IGO Ltd

ASX:IGO

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for standing by, and welcome to the IGO Limited March Quarterly 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.

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

Thank you for joining us for our presentation of IGO's operating and financial results for the March 2020 quarter, which we released to the ASX this morning. 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 our competent person's statements. Of note, all currency amounts in the presentation today are in Australian dollars, unless otherwise noted.So moving to Slide 4. We commenced the March quarter in the midst of a national bushfire emergency with unprecedented bushfires on the East Coast and bushfires in the Dundas Shire that closed the Eyre Highway and the road routes to Esperance. These highways are the umbilical cords that we rely on at Nova for the delivery of our supplies and the export of our concentrate product. People from our teams assisted the fire response, and collectively, we focused on the safety of our people as well as our business continuity through that period.We ended the March quarter in the midst of a global pandemic which has changed the way we all live and work and which is having a profound impact on people, businesses and communities across the globe. Regrettably, many, many people have died. At IGO, our proactive response to COVID-19 has focused, first and foremost, on contributing to the slowing of the rate of infection, while safeguarding the health, safety and well-being of our people and protecting the broader community that hosts our operating activities. When we talk about well-being, this encompasses people's physical, mental and financial well-being.We've also focused on work programs to maintain our business continuity by evolving the way we work and embracing, at a minimum, guidelines from federal, state and local government. In collaboration with our people, we have implemented extensive measures across the business to mitigate the impact of COVID-19, and some of these measures are set out on this slide.I am proud of the way our team, under the leadership of our Chief Operating Officer, Matt Dusci, has responded to COVID-19 and how everyone in the business has embraced the changes that we have adopted during these challenging times. Pleasingly, we have not had a reported case of COVID-19 within the business, and we have maintained uninterrupted operations at both Nova and Tropicana.We have engaged closely with our supply chain and our customers to ensure the inputs for our operating and exploration activities and the market for our products remains open. While this is an evolving situation, we are confident that we have the procedures and protocols in place to continue to manage the impact of the COVID-19 pandemic on our people, our community and our business.Moving to Slide 5. On safety, more broadly, we have been working on a continuing program of improvement, focused on a safe work environment, fit-for-purpose management systems and improving safety behaviors. This activity has been in response to disappointing safety performance over the second half of the 2019 calendar year. The delivery of our safety improvement program is progressing broadly in line with plan, albeit that some aspects have been delayed due to the focus of our leadership teams on our COVID-19 response. Pleasingly, though, we have started to see indications of improvement in some of our lead safety metrics during the March quarter. Although COVID-19 has slowed some progress on the implementation of our safety improvement plan, it has contributed to a stronger level of care in the business and a strengthening of our overall safety culture and behavior.Moving to Slide 6, where we discuss our financial and operating highlights for the quarter. This has been another strong quarter for IGO, with production performance and disciplined management of costs positioning the business for the delivery of a strong 2020 financial year. At an operational level, Nova metal production was higher quarter-on-quarter and is tracking ahead of pro rata guidance, while costs remain in line with our guidance range. Gold production from Tropicana was lower quarter-on-quarter, in line with expectations guided to the market in our last quarterly report. We expect gold production for the 2020 financial year to remain within guidance and towards the lower end of that range.Financially, group revenue for the quarter was $188 million, EBITDA was $76 million and the balance sheet remains strong with a net cash position of $407 million.Moving to Slide 7, where we provide a summary of the financial results for the quarter. As previously discussed, group revenue for the quarter was $188 million, with key drivers being higher Nova metal production, offset by lower gold production from Tropicana and lower U.S. dollar-denominated commodity prices, particularly for nickel, offset in part by the depreciation of the Australian dollar over the same period.As guided in our December quarter results, quarter-on-quarter cash flows were also lower due to expected timing differences in sales receipts, amplified by the lower overall revenue. A scheduled debt repayment of $29 million due in March has been deferred to September as a precautionary measure to keep the balance sheet strong in response to the COVID-19 outbreak. As a result, debt remains unchanged at $57 million, while total cash at the end of the quarter increased to $464 million, and this is after the payment of $35 million in dividends on the 28th of February. Margins at a group level remain strong, with an EBITDA margin of 40% and a free cash flow margin of 26%.Moving to Slide 8, where we provide a reconciliation of cash between the current and the prior quarter. Free cash flows from Nova and Tropicana were both lower due to the factors discussed previously as well as working capital movements. Exploration costs of $13.7 million were lower quarter-on-quarter due to lower planned activity over the summer months, together with rescheduling of some of our activities in response to COVID-19. Finally, you can see here the $35 million payment with respect to our $0.06 interim dividend payment.Moving to Slide 9, where we provide a brief summary of the quarter-on-quarter variance in net profit after tax. In addition to the contributing factors on the earlier slides, the net profit after tax result was negatively impacted by a $6.8 million mark-to-market decrease in the value of investments, primarily due to the impact on equity prices resulting from the broad market selloff of equities in response to COVID-19. This compared to a $12.9 million increase in the prior quarter, accounting for the near $20 million variance on a quarter-by-quarter basis. This was somewhat offset by lower depreciation and amortization charges of $13.9 million, which was driven by lower Tropicana deferred stripping asset amortization and lower tax as a function of lower revenue as guided in our December quarter report.Moving to Slide 10. Over the next couple of slides, we will provide a brief overview of the performance from our Nova operation.Moving to Slide 11. Nova delivered an outstanding quarter with higher metal production and lower costs. Our Nova team should be proud, very proud, of their focus and delivery, particularly with the challenges presented by both bushfires and the COVID-19 pandemic during the quarter. Nova's nickel production for the quarter was the second highest project to date at just over 8,000 tonnes, while copper production was at a record level, a new record of 3,784 tonnes in concentrate. The higher metal production was achieved as a result of a 7% quarter-on-quarter increase in milled tonnes as a result of no major shutdowns during the quarter. Nickel recovery remained in line with the previous quarter at 86.9%. Pleasingly, copper recovery increased to 88.9% as a result of continuing success from the copper recovery improvement project.Cash costs were 19% lower quarter-on-quarter at $1.96 per payable pound of nickel as a result of the higher metal production. As mentioned earlier, Nova remains on track to deliver at or marginally above the top end of production guidance and the midpoint of our cost guidance for the 2020 financial year.Moving to Slide 12, where we highlight the consistent performance from Nova over the course of the last 4 quarters. Strong cash cost performance during the quarter was primarily attributed to higher metal production, offset by lower copper and cobalt prices. Total production costs were largely in line quarter-on-quarter. The quarterly cash cost result puts Nova's year-to-date cash cost at $2.32 per payable pound of nickel, positioning it well for a full year result within guidance.The revenue result at Nova benefited from higher payabilities as we started delivering product into new offtake agreements, which commenced at the start of January 2020. This was despite realized payabilities remaining in line quarter-on-quarter as a result of the lower commodity prices that occurred during the quarter. Underlying EBITDA was $61.6 million, representing a strong EBITDA margin of 53% for the quarter.Moving to Slide 13 for an overview of developments at Tropicana. We start on Slide 14. As we telegraphed to the market in the prior quarter, gold production from Tropicana was lower quarter-on-quarter as a planned shortfall in ore mined from the open pit was supplemented with approximately 1.1 million tonnes of run-of-mine stockpile feed at a grade of 1.27 grams per tonne of gold. While total tonnes remained in line quarter-on-quarter at a 8.5 million tonne per annum run rate, processing of stockpiled material resulted in a 20% lower milled grade for the quarter of 1.69 grams per tonne as compared to 2.12 grams per tonne of gold during the prior quarter. Gold recovery remained steady at 90.2%.Consistent with the lower production levels, cash costs rose by 26% to $877 per ounce, and all-in sustaining costs were up 37% to $1,303 per ounce. We expect the gold production rate trend from the March quarter to continue in the second quarter and, in fact, through the whole of the 2020 calendar year. Gold production for the 2020 financial year is therefore expected to be towards the lower end of the full year guidance range, and all-in sustaining costs are expected to be towards the upper end of the guidance range, as foreshadowed in our December quarter results. Total capital expenditure for Tropicana is currently expected to finish the full year within guidance range.Turning to Slide 15. On the left-hand chart, we illustrate the impact of the introduction of stockpiled ore to the mill and how this has affected quarterly production and costs. Despite lower production and gold sold, revenue from Tropicana was only 9% lower quarter-on-quarter at $69.8 million, positively impacted by higher Australian dollar gold prices. Average realized gold price for the quarter was AUD 2,104 per ounce, which is 6% higher than what was achieved in the prior quarter. Underlying EBITDA for the quarter was $39.9 million, resulting in a continuing strong EBITDA margin of 57%.Turning to Slide 16. The Boston Shaker underground mine remains on track to commence first gold production in the September 2020 quarter, with key underground infrastructure progressing according to schedule during the quarter. Capital expenditure for the 2020 financial year development is tracking in line with our guidance.Turning to Slide 17, where we'll commence an overview of our exploration activities for the quarter. And we'll start that on Slide 18. Exploration remains a long-term key growth driver for IGO, and we are committed to an enduring investment in exploration to discover the mines of the future. During the quarter, the ability of our team to commence various work programs was limited, initially due to high temperatures, then fire-related road closures, then heavy rain events in January and later in the quarter by the implementation of the COVID-19 response plans, which caused us to suspend activity in the Northern Territory, the Kimberley region of Western Australia and Greenland. All of which are areas with vulnerable communities.We care about the communities in which we operate. And at this time, we do not have an expected date for when we will be able to recommence on ground exploration in those areas. Thankfully, there is plenty of work to be done on the Fraser Range, and we have refocused the capacity of our whole team to furthering our neo Nova and Fraser Range work programs, where we are able to better control the movement of people and where we have the infrastructure in place to support our teams in the field.As a result of the lower level of activity in the quarter and continuing in the June quarter, our full year exploration expenditure is expected to be approximately $6 million lower than the midpoint of our 2020 financial year guidance.Turning to Slide 19 for a snapshot of the quarterly exploration activity around the Nova mine lease. Our team continued to drill various targets within a 20-kilometer radius of Nova, successfully intersecting mafic-ultramafic intrusions, the host rock for Nova-type mineralization outside the interpreted Nova Eye feature at prospects including Western Eye, Orion and Hunter. Our geophysics team were also active running moving-loop and down-hole EM surveys at prospects including Hubble, Kaon 2, Washington, Wineye and Copernicus. Most of these prospects will be drill tested during the June 2020 quarter, subject of course to future and potentially changing COVID-19 restrictions.Moving to Slide 20. On the broader Fraser Range, work was limited to geophysical test work curtailed by weather and COVID-19, as detailed earlier. Our moving-loop and down-hole EM crews continued to follow up anomalies generated by the SpectremAir airborne EM surveys and the 2019 aircore drilling program. Several new targets have been generated, including off-hole down-hole EM conductors at the HA1 and Regal prospects, which were first drill tested in 2019 and moving-loop EM conductors at the Particular and Entire prospects. Our current program also includes more than 100,000 meters of aircore drilling, which commenced in late March.I note the recent success from Legend Mining at their Mawson prospect, located approximately 170 kilometers from Nova. And this -- and combined with previous discoveries at Octagonal and Silver Knight by the Creasy Group, these continue to validate our commitment to the consolidation and exploration of the Fraser Range. The Fraser Range has all the hallmarks of being a new built, with the potential for multiple ore bodies, and we continue to be very excited about the quality of our targets and the prospects for discovery.Moving to Slide 21. At Tropicana, exploration activity continued to focus on resource definition at Havana, which will inform the pre-feasibility study into the potential underground mine beneath the Havana pit. This has the potential to be the second underground mine at Tropicana, leveraging off the learnings from the Boston Shaker underground mine, which is expected to produce first gold in the September 2020 quarter. Drill programs were also progressed at Boston Shaker and the Madras-Masala regional target. Our overall commitment to regional exploration on the Tropicana leases is expected to increase this year to a planned spend of approximately $11 million on a 100% basis.Turning to Slide 22. As we discussed previously, IGO is actively pursuing opportunities to deliver near- to medium-term growth through disciplined M&A with a focus on accretive, high-quality, long-life projects of scale that produce metals critical to clean energy. During the quarter, our takeover offer for Panoramic Resources formally lapsed. However, we continue to progress a number of work streams to assess new opportunities.Subsequent to the end of the quarter, we acquired a strategic stake in New Century Resources. Through this transaction, IGO will work with New Century to assess exploration opportunities near to the strategic infrastructure that New Century holds in Queensland as well as a number of potential business development opportunities that are aligned to our clean energy metals strategy. Work is already underway, and we are looking forward to working with the New Century team via this new partnership.Moving to Slide 23. Ladies and gentlemen, before I open the line for questions from analysts, I will make a number of concluding remarks on the next slide, Slide 24.The March quarter has not been without its challenges. However, I am proud of the way in which our team has quickly and pragmatically adjusted to the challenges presented including bushfires early in the quarter and our response to the COVID-19 pandemic through the rest of the quarter and continuing. Protecting our people's safety, health and well-being has been our priority, and I am pleased that the team has embraced new working arrangements and gotten on with the job of delivering value. We have maintained operations uninterrupted, and both Nova and Tropicana are on track to deliver within our 2020 financial year guidance range. Cost discipline at both operations has resulted in strong margins and continuing strong free cash flow.From a growth perspective, we continue to assess opportunities on multiple fronts. This includes the Boston Shaker underground development at Tropicana, which is expected to produce first gold in the September 2020 quarter; opportunities for additional underground mines at Tropicana under the Havana South and Tropicana pits; the delivery of enduring long-term growth from our commitment to exploration to discover the mines of the future; and lastly, not least, the delivery of near- to medium-term growth through disciplined M&A.In closing, while the COVID-19 situation is evolving, we are confident that we have the plans in place to minimize disruption and keep our people safe and well. Thank you for joining us on this call this morning. We will now open the call for questions. Thank you, operator.

[Operator]

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

[Daniel Morgan, Director and Analyst]

A question just on payability. So that's started to come through this quarter. I appreciate that that's only one of the contracts. The payability, from my calculation, looks like it's 72.3% in the quarter, which is only marginally up quarter-on-quarter. Just wondering, did the new contracts come in late in the quarter? Or just trying to get a feel for what the new contract is really.

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

Yes, sure. There are 2 things going on. One is we've got the first impact from new payabilities, and we won't have full impact until the September quarter. And then the second thing that's going on is that payabilities are based on a curve. So the lower the nickel price, the lower the payability; the higher the nickel price, the higher the payability. So what you see going on between the December and March quarters is the impact of both of those, a contribution from the new contracts and then a discount as a result of nickel price moving down the curve, delivering effectively a lower payability level on the new payability curve. Have I explained that well?

[Daniel Morgan, Director and Analyst]

Yes. I guess we are waiting on the next couple of quarters to get more visibility.

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

Yes. But [ after the March quarter ] it will be a lot easier.

[Daniel Morgan, Director and Analyst]

Also, at Nova, your grade over the past couple of quarters has been very high versus prior quarters also against reserve grade. It appears that you are preferentially putting higher-grade material through the mill. Just wondering, are you? And why are you going through this decision?

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

Yes. So we have been working to a planned mining schedule that mines the Nova and Bollinger underground according to a sequence that delivers the best long-term geotechnical outcome. And what that dictates is that we have had in the first few years of the mine life higher overall grades than we will have in the later years of the mine life. And the grade outcomes over the last couple of quarters have just been as a result of conforming to that long-term planning schedule.

[Daniel Morgan, Director and Analyst]

And just a quick follow-up on that. Was there any positive reconciliation at all? Or was this the grade that you expected to pull?

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

It's pretty much right on the money on the grade we expected to pull. And then going into the June quarter, we expect grades to pull back a little bit. Production will be a little bit softer, and we'll end the year right at the top end, if not slightly over the top end of our guidance range.

[Daniel Morgan, Director and Analyst]

Yes. And just last question, just on the discovery or exploration piece. Legend Mining in the region, that you are a shareholder in, have made some very interesting drilling results and released those to the market, as you highlighted in your presentation. Just wondering, are they just lucky relative to you guys? Or are they doing anything differently? Just wondering your perspectives on that.

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

Ultimately, exploration is about having the right ground, funding the level of exploration appropriately, having access to the right people and the right science and then, ultimately, there's a final element of luck. Legend have been working on the same bit of ground for quite a long time, and they've unpicked this over multiple years. And so the other contributing factor there is time.We're coming up the curve at a much faster rate because our programs on the Fraser Range only really got going a few years ago, 2 or 3 years ago. And we expect to be delivering subject, of course, to having the right ground positions and the right luck. We certainly know that we are financing it well. We're applying the right people. We're applying the right science. And we expect to be delivering similar discovery outcomes in the future.What the Legend results do is just validate this commitment we've had to the belt. Our -- the picture of success here for us is that we end up with multiple discoveries over 300 or 400 kilometers of strike. And now knowing that we've got ore grade mineralization at Legend's prospect, 170 kilometers north of Nova, that's a great validation of our conviction.

[Operator]

Your next question comes from Hayden Bairstow of Macquarie.

[Hayden Bairstow, Analyst]

Just a couple of things. Just back on Nova, just a follow-up question on these grades. I mean is this something we should be thinking about on these byproduct credits? Particularly copper continues to be miles above the reserve grade. Is that something that's been underestimated? Or is that parts of the ore body that just don't have a lot of copper in them, hence, it will fall over time?And then just on the New Century deal, I'm just interested in the decision to take such a large equity stake. This obviously gets you exposed to zinc, which doesn't really fit the [ bench of ] minerals things so much. But obviously, the exploration story, but was there an option to go into an exploration JV outside of just the direct equity investment?

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

Well, I'll get Matt to first answer the questions around the nickel-copper ratios and reconciliations there. And then I'll address the New Century question.

[Matt Dusci, Chief Operating Officer]

So essentially, copper and nickel are correlated. So what we do see is when we're mining higher nickel, we're also seeing stronger copper grades as well. So when nickel starts to drop off grades, then copper grade will also drop off as well. In terms of reconciliation, not seeing everything is conforming to our models, et cetera. So we're not seeing the changes associated with that.

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

That solved that question, Hayden?

[Hayden Bairstow, Analyst]

Yes, that's fine. The only follow-on I have on that is -- so was there a thought to change guidance just for the byproducts given you're basically almost in the range where you are, I think, in cobalt already?

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

Yes, yes, yes. We expect all metal -- for all metals, nickel, copper and cobalt, we'll be right at the top end of guidance or above, marginally above the top end of guidance for the year.

[Matt Dusci, Chief Operating Officer]

The other element there with copper is we've had more success in improving recoveries on copper than we have on nickel. But we are still working through those recovery improvement programs on nickel that we're hopeful to get the same sort of delta recovery increases that we've seen in copper as well.

[Hayden Bairstow, Analyst]

Okay. Great.

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

And then going back to New Century. There's 2 strings to the bow that I talked to there. One is the opportunity to collaborate with New Century and look for opportunities to leverage off the strategic infrastructure they have in Northwest Queensland. And some of that inter-strategic infrastructure you would never have the opportunity to rebuild that again. The pipeline to the coast is a classic example there. And the collaboration that we will do in that area is to -- is cast a wide net to look at what opportunities there may be, exploration and BD and that footprint that could deliver metals that are aligned with our clean energy metal strategy.And then the second string to our bow is the collaboration on a couple of other business development opportunities that the team there had identified outside their sphere of activities in Northwest Queensland, where the only way for IGO to participate was to team up and collaborate with New Century. And there's not a lot more I can say to that at this point in time because it's something that's not yet of an advanced enough stage. DD is incomplete. Transaction terms are unknown. And -- but in the fullness of time, we hope to -- we look forward to updating the market further about that.

[Operator]

There are no further questions at this time. I'll now hand back to Mr. Bradford for closing remarks.

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

Great. Thanks, operator. Ladies and gentlemen, once again, we appreciate your participation through the presentation and Q&A, and look forward to engaging again with you very soon. Stay safe, and have a good day.