Stanmore Resources Ltd

ASX:SMR

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Stanmore Resources Limited September 2024 Quarterly Activities Report. [Operator Instructions]

I would now like to hand the conference over to Marcelo Matos, Chief Executive Officer and Executive Director. Please go ahead.

[Marcelo Matos, executive]

Good morning, all. Thank you for joining us today as we discuss our quarterly activities report for the September quarter. It's been another solid set of production results, with third quarter salable production of 3.8 million tonnes, bringing the year-to-date salable production to 10.6 million tonnes. Closing inventories were healthy across both sites, which helps building a buffer to meet expected sales performance and derisk the wet weather later in the year.

There were numerous one-off factors contributing to cash flow movements in the quarter, with almost USD 330 million in gross cash outflows between M&A-related settlements, the payment of the interim dividend and expenditure with our ongoing capital investment program. Nonetheless, closing cash remained healthy at USD 322 million, which when accounting for the USD 350 million principal balance of the new term loan facility, has resulted in a net debt position of USD 28 million.

We are very pleased to have announced during the quarter an agreement for the potential mining of a designated area within the western part of Moranbah South JV tenure adjacent to our Isaac South exploration permit. This transaction is a significant milestone in securing a capital-efficient brownfield expansion opportunity for the Isaac complex, and we look forward to updating the market on further developments for this exciting, top priority project.

Jumping to the body of the report with our safety performance. We're very happy to report that no serious accidents were recorded in the quarter, resulting in the serious accident frequency rate reducing slightly to 0.46. This is compared to the latest industry average of 0.51. This is a credit to our site leadership teams and is a positive initial change in trend following the numerous safety initiatives conducted this year.

Moving on to a brief operational update at each site. South Walker Creek continues to deliver a strongly salable production of 1.6 million tonnes in both the June and the September quarters. Year-to-date, salable production sits at 6.4 million tonnes on an annualized basis, providing a strong position heading into the fourth quarter. This positions the operation nicely for the fourth quarter ahead of the scheduled of 14 days CHPP shutdown for the timing of the expansion [indiscernible] dense media cyclone module later in November.

Strip ratios ticked up comparatively to the June quarter, with the majority of capitalized box-cut volumes related to the Y-South pit development having been completed in the prior quarter ahead of first call in August. We are already mining good volumes out of our Y-South pit, with good washing results so far.

The MRA2C project continues to progress well, with 100% of our targeted bulk earthworks achieved in the quarter, and we are reaching the tail end of this important project, with 94% of total budgeted material movement now complete. The project remains ahead of schedule and under budget.

I recommend you also have a look at our [ linkage time lapse ] that we posted recently upon the completion of the construction works for the CHPP expansion. It's a significant milestone for the overall mine expansion and was completed with only a [ bum vein ] on a finger as an injury. This is a testament to the quality of our site management teams and reinforces our strong safety culture.

As mentioned earlier, we will now look to move ahead with the DMC module tie-in and positioning in the fourth quarter. And lastly, for South Walker, we are pleased to announce as part of this quarterly that the tender of our pre-strip mining services and combining pre-strip and coal mining, mining services contract is now complete. Golding, who was also the existing contractor for the services, has been awarded a new contract spanning a 5-year term from January 26, with the current contract being extended from August '25 to the end of 2025. We are glad to continue this partnership with Golding and its workforce.

Poitrel had an exceptional quarter, setting a quarterly ROM production record of 2.6 million tonnes since the inception of the mine in 2006. This was supported by a very strong September, where 1.2 million tonnes of ROM coal was mined, driven by continuous mine sequence planning, resulting in short haulage and benefiting from the improved productivity and availability of the brand new 600-tonne class [ diggers. ]

This record coal mining resulted in closing ROM inventories of over 1 million tonnes as of September 30, giving Poitrel also a high level of confidence to manage anywhere the disruptions in the fourth quarter and remaining on track with guided volumes.

The Ramp 10 box-cut project has met our expectations communicated previously to the market in the June quarterly, having been completed in the September quarter. This is ahead of our initial budget, which has estimated completion in 2025. It is a major milestone in securing the production, strip ratios and cost profile for Poitrel over the remaining of its life of mine.

Isaac Plains recorded the highest coal mining and sale of production volumes for the year, recovering well from the wet weather challenges early in the year to maintain volumes comfortably within our guided range. This was driven by improved equipment availability and productivity as well as continuing to progress mining operations in the Pit 5 North area.

The CHPP saw the highest quarterly feed for the year, supported by improved utilization of the primary crushing units. Briefly on the Millennium Complex. The Mavis Underground was safely closed within a quarter, and the mining services contractor has since demobilized from the site in October.

I'll now hand over to Shane to summarize our corporate activities and key cash flow items in the quarter.

[Shane Young, executive]

Thanks, Marcelo. It's certainly been a busy quarter, with various transactions reaching their conclusion. Kicking off with the refinance. Following the announcement that we have received binding commitments for a USD 350 million term loan and a USD 100 million revolving credit facility, we have swiftly progressed through long-form legal documentation and are pleased to report that the refinance was concluded and new term loan fully drawn 30th of September.

The USD 350 million proceeds were used to repay and retire a USD 210 million principal repayment, a principal balance of the BMC acquisition facility as well as accrued interest and the various refinance transaction costs. The net proceeds have been posted to the balance sheet while bolstering our liquidity position during a somewhat cloudy macroeconomic environment and supporting the strong 30 September closing cash position of USD 322 million.

As previously highlighted, the refinance is another significant milestone in Stanmore's maturity, reinforcing the fact that there is still support for pure-play metallurgical coal companies with major commercial debt providers. The new facilities have significantly reduced our interest margin and overall borrowing costs while simplifying our debt capital structure and enhancing balance sheet flexibility.

We would like to thank the incoming lenders for their support during the process, and we look forward to strengthening our relationship with them over the coming years.

As Marcelo have highlighted at the outset of this call, there have been several once-off cash flows impacting the quarter. These include the USD 150 million final contingent payment to BHP for the BMC acquisition, approximately USD 36 million paid in total for the Eagle Downs acquisition, USD 15 million paid for the Isaac South designated area agreement transaction, and importantly, the interim dividend of USD 40 million paid in September.

When factoring in an additional almost USD 40 million of capital spend in the quarter, primarily attributable to our ongoing improvement projects, the total noncash -- nonoperational cash outflow for the quarter was approximately USD 280 million. After consideration of Q3's positive operating cash flows, this ultimately materialized into a net debt position of USD 28 million as at September 30, a modest position considering the significant M&A-related payments made during the quarter.

Finally, as evidenced from Marcelo's earlier comments, each of our operating assets are well placed to meet their salable production targets for the full year. As such, we have no change to public guidance released to the market with our half year results in August.

I'll now hand back to Marcelo to conclude the call with a brief overview of market conditions before moving to Q&A.

[Marcelo Matos, executive]

Thanks, Shane. [indiscernible] market softened throughout the quarter, with the PLV hard coking coal index retreating to a low point of $180 price per tonne in early September as an ongoing glut of steel exports from China impacted demand for seaborne met coals. In fact, the September monthly data for steel exports released last week of 10.2 million tonnes was the highest since 2016, stoking fears around Chinese domestic demand and the impact on property sector.

Pleasingly, we since have seen conditions improve late in the quarter and into October as the announcement of Chinese stimulus measures have returned a degree of confidence in the market. You have seen the PLV hard coking coal retrace back to around USD 200 per tonne, with PCI relativities also strengthening to almost close to 80% month-to-date given the reasonably tight market for FOB Australia high-quality PCIs.

It's not unusual to experience a cyclically weaker third calendar quarter, and overall, we remain optimistic heading into the fourth quarter as Indian buying is expected to return following a prolonged monsoon season and supply usually faces challenges with the wet weather season. Nonetheless, economic uncertainty remains with the upcoming U.S. elections and ongoing tensions in the Middle East.

With that, I'll now hand over to the moderator so we can take your questions.

[Operator]

[Operator Instructions] The first question comes from Brett McKay from Petra Capital.

[Brett McKay, analyst]

Another really strong quarter. Congratulations. Just looking at the guidance for the year, I know you've kept it unchanged post the update at the half year, but it looks like you're tracking pretty strongly. There's only about 3 million tonnes salable production left to achieve the upper end of your guidance for the year.

Can you just give us a bit of a feel for the length of the shutdown at South Walker Creek, because that looks like you're sort of going to have a softer quarter due to that shutdown based on where guidance is tracking. Maybe just give us a bit of a feel of how long that outage will be to tie in the new part of the CHPP, because it looks like it's probably not going to be that long to account for the lower production volumes that sort of guidance is implying at this point.

[Marcelo Matos, executive]

Brett, shutdown is scheduled as a 14-day shut. So far, on track, as planned. No reasons to expect that would be any shorter or longer at this stage. Q3 was a pretty big quarter. We were expecting, as we've indicated in previous quarterlies, that we would be catching up reasonably well in ROM production, and of course, [indiscernible] coal flow overall on the second half. It will position as well, all going well, of course, ahead of the wet season to start next year also with healthy ROM stocks, but the fourth quarter is expected to be not as big as the third quarter.

And hence, the reason we've kept guidance unchanged. Yes, we have the 14-day shut, South Walker. We have, of course, more wet weather potential risk as part of the plan. But if anything, I mean, with the performance year-to-date, we risk a lot in Q4, of course, any potential wet weather, and of course, the [indiscernible] shut that was always expected.

[Brett McKay, analyst]

Just staying on South Walker with that mining contract renewal, can you give us a feel for the percentage increase that you ended up [indiscernible] what ended up being agreed. Is there any sort of color you can provide around that?

[Marcelo Matos, executive]

We have a -- yes. We haven't considered providing that color, Brett, yet. It's all pretty fresh. Actually, we signed and announced today, and our results were also announced today. As we indicated before, a reset was already expected, right? The original HIC contract was signed many years ago. The last renewal was 5 years ago, it was a very different world, a world of 0 interest rates.

There will be a fleet renewal component as part of the new contract as we indicated before, where we're actually going to hire 5 new fleets, trucks and excavator fleets, under operating lease, and we will provide this to the mining service contractor to maintain and operate.

It will be actually a competitive solution for us to do the [ operators ] ourselves, but of course, have the benefit of the fleet review from a performance standpoint. But I mean, obviously, it's a new fleet, a new world in terms of financing costs, so -- and of course, a bit of inflation since the last contract, although the last quarter all already included some rise and fall mechanisms.

What we've managed to do as well, Brett, was to extend the existing contract from August to the end of -- August '25 to December '25, so it gives us another full calendar year of the existing contract, and then the new contract kicking in from January '26.

I think -- hopefully, I mean going forward as we provide a bit more color on guidance, we should be able to give a bit more visibility on what to expect cost-wise at South Walker. But as I said, I think the new contract -- and we see the new contract as a better contract, okay, with a better commercial model, in our view, with the scheduled rates, with price at ROM matrices and more alliance between us and the contractor towards achieving better production and productivities in the current contract.

[Brett McKay, analyst]

Yes, okay. That makes sense. And just finally, obviously, it's been a massive year of investment in both organic -- sorry, inorganic bolt-on acquisitions around the area, but also organic capital projects.

Can you give us a sense, moving into 2025, outside of sort of inorganic opportunities that you may be considering and outside of sort of the Eagle Downs project, are there any other projects in the pipeline across the 3 main projects that you might look to pull the trigger on moving into 2025?

[Marcelo Matos, executive]

Not really. As we've been saying for a while, I think the investment campaign through -- let's say to strengthen the [indiscernible] assets and make them more resilient in the next few years. I think it's concluded with the South Walker MRA and the Y-South development, and of course, the expansion project, Poitrel. I think we've If we concluded the campaign and we're going to see years of mostly sustaining capital going forward. Poitrel was always the operation that -- where fleet replacement was expected.

We are ready. We have embarked on that. But as you know, we are doing that in the form of our operating leases, but there's no other significant project in Poitrel. So a few improvement opportunities there, but they are not, let's say, material as the ones that we just concluded. And in Isaac, it's a short life, and the main target for the Isaac Complex now is extend life beyond 2028, which is where Isaac now start to get uneconomic.

So all the focus for us in the short term will be on progressing the Isaac South development, which would be a game changer for Stanmore because it could prolong and extend life in the Isaac Complex for another 10, 15 years, at least, at pretty competitive strip ratio. So of course, that project needs a mining lease, and we need all the regulatory and environmental approvals. I'm confident that we will work closely with the regulators to progress that, given that it is a brownfield extension of an existing mine, and we hope to be able to implement that very competitively.

[Brett McKay, analyst]

What would you say is the next major milestone we should look out for there for Isaac South?

[Marcelo Matos, executive]

Working in progress, Brett, but of course, we need to do all the data acquisition to support the EIS submission, okay? We are talking about ecology works and groundwater, and a development plan that we can land on to be able to support those submissions. That's very important to get the ball rolling, both on state and federal levels. And that, of course, then moves ahead with everything else in parallel.

Like all the engineering work and design work for the infrastructure pieces, which is overall bridge over the Isaac River and pit development overall can run in parallel, but really the approvals work stream is where it's always been the critical part to implement the project. It's quite a simple approach to be implemented, similar to what we've done in Isaac Downs. And implementation itself can be pretty -- we could move with it pretty fast, but of course, we need the approvals to start disturbing and getting the project moving.

We should be able to give a bit more update, Brett, soon, about when exactly we're expecting submissions to the EIS being made and so on and what we think could be an indicative time table expected at the state and federal level. Of course, we don't control those time tables, but as far as our internal work and submissions, I think we can we can plan to provide a bit more color on that perhaps in the next few months or so.

[Operator]

The next question comes from Paul McTaggart from Citigroup.

[Paul McTaggart, analyst]

So I just wanted to follow up on India, and you're saying that they were kind of slow coming back into the market, and maybe haven't sort of got back at that traditional run rate. So if you maybe give us a little more color on that. And I wanted to also know, what proportion of your comp sales does India represent now?

[Marcelo Matos, executive]

India at the moment is around -- probably around the mid 20s, if you look at percentage of sales. We do expect that to grow given India's growth. And I mean, we have a bit of growth volume in South Walker, so that should absorb a bit of that growth. To your first point, I think the Indian market is too quiet. We would have expected that at this stage, it would already be -- would be buying more.

What's been driving the spot market, Paul, has been mostly some positions and trades done in the Chinese market. So yes, I think it's still unfortunately a bit quiet in India, but we will hope that they come back and start restocking more, especially ahead of the wet season here in the Southern Hemisphere, right? I think that given they're growing and they need to secure volumes and they've been run stocks reasonably low, we are hoping to see that happening towards the fourth quarter.

[Operator]

The next question comes from Glyn Lawcock from Barrenjoey.

[Glyn Lawcock, analyst]

Marcelo, you've sort of avoided the elephant in the room, but any comments you can make on the Anglo coal sale process that you're willing to share?

[Marcelo Matos, executive]

We don't comment on M&A, as you know. As far as the process is concerned, I think the process -- what I hear, the process is happening. We are probably down to final stage. Rumors are that they want to get concluded soon, sooner than later. And that's a highly competitive process. That's as much as I can comment at this stage.

[Glyn Lawcock, analyst]

Second question, just if I look at the third quarter production, I know you should never annualize a quarter, but -- because you're obviously going to have maintenance and weather, but that's 15 million tonnes of production against your guidance for this year of 12.8 million to 13.6 million. I mean where do you think the business is now operating? On a sustainable yearly basis now, are we in that 14 million to 15 million tonne range, do you think, now, as a business?

[Marcelo Matos, executive]

Look South Walker, it's pretty consistent. The bottleneck was always the plant. The plant could always do slightly more. And importantly, the plant has been performing well. The hours we are getting in the plant has been fantastic. So -- and we had the opportunity to do a bit of toe washing with our -- the producer next door as well during this fourth quarter, which helped, let's say, with the -- well, we are expecting now in this fourth quarter, which will help South Walker to be slightly above its usual 6 million type of mark.

So it's [indiscernible] where volumes being really outstanding, okay? A combination of a few things. I think we've -- first, we started the year with very healthy ROM stocks, which helped, of course, with good performance in the first half, but now also in the second half with Millennium closure. I think some of the windows that -- washing windows in Red Mountain that were expected to be used by Millennium, I think we had an opportunity to -- given the high ROM stocks in Poitrel to really wash some of that core and bring production up.

So I think that's -- it's been -- I mean, other than that, productivity overall, Poitrel has been outstanding. Isaac, it's pretty much on the mark. So probably Poitrel was the outstanding one, and South Walker as well, just really performing well at the wash plant with a little bit of toe washing opportunity. I think for next year, [indiscernible], I think obviously, we are looking now at what the potential is, and it's going to all going to be about the ramp-up of the South Walker, the expanded CHPP module, which we are confident that we shouldn't have an issue.

I think we may build a bit of a ramp-up curve in the first quarter as we restart the plant now in December. So we may not get to assume that they're going to get to the 7 million in 2025, given we're going to build a bit of a ramp-up profiling in '25 -- I'm sorry, in the first quarter. But Poitrel is the one where we are having a strong look at, because there's a bit of a -- I mean, there's always a bit of movement between whether we take the mix more towards PCI or coke.

If we produce a bit more PCI, we get a better yield. And of course, how much of those lower seams that produce thermal coal that we can wash, especially now where Millennium is no longer there. So we could have -- likely that we could have another reasonably high year in Poitrel next year, but I think we are very active now as part of the budget process for the calendar year. And hopefully, soon will provide guidance in the normal calendar that we work towards.

[Glyn Lawcock, analyst]

All right. No, I appreciate that. And just a couple of quick ones to follow up. Just on Isaac South, do you have any sense of what the scope of that looks like? I know there's a lot of things to do and you've only just acquired it, but I mean, what are you thinking? Is it a low single-digit tonnage operation? Or what does it look like, in your mind?

[Marcelo Matos, executive]

We'll be targeting something, at least around the 4 million type of ROM setup. It could potentially do more. That's what we're doing in Isaac Downs now, okay? So if you look at dragline and the fleet configuration we have now at Downs, we should be able to replicate that in Isaac South with at least 4 million ROM. But as I said, there is a potential to do more there. It is a low strip ratio deposit for the first, I would say, 10 years.

It is -- there will be a dragline pit. So they do potential actually stretch that. CHPP now is running around 600 tonnes an hour, could perform extremely well after we implemented the primary crusher with actually improved yields as well. So there is a potential to do 4 million or more. If we want to do substantially more than 4 million, we could either wash that in Red Mountain, or we could also debottleneck the large plant at Isaac Plains a little bit further.

So that's something we, of course, we need to land on as part of the studies. But I mean, as the resource itself would offer the ability to -- definitely to do the same 4 million or potentially slightly more, but of course, that would shorten the life of that pit as well. Project-wise, a very simple project, box-cut, pit development, haul roads to connect to Isaac Downs, a bridge over the Isaac River as part of that haulage path and just basic pit infrastructure for the South. It's around 6 kilometers, 5, 6 kilometers between Isaac Downs from the ROM pit in the Isaac Downs to the Isaac South.

[Glyn Lawcock, analyst]

And you see this as all incremental tonnage, Marcelo, to the business?

[Marcelo Matos, executive]

Not really. Isaac Downs, we would phase out around 2028. We've indicated before that from 2028, Isaac Downs would start to get -- the economics would start to get very challenging. And given it's a steep and dipping seam and we have seen splitting beyond at that point as well, so we've been working very hard for a while in extending life for Isaac. This was the very logical opportunity.

We already own the eastern part of that Isaac South block. The West and South was very important because that where the subcrop is, that's where the lowest strip ratio and logic box-cut would sit. And now, we have it after the transaction done, get the approvals done. But it is an extension of life for Isaac rather than incremental tonnes.

If we keep it at 4 million, it will be just -- hopefully, if we can stagger it at the end of Isaac Downs without discontinuity, hopefully, it will just be a continuation of 4 million tonnes ROM, close to 3 per [indiscernible] for 10, 15 years. As I said, there is a potential to maybe stretch a bit more. That's something we need time to work on.

[Operator]

[Operator Instructions] The next question comes from Tom Sartor from Morgans Financial.

[Tom Sartor, analyst]

Just had a quick couple on the market, actually. Just firstly, on realizations. Going back a while, we had pretty low, sort of 0.6 plus sort of realizations would be a much more solid history, but we've seen realizations improve a lot despite a weaker prime hard market.

And I'm curious, you mentioned the tightness in Aussie supply. And previously, there was a Russian sort of oversupply issue. I'm wondering how that realization piece has normalized lately, if it's actually more around Australia, or what insights you could provide there?

[Marcelo Matos, executive]

Tom, look, there's definitely a decoupling of Russia [indiscernible] are doing, let's say, if you look at the CFR China base and India to what the price is for Aussie FOB, high-quality PCIs. The market's been quiet, which is good on the FOB Australia PCI.

It is tight. We are not seeing lot of offering of high-quality PCI FOB Australia. As we've spoken before, we've seen Korea, for example, South Korea phasing out some Russian volumes and moving some of that purchase into Australian PCIs, which was expected to generate some tightness. I think it's a process that's probably still happening, given the second batch of sanctions in Korea.

So that kept the, let's say, the demand and the, obviously, FOB prices reasonably tight and quiet. Relativities are up. They were pretty high. Recently, they normalized a bit towards the mid-70s, which where we always thought they would go to, and now just sitting being between 75% and 80%.

It's very aligned with historical levels. It's not -- there's nothing unusual to where things are at now. But as we all know, there's still this, let's say, this market that's not very normal, right, from a trade flows standpoint with Russia only going to a very limited number of markets at different prices, and then at the end, the other markets were sanctioning Russian coals, buying mostly Aussie PCIs at the FOB levels.

[Tom Sartor, analyst]

And just on China stimulus. I know China is not a key end market for you, but drives index setting. Just curious if you've seen any change in tone amongst your North Asian customers around this monetary stimulus out of China and whether it's actually changed anything yet to speak of in tone or sentiment around your steel customers?

[Marcelo Matos, executive]

Not really. General feedback we've got, these stimulus measure was, I'd say, disappointing as it had in significant impact, a material impact into steel demand, let's say, especially in the short term. But we've seen a bit of it. I mean, these recent trades have pushed -- boosted PLVs a bit up. I mean the primary low vol is what's driving the market rather than the mid vols that normally move more into India.

China drives the low vol spot market more, and that's why we've seen more activity. On the way up was mostly positions being taken, okay, ahead of the fourth quarter and maybe with an expectation of the stimulus-driven improvements. But you saw in the last couple of days, we saw already some of those positions unwound and price moved slightly down. I think it's reasonably quiet.

Fortunately, we still supported [ 180, 190 ] levels. We've seen improvement. Market is tight, and we are ahead of now approaching a wet season, with India having to come back and buy a wet season in the Southern Hemisphere. And we'll see if the disruptions we've seen here in Queensland will have an impact as well in terms of keeping the market a bit tight. Because I think we'll see what happens now in the next couple of quarters, but usually, they are stronger quarters, right, with the tighter supply.

[Operator]

At this time, we're showing no further questions. I'll hand the conference back to Marcelo for any closing remarks.

[Marcelo Matos, executive]

Thanks, everyone, for your questions and for joining today's call. As always, I'd like to thank our employees, our contractors. It has been a remarkable quarter, and delivering a strong set of numbers has not been easy, with all the activity and the construction going on at all the 3 sites. We look forward to continue to engage with our shareholders in the coming weeks and months. Thanks, everyone, again for your support. Have a good day.