Ramelius Resources Ltd

ASX:RMS

Earnings Call Transcript 2021-Q2

[Operator]

Thank you for standing by, and welcome to the Ramelius Resources Quarterly Teleconference. [Operator Instructions]I would now like to hand the conference over to Mr. Mark Zeptner, Managing Director. Please go ahead.

[Mark William Zeptner, MD, CEO & Director]

Good morning, everyone. Thank you all for taking the time to dial in. Joining me, as usual, is CFO, Tim Manners. Today's call will differ slightly from the previous quarterly call in that we will run through the highlights from the period as well as touching on 2 other announcements released this week, those being the Tampia updates that went out on Monday and the project study updates that also went out this morning. Following that, we'll open the line to questions.As most of you will already be aware that December 2020 quarter was another very strong period for the company, with production guidance exceeded yet again. Production came in at 72,896 ounces, beating guidance range of 67,000 to 72,000 ounces, while all-in sustaining costs came in at $1,279 an ounce, in line with our guidance range of $1,250 to $1,350 an ounce.Combined with the September quarter contribution, Ramelius produced 144,240 ounces of gold for the first half of the financial year, exceeding the top end of the guidance range by some 2,240 ounces. Tim will go into a bit more detail on the financials shortly, but the balance sheet remains in excellent shape, with cash and bullion at $221.5 million at the end of the quarter after capital and exploration expenditure, the payment of $0.02 per share of fully franked dividend in October and a one-off stamp duty payment.We also paid down $8.2 million of debt, reducing the amount outstanding on our syndicated facility to $8.1 million, giving a net cash and gold position of $213.4 million. Needless to say, it was another really strong quarter in terms of operating cash flow generation.Turning to the March 2021 quarter, we are guiding for 65,000 to 70,000 ounces at an all-in sustaining cost range between $1,290 and $1,390 an ounce.Capital and project development for the quarter is expected to come in at approximately $35.6 million with payments associated with Tampia and the final part of the Eridanus Stage 2 cutback, among the bigger items.We have reiterated our full year 2021 guidance of 260,000 to 280,000 ounces at an all-in sustaining cost of $1,230 to $1,330 an ounce.I now hand over to Tim to expand.

[Timothy Peter Manners, Chief Financial Officer]

Thank you, Mark, and good morning, everyone. As Mark noted, gold production for the quarter was 72,896 ounces at an all-in sustaining cost of $1,279 per ounce. Gold sales were 77,537 ounces at an average realized price of $2,301 per ounce. The headroom above all-in sustaining cost was, therefore, $1,022 an ounce, generating $74.1 million in operating margins. The average realized price of $2,301 per ounce was from a combination of approximately 40,000 ounces sold at spot and 37,500 ounces delivered into the company's hedge book. During the quarter, we added a further 28,500 ounces of forward positions at an average price of AUD 2,529 per ounce, which left us with a closing book position at December 31 of 229,750 ounces at an average price of $2,288 per ounce. This continues our previously stated gradual runoff of the forward sales positions, which we expect to bring down to approximately 200,000 ounces by the end of the financial year, which represents less than 15% of the current life of mine production forecast. However, if the spot market does change materially one way or another, which in this current economic environment is always a possibility, then this strategy may be adjusted accordingly.As I mentioned, the margin above all-in sustaining costs generated $74.1 million in cash flow, which was, in part, invested back in the growth capital, particularly at Eridanus and at Tampia as well as just under $6 million in new mine exploration and resource development.Also included in this quarter's cash flow was the first payment to Evolution Mining of a portion of the deferred acquisition costs from the 2018 purchase of Edna May. It marks a very positive milestone for RMS and Edna May, as the project has now produced more gold than the originally modeled 200,000 ounce mineral inventory, which formed the base case valuation and the $38 million acquisition cost of the project. We are now well and truly enjoying the benefits of the upside we had hoped to reach when we acquired our second production center.Allowing for numerous less significant line items, such as working capital movement, the underlying increase in cash flow for the quarter was $34.5 million, and there is more detail on this on Page 17 of the quarterly report. Furthermore, as Mark mentioned, we paid $16.1 million in dividends in October and a one-off stamp duty payment of $10.7 million for last year's Spectrum acquisition.Notwithstanding the investments made and the growth opportunities across the business, the dividends returned to shareholders and further reduction in the company's debt of $8.2 million, our net cash and gold position still increased to $213.4 million at the end of December 2020. Needless to say, the RMS balance sheet remains extremely strong and positions the company well for the future opportunities that will no doubt arise.I'll now hand you back to Mark to discuss the other releases made earlier this week.

[Mark William Zeptner, MD, CEO & Director]

Thank you, Tim. On Monday, we were pleased to announce an agreement to purchase the remaining 10% of the Tampia project, along with the freehold farmland, on which the project is located. Tampia remains an important growth project within the Ramelius portfolio, and the significance of this transaction is that it really gives us certainty over this development timeline. We can now say with high confidence that production at Tampia will start early next financial year with on-site preparation works to commence virtually immediately.As outlined in the release, we'll pay a total consideration of $10.75 million, with the 10% being a mix of cash and shares, whilst the consideration for the freehold land is $6 million cash split over 2 payments with settlement coinciding with the second payment at the end of March.We've also been conducting a number of studies and other growth projects, and this morning, we provided an update on the progress of several of these.At Eridanus, currently, our flagship mine at Mt Magnet, we're conducting a scoping study on an underground bulk tonnage operation, but that pushed back completion date to 30th June this year in order to properly consider upside potential from adjacent targets as well as alternate portal positions that may result from the development of new open pit deposits in the area, such as Orion.Recent RC drilling at Orion, along strike from Eridanus, has returned encouraging intersections with further follow-up drilling and the generation of an initial resource model expected this March quarter.The diamond drilling program at Eridanus has not progressed quite as quickly as we had hoped mainly due to the shallow drill angle, but a second larger rig has been mobilized to site to address this. Five of the planned 12 holes have been drilled to date with the resource model to be updated once the program is completed and assays received. This will then enable completion of the scoping study.The Mt Magnet processing plant study, which was investigating the expansion of capacity from the current 2 million tonnes per annum to 2.4 million, has determined that at the current time, the project does not meet our financial hurdles.The expansion would have allowed approximately 2 million tonnes of stockpiles that are to be brought forward by approximately 3 quarters and delivered an operating cost saving of approximately $3.30 a tonne over the Life of Mine Plan, equating to a cash flow increase of $30 million over that same period. Given the wide range in capital and operating estimates, cost estimates at this stage, the project's return on investment is considered marginal.Further work on this expansion will be dependent on the outcome of the Eridanus underground study and its ability to deliver further tonnage to the Life of Mine profile.At Edna May, we've completed a scoping study on the Stage 3 open pit cutback with the results included in today's announcement. They are positive to the extent that we've progressed to the next stage, a pre-feasibility study, completion of which is scheduled for the end of June. Our work to date is pointed towards the option of continuing our high-grade underground mine with a Stage 3 open pit coming through at a later date, mining much of what is left. This is a superior utilization of Edna May's 1 million ounce resource and certainly delivers significant mine life extension to that part of the business out towards 10 years potentially.There's more work to do, such as the drilling of the Golden Point area and incorporating backfilling of pits into the schedule, both of which are likely to improve financials.In summary, we're pleased with the outcomes reached to date on these growth projects and what they mean for the company going forward, and we look forward to updating you further as each reaches completion.I'll now hand over to the operator to open the line for questions. Thank you, Harmony.

[Operator]

[Operator Instructions] Your first question comes from [ Richard Hart ] from [ Top Wheel ].

[Unknown Analyst]

Congratulations on a great quarter, again, and that's to you, Mark and Tim, but also to everyone who works for Ramelius. I know nothing happens without everyone pulling their weight. Thanks, Mark, too, for answering my question I asked 3 months ago in the last quarter about Tampia. It took to a Monday, but I really appreciate the answer to that question.My question now is actually what I've asked you a couple of times before about share price. Your answer to it has been a good one from my point of view as an investor because you always said your job is to make as much money as possible and concentrate on the main game and the share price will do what it will do. Having said that, is our share price simply a reflection of the current gold price? Or is there more to it, do you think?And secondly, to ask your crystal ball question, because you have so much knowledge in the industry, have you got any idea what's going to happen to the gold price?

[Mark William Zeptner, MD, CEO & Director]

Thanks, Richard. Yes, I'd like to think that the share price that -- and the decline we suffered in the recent times has a lot to do with the gold market and the sentiment around gold and the restart trade due to the vaccines associated with COVID rather than it being a Ramelius-specific issue. You could make some arguments that the delays that we've put forward last year, about 6 months' delay at Tampia, had some part to play. We obviously addressed that. But I think that was more minor when you consider that contribution of Tampia to the overall business.In terms of gold price, you'll never get a gold MD tell you what he thinks the gold price is going to do. We still believe that the fundamentals are sound, but there's been a lot of money printed, and there will be a lot more printed going forward. Real interest rates are very low, and we believe that's supportive of a good gold price going forward. And at the moment, at a AUD 2,400 an ounce gold price, we're certainly not complaining, but we don't think that the fundamental value of the business is currently reflected in the share price given what I've just said. I don't know, Tim, if you've got any further to add on that.

[Timothy Peter Manners, Chief Financial Officer]

Well, that is -- if an MD won't predict the gold price, I can assure you, CFO won't either. So Rich, I'd love to be able to shed more light on where I think the gold price is going or indeed what others are, but it's clearly a very difficult point of time. But as Mark said, at $2,400, all gold companies should be making good returns. So I think this price should hold up.

[Unknown Analyst]

Okay. Look, I appreciate your response. It's wonderfully diplomatic, which I respect. The only comment I would make is, I wouldn't expect any gold mining MD to make a prediction, but diggers and dealers award-winning one, I thought, might [indiscernible]. But thank you for everything you've done for me as a shareholder.

[Timothy Peter Manners, Chief Financial Officer]

Thanks, Richard.

[Mark William Zeptner, MD, CEO & Director]

Thanks, Richard.

[Operator]

Your next question comes from Andrew Hines from Shaw and Partners.

[Andrew Hines, Senior Analyst]

Another good quarter. Well done, Tim and Mark. A couple of questions for me. One is the decision not to proceed with the Mt Magnet expansion. I do note in the release you say that you would be reviewing sort of future options. What would have to change, do you think, for that expansion to go ahead?Second question is on the Eridanus underground study, which has now been deferred to the middle of the year. Is one of the options there that you put a portal for the Orion deposit and come in through there underground? Is that part of what's slowing down the decision process there?And then finally, a question for you, Tim. I note your hedge book is sort of rolling off a bit, slightly lower ounces on hedging. Are you actually adding to the hedge book at the moment? Or are you just getting the whole thing roll off?

[Mark William Zeptner, MD, CEO & Director]

Thanks for your questions, Andrew. On the Mt Magnet mill, at scoping study level, you're looking at plus or minus 30%. It's fair to say that the capital, given the deterioration of a lot of the in-place existing facilities at Mt Magnet that weren't refurbished back in 2012 are probably in a poorer condition than when, obviously, earlier studies were taking place. So the capital could be as much as from rather than $15 million could be as high as $30 million. And if you've got a $30 million cash flow in the current Life of Mine tonnage, then, therefore, the result is pretty marginal. So it's really around firming up numbers plus ideally additional tonnage, and we think the most obvious place for additional tonnage into the mine plan would be Eridanus.In terms of Eridanus and Orion, you're spot on, Orion is looking very much like open pit potential, which gives us a potential portal position not too far away, and that may allow us to start an underground operation a little earlier rather than waiting the 2 or 3 years you need to wait to get to the bottom of the Eridanus Stage 2 pit. That's all part of what we're looking at in terms of further options. Notwithstanding the fact that the diamond drilling has taken us a little longer, there's no point for us doing too much more work on the underground design until we have all that drilling completed and updated resource model.

[Timothy Peter Manners, Chief Financial Officer]

Andrew, on your question, we are still adding some positions to the hedge book. We are certainly running it off, as you mentioned. We're settling more than we are adding. Within the quarter, we added 28,500 ounces at an average price of $2,529. So we're selective, and when we do that, it's not an automatic thought process, but the net rundown is still the current plan, as we mentioned.

[Operator]

Your next question comes from Larry Hill from Phoenix Gold Fund.

[Larry Hill]

Mark and Tim, just a quick one around your 5-year plan that you put out maybe midyear and just around what substantiates keeping the production up at Mt Magnet. I note that you have a resource. You've got a lot of -- 1.8 million ounces of resource in open pits, and it's about pretty low conversion to reserve 300,000 ounces or so. So -- and of those resources, [ I bet ] you're in the indicated category. So can you maybe just explain maybe bringing some of that into reserve, open pit at Mt Magnet and whether that is within your 5-year plan?

[Mark William Zeptner, MD, CEO & Director]

Conversion of those existing resources is not in the current 5-year plan. And the raft of studies that we've undertaken or commenced at the start of the financial year is primarily designed around bringing a lot of the resource inventory to account, and I'm talking about specifically the Edna May resource, but also resources at Mt Magnet. We're obviously currently focused on Mt Magnet primarily at Eridanus, but there is work commencing in the background on the Hill 50, which is the Saturn and Hill 50, Morning Star resources, which would be the resources you're talking about.

[Larry Hill]

Yes.

[Mark William Zeptner, MD, CEO & Director]

When we get to them, we might get them. Ideally, we would have got to them by June 30, but some of the pushback on some of these current studies may force us to look at that in the second half of the year. But there's a real recognition that the 23% conversion rate is lower than we would like. And so there is some real effort and some resources behind converting some of those resources.

[Larry Hill]

Yes. And maybe just a general comment around costs just for the second half. I know you are sort of bang on with your half year production so far. And just anything you're seeing in the industry for the second half with this year's guidance on costs?

[Timothy Peter Manners, Chief Financial Officer]

Larry, it's Tim here. In terms of what we've put in the quarterly and have guided towards in the March quarter, the increase in costs certainly in quarter 3, nothing really specific. It's more simply the case of shifting costs, I guess, from those projects that are in development into an operating state, particularly Eridanus. And then those costs are expected to come back down to $1,240-ish per ounce in quarter 4. We're not seeing any sort of particular cost pressures at the moment. There are a few areas within the business from a labor perspective that are, I guess, harder to attract in this environment, particularly around the geology side of the business. But at this point, we're not seeing anything material come through and affect the underlying costs that we're running towards.

[Operator]

[Operator Instructions] Your next question comes from Jon Ogden from Eastern Value.

[Jon Ogden]

I've actually got 3 questions. The first relates to Eridanus with those amazing 4 holes that you have got there. I think they probably added $200 million of market cap to [ De Grey Mining ] as they announced those. Can you give us some kind of perspective on what that might mean in terms of what's the kind of ounce of production per year? And how many years do you have as of now? And then if just making a kind of guesstimate, what these holes could mean in terms of how many further years you might have or even if you might be able to increase the ounce of production per year? So that was the first one. So those holes are pretty [ damned amazing ]. I don't see many holes like that among any gold companies in Australia.The second one is just any updates on Vivien? Because, obviously, it's a bit hand to mouth. We're just kind of down to final months. I mean how is the drilling going on there at the moment? Has that come up with some extensions? Because, obviously, Vivien is quite a high grade, so it does really help things.And the third one is, you may not want to comment on this, but obviously, the share price is coming down across the board. Does that mean we're likely to see some kind of M&A? I saw an article yesterday in Mining News saying that why don't Silver Lake get together with Regis. Both of those are sort of sub-$2 billion. And if they join together, they have production about 700,000 ounces, which would equal Evolution, and they are on $8 billion enterprise value. So possibly the idea of getting together with somebody in a similar kind of production profile could really add a lot of value potentially. Otherwise, just general comments on whether some smaller target might be more interesting now, seeing share price is coming off. Yes. So those are the 3 I have for you.

[Mark William Zeptner, MD, CEO & Director]

I'll answer the first. So it's a relativity game, obviously, in terms of share prices. But if I talk about Eridanus, we have -- quite exciting what's happening at Eridanus. We have a current mine plan that includes roughly 3 years of open pit and then there's only an additional year of underground. And the underground production rate is, let's say, around 100,000 ounces sort of max per year. And that's contained within the existing 500,000 ounce resource. We would like to think that we could double that in terms of -- as our next sort of target post drill-out. So 100,000 ounces, and if we're able to add another 500,000 ounces, it'd be lovely to add sort of a 5-year underground mine to the back end of that current mine plan. So similar to what Stage 3 could do potentially at Edna May, take a 5-year playing out to 10, Eridanus has got the potential to do the same thing at Mt Magnet, we believe.In terms of Vivien, yes, we're in the middle of drilling, assaying and assessing. And we'll, hopefully, be able to come out with some results of that, I would probably say, by the late March quarter, early June quarter because as you quite rightly point out, the current stated completion date for Vivien is October. So we'll have to be making decisions based on our current drilling program. So you keep an eye on it. You'll see more soon on Vivien.In terms of M&A, Tim?

[Timothy Peter Manners, Chief Financial Officer]

Look, Jon, I think I read that article -- 1.5 plus 2 was 3.5, not 8. But that's certainly, one, if you like, aspect that is on our minds at the moment. You do see a lot of speculation around companies being put together to add scale and size. And the market apparently rewards you for that. And that is something that certainly we are open to if the valuations work. And I guess that's the bottom line, whether it's a small deal, a large deal, an acquisition or a merger, if you like, of equals, so to speak. The numbers have got -- have really got to stack up and the values got to work for -- in that sort of stuff, for example, both sets of shareholders, and indeed, they certainly can, [ notwithstanding ]. We obviously saw the Northern Star and Saracen merger and that's, obviously, gone through and that's a clear example of where these things can work.Mark mentioned, it is a relative game. We have had some fall, obviously, in the share price, but I think in general terms, so has everyone else. But I think at the end of the day, the M&A prospects are still there. There's opportunities there for us certainly to investigate. And we'll see what happens, I guess, in the short answer. We continue to look at all sorts of opportunities to create value.

[Operator]

Your next question comes from Michael Scantlebury from Euroz Hartleys.

[Michael Scantlebury, Resources Analyst]

Well done on another solid quarter. Just a couple of questions for me. Just around the CapEx on Page 3. CapEx $165 million. Previously, really, you had around $100 million. If you could add some comments around that to know just how that kind of CapEx influenced the previous 5-year mine plan guidance. What -- how much of that was already factored into those CapEx guidance?

[Mark William Zeptner, MD, CEO & Director]

I'll let you answer that one, Tim. But I can say one thing, Michael, there's no consideration of CapEx or ounces, for that fact, for Stage 3 in that mine plan in terms of the $165 million, where we might have talked about plus $100 million in terms of CapEx and that might have been just [ pure dirt ] movement by the time you consider things like relocation of some mill-related facilities, railroading of the -- one of the Shire roads, tails dams and that, unfortunately, get to a bit bigger number. But we'd like to think that for a 400,000-odd ounce return, you've got to put out some capital for that. It's bigger than we'd like, but it is what it is at this point. We'll try to improve the financials, as I said, through drilling and some smarter scheduling and backfilling of nearby pits. Tim, do you have anything to add on the CapEx front?

[Timothy Peter Manners, Chief Financial Officer]

No. Look, I think you've covered it, Mark. It's just -- we've got a higher level of granularity in this study than we had before, and the number is what we published. So no, nothing to add further.

[Michael Scantlebury, Resources Analyst]

All right. And maybe just an additional one. Just you mentioned that you got a $20 million payment to Evolution on the commitment of the Stage 3 CapEx. Is there any further costs that we should be -- or one-off payments going forward that we should be [indiscernible]?

[Mark William Zeptner, MD, CEO & Director]

No. Look, in relation to Stage 3, it's quite a specific sort of a description in the original agreement that once we embark upon Stage 3 cutback, there is the option to issue shares for the value of $20 million and/or cash. But in relation to Stage 3, no, there's nothing else.

[Operator]

[Operator Instructions] That does conclude our conference for today. Thank you for participating. You may now disconnect.

[Timothy Peter Manners, Chief Financial Officer]

Thank you.

[Mark William Zeptner, MD, CEO & Director]

Thank you, Harmony.