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Edited Transcript of ARI.J earnings conference call or presentation 30-Aug-19 1:00pm GMT

Q4 2019 African Rainbow Minerals Ltd Earnings Call

Sandton Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of African Rainbow Minerals Ltd earnings conference call or presentation Friday, August 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Abigail Muelelwa Mukhuba

African Rainbow Minerals Limited - Financial Director & Director

* Jongisa Magagula

African Rainbow Minerals Limited - Corporate Development & Head of IR

* Michael P. Schmidt

African Rainbow Minerals Limited - CEO & Director

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Conference Call Participants

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* Brian Morgan

Morgan Stanley, Research Division - Equity Analyst

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Presentation

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Operator [1]

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(technical difficulty)

and feeding in (inaudible) and we seem to be pretty successful but we're going to bring it in slowly. And obviously, that would have quite a significant impact on the cost. The other thing is that at smelter, we need to -- we do need to buy in a lot of center out of Australia, which is very expensive. And so what we're looking at is defined as you deliver or you generate a significant amount of fines ultimately, albeit we send in lumpy product from South Africa. And we want to convert that lumpy into a type of, I would call it, a center that we've got technology and we're developing and we think we'll be able to do that and that will certainly get the balance of the fines, which we struggle to use back into, let's call it, an artificial lump and feed that into it. So that was -- that's something we're doing, there is a number of other interventions. Sorry, looks like I skipped a page. I'm going to take you back to the manganese ore.

So the disappointing side of Black Rock is obviously the costs. And from our side, we are not too uncomfortable as to why these costs are there and remain so high, notwithstanding a significant amount of capital that we inject into this business. But remember the first 3 years, we first pulled the one shaft down trying -- and then the next, then we had to close the plant, upgrade the plant, then we do the wrap out facilities. We now -- and then at Gloria we -- and that took a year. And each reporting period, that has an impact on us. And this reporting period, we pulled Gloria out for an entire 6 months. We still carry those costs, some of them are just moved around. But -- and this all impacts you. So it's a necessary transition for us to get the modernization, the upgrade, position ourselves, create the flexibility so that we can grow as -- and when we get our better allocation MECA3. So we're still seeing and going to see double-digit increases in the next reporting period and then those things can now normalize and we'll be able to ramp up with volume. And ultimately we -- operationally, this mine is really well capacitated at a stage to do 5 million tonnes providing you can get the allocation downflow at the market. So there's a lot of supposition there but the mine is going to be well-positioned in the long term. So we can get a great investment and very supportive of that.

Jongisa takes me to slide?

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Jongisa Magagula, African Rainbow Minerals Limited - Corporate Development & Head of IR [2]

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28 -- Slide 27.

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Michael P. Schmidt, African Rainbow Minerals Limited - CEO & Director [3]

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Yes, and I apologize because my slides are slightly different. Is it better? Slide 27. So I want to touch just briefly on Two Rivers because what's in the slides, previous one and this one is the (inaudible). So Two Rivers has been experiencing quite a challenging operating period for the last 2 years. So although they still meet all the cost -- overall cost controls, deliver against all targets, mining development and milling, it still remains a safe, profitable, very efficient and we do expect it to be a valuable cash contributor or producer into the business going forward for a long time. It has -- and moved into a lower grade environment. Initially, we looked at a lot of -- and tried to understand whether this -- is this long term, short term, we indicated to the market, we think it's a 3-year transition. We've done a lot of infill drilling and it -- the realization out of the infill drilling into the drilling density, as we're moving under that mountain is quite open. We don't have the densities we require. So a lot of that was inferred. The indications or the historic grades of ore, we're not going to see for the foreseeable future. There are going to be high-grade patches, no doubt, but we see it on the planning that we're going to run it roundabout 3.6. So what are we doing about it? So we've spent a lot of time in looking at the undercutting and if being successful, we're going into the southern area to do some undercutting there in the split-reef environment, and we're seeing good benefits coming out of it. But it's not scalable at this stage. We're currently doing in the region of 15,000 tonnes, maximal of that split-reef would reach 30,000 tonnes. But the split-reef yields less than 2 grams a tonne. With the undercutting, we are consistently yielding between 3.5 and 4, but it's not scalable.

And then so we're saying, well, what else should we do? So we've got more than enough mining flexibility and -- because we're ramping that up to take to at least get the ounce profile back under these, and we want to commission, we plant upgrade next year March. It's an 18-month build, and we will back at 380 because we will have these stockpiles ready by that time. The reason we're not kickstarting it earlier is that our tailings facility or tailings dam is full. We are busy building a new tailings dam and the growth and expansion has to dovetail with the tailings expansion and getting the tailings dam settled up.

So I did touch on the Modikwa's fatality and it had a massive impact, and rightfully so, on the loss of life. But we do -- we are doing a lot of good work. The first 6 months, we saw continual targets over the 200. There is no doubt, in the next 3 years, we can get to 240. We're also transitioning quite importantly from the historic 6 x 5 wastings with massively inefficient equipment, moving all of that and ordering low-profile equipment, ramping all these development ends onto reef. It creates a significant amount of flexibility and will help us accelerate growth. And secondly, it even allows us to move on-reef development on to mechanization which we know is far more efficient than the labor-intensive handheld. So I'm reasonably confident that Modikwa, going through ups and downs, is making progress albeit not reflected. So the earnings look disappointing but I think most of you can understand these accountants are putting IFRS 9 now and that took this but it's put back into that. But If I look at on an EBITDA basis, Modikwa last year was around 50, this year it's 380. So it is moving and I'm confident it's going to move in the right direction. We see indications of PGM prices being pretty supportive and the (inaudible) seems to have picked up and it seems to be, at least for some time, here to stay. So that's quite pleasing.

I -- the last one that I really wanted to talk about, on Page 29 is about Nkomati. So over the last 3 reporting periods, we have had disappointing results. The price outlook looked reasonably, and on that basis, we kicked our position that we'll continue mining. The mine only had an 8 year and now you got a 6-year life. But then the market outlooks changed quite a lot. And it's really consensus that we rely on the market, and we've made a call to exit and close down or rationalize and ultimately put this mine onto closure over the next 12 to 18 months. And there is probably 5 major reasons that support that, notwithstanding -- Brian, I think you had raised or someone raised today in the meeting that if you look at the nickel price today, would you hold out then? But probably the answer to that is, if you exclusively looked at the price, you probably could. But we have declining grades, highly volatile. We have -- every now and again, we get hit with impurities and we've got high arsenic levels. The recoveries go all over, we incurred huge penalties with arsenic. We sometimes can't even ship this material because of the arsenic levels. And with subeconomic and strip ratios as this mine's getting deeper, the cost escalations are running and the volatile nickel price and -- less than 6 years remaining life is -- both partners have agreed that we will optimally harvest this available ore and then we need to work on the ultimate closure. Ladies and gents, I think that's really my key messages I wanted to bring across. Abigail, is there 1 or 2 you wanted to raise before we hand over to Q&A?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [4]

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Thank you, Mike. Yes, there is. So I would like to go directly to Slide 34, just to highlight in terms of our capital allocation principles. We previously communicated these and this is the guidelines by which we defined now the dividend formula and also the guidelines by which we then allocate the cash that we generate. And to discuss the cash that we generated on Slide 35, we -- the business generated cash of about ZAR 2 billion on top of dividends that we received of ZAR 3.3 billion. And the majority of that cash was then used, the biggest bucket was to pay dividends back to shareholders of about ZAR 2.2 billion and then we spent about ZAR 1 billion investing in sustaining CapEx in our businesses. We also put a bit of money on the -- how many rights issue included in that bucket that says investments, which was the ZAR 341 million, the rights issue that we participated in was about ZAR 211 -- ZAR 211 million, at ZAR 19 per share.

Then I want to move to Slide 36, which reflects our net cash and net debt position. We're pleased that our net cash position -- net-cash-to-equity position has improved from 3.6% to 8.8% and the main reason being the cash generated that I discussed in the previous slide as well as the decline in the total borrowings that -- borrowings went down to about ZAR 290 million or rather ZAR 260 million. The majority of that being the repayment of the coal debt as Mike has already alluded to.

So if you look at our adjusted net cash, this is after we have adjusted for the coal loans, which is about just over ZAR 1 billion, the adjusted net cash ends up just over ZAR 4 billion compared to the ZAR 2.8 billion that we reported last year. Mike has also mentioned that since yesterday, Assmang has then declared a dividend of ZAR 4 billion, which means then our adjusted net cash, we could add another ZAR 2 billion onto that number in as far as it's attributable to us going forward.

And then on Slide 37, in the capital expenditure, I just wanted to highlight there that we pretty much -- we're just over 5% above the guidance that we gave for 2019 in terms of our final actual and the majority of that 5% is as a result of the capitalized reef stripping at the iron ore businesses, Khumani and Beeshoek in particular. And that, we expect to see going forward, capitalized waste stripping of about ZAR 300 million, ZAR 350 million or so from iron ore business. Also in the 2020 and 2021, those guidelines have been adjusted, one by about 17% up; the other one, by about 14% up. And the main reason for those is, again, a combination of the waste stripping both at the various businesses as well as the tailings dam at Two Rivers and then I also wanted to highlight in terms of our sustaining Capex, normalized amount is about ZAR 2.3 billion to ZAR 2.5 billion. So the difference then you can just see from that is all these other projects that I've highlighted. I think on a very short note that is about it as far as the capital allocation is concerned.

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Michael P. Schmidt, African Rainbow Minerals Limited - CEO & Director [5]

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So thank you. So we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question from Brian Morgan of RMB Morgan Stanley.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [2]

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Just a couple of questions. Could you just help us a little bit with Sakura? And we get -- you get one line item is just that ZAR 556 million, a clearly accounted loss, that it includes a couple of other things in it too. So I was wondering if you can just help us maybe, could you give us a revenue line and an EBIT and EBITDA, would you be able to do that with Sakura?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [3]

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Okay, Brain, we will get that information for you. And then your second question, I just want to say, (inaudible) you can address a little.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay, cool. And then -- at the last period, you gave us CIF percentage sales as a percentage of the total for manganese and it closed down at 59% in the first half. We don't have that number for the full year. Would you be able to help us with that one?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [5]

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Okay. For manganese? If you've included it for iron ore and...

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [6]

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Yes. It's there for iron ore, but it's not for manganese? Yes. Okay.

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [7]

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Yes. Okay, all right. I think everything will be okay.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [8]

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All right. And then next one is -- there was talk in the last results or could be the one before that, that Implats gave you a bit of relief on your purchase of concentrate agreements. But then I believe that that grows off. And we're seeing -- it looks to me as though the discontent has widened again. So have we gone back to the old terms in the purchase of concentrates, so roughly -- gone back to the old terms on that one? And then there are a couple of others, but maybe let's just go with those ones for now.

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [9]

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Okay. So I think it starts with the Modikwa question. So the POC agreement, the incremental percentage, it expires on -- at the end of December of this year and so we're still in that period. So I'm not sure, you might just check why your realizations look a little bit lower because we're still in that period of the higher percentage for now. So it will run into H1 of 2020 and then drop off.

It might also be that your 2018 -- just double check because remember 2018 actually had 18 months' worth of...

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Jongisa Magagula, African Rainbow Minerals Limited - Corporate Development & Head of IR [10]

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Yes. That might be why, Brian, because remember, we had to catch up because the transaction was backdated in terms of the incremental percentage. But Abigail's right, last year you had 18 months' worth of that extra percentage. And maybe that's why your number -- you were expecting a little bit higher.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [11]

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Okay. Cool. Yes.

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [12]

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Does that make sense?

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [13]

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Yes, that makes sense.

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [14]

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Okay. So I think with the current guidance it's probably based on -- what I'm going to do is, I mean, we've got the sales volumes, et cetera. I am going to give you an indication of what the dollar per tonne rate because I've got numbers but they're in Malaysian ringgits so I don't know if that's going to help. Well on average, the average realized price at Sakura was about $1,067 per tonne, okay? And then on the cost side, the cost of sales was a net number, I've got it on the ringgits. So I think the dollar-ringgit ratio, it's about -- so that was about MYR 4,500 per tonne. That's just the cost of sales, and then there's a little bit of freight and marketing at 463 if you could convert that number.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [15]

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Excluding from that?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [16]

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I said cost of sales is excluding the freight and marketing in that figure.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [17]

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Yes, then there, is -- then there was ZAR 186 million write-off and (inaudible) and inventory write-down, 224.

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [18]

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Yes, that's correct. And you just have to adjust for that as well.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [19]

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That's not in cost of sales or SG&A?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [20]

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No, it's not.

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Brian Morgan, Morgan Stanley, Research Division - Equity Analyst [21]

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Okay. Neither of them?

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Abigail Muelelwa Mukhuba, African Rainbow Minerals Limited - Financial Director & Director [22]

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No. Neither of them. It's accretive losses and the stock write down. So that's lastly where we are with regards to that.

And then your next question was on the manganese CIF percentage. So we did the manganese sort of about 40% with CIF and 60% FOB. I'll try out (inaudible) going forward (inaudible).

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Operator [23]

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(Operator Instructions) Sir it would appear that we have no further questions. Do you have any closing comments?

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Michael P. Schmidt, African Rainbow Minerals Limited - CEO & Director [24]

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I will. And thank you to everyone for participating and being on the call. But I think, in conclusion, I believe we are pleased with the results we've delivered. The last couple of years has -- being one of consolidation, we had work to address marginal and loss-making operations with -- the last one on the pack is probably in commodity. And I think that really positions us well. So we now look forward to a period of improved efficiencies at our operations. We want to continue investing and growing our existing operations. But we're also looking at what we call pursuing value and onto accretive growth, all of which we need to balance with returning cash to shareholders. And we do have a challenge so (inaudible) of cost ratios and we have a huge focus on containing costs. That all being said, we are confident about the future of our business, we think we're pretty well positioned. With that, thank you very much.

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Operator [25]

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Thank you very much. Ladies and gentleman that then concludes this conference call. And you may now disconnect your lines.