U.S. Markets closed

Edited Transcript of WSA.AX earnings conference call or presentation 19-Feb-19 10:30pm GMT

Half Year 2019 Western Areas Ltd Earnings Call

WEST PERTH Jun 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Western Areas Ltd earnings conference call or presentation Tuesday, February 19, 2019 at 10:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel Richard Lougher

Western Areas Limited - MD, CEO & Director

* Joseph Belladonna

Western Areas Limited - CFO & Company Secretary

================================================================================

Conference Call Participants

================================================================================

* Hayden Bairstow

Macquarie Research - Analyst

* Ian Warden

Global Mining Research Pty Limited - Mining Analyst

* Michael Slifirski

Crédit Suisse AG, Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to Western Areas half year results. (Operator Instructions) I must advise you that this conference is being recorded today, 20th of February 2019.

I would now like to hand the conference over to your first speaker today, Mr. Dan Lougher, Managing Director. Thank you. Please go ahead.

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Good morning, everybody, and thank you for joining us today over in Melbourne for the half year results. I have with me also here our CFO, Joe Belladonna. I'll start off with some commentary on the high-level points from the results before handing over to Joe to do some comments on the half year financial results.

We've had another consistent half year production and coming in as expected on production and on our costs -- for our cost of production, we're well within our guidance range for the half and expect to remain so for the full year. This follows some anticipated cost inflation in line with the rest of the mining sector. And in comparison to the previous first half, it included some pre-carry stockpiles. This planned rise in costs, offset partially by nickel price increases, has combined to give us an approximate breakeven impact.

Importantly, we've retained the capacity to pursue our growth initiatives with cash at bank of $134.3 million and no debt. This has followed us -- allowed us, sorry, to self-fund initial works following taking the decision late last year to open our mine at Cosmos, namely Odysseus. This was based on very strong feasibility results.

We have also significant upside potential at Odysseus, which was not included in the DFS, which is to do with the AM5 and AM6 deposits, which sit on the flank of Odysseus. The MREP project continued in a ramp-up mode during the half and a separate filtering and bagging plant was constructed and commissioned. This allowed a separate premium high-grade product stream to be produced in the order of 45% to 50% nickel grade. Spot sales of this premium product has commenced and demonstrated an ability to generate premium payability over the existing conventional quotation nickel sulfide offtake contracts.

The nickel market fundamentals currently are -- appear to be improving and are promising with somewhat of an increase in price trend beginning of this 2019 year. We are still pleased that the demand for stainless steel is continuing to be strong, although with some cyclicity. But we are certainly looking forward to the demand -- improved demand in nickel units for the EV, electric vehicle battery sector. The market looks to be in supply deficit with both the London Metal Exchange and the [shipping] stockpiles falling.

I'll now hand over to Joe for some comments on financials, after which we will then open for some Q&A. Thank you.

--------------------------------------------------------------------------------

Joseph Belladonna, Western Areas Limited - CFO & Company Secretary [3]

--------------------------------------------------------------------------------

Good morning. I'm just going to touch on some of the slides out of the corporate presentation that was released on the platform -- on the ASX platform earlier this morning. I'm not going to go through them in any granular detail given the phone line situation here. But like Dan said, we had another consistent and reliable half of production out of the Forrestania assets. EBITDA came in at $30.6 million. The breakeven NPAT was influenced by a high nickel price compared to the -- in comparison to comparative quarter and a 25% EBITDA margin was maintained as well.

I guess outside of nickel price and costs, the main half-on-half change has been a significant increase in growth expenditure as we continue to develop our newer assets, mainly the Odysseus Project, feasibility expenditure and early works expenditure on the new assets that we're developing there, came in at $21.5 million. Obviously, that expenditure didn't exist in the comparative half. So that's the main cash flow change year-on-year that we're seeing through there. And really that's our investment in our future growth, investment in the future -- the long-term future of the company. Cash on the balance sheet remains at strong levels, and we obviously maintain no debt.

The -- go to Slide 7. There's a cash flow waterfall there, really just demonstrating that operating cash flow remained strong out of the assets, Forrestania, giving us a strong net operating cash flow, obviously offset by the investment in sustaining capital at Forrestania plus also then following the decision to mine a significant increase in capital expenditure for Odysseus, which includes a lot of the long laid items around shaft assets, the Schlumberger high-volume pump, establishing all of the water management ponds, which are in now place and commissioned, and being utilized plus also continuing to invest in exploration over that time.

On Slide 8, there's a NPAT waterfall. Look, the obvious large blue bar there on cost of goods -- cost of sales is a significant comparative quarter increase. The reality there is that there was some low-grade stockpiles that we had a highly successful ore sorter campaign where we sorted the low-grade stockpiles and then traded them in that comparative quarter. And obviously, we didn't have that this quarter. And to give you an idea, while that $15 million bar looks quite severe, 60% of that, approximately 60% of that relates to the quarter -- or the comparative comparison, the removal of the low-grade stockpile. So it's not all just increasing costs, there is a large component of that that relates to that low-grade stockpiles.

The only other, I guess, well, one small note on D&A was slightly lower compared to the comparative period and that related to some added reserves, waterfall material that had diluted some of the depreciation and amortization charges.

Look, the -- Dan touched on the nickel price. One of the main things around the nickel price is, obviously, it has been strengthening into the quarter, and we're just noting that -- for the half, sorry, and it has been trading up around AUD 8 a pound today, which should actually flow into the current half with positive GP and stronger revenues.

I'll just finish off on guidance. The only change in guidance was around a change in some care and maintenance costs at the Cosmos mine site following the decision to mine, that would normally flow through the P&L. It flows through the operating cash flow, but as the project now has transitioned to an operation with mine development, the care and maintenance costs are just being reallocated back to the project. It was quite obviously a fair amount of money that's being spent out of Cosmos now around camps and accommodation and all of the things that are supporting that operation now belong to the project not as care and maintenance. But otherwise, guidance remains the same, and we think we're well on track to maintain the ranges there.

Look, from there, we might move on to Q&A. So we might throwback to the moderator there to launch that.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just I wonder if you can help me, thinking about the whole timing, the Spotted Quoll, Flying Fox declining mine life, some low-grade strategy MREP ramp-up. How tight does it all become between MREP giving you what you hope to achieve in terms of the ability to look at low-grade leachable material sort of versus mine life decline? Is there enough of a -- enough runway between the decline of sort of mine life and being able to exploit that low-grade material to avoid a sort of production hiatus?

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Thanks, Michael. Yes, look, I need to clarify, there's may be some confusion between what MREP plant actually does. The tank leaching facility is dealing with tailings. The low-grade stockpile strategy is to do with heap leaching using BioHeap, which is the original, I guess concept, which is more of a standard, I guess, technology. So the material for that, for example, we've mentioned previously is: a, we've got 270,000-odd tonnes of Mill Scats sitting next to the tailings facility, which will readily heap leach. So that material, which is a nickel sulfate coming from that, was going to the back-end of the MREP plant. And we've tried to show in the presentation our slide that clearly demonstrates the difference between the front and the back end, so the precipitation part of MREP is not only can be fed by the tank leaching, but can also be fed by a pregnant liquor and that's Slide #18. Now the -- so moving then onto other projects that we have in line, the other one that we've mentioned is New Morning and that project is being advanced. And then, the third one, which I guess comes to your question regarding the mine life, specifically at Fox because Spotted Quoll has got 6 to 7 years, so we're not really -- we can do low-grade reviews there as well because they both have them. But the main priority at the moment and that work is now currently being hammered out by the engineers and the geologists is really to give Flying Fox some extra mine life in terms of then looking at the low grade. The part of that really obviously is where the nickel price is going to land in the next 12 months. And obviously, as Joe said, it's currently running about AUD 8. So I hope that I've cleared up the confusion between what the 2 parts of the MREP can do and that the heap leaching is more standard heap leach BioHeap technology, which will feed us a pregnant liquor. Now obviously, a Odysseus is going to bring in production in 2023 as we've said recently and that project is spot on track. There is no issues currently on the table regarding advancing that project. And the main priority now is to really nut out what we have at Fox. And look, we've got Digger South, which is a low-grade 1.5% nickel sort of resource. So timing-wise, we believe we've got everything in hand, and we will obviously share that more and more with sort of quarterly periods as we get more and more information.

--------------------------------------------------------------------------------

Michael Slifirski, Crédit Suisse AG, Research Division - MD [4]

--------------------------------------------------------------------------------

All right. Look, just to clarify, I did understand the 2 parts of MREP, but the challenges you've had with the MREP are fundamentally in the front-end, aren't they? The back-end works fine. There hasn't been any underperformance or commissioning delays compared to your original ramp-up profile for that back-end part?

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [5]

--------------------------------------------------------------------------------

No, you're right. No, you're exactly right. The precipitation is working fantastic. So it's only the fact that the tank leaching, when you change any parameter, pH or whatever, it just takes a longer period than what we, I guess, expected to get it back into the mode or the parameters that we want to improve. So that efficiency is, I guess, taking a bit longer, but the precipitation, that can do that sort of, we've talked 3,800, 4,000 nickel tonnes is where we believe we can now get those other projects. And look, the first one really is the Scats because, a, it's good grade, 1.5% nickel, so it's circa 4,000 tonnes of nickel, and it's right next door. So the sort we really need is the approvals processes, which are in train to actually build the heap because you've to put through some geotechnical civil style modeling to make sure that you don't create any issues. So -- but yes -- so I'm glad that you've got that clarification because it is quite important, and I'm not too sure that we made a really good job of actually explaining the differential.

--------------------------------------------------------------------------------

Michael Slifirski, Crédit Suisse AG, Research Division - MD [6]

--------------------------------------------------------------------------------

No. It's helpful. And then you commented about Spotted Quoll, I guess we can see just sub-5 years in reserves. You're talking 6 or 7 years, I think, you suggested. So a high degree of confidence in extension conversion of resource to mine life?

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [7]

--------------------------------------------------------------------------------

Well, look, as Joe mentioned earlier on, we're always seeing down lower parts of Spotted Quoll, we're getting more and more out-of-reserve tonnages. So we're basically saying that we would probably have some more tonnes deeper down. But the drilling we're doing at the moment is in progress, and we will come out with the information when we've collected all the data at the end of the March quarter. But yes, we're just getting some good numbers coming out of Spotted Quoll at the moment. But look, we will publish. We're in the middle of doing our budgets, which involve resource, reserve reviews. So that's currently on the table. So all that information will flow into the next quarterly report.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of Hayden Bairstow from Macquarie.

--------------------------------------------------------------------------------

Hayden Bairstow, Macquarie Research - Analyst [9]

--------------------------------------------------------------------------------

Just a couple from me. Just on Cosmos, Dan, I mean obviously, it's very reliant on better nickel prices than what we got today. But what's the flexibility in the capital spend there? And at what point can you sort of pull back without impacting the planned start day? Because it doesn't -- certainly doesn't seem to generate an acceptable return at spot nickel prices. And just on -- I mean the earnings result seems to have these inventory movements which we didn't -- well, we had last year. I mean is there anything left that's sort of got some variability in that? Or are we going to see cash costs effectively more akin to what the EBITDA will be going forward?

--------------------------------------------------------------------------------

Joseph Belladonna, Western Areas Limited - CFO & Company Secretary [10]

--------------------------------------------------------------------------------

I'll just grab that. Just with this year's sand and spot nickel prices, that project as we know it today had a AUD 6 a pound breakeven. So I don't know that at AUD 8 spot prices today, it does generate a reasonable margin. So as we sit here today given where that nickel price is, there's no slowdown expected on that project. So just probably put that out there, that it doesn't require the, I guess the feasibility USD 7.50 at $0.75. It requires a reasonable return. But as we talk about that project, that's a project for production in 2023. So between here and then, we do expect the nickel price to be much better outside of, I guess a significant change in technology with -- for battery chemistry. So just on -- I don't know, it is just -- the base case at the moment is that, that is a developing mine. There's a jumbo underground there, bolting and machining and rehabilitating that client today. So the best case is definitely that mine is a go. Otherwise, we probably would have packed it up now. But you are correct in that if, for whatever reason the nickel price did catastrophically correct, we -- once we've dewatered ourselves down to the return airway raisable position, we will equip that with a pump station. And we can either, I guess maintain that position or we can then advance across to AM5 and AM6, which is -- which at the moment, is the best case, is we keep advancing across to that area. Look, AM5 and AM6 is currently being looked at by the mining engineers to see if we can bring that in either earlier or as part of the mine plan. And what it will do is that -- the best part of 60,000 tonnes of indicated resource into that mine plan and it will further dilute that breakeven cost. So it's -- yes, it's a strong project, and there seems to be -- I guess we're getting a message that people think we're -- I guess we've got it on the drip as a freight option on the nickel price. We think the nickel price where it is, is going to support that project going forward. But we do have some gateways. If the nickel price corrected quite savagely where we can stop, there's one little bear around the middle of this calendar year and there'll be another one when we get across into that -- to what that AM5 and AM6 area, which will be in another 12 months' time. And we're sort of looking around a $50 million expenditure mark at that stage. And then we will have a fresh development-ready operation that we'll either incorporate AM5 and AM6 at that time or the driving straight across towards that Odysseus body. So yes, we think it's a very strong project, and we're really looking forward to advancing that project. And I'll just cover off on costs there as well. The -- we obviously had our guidance put out there. If we look at the cost, and I'll give you a call later on and have a look at some of the modeling there. If we look at our cost guidance and the production that we had, the EBITDA number is in line with what we had guided. Obviously, revenue was slightly higher on the comparative quarter, but it was, I guess, not so much that there was a large increase in cost in this half. It was more around the lack of cost in the corresponding half in the prior year. So we do think that we are on trend at the moment as per the cost guidance that we provided.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from the line of Ian Warden from Global Mining Research.

--------------------------------------------------------------------------------

Ian Warden, Global Mining Research Pty Limited - Mining Analyst [12]

--------------------------------------------------------------------------------

Just had a question. I know you have a lot of restrictions on what you can say on this. But if you can give if there's any -- been any more clarity on the sort of premium that you're getting on the MREP product compared to your normal product, it would be great if you can provide any sort of thoughts there.

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [13]

--------------------------------------------------------------------------------

Yes, well, you opened up the question with the answer. It's confidential. Look, we are -- we have -- that's all I can say is we are -- the spot sales we've done and we haven't done it to one customer, we've got about several on the table, which it was part of the testing, I guess for refineries. Because I guess the payability would reflect how it's going to be used and the great thing is that it's a direct refinery feed. And our strategy, and we've said this many, many times, is to feed directly as closely as we can to the electric vehicle guide. So I guess if we can work out who does that, who supplies Panasonic, who da-da-da, Tesla, you'll be able to work up pretty quickly where we aim this product to land up. That's all I can say to you is that it's got an 8 in front of it and it's A-plus. So it's a premium product, and with the grid, the low impurities, direct smelter -- sorry, direct refinery feed and that's really where we're expecting to get -- if you look -- if you have any idea in the market generally around for a mix sulfide product, then you'd probably be in the right ballpark. But if I say any more, then I'm giving away some pretty confidential information with our parties. And -- but it is, I guess significantly higher than what we talk about in terms of the filtration sulfide concentrate.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

There's no more question at this time. (Operator Instructions) There's no more question at this time. I would now like to hand the conference back to today's presenters. Please continue.

--------------------------------------------------------------------------------

Daniel Richard Lougher, Western Areas Limited - MD, CEO & Director [15]

--------------------------------------------------------------------------------

Everybody, thanks very much for the questions and for listening in. Look, as always, we are always happy to give more detail over the telephone if you've got some other questions that you want to get some feedback on. But anyway, thanks very much and have a great day.

--------------------------------------------------------------------------------

Joseph Belladonna, Western Areas Limited - CFO & Company Secretary [16]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.