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Edited Transcript of 1208.HK earnings conference call or presentation 22-Aug-19 7:30am GMT

Half Year 2019 MMG Ltd Earnings Call (Chinese, English)

Hong Kong Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of MMG Ltd earnings conference call or presentation Thursday, August 22, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ross Anthony Carroll

MMG Limited - CFO

* Xiaoyu Gao

MMG Limited - CEO & Executive Director

* Xu Jiqing;Executive Director and Executive General Manager

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Conference Call Participants

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* Han Fu

JP Morgan Chase & Co, Research Division - China Basic Material Analyst

* Jack Shang

Citigroup Inc, Research Division - VP and Analyst

* Yan Chen;CICC;Analyst

* Martin Ritchie

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Presentation

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Xu Jiqing;Executive Director and Executive General Manager, [1]

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Good afternoon, ladies and gentlemen. Welcome to MMG Limited '19 -- 2019 interim results presentation. Hosting today's meeting is the company's Chief Executive Officer, Mr. Geoffrey Gao; and Chief Financial Officer, Mr. Ross Carroll. We'll kick off the meeting with an overview of the company's performance by Mr. Gao. This will be followed by an analysis of the company's financial performance by Mr. Carroll.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [2]

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Thank you, Mr. Xu. Good afternoon, and welcome to the 2019 interim results briefing. I trust many of you have read through our results materials. So today, I will discuss the first half results, our outlook and our strategy going forward. Ross Carroll, our Chief Financial Officer, will also discuss the financial results in detail. You may also have read that we have announced a new Executive team member, Mr. Wei Jianxian, who will join us in the second half of this year as Executive General Manager, Operations, Americas, taking responsibility for our important Las Bambas asset. Mr. Wei is a mining engineer with over 30 years of mining experience in challenging contexts. He joined us from our major shareholder, China Minmetals. His focus will be on leading the strong Peru management team, and he will play a key role in managing the Las Bambas joint venture on behalf of the owners. I look forward to introducing Mr. Wei to shareholders at the next opportunity.

Now I will start with safety as it is our most important value. MMG's total recordable injury frequency rate, or TRIF, is the lowest of all 23 companies in the International Council on Mining and Metals. This is something that we are very proud of as we believe that good safety performance is the foundation of good operational performance. In the first half of this year, however, we have seen a slight increase in our TRIF, which remind us that we still need to place safety at the forefront of everything we do, and we must continue to improve in this area.

Regarding our social and environmental impact, we continue to focus on improving our environmental performance and our contribution to communities. We know that this is key to maintain support for our future growth plans. As CEO, I will continue to drive strong performance in this area.

Before Ross takes you into the financial results in detail, I now wanted to quickly discuss the 2 main drivers that contributed to our disappointing performance in the first half. This includes the volatile macro environment and the impact that it has had on the copper price and also the logistics disruptions at Las Bambas.

Firstly, the copper market. Investors are clearly concerned that trade tensions and the rising geopolitical risks will lead to a slowdown in global growth. These concerns are being suppressed through the copper price, which is seen as a proxy for global growth. Given our strong earnings leverage to copper, this has clearly had an active impact on our financial results and our share price. The copper price is currently at 2-year lows and is 17% below its average in the first half of 2018. Having said that, we still see copper demand as solid despite the fact that it is not growing as quickly as it has in the past. Furthermore, the physical market is very tight, with TCRCs at 7-year lows. In the medium and longer term, the outlook for copper remains extremely positive. Copper is exposed to 3 mega trends that will underpin consumption growth over the coming decade. These are the decarbonization of energy, the electrification of the automobile and continued industrialization and urbanization of developing economies. China is at the forefront of this revolution. Under the blue skies of the future, we'll need more copper.

On the supply front, we continue to see more setbacks and challenges for copper projects. Technical, environmental, community and the geopolitical risks are all becoming more prevalent. In this difficult market, MMG has a unique perspective as an international operator with support from China's largest resources company, China Minmetals, as major shareholder. We view this as a competitive strength that underpins our strategy to develop our assets to their full potential and to target value-adding M&A in copper, particularly at these low points in the cycle.

Now to an update on Peru logistics. The Southern mining corridor is currently experiencing heightened community unrest particularly following the recent approval of the Tia Maria project. Much of this has a focus on the Matarani port used by Las Bambas and the 3 other major producers, making it the world's largest copper port, accounting for 49% of Peru's total copper production. The port and the rail has been open and running normally for the last 2 weeks. The port and the rail system is currently operating normally, but risks remain.

The broad logistics route used by Las Bambas is complex. It traverses remote communities in the Andes on its way to Pillones transfer station and then to Matarani port. It is important to understand that the issues that have periodically blocked this road are largely related to compensation. These are not protests to stop our operations. Following the community blockage in March, April, we have established dialogue tables with the community and government. We continue to engage in dialogue with the objective of finding long-term solutions to community demands.

Now I hand over to Ross for the financial results.

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Ross Anthony Carroll, MMG Limited - CFO [3]

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Okay. Thanks, Geoffrey, and welcome, everyone.

As Slide 9 highlights, our financial performance has deteriorated in comparison to last year, mainly because of lower commodity prices and a temporary plant shutdown at Las Bambas. This was partially offset by a full 6-month contribution from Dugald River following its commissioning in May 2018. Expanding upon the detail, revenue was down 27% or $511 million. And to give you some indication of the impact of the Las Bambas disruption, we have stockpiled inventory at the period end of around 33,000 tonnes of copper. This impacted revenue by approximately $230 million. As I mentioned earlier, the other major drag on revenue was lower commodity prices across the board. The detail of this you will see on the following slides.

In addition, Kinsevere production was also 12,000 tonnes lower due to operational challenges in both the mine and the processing plant in the first half of 2019. EBITDA was down by 34%, and profit after tax attributable to our shareholders has reduced from $124.2 million profit down to an $81 million loss.

I will talk about the operating factors that influenced our results in the next slide, but it's important to mention our depreciation and interest charges.

Depreciation increased by approximately $45 million due to the full 6-month contribution from Dugald River and additional ore mined at Las Bambas. Interest expenses were also $21 million higher despite a lower overall gross debt position largely due to the approximate 1% increase in LIBOR interest rates in last year -- compared to last year and the full 6-month interest contribution from the Dugald River debt facility, and that was because the interest started getting charged to the P&L statement once the project was commissioned. Fortunately, we are starting to see some interest rate relief with U.S. interest rate increases of last year starting to reverse, so LIBOR rate is coming down.

Slide 10 looks at the EBITDA bridge between the first half of 2016 -- of 2018 and the first half of 2019.

Starting from the left, we have the impact of Dugald River. In the 2 months post commercial production in 2018, Dugald River's EBITDA was $28.8 million. In the first half of 2019, EBITDA was $52.5 million, with the difference of $23.7 million being reflected in the chart.

Next is the impact of price which drove revenue and EBITDA $154.5 million lower. Compared to last year, the copper price was 11% lower and the zinc price was 16% lower. We then have a $33.2 million impact from our royalties and selling costs, which was due to lower sales volumes in the first half, now partially offset by higher royalty rates in the DRC. Movements in foreign exchange had a negligible impact of $0.2 million.

Moving to the right, the biggest impact to EBITDA was the lower sales and mainly at Las Bambas where copper sales volumes of 140,000 tonnes were 48,000 tonnes below the first half of 2018. Similarly, Kinsevere sales were 12,000 tonnes lower and Rosebery zinc equipment production was modestly lower as well.

Of the 60,000 tonne reduction in copper sales in the first half, we can expect to recover about half of that during the second half of the year as we gradually draw down and ship stockpiled inventory from Las Bambas. From a revenue and earnings perspective, the stockpiled inventory should generate about $230 million of revenue and $50 million -- $60 million of EBITDA in the spot -- second half assuming the current spot prices.

Just moving to the right, a $6 million increase in production expenses was the net impact of higher mining and processing costs at Kinsevere, following a 32% increase in material movement and higher asset costs, and this was partially offset by lower maintenance expenditure at Las Bambas in 2019 as 2018 include a major plant shutdown. We also have lower corporate and exploration costs to the tune of $13 million, which has been a consistent theme across recent periods as we continue to deliver on headcount reductions and cost savings.

In exploration, we have also seen a modest reduction in costs following the recent decision for a more streamlined focus and the winding down of greenfield projects in Zambia and Northern Australia. We also had a favorable cost variance of $217 million attributable to the stock movement, which is predominantly related to the inventory buildup at Las Bambas that I've already spoken about.

And finally, the other category was a negative to the tune of $12.8 million due largely to the nonrecurrence of the gain on the redemption of the convertible redeemable preference shares in 2018.

Now to Slide 11, which seeks to explain the profit that ends up being attributable to MMG shareholders.

As you will see, the starting point is $13.3 million, which corresponds to a 62.5% interest in Las Bambas. As we already touched on, these numbers are quite low following operational disruptions and inventory buildup that took place in the first half. We then had a loss of $22.1 million to the other operations, which includes a net loss of $45 million from Kinsevere that offsets a net profit of $23 million from Rosebery and Dugald combined. We then deduct exploration and corporate overheads of $24.9 million and net finance costs, which only includes a shareholder loan of $2.3 billion and a $500 million Dugald River facility, so a reduction of $11.6 million in total. And this was due to the substantial interest savings on the shareholder loan following renegotiated terms from the 1st of July 2018, and that was partly offset by a full 6-month of interest costs from Dugald River.

Just on this topic, I would like to remind investors that the reason why gearing and interest costs are so high is that MMG borrowed all of its equity for the LB project from our major shareholder, CMC. So although in relation to Las Bambas, it doesn't actually sit within the Las Bambas joint venture.

Now to our earnings sensitivity. Now this slide gives our shareholders and analysts an indicator of our sensitivity to both commodity prices and exchange rates.

Copper, zinc and the AU dollar, U.S. dollar obviously have the biggest sensitivity with a $0.10 per pound change in the copper price leading to a $94 million full year impact on EBIT, a $0.10 change in the zinc price leading to a $46 million impact and a 10% movement in the Australian dollar leading to a $33 million impact. So this slide makes it easier for investors to see why a $0.25 fall in both the copper and zinc price from this year to last year has had such a material impact on our profitability. We're working to lower this volatility over time through both cost and debt reduction programs.

Slide 13 shows the impact of the movement in copper and zinc prices on our free cash flow. Free cash flow is operating cash flow from our business, with CapEx, tax payments and interest costs. This chart, along with some additional information in the appendices, will help our analysts and investors to better understand and model MMG's financials.

Currently, we are roughly at $2.60 and $1 zinc price, so we would be sitting with free cash flow of around $95 million at the end of 2019 if we meet production and cost targets. Six months ago, when speaking with you, this number was expected to be around $700 million. Such has been the fall in commodity prices over the past few months.

Now to Slide 14.

I think everyone would be aware that debt reduction remains a major focus for MMG. Following the first 6 months of this year, however, our net debt has temporarily increased by around $100 million. This is due to lower earnings and cash generation in the first half, which we have discussed in detail on the previous slides.

As noted in the slides, stockpiles of copper at 30th of June equated to around $215 million, which we expect to draw down and ship in the second half of the year. As a result, and even at today's lower commodity prices, we expect to resume a trend of debt reduction in the second half, which has been a feature of Las Bambas since the commissioning in 2016 with $2.6 billion of debt reduction during that period.

Another point to note from this slide is that after just having developed the largest copper and zinc mines globally over the last few years, our capital expenditure will start to plateau at around $400 million to $500 million per year with the bulk to be spent at Las Bambas.

Slide 15 highlights our debt maturity profile.

2018 saw us make some prepayments, and we're currently ahead of the loan amortization schedule. Despite some short-term commodity price weakness, with our strong asset base and low-cost position of Las Bambas, we remain confident that we can continue to meet our debt commitments in the near term. We've also been very fortunate to have the support of our major shareholder, which has enabled us to fund the development of 2 world-class assets at favorable times in the cycle. We are confident this support will continue, which is a major benefit to our minority shareholders.

Now to some -- to discuss some exciting developments that we have recently announced from our drilling and exploration programs.

Last year, we announced some changes to our exploration strategy, with a more targeted focus in and around our existing operating hubs and the winding down of some of our more speculative and longer-dated greenfield projects. Positively, this targeted approach is already demonstrating some good early success.

At Las Bambas, we were drilling for hydrogeological and geotechnical purposes as part of the development at the Chalcobamba pit, but these drill holes have intersected mineralization within 300 meters of the existing Chalcobamba reserve pit. What this tells us is the mineralization is likely to be continuous with the main Chalcobamba mineralization and should drive an expansion of the pit design. These intersections are at high enough grains and shallow enough depths to validate our long-term belief that the Las Bambas asset has tremendous potential to significantly grow the mineral inventory and extend the life of the asset.

What is most pleasing is that these results of the first drill holes that we've been able to drill outside of the main Ferrobamba pit following the changes we've had with -- challenges we've had with land access. Our drilling program has identified several exciting targets in the second half of 2019 and 2020, and we look forward to updating the market as the program progresses.

Our DRC exploration program is also delivering some promising results. As you all know, our focus in the DRC has been targets within a 50-kilometer radius of the Kinsevere mine that have the best opportunity for economic exploitation via trucking and processing at the existing Kinsevere plant. The program is known at RAD50 and is critical to adding value to Kinsevere, which is due to the play that's current oxide reserves by 2023. Any new oxide discoveries have the potential to add additional life to Kinsevere and create value and flexibility for the Kinsevere expansion project. However, in recent months, the extensive drilling campaign at our Nambulwa project has delineated 2 prospects, being the Nambulwa Main and the DZ prospect, that show good chances of economic exploitation of oxide ore for Kinsevere. In addition to this, we have a number of other very exciting prospects at Mwepu and [Southern Hiroshi] within the RAD50 program, and we look forward to updating the market on these developments as the results are received.

I'd like -- now I like to hand you back to Geoffrey.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [4]

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Okay. So I'll talk a little bit more about MMG outlook.

In June this year, we celebrated the 10th birthday since the formation of MMG. Over that time, we have built a great company and transformed ourselves from an Australian-focused business to one with a portfolio of high-quality international assets in the world's most exciting mining regions. We have also shifted our production profile from zinc to copper over this time. As we look ahead to the new decade, we will grow our business and place our focus on maximizing value generation for our shareholders. MMG is pursuing a strategy that we expect will see us valued as one of the world's top miners over time. Of the pure-play copper names, we are the fifth largest and the largest copper miner in Asia.

On a consolidated basis, our cash cost for copper and zinc are in the bottom half of the global cost curve. And as a result, we generate tremendous free cash flow through the cycle. We have a track record of delivery. Growth has been consistent, and we have a strong asset base.

Despite the strong platform we have built over the first 10 years, we are not satisfied with our current performance. If we want to deliver on our aspirations, we need to make a step change in our performance. That is why we are embarking on the holistic business transformation program. We will target 3 key areas: first, to reduce overheads and improve efficiency; second, to optimize the operating business; and third, to strengthen our balance sheet.

The key to reducing overheads is to leverage a lean group office while evolving clear responsibility for performance to operational management. The focus at sites is to build competitiveness, maximizing production while driving down costs. There will be significant internal competition for capital, and we will aggressively pursue the best opportunities in our portfolio. And finally, we need to ensure we have the right balance sheet that maximize returns and gives flexibility to fund growth. Our current high debt levels helped us bring growth forward through Las Bambas and Dugald River. But in today's environment, we need to look at ways to improve our funding structure. This includes options to reduce our funding costs and improve the terms on these facilities. We will also look at how and when we approach equity markets to support us in delivering value-accretive M&A.

With that, I would like to open the floor up to questions.

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Questions and Answers

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Xu Jiqing;Executive Director and Executive General Manager, [1]

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Thank you, Mr. Gao and Mr. Carroll, for the presentations. Now the floor is open to questions. Apart from the persons joining us today at the floor, we also have 23 persons joining us through our dialing system. So whenever you have a question, just let our operator know, and then she will inform you how to dial in for the questioning.

Now the floor is open to questions.

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Han Fu, JP Morgan Chase & Co, Research Division - China Basic Material Analyst [2]

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I'm Han from JPMorgan. So I have 3 questions. The first one is, since we have some stockpiling at the Las Bambas due to logistic challenges in the first half, does that affect our maybe overhead costs, so that in the second half, if we're destocking that pile, will that help us on this cost reduction? That's the first question.

Second one is for the drilling or exploration progress in the -- both Las Bambas and Kinsevere. When can that turn into a feasibility plan, and when can that start to get developed? And what scale of CapEx will that require?

The third question is, we have heard there are some new mining policy change considered at Peru. Have you heard any news on that front or any insight you can share?

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [3]

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Thank you. Yes. I would like Ross to take the first one.

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Ross Anthony Carroll, MMG Limited - CFO [4]

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Yes. With the first question, in regard to stockpiles, it won't lead to any cost reduction as such. And in fact, it will cost us money. It's around about $100 a tonne to get the concentrate from the mine down to the port. So you'll see our transport costs actually go up in the second half because we'll be getting proportionately more tonnes to the port. But otherwise, it doesn't have any other impact on costs. Yes.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [5]

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Okay. On the exploration activity or drilling activity, as you see, generally, they are still in the early stage, and the progress is a little bit advanced in the Kinsevere than Peru, but we need to do more drilling before we can change that into the resources according to job standard. And then we will keep updating to the market about our progress in this regard. Okay. Thank you.

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Ross Anthony Carroll, MMG Limited - CFO [6]

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I think, Geoffrey, if I could just add to the exploration successes. Both the Chalcobamba Southwest, it would -- if -- assuming that it's developed, would go through the Chalcobamba pit infrastructure, so -- and we're already doing a feasibility on the Chalcobamba pit at the moment. And then the discoveries in Kinsevere would flow through the Kinsevere plant, so there'll be minimal sort of capital cost there. So it's not likely we'll be opening up new mines, so -- it will be just some form of trucking to get it to the Kinsevere operation.

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Xu Jiqing;Executive Director and Executive General Manager, [7]

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You also have a question regarding the new mining policies in Peru, right?

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Han Fu, JP Morgan Chase & Co, Research Division - China Basic Material Analyst [8]

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Yes.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [9]

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In fact, we don't have real information on that because that was firstly mentioned by the Peru President in his speech. And after that, no more detail been released, so I don't have any clue on that right now.

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Xu Jiqing;Executive Director and Executive General Manager, [10]

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Thank you. The next question?

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Yan Chen;CICC;Analyst, [11]

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Yan Chen from CICC. A couple of questions here. First one is, have you contracted the selling price for the 30,000 tonnes of copper concentrate stockpile ending in the first half? That's the first one.

Second question is for the cash cost of roughly $1.12 per pound in the first half. Is that based on the sales volume or production volume? The reason why I'm asking this is what cost did you use for the stockpile price -- stockpile cost in the second half in the calculation?

The third question is, what's the situation with the local community there? Are there still any outstanding issues with them?

And the fourth would be probably a longer-term question. I guess one problem facing the investors is that even though operating leverage of the company is actually quite low because we are a low-cost producer, but the total financial leverage of the company is pretty high if you include our interest cost and also the actual tax rate that we are paying in Peru. So I'm just wondering whether the company has got any longer-term plan to reduce the overall financial leverage.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [12]

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Probably, Ross, you take the first 2. I do the third one.

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Ross Anthony Carroll, MMG Limited - CFO [13]

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Yes. Sorry, I didn't write down the first question quick enough. Could you please repeat it?

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Yan Chen;CICC;Analyst, [14]

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Yes. It's just that have you contracted any sales price for the stockpile?

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Ross Anthony Carroll, MMG Limited - CFO [15]

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Yes. No, we haven't because it's all sorted on LME exchange prices at the time the ship sails. And then as a quotational period, that basically gives the time for the copper to get to the smelter, so the price will be determined based on the shipping schedule. So effectively, they are floating prices. So hopefully, the price goes up.

And the second question around the stockpiles and the calculation of the C1 cost, that the C1 is based on production tonnes, not on sales volumes. So the C1 is based on the higher -- the 185,000 tonnes, not the 140,000 tonnes that we shipped.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [16]

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I may take the chance to talk a little bit more about the logistics or community situation impacting Las Bambas in Peru. So what most recently happened, that is the protest against the government's decision to approve the Tia Maria project, and that has impacted the operation in Matarani and also the rail system from the transfer station to the port. I think through the dialogue of the government with the community leaders, and right now, as I mentioned earlier, the rail system and the port has been back into normal operation, so -- but we should cautiously see there are still ongoing protest activities and the risk still remain. So this is about Matarani.

And along with our logistics route used by Las Bambas, definitely, that is more complex because our transportation traverses remote communities all the way down to the transfer station. That's around 500 kilometers long. And as I mentioned earlier, it is important to understand that all these activities periodically block the road. That related to the demand for compensation. So none of them are pretty mean to stop our operations. So this is a quite important message. And right now, following the blockade happen in the first half of this year, right now, quite a few dialogue tables has been set up with the mitigation of the -- with the mediation of the government. And we continue to engage the dialogue with the government and also with the communities to work on the long-term solutions to community's demands.

And then the other one I want to touch about the -- more specifically about the Yavi Yavi of Ferrobamba community because that's the place the blockade happened in the first half of this year. And we have given the update about the agreement have been strike with the communities. And right now, we are still in a continuous dialogue with communities in implementing the agreement we had with the communities. And in the process, the communities time and time may raise additional requests, but our main team has been carefully working on managing the situation. So in general, we should see this is definitely a going challenge. But what have now, we believe, already now setting up of all these dialogue tables with the involvement by the government, by the company, also by the communities, that is really a good step forward in managing all these related things. So we still believe we are in a -- now in a better position to manage all these challenges or in meeting the demand of the communities than before. But I should say this will be an ongoing challenge and ongoing focus of the management's effort. Thank you.

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Xu Jiqing;Executive Director and Executive General Manager, [17]

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Next questions? Do we have any questions from the dial-in system?

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Operator [18]

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Yes, sir. You have 1 question from the line of Jack Shang from Citi Research.

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Jack Shang, Citigroup Inc, Research Division - VP and Analyst [19]

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So a couple of questions here. These are 3 questions. The first one, regarding cost. So your first half C1 cash cost is USD 1.12 per pound. And you didn't change or didn't revise your full year cost guidance. I recall it's $1.25, which is the higher range of your previous guidance. Would that imply that your second half cost would be much higher in terms of C1 at Las Bambas? That's my first question, regarding the second half C1 cost implied guidance. And also, a follow-up on this would be in the longer term, so what is this year's -- what is the current ore grade, the copper grade out of the ore mine at Las Bambas? And how that will trend into next year, 2020, and 2021, because that all matters to the depreciation cost and other C1 cost items? So what's the general trend of the outlook for the ore grade going forward? So is the first question.

The second one is a small follow -- is a quick follow-up regarding the processing cost at Las Bambas in the first half. Can you elaborate a little bit more why the processing cost actually declined quite a lot, quite significantly in the first half of last year -- over the same period last year? I understand the transportation part, but how about the processing part?

My last question would -- is actually regarding your long-run strategy regarding M&A, potential acquisition, because the Kinsevere is approaching the end of the mining cycle or mine life and your Las Bambas is getting into a stable operational stage. So what's the future plan? Are you looking -- currently actively looking for assets? Or is your focus still primarily focused on debt repayments in the next 2 years?

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [20]

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Can you answer the first 2?

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Ross Anthony Carroll, MMG Limited - CFO [21]

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Yes. Yes. First -- thanks for the question, Jack. First, in regard to the cost here, it was $1.12 for the first half. And it was a bit of an abnormal cost in that regard because, firstly, a lot of the concentrate was nicely transported, and the transport cost is around about $0.06 to $0.07 a pound. So if that ore had it been transported to the port, the C1 cost would have been up around $1.19 instead of $1.20 -- instead of $1.12. Now also, we did defer some maintenance and some expenditure while the mine was shut in for the 2 weeks as well during April. So that is why the costs are why there were for the first half. Now in the second half, we've said we expect the cost to be within guidance of $1.15 to $1.25 but up towards the upper end, so I think you can probably interpret that at somewhere between $1.20 and $1.25. So it's roughly in line with where it was in the first half if you normalize that for the transport costs. But obviously, in this live price environment, we're doing everything we can to reduce costs at the mine now at the time when we are struggling to make money.

In regard to your question on the ore grade, it was -- it's around about 0.85 for this year, and over time, it will trend down. It won't be significantly lower next year, but it will trend down. And that's why we're making improvements to the processing plant so that we can put more ore through the plant which will help us compensate for the lower grade over the years. But we'll give some guidance on next year's production and will be in the January quarterly report.

Now in regard to your question on the processing cost, there's 2 reasons why it's lower. Firstly, as we highlighted, there was a major plant shutdown in the 2018 half year, so that was quite a significant shutdown. Then also, when we closed the mine for the 2 weeks, this year, that meant that the processing plant wasn't running, so therefore, obviously, the plant costs were actually slightly lower because we weren't utilizing power or consumables for the 2 weeks that the plant was shut down. So that's the reason why the processing costs were lower in this half year.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [22]

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I'll take the question about our strategic focus, updated to, focus more on reducing debt or improving the existing operations or focus more on the future growth opportunities. We should see we have a more balanced approach. Definitely. Now I mentioned that we have embarked business transformation program. That is definitely now what we want to improve the operating performance and also to reduce the financial cost. That is focused on our existing business and make sure we are in a better position to face the coming challenge, particularly maybe a low commodity price cycle. That's one thing.

But at the other side, we do see the low cycle creates some real opportunity for us to look at some high-quality assets, particularly in copper and zinc. Our unique ownership structure that really make that possible because we still can rely on the support of our major shareholder if we can present any real opportunity to have value-accretive M&A opportunities. So we believe we are in a position to do both to deliver better shareholder return. Thank you.

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Xu Jiqing;Executive Director and Executive General Manager, [23]

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Okay. Now the next questions?

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Operator [24]

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Your next question comes from the line of Martin Ritchie from Bloomberg.

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Martin Ritchie, [25]

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Yes. Just to follow up on the question there about M&A. Are you actively looking at projects or assets, companies at the moment for M&A? And how far along are you in that process? And then the second question is just about the transformation program which seems -- it seems very ambitious. Can you -- are you able to quantify where you're going with that, perhaps in terms of how much you can cut costs?

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [26]

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Okay. Thank you for your question. The quick answer to the first question is quite simple. Yes, we keep looking at different opportunities in the market to find the growth opportunities for the business.

And the second thing, about our transformation program, right now, we are still in data gathering, design and analysis stage. So even though in a while, we have set ourselves preliminary competitiveness targets, but we will talk further about this once we have worked that through as Board and management team got more information. And then by that time, we may take that more information on our target to the market. Thank you.

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Xu Jiqing;Executive Director and Executive General Manager, [27]

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Okay. Thank you. So the next questions? Any questions from the floor? Any questions from the member of the media? If there's no further questions for the time being, we'll conclude our Q&A section, and thank you very much for coming today.

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Xiaoyu Gao, MMG Limited - CEO & Executive Director [28]

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Thank you.

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Ross Anthony Carroll, MMG Limited - CFO [29]

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Thank you.