Metro Mining Limited (MMI) Earnings Call Transcript

Good morning, everybody. Thank you for joining us. We have the June quarter webinar report delivered by CEO of Metro Mining, Mr. Simon Wensley; and the CFO, Nathan Quinlin. Simon will go into a discussion of the activities of the quarter and the outlook, and we'll have time for some Q&A at the end. This video will be recorded and available for distribution. I'll hand it over to you, Simon.

Thank you, Peter, and hello to everybody. Good morning, afternoon, wherever you are. Thank you for joining as ever and support your support of Metro Mining. So, look, I will, as usual, sort of share on the screen the release that we put out this morning, and I hope we can see that. Yes. So, I'll walk through this. And as Peter said, if there are any questions, put them through the chat function, and we'll try and get to them at the end. So, look, a record quarter from a tonnage point of view. I'm pleased with that outcome given that we had mobilized in March to try and get an early start, and then that was -- that effort was stymied by a large cyclone which came across the Cape. We didn't get much damage or any damage on the site at all. But obviously, the shipping channel was affected by what were quite significant waves. And so, we were able, though, I think, to come back online in April quickly and address -- I think we learned a lot from last year's. We had a similar non-cyclone event, but a similar kind of marine event at about Easter last year where we had some damage to the channel. Honestly, the damage this year was probably a bit worse, but we were really on top of it quickly. We had dedicated Tug crew and Tug assets with a specialist plow ready to go, and we were able to start barging literally in the first week of April again and steadily building up the draft in the channel. So really not as much impact as it could have been or we would have had in the past. So again, that's an example, I think, how we're trying to create increased resilience in our business to external weather events, particularly. Ikamba was also a way on its statutory 5-year dry docking cycle in Indonesia, and we also took that opportunity to do some maintenance on various parts of the vessel. She came back towards the end of April, and we were able to get her running in May again. And probably slightly later than we had anticipated, but that was partly due to us to take out some diesel fuel so that we can sort of mitigate against any shortages. So, she had a few issues in recommissioning. It turned out that some of the cylinders we replaced in Singapore, there were some faulty work on some of those, and we had to repair those. And then that repair wasn't really satisfactory. So, we decided to bring her down for a shut and replace all the cylinders on one of the cranes. So, we have 4 large 4-tonne hydraulic cylinders that operate each crane. And last week, we took it down and replaced all 4 of those cylinders so that we're effectively then -- and flushed out the whole hydraulic system, et cetera. So, we did actually plan shut in July. So, it was just a bit longer than we would normally -- we planned a 3-day shut and we were shut for just over 6 days. So look, that's gone well, and she's now back in operation this week. Look, if I then sort of rattle through, I think some of the things that really pleased me also about the last quarter, June, we saw -- certainly in the first 3 weeks of June, we saw really proof of concept around our new operating system, and that was probably the 3 most highest capacity, less variability weeks with all of the system, all of supply chain working extremely well. And that was in challenging idle conditions and some weather as well. And so, we really saw, I think, proof of concept in those first 3 weeks of June. We're also notably, and this is important from a cost point of view, we're 70%, I guess, higher than we plan to be in terms of waste. I mean those of you who are following us for a while saw that last year, we did get constrained in the second half year by a lack of waste or a limitation in the waste clearing. We're now way, way ahead of that. And that's had some cost impact in this last quarter, but it's something that I think strategically sets us up really nicely for the second half where -- which is always our strongest period. I mean I think of note as well that one of the things that our integrated planning has been focusing on, and this doesn't really come through the numbers in some senses, but it's part of our real focus on variability was grade control and the ability to take what is quite an expensive and detailed grade control program and really convert that into a consistent ore quality through to the barges and through to the shipments and customers. That's been a real focus over the last 6 months. That is significantly better in terms of where -- we mine from 2 or 3 pits at one time, getting that blending right, getting those grades right on the ship is really important in a DSO operation like we are to get that right. We don't have a processing club where we can sort of even out some of those grade issues. So that's gone extremely well, and we have added 2 new customers have taken control cargoes over the last quarter and into this coming quarter, which is really, really pleasing to see in terms of customer diversity as we grow and also as we grow our business. Notably, we've extended our port stockpile after working on approvals there. That is part of our Q1 resilience and cash neutrality drive, and that allows us to then put probably almost 400,000 tonnes on to stock there if we can mine that in advance of the wet season. That then disconnects our mine from our port, and we can -- if the weather is sufficient, we can then continue to load to load ships even if our pits have got water logged with rain, et cetera. So that allows us, particularly in March to start and have some confidence around despite how bad the wet season may have been, we can really have some confidence about being able to load vessels at least from a mine supply point of view. I'll pass to Nathan in a minute to talk a bit about finances and maybe a bit more about that new integrated planning and operating system. But we ended pleasingly the quarter with $24 million of cash. And from a secured debt, we're now down -- our debt is in U.S. dollars. It's down to just over $30 million. And from a balance sheet perspective, that really purchases is in good shape, and we expect to be close to cash neutral -- sorry, to be net cash in [indiscernible] I'll talk a bit about. And look, I think I'll make a comment here and Nathan may add that. But look, the EBITDA margin, which we knew coming into this year -- and irrespective, we were targeting roughly around a double-digit margin. So, we're still aiming to try and hit about AUD 9 to AUD 10 EBITDA margin. That was affected, obviously, some one-off nonrecurring items like the recovery from Narel, some of that maintenance work and a little bit of scale. We were looking to try, honestly, to do about $1.9 million to $2 million in this quarter. And so, we were a little bit down on that target. And of course, oil price flowing through. Now that isn't -- that is not a nonrecurring item, skews the double negative. That is -- that's likely to be with us for the remainder of the year and it's roughly AUD 2 to -- AUD 2 to AUD 3 sort of impact on the bottom line. So, look, I think a slightly weaker FOB netback. But I guess the main issue there was cost and scale. So -- but look, I think we're -- as a business, where I'm really targeting in this was a very weak pricing quarter was that we're still delivering double-digit margins, and that certainly was the target. So, a couple of things there for us to work on as we go through. Let me cover off on the sales stuff. And as always, we sort of have a bit of a more detailed deep dive into the market on coming through. I mean I think with the aluminum sector being strong, and this is obviously just a 12-month view on the left here, but what was -- that trend would still have been positive. And you can see even with the correction that's occurred over the last sort of few weeks that we're seeing a very strong aluminum sector. That's underpinned by long-term trends around electrification, around lightweighting of vehicles. The construction sector generally is still pretty weak, but we're still seeing really strong 3%, even up to 4% demand from aluminum coming through. And that's flowing -- mostly still flowing through to production. And indeed, the market is recognizing that China is not going to be adding a lot of capacity in aluminum production. So, the incentive price to bring new smelters online has got to be higher given the capital advantages that we know exist in China. So that's still a very strong positive story. We've talked about alumina in the middle here between bauxite and aluminum. That has suffered from an oversupply over the last year or so. We did see the bottom around sort of January, February, March this year and then sort of a recovery roughly around that RMB 200 per tonne equivalent, maybe slightly more. So that's about a $30 to $40 increase in alumina pricing. And look, I think that partly that's about a bit of rationalization of capacity in China. So, there are -- a couple of refineries have curtailed and shut down. I think that's partly that. And we're also seeing a pull-through from that aluminum demand on the top. We're seeing China currently averaging about 46 million tonne annualized sort of capacity, which is a bit above the 45 million tonne kind of cap. So that's flowing through, and we're seeing increased demand out of India and Indonesia. And I guess this is all in the context of the Middle East not taking as much alumina as they would normally take. So, there was -- this has happened in the context of extra alumina sort of flowing around the market, trying to find a home that wasn't flowing into the Middle East. So, look, I think we've seen the bottom. We're going to see prices rising, I think, from an alumina point of view, and that's good news from a bauxite perspective because bauxite prices also have to rise from the bottom, and there's a few reasons for that. Again, we saw around that February period, March period, we saw a low in bauxite pricing, and that has also sort of recovered. Now whether that's driving alumina up or whether it's sort of forcing it up, obviously, there's an equilibrium issue here. But I would argue that we're not -- the bauxite price not really is an equilibrium at the moment. At the moment, there's a bit of a standoff where we're seeing currently, about 70% of the bauxite used in Asia Pacific is -- it comes from West Africa, particularly from Guinea. And the freight rates from Guinea have gone from just over $25 a tonne in January, and that was probably a decent average over the last 12 months. And that rose to about USD 45 per tonne on a dry basis. So, averaging over the last quarter, probably around $40. And so -- and certainly, we saw at the bottom of the market in February, some signs that some Guinea producers couldn't make money at the sort of low 60s. So, I think the Guinea price got to about $62 for the standard 45 grade. And that would have been a lower price. A lot of the Guinea material now is not 45% alumina. It's more like 43%, even down to 42 and 41. So the pricing -- the delivered pricing for those lower grades would have been sort of probably below 60. And so that is -- that was challenging. Some producers already in February when that low was there. And we've only seen about an $8 to $9 rise so far. So it certainly hasn't covered the freight cost rise. And it also -- if Metro is seeing around a AUD 2 to AUD 3 rise, and we've got pretty short haul distances and pretty short transshipping distances compared to Guinea, they would be seeing probably USD 3 to USD 4 type impact on their mining costs over there. So it certainly hasn't risen enough to cover those costs. So at the moment, we're seeing a bit of a standoff between alumina producers who've seen a bit of a rise in price, but not much. And sort of there's a bit of stock on the ground from an oversupply of bauxite over the last 6 months after the Guinea government had said that they were going to restrict exports. Unfortunately, they announced that quota or restriction and then didn't go through with it from a legislation point of view or haven't yet gone through with it. And so anybody who had excess stock on the ground, put it on a ship and got it out before the quota could be put in place. So I think something has got to give here. We've seen shipments to Guinea drop from Guinea -- ships to Guinea and shipments out of Guinea dropped by about half over the last 3 months. And so that probably isn't enough to sort of sustain the demand. And so we're going to have -- something is going to give here. We've either got to see the price go up or supply from Guinea probably drop a little bit further. So this is an interesting period, and we just got to see some of that excess stock in China start to get absorbed. And there are signs that that's getting fairly close when we sort of talk to some of our customers and the people that run the ports, and we're seeing some of that stock being taken up. But from a Metro point of view, unfortunately, we price our bauxite in advance. So the quarter 2 pricing was done around about Chinese New Year in the end of February before some of these price rises had come through. And so it was a pretty weak pricing quarter for us having to compete with oversupply out of Guinea and so on. But look, we were able to agree those prices with our customers and ship them. And we were still -- as I said, we were still aiming for [indiscernible] absent some of those one-off issues, we would have hit that or close to it. So we've already seen, as I said, an increase, a bit of a bump there. We've negotiated prices for this quarter, roughly about USD 4 on average higher on the SIF basis. So that's about a 9% increase from where we were. And so subject to obviously demurrage and freight and other issues that hopefully, that will flow through towards the bottom line. So we're now -- pretty much all the contracts for this year are scheduled. And so we'll be pricing again in China sort of probably towards the end of this month and next month. So in that period, we'll see what happens to market pricing with that sort of, I guess, that tension that I just talked about playing through into the market. Nathan, I'll hand over to you and maybe you want to -- maybe talk through some of the other numbers.

Yes. Great. Thanks, Simon. So like I mentioned a little bit earlier, the key focus for us this quarter or one of the key focuses has really been the implementation of this revised management operating system, which, as we have spoken about previously, especially in the last quarter of last year, was really a focus, not necessarily around capacity, but was really about lifting the average performance and reducing variability. And so naturally, you can see the sort of step change that we had in production and the consistency of that production, particularly in the month of June. And taking that variability out is not only the right thing to do in and of itself, but it really increases the operations capacity and bandwidth to be able to deal with the extra complexities, particularly that we dealt with in this quarter. So when I think about the operational context of the quarter just passed versus of the year-on-year is there was quite a little bit of extra things to deal with operationally, not only the tropical cyclone and the impact that, that had on the control and depth of the river system, but the extra complexity of dealing with the geared vessels as well, while the Ikamba was away. Those are all extra external things that can really impact the supply chain. So with the backdrop of those extra complexities, it was really pleasing to see the Q2 record results sort of versus year-on-year. So that was really pleasing because for us, this management operating system is as much about setting what is a minimum level of acceptable performance, which is exactly where the resilience of the operation now comes from. And so naturally, we're going to see ups and downs in price cycles. And the test of the business is to be able to continue to cash generate within that context of weaker pricing and some operational complexity. So from that perspective, it's been pleasing to still have strong operational cash flow in this quarter and to really set ourselves up to be able to deal with those complexities but these other nonrecurring items like the geared vessels and the increased freight costs associated to that. But also like we've seen a pretty substantial impact for things like diesel pricing as well. So to be able to withstand some of those more macro-driven influences has been quite pleasing. And like Simon mentioned a little bit earlier, that sort of high in the numbers a little bit, but where we stand at the moment in terms of our clearing and stripping performance, which we've highlighted in sort of our monthly operational updates has far exceeded our own expectations at the beginning of the year. And when we sort of look back to the September, October period last year, where that had become a constraint and essentially cooled us towards the end of the year to be sitting here now with that strip horizon in front of us is a fantastic position to be in as we start to look towards what's going to be prime time loading conditions. And you can see that impact even just now within the April, June in terms of the mining versus shipping numbers, you can see that healthy ROM as we prepare to go into these next level loading rates versus the much smaller ROM we were sitting with at this time last year. So a pleasing quarter in terms of the economies of scale being there, being able to show the resilience to some external macro events, but most importantly, really setting ourselves up at this point for prime-time loading. Thanks Simon.

Yes, all good. Yes. So the target for -- there's some good operational detail in here. I think for those of you who go through it and to describe what we've been doing. We -- also safety stats. Unfortunately, we had a serious accident last -- during the quarter, which involved a low-speed truck rollover. The driver was okay. But again, operating in we're constantly trying to improve those areas. So -- and we take obviously those accidents seriously, but any what we call high potential incidents where there's sort of effectively what we call a near miss, and we go through now full investigations of all near misses, which could have caused an injury. And then we're trying to maximize statistics there. I just would also just want to call out the results of our dry screening test work, which we've been running over the last sort of 6 to 9 months. It's a really interesting and important part of Metro's future as we sort of seek to extend our resource base and reserve base. And so we've had really good proof of concept around taking higher silica ores and putting them through a pretty rudimentary screen. This is our backup screen on site, which we use when we take one of the larger screening units down, and we use this sort of what we call a scalping screen to -- mobile scalping screen to do the work. And we've been sort of fitting it with different aperture screens, and we've been running higher silica materials through there. And we're getting really good proof of concept now around taking even up to, I think, our highest 19% silica material and putting it through the screen and getting a salable product at about a sort of 60% to 65% yield and lower silica even up to 80% yield to get salable product through. So this allows us now to look at those resources and say, right, okay, where does that allow us to convert resource into reserve, and that's a big focus for us now in terms of maintaining and extending our operating life out further. So I would -- that's some potential announcements on that subject to competent person sign-off, et cetera, towards the end of the year. I also just wanted to -- a little bit of really nice kind of work by our environment and community team in a couple of spaces. One was sort of hosting -- setting up and us hosting the naming ceremony for our big tug Mandang. She's been on site now for about a year, but -- or more than that, but we hadn't had the opportunity last year for a number of reasons to formally welcome her. Mandang is the name for Ankamuthi strength. And so we were able to get a lot of our traditional owner groups from the Seven Rivers Corporation and the Old Maroon Corporation plus members of council and local traditional owners on to site, onto the boats and have a blessing and a proper welcome, and a really nice event, a couple of politicians and other guests as well. So it was an excellent kind of showcase, I think, to what we're doing up there. The other aspects there, and as I mentioned in the past, we've won awards for -- an award for promoting and sponsoring and hosting educational programs up on the Cape, one of them through the Johnathan Thurston Academy. You can see some of the graduates there from the JTBelieve program, a brilliant program, obviously, sort of architected by Johnathan himself and really -- a really big shout out to the team -- both the teams at the school and our own team. And then a nice bit of fun there with NPA College painting some boots for the Gold Coast Suns out there, a really nice opportunity for them to get involved in sports and kind of giving a Queensland putting team a real sense of the length and the breadth of our state and the support they've got, particularly in some of these communities. So a really excellent opportunity there and well done to the team for doing that. So look, that's where I might stop there and take any questions. Yes, 5 million tonne, second half of the year is where we really go hard, economies of scale come through, costs come down, tonnes go up. And I expect that also to be in at least a strengthening price environment for us. So it's the most important part of our year for where we make all the margin. So critical, still targeting that $6.6 million to $7.1 million sort of guidance. $7 million has been the big nameplate number that we've been looking for out of our expansion. And I guess what we know about from that first part of June and now into July is that we've got the consistency and reliability and the capability to get that done. So Ikamba's back operating after her shut. And I guess we're all primed ready for that. So Peter, if we've got any questions, happy to take them.

We do have some good questions come through. Congratulations on a pretty -- an excellent quarter of production, some great numbers in there, given the environment that's impacting current prices and contracts as well. So the first question is interesting. It's regarding critical minerals associated with Metro's bauxite, such as gallium. Is there anything else within the ore that you regard as valuable that might be worth looking at?

Look, gallium is a hard one. It's there. It's definitely there, but it really isn't something that's economically able to be extracted at the bauxite level. So it's really one for our customers. So our customers who buy the material, they're obviously processing and extracting the alumina from our bauxite and pretty much everything else ends up in a residue called red mud. So that's got iron and it's got a bit of bauxite in it still at iron and any other sort of minor minerals end up in that residue. So it's really not economic for us to do that. And it's not really at a level where we can sort of charge -- it doesn't -- the gallium content of our ore doesn't really -- there's not an economic case for buying our bauxite just to extract the gallium. So look, we've looked at that. I mean what I would say, though, is that we've got on our lease, and it's part of our thinking as we move forward. We talked a bit about gallium in the past. I mean gallium sits underneath the bauxite that we've got. And we're also sort of now looking -- we've also got some quite nice silica deposits. So in terms of the glass market, particularly solar panel glass, which is something that's sort of is in high demand, obviously. It's a pretty low-priced commodity, certainly below $100, but we've got now, I guess, the operational supply chain to be able to look at that. So we're investigating our leases for the presence of silica and the ability to be able to extract that and get it out. So there are some things. These are sort of more slow burn, longer-term issues, but there are -- we're not sort of a sleep at the wheel. We're looking -- we're certainly looking at those things in a methodical way.

Thank you. Our next question says, great progress with the integrated planning and grade control. Are you planning on further customer diversification? And what value upside are you expecting from this approach?

Well, look, the answer is yes. And it's something that we naturally should be doing anyway as we're growing the business. I mean, we talked about growing from 7 million tonnes. We've gone from a 2 million tonne run rate from the last -- from '21 up to now what we hope to be around 7 million for this year. And that's already meant that we've probably added a customer or 2 in that space. And what we need here is probably 4 or 5 core customers. But the market is also evolving. I think we've now probably served 15 or 20 refineries directly over the last 6 or 7 years. So our product is more well known. I think in a market, a more normal market, bulk market, these things tend to run -- become a bit more short-term in nature where people sort of have baseloads, but also they maybe put a bit more on to the spot market. I can see that happening a little bit with bauxite. I think there's some pros and cons to that. You've got to be aware and use different methods to sell the product. And last year, we saw the use of auctions and things like that. We don't yet have a trading platform that people can trade on, but I think that may not be too far away. So look, the market is definitely evolving. We're working hard directly with customers, existing customers, new customers. There are probably 4 or 5 new refineries that are either have commissioned or will commission this year on the coast of China. All of them are set up to take our product effectively. And so, we're working with all of those groups. And I said I was really happy that we sort of brought on 2 new customers, at least taking trial cargoes over the last couple of months and this month to bring on board. So look, the push is always on. The team working very hard in China, even in a difficult market where there's a bit of oversupply, we're certainly still getting a lot of interest in working with Metro and having, I guess, the security of supply of an Australian-based bauxite producer.

Thank you, Simon. The next question is regarding the share buyback. Can you give us an overview or comment on your timing plans for that?

Nathan, do you want to touch on that?

Yes, sure thing. So in terms of the buyback, we had anticipated Q2 for all the reasons around -- particularly around weather and the -- obviously, the recommissioning of the Ikamba that was scheduled for May. It was always anticipated that we would have a slower start to the buyback and look to start ramping up around this time. And obviously, in that intervening period, we've had the conflict in the Gulf and some increased diesel prices. So that's just made us be a little bit prudent. until we're in a position like we are now in terms of, one, our physical security over fuel and otherwise seeing the Ikamba being back up and running at the right nameplate capacity. So expectation at this point is you'll start to see activity from us on that in the very near future.