MMG Limited (1208) Earnings Call Transcript
July 24, 2020
Earnings Call Speaker Segments
Hello, and welcome to MMG 2020 Second Quarter Production Report Teleconference. This report and today's discussion cover the operational performance of MMG's assets for the June quarter. We will also provide an update on MMG's ongoing response to the COVID-19 outbreak. Joining us today are Geoffrey Gao, Chief Executive Officer; Ross Carroll, MMG's Chief Financial Officer; and Mr. Wei Jianxian, Executive General Manager Americas. Other members of the MMG executive team are also on the line, together with Mr. Sam Rodda in his capacity of overseeing MMG's Australian operations during the second quarter. In compliance with local regulations, we are hosting this call from multiple locations, so please bear with us should there be any technical difficulties. Thank you for joining us. I'll now hand over to Geoffrey, who will discuss the highlights in the report, after which there'll be an opportunity to ask questions.
Thank you, Blake, and hello to everyone who has dialed in. As everyone on the line today would be aware, at MMG, our first value is safety. In the second quarter, our operations recorded a total recordable injury frequency rate of 2.34 per million hours worked. This result is slightly higher than we would typically expect, but one that is consistent with MMG's position as a global leader in the industry when it comes to safety. Before I discuss the operational performance of our mining assets, I would like to provide an update on MMG's response to the COVID-19 outbreak. Seeking the early lessons of our major shareholders regarding COVID-19, MMG was proactive from early in 2020, establishing procedures to address the operational risk and safeguard our people. The steps we have taken are tailored to the unique challenges in each region. In addition to minimizing risk for our operations, we have also supported local authorities in their efforts to limit the spread of the virus and assisted host communities. As a result of these actions, I am pleased to confirm that today, we are yet to have any COVID-19 cases identified at an MMG operation. All of our sites have been able to operate continuously over the course of the pandemic. This is not to say that the broad MMG community has not been impacted by this virus. Our extensive pre-screening measures have identified several cases in employees and the contractors in the DRC, and in particular, in Peru. In Las Bambas, the most significant consequences of this has been our workforce availability, reliability of logistics and inevitably, the level of activity at site. We continue to effectively work within constraints, maximizing efficiency at site and working to achieve an effective ramp up and the resumption of normal operations as the circumstances allow. Despite the challenges presented by COVID-19, MMG produced around 77,000 tonnes of copper and 60,000 tonnes of zinc across its operations over the second quarter. Other than Las Bambas, we maintained existing production and cost guidance for all of our sites. Las Bambas continued to -- contributed over 58,000 tonnes of copper to this quarter's results. This was 26% below the prior period, with the impact of COVID-19 being the key factor. The team at Las Bambas was able to maintain mining and processing activity at site on the continuous basis over the quarter. However, production levels were directly impacted by the availability of our workforce. Average shift availability and the mine activity for the quarter was approximately 65% and 75%, respectively. With this reduced availability, mining activity focused on accessible ore with some planned waste movement being deferred. Workforce availability improved significantly over June, and we expect 85% to be achieved over the third quarter with near 100% mine operation. Concentrate transport was also impacted by COVID-19 restrictions over the period, in particular, during April. A step-based ramp-up over May and June has assisted us in reducing the balance of concentrate stock at site. However, we remain conscious of the potential for ongoing impacts to both road and the rail logistics due to the high number of cases of COVID-19 across South America. Finally, on concentrate transport. Unfortunately, earlier this week, a number of copper concentrate transport trucks were set on fire on the Southern Road Corridor, 1 kilometer from the city of Espinar in the Cusco region. While the project was not related to Las Bambas, we have worked closely with the government and the law enforcement to ensure the safe passage of concentrate convoys. While active dialogue with community is an essential part of operating Las Bambas, we deplore this kind of violence, particularly against our people and contractors. On a more positive note, we recently completed a debottlenecking project of the molybdenum plant. A gradual ramp-up is ongoing, and we anticipate increased molybdenum production levels over coming periods. COVID-19 will continue to impact production at Las Bambas during the second half. While we are effectively managing this challenge, we are not yet able to provide revised guidance. We will, of course, do so once there is greater clarity and operational certainty from a return to full-scale mining and the production activity. At Kinsevere, copper cathode production of over 18,000 tonnes was recorded in the second quarter. As the site continues to demonstrate improved operational performance in 2020, following a shift away from the Mashi pit. The second quarter results for this period was slightly above the prior period, with the wet season having subsided. This also allows the site team to achieve an increase in mining volumes. At a cost level, the company continues work to progress the assessment of a new phase in the Kinsevere project, being the processing of sulfide ores and the addition of a cobalt circuit to the operation. I anticipate that we will reach a decision on this project during the second half of the year. Turning now to our zinc operations. Dugald River delivered over 43,600 tonnes of zinc during the quarter, which was 22% above both the prior year comparative and the first quarter 2020 period. This pleasing result was underpinned by increased ore mining, with results emerging from a focus on opening new mining fronts, which led to a record month for stope ore during the period. The resulting steady flow of ore to the mill, together with a sustained improvement in recovery levels, also supported the production outcome. This work will be of great importance for future metal production, with current great levels anticipated to continue over coming periods. At Rosebery, zinc production of over 16,400 tonnes was slightly below levels achieved in the first quarter and 22% below the results for the prior year comparative period. As previously advised, this decline in production compared to prior years, reflects the anticipated decline in all grades as mining activity moves into deeper areas. Seismic events in 2019 have also continued to constrain mining activity, indirectly impacting our production. We anticipate regaining access to impacted areas shortly. In the interim, the team at site has developed lower risk mining areas that will enhance mine flexibility and our response to future seismic events. Regarding the longer-term future of Rosebery, we remain committed to extending the operating life of this site and continue a resource extension drilling program. I am now happy to take your questions. I would ask that all questions to be directed to me in the first instance. I will then call members of the executive team to respond as appropriate. Please can all questions be asked in English, and we will arrange for translation for Mr. Wei, who'll be able to address Las Bambas-related matters. I will hand over to the moderator.
[Operator Instructions] Your first question comes from Lawrence Lau from BOCI.
I have a couple of questions. First of all, I would like to know more about the current status of the operation in Las Bambas? Like you mentioned about road blocking, is the road being cleared now? And what kind of productivity at the current status compared with the normal level? And secondly, you mentioned in the last time, we have seen that you have done an interest rate swap. I would like to know at what level you have a fixed interest rate on those loan concerned? And finally, what is your latest guidance on the Capex, given the likely delay of the project in Las Bambas?
Okay. Thank you. I will ask Mr. Wei to answer the first question and then our CFO, Ross, will address the following 2 questions. Please make the translation of the first question to Mr. Wei.
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Wei? [Foreign Language]
Okay, okay. Sorry. [Foreign Language]
[Interpreted] So Mr. Lau, in answer related to your Las Bambas question. So Las Bambas has been able to maintain the continuous operation during the COVID-19 pandemic. Active -- activity levels have fluctuated. However, during the second quarter, were driven directly by the availability of Las Bambas workforce. The workforce rate fluctuated on the ship change base of 65% of the average. And the average level of mining capacity for the quarter was at 75% of normal levels. Currently, Las Bambas is operating at 95%, with an average of 75% of the workforce available. And then the expectation for next quarter is to operate at 100%, with an average of 85% workforce levels on-site. Thank you.
It's Ross Carroll here, and I'll answer the 2 finance-related questions. Virtually, with the interest rate swap, we've effectively hedged the LIBOR rate for half our exposure for the next 5 years. And we've locked in an interest rate of 0.43%. Now that is well below what it has been over the last couple of years. And at different times over the last couple of years, we've been looking at a rate of nearly 2%. So it's quite a significant saving, and we're happy to lock in that rate, as I said, at 0.43%. In the second question, in relation to the Capex, our CapEx guidance was $600 million to $700 million initially. We'd probably be in a better position to give an updated revision on that at our half year accounts, which will be released next month. But certainly, you could expect it to come in, so at the low end of the $600 million to $700 million, if not even lower again because, obviously, with the COVID virus, we've had to curtail some activities so that we can maximize production. So that has meant that some capital projects have been delayed slightly, but as I said, we'll give an update on that at the half year results in late August. Thank you.
Your next question comes from Han Fu from JPMorgan.
Actually, the first asker has already bring up some of the questions. The remaining ones from my side is that, can you give us a bit idea of how the Las Bambas location is versus the epidemic center of current outbreak in Peru? And is that neighboring communities are also heavily impacted? Or is that like Las Bambas is remotely located and less affected? And the second one is that could you give us a bit more context on the convoy truck incident, where has the road been cleared so far? And what's their demand behind the protest? A bit of context on that would be great. And the third one is just a clarification for the briefing part. I didn't hear quite clearly. Did you say that in the Dugald River, the ore grade decline will continue or the current ore grade level will continue into like foreseeable future? So yes, that will be questions from my side.
[Foreign Language] The first question, I actually couldn't get very clearly. I got the second one about the convoy truck incident background and the demand behind that. And the third one was related to Dugald River. Can I just clarify your first question so I can explain clearly, please?
Yes, the first question -- sure. So the first question is about, can you comment a bit about the COVID-19 situation surrounding the Las Bambas area? Is that Las Bambas remotely located so that area is less affected? Or is that also like the pandemic is very prevalent in the surrounding region?
Okay, got it. Thank you. Thanks very much. [Foreign Language]
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[Interpreted] Fu Han, so Mr. Wei just mentioned, because Las Bambas is remotely located in the Africa region, so the impact of the COVID-19 less impacted compared with Cusco and the other city areas. However, because of the economic interactions, that we do see a little bit of increase in few communities around the Las Bambas area.
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[Interpreted] So Fu Han, actually, this happened on the 20th of July, Monday. So 1 concentrate truck and a 4-wheel drive was set on fire on the Southern Road Corridor, which is 1 kilometer from the city of Espinar in the Cusco region. These 2 convey are part of -- so these 2 vehicles are part of the convoy and these 2 cars were stopping by the protestors, and they sprayed the gasoline and set fire to the vehicles. The drivers of both vehicles who were threatened by the protesters suffered injuries and now are safe and receiving care. So the blockage -- blockade is still in place by community protestors. Antapaccay and a government officials have released the statements, both regretting the violence and imploring for a return to negotiation. So there have been further acts taken by some community members in the past few days against the Antapaccay operation and the road remains blocked. The community is demanding the presence of Peruvian Prime Minister and other cabinet ministers to resolve this issue. And that the demand related to the roadblock is again related to the compensation, but this is not -- this issue does not involve Las Bambas.
Fu Han, your third question related to Dugald River, in my briefing -- in fact, the key message about the Dugald River in the second quarter is we got higher mining volume. We got better recovery, but we said the grade level was lower than our anticipation. You can see from our production report the average grade of ore mined in the second quarter at $10.28. We are happy this ore grade level will continue over coming periods. I think that's a very fine message.
Your next question comes from Jack Shang from Citi Research.
Geoffrey, Ross and Maggie. Two questions. First one, regarding the nature of the community issues. It seems that over the past few quarters, there has been more frequent roadblocks. And it seems that the local communities will just demand for money. And maybe probably as long as they spend them all, they will block the road again. So are there any solutions that you can foresee at this moment to solve this issue more permanently? Otherwise, it becomes more of a normal disruption every year to your Las Bambas operation. So the overall nature and how do you see the solutions potentially to get out of this over the medium term? That's my first question. And the second one is regarding Las Bambas operation sales, so I recall that last year, you -- due to the last year's roadblock. You've already built up, I think, over 50,000 tonnes of corporate containing inventory at Las Bambas. So what is the inventory level now? And is it -- was it a case that your sales volume were also affected during the second quarter. I can imagine so, but I want to understand it a little bit better. Have you been building more inventory on-site over the second quarter? And another question following up on this is with the operation level, utilization is affected, by over 20% quarter-on-quarter down in the second quarter. How was the cost levels? How did you manage to maintain the -- cost production costs at Las Bambas?
They are all related to Las Bambas, I will ask the translation be made to Mr. Wei. But regarding the cost performance, maybe our CFO, Ross, can also add some comments after Mr. Wei.
Thanks, Geoffrey [Foreign Language]
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[Foreign Language] [Interpreted] So Jack, Mr. Wei just answered some -- answers around the logistics, the concentrate transport. I think that's related to the sales as well. So we're trying to build a safe and reliable logistics solution for Las Bambas, which is critical to the current operation and supporting the future expansion. The road and rail option continues to be improved with the road upgrades; better management of dust and vibration; and the investigation of alternate routes or bypass options. So regardless, however, the road is very exposed to simple actions by the many remote communities through which the road travels. Increasingly, the actions of external agitators seeking a share of community compensation is playing a negative role with a number of arrests related to the extortion carried out in 2019. We continue to work very closely to -- and hard to build the relationships, provide the development and the business opportunities, and deal quickly with the grievance to maintain road access. We remain constructive dialogue with the key stakeholders. So from the medium term, we continue to work together with governments, community and the third parties on transport option, including alternate roads, routes, pipeline and rail options and a combination of all these. We -- there are longer-term solutions, but it is critical to the future of Las Bambas. We also have begun a study in relation to a pipeline option, but this remains in the very early stage of the development.
Maggie. Just a follow-up -- sorry. [Foreign Language]
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[Foreign Language] [Interpreted] So thank you, Mr. Wei for your answer, just following on from your answer, because Jack would like to know the nature of these community issues because even we found alternate or pipeline or other bypass options, but that will not stop the community to protest or block the road. Are their demands like compensation related or cash kind of demanding? Can you please give us more details on that? [Foreign Language]
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[Foreign Language] [Interpreted] So Jack, actually, Mr. Wei just mentioned, because Las Bambas is located remotely, and its logistics corridor actually is a combination of over 400 road, plus over 300 rail. So Las Bambas has always been facing these community issues along these logistic routes because there are over 80 communities along the logistic routes. So the current focus of Las Bambas team is actually trying to reduce the risk or mitigate the risk and trying to provide a better logistic environment for the operation. Thanks.
[Operator Instructions] We do have a follow-up question from Lee Eun Young DBS Bank.
Can you hear me? Hello?
Yes.
Yes. I have from [indiscernible] on the -- still Las Bambas. So I want to know about current situation. So currently, what's your condition for logistics for Las Bambas? So currently, Las Bambas is not able to transport copper concentrate? Or have you secured another route? And then I think I didn't get answer for the -- catch answer from the previous analyst, so what are your inventory level in the -- of the copper concentrates in Las Bambas? I believe there will be the quite sizable, the inventories for the copper concentrate. So I'm just wondering if the company is able to sell and then ship this concentrate to the customers in second half? And I understand that you are making last 1 to 4 warning -- early warning for the first quarter. So I read at the comments, but I just want to specific reason for this ordering, making quite sizable losses for the first quarter? That's all questions from me.
Great. Again, I'll ask Maggie.
I'll just clarify your question, please. So the first one is you would like to know the current logistics of Las Bambas, and the current stock level -- the inventory level, right? And then are we able to reduce the stock for the -- in the second half? The second question is on the profit warning.
Yes. Yes.
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[Foreign Language] [Interpreted] So currently, the site stock level is 116,000 wet metric tonnes, which represents 36% of the total site storage capacity used. And inventories are planned to be reduced in September. This is subject to the availability of truck operators and the train crew affected by COVID-19. Thanks.
And Ross, on the profit warning?
Sorry, I didn't quite understand what the question was about the profit warning.
Yes. So yes, my question is that -- what is the major reason for the profit warning? Is it from the operation -- operating losses from Las Bambas? Or if there are any other reasons? And then what is -- what would be the cost level of the Las Bambas in the first half compared to how much is increased by -- compared to the last year? Yes. And is there any specific other like provision losses, something is affected to the losses in the first half?
Yes. I'll start with the profit warning question. The reason for the profit warning is twofold. Firstly, with the COVID, we saw a significant drop in prices during the -- particularly in the month of February, so that copper price dropped from $2.70 down to -- it hit a low of about $2.10. Then the zinc price dropped from roundabout $1 down to below $0.80. So the price has a big impact on us. And I think if you look at our previous materials, you'll see how much it is. But roughly like a $0.10 drop in the copper price is about a $90 million drop in profit. So that was one impact. And the other impact was operations hit primarily at Las Bambas because you would have seen that the 3 other operations have had strong quarters -- strong quarter then strong half. At Las Bambas, we had the issues with the conveyor belt earlier in the year. And then we've been effectively impacted by COVID since about the middle of March when the state of emergency was declared. So it's a combination of price, the initial production problems at Las Bambas plus the impact of the COVID. Now with the cost, we will disclose the cost at Las Bambas when we release our half year results. But as Geoffrey said earlier, we're not giving revised guidance on Las Bambas until the whole COVID situation becomes clearer, particularly in Peru where it's quite a significant issue there at the moment. But as far as cost management, obviously, we're very focused on that. We've reduced maintenance cost, not necessarily because we wanted to, but because we can't get enough people on-site. We've also reduced our community spend because we're actually physically not able to go out into the communities and spend that money. And then there's just really deferral of other discretionary costs. People aren't traveling and all sorts of things, but obviously, given the tough economic conditions, we are trying to limit our expenditure as much as we could.
Thank you, Ross. Yes. Also just to clarify what exactly is the stock level, because we gave the number of metal tonnes before. And Mr. Wei just mentioned, that is the physical tonnes of stock level, that's 111,800 tonnes. That is consistent to the number we disclosed in the production report that is equivalent to 38,000 tonnes, metal tonnes, just to clarify that.
Our next question comes from Jack Shang from Citi Research.
Sorry, it's me again. Just want to follow up. Just now that Geoffrey mentioned that, that was physical tonnes. And in terms of metal tonnes, apples to apples, I would just want to clarify, is that 38,000 metal contained? And if that is apples-to-apples, it means that over the first half, Las Bambas has managed to sell more than its production. So as a result, the inventory on-site declined because I recall that at the end of last year, it's over -- it's been over 50,000 tonnes, right? This is just first point I want to clarify. And the second one was regarding to cost and management downsize. Ross mentioned that you are actually cutting the expenditures, of course, on-site. And so how does that work in a situation where your utilization has been significantly affected over the second quarter?
The first one, yes, you are right. In the first half, we shipped more copper concentrate than we produced, so we've got reduced stock level -- I mean constant stock level. And as we said in weather report, we expect we can ship all the concentrate stocks in the second half. And about the quarter -- our measures to try to control the cost or reduce the cost, I'll let Ross to comment on this.
Thanks, Jack. I think with the cost, it's -- because of the manpower shortages on-site, and because of the COVID restrictions, we haven't been able to get as many people on-site. So now even in the mine, for instance, we focused on ore mining, somewhat at the expense of waste stripping because it's -- obviously, we're trying to keep production going as high as we can initially. So we will have had lower waste mining costs. We've also had to defer some maintenance, whether it be to the fixed plant or the mobile plant, again, because we just can't get enough people on-site. So I think Mr. Wei mentioned earlier, we're sort of roughly around 75% to 80% of manning on-site. So obviously, having less people on-site means we'll be spending less money. So that's a bit of -- in a way, a deferral. But as I also mentioned in the previous question, we're tightening our belts as much as we can because we have reported a loss, and we're going to do everything we can to mitigate that during the year. So anywhere where we had discretionary spend, we've stopped at where we could. So I think when the half year results come out, I think you'll see that the cash production costs have reduced significantly, and it's not just at Las Bambas, but at the other sites as well.
That does conclude the question-and-answer session. I will now hand back to Mr. Gao for closing remarks.
Okay. Thank you. In closing, let me reaffirm that my management team and I remain committed to safely guiding MMG, its employee -- employees and members of our host community through this volatile period. Despite the challenges faced, we remain positive about the future of not only the company, but the regions in which we operate and the fundamental strength of our key commodities. I look forward to speaking with you in further detail at our interim results presentation in August. Thanks for joining us today. If you have any further questions, please follow-up with our Investor Relations or corporate affairs team. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
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