Mineral Resources Limited (MIN) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Mineral Resources September Quarterly Call. My name is Chris Chong, the Investor Relations Manager. Shortly, I will hand over to James Bruce, EGM Corporate Development, to provide a short introduction before opening the lines for analysts' questions. Just a little bit of admin before we kick off. Please be aware that today's call is being recorded, and a written transcript will be uploaded to our website. This call is a Q&A with our sell-side analysts to discuss our quarterly production report. [Operator Instructions] And with that, I'll pass the call over to James for a quick introduction.

Thanks, Chris. Good morning, everyone, and welcome, wherever you are, and thanks for joining us today. It's been another busy quarter for MinRes. And as such, I'll just go through some comments. We had a pretty good safety performance, industry-leading once again. Our Mining Services business had another predictable and solid performance during the quarter. We progressed with the Onslow Iron FID decision and the work is progressing on that. Our iron ore business performed well and in line with our expectations. The lithium business Wodgina, we started train 2 and we converted hydroxide for the first time at Wodgina, producing 931 tonnes and that will be sold in Q2 of FY '23. At Mt Marion, there's a significant amount of work that many of you saw when we did the site. The expansion work is progressing. The pit is actually in very good shape to deliver FY '23. This quarter, our spodumene production was 54,000 tonnes, which had 25% high-grade material. That was impacted by the plant shutdowns and tie-ins. But our guidance remains at 300,000 to 330,000 tonnes and we expect that to be 40% high grade. As the expansion comes online, we expect to do our share of 450,000 tonnes of production from Mt Marion, and that will be at 50% high-grade once that expansion commences early next year. At Mt Marion, we converted [indiscernible] tonnes of hydroxide at a price of $79,000 a tonne. And we -- in the announcement, we've just set out the spot price used for conversion is going to be set by formula used by Greenbushes, so it's very similar to that. And I'll just make the point that as we convert our spodumene into our drop site, there will be timing on cash flows that we should be thinking about. It will take 3 to 4 months to ship spodumene and convert it. And there's about another 3 months based on payment terms. So that's just the timing of cash flows, but we are going to be a fully integrated hydroxide producer. And then finally, I'll just finish off with our gas business. We received some approvals from [indiscernible] during the quarter, and we expect to start drilling in December and through next year. So a pretty exciting quarter for us. I'll leave my prepared comments at that and open it up to questions. So Rachel, if you could please queue up the questions, please.

Thank you. Your first question comes from Paul Young with Goldman Sachs.

A few questions on the iron ore business, James. And the first one is around the price realizations, which might have been a little bit below expectations. I see that you're switching the strategy from M-2 to M-1. I think you might have previously flagged that, but curious around that change in sales strategy there. Is that -- are you going to be selling through traders? Are you selling to different steel mills and you think you'll get a benefit on price realizations with that change?

Yes, Paul, so we had previously announced that at our full year results. I think the -- I don't think there's any real change in who we're selling to. It's just a matter of change reducing from 2 months to 1 month and that will actually reduce the volatility on a quarterly basis in the price to see. So it's still going to take us another quarter or so to get to the full 1 month [indiscernible] . But I don't think it -- over the long term, it [Audio Gap] some change. It will just reduce quarterly volatility of the numbers.

Got it. And then maybe just on the yield on just the shipments there, just appears a bit of a build of inventory looking at restrained production and shipments, is that just really just timing the vessel arrivals at [indiscernible]?

Yes. Look, it's just we are -- you're exactly right, and production is going per plan there and shipments will follow.

Yes. And then lastly, just on switching to Wodgina. And production of hydroxide, so well done on that front and the recovery has actually looked pretty good when you calculate the conversion factor. So maybe just further to that, anything you can sort of provide as far as the quality of the hydroxide and any sense of how we should think about pricing? And should we be using, I guess, Mt Marion as the guide?

Yes. I mean you saw the pricing for Mt Marion during the quarter, $79,000. We will sell the Wodgina material in the Q2. So that will be priced now or the next month or two. And there are no other quality issues.

Our next question comes from Alex Ren with Credit Suisse.

A couple from me, please. On this first one on this spodumene pricing mechanism, same as Greenbushes, just wondering when was this signed? And how long is this agreement in place for? Is this a legacy agreement from a couple of years back? And is there any risk for transfer pricing with running into trouble with the ATO. Also, I understand IGO might be moving away from this to a more up-to-date pricing mechanism next year. Is this something you are discussing with Albemarle these days. I'll come back on the second one.

Yes. Thanks, Alex. So as we have stated many times through the last year, we want to be a fully integrated hydroxide producer. And this is the mechanism -- the pricing mechanism by which we will price spodumene as it goes into conversion into hydroxide. It's -- we've got -- we've aligned it with Greenbushes, and we would expect that to apply going forward.

So even Greenbushes is moving away, how you -- will you still stick with the current structure?

Well, we've announced the structure that we're going with right now. And if things change, then we would announce any changes in the future. But there is no change right now, we've only just announced it. So it is what it is.

Right. Got it, got it. And also on Wodgina on the bottlenecking project, I think the aim is to get capacity of each train from 250 to 325 if I remember correctly, with the aid of low-grading product down to 5.5%, right? I'm just wondering, is there a rough time line on this? When do you expect Train 1 and Train 2 to at least to get to roughly get to 320 run rate. Or is this more contingent on whether [indiscernible] converter is able to accept low or lower grade feed?

So Alex, we went through this a little bit on the site visit. But we've learned a lot from what we've done at Mt Marion, and we've had a very successful strategy there and had a really good partnership with Ganfeng in being able to convert that material. At the moment, the agreement with Albemarle is to produce 6% and the 3 trains at Wodgina can produce 250,000 tonnes at 6% spodumene. There are, in our view, significant benefits of reducing that grade to 5.5% and increasing production to 320,000 tonnes of spodumene but we don't yet have agreement. And right now, we're ramping up the trains. And once we get agreement and once the trains are ramped up, we would obviously announce that in due course if we get agreement with Albemarle.

Understood. So basically, the most recent hydroxide produced are at Wodgina and that is based on 6% grade.

That's right, yes.

Yes. And also, sorry, if I could quickly squeeze in one more. What are your guidance, 190 to 210 that is based on 50% equity rights, but currently you haven't moved up to 50 yet. So is this effectively saying the full year attributable amount will be more like the low end of guidance? Or would there be sort of some kind of backdating mechanism, say effective date would be first of July 2022?

You're right in the comment that the guidance does assume the 50% and then everyone should note that. And when we come out [Audio Gap] agreements, we would update you at that time.

Next question comes from Matthew Frydman with MST Financial.

Maybe firstly, following on those comments around the restructure of the MARBL JV. You've put a bit of a comment there in the footnote, suggesting that the scope of the proposal has been updated. Not sure if that's new language there, but just wondering how should we take this in terms of exactly what's being considered in this update? And also, what's the updated time line around resolution of the restructure?

Thanks, Matt. So there's no real change here. It's just -- it's a cautionary language that legal required us to put in place. So there's no change in expectations here at all.

Thanks, James. Any update on the time line?

No, we're not prescriptive on the time line, and that will occur when it occurs, you know that we're hopeful of getting completed.

Got it. Maybe to, I guess, approach the question of the JV restructure in another way and maybe bit more philosophically. I think there's consideration in the market around the inclusion of additional conversion assets in that JV, be they in Australia or overseas? Just wondering how the team internally thinks about mean contributing capital to acquire or build additional conversion assets to something that effectively you're getting for free currently or at least very cheap relative to the cost of capital. I mean I understand that the returns on achieving a chemical margin for your sales versus a concentrate margin would justify additional capital, but you're already really achieving those returns through your tolling arrangements. So, how do you see that incremental return of applying additional capital to acquire conversion facilities when really you're only getting back to that incremental economic rent of the tolling charge you're currently paying. I mean, does that incremental return clear the Chris' ambition for 20% to 25% return on capital?

So Matt, I think there's a couple of things. One is we've got a strong intent to convert over the long term, all of our share of spodumene in hydroxide from all of our operations. And we want to do that, we've got assets that have lives of 20 and 30 years. So we need a long-term solution. Tolling is a great short-term outcome for us, but they are short-term agreements. And over the long term, the return on invested capital is definitely by making the investments in the hydroxide capacity. And the other point is that we would want to have control of that -- of those volumes into a market which is very strong, and we expect to be strong for a long time. So we see ourselves being one of the world's top 4 producers in hydroxide. And as a top producer, we want to have control of the outcomes for the business. And that has significant value to all shareholders in MinRes.

That makes sense, James, it's a very clear answer. Maybe finally for me before passing it on. Just on the iron ore business, you made some comments around pacing, realizations. Just I guess a fairly direct question. Did the Yilgarn make money in the September quarter? I mean looking at your received price relative to your FOB cost guidance, it's hard to see how that asset didn't lose money during the quarter, I guess, notwithstanding the margin you make on mining services from an intersegment perspective. So I mean, what's giving you confidence to continue operating that asset? Are you seeing better pricing outcomes in the current quarter given the fact that discounts have closed up. Is the cost performance better than what's implied in the guidance? Just wondering the context there.

Yes. So Matt, I think there's a number of moving parts. Right now within both the cost structure and the iron ore price realizations, which are -- and the puts and takes are that we continue to be very focused in Yilgarn and Utah assets on cash and cash flow generation. And the puts and takes are that the Aussie dollar is significantly lower. The freight rates are lower, oil prices are coming in a bit. And all of those -- some of those are external to what we're doing at the operations. At the operations itself, we've given cost guidance and you can take that as [indiscernible] but also on the revenue side at Yilgarn, we've got lump ore that's going to come in from this quarter that we're in right now. So I think all of the puts and takes are that we continue to manage this business very effectively [indiscernible] continue to be agile. And I think we are aware of what we need to do to maintain profitability.

Kaan Peker with Royal Bank of Canada.

First one is really around Mt Marion spodumene pricing, things are down quarter-on-quarter despite having a higher percentage of high-grade con. Was this largely driven by the ramp up and I suppose that the inclusion of lower grade, higher impurity ore being used in the concentrate?

No Kaan, it's more just spot pricing and the delta and pricing structure. So we've given you what the new pricing structure is and that's based on the -- on Greenbushes. I think that's what your -- that's the delta that you're seeing coming through. As we are converting it all to hydroxide, we will see the benefit on the hydroxide side where we sold product of $79,000 a tonne.

Yes. So I mean, on that, given that you are targeting to become very clean, I think you mentioned fully vertically integrated, should our focus be more on the hydroxide pricing, which appears to have come in better than expected?

Absolutely. I mean we -- that's been our strategy all of this year. We first talked about it in February. And we expect to make this a long-term part of our business, we are not selling spodumene, we're selling hydroxide.

Yes, makes sense. And maybe on Wodgina, could you provide any progress on the permitting? I think is it still expected for Feb 2023 and where are we up in terms of that progress?

Yes. No, Kaan, that's our expectation, and we don't see that being a limit to what we're doing. We do have some flexibility on Wodgina Train 3 as one saw on the site visit. That is ramping up over the next couple of months and will be available. The thing that limits our production at Wodgina will be the pit, and you also saw the pit and the steps that we've got to take there. But we don't see any approvals being a limit at the moment.

Last question before I pass it on. It's more around iron ore pricing there. Should we expect product quality to change over the year?

In iron ore, well, we will be producing more, but we will be producing lump at our Yilgarn operations. So the product quality will go up because of that. That's 20% marked in the guidance.

The next question comes from Lachlan Shaw of UBS.

So a couple from me. So firstly, hopefully an easy one. So again, just to come back to the Wodgina joint venture and the question of moving to 5.5% from 6%, could you just remind us what steps and what catalysts you need to work through there? Is it a case of qualifying 5.5% with Albemarle? What do you have to do to sort of get both partners to agree and get that change in effect?

Yes. I mean, obviously, not on as you do, we're negotiating a pretty important a set of new arrangements with Albemarle. And I think a lot of focus is on that. And I think we, as MinRes will be hopeful of a change to producing 5.5% because of the benefits of it. And in due course, hopefully, we get agreement to do all of that.

Yes. Okay. Okay. Makes sense. And timing, I'm guessing sort of angling for it as soon as possible, but what do you think is realistic?

As soon as possible. Look, it's subject to agreement by both parties and [indiscernible]. We've talked about that for a little while now. So I can't give a date.

Understood. And then just moving to mining services. So obviously, nice little lift in the quarter there on contract tonnes. Can you talk to activity levels that you're seeing in the market? Which commodities are you seeing more active than others and I guess related, how is the competitive landscape at the moment?

Yes. So look, the -- I mean, we perform our mining services across lithium iron ore and a few gold operations. There's no doubt that it's very active in the iron ore space, but we've also actually -- we, in the last 6 months have started work at a lithium operations in the Northern territory as well. So I think the iron ore industry has capacity, and the mines are moving further away from the fixed infrastructure. And as that occurs, our services become more valuable and in demand. In terms of the competitive landscape, we tend to compete against performing these services themselves. And we generally are more productive and more efficient in the delivery of those services. So that's our value proposition. We are having some success and the volume growth in our Mining Services business over the next 3 to 5 years will be very significant. We expect to double the business. Some of that obviously comes from our own internal joint ventures. But another component is also the third-party services, which continue to be attractive for us. So it is a pretty good environment for us. It has been a good environment for the last several years and our proposition and the value that we can add to clients, I think, is well understood.

Lyndon Fagan with JPMorgan.

Just a quick update on Camerton if I could. Is there any kind of further color on commercial production being reached, like when?

I think we put the comments in the quarterly here and Lyndon, it does take a period of time for these projects to go through both commissioning and qualification. The qualification period can be anywhere from 6 to 9 months. We would hope that it's going to be shorter than that, but it is a process that the joint venture has to go through. So I don't think we have -- we're not expecting any major production coming out of Camerton in financial year '23. And -- but it should from 2024, it should ramp up.

Okay. And then it's good to see those separated tables around the hydroxide sales for the various mines. But I do notice this time you haven't provided the EBITDA. Are you able to give some color as to whether we're likely to get that going forward? Or i.e., is it admitted while the sort of joint ventures being signed off? Or -- and if not, does the toll charge at Wodgina look the same as what it does at Mt Marion?

So Lyndon, the -- this is a quarterly production report. We don't disclose EBITDA in our quarterlies. So I don't think you should have an expectation of it in this quarterly. We did disclose about our full year results, and we will disclose at our half year results in February. The EBITDA margin for tolling last half was 30% or thereabouts. And I think a reasonable assumption is that sort of level going forward. I think if you work through the received price of -- I'll talk about the Mt Marion material, but because we've put out the price received there was $79,000. That includes the VAT. It includes, obviously, the conversion of -- to work out what the EBITDA would be you need to have the conversion of the spodumene and you've got the spodumene pricing, and you've got the spodumene volumes, so you can do that calculation. And then there's a converter margin that conversion cost, I should say, that you need to be thinking about. And I think if you went back to last half, that was about $10,000 a tonne or thereabouts. And so if you use that, you would come up with an estimate of what you think EBITDA would be. So I'll leave you to work through those numbers, but that's the sort of color that I can give you.

Yes. No, that's helpful, James. And I've got all that. I guess as a reminder, is the toll charge on the input, i.e. the tonnes of spodumene converted or the output and put against the tons of hydroxide produced?

It's on the tonnes of hydroxide produced.

Great. So it's sort of independent of whatever grades going in. And then I guess the final one, just a bit of housekeeping. Though the Greenbushes pricing is obviously how you're doing your pricing, but the royalty at Greenbushes uses a different basket of indices. I think the state government include Platts. Is that the same case for you guys?

We've given out the basket that's used. It's fast market of Asian metals and benchmark minerals, and that's the basket that we're using.

But yes, so that's clear for your revenue. But for the royalty calculation that you're paying the government against. I mean the IGO situation is that there's a different basket with Platts included. Is that the same for you guys? So is our royalty calculation based closer to spot is what I'm asking.

Lyndon, I'll get back to you. But I'll say this right now, we put those numbers out there because that's what we expect the royalty calculation to be, but I will absolutely confirm that with you in following up.

And I guess just final one. Why was the iron ore discount so large, given that we have seen a narrowing of grade spreads more recently?

Yes. So it was 78% if you exclude prior period adjustments.

Your next question comes from Rahul Anand with Morgan Stanley.

Look, I just wanted to firstly perhaps follow up on Lyndon's question. Lots of good color there in terms of the cost of conversion. I just wanted to also perhaps follow up on that and check if that conversion cost is perhaps moving with the hydroxide price at all? Is it linked? And then if not, is there any sort of profit share differential that happens as the price moves up or down?

Thanks, Rahul. So many of the short-term agreements that we have in place for the conversion and as such I don't think one of our intention is to convert these short-term agreements into long-term investments for us in the hydroxide capacity. But specifically to your question, the $10,000 a tonne number I sort of gave you a sort of guidance is a number that only applies in this current market right now because we've got short-term agreements. So -- and what it includes is the cost of conversion are for use of that plant for that period of time. So that's the way you should think about it. This is why long term, I think we definitely want to own our own plants. And to make that investment because long term, I do think the return on invested capital will be even better than what we're doing right now.