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Edited Transcript of IGO.AX earnings conference call or presentation 29-Aug-19 12:00am GMT

Full Year 2019 Independence Group NL Earnings Call

Belmont, WA Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Independence Group NL earnings conference call or presentation Thursday, August 29, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* 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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* Matthew Frydman

Goldman Sachs Group Inc., Research Division - Research Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

* Rahul Anand

Morgan Stanley, Research Division - Equity Analyst

* 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 FY '19 Results Presentation. (Operator Instructions)

I would now like to hand the conference call over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. 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, and good morning, ladies and gentlemen, and welcome to this morning's call to discuss our full year results for the 2019 financial year. We pre-released our key unaudited financial results for the year in late July as part of our fourth quarter 2019 activities report. As a result, there is little new news in today's announcements other than our dividend announcement and the fact that the results are now audited. Therefore, I will speak to the materials very briefly to maximize the time for Q&A at the end of the call.

I am joined on the call today by Scott Steinkrug, our Chief Financial Officer. And I note that all currency amounts referenced in the presentation are in Australian dollars, as set out on our disclaimer slides at the end of the presentation.

Moving to Slide 2. I am delighted to report that as we stand today, IGO has never been in a better or stronger position. The 2019 financial year was a great year with outstanding operational performance from Nova and strong consistent performance from Tropicana, which, together, delivered record revenue of $793 million, record EBITDA of $341 million and higher net profit after tax of $76 million. The strong cash flow generated from our high-quality portfolio has continued to strengthen the balance sheet with a cash position at year-end of $348 million and net cash of $263 million. Our strong free cash flow generation and strong balance sheet position is enabling our enduring commitment to exploration to discover the mines of the future as well as the delivery of a record $59 million of cash returns to shareholders in respect of the 2019 financial year.

Moving to Slide 3. At IGO, in addition to our focus on our operational and financial delivery, we also focus in parallel on our nonfinancial performance. We do this by making a difference through our commitment to our employees, our host communities and the environment. We do this because we care. I am pleased to report that we continue to make positive and measurable improvements in the key metrics that we use to measure success in this area. For example, over the last year, we have seen higher levels of employee engagement year-on-year and currently sit in the top quartile for employee engagement when looking at businesses similar to ourselves. We are also seeing benefits, including improved lead and lag safety metrics, lower staff turnover rates, an increase in the number of women and indigenous employees in the business and an expansion of our graduate intake program to foster the next generation of industry leaders. We attribute this success to our commitment over many years to building a culture which respects the health and wellbeing of our staff, contractors and host communities while promoting diversity, professional development and sustainability. This is how we are making a difference at IGO.

Moving to Slide 4. As I highlighted in the opening slide, strong operational performance from Nova and Tropicana has delivered record financial results for the 2019 financial year, and these are summarized on this slide. Revenue and EBITDA were both marginally higher year-on-year while net profit after tax increased by 44% to $76 million. We delivered record net cash from operations and record underlying free cash flow, which were up 34% and 100%, respectively, year-on-year. Once again, our improved financial results and cash generation were underpinned by Nova and Tropicana, which both delivered higher production at higher margins relative to the prior year. Cash at bank and debt at year-end were $348 million and $86 million, respectively, resulting in a closing net cash balance of $263 million.

Moving to Slide 5, where we outlined the cash flow generation for the 2019 financial year with cash balance increasing by over 150% during the period. As is evident from the chart, Nova was the main engine of free cash generation, adding $251 million for the year while Tropicana continued to deliver with $94 million of free cash flow. Also shown is the $58 million of expenditure on exploration to fund our work programs during the 2019 financial year to understand the prospectivity of the Nova mining lease and our belt scale greenfields exploration projects. This work has generated numerous targets, which are progressively being drilled with the objective of delivering a material discovery.

Moving to Slide 6. In January 2019, we announced our new policy to return 15% to 25% of free cash flow to shareholders by way of either dividends or share buybacks. I am, therefore, pleased to announce that as a result of this policy change, and coupled with our strong financial results, the Board has declared a final dividend of $0.08 per share for the 2019 financial year. This dividend will be 97% franked and will be paid on the 26th of September 2019. The total dividend declared in respect of the 2019 financial year of approximately $59 million or $0.10 per share is a record for IGO and a substantial increase relative to the $0.03 per share declared in respect of the previous financial year. After the payment of the final dividend for the 2019 financial year, our franking account will be effectively depleted. This will mean that cash returns to shareholders in the short to medium term are expected to be by way of either unfranked dividends or share buybacks. This will remain the case until some years from now we start paying cash taxes and replenish our franking account balance.

Moving to Slide 7, where we showcase the key highlights for Nova for the 2019 financial year. As we mentioned in our June quarterly report, Nova outperformed the top end of metal production guidance with production of over 30,700 tonnes of nickel and 13,600 tonnes of copper contained in concentrates for the year. This also represented a significant increase in metal production year-on-year in what was Nova's second year of commercial production. Cash costs improved significantly year-on-year to $2.07 per payable pound of nickel. These were above our guided range, however, were impacted by lower by-product prices. Operationally, the team on site outperformed with cash costs before by-product credit adjustments being better than guided. Also shown on the slide are our all-in sustaining costs for Nova, which at $2.79 per payable pound of nickel, further highlight Nova's low-cost, high-quality pedigree. Low costs equate to high margins, and for the 2019 financial year, Nova delivered an EBITDA margin of 51% and a free cash flow margin of 50%.

Moving to Slide 8, where we illustrate the improving production and cash costs over the first 2 years of commercial production at Nova. Over this period, Nova has generated some $344 million of free cash flow for IGO, with an average EBITDA margin of 53%. Our attention is now focused on delivery of operational excellence, including the application of technology and data analysis to optimize operational performance and deliver higher productivity, greater efficiencies and higher consistent metallurgical recoveries as well as lower costs.

Moving to Slide 9, and where we turn to Tropicana, where production, cash costs and all-in sustaining costs were improved year-on-year and met the midpoint of our guidance range. This strong operational performance, coupled with higher Australian dollar gold prices, delivered an improved EBITDA margin of 62%.

Moving to Slide 10, where, as we did with Nova on the earlier slide, we illustrate the consistent production and cost profile for Tropicana over the last 2 years. Tropicana has a history of consistent delivery and remains one of the larger lower-cost open-pit gold mines in Australia with all-in sustaining costs in the bottom quartile for Australian gold producers. Over the past year, processing plant throughput rates and metallurgical recovery benefited from the successful construction and commissioning of the second ball mill at Tropicana. Looking to the future, Tropicana will transition from an open-pit operation to an open-pit and underground operation as a result of the development of the Boston Shaker Underground mine. This work commenced in the June 2019 quarter and will continue through the 2020 financial year, culminating in first gold production from underground in the September 2020 quarter, approximately 1 year from now. Further opportunity exists at Tropicana for further underground development to make the Tropicana and Havana pits as well as from continuing regional exploration.

Moving to Slide 11. Our guidance for the 2020 financial year has been previously released and is included here for completeness. I do not propose to talk to the guidance, but I am open to questions at the end of the presentation.

Moving to Slide 12. IGO has an enduring commitment to exploration and discovery, to deliver extension of mine life and to discover the mines of the future. For the 2020 financial year, we have committed $66 million to exploration, with 44% of this committed to near-mine exploration at Nova and Tropicana to extend mine life. The remainder is committed to our portfolio of belt scale greenfields exploration projects, which are prospective for nickel and copper in Western Australia, South Australia and the Northern Territory and also in Greenland.

Moving to Slide 13. In summary, these are exciting times at IGO with a range of high-impact growth opportunities being pursued. At our existing operations, we are focused on leveraging smart solutions to improve productivity and reduce costs. Also, as discussed on the earlier slide, Tropicana is transitioning to underground mining with development underway at the Boston Shaker Underground and studies in progress for additional underground developments under the Tropicana and Havana open pits.

To extract more value from our nickel sulphate concentrate, we have multiple parallel work programs underway. This includes our downstream processing study to assess the opportunity to produce battery-grade nickel sulphate from our nickel sulphate concentrate. In addition, we are working with potential partners on the opportunity to collaborate on the production of nickel sulphide -- nickel sulphate, sorry, which could potentially reduce IGO's exposure to the added technical complexity and funding requirement of a potential downstream project.

Lastly, and also in parallel, we have progressed the tender process for our nickel sulphate concentrate offtake agreements, which expire in December 2019 and June 2020. All work streams are at an advanced stage and expected to be concluded in parallel early in the December 2019 quarter.

Lastly, we continue our enduring commitment to exploration and discovery to both extend mine life at Tropicana and Nova and to also discover the mines of the future through our greenfields exploration programs.

Moving to Slide 14. Ladies and gentlemen, thank you very much for joining us on the call this morning. In conclusion, I am proud of what the IGO team has delivered over the past year in collaboration with our partners and contractors. Our collective efforts have resulted in operational outperformance at Nova and continued consistent strong performance from Tropicana, with both delivering improved production and lower costs in the 2019 financial year. Financially, the business has never been in a stronger position with strong free cash flow generation building a strong balance sheet. Looking ahead, I am excited about the potential to generate significant value for shareholders through the various work streams that are underway including continued progress towards operational excellence at Tropicana and Nova, exploration and discovery success to extend mine life and deliver the mines of the future, the opportunity to extract more value from our nickel sulphate concentrate through either downstream processing or improved offtake payabilities, and lastly, disciplined M&A to identify value-accretive opportunities to enhance the portfolio.

Ladies and gentlemen, thank you for joining us on the call this morning. We will now open the call for questions from analysts. Thank you. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The call is being recorded today. (Operator Instructions) Our first question today comes from Rahul Anand of Morgan Stanley.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [2]

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I've got a couple. First one is about Nova. Peter, I wanted to discuss the sprint capacity. I want to understand, in pricing environments the nickel where the price is elevated, is there an opportunity here to push the mill harder, produce a bit more nickel? Or are there some constraints around recoveries, et cetera, that stop you from doing that? That's the first one. Second one...

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

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Actually, there's 2 areas to flex: one is the front end of the processing plant and of course, the sort of mining activities in order to deliver the metal to the front end of the processing plant; and then the second area to flex is at the back end of the processing plant. At the front end, it's all about how many times we can put through the crushing and grinding section. And at the back end, it's all about the amount of metal that we can get through thickness and filtration.

At the top end of our guidance range, we're pretty much fully flexing the back end of the processing plant. So based on projections we have for FY '20, FY '21, we do not see a lot of opportunity for flex to respond to higher metal prices without the additional capital to expand thickening and filtration capacity.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [4]

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Okay. Understood. So the back end of the plant is the bottleneck. Then -- okay, moving on to the second one. In terms of the payability renegotiations at the end of this year and sort of mid next year, could you help me understand then how do the sort of economics around the sell-side plant perhaps change if you are able to get a bit more payability through the system? And basically, I also wanted to marry that up with perhaps what your forecasts are internally if the payability uplift from the sell-side change over time as more people produce it.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [5]

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Yes. So this is a work stream that's underway at the moment. We don't know the outcome to either the downstream processing pre-feasibility study or the offtake negotiations. For the avoidance of doubt, we're actually tendering both the portion of the offtake that expires in December this year and the portion of the offtake that expires in June next year. We're tendering both of those at the same time. We expect, based on indications generally from the market, that we will see improved payability terms. And we then go back and apply those payability terms to the downstream processing study because the level of the payability sets the cost of the feedstock into the downstream processing. And then we'll make an economic decision on -- from that, whether we continue with the downstream work through to full feasibility study or whether we continue to sell our offtake to customers. When we announced our update on the nickel sulphate downstream processing work back in March, April 2019, we've provided some guidance on what our cutover payabilities might look like for different nickel sulphate price premiums. And obviously, the closer we get to those cutover points, then the less the incentive to continue work on the downstream processing. I hope that answers the question.

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Rahul Anand, Morgan Stanley, Research Division - Equity Analyst [6]

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Yes, it does. That's very helpful.

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Operator [7]

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Our next question comes from Michael Slifirski of Credit Suisse.

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

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Three or 4 for me. First of all, on the payability, just wanted to understand the existing contracts. Is there any percentage payability that doesn't flex with price? Or is there some other mechanism where as price goes up, your payability actually improves? And just want to understand that, first of all, please?

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

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We don't have any disclosure out there on the specific terms of our offtakes. But in general, our offtake agreements tend to have a range of payabilities which tend to increase with nickel price.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [10]

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Yes. Okay. That's useful. Secondly, you comment about partnering opportunities as a parallel stream for nickel sulphate production. Is that partnering with your technology or partnering with somebody with an alternate technology?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [11]

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Well, we would never like to claim that we always have the best of something, even though we've made some great innovations with the downstream processing work that we've done. So we're open to both collaborating with others on the IGO process that we've developed, but also understanding progress that others have made and also collaborating on tweaking of the technology. And really, what it's about is trying to create a scenario where we can focus on what we do best, which is more upstream, and find a partner that can help carry us into the downstream activity and provide some of that technical capability and also carry a share of the funding requirement for downstream.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [12]

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Okay. A couple for Scott, if I may. In terms of the carryforward tax losses, I can see the $154 million and then the $14 million. So wanted to understand the realizability of the $14 million, the potential tax benefit. And then if we add the 2 together of getting close to, whatever that is, $170 million, using spot assumptions, is it fair to say that gives you about 3 years of protection from cash tax?

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [13]

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Yes, it's a good question. And just for everyone's benefit, you all need bear in mind as well that the $152 million number that you mentioned and the 14, they -- these are numbers then that -- on -- that reflect the value of the tax losses on the balance sheet. So natural fact, at the end of the 30 June, we've got $560 million worth of tax losses. So then at 30%, that comes down to around the $150 million less some tax losses that we haven't actually got recorded on our books because we do recognize those about a year ago. And previously, we disclosed that we might be in a position where we will be paying tax in about 3 years or so, so possibly 2023 verticals. That's highly dependent on what happens with commodity prices in the future, partly dependent on mine plan updates, et cetera. So that's something that obviously we can't say very much about.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [14]

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Okay. So that's sort of as I understood, so it's useful. Then with respect to the portfolio of sort of exploration assets, the $13 million against Stockman, does that reflect the potential value of the royalty stream?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [15]

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Correct. That's right.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [16]

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Okay. And then the $34 million against Nova, I thought Nova was pretty well drilled out, grade-control drilled, and there wasn't any upside. So does that reflect something beyond Nova, which is Nova operations? Just trying to understand where that $34 million sits.

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

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So that $34 million came about as part of the acquisition that Independence made of service resources. So we -- our policy is to expense all exploration expense, particularly greenfield exploration. However, if we acquire a tenement package, then we'll put that on the balance sheet. So that was acquired back in 2015.

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Michael Slifirski, Crédit Suisse AG, Research Division - MD [18]

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Okay. Great. That's all, but I just want to say congratulations on producing results for your quarterly that make our job easy. It's refreshing when some of your peers produce quarterlies that don't -- from which financial don't actually logically fly. But you're doing it all together and audited results reflecting the unaudited, I think, is terrific.

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Operator [19]

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Our next question comes from Matthew Frydman of Goldman Sachs.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [20]

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Peter, just wondering if you can give us a bit more detail on the plan of attack for the $50 million you're spending between Nova and the Fraser Range this year on exploration. I suppose you've got a number of known near-mine targets. You've got a long list of prospective targets. And then obviously, regionally, you've got over 400 km of strike length along the range. So I suppose, firstly, how fully do you expect to test those known targets? And I'm talking here about Elara, Hercules, Orion, et cetera. How fully do you expect to test those this year? And I suppose what's the priority ranking or the plan of attack for the other near-mine targets prospectively and along the range?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [21]

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Yes. So we have 3 surface drill rigs on site at the moment. And we try to -- we have a plan of attack that addresses all the sort of prospective types of targets at the same time. So one drill rig dedicated to the deeper targets at the northeastern corner of the Nova mining lease, Elara, Hercules, et cetera; and then the other 2 drill rigs are focused in the sort of Southwestern portion of the mine lease and the area around the mining lease. And typically, we do -- we have broad regional programs, and those broad regional programs are ongoing for the Fraser Range. And we would expect to complete the last of the regional aircore and ground testing of EM targets identified previously from airborne. We'd expect to complete all that this year. The work we've done previously and the work we continue to do has generated targets. So we are using RC and diamond drilling to do initial testing of those targets. And where we get positive success, we're converting those into prospects. And then we do deep and deepwater -- not deeper, but more intensive drilling as we better understand those targets. So it's a sort of a range of activity over quite a broad area with multiple tools from the toolkit being applied at all times.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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Sure. So if I roll forward and think about what this exploration program might look like in next year's budget, you'd expect that there will be a number -- regionally, there'll be a number of targets that have been potentially converted into prospects that will require more detailed drilling to follow up. And then near-mine, you're expecting, say, by the end of this year that you'll have sufficiently tested some of those near-mine deeper prospects that we talked about, say, Elara, et cetera, et cetera, and therefore, be converting them to an infill drilling stage or further following up other prospective targets. Is that kind of the right way to think about the evolution of the program?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [23]

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Absolutely. You hit the nail right on the head. And success for us is putting the first drill hole into 50 meters of massive sulphide mineralization and then having that challenge of going to the Board and motivating the commitment to the extra funding over and above our existing exploration budget to drill that out.

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Matthew Frydman, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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I can't imagine that would be too much of a challenge, if that was the case.

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Operator [25]

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Our next question comes from Sophie Spartalis of Bank of America Merrill Lynch.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [26]

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Just a quick follow-up. Apologies, I was a little bit late coming to the call. Just in terms of the negotiations in terms of concentrate. Can you just talk through the timing? You said that you have currently kicked off those discussions. When would they expect to -- and given that the expiry is at the end of this year, I mean, you said you also brought forward the Glencore component, too?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [27]

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Sure. We would expect to come to a landing on offtake contracts early in the December quarter. And aspirationally, we'd like to think that we're making an announcement around the outcome of that and the parallel work streams associated with it, which includes the downstream processing when we do our results conference call for the September quarter. That's our aspiration. Whether we get there or not remains to be seen.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [28]

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So sorry. So in the September quarter, which will be October, late October, you would have an outcome on that December tender?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [29]

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Correct.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [30]

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Okay. And then just -- I just got the back of Michael's answer in regards to potential strategic partners in regards to the downstream processing. What's the update there in terms of your thinking?

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [31]

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Like -- as we've messaged all along, we've had multiple work streams. One has been to understand where payabilities are drifting to and whether we get a better bank rebate from offtake agreements going forward. And there's many reasons for why that would be the case. Number one, market is getting tighter. Number two, Nova concentrate as a high-quality concentrate is branded, it's well-known. Second work stream is the downstream processing to try and unlock more value from the nickel sulphate concentrate ourselves. And then the third work stream has been trying to take that technology and the wins we've had there and find a partner to that -- where we can mitigate some of the technology risks, financial risks associated with the downstream, allowing ourselves to focus more on the upstream. So we've continued all those work programs, as we've previously messaged. And we expect to bring all of those work programs together for a decision point in the December quarter.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [32]

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Okay. And then can you just provide some insight as to how you overlay the risk management framework when you're dealing with a number of customers in the downstream world, which are relatively new, relatively unknown? How do you then overlay that with your tried-and-true customers that you've had for many years at the -- in the nickel concentrate world?

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

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Yes. Scott Steinkrug runs that process. And we've got an established framework for making the decision. And ultimately, that's why he's paid the big bucks.

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Scott Steinkrug, Independence Group NL - CFO & Company Secretary [34]

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Yes. Thanks for the question.

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Operator [35]

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Okay. And there are no further questions. At this time, I now hand back to Mr. Bradford for closing remarks.

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Peter J. L. Bradford, Independence Group NL - MD, CEO & Director [36]

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Great. Thank you, operator. Ladies and gentlemen, once again, we appreciate your participation through the presentation and Q&A, and look forward to reengaging for the September results conference call in October later this year. Bye.

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Operator [37]

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That does conclude our conference for

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