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Edited Transcript of MGX.AX earnings conference call or presentation 21-Aug-19 1:00am GMT

Full Year 2019 Mount Gibson Iron Ltd Earnings Call

West Perth, WA Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Mount Gibson Iron Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Peter W. Kerr

Mount Gibson Iron Limited - CEO

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Conference Call Participants

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* Glyn Lawcock

UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst

* Hayden Bairstow

Macquarie Research - Analyst

* Michael Emery

Euroz Securities Limited, Research Division - Resources Analyst

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Presentation

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Operator [1]

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Thank you for joining today's teleconference for the release of Mount Gibson Iron's financial results for the year ended June 30, 2019. Mount Gibson's Chief Executive Officer, Peter Kerr; Chief Financial Officer, Gill Dobson; and External Relations Adviser, John Phaceas. Mr. Kerr will provide a brief overview, after which there will be an opportunity to ask questions. (Operator Instructions) A recording of the call will also be available via the Mount Gibson's website shortly after completion of today's teleconference.

Go ahead, please, Peter.

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [2]

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Thanks, Bree, and good morning all. Thanks for joining us to discuss our financial results for the year ended 30 June '19. I'll give a brief rundown and then open up for any questions.

So as we reported in our recent June quarter report, we delivered a reasonably good operational performance for the year. And the financial results we've published today reflect that performance. At the headline level, our net profit after tax was AUD 133.4 million, up from AUD 99.1 million in the previous year. And in the previous year, we also had a AUD 64 million insurance settlement component there. So on an underlying basis, a pretty good result.

So this year's result comprised net profit before tax from all sites of AUD 70.5 million, plus the recognition for accounting purposes of tax assets totaling AUD 62.9 million. And those tax assets basically reflect the company's carryforward tax losses and also the future depreciation tax basis that aren't in our balance sheet or haven't been until now.

On an underlying basis, as I mentioned, the pretax figure of AUD 70.5 million is more indicative of our actual performance. And that was 45% higher than the underlying result of the previous year, AUD 35-odd million. And that excluded in that previous year, the insurance settlement in Koolan. So it was an important achievement in the year just gone, given the operational transition for our Mid-West business. And in that business, mining was completed last December and the last of the higher-grade sales went out in February 2019. And then we moved our focus up to Koolan Island, where shipments from our high-grade operation up there began at the end of April. The transition resulted in total direct shipping ore sales for the year of 2.9 million wet metric tonnes and that was in line with the guidance that we gave. And then including the sale in June of about 240,000 tonnes of remnant stockpiled low-grade material from Extension Hill. Now that took our total for the year to 3.2 million tonnes as we reported.

So the key factor in our profit performance, which is not a surprise to anyone, it certainly beat our internal expectations with the uplift in the iron ore price earlier this year following the tragic tailings dam incidence in Brazil. And I would say that although prices in the last few weeks have come off from those highs that we reached in June and July, they're still well above the levels we experienced 12 months ago. So for us, that represents a pretty good position.

And in addition, at Koolan, as we are now selling high-grade sales from Koolan Island, Koolan provided a good contribution to the profit result after the commencement of commercial production of that operation at the end of May. So during the year, the Platts CFR processed 62% iron, averaged USD 80 CFR per dry metric tonne. And the prior year, it was USD 69, so reasonably higher. But as noted in the year just gone, the prices were much higher in the second half of the financial year, averaging around USD 91 per dry metric tonne.

So what does that mean for us? Well, as a result, we achieved an average realized price across all products. So high-grade and low-grade of AUD 76 per wet tonnes sold FOB, and that was up 41% from the prior year. So clearly, we're the beneficiary of those higher prices. That translated into a solid cash margin given that our all-in group cash costs, that excluding the Koolan Island redevelopment expenditure averaged around AUD 53 per wet tonne FOB for the year, which was at the lower end of our guidance.

So the businesses performance enabled us to maintain a healthy cash and investments balance, and at 30 June, that was AUD 385 million. So higher than our internal expectations at the start of the year. And overall, that was a reduction of just AUD 73 million, even after the spend at Koolan, where we capitalized mine development costs of almost AUD 110 million. And we paid last October, the cash component of our final dividend for the previous year of just over AUD 18 million.

So the operating cash flow for the year ended 30 June '19, year just gone, that included corporate costs totaled AUD 59.4 million. And in addition to that, we had interest income of AUD 11.6 million. So a very pleasing, particularly in that final year of high-grade material from the Mid-West operations. So based on that result, the Board has declared a fully franked final dividend of AUD 0.04 per share, and that will be payable at the end of September. And so this continues the company's record of dividend payments. So including the announced dividend today, that place the total to about AUD 274 million in fully franked dividends paid to shareholders since the first dividend we paid in late 2011.

So looking now at our operations. Just to spend a few minutes on each. At the Mid-West, a lot of our earnings came from the Mid-West and the EBIT generated for the year was AUD 60 million. The site cash costs were at the lower end of our guidance at AUD 39 to a tonne sold. And the sales comprised 2.6 million tonnes of direct shipping ore, so the higher-grade material on the Iron Hill deposit and the third at 240,000 tonnes of low-grade stockpiled material, as I mentioned, at the end of the year.

So earlier in the year, as planned, the final DSO cargo went from Iron Hill in February. And we had intended to move that site to closure. We had actually made -- said goodbye to most of their people and ended contracts, but then the rise in the iron ore price, and particularly, the narrowing of the lower-grade discounts earlier this year prompted us to quickly turn around, and refresh our key commercial and contractor arrangements and commence the shipments of what were previously uneconomic low-grade stockpiles, which would have been rehabilitated on the site. So that -- those sales commenced in the June quarter.

So just from a personal note, I consider that the work done by our site and technical and commercial teams in restarting that operation so quickly is a real credit to them and was well done. So now we've been able to schedule approximately 1 million tonnes of that low-grade material for sale going forward. And they've been undertaken on a fixed price basis. Shipments in June realized an average price of USD 29 FOB for fines per dry metric tonne, and the lump figure was USD 36 per dry metric tonne. So ore prices here in FOB terms.

So the cash flow from here is modest, but welcome. And it also sits with the final closure and rehabilitation obligations that we have on site. And in relation to those obligations, given the rehab and closure works that were done, we've also reduced the rehabilitation provision at the Extension Hill site by a couple of million dollars. And that now sits at AUD 9.9 million as at 30 June 2019.

And then just finally on the Mid-West, as we pointed out earlier this year, we've also become entitled to a partial refund of historical rail access charges. And that refund started accruing late February this year. So by 30 June, we had about AUD 2.5 million accrued, the total refund, which we should receive over 4 to 5 years is kept at AUD 35 million and is paid on a unit rate based on third-party tonnages, railed over specific parts of the Mid-West network.

So at current rates, we expect to receive the amount over 4 to 5 years and accruing for it about AUD 1.8 million per quarter. The first payment is due to be received at the end of September.

So then now moving to Koolan Island, and while the Mid-West business provided significant operating cash flow, we were focused on the key task of bringing the Koolan Island operation back online. This is, as people know, the same pace of our business and is expected to generate strong cash flows over the next 5 to 6 years. And that's at almost 80 -- what I would say a reasonably envisaged iron ore price regimes going forward. And that's due to the high-grade nature and low-impurity nature of the ore.

And we explained on our quarterly call last month, the Koolan operation has taken a little longer than initially planned to ramp-up. It's a challenging place to operate, but we have a very good team and workforce there. And so we're methodically ticking off the various restart project steps, and we have time to go. But at the moment, the continued focus is on those improvements. The seawall and the impermeable barrier within the seawall are performing well and to design. The footwall refurbishment works are also tracking very well and some procedural changes have been made there, which have improved things.

Mining in the Main Pit has at times been difficult in the initial ramp-up phase due to constrained conditions in the confines of the first production areas. But now we have new mining faces having been opened up in the pit, and on the both sides of the footwall and the seawall, we're on track to deliver 3 to 4 shipments in our shipments of Panamax vessels per month as envisaged in our initial mine plan. So it's that production rate that has informed the guidance that we are going to talk about shortly.

The cash costs at Koolan were AUD 77 FOB in the month of June, so that was our first month of commercial production. So while that's difficult to just take 1 month in isolation, it sets a reasonable guide, given we're in the high stripping phase of the mine life. So it was slightly above our original expectations given the slow start, but it's still reflective of the overall mine plan. And those costs will progressively decrease over time as the strip ratio reduces as we've shown in our disclosure materials.

Nonetheless, Koolan is still AUD 10 million cash flow positive in June, and that's given the high-grade nature of the ore, which averaged 65% iron. And we achieved an average realized fines price in that quarter of USD 106 per dry tonne FOB. So that's roughly AUD 150 a tonne. So importance for us, obviously, is to make sure that our grade is realizing those prices. So we're, today, generating very good margin. And even though it's in the highest cost of the waste mining phase, they will fall as the strip ratio reduces, as I mentioned.

But while the iron ore price has fallen in the last few weeks, I pointed out that they do remain well above the base case assumptions we used in our redevelopment study. And matter of fact, we used the price of USD 55 a tonne CFR for iron ore, and we used an exchange rate of USD 0.75. So we're well away from those numbers. And so therefore, as at today's prices and exchange rate, the operations post-tax net present value sits somewhere around AUD 800 million. So pent out enthusiasm for the significant cash flow generation that Koolan could deliver for us.

So then to end there, just bringing us to our outlook for the current year so the '19-'20 financial year based on our ramp-up expectations at Koolan and also sales we had expected in the Mid-West of the low-grade material, we're expecting total sales for the year in the order of 3.7 million to 4 million wet metric tonnes, and that's broken down between Koolan at between 2.7 million and 3 million tonnes, and Mid-West of around 1 million tonnes.

Now all-in group cash costs to the cash costs from both sites and also our corporate head office costs are expected to average between AUD 70 and AUD 75 per wet tonne FOB for the year. And that reflects -- that priced or all that costs, I should say, reflects the strip ratio at Koolan primarily, which is in line with the original feasibility plan.

So we look forward to the coming year with confidence, both in the ability of the existing business to deliver good returns. And also now that we are on track with the restart of Koolan to step up our activity with efforts to identify new growth opportunities.

So with that, I'll hand back to you, Bree, for any questions that anyone might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Firstly, we have Hayden Bairstow from Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [2]

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Just a question on realized pricing. I mean, you're seeing the Koolan products. Are they sort of broadly in line with what you'd expected? And if we need to stay in line, they could carry in close to the Brazilian high-grade price in terms of the benchmark price and also the standards of the Pilbara blend benchmark. When you sort of -- are you seeing variances in what you're getting on per shipment based on impurities? Or has it also been in line with what you are thinking?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [3]

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Okay. It's certainly, highly in line with what we were thinking. And maybe, just to spend a minute describing how it works. If we're selling ore about 65% iron, which we are, then the relevant index that's referenced is the Platts 65 index. And that index is actually informed by Brazilian sales primarily. And so there are some adjustments from that index for us. If we're selling grade a bit higher than we have in uplift, but we also, at Koolan, have lower or similar alumina, but slightly higher silica than the Brazilian product. So we do incur a penalty on the silica side of things. And that can be a few dollars, depends on what the silica level is.

And then there are other adjustments for sizing differential. Koolan is obviously a very fine product. And so sometimes, there is a slight deduction for the proportion of fines in CAGR. We're selling just fines at the moment, not lump. And the lump product that we are looking at and we're doing various items of test work, has always been very low in terms of total production. So that will be something for the future if we can make some CAGR so that mine is concentrating on those fines. So what we've seen in the prices, we're referencing that 65 index. And just to summarize, you kind of go up the grade and then down for a couple of impurity type pieces, but, generally, in that ballpark that I've described.

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Hayden Bairstow, Macquarie Research - Analyst [4]

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Okay, cool. And just on the Mid-West, I mean, you're obviously just pulling those really ordinary low-grade stockpiles out? I mean, is there a scenario where you could get enough forward hedging on something like Shine and justify doing it? Or is it given you is getting the payback on the offtake on the rail, it's probably not worth it?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [5]

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It's probably the latter. Shine fits there as a sort of a 4-year open-pit project. The average grade sitting around 59%, 58.5%, 59%. So it's something that we have been evaluating. But given the pace that we wanted to turn around the Mid-West with the prices earlier this year, we just went straight for the low grade. And then the rail obviously comes in, no matter what that's dependent on the rail volumes of others. So I guess, it answers your question, Shine sits there as a possible, but it's not a focus right now.

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Operator [6]

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Next, we have Glyn Lawcock from UBS.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [7]

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Look, just going back to the Mid-West on those low-grade sales, 1 million tonnes. Have you been out of lock away the price or is that -- it's going to be subject to the price on the day? And if it is the latter, just curious, I mean, the price has come up still very elevated, as you say. But where -- how far does it fall before it becomes an economic to sell that 1 million tonne?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [8]

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Look, the price raising is actually the former. So we have -- these are effectively fixed-price contracts. They do vary with adjustments for grade, and we've been doing a little better in the grade on some of them. So there's a little bit of an uplift. But effectively, those realized prices that we reported, now broadly, the kind of numbers that we expect going forward. So the way it works is our critical piece here was to make sure that we didn't incur a whole lot of restart costs at Extension Hill. I mean, to have the iron ore price fall away, and then as the less on carrying costs of no revenue. So the way we've done it, these customers who are interested and have bought this product have provided letters of credit and financial support upfront.

And so we are just drawing down on those over time. And so that program at this point continues through to late this year. And then we'll have some additional cargoes that we'll start to market shortly. And just see whether we can do something similar or perhaps even better, but it would depend entirely on the price environment at the time. But the whole basis was to try and make sure that we are protected on a credit perspective. So that we can make these cargo shipments. And in Australia, the customers have very much liked them, and they've used as blending low-grade sources for metals in China.

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [9]

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Sorry, just forgive me, but I remember 10 years ago, we all had contracts and they did work with the paper that were printed on. So do you think slightly different to that in the context of if the market would fall away, they -- because they have letters of credit, they are more binding than what we used to have?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [10]

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They are different to what we have. I consider them more binding. But I'd also be fairly weary if the price fell away significantly, we might have the risk of customer requests for price changes and other things. So our position then is, look, we may be able to deal with that. We're keen to get all those volumes out before November, December. But at the very least, we had covered our startup costs. We're covering our day-to-day costs now and making small margins. So we could actually instantly stop the business. And I think we'll be protected with the little credit that we have for the shipments that we cover those costs incurred at the time of stocking them. Does that make sense?

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Glyn Lawcock, UBS Investment Bank, Research Division - MD, Head of the Australian Mining & Energy Team and Research Analyst [11]

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Yes. No, no it does. Perfect. And just looking at Slide 13 and the cost profile now for KI. Obviously, it seems to have changed a little bit over time. You're now comfortable with, we know, you talked a little bit about the trading issues getting in, it was a bit tighter when you started out? Comfortable now this profile you can hope?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [12]

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Look, recently, the type that you're looking at on Slide 13 actually hasn't changed. That's been the same. But obviously, our experience in ramping up has been a little more expensive than those. We're still targeting these type of costs. And you can see that they're purely a function of the strip ratio. So the first year is sort of close to a calendar '19, and year 2, calendar '20. So it's calendar '20 where there's quite a bit of stripping involved as well. And so I think based on what we're seeing, we've got a pretty good chance of hitting those types across, but we'll have to see how it goes.

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Operator [13]

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Next, we have Michael Emery from Euroz Securities.

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Michael Emery, Euroz Securities Limited, Research Division - Resources Analyst [14]

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Just quickly, actually, just touched on briefly towards the back end of your last question. Just looking at your strip ratio at the year 2, obviously, increases up to sort of turning a bit. Do you have all the gear on-site ready for that? Or are you planning on sort of hiring a bit more for next year? Just sort of kind of understand how that's going to adjust?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [15]

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Right. No, we do have the gear on-site already. So we have the excavator fleet and the truck fleet that we need. I think what may happen is that some of that strip ratio work might be blended a bit across the years. There are some connecting we're doing to the mine plan. This is the best case that we've got, but the fleet we have and the personnel we have is sufficient for what's there. So what we did is we own 9 trucks, kept it at 9. And we've supplemented that with 3 hired trucks and the term on that hire is for the first 2.5, 3 years of the operation. And that's been, obviously, specifically geared to deal with the West-Mid. Now once we've done that, those trucks will move off-site.

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Michael Emery, Euroz Securities Limited, Research Division - Resources Analyst [16]

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Okay. And just, I guess, the day-to-day, it's -- I know prices are elevated? There wasn't much opportunity for expansion, was there? You could probably scratch on the half year or a year out of Koolan?

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [17]

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Look, that's about right. There are a couple of things we're focusing on at the moment that aren't in the reserve at the moment. One is there is an area of ore at the western end of the Main Pit and you can say that it's on the photographs. That ore is lower, right, it's more like 59%, 60% iron compared with the high-grade components of the Main Pit ore body. But it might represents an opportunity for us to just blend that in and get us some additional tonnage at these types of prices. So we have been looking at how that might work. And then the second part, which has always been there is profitability is, in the final years of the mine, what are the geo technical designs? And is there an ability to maybe slip in a wall slightly on the hanging side to extract just ore a little bit deeper? But as you mentioned, it's not something that's got away at multiple years of the operation. It might be about 0.5 year or 1 year, something like that, don't know yet.

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Operator [18]

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There's no further questions at the moment, Peter.

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Peter W. Kerr, Mount Gibson Iron Limited - CEO [19]

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Okay. Right. Well, thanks, Bree. Thanks to all. If you do have any further questions, then please contact either myself or Gill. And our details are around at the bottom of our release. And we look forward to catching up with you in the coming days. Thanks.