I think that's sort of a long-winded explanation to say that the contract and spot are not the same. There are more factors involved in a quarterly price negotiation. It is still a relatively short-term pricing period, but there are other factors that will go in that will moderate the volatility of that outcome.

There are a few questions coming in here, which are recorded. We'll get to all of them perhaps offline. But sticking to the quarterly thing, the freight charges seemed a little high. Would that be reflective of the external tug charges you had to bring in?

It's more reflective probably -- so the majority of our freight contracts were fixed. We did -- because of the -- we normally have to indicate our freight about a month in advance. So you can see that if you get a weather event that's unforeseeable more than, say, a week in advance, it's very difficult to modify your structures. So there are demurrage. So when we have to make a vessel wait, we have to pay the cost of that vessel while it waits. And so that factors into that difference between CIF and FOB. There are also other costs in here. So for example, depending on as we move forward, some of our legacy contracts had relatively high penalties in them for missing grade. As we've expanded through this year, we've seen a few cargoes where as we've ramped up, grade has been a bit of a casualty of us ramping up. And so we've seen some additional penalties in our contracts for that $1 to $2 a tonne maybe in some of those contracts. So you can see that contains -- the majority of it is freight, but most of our contracts have been relatively fixed for freight. So the volatility there has been mainly due to sort of other factors like demurrage costs and maybe penalties. Now looking forward, as I said, our freight costs are going to drop by about USD 3 per tonne as we move forward. So that will factor into that differential there. And we've also taken the chance to renegotiate, as I said, with those contracts. And so the penalty rates and the target specifications will have all changed there. So I'm also expecting to see fewer penalties coming through in our contracts. That will also be a function of us having a more stable -- as you ramp up, things can be a little bit volatile, and we'll have a more stable production process for 2025 and beyond.

And we've got a question here regarding your foreign exchange hedging. It looks like you've got about a month of it hedged. What is your -- what is the strategy for hedging? And what will your foreign exchange hedging program look over calendar '25?

I might start that question and answer and then get Nathan. I mean I'll talk a bit more about history and strategy. So look, there was a period, obviously, when we took over the company that margins were extremely -- well, they were negative, frankly. And we were trying to -- as we talked about a lot to investors, try to become a much more predictable company with a more predictable set of outcomes. And there was a period there, I can't quite remember exactly when it was, but we started to see exchange rates rising towards $0.80, and that would have been catastrophic for medium-term outcomes for margins as we were trying to recover the business. So we do need -- in this period of the last couple of years where we've been trying to turn the company around and then expand with the uncertainty that goes with expansion, try to create a more predictable set of outcomes, even if they may in the aftermath and on reflection, have actually reduced on average what our margin might have been. At least it's been a more predictable outcome that we've been able to look at. And so hedging for us has been about creating a predictable outcome and not being able to suffer the volatilities of what had caused Metro to get into trouble back in that early 2020 and 2021 period. And so that's been the objective of what we've been trying to do. So I might get Nathan then to answer more in terms of what's in place and what we're doing now from here on.

Yes, sure. Thanks, Simon. So as you can imagine, we're pretty conservative with our hedging strategy, both in terms of coverage and also the instruments used. So nothing beyond ultimately some vanilla forwards and participating options. In terms of quantum that we have currently as of the quarter end, it was about USD 50 million notional. That $50 million represents probably about 1/4 of what our total sort of net USD exposure would be over the period. So what that means for us is sort of 75% exposure remaining to obviously benefit from the improved rate. We'll start to, as we get closer to the season, start to lock away some baseload hedging for both Q3 and Q4 at the respective forward rates at the time. But otherwise, pleased with the balance between the risk management from a Q2 perspective, but also being in a position to ultimately start to average that down and benefit from the current rates.