Mount Gibson Iron Ltd

ASX:MGX

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for joining today's teleconference for the release of Mount Gibson Iron September Quarterly Activities Report. Mount Gibson's CEO, Peter Kerr, will lead today's discussion and is joined by COO, Scott de Kruijff; CFO, Gill Dobson; and External Relations Advisor, John Phaceas. Mr. Kerr will provide a brief overview, after which there will be an opportunity to ask questions. Due to time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via Mount Gibson website shortly after completion of today's teleconference.Go ahead please, Peter.

[Peter W. Kerr, Chief Executive Officer]

Thanks very much, Bree, and welcome all. Thanks for joining us to discuss our September quarter performance. This is my first call since taking over from Jim. It's pretty good to get off to a good start, being able to report another good quarter result. In particular, we've continued to make very good progress at Koolan Island, where we've now extracted over about 1/3 of the water in the main pit, with the seawall performing exactly as planned, and we're on track to start shipping late in the March quarter next year. I'll talk about Koolan a little more shortly, but I first would like to discuss the Mid-West business, which, you can see from our report, has continued to be a positive contributor. Sales from the Mid-West grew strongly in the quarter, up 19% to just over 1.1 million tonnes and in line with our annual guidance. Revenue for the quarter totaled AUD 65 million free on board, and that was up $20 million on the prior quarter, reflecting our higher volumes, some improved pricing and grades and an increased proportion of lump sales. So the lump sales totaled 607,000 tonnes, accounting for 53% of the sales, and the fines sales totaled 542,000 tonnes. The average grade of both lump and fines across the quarter was just over 60%, and we expect that to stay broadly the same over the remainder of the sales volumes from Iron Hill. Realized prices reflected both a slight improvement to the average headline 62% Fe CFR price, and in the quarter just gone, it was USD 67 a tonne. In the prior quarter, in June quarter, it was USD 65 a tonne. As well as the ongoing discounts on material grading below 62% iron. Our Iron Hill lump products realized an average price of USD 56 per tonne FOB in the quarter compared with $52 in the June quarter. And the fines material, lower than that, realized USD 28 a tonne, up from $26 in the preceding quarter.I'm also pleased to report that our site cash costs at Extension and Iron Hill remain good. They averaged AUD 37 FOB in the quarter, below our guidance range of $38 to $42. So at this stage, we keep in line with our guidance and keeping Iron Hill on track to be a good contributor over the remaining life of sales. And as a result of the improved pricing and cost performance, the Mid-West business generated positive operating cash flow, which was very pleasing, of AUD 18 million in the quarter, and that largely offset the money that we are investing in Koolan Island, which totaled $23 million. This resulted in our cash reserves and liquid investments declining by over $5 million in the quarter to AUD 452 million as at September 30, which is better than our internal plan. In line with our mining plans, mining will wrap up in the Iron Hill deposit in the next month or so, and sales will extend into early 2019, after which the operation will transition to closure. As indicated when we put out our full year results back in the middle of August, we have provision for total closure and rehabilitation costs of around $15 million, including redundancies, and roughly half of this amount will be spent this financial year.I'd also like to commend and congratulate our past and present teams right across the Mid-West business, from those at the mine site through to the Perenjori rail siding and the Geraldton Port, who have contributed to a very successful 15-year operational presence in the region. And in particular, one item worth noting is in the last month, the sites have achieved some significant safety milestones at the Extension Hill site, which is a 5-year Lost Time Injury-free milestone, and the team in the Geraldton Port is now -- or has now reached a 9-year LTI-free milestone. So those are wonderful safety results, which our teams can be very proud.Turning to Koolan. As already noted, we spent $23 million in the quarter, and about half of that amount was on construction and dewatering activities and the other half related to preproduction activities and equipment purchases. So that spend takes the total expense on the restart project since we commenced in May 2017 to approximately AUD 111 million. So we're now well into the preproduction and working capital build phase, and we'll be looking to commence mining shortly. And so in simple terms, the -- this phase ahead of us now accounts for the remaining approximately $65 million of the estimated $175 million peak cash flow that we are still projecting for Koolan prior to its initial sales. And importantly, we remain on track for those sales to commence towards the end of the March quarter, and today, the project, by our project plans, is about 88% complete.Dewatering is well advanced, and we have removed 8.5 million cubic meters of water out of the pit, so that's about 1/3 of the total. And the water level today is down about 20 meters and is only now about 7 meters above the bottom or the lowest point of the seepage barrier that we have installed within the seawall. So critically, the seawall is performing as designed, and we expect to be able to start at initial mining, initially in higher levels within the pit, in the next month.In parallel with the dewatering program, we continue to carry out rehabilitation activities on the footwall of the main pit in advance of mining commencement, with shotcreting and installation of avalanche mesh proceeding along the length of the footwall. And we have some photographs of that in our quarterly report annexure. Recruiting of the site workforce is also going very well, and we have had no shortage of quality applicants and, very pleasingly, a good number of former Koolan workers applying to return. So that's been very good.It's important to keep in mind that Koolan, as it gets going, will be Australia's highest-grade direct shipping hematite mine, and we just like to reinforce that the average ore grade in the reserve estimate is 65.5% iron, and the impurity levels are low. So this makes Koolan a unique investment opportunity for us, which looks to be well timed for the recent shift we've seen in market preference for high-grade products and the premium that is in the market for, in particular, 65% versus 62% iron products. Well, really a compelling investment using our conservative base case assumptions for iron ore prices and exchange rates, it will therefore benefit strongly from a substantial premium now in the iron ore price. So as we've noted in the quarterly, if you use, in our feasibility study estimates, the today 62% iron price of around 75 U.S. tonnes CFR and account exchange rates and high-grade premium, the NPV on a pretax basis for Koolan is over $900 million and the IRR is plus 90%. So they're terrific metrics, and of course, we've evaluated the project on much more conservative numbers from that. But no matter how we look at it, once we get going, we should be looking forward to achieving some good returns.So before I finish and invite questions, I'd like to acknowledge the contribution of my predecessor, Jim, Jim Beyer, over the last 7 years. Many of you know him. And as many of you are aware, over that time at Mount Gibson, the team has been very much [ syne ], and we've had our share of good and challenging times. But under Jim's leadership as CEO, we performed and improved, and Jim certainly has been pivotal to that strong position that we're in today. So we wish him all the best in his new endeavors.I'd also like to mention 2 people that are sitting with me here today: the newly appointed Chief Financial Officer, Gill Dobson; and Chief Operating Officer, Scott de Kruijff. A number of you will have already met Scott. He's been the head of our GM operations for some time. And both Gill and Scott have been major contributors to our performance, in particular, the insurance claim for the Koolan seawall and the work over the last 5 years on the sites, which has been -- and very good, from my perspective, to be able to fill the key roles in a seamless manner and from within the organization.So on that note, I'd like to say again that it's pleasing to report a good, strong start to 2019 financial year. And Bree, I'll now hand back to you for any questions that we may have.

[Operator]

[Operator Instructions] We have Michael Emery for questions.

[Michael Emery]

Peter, welcome to the job. You're doing a great job so far. Early days, I know, but we're looking to great results. Certainly, pleasing to see positive operating cash flow from the Mid-West operations. Just moving forward, I guess, obviously, you received a slightly higher price received than you guys were expecting initially, and the market is heading the right direction. Do you see any chance of opportunistic low-grade sales in the upcoming quarter as you sort of wind down the Mid-West operations? And I guess the next question as well on 2-part question is on your -- you mentioned the partial refund of the railway charges. Just seeing some -- what your sort of thoughts are if you're likely to see any of that refund happening.

[Peter W. Kerr, Chief Executive Officer]

Thanks, Michael. It hasn't been long in the slate, but it's been pretty smooth here because everyone here is involved in practically all parts of the business. So re your questions, the chance of low-grade sales, I guess there is a chance. The low-grade stockpile at Extension Hill, there are a number of them, and there's some slightly better ones and slightly lower-grade ones. We are now in the discussions with customers to see whether there's any potential for some of that stockpile to be marketed and monetized. At this stage, no certainty on that, and I think it really will depend on what happens to the iron ore price within the next few months. But maybe some of that material that are going to be crushed in a low-grade lump product produced offers some opportunity, but at this stage, I think we think it's only, at most, a handful of shipments and probably not a terribly long-standing opportunity for us. On the rail side of things, the way that works is, of course, that Mount Gibson has over the last X years paid for rail access, and quite a large component of that payment was used to refund and provide a return to the leaseholder of the rail for the capital that was originally installed. So to the extent of the uses -- use again in the future once we finish, then we receive a refund. And it's based on tonnage pulled by other passover section or defined sections of the rail, so it really is fully reliant on whether those other parties do that. But at this stage, based on what we see in the area, the cap amount of that refund, which is $35 million, although it is indexed, so it's an approximate cap at this stage, is likely to be, if current volumes continue, in over, say, 4 to 5 years. And that's about as specific as we can be on it at the moment because it's entirely dependent on the railing volumes of other parties.

[Operator]

At this stage, Peter, we don't have any further questions.

[Peter W. Kerr, Chief Executive Officer]

Okay. Well, look, if that's all, thank you all for listening in. And we look forward to catching up with you soon and get running through the December quarter and any important one for us as far as the startup of Koolan Island is concerned. Thank you and good day.