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Edited Transcript of SFR.AX earnings conference call or presentation 20-Feb-20 2:00am GMT

Half Year 2020 Sandfire Resources Ltd Earnings Call

West Perth, Western Australia Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Sandfire Resources Ltd earnings conference call or presentation Thursday, February 20, 2020 at 2:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jason Grace

Sandfire Resources Limited - COO

* Karl Matthew Simich

Sandfire Resources Limited - MD, CEO & Executive Director

* Matthew Leslie Fitzgerald

Sandfire Resources Limited - CFO & Company Secretary

* Shannan Bamforth

Sandfire Resources Limited - General Manager of Geology

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Conference Call Participants

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* Daniel Morgan

UBS Investment Bank, Research Division - Director and Analyst

* David Coates

Bell Potter Securities Limited, Research Division - Resources Analyst

* Hayden Bairstow

Macquarie Research - Analyst

* Lyndon Fagan

JP Morgan Chase & Co, Research Division - Analyst

* Samuel Berridge

Perennial Value Management Limited - Equities Analyst of Small Caps

* Sophie Spartalis

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

* Nicholas Read

Read Corporate Pty Ltd - Principal & MD

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Sandfire Resources 1H FY '20 Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Nicholas Read. Please go ahead.

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Nicholas Read, Read Corporate Pty Ltd - Principal & MD [2]

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Thank you, Lexi, and welcome, everyone. On behalf of Sandfire, thanks for joining us for today's investor call and webcast for the company's interim financial results.

I'd like to draw your attention to the release of a number of documents on the ASX platform earlier today, including the half year financial report and Appendix 4D and ASX release on the company's results for the 6 months to 31 December, the half year financial results presentation and other statutory filings.

I'd like to begin by introducing the senior management team from Sandfire here in the Perth office this morning. Leading today's call, we have Karl Simich, the company's Managing Director. Following Karl's introduction, the company's Chief Operating Officer, Jason Grace, will present an overview of operations and growth projects before handing over to Chief Financial Officer, Matt Fitzgerald, who will run you through the detail of the financial results before handing back to Karl for a brief summary and outlook.

A live webcast of this teleconference and a synchronized slide presentation can be accessed using the BRR Media service. Just follow the link on the front cover of the presentation. And a recording of the webcast will be available at the same link shortly following the completion of the call.

Also in the room, we have Shannan Bamforth, General Manager of Geology; and Julian Hanna, Head of Growth and Exploration in Botswana, who are available to answer any questions.

I'll now hand over to Karl to kick off today's presentation. Please go ahead, Karl.

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [3]

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Thank you, and welcome, everyone, to the presentation, and look forward to going through this today. So from Sandfire's consolidated perspective, it's been a very pleasing half year in terms of the operating performance of the business and the results, which will be articulated by Matt Fitzgerald, the CFO, who will indicate those solid results. So we've been very pleased with those results. We are continuing to work at ensuring we achieve our target levels and we keep on that trajectory.

I suppose the important thing from us at the moment as the business rolls through and with a number of events and clearly the acquisition of MOD Resources, which has well and truly been worked into our business now as we brought it in, and that's run smoothly, is we really have established a platform for our business for growth into the future. We continue to operate well at DeGrussa and Monty in our operations. We continue to explore in that part of Western Australia where we believe there is still significant potential for further discoveries.

But at the same time, we've changed a gear in terms of looking for those other growth platforms. We will over the next few years be in a position where we have an operating scenario in Central -- in Botswana in the Central Kalahari Copper Belt. And we, as the dominant ground holder in that country, will have operations established on the ground there. We will also continue to pursue the operating platform in Montana at the Black Butte Project, and that continues to move forward in terms of working through that permitting process. And we are confident, as we have mentioned many times before, that, that ultimately will be a platform for operations and also further growth in Montana but also in other parts of the U.S.A. and Northern America.

So from our perspective, we are laying the foundation for our business for growth, for transformation, leveraging off the balance sheet that we have got and the relationships that we do have as well. So we're looking forward to that future.

And what we'd like to do now is I'm going to pass over to Jason so he can run through the detail of the performance over the last 12 months and having a look at where we are at the moment, and Matt will follow him in terms of the financials. But look forward and handing over to you now, Jason.

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Jason Grace, Sandfire Resources Limited - COO [4]

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Thanks, Karl. So in terms of operations and growth, I'll start with safety. We had a solid half in safety performance, achieving a TRIFR of 6, and that's compared to 6.2 in the prior half. We continue to remain committed to improving safety performance and working very hard with our people and also our key contractors and service providers to keep that trending in the right direction.

In terms of operating results, we achieved production of 34,988 tonnes of contained copper, 19,370 ounces of contained gold at a C1 cost of USD 0.84 per pound. As a result of these -- on the back of these results, we do reconfirm guidance at 70,000 to 72,000 tonnes of contained copper, 38,000 to 40,000 ounces of contained gold at C1 cost of USD 0.90 per pound. And this also takes into account the recent water ingress event that occurred at DeGrussa mine associated with the heavy rainfall from Cyclone Damien. Now this saw a temporary closure of the underground mine, but we did remain active and continue processing of ROM stockpiles, and this will have little to no impact on our results for the year.

Some of the highlights from the first half were particularly in the Monty Copper-Gold Mine, which saw the ramping up of production in both ore tonnes and grade. And we completed an extensive grade control drilling program, which will underpin our mine plan going out for the full life of mine.

At the T3 Copper-Silver Project, the acquisition was completed. We also completed the integration of the MOD and Tshukudu teams. The feasibility study optimization is well advanced, and approvals are on track to be received in the June quarter.

At our Black Butte Project, we've entered into the final stages of permitting and also of the final stages in the feasibility study. And with our exploration programs, we continue our multipronged approach, mainly across the Greater Doolgunna region, our Eastern States projects and also Tshukudu in Botswana.

Moving on to the Monty mine. At the Monty mine, a series of milestones were achieved in the first half. So firstly, with first ore production occurring very early in the half, and production rates and grades, as stated before, ramping up in line with the mine plan. An extensive grade control drilling program was also completed during the half, with over 60,000 meters of drilling completed during the calendar year 2019 and has defined the ore body using a 10 x 10 or a nominal 10 x 10 meter spacing, and this will underpin our future interpretation of what is a very complex ore body and also underpin both ore reserves and life-of-mine plans that gives us a higher level of confidence going through on future production.

At Tshukudu operations, as I've said before, in summary, optimization of the T3 project feasibility study is well advanced. A lot of work has been happening, particularly in mine planning, mine design, mine scheduling and most recently plant size optimization. We're also in the final stages of our ESIA process, and that has been -- the final document is submitted for the T3 project, and our mining license application will follow. Overall, all approvals are expected to be in place prior to the end of the June quarter. We remain very excited about the near-mine growth potential in the area, and we have an exceptional pipeline of projects right across the region.

And if we look particularly at our A4, the A4 Dome, which is about 8 kilometers away from our T3 deposit, we've continued our exploration drilling program and we currently -- or we now have 5 drill rigs operating on the project. Assays have been received for the first 5 drill holes and are shown, and further assays are expected from an additional 11 drill holes in the very near future.

With reference to the cross-section shown, the exploration strategy has initially been to target both the shallow and deeper vein-hosted and disseminated mineralization, plus the deeper NPF contact zone. Since the discovery of the near-surface vein-hosted and disseminated mineralization, which is very similar in orientation and nature to the T3 deposit, our focus has been to preferentially target this area and define its extent on along-strike and down-dip.

If we might go to the next slide. To date, and looking at this slide, which shows our regional aeromagnetics and the overall interpretation of the A4 Dome as well as the location of existing drill holes, you will note that to date, drilling has extended along a length of approximately 1 kilometer, which is a very small part of the overall A4 Dome, which is approximately 10 kilometers in length on a northeast-southwest orientation. So we remain very excited about this -- potential of this project, and we'll continue doing a lot of work in the coming months.

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Matthew Leslie Fitzgerald, Sandfire Resources Limited - CFO & Company Secretary [5]

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Moving across to the financial results for the 6 months to 31 December '19, and a number of these -- parts of these results have been prereleased with our quarterly but just to cover them here. Revenue of $313 million came from a mix of copper at 86% of revenue, gold at 13% and silver at 1%. Gold a little higher than in prior periods with a strong gold price, which has also impacted our by-product credits and C1 headline numbers.

Strong operating cash flow, of most importance to us, $109 million for the 6 months and $140 million prior to our investments into exploration and evaluation. That $109 million is up on last year -- at an equivalent period last year at $97 million. Looking at DeGrussa specifically in the segment, earnings before net finance and income tax of a pleasing $91 million for the 6 months to December.

Dropping down now into our profit numbers, around $50 million, and after-tax, $33 million. D&A higher than prior periods as guided and as prereleased in our quarterly as well, $92 million of D&A, which is being impacted by -- increase impacted by the production coming out of Monty, which is not only the amortization of the Monty decline underground activities but also amortization of the acquisition of 30% of Monty from Talisman Mining 2 years ago. Down to earnings per share, that comes to $0.20 per share. And also as prereleased, cash in the group just above $200 million at the end of the calendar year.

Pleasingly, that has allowed us to continue our dividend stream to shareholders and, for these 6 months, declaring today a dividend of $0.05 per share fully franked to follow on from a number of periods of dividends that we've been able to pay. We've also been, of course, balancing our needs between acquisition, and I'll touch on this in a moment in the cash graph, but acquisition, our development needs, our new work and activities that we're completing at Tshukudu and Botswana and including the exploration activities. So continuing to balance those cash needs while, importantly, returning earnings to shareholders. Dividend record date, 26th of February and payments into the first part of March.

To drill down a little bit into some of those drivers of performance, particularly the graph on the right. The U.S. copper price, as we know, a little down period-on-period and certainly down compared to the full financial year of last year as well. That has been predominantly really completely offset in fact by the drop in the currency, Australian dollar currency, which is now in that sort of $0.68 level. That has also impacted our C1 disclosure, but it has really resulted in that Australian dollar copper prices maintain moderate but reasonable levels in our view.

The revenue increase has been pleasing with production up, as we've stated in our quarterlies before and as guided. We knew that the early stopes and production and development all coming out of Monty would be at lower and under reserved -- ore reserve grade. We're seeing that ramp up, and we saw that ramp up into the second half of the year, and we'll continue to see that ramp up. That will also, like-for-like, have an impact on our -- a positive impact on our earnings. Just as a bit of guidance around that. If Monty was returning, for example, its ore reserve grade during the 6 months, NPAT would be around 50% higher than what we've stated here. So very much a timing -- to some extent, a timing issue with what grade comes out of Monty, which is, as we know, quite variable in grade. As Jason touched on, an ore reserve upgrade or change will come -- update will come in April of this year.

Also impacting P&L results is the higher exploration, evaluation expenditure that's across Doolgunna and also the start of the -- or the commencement of our push into our Tshukudu exploration, which is delivering those excellent results at A4. And also a contribution from our feasibility and permitting work at Black Butte was around $5 million impact for the half, impact on NPAT.

Looking at the balance sheet. We've previously talked about cash, and I'll cover the cash inflows and outflows in a minute. Other sort of material movements, financial investments up, and that's as a result of our very strategic move into Sandfire Ventures, including into Adriatic Resources. The other real material move is the exploration and evaluation assets where we have accounted for the acquisition of MOD Resources, the T3 project as well as the surrounding exploration area. So that has certainly increased the noncurrent side of the balance sheet in that period.

Cross to the liability side. Interest-bearing liabilities up, which is around the adoption of the lease -- accounting leasing standard. So we'll see that on an ongoing basis. Of course, not a large impact on us, but certainly you can see the impact there in terms of balance sheet.

P&L-wise, just for those looking at future results, for the sake of comparison for these 12 months saw around $6 million to $7 million of OpEx move out of operating expenditure into D&A as a result of the impact of the adoption of that leasing standard. So we will see some ongoing impact of similar nature to that over the next few years as well.

So most importantly for us, cash flow. Cash between June 2019 into December '19 reduced by around $45 million. From a DeGrussa operations sense with a cash margin of 58%, we were able to increase cash flow or cash available funds by around $180 million. So combining those together, about $226 million has been deployed towards: growth at $98 million; operations and operational requirements, around $60 million; and shareholders and tax of $68 million. As I said before, the dividend's really balancing our requirements between our existing assets and operating assets but also looking at our growth strategy and where we see the company growing into the future.

I'll pass back to Karl for the summary.

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [6]

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Thanks, Matt. Thanks, Jason. And then just in summary, once again, a pleasing half year for the business. very consistent but also, importantly, a rising operating physical performance over the next few years coming forward off the base that we've established at the moment. We're very much looking forward to also that strong pipeline of assets coming to bear with respect to the U.S. asset moving along and also with the acquisition of MOD and the -- not only the development of the T3 project in due course but also the opportunity to leverage off that exceptional ground footprint of almost 12,000 square kilometers in the Central Kalahari Copper Belt. So we see our business very much moving into a transformational stage where we will have 3 centers or 3 platforms to leverage off, being in Botswana and being in obviously Western Australia, and being in Montana over this next number of years.

We're looking forward to obviously maintaining guidance. As we sit for the balance of this year, we see the production profile -- obviously, there's some grade balancing out for Monty and getting to those average numbers and above coming out of Monty, actually delivering better profit results in the second half and going forward to the end of the current known operations. Development and the continuation of moving the T3 Copper Project into a critical stage, which will be a decision, hopefully, during the second half of this year in quarter 2 with respect to taking that forward into a development stage.

Once again, we continue to march forward the Black Butte Copper Project. Those things and permits, et cetera, are expected in the pipeline. Somewhat frustratingly a little bit slower than our hopes but nonetheless it is moving forward and, as we have talked about, that continuation of that organic exploration, which is a very critical part of our business and seeing some exceptional pleasing early results in Botswana, which potentially will have a significant impact.

So we're looking forward to leveraging off the resources and the assets we've got and taking this company forward off these 3 platforms that we will be establishing.

Thanks very much for your time, and I open the floor now to questions at your leisure.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Hayden Bairstow with Macquarie.

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Hayden Bairstow, Macquarie Research - Analyst [2]

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Just a couple for me. Just on Botswana, just to get a better feeling about -- obviously, you've got new discoveries, just how quickly you can sort of advance through this Board approval and finish the studies off of that. Should you get something moving there? Or is it starting to look like you might actually slow it down a bit and -- to get a better handle on what you mine first? Or is T3 guaranteed to be the first thing and you just add things over time?

And then the second one, just on Monty. I mean the potential dilution on that grade into next year and the final couple of years of those, obviously pretty important to what the production will look like for '21 and '22. Can you just give us an idea of the work being done on that infill program? Is it actually adding tonnes? Are we taking a more conservative view on dilution so we'll get all the copper out, but it will just be at a lower grade? Just keen to understand both of those things.

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [3]

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Thanks, Hayden. I'll try and answer the first one, and then I'll pass to Shannan to look at the multigrade question. With regard to Botswana, it is important for us at the moment to maintain a very healthy momentum on 2 fronts. Ian Kerr was charged as Project Director for T3, which will evolve as an [known material] mine being new beginning in [6/1]. He has the job at the moment of -- and with the Board directive -- of moving that project through an optimization study and then having it ready for a decision to mine as quickly but as sensibly as possible, leveraging off the very good work that MOD had previously done, but just tightening it up in terms of confidence of delivery. So that is his job, and he is expecting to deliver that optimization study for that project during May. And so that is on track.

Separately, Julian is charged with the responsibility of finding a really big discovery, the big mine in Botswana. So he is driven on that organic side to work hard. So he is operating independently. But obviously the left hand needs to know what the right hand is doing. So we are -- with all the (inaudible) the organic opportunity in that area is significant. We were -- that was brought to our attention very early in the piece with Julian and integrating the businesses together. We obviously have taken that -- those -- that sort of confidence -- that confidence in the organic potential to hand, and we've put forward a very aggressive or a solid budget for $10 million to $12 million between now -- or couple of months ago and the middle of this year, June, to try and see if we can change the dial relatively quickly. The objective of the exploration and looking at concentric circles away from T3, it has an objective of, one, trying to see if there's an opportunity to displace T3 tonnes with higher grade tonnes. And the second objective is looking for more volume in the region. That gives us a level of confidence that we should be erring towards possibly an operation that may have greater volume capacity.

So there are couple of key things there. I think with the 3 -- the 5 rigs we have on site at A4, for example, and the work being done at the moment, is that over the next couple of months we will get a very good handle of what we think may be there. We don't want to delay anything that is happening with respect to T3 and its optimization. But at the same time, we're cognizant of the fact that depending on what happens at A4, it might provide some additional incentive encouragement to make certain decisions with respect to T3.

So those critical decisions will need to be made in the next, probably, call it, 8 weeks, 12 weeks. And they're sort of decisions that we don't need to make today. But depending on how things roll out, that might have an impact on those critical decisions that we make. But we're pushing hard on both fronts. But we're not going to sit here and say, "Well, let's slow down." The project are pushing forward as we see it today. Or we do believe that, as we see it today, A4 is just going to enhance hopefully and give more weight to some of the decisions we may make with respect to the operating center at T3 where we already have a number of things ready to go. So -- and I think, Jason, you made a comment, which you might want to bring in, about the decisions we need to make are not critical necessarily. So you might you want to touch on that.

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Jason Grace, Sandfire Resources Limited - COO [4]

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Yes. So a lot of the work that we are doing at the moment includes option studies to expand the plant, and we have identified a number of pathways there that could incorporate a (inaudible) or incorporation of A4 as part of the project. So we're keeping our options open at the moment, and it will depend on the drilling results that we do get from A4. And that's partly -- or that's mostly the reason we've got 5 drill rigs churning away there so we can get those answers as quickly as possible.

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [5]

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All right. And Shannan?

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Shannan Bamforth, Sandfire Resources Limited - General Manager of Geology [6]

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Okay. Hayden, Shannan here, mate. In terms of the reserve and where we're headed to with reserve at Monty, the 60,000 meters of drilling that occurred in the last calendar year has definitely updated our understanding on the morphology of the ore body and the distribution of grade within the ore body as well. So once we start to get those to get an updated resource, we're seeing the optimized mine plan for Monty is coming along and is not looking significantly different at the early stages to what we were seeing previously. And it's then also ensuring that once we've got that optimized mine plan for Monty, we are ensuring that the sequencing to the life-of-mine plan harmonizes with DeGrussa so that they have to actually operate in concert together to make sure we've got the best outcome for the project as a whole.

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Hayden Bairstow, Macquarie Research - Analyst [7]

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Okay. And just one for Matt. Post all the MOD deals, you've obviously got numerous footprints now. And I guess a bigger sort of overhead. I mean how do I think about sort of corporate costs beyond the sort of cash cost that you report at DeGrussa at the moment?

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Matthew Leslie Fitzgerald, Sandfire Resources Limited - CFO & Company Secretary [8]

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Yes. Hayden, we have -- we try and obviously run a relatively lean ship. We -- the corporate expenses here have really been a DeGrussa overhead as much as anything else. So we are transitioning a little bit to be a bit more of a global overhead, I suppose. But we'll manage those as well as we can. We will essentially control what we can, but we'll also run things in-country where possible, particularly across into Botswana. So there's an argument that you -- some people run -- we just run bigger corporates and you get spreading of costs and ultimately lower, but our view is more run direct management in-country and make better decisions. And hopefully that will give you a better financial results. So certainly very well controlled at this level, I think.

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Operator [9]

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Your next question comes from Sam Berridge from Perennial Value Management.

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Samuel Berridge, Perennial Value Management Limited - Equities Analyst of Small Caps [10]

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First question, just on the income tax receivable, $24 million, it's a reasonably chunky number. Were you -- is that actually something you're getting cash? Or is that just going to be offset against tax to be paid over the next half or so?

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Matthew Leslie Fitzgerald, Sandfire Resources Limited - CFO & Company Secretary [11]

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A bit of both, Sam. So there's an overpay in the tax from the prior financial year of around $9 million, and then we've got tax installments that are often -- the way our tax installments work, they often exceed our ultimate tax payable. So we do have a bit of a buildup in the balance sheet.

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Samuel Berridge, Perennial Value Management Limited - Equities Analyst of Small Caps [12]

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Got you. And then just sort of bit further on Monty. I mean I understand -- I mean obviously, there's parts of that ore body that is quite high grade, and you need to be mindful of just sort of the optimal -- the blending with DeGrussa. But is there -- I mean is there -- if the bottleneck is at the back end of the plant, which I think it is, is there -- I mean is there sort of a number in terms of copper production that you're constrained to by the back end? Or is it not that simple, it just all depends on sort of grade of ore?

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Shannan Bamforth, Sandfire Resources Limited - General Manager of Geology [13]

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Again, it's Shannan again, mate. The back end of the plant is not constrained. We actually went through and upgraded the filters and put additional filters into the plant, with Monty coming along, with that in mind. But just stable operations of the flotation circuit that we can actually maintain some sort of stability with our great grade spots coming out of Monty in big slabs, then it definitely helps operations and overall recovery.

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Samuel Berridge, Perennial Value Management Limited - Equities Analyst of Small Caps [14]

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Yes. Okay. Understood. So I mean then looking forward, I mean you used the term or phrase there, not significantly different. I mean I think it's definitely an area of focus for the share -- or what's been impacting the share prices and how the grade are going to come out of that thing. I mean is -- do you want to put a sort of tighter range on it than that relative to the existing reserve or nothing further?

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Shannan Bamforth, Sandfire Resources Limited - General Manager of Geology [15]

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No, we're still working through that reserve theme. So putting a tighter range on that would be problematic at the moment.

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Operator [16]

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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 [17]

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Karl and Tim, just wondering back to T3 and I guess, well, the broader Botswana assets. Can you just talk about approvals, that process, and dovetailing that with what you're doing on the feasibility study? Because it looks like what you're saying is you're trying to optimize, but you're finding more ore with A4, so you're looking at optionality of potentially building a bigger project. Just wondering how that works with approvals and what you're seeking approval for.

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Jason Grace, Sandfire Resources Limited - COO [18]

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Yes. So thanks, Daniel. It's Jason here. So firstly, where we are at the moment, we are in the ESIA process. So we've submitted that. The government has given us full endorsement on that. That has gone through a public comment period. And we're just finalizing the output of that. So we do expect to have that finalized very soon. Once that is fully accepted, then we move towards an application for a mining license, which has I think a 2-month statutory approval period. So that's the process that we're moving into there. Now as part of that ESIA, we have approval in that to go up to a 4 million tonne per annum processing rate. So with the MOD feasibility that landed at about a 3.2, there is some scope immediately with existing permits or likely existing permits to increase production up to that rate if required. Going beyond that, we would have to seek a variation on our T3 permits. And also, if we were to undertake mining at A4, we would need to seek new permits to cover an open pit or potential open pit mining operation there.

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Daniel Morgan, UBS Investment Bank, Research Division - Director and Analyst [19]

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Right. So it sounds like kind of get it into production at somewhere between 3.2 to 4 is the focus and then, if things grow, modularly lift that through approvals and CapEx?

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Jason Grace, Sandfire Resources Limited - COO [20]

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Correct. And with the process in Botswana, that's certainly nothing like what we're seeing in Montana. It's more of a streamlined process, particularly with incremental permitting approvals. The other point I'll make as well is the study team at the moment, as we are going into the engineering phase and we are in that stage at the moment, we are at the same time doing a full options analysis on how to ramp up beyond 4 million tonnes per annum, at what options that we have to do there in a modular way.

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

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Okay. And maybe just dovetailing over to Montana, could you just talk about what is the holdup on the process for permitting, why it is taking longer and what your latest expectations are on it at the moment? I appreciate that some of this is out of your hands.

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Jason Grace, Sandfire Resources Limited - COO [22]

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Yes. So we believe that we're in the very final stages of receiving a Record of Decision. We expected to receive that late last year. Now the only complications that have emerged recently relate to water licenses. While we have water licenses in place, there is a theoretical change in use from basically a beneficial type use to a different consumptive type use. So the Montana state government and the departments -- the agencies over there are doing a review of preliminary determination on whether that will impact on downstream users. Now where we are at the moment is we've had feedback from the agencies, that we've submitted all the information required and that's at a technical level, then that will enable them to issue that preliminary determination in the very near future. Once that's occurred, the ESIA will be published and will be issued with a Record of Decision.

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Operator [23]

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(Operator Instructions) Your next question comes from David Coates with Bell Potter Securities.

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David Coates, Bell Potter Securities Limited, Research Division - Resources Analyst [24]

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Good work on the results. And just going back to Monty, you -- in the discussion about the grade control results and interpreting what you mentioned, I guess, some of the -- you talked about the complexity of the ore body. Just wondering what that grade control drilling has sort of thrown up in terms of that. Is it different to perhaps -- different to sort of what you -- how you guys have sort of seen it before? What are some of the features that have come out of the grade control program?

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Shannan Bamforth, Sandfire Resources Limited - General Manager of Geology [25]

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David, some of the key things that we've seen is that there are more small-level lenses at Monty, which were initially giving cause for concern. But to balance that out, we've also seen some of the zones ticking up considerably with solid grades. So understanding that morphology, it's changed, but it's also almost a yin and a yang. We've lost a little bit, we've gained a little bit. And really, it's going through this entire process to really come out with an educated answer at the end of it and to avoid the speculation internal to getting an educated answer.

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David Coates, Bell Potter Securities Limited, Research Division - Resources Analyst [26]

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Okay. And also just following on from that, and I appreciate it's a little bit early, but has that sort of changed your level plans and mining method sort of plans for those zones where you've got those narrower lenses or indeed where that's ticking up?

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Shannan Bamforth, Sandfire Resources Limited - General Manager of Geology [27]

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No. If we look at the overall envelope for all of the mineralization, that still sits within the same overall envelope. Just in terms of that envelope, we see the variations. So level changes, no; mining method changes, no. It is still very, in gross terms, similar to what was there to start with.

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Operator [28]

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Your next question comes from Sophie Spartalis with Bank of America.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [29]

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Just 2 quick ones from me and then a more broader strategic one. Firstly, on the financials, just those D&A and exploration expenses, is that the kind of run rate we should expect heading into the second half as well, please?

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Matthew Leslie Fitzgerald, Sandfire Resources Limited - CFO & Company Secretary [30]

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Yes, Sophie, it is elevated and will stay elevated while we're mining Monty. As Monty's tonnes increase, that'll also come through with amortization for Monty. But really sort of towards this back half of the first half of the year, we've really hit a pretty reasonable tonnage rate for Monty anyway. So yes, it should happen.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [31]

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Okay. And then that then should flow into '21, '22 then, yes?

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Matthew Leslie Fitzgerald, Sandfire Resources Limited - CFO & Company Secretary [32]

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Yes. We'll give guidance on those years, and they'll run off the things like the Monty grade control drill-out. But yes, I'd expect them to stay elevated into those years as well.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [33]

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Okay. And then just a more broader question. Obviously, we've spoken a lot about growth and sort of just shaping up the optionality within the portfolio. Can you just maybe help us step through a time line on when you expect sort of production to come out of Botswana. And then, obviously, appreciate the delay in the permitting at Montana, but when do you think that you can physically get tonnes out?

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Jason Grace, Sandfire Resources Limited - COO [34]

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Yes. Thanks, Sophie. It's Jason Grace here. So firstly, Botswana. Our current plans at the moment has us in production at T3 in the first half of 2022, and that's calendar year. In Montana, as you noted, the permitting process there is largely out of our control and the process going forward. But we do expect a time line of around about 2 years to get into production once we commence.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [35]

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So from the record -- just remind me again, from the Record of Decision, is there anything that's needed post that or you can then start developing?

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Jason Grace, Sandfire Resources Limited - COO [36]

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We have -- once we receive the Record of Decision and we have all the other permits in place that are required, so it's the only outstanding item, we have permission to commence construction.

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Sophie Spartalis, BofA Merrill Lynch, Research Division - VP and Senior Resources Analyst [37]

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Okay. And then production is 2 years from that.

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Jason Grace, Sandfire Resources Limited - COO [38]

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Correct.

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Operator [39]

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Your next question comes from Lyndon Fagan from JPMorgan.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [40]

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Can you maybe give us an update on how to think about dividends now that the company's changed a bit with 2 projects on the go and, I guess, the need to conserve capital and funding?

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [41]

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Thanks, Lyndon, Karl here. Lyndon, I think the -- obviously, the capital management program of a business that has gone through exploration, discovery, development and very solid operations with great cash flows, which continue and have a time frame related to them and a business that's starting to look at going into some transformation and resetting itself and having a multitude of platforms then to leverage off, clearly it is a situation where we will need to be reallocating elements of capital and resources to that. The balancing -- we understand the discipline of earning and winning these results and then actually returning annuities to our shareholders to a degree, and I think that we'll continue with the discipline with respect to that. But once again, we need to balance that up with where we need to deploy those resources, in terms of financial resources, to achieve delivery of those other platforms for future growth and future profitability.

So we're going to have to balance that through. I think it's fair to say that if we have a reason to essentially divest and -- or invest money in other areas, it will have an impact on the payout rate. We have, historically, over the last number of years, initially started paying off around a guided 30% of NPAT. And I think in the last couple of years, it's been, on an annualized basis, about 35% of NPAT. Clearly, if we're going through a growth and capital investment stage, we may need to alter that to some other more sensible level. But I think there'll be continuum of a discipline with regard to returning some funds to shareholders in the form of dividend. We think that's a good discipline. And that each of those projects that are coming up for investment decisions have to compete and fight for capital and have to justify the investment in capital and they also must be able to win their own capital and essentially convince the Board and the shareholders on that, that it's worthwhile investing that capital into those investment propositions as opposed to returning all the funds to shareholders.

So I think it is a bit of a balancing act that we'll go through. So exactly where it gets to, I think we'll start to see that evolve over the next 12 to 18 months as capital is required. We will also be looking at a sensible level of gearing of the respective investments without over-gearing them, I think, intentionally. But nonetheless having a discipline within each of those investment propositions that they have a level of gearing to enhance their equity return to shareholders, but without laboring them to such a level that may suffocate the projects. So I think those sort of financial decisions and capital management decisions are something we're well across, well in tune with. And I think we will make sure that there is an appropriate balance between all of those demands on the capital and resources of the business.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [42]

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So what payout ratio should we be modeling in the near-term for the dividend?

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [43]

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I think it will be less than where we've been historically. And we haven't come to a landing on that at this point in time. But in the last couple of years, we paid, on an annualized basis, 35% of NPAT. I think it will be a number that's lesser of that as we go forward. And the Board hasn't got to a point or a decision. But it will be less than probably 35% of NPAT, I would have thought.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [44]

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Okay. Great. And then just back on Botswana. So you've spoken about making the plant quite a lot bigger, up to 4 million tonnes plus from 3.2 million, and we're talking about higher-grade ore potentially displacing T3. What idea would that -- where would that lead to in terms of copper production? And how really sticky is that as a base case for us to be thinking about? Or is it a bit too optimistic to sort of look at that stuff just yet?

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [45]

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I think it's too early to look at that at all, Lyndon, at this point in time. I think that the core fundamental position is we, through the acquisition, picked up a feasibility study. We're optimizing it. We think there were very good people doing good work. And I think the reality is that somewhere where the previous feasibility study was at is probably where we'll get close to. I think it's too early to think about that at the moment. What we will be doing in this process right now through that optimization study, we're looking at a variety of options. So we know what those options are, what they might cost. We've heard from Jason that the current permitting that's in place is for up to 4 million tonnes. But quite clearly that's just the firming stage. So I think it's too early to work out whether we'll be doing anything more than what was the original feasibility study at this stage. And I think it's -- yes, it will just take us some time to get our head around that. But depending on those results and where things are over the next 3 to 4 to 5 to 6 months, we'll get a sense of the ability for that project scale to change relatively quickly. So I think we'll just keep at the modest -- well, not at the modest but the sort of levels we originally acquired is probably a fair starting point for now.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [46]

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And I guess final question, just on Montana. We're obviously in the final stages of getting a permit and then starting. Will you be updating the market on scope, CapEx, updated cost assumptions? Or are you happy with what's already out there?

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Jason Grace, Sandfire Resources Limited - COO [47]

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Yes. Jason here, Lyndon. The short answer to that is we will be updating the market, and that will be updated once the ROD is issued and once we've finalized the feasibility study. And as we've advised, both of those processes are in their very final stages of completion.

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Lyndon Fagan, JP Morgan Chase & Co, Research Division - Analyst [48]

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So I imagine the feasibility study is running on its own schedule separately to the Record of Decision. When should we expect that? Or aren't you in a position to release that until you get the Record of Decision?

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [49]

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So with the ROD and EIS, you can have some conditions. So we expect the DFS will be ready and available post the ROD and EIS so that we are able to implement and include any of those special conditions, if there are any, into that feasibility study.

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Operator [50]

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

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Karl Matthew Simich, Sandfire Resources Limited - MD, CEO & Executive Director [51]

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Thank you, everyone, for listening today to the first half financial year 2020 results which, from the company's perspective, were very solid and pleasing results, in line with our expectations. We look forward to giving you a further update at the next quarterly. And we're very excited about the future prospects of the business and the transformation that we are at the beginning of going through and achieving those key milestones and being able to leverage off 3 platforms in the near future. So thank you once again for listening, and we look forward to keeping you up to date.