Sandfire Resources Limited (SFR) Earnings Call Transcript

Thank you for standing by, and welcome to the Sandfire Resources September 2026 Quarterly Report. [Operator Instructions] I would now like to hand the conference over to Mr. Brendan Harris, Chief Executive Officer and Managing Director. Please go ahead.

Good morning, everyone, and welcome to our quarterly call. Look, I plan to keep my opening remarks very brief, and given we're only 3 months into the new fiscal year, and we're trading very much to plan. As you'd expect, our executive team is here with me today, and we're looking forward to answering your questions. But before we start, I'd like to acknowledge the traditional custodians of the land on which we stand, the Whadjuk people of the Noongar Nation as well as the First Nation people of the lands in which we conduct our business, with our respects to the elders and leaders past, present and emerging. As always, we'll start with safety. We finished the period with a group drift of 1.8 compared to 1.6 at 30 June, having reported 7 high potential incidents in the quarter. We do have an extensive and connected program of work underway across the organization, led right at the top by Jason Grace. It's designed to further enhance our system of risk management while creating an environment where all of our people feel safe to speak up and stop with when something doesn't look or feel right, irrespective of their title or level in our organization. Of course, that's because nothing will ever be more important than the health and well-being of our people. More broadly, I'm sure you've seen we've made a very, very solid start to the financial year, with group production tracking bang in line with full year guidance and our strong commitment to exploration delivering very exciting results. During the quarter, we achieved copper equivalent production of 38,900 tonnes, including 22,900 tonnes at MATSA and 16,100 tonnes at Motheo. I note with the A4 pit now contributing around 15% of ore feed to the crusher. You've also seen that we've maintained group production cost and capital expenditure guidance with volumes still expected to be evenly weighted across half 1 and half 2. While our operations have also retained a very competitive position on the global cost curve, of course, we're watching energy markets closely, given the potential to further exacerbate inflationary pressures, and we're looking forward to taking your questions, as you might imagine, there are many moving parts, which will be good to work through with you; suffice to say, our cost guidance looks good. Al Calculo, we have completed the first 8.7 kilometers of our planned 130-kilometer infill and extension drilling program despite losing around 3 weeks of site access because of wet weather. We're in the process of adding drilling capacity and remain on track to complete the pre-feasibility study in the second half of FY '28, which we expect to identify a low-cost and long-life copper-gold development opportunity with an optimal scale of at least 10 million tonnes per annum and likely more. At MATSA, follow-up drilling has confirmed the potential of the prior La Juliana discovery hole with further high-grade polymetallic massive sulfide mineralization identified on both sides of the initial Interset, extending the mineralized horizon across some 160 meters of strike. What's more, downhole EMs indicates that the massive sulfide horizon may extend across the strike of at least 350 meters within a prospective geological horizon, which has an interpreted strike length of up to 2 kilometers. Considering the first 4.5 short years since we've acquired MATSA, our team has now discovered San Pedro, Oliva and La Juliana, which really only serves to highlight the incredible of both the Belt and more broadly within the corridor that extends from Aguas Teñidas through to and As we like to say, the identification of new high-grade reserves within close proximity of our modern processing hubs is likely to deliver the best economic return to our shareholders. It's also why we're mobilizing additional resources and plan to allocate additional funds, some $10 million to $20 million, to accelerate drilling at both La Juliana and underground project and with that commence concept studies to help us better understand the scale and economic potential of these exciting opportunities. And finally, at the other end of the spectrum, we continue to view the Black Butte project as a compelling development opportunity, given its relatively high ore grade environmentally sustainable design and minimal surface footprint and have confirmed our ongoing financial support for Sandfire America as their Board undertakes a review of their strategic alternatives, including but not limited to the sale of the company. So when we bring this together, as I've said before, we're set up well operationally, and we have put early runs on the school board, having generated group sales revenue of $480 million for underlying EBITDA of $272 million and an operating margin of 57% to finish the quarter with unaudited net cash balance of $342 million after returning $117 million to shareholders in the form of a fully franked final dividend that was effectively funded out of quarterly free cash flow. We believe we have the right strategy and the right team. We have a strong balance sheet, and we're investing in opportunities that have the potential to unlock significant long-term value for our shareholders. And you can be sure that we'll keep you working hard to do what we say we will do. So with that, let's go to questions. Thank you.

[Operator Instructions] Your first question comes from James Redfern with RBC Capital Markets.

I just want to ask about the MATSA unit cost, please, $95 a tonne in the quarter compared to guidance of $90. Just wondering if you could please run through your exchange rate assumptions are in the guidance. And then also at Motheo in terms of the diesel cost there just in terms of what your guidance assumes for Motheo costs as well, please?

Yes. Look, thanks, James. Look, we might take a chance to explore some of the costs in a bit more detail, give I'm sure that's where a number of the questions will go. Look, our guidance for the euro across the year is 115, and it's really a shape of the curve, as you might imagine, we don't forecast. We take it at 30 June, and we look at a 30-day moving average as we do with the commodities and other uncontrollable. So again, you'll hear us talk in a moment, the euro today is sitting under 112, it's in the 111. So of course, with 90% of that cost base exposed to the euro, that's a really important driver as we look to the second quarter and obviously, the remainder of the year depending on how that continues to play out. What I might do is then just quickly turn to Motheo, I'll come back to MATSA and I want to talk about power. But Motheo, in terms of diesel the right question to ask, it's around 15% of our cost base and I'll pass to Megan to give you a bit of a sense as to how that can flow through into our numbers but also to talk about some of the offsets that we're seeing, which again, as I mentioned earlier, when you take everything into account and you look at our unit cost guidance on a spot basis, we actually think that the current guidance holds for both Motheo and MATSA within materiality. In fact, MATSA, if we run a spot scenario, is probably running slightly below our guidance. Motheo is fractionally above but nothing material. Megan?

Yes. Thank you, Brendan. And James, maybe just to start off with Motheo overall costs are tracking well relative to plan. So across the quarter, just at a headline level, Motheo ran at in excess of a 70% EBITDA margin. So we're still very much seeing margin expansion at that macro level. which is great. And nonetheless, as an compete operation, there is exposure to diesel prices. In terms of diesel as a sort of a percentage of our total cost, it's about 15%, as Brendan touched on. And effectively, our guidance for financial year '27 does assume that the price of fuel steps down about 25% in the second half of the year relative to the first half of the year. And if we sort of flow through that we're experiencing at Motheo. Important to note that the price of the fuel in Botswana are offset by the regulator by Berra. So there is typically a lag with what you see in terms of the global oil prices then flowing through into refined product and Berra than passing those prices on to us. But if we take the sort of current prices we're experiencing in and sort of play that out for the remainder of the year, there is a sort of -- we're talking at 2% to 3% of our operating cost base that is an exposure, that's relatively insignificant is how we think about it, James. So in dollar million terms, around $8 million, effectively, potentially higher fuel cost in the second half, if current prices remain forward the balance of the year. Now as Brendan touched on, there are some, I guess, benefits going the other way that we're also seeing. One of them is TC/RC which are really helping, we're maintaining our position on the cost curve, and we're seeing that play through into our margin expansion. What we've seen in the first quarter is strong TC/RC performance around minus $90 per tonne. We're expecting that to improve yet again in the second quarter. We have a number of spot sales that we've locked in at very favorable market terms. And I'm expecting that we'll see on average TC/RCs increasing to in excess of minus $200 a tonne in the second quarter. So there's some of the things coming through on the other side of the ledger, that are really helping to take off some pressure that we're seeing coming through across the fuel base. The other one is probably just freight rate. So we've been securing some favorable freight rates over the first quarter, really benefiting from our cargoes at 10,000 dry metric tonnes or thereabouts. And so with that side, we can really opportunistically secure what we call stranded vessels that have excess idle capacity that are going past where we're staying. And so that is providing some relief on the other side.

Yes. And I think so, James, hopefully, what helps there is if you look at unit cost, but then right through to C1 and you take all of that into account, as we said, from Motheo's perspective, things are playing out broadly as we'd hope with some -- as we said, offsetting factors. If I go to MATSA, I just want to touch on this because while we're on costs. So you would have seen that European power prices have gone almost somewhat vertical in the last literally a number of weeks, given what's going on in energy markets globally. And obviously, what's going on in the Middle East and obviously, Ukraine. So just to give you a sense, and I'm hoping this isn't a surprise to many of you. We have around 70% to 75% of our electricity prices very much locked away across 3 PPAs at the moment, and that's what you've seen flow into the recent quarter. So we have a relatively limited level of exposure to the spot market. That persists out into the end of the first half. Ironically, as we move into the second half, we end up in a very similar position with slightly less coverage in the first quarter and even more in the second quarter. So we run around an open position in the first quarter of around 35%. That's of the calendar year, '27. But that then goes back closer to just over 20% because our solar facility starts to ramp up and we get actually some of the cheapest electrons available to us. What that means, suffice to say, is, again, if you look at power, power historically being around 10% of the cost base. In fact, that's roughly what's built into our budget and guidance. If you then look at that sort of level of exposure, it's possible minus 2% of our costs that we think -- with the sort of level of increase we could see if current spot rates persist, and that's around EUR 200 a megawatt hour. Just to be really clear, on the flip side, 90% of our cost base is euro denominated. The euro is trading, as I mentioned earlier, below 112. It's in the 111 as we sit here. So in fact, that more than offset the impact of power. So again, lots of moving parts, and I'd just encourage you to think through all of them and not look at things in isolation. We're regularly running spot scenarios to understand where we're at of the business. You can see in our margins that we, as Megan mentioned, continue to see margin expansion. But hopefully, across the 2 business in terms of some of the factors that we don't have a lot of control over it gives you a real sense of what's going on in the cost within the business, James.

Yes, it does. Okay. Can I ask 1 more question, please, [indiscernible]

Yes.

I just want to ask about the zinc production for MATSA. So I think around about 19% of guidance and the recovery was below plan as well. So just wondering, in terms of achieving the zinc guidance at MATSA, is that a function of grade recovery or ore

Yes. Look, I'll try to, Jason, -- and look, I've mentioned other assets historically, other polymetallic fill operations and talk to the level of volatility that they see and 1 reported only recently where I think we saw 20, 30-plus percent variability quarter-on-quarter. Where we always said there's a lot of variability in these operations depending on the stopes that we're actually extracting -- and most importantly, as a path to Jason, from my perspective, continue to see our guidance being met across the business, and we are just seeing that usual variability that -- and in fact, relative to what we've seen historically and relative to what others often see, this is a really low level of volatility if I can stress that, okay?

Absolutely. And thanks, James. If I look specifically at zinc for the quarter and then we can talk about the full year. So we saw an average head grade there of 3.4%. If I look at -- and with reference to Appendix A as well, if I look at basically in the next 3 quarters, I expect to see that zinc grade increase. So up to around about that 3.7% that we have in our FY '27 estimates and in some quarters, even sneaking up close to 3.8%. If I touch on recoveries and just looking at zinc specifically there as well, we had 66% metallurgical recoveries there for Q1. We do expect that to increase over the year to around about 77% on average. And if you look at the impact that we have, particularly in Q1, it's simply a combination of lower grades. So lower grades inherently, we do get lower recoveries. And and that's a consistent theme at MATSA and most other orebodies that I've worked with. But we also have the other factor there as well is that we have quite complex -- a reasonable amount of complexity in our metallurgical domains and particularly what we saw in Q1 was we had a higher proportion of and which we know is metallurgically less favorable, and we do get lower recoveries and low from those ore sources. I expect we'll see significantly lower volumes of that material come into the blend in the next 3 quarters.