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Edited Transcript of IGO.AX earnings conference call or presentation 31-Jan-19 12:00am GMT

Half Year 2019 Independence Group NL Earnings Call

Belmont, WA Jul 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Independence Group NL earnings conference call or presentation Thursday, January 31, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Matt Dusci

Independence Group NL - COO

* Peter J. L. Bradford

Independence Group NL - MD, CEO & Director

* Scott Steinkrug

Independence Group NL - CFO & Company Secretary

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Paul Hissey

RBC Capital Markets, LLC, Research Division - Analyst

* Peter O'Connor

Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining

* Sophie Spartalis

BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Independence Group December 2018 Quarter and Half-Year Results Presentation. (Operator Instructions) I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and CEO. Please go ahead.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [2]

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Thank you, operator. Ladies and gentlemen, happy new year. I think that's the last day that you're supposed to say that, so I'll take advantage of it. We released our operating and financial results for the December 2018 quarter this morning as well as our financial results for the first half of the 2019 financial year. In this presentation, we are going to talk to both of them. With me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer.

I note Slides 2 and 3 which highlight our cautionary statement and disclaimer as well as our competent person's statements.

Moving to Slide 4. We are proud of our results for the December quarter and of the first half. For the first half, we delivered underlying EBITDA of $130 million, resulting in a continued strengthening of the balance sheet. This was achieved through operational delivery in line with guidance. We have also reviewed and refreshed our capital allocation and shareholder returns policy, which I will discuss in more detail later in the presentation. The first half results was underpinned by record production from both Nova and Tropicana in the December quarter. Nova delivered an 11% increase in nickel production in the December quarter as well as a 30% reduction in cash costs quarter-on-quarter. While Tropicana delivered a 9% increase in gold production and an 18% reduction in all-in sustaining costs quarter-on-quarter.

Net cash increased through the first half from negative $4 million net cash at 30th of June to $62 million net cash at 30th of September and then through to $94 million of net cash at the end of the first half. Quarter-on-quarter, net cash increased 52%. Underlying EBITDA for the December quarter was $68 million with underlying free cash flow of $29 million. Nova and Tropicana remain on track to deliver guidance for the 2019 financial year.

Moving to Slide 5. Our key lead and lag safety metrics continue to improve, which is a credit to the commitment to safety from all of the people who work within the business, whether they be IGO employees or contractor employees. While we continue to focus on all aspects of safety, we highlight, on this slide, the great result achieved in reducing our serious potential incident frequency to 1/4 of the levels we observed in December 2015. This is a great achievement.

Moving to Slide 6. As set out on this slide, both revenue and EBITDA increased quarter-on-quarter by 13% and 7%, respectively, while net cash from operating activities and underlying free cash flow were both negatively impacted quarter-on-quarter by lower nickel prices and working capital movements.

I will dive a little deeper into some of the working capital movements in the September and December quarters. The September quarter benefited from $12 million of nonrecurring proceeds from the discharge of our royalty to Dacian as well as from $38 million of proceeds from Nova concentrate that related to the June 2018 quarter into the September 2019 -- 2018 quarter. Also, the December quarter was impacted by the delay of $22 million of Nova concentrate proceeds into the March 2019 quarter as well as other working capital movements associated with the timing of payments.

As you can see, a lot of this noise between the quarters but, over the long run, all of this is washed out. As previously mentioned, our net cash position increased 52% quarter-on-quarter with cash on hand and debt at the 31st of December 2018 of $208 million and $114 million, respectively.

Moving to Slide 7. Major net cash contributors to the December quarter included Nova and Tropicana as well as the final $10 million of deferred proceeds received from the sale of Stockman. Significant expenses comprised our ongoing commitment to exploration and discovery and payments for investments which included our entry into 2 new exploration joint ventures with Encounter Resources and Buxton Resources.

Moving to Slide 8. Results for the first half of the 2019 financial year were positively impacted by the expected significant contribution from Nova, which is now at steady state and mining the main zones of the Nova and Bollinger orebodies. Net cash from operating activities and underlying free cash flow improved significantly by 46% and 174%, respectively. This allowed a continued orderly retirement of our debt facility and build of cash on the balance sheet.

Moving to Slide 9. The waterfall chart on this slide highlights the significant free cash flow contribution from Tropicana and Nova with a minor contribution from Long. Other positive cash flow received during the period includes the sale -- proceeds from the sale of Stockman, as previously mentioned, and $11.5 million from the divestment of a gold royalty to Dacian.

Moving to Slide 10. The segment results speak for themselves. Nova revenue earnings and free cash flow were all higher as a result of increased throughput with Nova at steady state and higher grades being mined from the core of the Nova and Bollinger orebodies. Tropicana benefited from higher gold sales resulting from improved throughput and grade as well as lower cost.

Moving to Slide 11. Nova achieved record nickel production in the December quarter of 7,574 tonnes of contained nickel in concentrate and 3,482 tonnes of contained copper in concentrate. Unit costs improved 30% quarter-on-quarter to $1.94 per payable pound of nickel, which was achieved despite lower byproduct credit commodity pricing. We continue to drive cost improvement initiatives across the business.

Improved production was the result of higher than nameplate processing throughput and expected higher milled grades. During the December quarter and the half year, we ran at a higher than nameplate throughput rate to process lower grade stockpile material as a supplement to the mill feed and the higher grade material mined from underground.

Copper production improved due to significantly improved copper recoveries, which were up from 81.3% to 87.1% quarter-on-quarter. Our goal is to further improve both nickel and copper recoveries, and we have a number of work programs underway that are designed to do this. Sustaining and improvement capital for the first half was substantially below the pro rata guidance range. We achieved this through active management of capital on a project-by-project basis. In addition, some projects have been delayed as we explore cost-saving alternatives before deployment of capital, and this may result in some capital expenditure originally scheduled for the 2019 financial year trailing into the 2020 financial year.

Moving to Slide 12. Tropicana continues to be a strong performer in the IGO asset portfolio with record production achieved in the December quarter as a result of a sustained 8 million-tonne per annum annualized throughput rate at improved grades of 2.4 grams per tonne gold. As a result of steady unit costs and improved production, all-in sustaining costs were materially lower quarter-on-quarter, in fact, 18% lower. Waste stripping, as part of the continued Long Island mining strategy, was slightly ahead of budget with resulting capitalized costs at the top end of the guidance range.

Moving to Slide 13. In late November 2018, as guided, the second ball mill at Tropicana was successfully commissioned and, in December 2018, delivered an immediate step change resulting in a 4% increase in mill throughput and a 27% improvement in grind size which contributed to a 2.5% improvement in average gold recovery. You will recall when we first talked to this project that we expected a return of capital within the first 12 months of operation.

Moving to Slide 14. Also in December 2018, the Tropicana joint venture partners completed a pre-feasibility study at Boston Shaker for an underground development. The pre-feasibility study was based on an approximate 100,000 ounce per annum underground contribution over a 7-year period. The capital cost to establish the underground are expected to be $95 million on a 100% basis and operating costs are expected to be approximately $102 per tonne inclusive of continued underground capital development cost post first gold production.

In parallel, we have commenced the feasibility study which is expected to be completed in the second half of the 2019 financial year. Subject to approvals, the decline development should commence before the end of the 2019 financial year. An infill drilling program designed to upgrade the resource classification for a large amount of the material from inferred to indicated was completed during the December quarter as part of the feasibility study work program.

Moving to Slide 15. We are building momentum across our systematic Fraser Range regional exploration program. Our regional programs are now approximately 70% complete, and through this we have identified some 40 targets for follow-up work, some of which will be drill tested in the second half of the 2019 financial year.

The second half of the financial year should be exciting. We ramped up our activity on the Fraser Range with up to an expected 3 aircore drill rigs, 2 reverse circulation drill rigs and 4 diamond drill rigs operating during the period. At the same time, we will continue the systematic regional, geophysical and geochemical programs over the areas remaining to be tested.

Today, we focus on our Widowmaker concession which is located immediately south of the Creasy Group, Silver Knight magmatic nickel-copper-cobalt discovery. At Widowmaker, we have 5 priority targets, including some with evidence of sulfide mineralization intersected in aircore drilling and/or bedrock electromagnetic conductors. Drilling is expected to commence at Widowmaker in the March 2019 quarter. Watch this space.

Moving to Slide 16. At the Lake Mackay project in the Northern Territory, a joint venture with Prodigy Gold was complete -- our joint venture with Prodigy Gold completed the earn-in component of our option agreement in the December quarter. IGO is now a 70% holder and operator in the joint venture. We completed airborne geophysical surveys over most of the granted tenure at Lake Mackay, and that has enabled targeting of a pipeline of bedrock conductors that we will start drill testing in the second half of the 2019 financial year.

In parallel, our soil geochemical programs continued to define new prospective areas such as the Swoop nickel-cobalt prospect which appears to be similar to the previously reported Grimlock prospect.

Moving to Slide 17. We have advanced the pre-feasibility study on the downstream processing of Nova concentrate to produce nickel sulfate. The strategy is to capture additional value not realized through traditional offtake agreements for nickel sulfide concentrate. The focus during the December quarter has been on trade-off studies, successful continuation of metallurgical test work and refinement of capital and operating cost estimates. We also made the strategic decision during the December quarter to further de-risk and optimize the process flow sheet through continuous pilot plant metallurgical test work programs. This work is beyond what is normally completed for pre-feasibility studies. I was at the laboratory yesterday to see some of the pilot scale crystallization test work which we will conclude shortly. We are pleased with the results to date, but we also want to make sure that the test work is comprehensive before we release results. We expect to be able to provide a more fulsome update on the progress of the pre-feasibility study when we report the March 2019 quarter results.

Moving to Slide 18. The Board has approved a change to our capital allocation and shareholder returns policy. Until now, our policy has been to pay a minimum of 30% of net profit after tax as a dividend. Going forward, our policy will be to return 15% to 25% of free cash flow to shareholders as either dividends, special dividends and/or share buybacks depending on market circumstances. Based on our forward estimates, this results in a significant increase in the amount of cash to be returned to shareholders relative to what would have been the case with our past policy, while also preserving significant cash within the business to fund growth activities including our ongoing commitment to exploration and discovery. The Board's intention is to once again review the policy in the 2021 financial year. The Board has approved an interim fully franked dividend of $0.02 per share which will be paid on the 1st of March 2019.

Moving to Slide 19. Ladies and gentlemen, to summarize, IGO has delivered a great December quarter and a strong result for the first half of the 2019 financial year. This was achieved despite base metal price headwinds. Our balance sheet continues to strengthen with net cash of $94 million at the 31st of December. Nova and Tropicana both delivered record metal production in the December quarter and both remain on track to deliver on guidance for the 2019 financial year.

While we benefit from the ongoing low-cost production at these 2 world-class assets, we are also making plans for IGO's future in line with our strategy with key growth projects progressing. This includes the successful commissioning of the second ball mill at Tropicana; the completion of the pre-feasibility study for underground mining at Boston Shaker, enabling our immediate commitment to the feasibility study; and further advancement and de-risking of the downstream nickel sulfate processing opportunity. Lastly, our ongoing strengthening of our organic growth pipeline through expansion of and continued understanding of our portfolio of [both gold] projects prospective for nickel and copper.

We have worked hard and achieved a fantastic result by optimizing our operations and investigating how to further maximize value to shareholders through the IGO portfolio. I would like to take this opportunity to thank all who work at IGO, whether they be IGO employees or contractors, for their continued contribution to our operating results and, more importantly, our safety performance. Together, we are making a difference.

I will now hand back to the operator and open the call for questions from investors and analysts.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Michael Slifirski from Crédit Suisse.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [2]

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A couple of pretty simples ones for me, please. I guess, ahead of your result, we were concerned that our assumption around group depreciation was a lot higher than market, but we seem to have also underestimated compared to what you delivered, specifically around Tropicana, and that's the big increase in June -- sorry, in the December quarter. Can you give us some sort of guidance as to how we model it when it is so volatile? Is there any way you can give us some help on what we should be projecting for D&A?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [3]

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Yes. Certainly, I'll get Scott to give you a high-level response on that.

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [4]

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Yes. Look, it's a bit hard to provide detailed, granular announcements on where that's going to go in the future. But I can say that we've made a comment in the quarterly that D&A at Tropicana is higher because of the deferred stripping asset amortization. Now as a guide, that represents about 1/4 of the total cost to mine properties other than the deferred stripping which is going to be amortized based on where the ounces come out of the pits.

And ultimately, if they come out of Havana as opposed to Tropicana then the amortization will be higher. Other than that, the mine properties would be amortized generally based on the depletion of ounces in the reserves. So there's a bit of granularity there that will help, but it really comes down to the mine scheduling and the mine plan.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [5]

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Okay. Well we'll blend along. Also on Tropicana, the December quarter uplift throughput recovery, I know it's only -- sorry, December month, I know it's only 1 month since commissioning. But when you look at those numbers compared to expectation from the feasibility study, you still think you'll get -- or at least achieve what the feasibility study projected in terms of recovery and throughput?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [6]

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At Tropicana, it's always going to be a trade-off between our throughput and recovery. And the annualized rate that we achieved in the month of December from recollection was about 8.4 million tonnes per annum, which is very much at the top end or over the top end of the assumptions we made for the feasibility study. And as a result of that, we claw back a little bit of the recovery improvement that we might have otherwise expected based on the feasibility study work. But as you can see, for the results for December, the trend is clearly in the right direction. The extra ball mill has delivered higher throughput and improved grind and, as a result of that, improved recovery. Going forward, the AngloGold Ashanti team at Tropicana will continue to optimize, and we would expect to see that trend continue and potentially improve.

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Matt Dusci, Independence Group NL - COO [7]

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Yes. That's right. So for the month of -- it's Matt here, so just for the month of December, we deliberately pushed throughput to understand the constraints on the ball mill. Going into the next quarter, they'll optimize to look at recovery as well.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [8]

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Okay. That's helpful. With respect to Tropicana guidance, effectively, you've delivered half of the full year guidance already before the throughput increase, before the recovery increase. So given the guidance is unchanged, does that mean grade is the offset there in the second half?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [9]

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Yes. We haven't changed our guidance for the year. And based on the granular forecast that we have for the second half, we would expect second half performance to be in line with first half. So there'll be, as you've implied, a trade-off between grade and throughput.

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Operator [10]

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Your next question comes from Daniel Morgan with UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [11]

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Just a question on exploration. It looks like you're going to go very much into a lifted focus on drilling in the back half of this financial year. Just wondering on Widowmaker, how you plan to be communicating results? Is this something that we have to wait till the quarterly, the next quarterly? Or is it something you might release if you find something?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [12]

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So with the well programs we have there, we will look at materiality. We're adding to our understanding of the deposits. And if the materiality is low, then we'll report that through our quarterly reporting process. If we put a discovery hole in the next magmatic nickel-copper-cobalt discovery on the Fraser Range, we'll be reporting that to the market in real time once we've confirmed all the numbers.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [13]

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And just a quick question on copper recoveries and nickel recoveries at Nova. You've seen a big step-up in the copper and you talked about aiming to lift these in the future. Just wondering if it's too early to give us any ballpark of where you're trying to get to, and maybe expand on what programs you are doing on this recovery project?

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Matt Dusci, Independence Group NL - COO [14]

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Yes. So it's Matt here. I mean, as you saw in the quarter, we lifted copper recoveries by 7% from that 81% to 87%. We've got nickel and copper recoveries trading at around about the 87%. What we're doing is applying that learning that we've taken from the copper now into the nickel. So there's a number of work programs that we're implementing in terms of change in control philosophies and also looking at recommissioning the regrind circuits that will happen in the quarter as we strive to push the nickel recoveries up.

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Operator [15]

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(Operator Instructions) The next question comes from Sophie Spartalis with Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [16]

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Most of my questions have been answered already. Just on the Tropicana, though, like it's a great asset and the cost and production profile is second to none. I guess, how does that fit in your longer-term strategy, given you kind of notified the market that you want to pivot to an [AV] portfolio but obviously gold doesn't quite fit in that portfolio. Can you just maybe talk through how you're looking at the asset now given the significant underground potential that's coming through and the operational performance of the asset?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [17]

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Sophie, we've addressed this on a couple of previous conference calls, and our position remains unchanged. Tropicana is a high-quality asset. We're continuing to do work there in collaboration with our joint venture partner, AngloGold Ashanti, to understand opportunities for value enhancement. We've seen some of that delivered in the December quarter with the successful commissioning of the second ball mill and the completion of the pre-feasibility study for the Boston Shaker underground.

As we progress those underground studies, that's going to contribute to an improved understanding of value. And we remain optimistic about the potential for discovery of potential satellite deposits around Tropicana on this -- the approximate 3,000 square kilometers of tenure that we have around the Tropicana asset.

And then as we've evidenced over the course of the last quarter, we've got a little bit of a natural hedge between the nickel and the gold. And where we've seen nickel price headwinds in the quarter, we benefited from gold price tailwinds. And that's the dynamic that we continue to like and appreciate.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [18]

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Okay. And then just a follow-up question, just in regards to the change in the dividend policy and the potential for special divs and buybacks. Is that signaling to the market that you potentially don't see value out there from a growth perspective, at the moment, you prefer to do grassroots exploration?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [19]

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Yes. We've signaled for some time that we want to tilt our growth endeavors towards organic growth and building up a portfolio of first-class greenfields projects and to be discovering those mines in the future. As an industry, we've underperformed from a greenfields exploration and a discovery perspective, and we need to change that. The only way to change that is to allocate capital to the greenfields exploration which is exactly what we're doing.

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Operator [20]

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We have a follow-up question with Daniel Morgan with UBS.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [21]

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Just on that dividend policy. You talk about a free cash flow metric being -- how much -- you're referencing a free cash flow metric and how much you're going to do with dividend. Just wondering if I could just get that defined. Is it operating cash flow less maintenance CapEx? Or is it all CapEx? Or if you could just follow that up?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [22]

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Yes. So our operating cash flow less investing cash flow.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [23]

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Okay. So growth CapEx would come into that as well then?

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [24]

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Yes. And just to add a bit more clarity to that, so we generally report underlying free cash flow in many places, and the sort of things we don't include, or that are excluded from underlyings, would be proceeds from sale of investments, et cetera. And under this policy, we would envisage that we wouldn't be making those sort of adjustments because naturally, it would make sense to return some of those proceeds back to shareholders. So it's straight cash flow from operating activities, less cash flow from investing activities.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [25]

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And the overall intention here is to provide a more readily transparent formula which is impacted less by volatility in depreciation and amortization payments from one period to the next, which was referred to in a prior question.

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Operator [26]

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Your next question comes from Paul Hissey with RBC Capital Markets.

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Just to follow on from Sophie's question a little bit. Do you think the value of Tropicana is being reflected in the share price given the moves in gold over the last month or so? Obviously, we've seen other gold producers in Australia perform quite well. It seems to me from the outside looking in that IGO's performance has been underwhelming, I guess, given the level of gold exposure you have.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [28]

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Well, like all good CEOs, I'm convinced 100% of the time that all of our assets are undervalued and underappreciated. And our job is to convert everyone to the opposite. And yes, when we've got a mixed portfolio like this, Paul, it's very difficult to talk to what value may be getting recognized by the market for particular assets. What is the premium that might be paid or implied in the portfolio for the gold versus the discount that might be implied in the portfolio for nickel. And it's -- like yourself, we constantly question the dynamic. Do you have a follow-on question to that, Paul?

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Paul Hissey, RBC Capital Markets, LLC, Research Division - Analyst [29]

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No, sorry. That was it. But no just -- I guess, it goes to the portfolio construction and whether -- of course, we don't know how the market is valuing each of your 2 different assets. But yes, just interested in your views. I'd have thought given the level of your gold exposure, we might have seen the market perhaps reward you a little bit more for that in the last 6 or 8 weeks. But it doesn't seem to have made a great deal of difference, and yes. And I just wanted to get your thoughts on that.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [30]

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Great. Thanks, Paul.

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Operator [31]

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Your next question comes from Peter O'Connor with Shaw and Partners Limited.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [32]

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A question on tax and franking. I just got -- I just went through the notes from the last call we had which was back in -- I think it was August. Could you just remind me of where we're at with the carryforward tax losses, when you expect to pay cash tax, franking, therefore, when that flows and thoughts of capital management with or without the franking?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [33]

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Okay. So we've announced that we've got $58 million of frankable -- fully frankable dividends, so that comes off the back of about $20 million of the franking account balance. That's something that we're obviously going to return to shareholders. And the franking balance would not get replenished until we start paying taxes. Naturally, it gets diminished by dividends that you pay -- fully frankable dividends that you pay. Ultimately, when we start paying tax, it's going to be highly dependent on commodity prices. And just on that subject matter, we have currently about $650 million worth of carryforward tax losses. And of those, we've got on our books $600 million worth of those tax losses. So we've got a pretty big chunk of that to utilize going forward.

However, having said that, we're also in a position whereby we wouldn't expect to -- for that balance of tax loss to completely come down to 0 before we start paying tax. There's an element of those tax losses that has to get utilized over time in the future. So we'd be looking to paying tax, I would say, somewhere 2022, '23 or even 2021, obviously, depending on commodity prices.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [34]

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The source of the $20 million that you referred to earlier, that's a...

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [35]

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So that's the franking account balance. And the way you work through that is, so there's a $20 million franking account balance at the end of December, you multiply it by 70%, divide it by 30%, that then gives rise to the $58 million of frankable dividends. That divided by 590 million shares on hand equates to $0.10 per share of fully franked dividends.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [36]

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Okay. Sorry, the source of that was more of my question.

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [37]

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The source of what, sorry?

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [38]

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The franking balance?

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [39]

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That arose from payments of tax in the past. And I think the last tax payment we made was in 2010 or 2011, quite a while ago. So in a period of paying taxes, and then we've had various corporate activities that has given us tax losses over the period of time, and that we've been drawing down those -- that franking account balance ever since.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [40]

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So then the extension, this franking will be -- it's there but it's more in the scheme of things that's taking for a few years. The capital allocation framework around [notional] minimal franking? How does that weave in? Is that in...

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [41]

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In terms of the capital allocation framework, we would be looking to return to shareholders a mix of fully franked dividends, potentially share buybacks and/or unfranked dividends over time.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [42]

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Okay. And given the chatter regarding federal election, and potential change of government, potential change of the way franking may or may not be treated. How do you think about that $0.10 franking balance and the net cash position that you're in? Is it within your framework the potential to have out-of-cycle capital management to take advantage of things such as franking account balances that may be paid away before they're lost or changed?

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [43]

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It is something that we think about, but we've also got to think about how we release those franking dividends into the market because there are constraints that we need to follow for the payment of those frankable dividends. For example, you can't just pay a $0.10 dividend immediately. It's got to be paid out of profits, for example, to be fully frankable. So we need to take that into account. And hence, we've certainly spoken about the fact that, for the half year, we haven't created a large profit. However, we are a very solid free cash flow-generating company. So it is that distinction there that gives rise to the fact that we can pay unfranked dividends. We can buy back shares or we can pay fully franked dividends. However, as I said, there are constraints on paying out all of our franking account balance at any one point in time.

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Peter O'Connor, Shaw and Partners Limited, Research Division - Senior Analyst of Metals and Mining [44]

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Given Pete's early comment about value, that your shares are cheap, and I don't disagree, and the potential for off-market share buybacks which utilize franking, is that something that is within your framework?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [45]

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It's something that we would look at, yes. But about on the whole share buybacks, our return of capital, they are different to unfranked dividends. They don't tend to attract the franking credits, share buybacks. And so we've got a decision to make there on ultimately on what's in the best interest of shareholders as to whether it becomes an income item in the hands of the shareholders or a return of capital in the eyes of the shareholders.

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Operator [46]

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There are no further questions at this time. I'll now hand back to Mr. Bradford for closing remarks.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [47]

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Ladies and gentlemen, once again, we appreciate your participation through the presentation and the Q&A. And we look forward to reconnecting at the end of the March quarter to talk about the progress of the business. Thank you very much and good day.