Aurelia Metals Ltd

ASX:AMI

Earnings Call Transcript 2020-Q4

[Operator]

Thank you for standing by, and welcome to the Aurelia Metals Limited quarterly investor conference call. [Operator Instructions] I'd now like to hand the conference over to Mr. Dan Clifford, Managing Director. Please go ahead.

[Daniel Clifford, MD & CEO, Director]

Thank you, Eric. Good morning, everyone, and thank you for your time this morning. With me are Peter Trout, our Chief Operating Officer; Adam McKinnon, Group Manager for Geology; and Ian Poole, CFO. And welcome, Ian, to the group.This morning, we have released our June quarterly production report and our group mineral resource and ore reserves statement as flagged during the June quarter. I'll hand over to Peter and Adam and Ian shortly. Just a few opening comments from myself.The June quarter was a strong finish to the year with 32,000 ounces at $1,100 an ounce. It's underpinned by strong throughput performance and underlying operating performance, heavily driven by higher head grades in both operations. That performance supported a full year result of just over 91,000 ounces at $1,520 an ounce.Exploration success continued, particularly with the maiden resource at Federation and continued ongoing success at both Kairos and Peak North, the Peak operation. From a corporate perspective, we had a healthy increase in our cash balance for June 30 to $79 million, and we completely unwound our hedging position at the moment, and that gives us a strong position for cash flow going forward throughout this next year and looking forward.With that, I'll hand over to Peter for some operational comments.

[Peter Trout, Chief Operating Officer]

Thanks, Dan, and good morning to everyone on today's call. As Dan mentioned, a highlight of the quarterly results announcement was the strong production finish to both the June quarter and the financial year. Our quarterly group gold and base metal production was the highest for the year, with 32,800 ounces of gold production being a major contributor to the much improved all-in sustaining cost and cash flow.At both sides [indiscernible] gold production benefited from better ore grades as stoping progress through higher-grade ore zones, and we had some localized areas where the gold grade outperformed our geological model. This positive grade variation is a characteristic of a negative gold distribution in both deposits and underpins the variability we do see from time to time against our model grades.Moving on to Peak. We continued the upward trend of mine and mill door volumes with progressive debottlenecking of the capacity constraints such as the shaft at Peak and better scheduling execution of our work activities. The underground mine delivered a more consistent ore supply to the process plant, and that allowed us to run copper and lead-zinc all campaigns to the mill over longer durations. And what that did is reduce the time we lost to clean up the circuit and reconfigure the process plan as we change between the different ore feeds.The longer campaigns also gave us more favorable conditions for optimizing the circuit to treat the polymetallic ore types. So this operating strategy enables us to achieve a higher processing volumes, but also contributed to quarter-on-quarter fluctuation in our base metal production, and that depends on the proportion of copper or lead-zinc ore [indiscernible].Development of both declines to the Kairos deposits continued over the quarter, with the lower decline now having reached the Kairos zone, and giving us a platform to set up the power and the watering systems, the ventilation circuit, to perform stope definition drilling and to get stope development in place. These activities will occur in [indiscernible] with the development of the upper decline towards the Kairos zone. Once connected, the upper decline will provide us with the second means of egress and the additional ventilation air flow required for first Kairos stope production in the second half of this financial year. Moving to Hera. It's pleasing to report that our ore production from the underground mine increased by more than 10% relative to prior quarters. In the process plant, we experienced lower throughput rates and some unplanned downtime that reduced the process tonnage. However, that loss was much -- was more than offset by the higher gold grade and recovery through the circuit. The gold grade doubled relative to quarter 3 as stoping fronts retreated through higher grade mining areas, and we also benefited from a favorable grade performance in the Far West Peak zone against the geological model. Our gold recovery also improved, and we saw a higher proportion of gold recovered through the gravity circuit at Hera in the last quarter. We also released the updated Hera ore reserve statement today. And I'd like to point out that the ore reserve does have a lower average gold grade, the higher average base metal grades than those achieved during the June quarter. And that the ore reserve grade give us a more indicative reflection of future mill grades at Hera.

[Daniel Clifford, MD & CEO, Director]

Thank you, Peter. I'd now like to hand over to Adam to give a summary of the reserve and resource statement, please.

[Adam McKinnon, Group Manager for Geology]

Thanks, Dan. So today, the company has released its group mineral resource and ore reserves statement for 2020.Starting with the resources, the group estimate this year sets at a measured indicated deferred total of 16.8 million tonnes. This represents a 5% decrease in tonnage from 2019, although this is offset by a 9% increase in equivalent grade with the average NSR increased from $214 to $233 this year. Outside of mining depletion [indiscernible] both economic and recovery frames adopted for their NSR calculations. Across the board, less favorable commercial terms for concentrate treatment were assumed with a significant increase of the improvement charges, in particular, affecting total at Hera and the maiden resource at the Peak. The company has also adopted a more conservative lead, zinc and gold recovery assumption for the metallurgical -- for further metallurgical test work is conducted in the coming year. On the positive side, this year's group total includes high-grade resources from Federation for the first time after the release of the maiden in June this year.Moving to reserves. The group estimate for 2020 states that proved and probable total of 4.5 million tonnes, an increase after mining depletion of 3% from 2019. The biggest contributor to the new reserves total was the [ definition ] drilling at Kairos, with reserves in the [ lane ] increasing more than 200% to 550,000 tonnes at 5.3 grams per tonne gold and 8% combined lead-zinc. [ Positive additions to ] reserve totals were also returned from drawing at Chronos and at Peak North. At Hera, the decrease in the reserve was basically in line with mining depletion for the year.Looking forward, the next financial year represents an exciting phase for the company. Recent exploration success, both near-mine and regionally, has focused drilling efforts into the dual lanes of discovery and also into resource-to-reserve conversion. In addition to the significant ongoing and near-mine regional exploration efforts, high potential extensional and resource conversion infill drilling programs, a schedule for Federation, Great Cobar and Kairos in the first half of the financial year. Thanks, Dan.

[Daniel Clifford, MD & CEO, Director]

Thanks, Adam. I'd just like to close off with some final statements before I hand -- well, sorry, I'm going to hand over to Ian. My apologies, Ian.

[Ian Poole, CFO & Company Secretary]

Thanks, Dan. Just a quick summary. The company had a significant cash build during the June quarter from $51 million to $79 million, as shown in the waterfall graph in the quarterly report. Cash build was primarily due to a significant lift in gold production at both Hera and Peak because of the higher grade sources of ore as well as the increased base metal production at Peak due to head grades and higher throughput in the mill following the completion of the upgrade of the lead-zinc plant in the last quarter.The company also closed out its gold hedges during the quarter. The company is now unhedged except for [indiscernible] hedging of base metals to minimize the fluctuation between provisional and for pricing of concentrates. During the quarter, the company also established a $30 million working capital facilities with bankers, investors and ANZ. The documentation for the new facility was executed in early July. And also, just the company will be releasing its audited FY '20 financial statement in mid to late August.

[Daniel Clifford, MD & CEO, Director]

Okay. Thanks, Ian. Before I hand over to Tom for questions, just a few closing comments from me.We've seen a great finish to the year for base operations, resulting in a strong platform ready for execution in this coming year, with a plant upgrade behind us, exploration success and underpinning focus on reliability and predictability and control of the assets, giving us an improving operating performance. Finished the year with a strong balance sheet, and therefore, very exciting platform in which to move forward into the next few years. That -- for us, that is absolutely driving certainty in returns to the company and its shareholders. And I look forward to the next short period of time leading to the full year results, delaying out what the strategy is for the company moving forward with a key focus on the highest value operating configuration of our mills at full capacity with a very clear basis of NSR prioritization into those mills. During the course of this year, too, we have significant reinvestment back into our business in terms of ongoing exploration and the scoping studies and the infill drilling for the Federation deposit and some of the drilling for the Great Cobar project. And with that, we will give that outlook and that picture during the course of August in conjunction with the full year results. So with that, I'd like to hand back to the operator and open up for the Q&A.

[Operator]

[Operator Instructions] Our first question comes from Andrew Hines of Shaw and Partners.

[Andrew Hines, Senior Analyst]

Dan, congratulations on a terrific finish to the year. It's obviously a cracking quarter.Look, after the March quarter, I guess, we talked about stability and predictability and performance of the assets. And given that huge finish, just a couple of questions around that is, do you feel that you guys are yet on top of the predictability and the stability of the operations? Obviously, that's a massive improvement from one quarter to the next, and it sounds like it was even better than you were looking for. So is there more work to be done there?And secondly, when we're looking forward, looking at the performance coming through in 2021, I presume we shouldn't extrapolate that June quarter, and were there one-offs in there that means that that's not going to be repeated. I'm obviously not going to go back to the March quarter, but how should we think about stability and predictability going forward?

[Daniel Clifford, MD & CEO, Director]

Thanks, Andrew. I think the way I'd like to answer the predictability for us is what we can definitely control. And I think what we have seen is a lot of attention has gone into the execution on the ground, particularly from a tonnes and a cost perspective. Those steps, we can see, have resulted in positive results, particularly at Peak in terms of mined tonnes and throughput.The real challenge for us is, though, is the predictability in the grades. We are dealing with a polymetallic business, and I've alluded to this a couple of times. I think your assumption there of not flatlining the June quarter performance is prudent. And the next steps for us, whilst we can control development, stope turnover, costs, capital, the variation in grade is a challenge. And during the course of this next year, certainly through our budgeting, we have increased further definition and start definition drilling through that, particularly at Peak. And I would say that, that density closing up much tighter to where it has been. And I would estimate that, that would be a double of intensity in the drilling over this next year to drive that further predictability.Just coming to the second point you make about how should we expect to see things going forward. I'll sort of split the answer into 2, if I can. Hera, we are running pretty much at mill capacity. As Peter alluded to, we did suffer some downtime. There will be an ongoing focus in their reliability, operating out and throughput for that mill. So I think what we will see is a continued expectation of that mill running at its nameplate capacity and the mine feeding it. But we will naturally see, and I draw your attention to the resource and reserves statement for the head grades at Hera, in particular, do come off, and that's natural. We're going to see the end of the mine life going from high grades to low grades, and we'll see gold come off and base metal increase.I think the Peak -- the real predictability piece to be following is mine tonnes and throughput tonnes. And we will continue that definition drilling to drive out certainly what we know is coming at these mills to ensure that we get clear visibility on every tonne we're mining, we're making clear margin on.

[Operator]

Our next question comes from Sam Berridge of Perennial.

[Samuel Berridge, Equities Analyst of Small Caps]

I just wanted to dig down on that geological reconciliation between sort of the grades that you reported and also what's in the reserve? I mean particularly for Hera, just looking back at the historicals there, I mean the Hera head grade has been trending above the reserve grade pretty consistently for, what, at least the last 18 months that I can see. I'm just sort of curious, is there any -- can you give any more further color on the sort of the metrics or -- that you've cut or sort of modeled down those gold grades to get a reserve grade that you're comfortable with?

[Peter Trout, Chief Operating Officer]

Sam, it's Peter here. I'll answer your question there. So what we've seen historically at Hera is we have seen the gold grades reconcile better than those in the resource model. We've got no certainty that, that will continue in the future. But the point that Dan makes is around getting a reasonable amount of information that gives us confidence that we're going to a stoping area, we'll make a margin on that material. So what you're seeing converted through into the reserve then includes an allowance for dilution or loss, et cetera, as well as the underlying resource model. So going forward, we've not made any changes to account for the positive reconciliation so far. But similarly, we can't rule out the possibility of that occurring.

[Samuel Berridge, Equities Analyst of Small Caps]

Okay. And so -- and just one more question for me. In the cash flow statement, there is a $9.7 million working capital build. I was curious a bit of color what that represents?

[Peter Trout, Chief Operating Officer]

That represents primarily inventory carried out over the end of the year.

[Samuel Berridge, Equities Analyst of Small Caps]

Okay, in terms of concentrate or just -- or raw stockpiles? Or just a mixture of both?

[Peter Trout, Chief Operating Officer]

Mixture of both.

[Samuel Berridge, Equities Analyst of Small Caps]

Got you. [indiscernible]

[Operator]

[Operator Instructions] Our next question comes from Mike Millikan of Barclays.

[Mike Millikan, Resources Analyst]

Just a very quick one for me. When we get guidance out probably in August, are you going to provide like a 3-year outlook as well? And also, what should we expect? Should we expect some sort of guides on throughputs, some sort of expectations on like a grade or NSR? Can you just talk around that, please, Dan?

[Daniel Clifford, MD & CEO, Director]

I will. Thanks, Mike. I think, certainly, a baseline expectation will be that we'll give guidance during August aligned similarly to what we have previously. In terms -- we won't go beyond the 1 year. We will certainly put some ambitions around what the 3 year looks like. As we lock down, uncertainty will increase sort of definition and drilling things underground. So at this stage, we'll be planning for a consistent approach to guidance with a forward look on what some of our ambitions are.

[Mike Millikan, Resources Analyst]

Okay. Sure. And just for Kairos, expectation of first starting ore in the second half of FY '21, are you talking pretty early in the second half? Is that the kind of the expectation?

[Daniel Clifford, MD & CEO, Director]

Look, we'll leave that for when we get to the guidance piece, Mike. The -- we just want to be clear, we've got the lower decline into the target area. There's a lot of capital infrastructure to bring forward into that period. And at this stage, in time, we'll leave it at half 2.

[Mike Millikan, Resources Analyst]

Okay. Cool. And just on Federation, obviously, expectations for the scoping study within 12 months. Have you got a bit of a tighter time frame on when we should expect that?

[Daniel Clifford, MD & CEO, Director]

No. We've recently commenced the work, Mike. And I think in accordance with the last call, we've said in the order of 12 months, and there's nothing at this point in time that will change that view.

[Operator]

Our next question comes from Brian Chu of Australian Gold Fund.

[Brian W. B. Chu, Founder]

Dan, Peter, welcome on the end of year results, quite impressive. Just looking at the cash balance and the company has actually increased it quite substantially. And do we expect that -- this to be going on -- going forward into 2021? And are there any plans for potentially expanding by acquiring other mine deposits as we have seen that there are a lot of companies in recent times that are stepping up explorers and mine deposits to expand their reserves and resources base?

[Daniel Clifford, MD & CEO, Director]

Thanks, Brian. I think -- look, we've set the company over, what, 2 years to 18 months now, if not a bit further, has done a lot of work to set up for future years of strong cash flow in the business. So that's from the Peak acquisition through to the upgrade in the mill and the current operating performance. So I think that our view in looking forward is that cash flow performance remains within the business.In terms of growth capital or M&A targets, certainly from a growth capital, we're taking an internal look at where we are at the moment that the rate of return we're achieving on the drill bit now. Naturally, we are going to heavily focus on the tenements and the ore sources that we own, particularly Federation, Great Cobar, Peak North, Kairos Deeps and those areas. So capital will continue to flow towards that rate of return we're achieving so far out of exploration.In terms of M&A, I won't be commenting on any specifics or targets around there other than we're aware of what's happening in the industry. And we'll set up the appropriate tension between investment in their own internal growth and that of external opportunities when and if they arise.

[Operator]

Our next question comes from Brett McKay of Petra Capital.

[Brett McKay, Head of Resources and Analyst]

Just a couple of quick ones. Just wanted to clarify, you guys sort of, well, in a comfortable position relating to the impacts around COVID, just in terms of having the confidence to provide that guidance for next year in August, as you say. Just wanted to get a sense for how well in hand that those changes that you needed to make are understood and will be factored in and included into next year's forecast?

[Daniel Clifford, MD & CEO, Director]

Thanks, Brett. It's a very timely question considering what we're seeing unfolding through the southern states at the moment. Take a step back. We put a lot of effort into how we managed during -- particularly during February and March. And the basis in which we set up our protocols were around small consistent and traceable teams. Now that philosophy has gone right through the business and remains that way at the moment. Through the period of June, we did, on the basis of New South Wales, well, in fact, the full country's performance, we did back off a little bit in some of the controls we had in place that they were not about watering down the impacts of the small traceable and consistent teams. It was more about how our workforce and contract partners interacted within some of the communities around us. Subsequently, and I will say, over the last week, our team -- to 10 days, our team has reviewed where we did relax and reviewed that against what we are seeing unfold in -- particularly Victoria and potentially in New South Wales, as we speak. We have put those protocols back into place and added further, particularly from some of our drive in, drive out teams.In terms of the impacts of the small consistent traceable groups, we factored those into what the performance for next year and the year after will look like. And as I said, pretty consistently, it's not a matter of -- it is an efficiency issue on getting people deployed or back from work areas to central areas. We believe those protocols will remain. And for me, personally, I can't see how our communities and society can relax, not yet until we see a vaccine. So naturally, we've factored those efficiencies or inefficiencies into the business.In terms of what that means for us in guidance, Brett, I think we -- with the significant uncertainty that came at the company during February and March and all of Australia, for that matter, that did drive us to withdraw guidance. Subsequent to that and towards the end of the year, we provided -- we thought it was very appropriate to provide month-on-month production performance, in particular, just ensuring full disclosure and expectations to our shareholders. With where we think we are now and our ability to manage through the phenomenon, and it is still a reasonable risk to the business, our plan is to put standard guidance back into place for the company in the period for August. Albeit we'll be very closely watching what happens within particularly now New South Wales.

[Brett McKay, Head of Resources and Analyst]

Yes. Just another -- just minor question. At Hera, site operating costs are up a little bit, but I just wanted to ask, could you feel anything sort of driving that? I know they're not significantly higher than what they've been in the past, but also sustaining capital seems to have dropped away quite a lot. Is that going to normalize back to a slightly higher level going forward?

[Peter Trout, Chief Operating Officer]

Yes, Brett, it's Peter here. I'll jump in and answer your question there. In terms of sustaining capital at Hera, we see that dropping off. Most of that recent sustaining capital has been in extending the North Pod incline, and we're satisfied now that that's sufficiently advanced to support the required production rates. The other impact on the unit costs has been a slight reduction in mill throughput on the denominator side. So clearly, for us, sustaining and improving the mill volumes is a key driver of our improved unit cost performance moving forward at Hera.

[Operator]

[Operator Instructions] Our next question comes from Joshua Hain of REST Investments.

[Joshua Hain;REST Investments;Analyst]

Just a quick one, maybe just a sort of a follow-up to Hines's question before around Peak. You obviously annualized sort of close to 700,000 tonnes through the mill in the quarter, which is a fantastic improvement. Are we still targeting the 800,000 tonne per annum nameplate that you talked of previously? And if that's the case, what -- I guess what needs to happen to get there in sort of development rates? Or are we sort of there already?

[Peter Trout, Chief Operating Officer]

Yes. Joshua, it's Peter here. We're certainly looking to move the throughput through the mill and take advantage of that capacity. I would caution that it's -- we need to consider the nature of the ore going into the circuit. So for example, when it went into [ 8400 ] zone in quarter 4 for the first time, and there's a high proportion of [indiscernible] in that area, what that did is actually reduced the throughput rates in the mill. So it's not a straight extrapolation to get to 800,000 tonnes per annum, but the focus is very much on getting there as close as possible by lifting the mining performance to fill that available capacity in the circuit. And then it's about maximizing the recovery through the circuit as well.

[Daniel Clifford, MD & CEO, Director]

Okay. I have a comment there, too, Josh. I think the work that the operations team has done over the last 3 to 4 months in finding additional reliability or further reliability and stope turnover, compliance to the plans and the debottlenecking of the hoist has delivered significant improvement over the performance of the asset. That -- we believe there is further opportunity to be sourced there and found, and that's the nature of the continuous improvement. So there is certainly improvement planned for us coming. It's not something that will come in, in 2 or 3 months. Again, we will be constantly driving that performance, but the ambition is, and realistically, the need or the opportunity for us to absolutely maximize the tonnes through these mills is a distinctive advantage of the company.

[Operator]

Our next question comes from Mark Fichera of Foster Stockbroking.

[Mark Fichera, Executive Director & Head of Research]

Just a question on the exploration. You mentioned earlier in terms of trying to get a bit of a grip on the grade variability, doing some more intensive definition drilling. What does that sort of mean for exploration spend in FY '21 versus the FY '20 year in terms of the [ incremental? ]

[Daniel Clifford, MD & CEO, Director]

I think we'll leave some of these comments further when we're giving in terms of guidance, Mark. But I think there's 2 prongs to this. One, regional and near-mine exploration during this year, we will expect to see that again as a minimum through FY '21. And -- but additionally to that, that -- because we're getting such success in that, particularly in Federation in and around near-mine at Peak, and even sort of further feel regionally around Hera, we will continue that drive. Additionally, though, as we find these deposits, particularly Federation, there is increased drilling to go into particularly the infill drilling of Federation, and which, to a degree as well for October this year. So naturally, as we find ore bodies and we continue to find, then that exploration spend will continue. But additionally, there will be capital being deployed towards the infill drilling certainly to bring the certainty and the resource to reserve conversion within those new finds.

[Operator]

Mr. Clifford, there are no further questions at this time. Would you like to make some closing comments?

[Daniel Clifford, MD & CEO, Director]

So thank you. Thanks again, everyone, for their time. Just a couple of key comments at the end. The company's health and safety performance is requiring some attention. We haven't seen the improvement we planned over the last 6 to 8 months. We can see our TRIFR has actually increased over the period. So for myself and the management team, it's a key focus. We have recently instigated specific targeted intervention plans on both sites now with a particular focus, not only on personal injury but also on fatal hazards. And from a sustainability perspective, that has also extended through to key environmental risks with a very similar approach as to health and safety.We've got a great finish to the year, and we're putting behind us now the plant upgrade, some great ongoing exploration success. And the reliability and the further investment method into predictability that business has given us and improving operating platform. And that's what I alluded to in the last presentation, that's us getting absolute control on these assets.The whole convergence, I suppose, of those moves within the business is driving that certainty in returns to the company. And we're on a terrific platform looking forward now with mine lives, cost structures and strong cash flows coming from our operations. As I've said, those -- the look forward position will give further light on during the course of this year, focused on a higher value operating configuration of our mines and mills. So thank you, everyone, for your time. And with that, we'll sign off. Thank you.

[Operator]

Thank you. You may now disconnect your lines.