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Edited Transcript of SBM.AX earnings conference call or presentation 19-Feb-20 12:00am GMT

Half Year 2020 St Barbara Ltd Earnings Presentation

West Perth Mar 14, 2020 (Thomson StreetEvents) -- Edited Transcript of St Barbara Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Anthony Jetson

St Barbara Limited - MD, CEO & Director

* Garth Campbell-Cowan

St Barbara Limited - CFO

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Conference Call Participants

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* David Radclyffe

Global Mining Research Pty Limited - MD

* Kate McCutcheon

Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst

* Samuel Berridge

Perennial Value Management Limited - Equities Analyst of Small Caps

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the St Barbara briefing on half year report conference call. (Operator Instructions) I must advise you that this conference is being recorded today, 19th of February 2020.

I would now like to hand the conference over to your speaker today, Mr. Craig Jetson, Managing Director and CEO. Thank you. Please go ahead.

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [2]

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Thank you, and good morning, and thank you, everybody. Thank you for joining St Barbara's first half FY '20 interim financial report briefing. As you all know, I commenced as CEO and MD 2.5 weeks ago. And I guess for my first briefing, there would be one request, and that is you take it easy on me for this one, at least, and I'm sure that might be the case.

On the call with me today, I have Mr. Garth Campbell-Cowan, our CFO, who you're all familiar with; Mr. Rowan Cole, our Company Secretary; Ms. Val Madsen, our General Manager, HR; Mr. Lucas Welsh, our General Manager, Commercial; and Mr. David Cotterell, Manager, Investor Relations. And I thank the team for coming along in support.

Before I move on into our report, I'd like to let you all know that Ms. Maryse Bélanger, our current President of Americas, informed me after almost 4 years of growing Atlantic Gold that she would like to move on and transition into new opportunities, which potentially would include director and non-executive director roles. Maryse has clearly been instrumental to the success of Atlantic Gold, and I'm generally disappointed she is leaving. Maryse will remain as President, Americas, during this transition period, which is scheduled to conclude early May on 2020.

I will now provide a short overview of the first half results before handing over to Garth to take you through the financials in more detail. So where I'd like to go to now in terms of the deck that's been provided in the presentation pack that's been provided is to move to Slide 4. Slide 4 is a key focus for everyone, in particular, on our safety. And as I've indicated internally to the management team and the company employees, that a job anywhere in our operation that can't be done safely will not be done at all under my stewardship. I'm obviously pleased with the current results in our safety performance in a downward trend, particularly in our total recordable injury frequency rate, that's been improving, and some great projects have been delivered across the organizations. And good safety processes are starting to deliver and support the operations to deliver those results. Clearly, there's some opportunity to improve, and it's not where we need to be. And we'll continue to improve in this space.

Moving to Slide 5 and the key highlights for the half year. Production-wise, the first half really benefited from the contribution of Atlantic Gold. The operations had a fantastic EBITDA margin of 69% and demonstrating how well it's performing. Cash flows for the first half was $65 million, lower than last year due to a lower production and capital spend in the Gwalia Extension Project. For H1 FY '20, the company's achieved an NPAT of AUD 39 million. I'm pleased to announce that the Board has declared an interim $0.04 per share fully franked dividend, consistent with last year's interim dividend.

With that, I'd like to move on to Slide 6 of the pack. Slide 6 compares the consolidated production with the all-in sustaining cost on a 6-monthly basis. As we previously highlighted, the half was softer with both Gwalia and Simberi performance. It was helped by contribution by Atlantic, and the overall EBITDA margin remains at 47%.

Turning to Slide 7, and this slide looks at the performance of Gwalia on a yearly basis. FY '20 has been a challenging year for the operation as we've completed the PAF component of the Gwalia Extension Project and the last stage of completing that ventilation project.

Slide 8, moving into the project in itself and where we are on our current project pipeline. The project -- extension project at Gwalia is due to the completion in the next corner. Fourth and final ventilation and raisebore is currently being completed. Ventilation had been increased from underground from the installation of the surface fans and the use of the completed shafts that have already been done. The full effects will be recognized, of the extension project, in the June quarter.

Moving on to Simberi. Simberi's had a lower performance on tonnage and also grade. As mentioned in the last quarter, we commenced mining in the Botlu open pit. And unfortunately, that is underperformed -- that has underperformed versus expectations. We don't expect Simberi to outperform guidance, as it has done over the last 4 years, but it will deliver a strong and a solid result for the company.

Moving on to Atlantic Gold production, in particular. Atlantic has had a fantastic first half with record production and low costs. It was our best-performing operation, full credit to Maryse, Laird Brownlie, in particular, whose -- and his team for their achievement so far. A great job by that team.

Turning to Slide 11. Slide 11 shows the growth projects and the upside potential along the strike from existing Touquoy operation. We're feeling very encouraged by the drilling results to date, and there's more exploration still to do, as you would be aware.

With that, I will now hand over to Garth to discuss the financials in more detail.

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Garth Campbell-Cowan, St Barbara Limited - CFO [3]

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Thanks, Craig, and good morning to everyone on the call.

I'll start with the key financial outcomes for the first half of FY '20, which is set out on Slide 12. The company delivered a net profit after tax of $39 million and an underlying net profit after tax of $35 million for the half, which was down on the previous period due mainly to the lower production at Gwalia and Simberi. Simberi also reported higher operating costs in this half.

I'll discuss the key items that impacted net profit after tax in the half a little later. If we look on this slide, Gwalia maintained a solid EBITDA margin of 47%, with Atlantic, the standout operation, with an EBITDA margin of 69% for the period. Basic earnings per share were $0.06 for the half, which was down from the previous period driven by the lower profit contribution from Gwalia and Simberi. And as Craig mentioned earlier, the company has announced this morning a $0.04 per share fully franked interim dividend. This maintains the company's interim dividend level compared to the previous interim period.

If we now turn to Slide 13. The difference in reported and underlying EBITDA and net profit after tax is presented on this slide. The difference between the underlying and the reported results represent significant items, which are the one-off costs associated with the Atlantic Gold acquisition and integration and amortization of a hedge liability booked on acquisition of Atlantic Gold. Now as at acquisition of Atlantic, a financial liability of $44.6 million was recognized in the balance sheet, and this amount amortizes to gold revenue as the hedge contracts mature through to February 2021. This liability represents the out-of-money position of the hedge book at the acquisition date. So it's essentially an accounting entry done at the acquisition that now needs to be amortized. So the amount included in revenue in this half was $11.8 million, and that is the amount that's shown in significant items. And this means that each reporting period, we will have some of the remaining liability amortized in revenue. And the balance at 31 December on this liability was $32.8 million reported in the balance sheet.

Now moving to Slide 14, where we present the changes to the underlying profit before tax at the half-on-half. Gwalia and Simberi both delivered lower gross profit driven mainly by the lower production, which was partly offset by Atlantic's strong contribution since acquisition in July 2019. Exploration expense to the income statement was higher than the previous corresponding period due to increased expenditure across the portfolio and the inclusion of Atlantic Gold. And during this period, we've spent $2.6 million relating to Atlantic Gold. The other major impact was higher depreciation and amortization expense, resulting mainly from the acquisition of Atlantic.

With the allocation of the purchase price, a substantial value is attributed to a balance sheet category called mineral rights, which is amortized over the ore reserve life of Atlantic Gold, including the future projects. And if you look at note 10 to the half year financial statements, there's a detailed breakdown of the assets and liabilities that we acquired. In the period, $26.7 million was charged as amortization of this mineral rights balance. In addition, an amount of $5.4 million was included in depreciation related to the accounting standard AASB 16, which deals with leasing. And this amount would previously have been included in operating costs.

So turning to Slide 15, which provides the profit and cash contribution from each of our operations. Gwalia delivered free cash flow for the half of $37 million before growth CapEx, which was then partly used to fund the completion of the GEP project and continued deep drilling. After growth CapEx, Gwalia contributed $9.5 million of free cash flow, reflecting the higher sustaining and growth CapEx in previous periods. Simberi continued to deliver a strong cash contribution of $32 million before growth CapEx of $2.5 million associated with the sulfides project. And pleasingly, Atlantic Gold produced a strong cash contribution for the half of $56 million, with $8.3 million being deployed to advance its growth projects. The director's report gives a detailed analysis of profit and cash contribution for each of these operations, if you want a bit more detail.

Slide 16 provides a breakdown of how cash was applied within the business during the half. The larger expenditure items, as you can see from this waterfall, were exploration, capital expenditure and income tax, which left us with a negative $4 million cash surplus before paying the FY '19 final dividend of $19 million. At the end of December 2019, the cash balance was $79 million, which we will build in the second half of the year.

Just looking at a couple of those items. The high exploration and evaluation expenditure of $27 million included $10.8 million relating to Atlantic. Capital expenditure of $61 million comprised sustaining CapEx of $36 million, which was higher than previous periods at Gwalia due to increased mine development; and the growth CapEx, mainly GEP, of $24 million. And Australian tax payments amounted to $33 million, comprising payment to the prior year provision and the FY '20 pay-as-you-go installments. Now this should be the last time that you see a big tax payment in December, as our monthly PAYG installment payments will now ensure that by the end of the financial year, we will have paid our tax -- predominantly paid our tax that financial year.

Slide 17, just having a look at the balance sheet. Balance sheet remains strong with cash of $79 million at the end of December and debt of $138 million, which includes $32 million relating to the accounting standard on leases, with the other side of that being in assets. During the half, we consolidated the Atlantic Gold debt facility with the company's syndicated facility, creating a AUD 200 million Australian tranche and CAD 100 million Canadian tranche as 1 facility. This delivers a saving on interest of around $1.6 million per annum and has simplified the covenants and administration relating to the Atlantic facility. The Australian tranche remains undrawn at this time. The group's gearing at the end of December was 8% with leverage at around 0.2x.

And lastly, just turning to Slide 18, dividends. This slide shows our dividends paid and the dividend yield since commencing dividends in FY '17. And today's announcement is the sixth consecutive dividend totaling $0.30 since their commencement.

With that, I'll hand back to Craig.

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [4]

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Yes. Thank you very much for that.

So turning to Slide 19. So Slide 19 outlines there, I guess, our key exploration areas we highlighted in the quarterly last month. We clearly continue to be very active with a number of encouraging results across these various projects.

Touching on Slide 20 that highlights, in particular, St Barbara's diversity programs and gender pay gaps. And the company has been awarded and continues to be continually recognized with a number of our initiatives in this space. I'm personally very proud to join the company that is committed to building and diversifying its workforce. These remain a key focus for me in the company going forward.

Now moving to Slide 21. On Slide 21, we outline a number of areas that we've progressed the company's efforts in the community or sustainability. These are areas that we're very committed to in moving forward and improving our fundamental way of -- our social license to operate, in particular.

So in conclusion, on Slide 22, I'd like to conclude by just saying that we've had a reasonable start to the first half with record production at Atlantic Gold, offset performance at Gwalia and Simberi. The company remains in good financial position, which has enabled a $0.04 per share fully franked interim dividend. Project-wise, we've almost completed the Gwalia Extension Project, which enables us to build a better future for that operation. In the next month, I expect to be able to provide an update on Simberi sulfide project. Lastly, the Atlantic Gold projects are progressing, and its exploration results from around the Fifteen Mile Stream have indicated there is a lot of upside yet to be realized.

And then with that, I'm now happy to take any questions and answer those questions in order. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Your first question comes from the line of David Radclyffe of Global Mining.

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David Radclyffe, Global Mining Research Pty Limited - MD [2]

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I was just wondering maybe if you could start by providing maybe some of your early thoughts on the strategy and where you see opportunities within the business, where you think you can take it and maybe any areas that you think maybe you should -- you'd like to change.

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [3]

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Yes. David, look, thank you very much. I mean, I guess with the caveat of being here 2.5 weeks and I haven't been to any of the operations yet, but I am happy to share that we have a fantastic portfolio of opportunity. And clearly, the performance and the overperformance of what Atlantic has been able to deliver early is a credit to the people in North America that's running that operation for us. So I reach out to Laird, in particular, and his team, but it's early days. There's clearly opportunity for growth in that operation. We've been fighting hard for a long period of time now and working hard to deliver the extension programs at Gwalia, and I look forward to bringing that online and -- I guess optimizing Gwalia. The sulfide project is certainly well advanced to a point where I mentioned in the early part of this phone call that we're not far away from coming back out and hopefully announcing some good opportunity there. Now that is going through our internal processes at the moment, and it's way too early to make a call. But what I'm trying to allude to, in terms of the platform that the business has certainly built over the last 4 or 5 years, in particular, it's exceptionally strong to be able to transform into the next phase of our business. So I think there clearly is some organic and inorganic growth around our business. There's been successes. A lot of our projects are starting to deliver what we forecast and where we're going, which will continue to deliver our strategy as previously announced. So there's actually no change from my point, at this point in time, in terms of the strategy laid out in previous months and years. So we'll continue on that. I'm not suggesting for a moment that we will have other opportunities as we move forward. I know it's a long way around saying it's really continuing to deliver the strategy that we've said that we were going to deliver, albeit as nimble as we possibly can, so we can realize the benefits.

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David Radclyffe, Global Mining Research Pty Limited - MD [4]

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Okay. So maybe -- I mean, just a little bit how harder vision out then would the regional exploration in Australia and the investments there, a fair bit of capital has gone onto those, and we haven't sort of seen many results. Is that fair? Or do you still sort of see opportunity there?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [5]

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Yes. Look, I think that's the nature of the beast in our industry. But to be fair, I think there has been some targets prioritized that we are seeing some good results come through now. The exploration programs for any of our businesses, I guess, across the group are very difficult and they do certainly take time to deliver. But I guess early days for me yet, but some of the exploration results that I'm seeing come through are rather positive. So hopefully, in that space, in the very near future, we'll have some better news.

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David Radclyffe, Global Mining Research Pty Limited - MD [6]

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Okay. Then maybe a last kind of follow-up. I mean the loss of Maryse seems to be a bit of a blow there. Are you confident you've got enough depth in the management team in Canada or that you can replace it? And one of the differences with the acquisition from the St Barbara point of view was you kept the original plan as it was before when other people have made offshore acquisitions, have changed the plans. Is this an opportunity for you guys to sort of change that forward plan at Atlantic?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [7]

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Look, the immediate forward plan still stands. And to be very clear, Maryse leaving and pursuing other interests and certainly other adventures in her career is a loss. And somebody with that gravitas and experience in our business would always be a loss. But we're a global company, and we certainly look at the best talent we can possibly attract into our business to cover that loss and we'll move on.

Very good question about the depth in North America. And I'd have to say, and I have met Laird and I've sat with Laird and the Operations General Manager -- as the Operations General Manager for a few days here over a week ago. I'm in contact with Laird and his team almost every second, third day. I'm very encouraged about where they have, what, how they've, I guess, ramped up, started the operation, delivered the operations safely. It's certainly performing exceptionally well. And that in itself with the results and the safe result that they've been able to deliver so soon would suggest that the depth of the organization is very strong there. So I have no concerns about that continuing on. We will certainly increase our search and pursue that search for Maryse's replacement as soon as we possibly can because clearly, that is a key role for our organization. So we will attract the best talent we can as soon as we can.

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Operator [8]

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Your next question comes from the line of Kate McCutcheon from Citi.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [9]

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Craig, welcome aboard. I'll start with a PNG question, which is perhaps closer to home for you. So assuming that you do a feasibility study in Simberi, can you just talk through the steps and timing required with the government before you commit to an investment decision?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [10]

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Yes, Kate, that's really good question. And I think we all know how difficult it can be in PNG. But rightly so, you've mentioned my knowledge of PNG, in particular, the relationships that I have with the PNG government, the regulators. I'm heading to PNG, to Simberi for the first time very soon. And with that, we'll be meeting with the clans and the clan leaders, the mine life and local government on the ground, so looking forward to that. But I believe that our reputation, built by St Barbara working together in the community with the community, holds us in extremely good stead for a lot of support for a lot of changes that we may have to have if we need to go down a sulfide path eventually. So look, I think the future, if it comes out that we will continue on with the sulfide project, certainly it would be very strong in terms of support not only from the government but the local level government, provincial government as well. So I don't really see a major problem. I think as all businesses in PNG in the mining sector and petroleum sector, in particular, it's probably the Mining Act that we are keeping a very close eye on and understanding what the impact might be with that. So we are working together with all the key stakeholders and have, I guess, an influential seat at the table in terms of providing input and impact, in particular, of any Mining Act changes. So we're looking at the whole picture. Nothing is simple. And certainly, nothing is simple in PNG. But we're very well connected, very well respected and have a good team on the ground there.

We seem to have lost Kate, I believe. But maybe if we can take another question. And if Kate, if you're still on the line, you appear to have lost your line here. I'll certainly come back and try and answer the second half of your question.

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Operator [11]

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(Operator Instructions)

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [12]

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I was on the conference call and then they said they couldn't hear me.

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [13]

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You're back, Kate. Thank you.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [14]

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Am I back?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [15]

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Yes. You certainly are.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [16]

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Okay. Sorry. At Moose River, that revised time line in June quarter, does the scope for that include some of the near-mine deposits that were outside of that original production schedule? Or is this talking about just Fifteen Mile and Cochrane? And have there been any updates on the permitting process since December quarter?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [17]

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Look, no, there has been nothing that I can really add to that quarter announcement. So for now, and again, from my knowledge, I'd probably leave it there.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [18]

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Okay. And the revised time line in June quarter, would that look to incorporate some of those newer satellite deposits? Or that will be the original?

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [19]

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Yes. It would be the original, I would suspect.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [20]

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Okay. And then on Moose River, is there an updated timing for a potential consideration amount for the purchase of their MRRI dividend stream? I think the last time, it was going to the next Board meeting.

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Craig Anthony Jetson, St Barbara Limited - MD, CEO & Director [21]

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Yes. Look, we're working through the project pipeline obviously, and permitting is sort of key for us to resolve quickly. And we're working very closely. And in fact, there are meetings as we speak today on those particular issues with all the key stakeholders. So I think it's a bit premature for me to say at this point in time until I get that official feedback.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [22]

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Okay. And then one final question perhaps for Garth. Is there any guidance on the dollar per ounce depreciation moving forward from Moose River? Or should we assume that those mineral rights will continue to be amortized at the 1H level?

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Garth Campbell-Cowan, St Barbara Limited - CFO [23]

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I think the way to look at that, Kate, is we amortize the mineral rights over the reserve, being the reserve for the whole project, so that's Touquoy and those other deposits. So I think the reserve is about 1.8 million ounces. So if you use that reserve as what you're going to amortize the balance in the balance sheet by, then that will give you a per ounce number and that you then multiply by the production that you have coming out of Touquoy.

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Kate McCutcheon, Citigroup Inc, Research Division - Assistant VP & Metals and Mining Analyst [24]

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Okay. But those mineral rights will continue over the life of mine?

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Garth Campbell-Cowan, St Barbara Limited - CFO [25]

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Yes. And they relate to not just the existing operation but all of the future projects, so all of the reserve.

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Operator [26]

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Your next question comes from the line of Sam Berridge from Perennial.

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Samuel Berridge, Perennial Value Management Limited - Equities Analyst of Small Caps [27]

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Sorry if you've already mentioned this. So just on the change in D&A for Atlantic. Is there any cash tax implications for that? Does it flow through into a tax impact or no?

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Garth Campbell-Cowan, St Barbara Limited - CFO [28]

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No. I mean, the accounting -- that depreciation relates to the accounting base, and the mineral rights that you amortize or gain doesn't have a tax base. So yes, I think -- I'm not sure that we've disclosed the tax position for Atlantic. We're not paying tax at Atlantic at this stage. So there's still tax losses. And I think in the tax note in the financials, you'll see that there's a number there for the tax loss number. I think it's around AUD 22 million. So that will shield tax for a period, but that large mineral rights is not a balance that's amortized for tax purposes.

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Operator [29]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.