IGO Ltd

ASX:IGO

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by, and welcome to the Independence Group 2018 September quarterly report. [Operator Instructions]I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and Chief Executive Officer. Please go ahead.

[Peter J. L. Bradford, MD, CEO & Director]

Thank you, Amber. Ladies and gentlemen, it's my pleasure to lead you through our results presentation for the September quarter. With me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer.Moving to Slide 2 to our cautionary statements and disclaimer slide. I note that all currency amounts in the presentation today are in Australian dollars unless otherwise noted.Moving to Slide 3. Over the past 12 months, our strategy has evolved. Our strategy now is to be a globally relevant producer of minerals that are critical for renewable energy and energy storage. Pursuant to this, we reshaped our portfolio in the 2018 financial year, completing the sale of Stockman copper-zinc project in Victoria in December 2017 and the sale of the Jaguar zinc-copper mine in Western Australia in May 2018. In addition, we transitioned Long into care and maintenance in June 2018. The portfolio that remains comprises our high-quality, long-life assets at Nova and Tropicana, which deliver great EBITDA and cash margins. Both Nova and Tropicana share a similar geographic address along or adjacent to the Fraser Range, and we have made this region a key focus for our business. In addition, we have belt-scale exploration holdings at Lake Mackay and Raptor in the Northern Territory, both of which are prospective for nickel; as well as a relatively new exploration joint venture position in Greenland, which is prospective for copper and cobalt. The September 2018 quarter is therefore the first quarter where we are reporting to this reshaped portfolio.Moving to Slide 4. The results for the first quarter demonstrate the quality of Nova and Tropicana, with both continuing to deliver strong cash flow, with cash flow from operations for the quarter of $108 million. As a result, our cash balance at quarter end increased to $176 million, resulting in a net cash position of $62 million. Nova nickel and copper production of 6,854 tonnes and 3,019 tonnes, respectively, were both within guidance, while cash costs were higher than guidance for the quarter. We will talk to drivers for this later in the presentation. Tropicana gold production for the quarter was also in line with guidance, totaling just over 125,000 ounces, with cash costs at the midpoint of guidance.Following the quarter end, we entered into 2 strategic agreements for Nova doing the development of a solar farm in collaboration with our power provider and the 4-year extension of the Barminco underground mining contract. Good progress is also being made with our growth projects, which include the Nova downstream nickel sulfate prefeasibility study; the Tropicana Boston Shaker Underground; the second ball mill at Tropicana; and our $51 million exploration and discovery program, the core of which is our activities at Nova and the Fraser Range to unlock further discovery.Moving to Slide 5. Our lead safety metrics continued to improve. And as a result, the number of total injuries in the business has reduced. Unfortunately, we did have 1 lost time injury associated with IGO-managed activities during the quarter, resulting in our 12 months rolling lost time injury frequency rate as at 30th of September increasing marginally.From a community and environmental perspective, we are pleased to advise that, during the quarter, the Southern Ports Authority at Esperance was granted a license amendment enabling the shipment of our nickel and copper concentrate on an ongoing basis from the port of Esperance. This approval follows the successful completion of trial shipments of our concentrates through the port since concentrate production began.I also note that our 2018 sustainability report, our fourth such report, was released to the market on Friday and is available on our webpage at www.igo.com.au. This report provides a broad and transparent perspective on how we conduct our business and the continuous improvements we make -- or continue to make on multiple fronts.Moving to Slide 6. Overall, IGO's balance sheet continues to strengthen quarter-on-quarter, with strong free cash flow delivering increased cash and lower debt. IGO's cash balance at quarter end increased to $176 million, a 27% increase in cash on hand relative to the previous quarter, resulting in a net cash position of $62 million. Underlying free cash flow was $82 million for the quarter. Total revenue for the quarter was lower than the previous quarter at $167 million, and underlying EBITDA decreased relative to the previous quarter to $63 million. This was predominantly the result of lower metal prices, lower production from Nova quarter-on-quarter and the absence of the Jaguar and Long operations.Moving to Slide 7. Key movements in cash flow are set out in this slide. Free cash flow from our operations was $91 million, thanks to strong cash flow generation from Nova and Tropicana. We also received $11.5 million from the sale of a gold royalty over one of Dacian's gold assets in Western Australia in June 2018.Notable cash outflows included our scheduled $29 million debt repayment; $12 million in final dividend payments for the 2018 financial year; and $19 million for exploration and business development activities, which included the $6 million cash consignment of a $21 million investment in the Southern Hills tenements on the Fraser Range in Western Australia completed in July 2018.Moving to Slide 8. Nova's production for the quarter was delivered at an annualized mining and processing rate of 1.6 million tonnes per annum, with production in line with guidance. Quarter-on-quarter cash costs after byproduct credits per payable pound were impacted by a number of factors. This included lower metal production, which reduces the pounds of nickel to spread the cost over; lower copper and cobalt prices and production, which reduces the byproduct credit; higher fuel costs; and more operating development and less capital development than in the previous quarter, with less capital development in the quarter than what we guided for, for the first half. What this does is result in an increase in operating costs and a decrease in capital costs. As a result, mining costs per tonne of ore mined, as an expense, were higher than the previous quarter, with cash flow relatively unaffected.We also saw an increase in nonrecurring items, which increased cash costs during the quarter. This included the completion of a mill reline in early July as well as a second scheduled mill shutdown in September. In addition, higher and -- maintenance costs for our water treatment and reverse osmosis plants used to create potable water for rinsing concentrate were higher. We plan capital expenditure later in this financial year, which is intended to reduce these costs going forward.Nickel recoveries were broadly in line with expectations in the quarter. However, copper recoveries underperformed. We continue to investigate opportunities to optimize both nickel and copper recoveries. To that end, subsequent to quarter end, we have achieved a step change in copper recoveries as a result of a process optimization improvement made in late September. Month-to-date in October, copper recoveries have averaged 86.6%, a significant improvement relative to the average copper recovery in the September quarter of 81.3%. We expect nickel production to trend higher through the remainder of the year, driven by scheduled availability of higher-grade stopes. Higher nickel production is expected to positively impact cash costs per payable pound.Moving to Slide 9. This slide explains the cost variance relative to the previous quarter in greater detail. As discussed on the previous slide, higher fuel price and lower copper and cobalt prices have had the greatest impact on cash costs. We have classified these costs as external. Both can be controlled with hedging programs, and we do have some hedging in place for fuel. However, the proportion of fuel hedged is lower year-on-year, with about 25% of our diesel hedged in the current financial year compared to in excess of [ 17% ] of diesel hedged in the 2018 financial year.The internal cost variance was driven by a number of factors also discussed on the previous slide, but to summarize again: These included 7% lower nickel production quarter-on-quarter, which reduces the number of pounds of nickel to spread the cost over; 6% lower copper and -- production and lower cobalt production, which reduces the byproducts credit further; and then higher costs mainly related to our shutdown maintenance and water supply, as discussed on the previous slide.Moving to Slide 10. Last week, we announced an agreement with Zenith Energy for the development of Australia's first commercial hybrid diesel-solar photovoltaic facility at Nova. Zenith will build, own and operate the facility, which has a 12.5 gigawatt hour capacity. Construction will commence in early 2019, and first power is expected in the September 2019 quarter. This facility is aligned with IGO's commitment to minimizing our carbon footprint and will improve our cost structure. Solar power also provides an effective diesel hedge and has a break-even price of about $0.65 per liter. Power generation costs are expected to be -- power generation cost savings, sorry, are expected to be delivered, with diesel prices above $0.65 per liter, once the solar farm is operational.Moving to Slide 11. We also finalized a new agreement with Barminco, our mining partner at Nova. The new agreement is for an initial 4-year term, with the option of an additional 2-year extension. Key aspects of the partnership include a collaboration on technology development and how we can harness safety and productivity opportunities as a result. We expect that the new agreement will deliver an overall 5% improvement to mining costs at Nova as a result of improved productivities and efficiencies achieved.Moving to Slide 12. Work on the Nova downstream processing prefeasibility study to produce nickel sulfate directly from nickel concentrate was progressed in the quarter with a number of trade-off studies completed to determine the final process flow sheet to be adopted in the prefeasibility study. We also completed a plant trial at Nova to produce an optimized nickel sulfide concentrate and collected 3 tonnes of higher-grade nickel concentrate with reduced sulfur content specifically optimized for the downstream processing project. This material will be used for additional prefeasibility and feasibility study metallurgical test work.Downstream processing of nickel concentrate from Nova to produce nickel sulfate for the battery storage energy market has the potential to be a significant value driver for IGO, delivering multiple benefits, including significantly higher payabilities than traditionally received from nickel concentrate offtake; the opportunity to maximize recovery at the concentrator stage by producing a bulk concentrate for the downstream processing; a premium price for the nickel in nickel sulfate when compared to the London Metal Exchange price for nickel as nickel metal; and linking IGO to the energy storage supply chain, allowing for discovery by a wider range of potential investors.Moving to Slide 13. Gold production and cash cost at Tropicana both continued to improve quarter-on-quarter as a result of the grade streaming strategy, which is expected to deliver higher production and lower costs in the 2019 and 2020 financial years. The Tropicana process plant achieved record throughput of 2 million tonnes, which equates to 8 million tonnes per annum, at a 2 -- grade of 2.2 grams per tonne of gold. Gold recoveries were unchanged at 89%.Moving to Slide 14. Our share of improvement capital expenditure for the quarter at Tropicana was $4.3 million, which comprised of continued construction and implementation of the additional 6-megawatt ball mill at Tropicana which is due to be commissioned in the December 2018 quarter. The second ball mill will provide a marginal throughput lift of 5%; and will improve metallurgical recoveries by some 3%, up to 92%. The delivery of the Boston Shaker prefeasibility study remains on schedule and is expected to be released to the market in the December 2018 quarter.Moving to Slide 15. Of note, continued positive drilling results were released to the market in August 2018, and these have informed the Boston Shaker Underground resource model for the prefeasibility study. Boston Shaker is located on the northern portion of the Tropicana mineralized system and is currently being mined via open pit. The underground prefeasibility study is focused on 2 continuous, parallel high-grade shoots which remain open at depth. Once our technical studies are complete at Boston Shaker, there are several additional opportunities that the joint venture partners will consider for the potential of future underground assessments at both Havana and Havana South.Moving to Slide 16. Our 2019 financial year exploration work program on the Nova mining lease includes a 20,000-meter diamond drilling program which commenced during the quarter. The diamond drilling work to date has focused on testing several targets where previous work had intersected intrusive rocks and Nova-style mineralization. This includes Phoenix, 400 meters west of Nova, which has been drilled from an underground position. We also drilled at Aries and Chamaeleon, north and south of Nova, using a surface drill rig. Initial interrogation and interpretation of the high-resolution seismic data collected earlier in 2018 has already identified numerous targets for drill testing, which will -- is commencing in earnest in the December 2018 quarter following the mobilization of a second surface drill rig to Nova in October. Additional targeting on the mining lease will continue, utilizing multiple deep-sensing geophysical platforms to supplement the seismic data.Moving to Slide 17. Our systematic regional exploration activities across the Fraser Range continued on a number of fronts, utilizing regional aircore drilling with 4 drill rigs in the field as well as airborne geophysics and follow-up grounds geophysical surveys. Multiple airborne electromagnetic anomalies have been identified, with some promising targets being identified within 20 kilometers of Nova. And these are expected to be followed up during the December quarter.On the Widowmaker concession, which enables the Creasy Silver Knight discovery, we diamond-drill tested 3 electromagnetic geophysical targets. All holes intersected encouraging geology, with multiple zones of mineralization observed, ranging from semi-massive to disseminated sulfides dominated by pyrrhotite, with local minor chalcopyrite. Assays for these are pending. We also progressed aircore bedrock geochemical programs and electromagnetic geophysical programs on the northern part of the Widowmaker concession at a target area that we call ecliptic.At Andromeda, where we previously identified a zone of copper-zinc mineralization, we received the final assays from drilling carried out in the June 2018 quarter, with similar overall widths and grades to that previously encountered. We are now interpreting these results and considering further work. We continue to be excited by the prospectivity of the Fraser Range.Moving to Slide 18. At the Lake Mackay project in the Northern Territory, we recently completed the earn-in expenditure requirement to secure our 70% interest in the joint venture with Prodigy Gold, whereby Prodigy Gold will now fund its 30% pro rata share of the 2019 financial year joint venture exploration program. Works during the quarter included continuation of the airborne EM geophysics survey using SpectremAir as well as regional soil geochemical sampling and ground geophysics to follow up on targets identified through the airborne EM. The airborne system has proved to be very effective and efficient as a reconnaissance geophysical tool in defining bedrock conductors.Moving to Slide 19. Ladies and gentlemen, I thank you for your participation through this presentation. To conclude: IGO has had a solid start to the 2019 financial year with a simplified and reshaped portfolio. We have delivered strong cash generation resulting in a net cash position while retiring debt; paying disciplined dividends; and aggressively funding organic growth opportunities through our belt-scale exploration projects, prefeasibility studies and value-enhancement projects.Ladies and gentlemen, finally, I want to acknowledge the hard work and dedication of all our employees. They strive every day to make IGO a better company to make a genuine difference for the benefit of all stakeholders and for the community at large.I will now hand the call back to the operator, Amber, and open the lines for questions from analysts.

[Operator]

[Operator Instructions] Your first question comes from Hayden Bairstow from Macquarie Group.

[Hayden Bairstow, Analyst]

Just a couple for me. Just on -- just in reconciliation on Nova, just trying to get a feel for EBITDA versus cash flow. Can you just sort of walk us through that one just given what the difference is between the previous quarter and this quarter? I'm assuming it's capitalized development or something. And then has that been reversed? And just also on business as a whole, Pete. I mean, you're obviously starting to generate some pretty serious cash flow with Nova now going. And I know you've got some at Boston Shaker and these sort of things without massive CapEx, but I mean, where do you sit on business development beyond just exploration? I mean, you're going to build a pretty aggressive cash balance pretty quickly, too.

[Peter J. L. Bradford, MD, CEO & Director]

So I'm going to deal with the second part of that question, first. And then I'll get Scott to talk to the reconciliation between EBITDA and cash flow. So with the business, you're right. We are generating good cash, and that cash will build on the balance sheet quite quickly. And our focus as a business is trying to unlock some of those organic growth opportunities that we talked to in the presentation, which have the potential to deliver transformational growth to the business. When you try and paint a picture of what future success looks like for us, Hayden, it would be delivering multiple discoveries on the Fraser Range and then investing some of that cash flow in unlocking those discoveries through a series of developments, all of which adds greater critical mass to -- and increased scale to a downstream nickel sulfide project so that we'll get full value for the nickel, copper and cobalt that we produce. We think we have compelling organic growth opportunities in the business, and there's no need at this time to consider going outside the business to look at potentially inferior inorganic opportunities. In parallel, well, we continue to fine tune the allocation of capital and to potentially ridging the dividend formula. And we would expect to update the market broadly on that at the time we come out with our interim dividend in January, February; and likely move away from an income model to a more of a free cash flow model which marries the returns to shareholders with the success of the business. Over to you, Scott.

[Scott Steinkrug, CFO & Company Secretary]

Yes. There were are a few things, absolutely, happening when comparing the fourth quarter with the first quarter. So you've probably seen in that revenue and EBITDA were higher in the fourth quarter than the first. However, we got a reversal of that in terms of cash flow, so there's definitely a mismatch. So what happened was, if you look at quarter-on-quarter, we did sell a bit more nickel. However, we sold less copper quarter-on-quarter between the fourth and the first. It was heavily impacted by commodity prices. So the other thing that happened in the fourth quarter is that we got revaluations coming from the third quarter into the fourth quarter. And we saw virtually the opposite of that as prices fell in this quarter, whereby we had a $7 million negative revaluation coming through into the first quarter from the fourth quarter. Other things impacting this was like -- hedging was certainly one of them, diesel hedging that had a turnaround figure. So we had higher hedging in the fourth quarter versus the first quarter. And yes, you're right as well about capitalization of -- and quality in relation to ore development and capital development. So we effectively expensed more in the first quarter because we did quite a lot more operating developments in the first compared to the fourth quarter, and that also then has a direct impact onto -- into P&L versus the fourth. So I hope that sort of answered your questions in a way.

[Peter J. L. Bradford, MD, CEO & Director]

Yes. So just to recap on the key drivers there, Hayden. Quarter-on-quarter, significant difference on revaluations. We got a circa $6 million benefit in the fourth quarter and a $7 million hit in the September quarter. So it's quarter-on-quarter that's a big influencer. We also saw the value of that shipment that we had shipped at the end of June, waiting for the -- we saw the cash flow of that come through in the September quarter. And those were the 2 lumpiest elements that you need to focus on through them also.

[Hayden Bairstow, Analyst]

So if we're looking forward then, I mean, EBITDA and cash flow will just probably sustain your capital development of 30 or 40 or whatever of a year. And then it should match up pretty close if we strip out provision and pricing movements.

[Peter J. L. Bradford, MD, CEO & Director]

Yes. Over a short-term period, there will always be a little bit of lumpiness as a result of the lumpy nature of the shipments that we send offshore, both nickel and copper. And while do always try to align shipments with quarter ends and try and reduce that noise, there will be fluctuations from 1 quarter to the next. But over the longer run, that noise sort of gets filtered away. And you should see relatively good alignment between cash and EBITDA.

[Operator]

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

[Peter J. L. Bradford, MD, CEO & Director]

Great. Thanks, Amber. Ladies and gentlemen, once again, thank you for participating in the presentation.To recap the quarter. We continue to generate strong free cash flow and further strengthen the balance sheet. Both Nova and Tropicana delivered sound results, and our full year guidance remains unchanged for both. We executed 2 significant strategic contracts, the Nova solar farm and the Nova underground mining contract, both of which will deliver long-term benefits to Nova. And lastly, good progress is being made with our growth projects, which include the Nova downstream nickel sulfate prefeasibility study; the Tropicana Boston Shaker Underground; the Tropicana second ball mill; and our $51 million exploration and discovery program, the core of which are our activities at Nova and the Fraser Range to unlock further discovery.Thank you for your participation, and good day.