IGO Ltd
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Thank you for standing by, and welcome to the Independence Group 2019 September Quarterly Report. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and CEO. Please go ahead.
Thank you, operator. Ladies and gentlemen, good morning, and thank you for joining us today for our presentation of our September 2019 quarter results, which we released to the ASX this morning. With me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer.Slides 2 and 3 highlight our cautionary statement and disclaimer and competent person's statements. Of note, all currency amounts in the presentation today are in Australian dollars unless otherwise noted.Moving to Slide 4. Before we begin, and on behalf of all of us at IGO, I would like to acknowledge the fatality that occurred during September following an incident at Nova during the final stages of loading and securing a concentrate haulage truck operated by one of our contractors. The incident has deeply saddened all of us at IGO, and our thoughts remain with the deceased's family, friends and colleagues during this difficult time. A full and thorough investigation continues into the circumstances of the incident. IGO has an enduring commitment to safe work practices and care for our people. We have made significant improvements to our lead and lag safety metrics over recent years. However, more needs to be done.Moving to Slide 5. It is pleasing to be able to report an excellent first quarter for the 2020 financial year with strong metal production from both Nova and Tropicana and higher metal prices, delivering quarter-on-quarter increases in revenue, EBITDA and net profit after tax. In fact, the 29% quarter-on-quarter increase in revenue to $263 million represents a record quarterly revenue result for IGO.We declared and paid an $0.08 per share dividend, 97% franked during the quarter. This was in accordance with our new shareholder returns policy to return 15% to 25% of free cash flow to shareholders and amounted to over $47 million being returned to shareholders. We have also progressed the tender process for our nickel and copper concentrate offtake agreements, and I will discuss this in greater detail later in the presentation.Moving to Slide 6. I've already talked to our record revenue of $263 million for the quarter. Underlying EBITDA was also higher, up 64% quarter-on-quarter at $154 million. These results were primarily driven by a combination of better-than-guided metal production at Nova and higher realized nickel prices. We also benefited from strong production results at Tropicana and higher realized gold prices. Underlying free cash flow was marginally lower quarter-on-quarter, impacted by timing of sales receipts, as evidenced by a large increase in trade receivables at quarter end to $76 million. Group EBITDA margins increased quarter-on-quarter to 58%.Moving to Slide 7 and to the cash flow waterfall showing the key inflows and outflows for the quarter. Cash flows from Nova and Tropicana delivered close to $100 million in free cash flow for the quarter, in line with the previous quarter. Payments for investments included a $9.8 million share subscription in Legend Mining, as announced by Legend on the ninth of July 2019. The balance sheet continues to strengthen with a closing cash position of $321 million. Following the scheduled debt payment of $29 million during the quarter, total debt is down to just $57 million, and we had net cash of $264 million.Turning to Slide 8, where we compare quarter-on-quarter differences between net profit after tax for the June 2019 quarter versus this quarter. The key drivers of the differences are set out on the slide, and these included a significantly higher quarter-on-quarter contribution from Nova due to another quarter of strong production combined with higher nickel prices; the Tropicana result, which benefited from a 6% higher gold price partially offset by 4% lower production; a $6 million positive variance in the value of investments held; and higher tax expense as a result of higher income from operations, but noting that this does not translate to higher cash taxes payable given our accumulated tax loss position.Moving to Slide 9 and to Nova, which has continued to deliver outstanding operational and financial performance.Moving to Slide 10, where we summarize those key performance indicators for Nova and how we are tracking against pro rata guidance. As shown, metal production was more or less in line with the previous quarter, placing us comfortably ahead of the top end of pro rata guidance for nickel, copper and cobalt production year-to-date.Cash cost per payable pound of nickel was 17% higher quarter-on-quarter at $2.59 per payable pound. This was due to our -- a number of factors, but primarily, we saw lower capitalized lateral development for the quarter resulting in a higher proportion of fixed mining cost being allocated to OpEx. This accounted for $0.24 per payable pound of difference. The second factor that I will note is the higher notional royalties for nickel sales due to the rise in nickel price over the quarter. This accounted for a $0.09 per share -- sorry, $0.09 per payable pound increase in cash cost but could be best characterized as a champagne problem. While the cash cost is higher than the top end of our 2020 financial year guidance of $2.50 per payable pound, we expect to deliver within guidance for the year.Nickel recoveries fell quarter-on-quarter to 86.8%, a result that was anticipated given the combination of mineral types mined and processed in the quarter. Copper recovery was unchanged at 87%. We have opportunities to continue to optimize and improve both nickel and copper recoveries over the coming quarters.Moving to Slide 11, where we profile Nova production and cash cost over the last 4 quarters and demonstrate the consistent metal production performance being delivered. Much of the increase in cash cost per payable pound shown on the left-hand chart over the last 6 months can be attributed to the reasons outlined previously in relation to the quarter-on-quarter variance. These included lower allocation of cost to capital and higher royalty expense. Lower cobalt prices during the period have also contributed since byproduct credits are a key component of our cash cost calculation.The second chart, on the right, demonstrates how operating cash flow lagged underlying EBITDA for the quarter. And this is attributed to timing of cash receipts, as can be seen in the large increase in receivables at quarter end. The underlying EBITDA margin for Nova increased to 70% for the quarter while the free cash flow margin was 38%.Moving to Slide 12, which highlights some of the work we are doing to optimize our operations, reduce costs and fulfill our desire to be proactively green. The image you see on this slide is of the Nova solar farm, where construction is well advanced and due to be completed in the December 2019 quarter. The solar farm is a 6-megawatt facility, which will be fully integrated with the existing diesel power plant at Nova. The solar farm will be capable of providing approximately 15% to 20% of Nova's total power requirements, displacing a significant volume of diesel fuel, thereby reducing both costs and emissions. The breakeven diesel price where the solar farm delivers a financial benefit is $0.65 per liter, demonstrating the excellent economics this project will deliver to Nova. We continue to explore options to further reduce our carbon emissions.Moving to Slide 13. As we have previously informed the market, our current nickel concentrate offtake agreements with BHP Nickel West and Glencore are expiring at the end of December 2019 and June 2020, respectively. In addition, our copper concentrate offtake agreement with Trafigura also expires at the end of December 2019. Over the past months, we have been actively tendering our offtake. As expected, the better market branding of Nova concentrate and the timing of nickel market supply have resulted in a highly competitive process. The process is at an advanced stage. And although we cannot announce the final outcome yet, we are pleased with contractual terms tendered, which deliver materially higher nickel payabilities than achieved at Nova historically.Moving to Slide 14. We have also progressed the finalization of our downstream processing prefeasibility study. This work stream has resulted in a design and delivery of a process flow sheet that is highly efficient, has low operating cost and has strong environmental credentials. A final decision is yet to be made on how we progress our downstream processing. However, the competitiveness of the nickel concentrate terms tendered are expected to have an impact on the final economics of the prefeasibility study. A detailed update on the concentrate offtake tender process and nickel sulfate downstream process will be made once binding offtake agreements have been signed.Moving to Slide 15. I will now discuss Tropicana, our gold asset which we co-own on 30-70 basis with our partner, AngloGold Ashanti.Moving to Slide 16. The consistent performance from Tropicana continued during the quarter with gold production at the top end of pro rata guidance. Cash costs and all-in sustaining costs were both higher quarter-on-quarter due to lower production. But I'll note that all-in sustaining costs are tracking better than our current year guidance range. Gold recoveries were in line with the previous quarter at 89.4%, while lower milled grades were the primary driver of lower production. CapEx is tracking below pro rata guidance. However, expenditure is expected to ramp higher over coming quarters as the Boston Shaker underground decline development completes and lateral and drill drive development commences.Moving to Slide 17, which sets out quarter-by-quarter production and cost performance from Tropicana over the last 4 quarters and highlights the consistent delivery from the AngloGold Ashanti team. Underlying EBITDA margins remained more or less steady quarter-on-quarter at 61% with slightly higher cost offset by higher realized gold prices. Free cash flow margins were also consistent at approximately 34%.Moving to Slide 18. Development of the Boston Shaker underground continues to plan with current development rates in line with those forecast in the feasibility study. Development of the first drill access drive has commenced, providing an additional heading going forward, which will enable increased development rates over the coming quarters.Moving to Slide 19, where I will spend a few minutes to update on the extensive work that is being done to unlock value through exploration.At Nova on Slide 20, we have had a very busy quarter with significant drilling on and around the Nova mining lease. A total of 5 diamond drill rigs have been testing, a range of 3D seismic features identified to be mafic/ultramafic intrusions as well as testing geophysical and geochemical targets within the 15-kilometer footprint of the Nova mining lease. Encouragingly, we continue to intersect Nova-style intrusive rocks with 3-phase disseminated sulphides within these interpreted intrusions.Moving to Slide 21. On the broader Fraser Range, works during the quarter continue to confirm the prospectivity for Nova-style mineralization as well as copper-zinc VMS and gold mineralization. Drilling at the Pion and Themis gold prospects continue to identify anomalous gold mineralization. An aircore infill drilling program is planned for the December 2019 quarter to further assess these prospects. At Libra and Aries, drilling intersected a thick package of low-grade copper-zinc mineralization similar to that previously identified on the Andromeda prospect. The number of targets generated to date demonstrates that our systematic approach to exploration is working. Importantly, new mafic/ultramafic complexes and exhalative rocks prospective for nickel sulphide and VMS mineralization are being identified up and down the Fraser Range project. Work will continue on these in coming quarters.Moving to Slide 22. Briefly at Lake Mackay, IGO has continued its geophysics and drilling activity across this large tenement package in the Northern Territory. Key activities included drilling of 31 holes over several electromagnetic and geochemical targets. Minor sulphides were intersected at all EM targets, while copper and gold were intersected over 750 meters of strike at the Phreaker prospect. Downhole EM indicates we have missed the more conductive parts of this system, providing an opportunity to retest with deeper drilling in the future.At the Arcee deposit -- sorry, prospect, strong gold results were returned with a highlight being 12 meters at 3.47 grams per tonne of gold from a 112 meters depth. Given the approaching end of the field season at Lake Mackay, activity during the December 2019 quarter will focus on rehabilitation of drill pads and the completion of metallurgical test work for the samples taken from the Grimlock Manganese-Nickel-Cobalt prospect.Moving to Slide 23, where we show our expanding footprint in the Kimberley region with new applications for tenure and renegotiated joint ventures in this highly prospective King Leopold and Halls Creek Orogens. IGO's landholding now extends beyond 11,500 square kilometers with the key targets being Nova-style nickel, copper and cobalt discoveries in a belt with proven magmatic nickel sulphide occurrences at Savannah and Merlin.Moving to Slide 24. Significant regional exploration upside potential exists at Tropicana, where the joint venture has approximately 3,000 square kilometers of tenure around the Tropicana mining lease. A number of prospects continue to be evaluated, as shown on the map. And in the 2020 calendar year, the joint venture expects to increase the rate of regional exploration.Ladies and gentlemen, I would now finish with some final comments before opening up the call for questions. Moving to Slide 26. The September 2019 quarter has been another strong period of operational and financial performance for IGO. Consistent production and the benefit of higher metals prices have resulted in outstanding financial returns, including record revenue and strong underlying EBITDA and free cash flow. Our balance sheet remain strong.Importantly, the tender process for our nickel and copper offtake is due to be completed imminently with materially improved offtake terms offered for our nickel sulphide concentrate. Across both our brownfields and greenfields exploration portfolio, we are progressing our work programs and continue to be excited about the prospect of a material discovery. We believe we have the people, the technology and the required financial commitment to maximize our chances of its success.Lastly, I want to once again acknowledge the tragic incident at Nova in September, which resulted in the fatality. We will learn from this incident. And we will continue the journey to ensure we have the right design, the right systems and process and the right culture and behavior to do better to ensure our people arrive home in as good or better condition than they left for work.Thank you for joining us on this call this morning. We will now open the call for questions. Thank you. Operator?
[Operator Instructions] Your first question comes from Michael Slifirski from Crédit Suisse.
Three quick ones for me if I may, please. First of all, with respect to Tropicana throughput, the throughput looked very, very good despite what seemed to be quite significant maintenance activity. Does that change your view as to what the mill is capable of doing on an annualized basis? Or was that exceedance during the September quarter, does it get caught back because of an even heavier maintenance schedule during December?
Yes. Michael, so essentially, yes, we managed to ramp up throughput through Tropicana during the quarter. So we averaged around about 1,003 -- 1,030 tonnes per hour. Again, that's a trade-off between recovery and throughput. For the following quarter, we're still working through what we'll run through, but it shows the capacity to run the Tropicana mill at a higher throughput than what originally was designed.
Yes. So first, my recollection is wrong, but my recollection is that you sort of talked in the past of it, post the expansion, being an 8.2 million tonne per annum annualized rate. But you're doing better than that. So should we still be thinking of it as 8.2? Or does that coarser grind mean that you've got a new number in mind?
It's still a work in progress. Essentially, most of the shutdown you saw in the quarter were at the back end, which didn't affect the mill throughput. We're going through some shuts in October that also affects throughput.
Okay. Secondly, with respect to Nova, I wasn't quite sure about the commentary there where you talked about some better-than-guided production. Is that just taking the full year and dividing it by 4? So is it pretty much as you expected? Or is it better?
Yes. Sure, Michael. The quarter was pretty much in line with our internal projections. And as you would expect from month-to-month, quarter-to-quarter, we're going to see variations as a result of the stoping sequence and where we might be mining during any period. For this particular quarter, we've had some high-grade stopes that carried over from the June quarter, and we benefited from that during the September quarter.
Performing as per expectation, not better than expectation?
Better than pro rata guidance based on -- taking the full year and dividing into 4 quarters.
Yes. Got it. Right. And then finally with respect to the payability negotiations, I know you can't talk specifics. But I guess when nickel prices are high, you'd expect improved payability. Otherwise, the dollar per pound the smelter gets goes up. So how does negotiations in terms of what you're giving away do you end up giving away broadly to some amount in a dollar per pound basis? Or is there actually some improvement on that?
The terms for concentrate offtake for nickel, they're sold on a binary number. They tend to be a range of payabilities over a range of nickel prices. And so when assessing offtake agreements between providers and over time, we tend to look at the slope of that curve. And the slope of that curve dictates a relatively consistent return back to the smelter.
Okay. So that curve hasn't changed. It's just you're on a better point in the curve at the moment.
Through the tender process, we're seeing a shift in this -- in the position of the curve on the chart.
Your next question comes from Sophie Spartalis from Bank of America Merrill Lynch.
Just a few questions on Nova, if I can. Firstly, the nickel payability in the quarter seemed to increase slightly from what was received last quarter. If you could just go through that detail. Also, the sales are quite a bit less than the production. So do we expect to catch up in this second quarter? Or how does that timing fit? And then just thirdly in terms of that lateral development, the reason why the cash cost increased in the quarter. Is that due to ramp-up over the remaining of the year or in the back half of the year, which is sort of underpinning your confidence that the cash costs will lower going forward and finally get within the guidance range?
Sophie, look, I'll answer about the nickel payabilities. You'll see -- if you do the calculations because we're quite transparent on what our payabilities are into that. For the quarter, we were between 72% and 73% payabilities on nickel versus 70%. And that's a direct function of where the nickel price has gone over the quarter. And payabilities are commonly staggered based on if you get above a particular U.S. dollar per tonne price range and all of a sudden, that increases by a certain percentage. In relation to -- I hope that answered that question there for payabilities. In relation...
Yes. So just before you go on, Scott, so we should use that 73% then for the coming quarter given when nickel prices are holding up?
You can -- well, I mean nickel price is holding up at the end of the September quarter, nickel -- the nickel price, spot price that we use to value our debtors was $17,200. Now we are close to the $16,000 a tonne. So I would factor in some sort of small reduction on payabilities for this quarter and ultimately dependent entirely on the price for the quarter that we get for nickel.And in terms of the sales question, I mean, we've had a look at the big increase in debtor at the end of the quarter. And I mean if you look at the volume sold, we've actually sold pretty much bang on the same tonnage of copper and nickel concentrates and that the increase is all about the price. So I'm not sure the point you're making then in relation to sales and production.Certainly, we expect to see those debtors reduced during the December quarter. Well, they are to get reduced by payments or they’ll come -- fall away somewhat as we get into the quotation period as that finalizes at what may be a lower price and we value at the end of September.
Okay. And then the C1 cost for Nova?
Yes. Just in relationship to capital development, so for example, this quarter, we completed around about 26 meters of capital development, which was -- represented only 3% of the total planned capital development we plan to commit to in FY '20.
Okay. And is that roughly split then over the remaining 3 quarters? Or is there a certain profile that we need to be aware of?
Maybe towards the back end. For example, the last quarter has around about 200 meters of capital development.
Okay. Great. And then can I just ask another question which is becoming quite topical? If you can just give us some insight into what's happening with -- in WA, just in regards to water availability. Is that becoming an issue over there? Do you expect it to become an issue, please?
Yes. We -- all of our water for Nova, we secure from ball fields in and around the Nova mining lease. And we're pumping water from distance of up to about 20-odd kilometers. All of the waters are highly saline. So where we need potable water, we put that through a reverse osmosis process. And we have capital which we expect to deploy during FY '20 to improve the capacity of our reverse osmosis unit to give us greater flexibility to produce more potable water. Based on what we project today, we have line of sight to sufficient water reserves for the life of mine. But we continue to do water exploration to build in redundancy to mitigate the risk of any of those water sources drying up earlier than expected.
And essentially, Sophie, it's about quality of water. There's no scarcity of water. It's the quality of water which ultimately drives the cost structure, and that's converting poor-quality water into good-quality water.
Your next question comes from Daniel Morgan from UBS.
Just wondering with Nova, we've seen a succession of better grades at Nova than reserve grade and as a result of, as you point out, pro rata production in the quarter has been above guidance. Just wondering to what extent -- given that you've drilled out the orebody quite comprehensively, you understand it very well. You do have a lot of development within the orebody. Just trying to get a feel for -- given the nickel price is high and you have been pulling out higher than reserve grade nickel, is this something that we could continue to see over the course of this year as a way to bring forward cash flows in the mine? Just want to understand the risks on the upside to guidance.
Sure. If you think about this holistically, we previously indicated that for the first 3 years of commercial -- or this 3-year period, FY '19, '20 and '21, we expect a range of about 27,000 to 30,000 tonnes of nickel in concentrate per year. So a fairly flat profile. And then because the grade of that production will be better-than-average reserve grade, the rest of the mine life will then be at a grade that's lower than the average reserve grade as we understand it today. As indicated earlier on the call, the grades -- the stoping sequence dictates the grade that we get in any particular month or quarter. And our -- and we will see that quarterly variation through the course of the year. In this first quarter, we benefited from some carryover high-grade stopes from the June quarter that weren't built into our original projections and thus delivered a little bit of a bonus for the September quarter.
Okay. And a follow-up question just on nickel offtake negotiations taking part. I understand that you are negotiating and you can't talk at length on them. But in principle, how are you looking at the terms for contracting? Have you narrowed that down in terms of number of years that you're going to offer for offtake?
Yes. As we indicated, we are on those very final stages where we would expect to reach a binding commitment imminently. And we'll provide a fulsome update to the market once we do finalize that -- a binding agreement. And at that time, we'll talk to the counterparty, the materiality of the change in the terms and the term of the agreement.
[Operator Instructions] Your next question comes from Ian Warden from Global Mining Research.
Just a question on strategy going forward with your exploration spend. You've been fairly aggressive. You've got a budget, I think, around $66 million, $70 million this year. And there's a lot of targets that you have. But I think in exploration, nothing's guaranteed. And you've had success with M&A in the past. At what point, if you don't have exploration success, do you start looking at M&A opportunities given that you're building quite a war chest over time?
Yes. No, a great question. As you rightly said, our brownfields, greenfields exploration total this year was about $66 million, and that's split roughly 40% brownfields and 60% greenfields. Most of the work we've done over the last couple of years on the greenfield side are particularly around Nova and on the Fraser Range. It's really about that first phase of exploration to understand whether we have targets. And we're now in that target set testing stage. And you actually see our ground positions on the Fraser Range start to reduce as we concentrate our activity around those targets and ultimately prospects. And that program of work will continue to mature.From -- and our goal as a business is to deliver that highly accretive organic growth for the business. But we're also pragmatic and we realize that the discovery dividend there may have a time horizon on it that's longer than 5 years. And therefore, to continue to sustain and grow the business, we need to also look at inorganic options to grow the business in the near term. And we have had an enduring work program, headed out by Andrew Eddowes, that looks at inorganic opportunities that are aligned to our strategic focus on the metals that are important to clean energy, so primarily nickel and copper. And as yet, we haven't seen the quality or the scale of inorganic opportunity that really turns our crank.
Your next question comes from Peter O'Connor from Shaw and Partners.
Just a follow-up to Daniel's question about the nickel sales agreement, which is pending. You mentioned counterparty, not counterparties. So I want to understand, is there one party involved here? Is that for all of nickel and copper? Or is it one counterparty for each? Can you give us any color on that? Was that...
That would be counterparties. And you don't get -- there's a bit of a gap between the number of parties that concentrate on this copper offtake space and the nickel offtake space. So that was probably just bad language on my part when I might have said counterparty.
Okay. The solar farm, the obvious question is why not bigger, if it works and it's got a good breakeven price. We've basically seen those in the last 3 days with FMG and BHP. You guys are leading the charges. Why not bigger?
Yes. That is a great question. And so this solar farm is sized to the maximum that we can have and integrated with the existing diesel power station because you need to have enough diesel set online to give that spinning reserve that you can power up the diesel supply in the event that there's a momentary drop-off in solar supply. So we've scaled it to integrate well with the diesel power station. The next step for us if we went bigger will be to invest in good scale batteries that will then provide that instantaneous capacity in the event that we had a shortfall in solar-generated power, which will then allow enough time to bring up spinning reserve on the diesel-fired power station.
I guess the current life of mine of the reserve of Nova wouldn't justify that. But is that why, as the region opens up, that becomes a more viable option?
Correct. And so we see 2 things. Number one is let's see the evidence that we achieve the output from the solar farm that we expect to get. So there will be a learning over the next 12 months. And then coupled with that, we'll look for progress on the journey to extend mine life at Nova. And then when those stars align, then we would look to expand solar capacity in the future. And aspirations long term would be to able to take ourselves off diesel altogether.
And another one was the investments mark-to-market, just remind me of the process you go through with that, the time frame and when and why.
Peter, we have to look at these monthly. So we'll be seeing these in accumulation of the quarterly's mark-to-market. So we take a look at the investments, the share price we have, and we calculate mark-to-market at quarter end and compare that with the start of the quarter. And prior quarter, we had a small devaluation. This quarter, we had a fairly large revaluation upwards. And the 2 together adds to about $6.3 million positive for the quarter when you're comparing quarter-on-quarter.
There are no further questions at this time. I'll now hand back to Mr. Bradford for closing remarks.
Ladies and gentlemen, once again, we appreciate your participation through the presentation and Q&A session today, and look forward to reconnecting at the half yearly presentation towards the end of January. Thank you very much.