IGO Ltd

ASX:IGO

Earnings Call Transcript 2020-Q2

[Operator]

Thank you for standing by and welcome to the IGO December Quarterly and Half Year Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Bradford, Managing Director and CEO. Please go ahead.

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

Thank you, operator. Good morning, everyone, and thank you for joining us today for our overview of the December quarter results, our audit-reviewed first half results and our updated mineral resource and ore reserve statements as at the 31st of December 2019, all of which were released to the market this morning.Before starting and as announced a few weeks ago, I note that we have changed the name of the company to IGO Limited and transitioned the company type from a no-liability, NL, company to a limited company. The new name aligns with how we identify ourselves, IGO. Joining me on the call today are Matt Dusci, our Chief Operating Officer; and Scott Steinkrug, our Chief Financial Officer, both of whom will be available to answer questions during the Q&A session at the end of the call.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, where I would like to comment on safety and our renewed focus across the business in this area. Safety is of paramount importance for the Board, leadership team and every single person in the business, and our renewed focus follows a period of disappointing performance over the last 6 months. We have strengthened our people resources in this area, refreshed our safety strategy and developed an implementation plan, which is being progressed.Moving to Slide 5. In late 2019, we reimagined our values to align these with our purpose, which is making a difference. These new values were co-created by the people in the business and are designed to underpin our behaviors and beliefs. One of these values is see beyond, which, among other things, references our understanding that our actions today will impact the world tomorrow. Clearly aligned with this is our ongoing commitment to sustainability. A highlight for us in the December quarter was the successful completion of the hybrid solar-diesel power facility at Nova, which will deliver a reduction of CO2 emissions by some 6,500 tonnes per year while also reducing our energy costs. In addition, it was pleasing to see IGO recognized through our admission to the Dow Jones Sustainability Index.Moving to Slide 6. We are pleased to be able to present another strong set of results from both Nova and Tropicana for the quarter, with both operations delivering metal production above the top end of pro rata 2020 financial year guidance. The strong production result has translated into excellent financial performance with group revenue for the December quarter at $212 million. Underlying EBITDA and free cash flow were $117 million and $135 million, respectively.Other highlights for the quarter, which I will talk to in more detail later in the presentation, included the signing of new offtake agreements on materially improved commercial terms and the announcement and lapse of the takeover offer for Panoramic.Moving to Slide 7. I'm pleased to report the business generated a record net profit after tax of $100 million for the first half. This reflects the quality of the Nova and Tropicana operations, both of which benefited from robust underlying commodity prices over the period. Underlying EBITDA and free cash flow remained strong. Importantly, the strong production performance over the first half from both Nova and Tropicana has positioned the business to deliver within full year production guidance.Moving to Slide 8, where we provide a detailed summary of the quarterly financials, which reflect lower earnings but improved cash flow. While operating performance was strong for the quarter, the 19% decrease in nickel price relative to the prior quarter impacted revenue and EBITDA, which were 20% and 24% lower, respectively, on a quarter-on-quarter basis. From a cash flow perspective, we recorded positive quarter-on-quarter movements to underlying free cash flow and operating cash flow. This is explained by the collection of prior quarter debtors during the reporting period. We will expect these timing differences to continue in the second half with free cash flow lower relative to EBITDA in the March 2020 quarter and higher relative to EBITDA in the June 2020 quarter. The balance sheet is strong with a closing cash position of $453 million and net cash of $395 million.Turning to Slide 9, where we show quarter-on-quarter movements in cash flow and the drivers behind the 41% increase in cash as at the end of December. Nova free cash flow generation during the quarter of $137 million was enhanced by the receipt of sales made in the prior quarter, as previously discussed, offset by lower realized nickel prices during the December quarter. Putting aside the noise related to the timing of these quarter-on-quarter sales receipts, the strong combined result for the half year demonstrates the continued strong generation of free cash flow, which has enabled the Board to declare a $0.06 per share unfranked dividend, which will be payable on the 28th of February 2020.Moving to Slide 10. Quarter-on-quarter, net profit after tax was lower due to the impact of lower nickel prices on revenue and EBITDA, as illustrated on this chart. An increase in depreciation and amortization relates primarily to Tropicana, where amortization charges increased by $9 million quarter-on-quarter due to mine scheduling changes, which accelerated the amortization of our deferred stripping assets. This higher rate is expected to be confined to the December quarter, and normalized rates should return in the March 2020 quarter.Moving to Slide 11, where we provide a summary of the financial results for the first half of the 2020 financial year. Of note is the record half yearly net profit after tax result, which exceeded $100 million and the 84% increase in underlying free cash flow generation when compared to the prior first half. Underlying free cash flow was a record $206 million. These outcomes are primarily attributable to higher production at Nova as well as higher prices for both nickel and gold in the first half of the 2020 financial year. Two scheduled debt repayments of $29 million remain to be paid in the March 2020 and in September 2020.Moving to Slide 12. Strong metal prices and operational outperformance, as discussed earlier, resulted in combined free cash flow from Nova and Tropicana of $256 million for the half year. We also spent $40 million on exploration and evaluation and $23 million on investments, including the Legend Mining subscription and Panoramic investment.Moving to Slide 13, where we set out the segment financial results for Nova and Tropicana, all of which were significantly improved relative to the prior first half. The improvement in Nova performance is attributed to moderate improvements in production, reduced costs and, most significantly, a 40% increase in realized nickel prices. At Tropicana, marginally lower gold production has been offset by higher gold prices.Turning to Slide 14. As I mentioned in the opening, we released our annual mineral resource and ore reserve report this morning. Substantial in situ metal remains at both Nova and Tropicana, which includes over 230,000 tonnes of nickel and 94,000 tonnes of copper in mineral resources at Nova, and over 7 million ounces of gold in mineral resource at Tropicana on 100% basis. The change in mineral resources and ore reserves since our last update as at 31st of December 2018 are primarily due to mining depletion. We expect that our ongoing commitment to exploration around Tropicana and Nova, which I will talk to later in the presentation, will continue to deliver mine life extensions.Turning to Slide 15. We will now discuss Nova's performance for the December quarter in greater detail.Moving to Slide 16. Metal production for the December quarter was marginally lower than the first quarter, explained by 9% lower milled tonnes offset in part by higher grades. Important[Audio Gap]Yes. Cash costs were down 6% quarter-on-quarter to $2.42 per payable pound of nickel, which resulted from lower overall production costs and royalties offset by the lower nickel and copper production. Recovery rates for nickel and copper remained in line with the previous quarter.Moving to Slide 17. While underlying EBITDA was lower than previous quarters, operating cash flow was bolstered during the quarter by the substantial receipt of sales proceeds from both the December quarter and the prior quarter. This led to the high operating cash flow relative to EBITDA, as illustrated on the right-hand chart. EBITDA margins at Nova remained healthy at 59%.Turning to Slide 18. As announced in early November, IGO completed a tender process for the Nova nickel and copper concentrate offtakes during the quarter, with new agreements being finalized with BHP Nickel West and Trafigura. The process was highly competitive with strong global interest for Nova's high-quality concentrates. This competitiveness resulted in materially improved commercial terms, which further enhances value for IGO shareholders. In parallel, we concluded the pre-feasibility study into domestic downstream nickel sulphate production. This project was a technical success and demonstrated that nickel concentrate could be converted directly into nickel sulphate efficiently and cost effectively. However, the improved commercial offtake terms that we achieved had the effect of raising the feedstock price into the process, which ultimately eroded the value of IGO progressing the study further. We are continuing to actively pursue partnership and collaboration opportunities to leverage our technology to transition into the commercial production of nickel sulphate.Moving to Slide 19. I will now review the quarterly performance of the Tropicana operation, which we own in joint venture with AngloGold Ashanti.Turning to Slide 20, where we highlight the gold production and all-in sustaining costs at Tropicana, both of which beat guidance for the quarter and the half year. Cash costs are tracking at the bottom end of guidance.For the December quarter, Tropicana produced 134,000 ounces, 8% higher than the first quarter, driven primarily by an increase in milled grade from 1.9 grams per tonne to 2.12 grams per tonne. Gold recoveries also increased relative to the prior quarter, which helped bolster gold production. Boston Shaker underground capital expenditure is currently tracking marginally behind pro rata guidance, but it is expected to catch up during the second half.Moving to Slide 21. The chart on the left demonstrates the continued, consistent performance from Tropicana, with production and costs remaining within a tight band over the last 4 quarters. This has been the result of the great streaming during this project -- this period, sorry, where we have mined more ore than required for the process plant, allowing the preferential processing of the higher-grade portion and stockpiling of the lower-grade portion. In the second half, we will commence processing some of the low-grade stockpiles, which will result in lower grades and, therefore, lower production and higher all-in sustaining costs for the second half.As highlighted in the chart on the right, operating cash flow has lagged underlying EBITDA for the quarter, which is attributable to the ongoing build of the run-of-mine ore stockpiles. We now have some 21.7 million tonnes of low-grade stockpiles, which we will commence processing in the second half.Moving to Slide 22, where we show the current status of the Boston Shaker underground mine. Progress has conformed to plan, and recent developments include the commencement of raiseboring and the first lateral development into ore. The project remains on schedule to deliver first gold during the September 2020 quarter.Moving to Slide 23, where I will discuss some of the highlights of our exploration and growth programs during the December quarter.Moving to Slide 24. Diamond drilling around Nova continued with 3 surface and 2 underground drill rigs for most of the December quarter. Of 17 holes drilled from surface and underground, 9 holes successfully intersected mafic-ultramafic intrusions containing variably disseminated magmatic nickel-copper sulphides. This is encouraging as it proves the existence of a large, active and mineralized intrusive system around Nova.Moving to Slide 25. Further afield on the Fraser Range, we progressed multiple work programs before the conclusion of the 2019 field season in early December. Several high-priority targets were drilled and tested during the quarter. At Mammoth, diamond drilling intersected a narrow zone of semi-massive nickel-copper sulphides within a mafic intrusion. Downhole electromagnetics then identified an off-hole conductor, which appears to be open down plunge. This target will be tested during the 2020 field season.At Hook, diamond drilling was completed to test an electromagnetic plate and anomalous copper and zinc geochemistry. While at Pike, drilling has identified 40 meters of gabbronorite, which is a favorable geology for Nova-style mineralization.Moving to Slide 26. At Lake Mackay in the Northern territory, the focus for the quarter was the Arcee and Grimlock prospects. Drilling at Arcee confirmed the orientation of previously identified gold mineralization, with drilling returning further positive gold intercepts. At Grimlock, the focus was on bench scale metallurgical test work of samples collected during 2019 to understand the leachability of this cobalt, nickel and manganese prospect. Promising metallurgical extractions in the solution exceeding 97% for cobalt and 85% for nickel were achieved from atmospheric leaching.Moving to Slide 27. In the Kimberley region of Western Australia, work focused on a large-scale aeromagnetic and radiometric survey across the West Kimberley, which will continue into the March 2020 quarter. In the East Kimberley, IGO has staked an additional 1,500 square kilometers of tenements, adding to our existing landholding across this prospective belt.Moving to Slide 28. Finally, at Tropicana, activity was primarily focused on resource definition drilling at Havana with the objective of upgrading the resource confidence and to assess the suitability of the mineralization for underground mining. Regionally, RC drilling was conducted at several targets following up on previously identified prospects. Promising results were received from New Zebra and Voodoo Child, with mineralization being intersected approximately 500 meters along strike from the existing prospect.Before I conclude, I would like to discuss, on Slide 29, the takeover offer we made for Panoramic Resources in early November 2019. We made the offer based on public information released by Panoramic and the conviction that the combination would deliver a win-win outcome for both IGO and Panoramic shareholders. To that end, we were pleased with the level of support for the transaction from shareholders of both companies. Following the offer opening, Panoramic made several public disclosures, including downgrading production and proceeding with an equity raise actions, which breached specific conditions of the IGO offer. While the Panoramic Board agreed to allow IGO and other parties to conduct detailed due diligence, the disclosures by Panoramic during the offer period resulted in an erosion of the value proposition for IGO.On this basis, IGO decided not to waive the breaches of conditions, and the offer subsequently lapsed on the 17th of January 2020. IGO remains focused on delivering value to shareholders, be that organically through discovery or inorganically via mergers and acquisition. The Panoramic takeover process demonstrates our disciplined approach to M&A and our ability to minimize the risk, while maximizing potential return for our shareholders.Moving to Slide 30. Ladies and gentlemen, thank you for your time during our combined results presentation for the December quarter and the first half. I will now make some concluding remarks on Slide 31.We are proud of the results that have been delivered across the business, both from an operational and financial perspective and with the various growth projects we have progressed. Operationally, production and cost performance from Nova and Tropicana has exceeded or been in line with guidance for the first half. We remain on track to meet full year production guidance. The free cash flow generation continues to impress, benefiting from strong production results and improved nickel and gold prices. We have also delivered improved earnings, continued strengthening of the balance sheet and increased cash returns to shareholders. The new concentrate offtake agreements signed in the quarter are expected to further enhance earnings and cash flow as the new agreements take effect in 2020.From a growth perspective, the focus remains on delivering discovery success to build the portfolio organically and to assess strategic opportunities to execute disciplined and value-accretive M&A.Thank you for joining us on the call this morning. We will now open the call for questions from analysts. Thank you, operator.

[Operator]

[Operator Instructions] Your first question comes from Michael Slifirski from Crédit Suisse.

[Michael Slifirski, Managing Director]

Four quick ones from me, if I may, please. First of all, with respect to Nova's costs in the first half, what are the main factors that drove costs exceeding guidance when production also exceeded guidance? I guess we're accustomed to elevated production beyond guidance delivering lower costs, not higher costs than guidance. So what were the main factors there, please?

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

Yes. So from a cost perspective, with Nova, we expected cash costs for the first half to be towards the top end of guidance and cash costs in the second half to be towards the bottom end of the guidance. And the key driver there was the degree of capital development we do in the second half compared to the first half, and that capital development in the second half reduces our operating cost profile. So we're on track to deliver that. In addition, we've seen higher overall nickel prices, which has meant that we've had a higher royalty payment during the first half, which has further pushed us towards the top end of that spend.

[Michael Slifirski, Managing Director]

Secondly, with respect to the Nova reserve, very minor adjustment beyond depletion. A couple of questions there. The change in the cost assumptions for the NSR, did that -- that seemed quite material, the development cost, up 37%; the incremental stoping, up 19%; the full attributable stoping costs, up 22.5%. Did those cost impacts -- one, what drove those year-on-year? And secondly, does that have any implication? Do they have any implication for reserves? Or was the reserves simply an adjustment on the mine dilution factor, as is outlined? And do those cost assumption increases have any implication for operating costs going forward?

[Matt Dusci, Chief Operating Officer]

Michael, it's Matt here. So you're correct. You saw an increase in those operating costs for NSR associated with NSR cutoffs. And those costs are associated with catching up in terms of ensuring they're aligned with where we're at in terms of delivery for calendar year '19.In terms of the impacts, you would have seen that had no impact to the reserve. And what that means and what that shows is the insensitive nature of Nova's reserve to any change on cost, et cetera. So they had -- although they looked material from an NSR point of view, they were immaterial to a reserve reporting pulp test.

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

And that just reflects the high-grade nature of the ore body and the fact that you're either in the mineralization or you're not.

[Michael Slifirski, Managing Director]

Okay. So the 6,000 tonnes of nickel lost from mine dilution factor adjustments, can you talk me through that a little bit, please?

[Matt Dusci, Chief Operating Officer]

Yes. So you're correct. So there's about 6,000 tonnes. That's mainly associated with changing our dilution and ore loss assumptions that we've seen through the calendar year '19 and applying that to the whole life of mine.

[Michael Slifirski, Managing Director]

So presumably, that's just the age of the ore body with -- maybe it's not a large proportion of tonnage impacted.

[Matt Dusci, Chief Operating Officer]

Correct. And where we've optimized some of the stopes to ensure some of the stopes were driving down a little bit of metal that didn't make a lot of sense. So it's just fine-tuning around the life of mine to shapes.

[Michael Slifirski, Managing Director]

And then finally, with respect to the Tropicana guidance, I think I probably missed guidance that the second half was going to be so much weaker. So can you help me understand that a little bit? So you're reverting from streaming back to run-of-mine and stockpiles. And how does that change the profile going forward? Is the implied -- I think the implied second half production rate, subject to what your guidance actually does mean, give or take, 200,000 ounces, maybe a little bit more, is that the sort of new normal run rate before the underground contributes?

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

Yes. That's correct. So we have a -- going forward, we will be processing low-grade stockpiles on a continuing basis, and we'll see an impact from that in the second half. And then that impact will be mitigated, to some extent, by the commencement of underground mining at Boston Shaker from the September 2020 quarter.

[Michael Slifirski, Managing Director]

Yes. Great. And one very last one, if I may, please. The deferral of commitment of capital to the RO plant, if I recall correctly, that was for concentrate washing in the event that you increased throughput and needed more clean water. Has something changed with the plant? Is that a deferral? Or is it a change in thinking and with respect to schedule, please?

[Matt Dusci, Chief Operating Officer]

Yes. Matt here again, Michael. So we have deferred that capital for the RO plant. Currently, we have a rental RO plant on site. They're washing our concentrate. So it's not a constraint to how we produce our metal or concentrate. What it is, is an operating cost improvement. That rental of that RO plant comes with a cost. The reason we've deferred that capital is, ultimately, if we can find better-quality water proximal to Nova, then we don't necessarily need to spend that sort of capital on that RO plant. So we're still in the process of trying to identify better-quality water, which will be an input into the design of the ultimate RO plant for the site.

[Operator]

[Operator Instructions] Your next question comes from Daniel Morgan from UBS.

[Daniel Morgan, Director and Analyst]

My question -- first question relates to the reserves changes again and just following on from what we heard from Michael's question earlier on. I guess your answer was saying that the ore body is relatively insensitive to some of these economic assumptions. And kind of just digging on that a little bit, so the -- it appears that the cobalt price has been -- cobalt price has been reduced a little bit, which, in part, has resulted, from my read of the report, in reducing the reserves. I'm just wondering if you have factored into your thinking the appreciable uplift in payability terms that you've got in this reserve release.

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

Yes. In terms of this reserve release, we -- they haven't captured their payabilities, but we know that they don't fundamentally change our reserve criteria.

[Daniel Morgan, Director and Analyst]

Right, because of the insensitive nature of the reserves because of their high grade.

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

The interesting factor of our -- of the reserve of -- or our deposit is relatively insensitive to changes in our modifying factors such as commodity price, FX, input assumptions like costs and, ultimately, that we've run a lot of sensitivities on that. So whatever we do at Nova in terms of cost reduction, et cetera, doesn't fundamentally change our reserve.

[Daniel Morgan, Director and Analyst]

Okay. That's loud and clear. And just revenue at Nova, just wondering if you can remind us how your revenue and provisional pricing works when you get to quarter end and how this will interrelate with the receivables balances. Can you just remind us on how that all works?

[Scott Steinkrug, Joint Company Secretary & CFO]

Yes, Daniel. So it's Scott here. You would have seen then in the quarterly that we did record our revaluations in quarter 2 that were different to the revaluations in quarter 1. Because of the falling nickel price, we will see a revaluation at the end of the half, and that's likely to be the order of about $10 million to $12 million. So that's going to impact then on cash flows in this quarter and, hence, why Peter made the comment as well. Contributing to this is why cash flows will be lower in quarter 3 and somewhat higher in quarter 4.And just to refresh on how the quotation on pricing actually works. So the reason cash flow lags the earnings side of things is because we get paid based on a future nickel price. So if we make a shipment in the current month of January, then we would get paid based on the price of nickel in March, for example. And then often, that payment may well come through then in March. It may well come through in April. So it's -- in a sense then, earnings give us a truer reflection of where we're at. And if you have a look at the half, you will see the underlying EBITDA and operating cash flow, they're virtually identical, but we have seen 2 large swings in quarter 1 and quarter 2.

[Daniel Morgan, Director and Analyst]

And then my last question just relates more strategically to the balance sheet. Net cash, in a very strong position that's building. You've decided not to proceed with the takeover of Panoramic, which might have either had a cash component at some point or it might have consumed cash in developing it. Just wondering what your plans are with this cash position and reflecting on potential capital returns via dividends or otherwise.

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

Yes. So we put our current capital allocation policy in place earlier in 2019. And if you think about that holistically, that results in a split of free cash, our pregrowth free cash, of approximately 20% into exploration, approximately 20% cash returns to shareholders, leaving about 60% going to the balance sheet to fund near- to medium-term growth. And the key growth drivers that are on the horizon for us is to -- being able to quickly implement any discovery success on the Fraser Range; and secondly, being able to incorporate cash into any value-accretive M&A that the company may be able to do. We've said to the market that our intention is to review that capital allocation policy again in early 2021. And if we don't see that use of proceeds either in the development of our organic projects or utilization in completion of any inorganic growth, then we would potentially increase the return to shareholders at that point in time.

[Daniel Morgan, Director and Analyst]

And just one final follow-up question on that. What is now the scope that you consider for potential M&A? And what I'm talking about is commodities, locations. I know you've spoken about this in the past, but just -- yes.

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

Yes. Yes. Sure. So our strategic focus is quite visible. We are focused on those clean energy metals, and we've long said that's primarily nickel and copper because we see those as being the 2 biggest metals demanded into that clean energy space. But we also look opportunistically across some of the other key commodities into clean energy, which could potentially include lithium and rare earths. And we know the areas where we are exploring. There are opportunities for those. So when our discovery team is in the field, we're searching broadly across -- or for the elements that could contribute to that clean energy space.From a jurisdictional point of view, we like Australia. And if we were to move outside Australia, it would be to jurisdictions that have similar mining investment fundamentals as what we enjoy here in Australia.

[Operator]

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 & Executive Director]

Ladies and gentlemen, once again, we appreciate your participation through this presentation and Q&A and wish you all the best for the day. Thank you.