Hillgrove Resources Ltd

ASX:HGO

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Hillgrove Resources Limited September 2024 Quarterly Results. [Operator Instructions]

I would now like to hand the conference over to Mr. Bob Fulker, Chief Executive Officer and Managing Director. Please go ahead.

[Robert Fulker, executive]

Thanks, Ashley, and good morning, everyone. Welcome to the Hillgrove Resources September 2024 quarterly report. My name is Bob Fulker, Managing Director and CEO, and I'm joined on the call today by Joe Sutanto, CFO and Company Secretary. We appreciate you taking the time to listen in today, and I'm excited to be able to host my first live quarterly conference call at Hillgrove. Since declaring commercial production on July 1, we have now officially rejoined the ranks of Australian copper producers and are planning to ramp up engagement with shareholders in the broader market going forward.

The outlook for copper looks great. My view is that, there will be continued support for copper demand over the long term, driven by global population growth and urbanization in developing countries. The decarbonization thematic will also continue to play out and transition to renewable energy result in growing copper demand through the electrification of the global power grids. Very recently, China has also come to the party and provided a lift in the commodity price as it has signaled its intent to turn around a sluggish economy through cutting rates and providing stimulus measures. Still while copper demand remains strong, on the other side of the coin, we are seeing increasing concerns about the global supply of copper. The average grade of copper mines continues to decline. A recent report by BHP estimated that the average grade of copper mines has declined by around 40% since 1991.

On top of this, underinvestment in new projects, extended permitting time lines, global geopolitical tensions and frequent operational disruptions at some of the world's largest copper mines all point towards longer-term vulnerability around copper supply. I don't have a crystal ball, and I can't tell you exactly what the copper price is going to do. But in taking on my new role at Hillgrove, I have made a very deliberate decision to get back involved in the Australian copper industry. I think there is a tremendous opportunity to benefit from these market dynamics in the years ahead.

Before turning to the operational results in the quarterly report, which was released this morning, I first want to highlight a couple of key announcements we have made over the last week. These are both important to set our business up for future success. Firstly, last Friday, we released an updated mineral resource and ore reserve for our 100% owned Kanmantoo copper mine. In what was a very positive announcement, we declared a maiden ore reserve of 2.8 million tonnes grading at 0.91% copper for -- sorry, 26,000 tonnes of contained copper. This is the first step in improving the transparency to the market on what we see as a mine that has potential to properly produce copper for many years to come.

In addition to this, we announced a 96% increase in the copper mineral resource at Kanmantoo and now have a resource of 19.3 million tonnes grading at 0.77% for 150,000 tonnes of copper. This is clearly a very large resource base for this operation when taken in the context of our current mining rate of around 1.2 million tonnes per annum. Our goal in the next year is to continue the drill program to convert additional mineral resource into ore reserves to keep extending the reserve life. As mentioned in the release, the pleasing result is the increase in grade as we improved the classification levels due to increased drill hole density.

The second important news I want to highlight is, today's announcement on the $10 million debt facility, which we have been successful in securing. Although we don't currently have any plans to draw down on the funds, this gives us additional financial flexibility as we continue to scale up operations at Kanmantoo. In recent months, we have assessed a number of options to strengthen our balance sheet and decided that securing this standby facility was the most prudent approach to improving financial flexibility in our business. With this additional financial buffer now secured, we can continue to focus on the production ramp-up of Kanmantoo and implementing measures to improve efficiencies and reduce costs at the operation.

Turning to the report. As a company, we have a strong focus on our safety culture. So it's with great pride I'm able to report that we recently received the Chairman's Award at the 2024 South Australian Mines and Emergency Response Competition. We are delighted with our team's performance that has set a benchmark for excellence in mine emergency response in South Australia.

With regards to our operating results in the September quarter, it's pleasing to see all physical metrics continue to track in the right direction. Copper production was up 13% on the previous quarter, and we're now consistently producing around 1,000 tonnes of copper per month. Both C1 and all-in costs were lower in the September compared to the June quarter. This is an area of our business we have a laser focus on, and we'll be working hard to identify ways to improve our effectiveness and reduce costs. The 2 levers we have in cost control are improved productivity with the same cost or reduce costs. We are working on both of these. The increase in all-in sustaining costs during the quarter was due to the declaration of commercial production on the 1st of July 2024, which meant that some costs are now being allocated to sustaining costs that were previously classified as major costs.

With plenty of spare capacity in our 3.6 million tonnes per annum processing plant, we plan to improve mining rates to increase throughput. Opening up new mining areas in the Nugent will improve our flexibility in accessing mining stocks and ultimately helping lift mining rates throughout the mine. As of yesterday, the development cycle had 19 faces and 6 work areas. This is the most we've had to date. We also have 54,000 tonnes of broken stocks underground and 166,000 tonnes of drilled stocks waiting to be mined. The processing plant is performing well with milled tonnes and recoveries both improving quarter-on-quarter.

Our target remains a 94% recovery with a concentrate grade of plus 24%. The plant batch processing operation is performing well and processing losses are at a minimum. Overall, I'm very happy with the progress we've made over the last few months, and we continue to work hard transforming the Kanmantoo operation into a safe, reliable and profitable copper mine.

I'd like to hand over to our CFO, Joe Sutanto, and he'll update you on the financials.

[Joe Sutanto, executive]

Thanks, Bob, and good morning, everyone. In our first quarter of commercial production since operations restarted, Hillgrove generated net revenue of $36.9 million from metal sales. The company's cash position as of September 30 increased to $7.8 million from $7.4 million on June 30. Total liquidity, which includes cash, receivables and unsold concentrates at $12.2 million at September 30. With the investment we made in the quarter, we have set Kanmantoo up well for future growth, continued operational delivery and stronger free cash flow generation in the December quarter and beyond.

In particular, I would like to point out the following: First, with our processing plant campaign milling of 1 week on and 1 week off, our last campaign for the quarter finished on the 23rd of September. This meant that we did not process ore for the entire last week of September and a 20,000 tonnes of ore on the ROM pads at September 30. This ore was processed in the first week of October and at current spot prices is worth nearly $3 million in revenue.

Secondly, cash flow was impacted by the delivery of 2,100 tonnes of copper hedges at a price of AUD 12,500 per tonne. There were no deliveries into the hedge book planned during the December 2024 quarter. Hillgrove's outstanding hedge book now sits at 7,900 tonnes at an average price of $14,056 per tonne, which is close to the current spot price.

Thirdly, there was an increase in capital during the quarter with the majority spent in 3 key areas: increased underground drilling; TSF construction works; and the commencement of the Nugent decline development. Investment in all of these areas is setting the operation up for sustainable production over the longer term. Overall, our balance sheet is healthy and cash flow is expected to continue to increase as we ramp up production. As Bob discussed before, we've also secured a standby $10 million debt facility, which provides us with additional balance sheet flexibility.

On the cost front, despite the additional USD 0.15 per pound invested on sustaining and major capital this quarter, our all-in costs again decreased quarter-on-quarter. As we realize further efficiencies, our expectation is that, cost will continue to improve in the quarters ahead. One of the inherent advantage we have on the cost front is the location of Kanmantoo, which is only 55 kilometers away from Adelaide. This gives us access to a large pool of skilled labor with the vast majority of the workforce being residents of the broader Adelaide region. Our labor costs represent less than 20% of the total cost base for Hillgrove, which is somewhat unique in the Australian mining industry.

In addition, being in a Tier 1 jurisdiction such as South Australia, it gives us ready access to good infrastructure. For example, being connected to grid power provides us low-cost energy to the mine site, for which we are currently paying $0.14 per kilowatt hour. As CFO of Hillgrove, I am confident that with a strengthened balance sheet, as well as the investment we made in the last quarter, our business is set up well for the future.

Thanks for listening to the call. And I will now hand back to Ashley to open the lines for questions.

[Operator]

[Operator Instructions] Your first question comes from Sam Catalano with Wilsons Advisory.

[Samuel Catalano, analyst]

So I've got a couple of questions. Firstly, just to focus on costs and in particular, the capital component of AISC and AIC. I hear you on the issues around the timing of cash flows given the plant. Obviously, the ramp-up in development over the course of the quarter was very positive and sets you up well. And you obviously got all this broken ore stockpile and some service and underground that you've mentioned. So I hear all that. I think as we look forward, though, efficiencies will obviously drive C1s down in general. But I would think that the fastest way AISC and AIC going to come down are dependent on how that sustaining CapEx component moves. So given that you've sort of done sort of $13 million, $14 million of sustaining CapEx in the quarter, which is not far off what we were expecting for the half. That's the key delta for our numbers.

So I'm just wondering, Bob, if the sort of run rates of development now that you have sort of seem to be well ahead on that front are going to continue and we can expect to see that number drop. Or if indeed that's the sort of indicative of the run rate? I'll leave that question there and ask the next one in a second, Bob.

[Robert Fulker, executive]

Thanks, Sam. And look, I'll pass it over to Joe in a minute on the costs to expand a little bit further. We have had the TSF build and the Nugent decline and portal going in this last quarter. Obviously, the portal was a one-off. The TSF will be repeating throughout the years, but it's around about 2- to 3-month build every sort of 9 months or thereabouts.

The other one is the additional diamond drilling that we started last quarter, which is to increase that conversion of resource into reserve.

I'll hand it over to Joe for a further.

[Joe Sutanto, executive]

From a total spend perspective, you're right there, Sam. So from a sustaining as well as major capital, that number that you quoted there, I believe, was both. Look, effectively, from a total spend, there might be a slight decrease, but where we see the potential is that, if you decrease the -- or you increase the denominator, obviously, from a cost per pound basis, that would decrease. So that's, I guess, where the efficiencies could potentially lie in the future.

[Samuel Catalano, analyst]

Okay. So if I can just push you both a bit, you're probably unlikely to see a material drop in that $14 million figure. Obviously, Bob, as you mentioned, the portal is a one-off, so maybe a little bit of a drop, but you're saying not a massive drop over the next couple of quarters.

[Robert Fulker, executive]

Look, we'll see -- I believe we will see a drop, Sam. The portal won't be a recurring one. TSF, that won't be recurring. We did increase the diamond drilling significantly last quarter. Once we start getting that to the levels that I'm comfortable with, we'll drop that down a bit as well. So we're planning to try to reduce those costs as well. So where we can, we will be reducing those costs. And there are some one-offs in that last quarter.

[Samuel Catalano, analyst]

Okay. Great. And then the second question is just around grade. Obviously, a very strong grade in the quarter just reported, nearly 1.2%. Given that, that's a fair bit ahead of particularly the updated resource grade, I know you've spoken about as your ore definition increases, typically grades have been going up. But how variable do you think that looks over the course of the next 12 months because your throughput is sort of going well. But if suddenly -- you're suddenly mining 1%, then that could potentially be a bit of a drop in output on a Q-on-Q basis. So just wondering how your grade profile is looking in the mine plan over the next 12 months.

[Robert Fulker, executive]

Yes. Thanks, Sam. I'm going to answer -- and if I don't answer your question, just come back to me, please.

[Samuel Catalano, analyst]

Sure.

[Robert Fulker, executive]

We've had a history of not great grade reconciliation going back 10, 15 years. But since 2017, the reconciliation has been pretty good to the model with the modified indicator kriging (sic) [ Multiple Indicator Kriging ]. In the last 6 months since we have started the underground -- the last 6 to 9 months since we started the underground, we've actually had nice positive reconciliations with the model. The recent mineral resource has changed from the MIK to an Ordinary Kriging. I'm still expecting to see a positive reconciliation going forward because that's what we're seeing in the models that are going back over the last series of stopes.

I do expect that our grade will be around that 0.95% to 1.05% range in the future. And that's where we start converting the proved -- into the proved reserve into the mining plan and start to bring that probable up into the proved category with uplift in the grade there as well. So it's been a positive reconciliation for the last 6 to 9 months. I do expect that to continue into the future.

[Samuel Catalano, analyst]

Okay. So that's good. That's relative to the resource base. But just in terms of your sort of expectations for stopes over the next couple of quarters, is there a meaningful change in the expected grade at the moment before you obviously have the reconciliation?

[Robert Fulker, executive]

So we're still mining stopes now that were designed with the old resource model. We're changing those now as the new model came out and the new model is coming into effect basically in the next couple of months, Sam. And then the next sort of second quarter will be the entire new model. So I do expect that we'll continue with a slight improvement in the grade reconciliation. I don't know that we'll be getting that large one that we've been getting for the last couple of months.

[Operator]

Your next question comes from Chris Drew with MST Financial.

[Christopher Drew, analyst]

Great work on a positive cash flow quarter. It's good to see. A couple of questions from me, if that's okay. Firstly, just sort of near-term production, where we're sort of creeping up towards 3,000 tonnes a quarter and talking about sort of 1,000 tonnes a month rate. Is that what we should sort of be looking for over the next kind of 3 to 6 months? Or as you sort of continue with the development work open up new fronts, might there be a little bit more to come there on the production side? And I'll follow up with the second question after that.

[Robert Fulker, executive]

Yes. Thanks, Chris. Look, the development, opening up new areas, the amount of broken stocks and drilled stocks we have underground, the improvement in the trucking operation is allowing us to get more tonnes, which should allow us to actually produce more going forward.

Now, is it 50%? No, it's definitely not. But I do expect that we will be increasing our production over the next coming quarters to a higher level than it has been for the last couple.

[Christopher Drew, analyst]

And yes, just I guess a question on the resource and the reserve. Obviously, a good update last week on that. What's the sort of work program and plan going forward in terms of sort of further resource and reserve development?

[Robert Fulker, executive]

Yes. It's 19-odd million tonnes of resource is pretty awesome from my perspective. So if you take 1.2 million to 1.4 million tonne rate, that gives us quite a bit of runway from a resource conversion capability. The resource extensions really are around down dip and along strike of those areas that we've been drilling. Emily Star, I was really pleased to see it coming in because I do believe that it's got potential in the future, but it's got a little bit more to go before we can claim a major success there. But I do believe it's got high likelihood of coming to the plan in the near future. The next 12 months, we're going to really concentrate hard on converting that resource into reserve and extending that reserve further than what I'm classifying as close enough to 2 years of reserve life to something higher than that.

I would like to also start to get more of the probable up into the proved category. So that really is our target. We will continue to do resource extensional drilling, but the main focus will be on that conversion into reserve.

[Operator]

Your next question comes from Paul Hissey with Moelis Australia.

[Paul Hissey, analyst]

Just a follow up on that -- on the response to Chris' question there, Bob. What's the rationale of trying to prove -- push reserves from probable up to proved?

[Robert Fulker, executive]

Paul, I would like to -- I mean, if I start with, we've now got 2 years of reserve. Last Thursday, we had 0. Is 2 years enough? It probably is getting there. I would like between 3 and 5 years of reserve life as a rolling average going forward with an equal mix between proved and probable. The only reason that I'm saying that I'd like to get more into the approved is that, with the additional drilling, we get an uplift in the grade. So we find that every time we put holes into the ore body, the very nature of the ore body allows us to uplift the grade a little bit. So you'll see that from the indicated through to the measured, as well as the probable that is approved.

[Paul Hissey, analyst]

Okay. And if I could just ask a question about the debt. Obviously, some funky terms there with the lender. I just wanted to circle around on the copper price participation there. So I can see it says confirm or -- confirm this or otherwise, but this is only applicable following drawdown on the facility that you'll participate. And then I presume that falls away then as and when the debt is paid off, if in the event you actually draw it.

[Joe Sutanto, executive]

That's correct. So there is a tonnage component to that as well, Paul. But that only obviously kicks in if and when the debt -- or not when, but if it is drawn down. I guess, the second point also is with sort of where the copper price is and the price participation levels that they have, look, we are exposed to 90% of the upside of that still. So it's not as if it's -- you're giving away all of the upside. It's only a small component of that upside.

[Paul Hissey, analyst]

Yes. Well, it's 10%, yes. And so, just on the 15,000 tonnes of them, so that's obviously under the offtake agreement, which commenced, I guess, commenced when you restarted the operation back in March, correct?

[Robert Fulker, executive]

We have 100% of our offtake goes to Freepoint. So we are important partners together. So the copper will be delivered to them, but the 15,000 with the debt is a different agreement. And it's only comes live if we draw.

[Paul Hissey, analyst]

Yes. Okay. A little bit unclear, but perhaps we can take it offline. Yes. All right. I think that was it for me. The other guys, the previous questions answered a few of my others around the grade profile. So perhaps I'll leave it at that.

[Operator]

[Operator Instructions] There are no further questions at this time. I will now hand back to Mr. Fulker for closing remarks.

[Robert Fulker, executive]

Thanks, Ashley. As I mentioned earlier, with Kanmantoo now in commercial production and the strong demand for Aussie investors for new copper stories, we'll be increasing our engagement with investors and analysts in the coming months.

In response to a lot of incoming requests, we'll also be hosting a site visit to Kanmantoo for institutional investors and analysts on the 19th of November. I understand there's a lot happening towards Christmas. So please, if you can just let me know if you are interested by the end of October, and we can start organizing it.

And thanks again, everyone, for your time today. We look forward to continuing to update you in the future on our progress. Thanks a lot.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.