Mount Gibson Iron Ltd

ASX:MGX

Earnings Call Transcript 2020-Q3

[Operator]

Thank you for joining today's teleconference for the release of Mount Gibson Iron's quarterly activities report for the March quarter 2020. Mount Gibson's Chief Executive Officer, Peter Kerr, will be leading the discussion; and is joined by Financial Officer, Gill Dobson; Chief Operating Officer, Mark Mitchell; and External Relations Manager, 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's website shortly after completion of today's teleconference.Go ahead, please, Peter.

[Peter W. Kerr, Chief Executive Officer]

Thanks, Brie. Good morning all, and thanks for joining us to discuss Mount Gibson's March quarter activities report. As usual, I'll make a few starting comments, and then we'll just open up for Q&A.So by way of introduction, our operations performed reasonably well in the quarter, but we did face delays from heavy rainfall events at Koolan as well as travel and operating restrictions related to the COVID-19 virus, and we'll talk a bit more about those.Our total ore sales were 1 million tonnes, lower than the previous quarter, primarily due to the lower ore extraction rates at Koolan Island. Sales at Koolan totaled 439,000 wet tonnes of high-grade fines. And the average grade we sold was 65.6% iron, so keeping well in line with the ore reserve. And the sales from the Mid-West operations totaled 587,000 wet metric tonnes of low-grade material. So for the 9-month year-to-date period to the end of March, our total sales were 3.8 million tonnes. So aided by resilient iron ore prices and the weaker Australian dollar, our sales revenue for the quarter totaled approximately AUD 82 million FOB. All of our revenue and costs are reported on an FOB basis out of the relevant ports.Our total gross cash flow for the quarter was AUD 19 million before investment in a couple of things. Firstly, in capitalized waste stripping at Koolan of $16 million. And we think of that capitalized waste stripping as normal operating expenditure, and we capture that in our unit cash costs. But in addition to that, we also had the initial construction expenditure on the new Koolan airstrip of $5 million as well as some positive working capital movements. So as a result, we slightly increased the group's cash and investment reserves by $4 million to $402 million at quarter end. And obviously, we have a continuing strong balance sheet and no borrowings.Turning now to Koolan in a bit more detail. As we previously reported, the operation did suffer from a number of heavy wet weather events related to cyclones in the quarter. And while we have wet season planned, we expect these events and we have pumping systems in place, we were unable to avoid all the delays for dewatering and mining catch-up activities in the Main Pit. Severe rainfall events do result in large amounts of water being quickly funneled into the narrow base of that pit, and this takes time to remove and for the mining activities to get back on track. So this -- sorry, this resulted in reduced ore extraction and shipments during the quarter. And we also, obviously, in March, had the adverse impacts of the COVID-19-related changes.So while we're able to ensure that total tonnes mined at Koolan in the March quarter were within 10% of the December quarter levels, our unit cash costs per tonne sold, and it's a simple metric, it's simply adding up all of our operating costs and dividing by whatever we sell, they were temporarily increased, reflecting the high level of fixed cost on the island and the waste stripping requirement that's at elevated levels in the first 2 years of the mine life and the lower shipment volume that we made. Mining performance has continued to be more consistent into April and ore production is improving. While we have withdrawn our annual guidance, and that's given the recent performance and also the COVID-19 regulatory uncertainties that we face, we do expect Koolan's sales and costs in the June quarter to be improved from the March quarter.From a geotechnical perspective, the mine continues to perform to plan. The seawall is working to design and normal operational geotech activities on the footwall, and those activities comprise depressurization drilling, cable bolting, shot-creting and meshing, all of these things continue to progress well.In relation to COVID-19, I just wanted to give you a flavor of the type of things that we are doing and have done, in particular because it's been obviously a big issue for the resources sector across Australia in the last 2 months. Some of you will be aware that the Kimberley region, which includes Koolan and the towns of Broome and Derby was, in March, made the subject of not only the West Australian government's travel restrictions but also some stringent federal government biosecurity protections, and there are a handful of regions in Australia that have these extra protections. So as a result, we were required to negotiate with the regulatory authorities, in particular, the WA government and the police, and arrange -- and agree a range of detailed travel and operational changes to ensure that Koolan remains safe and was approved to continue. So the type of things we've done include pretravel screening and documentation; social distancing, as you would expect, during travel and on site; improved cleaning and personal hygiene measures, as has occurred right across the country; extended rosters to reduce travel movements. So we've actually transitioned the majority of the site workforce from a 2 weeks on, 1 week off roster to a temporary 4 weeks on and 2 weeks off roster as well as relocating a number of interstate personnel. And we have replaced the commercial flights that we had used from Perth to Broome and back now with a dedicated jet charter service between those 2 towns, twice per week. So a number of pretty important changes have occurred in a very short space of time. Site manning levels have also been reduced since mid-March, and we've deferred some nonessential work. And we've also, for obvious reasons, halted the hiring of personnel from interstate. So we're grateful that a number of our interstate resident workers have chosen to relocate to WA for the time being in order to be able to continue to work on Koolan Island.So in addition to the above, a special focus has also been required on-site to minimize contact between our personnel who fly in from Perth from locally resident personnel. And that's involving a number of changes just to try and increase separation and reduce the risk of any transmission if the virus does come into the Kimberley.In relation to the Koolan airstrip, construction is proceeding well, and we spent the first $5 million of the expected $20 million capital cost in the quarter and remain on track to commence flights onto that airstrip around October. It's a new 2.1-kilometer strip, and it will enable us to fly in our Perth-based FIFO workers direct to site on commercial jet aircraft, something we've never been able to do. It will have significant safety, well-being and productivity benefits, notably through reductions in the average transport time for our personnel. And also productivity-wise and cost-wise, it will have benefits over the life of the mine. The airstrip is now obviously considered a key part of our COVID-19 management plan, in particular because it enables us to avoid transitioning our Perth-based personnel through Broome. And therefore, we are pursuing some opportunities to try and expedite this project.In the Mid-West, we had another positive quarter, and we'll keep on delivering low-grade material during the June quarter and possibly into early next financial year. We shipped just under 0.6 million wet metric tonnes of material in the quarter, and the cash cost was AUD 41 per tonne sold FOB, which was in line with plan. So since we started the low-grade program in June last year, we've now sold 2.2 million tonnes, which is over double our original target, and we continue to investigate additional sales to extend into next financial year. So we're just looking at the extension program for that now. The business in the quarter generated cash flow of -- this is the Mid-West business, of AUD 5 million, and that comprised AUD 3 million from operations and AUD 2 million being the ongoing refund of historic rail charges. But the performance of that operation is a credit to our small Mid-West team and the contractor group. And like all other operations, that team has also adjusted to the necessary COVID-19 management requirements and travel restrictions. And it's been managed with limited impact on the business, and obviously, something that we continue to watch closely.In relation to unit cash costs, and arising from the comments I've already made, our all-in group cash costs were higher, obviously, at AUD 80 FOB in the quarter, and that was up from AUD 69 in the December quarter. And for the year-to-date, for the 9-month period, those cash costs are AUD 71. So that AUD 71 is actually in line with the guidance that we have now withdrawn, but obviously, comprised of a slightly different mix. We had originally expected slightly higher Koolan production and had not expected the way we've been able to extend in the Mid-West business. But the net result is for that cash cost. Those -- that number is due to temporarily higher costs at Koolan, which were AUD 127 per tonne FOB sold, and that includes all of the waste stripping investment. So reflecting that ongoing elevated waste movement whilst we move through the next 12 to 18 months, plus the wet season interruptions and primarily our resultant lower shipment tonnages.In relation to realized prices, we benefited from higher realized prices in the period. The Platts 62% Fe CFR benchmark index, so this is the delivered price in China, was steady from the previous quarter at USD 89 a tonne. And the 65% Index, which is relevant for us at Koolan Island, actually did improve from the previous quarter, where it was $98, it actually averaged $104 in the March quarter as the premium for high-grade material increased. And this high-grade premium is currently sitting today at around 12%. The demand from China appears to remain robust, and I suppose that's been well supported by other production and supply issues in Brazil, Canada and South Africa, where those countries have had their own wet season, wet weather impacts as well as COVID-19 shutdowns.Shipping freight rates for us were also lower in the March quarter with the rate for Panamax vessels from Koolan Island to China reducing from USD 10 to USD 12 a tonne shipped last year to around $8 to $9 a tonne shipped so far this year. So on a provisional basis, we realized an average price of USD 86 per dry metric tonne FOB that we sold for the Koolan high-grade fines, and that was up from USD 73 a tonne in the December quarter. Low-grade sales from the Mid-West also realized slightly improved average prices of USD 37 per tonne FOB for lump and USD 27 per tonne FOB for fines. We also benefited from the lower Australian dollar, which averaged just below USD 0.66 for the quarter compared with USD 0.68 in the December quarter. So to put that in context, our average realized price for our Koolan high-grade fines was around USD 130 per dry metric tonne FOB in the quarter.So in closing, while the March period presented a number of challenges and some relating to delays arising from weather and others to the impacts of COVID-19, we remain in a stable and financially strong position to deliver on our long-term objectives.So that's a short summary of our activities in the quarter. And so, Brie, I'll now hand back to you for any questions that may be there.[Technical Difficulty]Sorry, Brie, can you hear me?

[Operator]

Thanks so much, Peter. Good morning, everyone. I'm Brie from Express Virtual Meetings, and I'll be managing your Q&A session today. [Operator Instructions] Firstly, we have Hayden Bairstow from Macquarie.

[Hayden Bairstow, Analyst]

Maybe just a couple of ones. Firstly, just on Koolan. I mean you've obviously provided all that life of mine guidance and everything. Can you just give us an idea, though, when stripping actually does start to tail off? Because obviously once it does, the cash generation is massive. Just want to get an idea of, given what you've had in a few delays and everything else, what sort of quarter that looks like we're going to start seeing the drop? Because from memory, there was actually a step-up from here. It was in the high stripping for the next few quarters. I just want an idea when that starts tailing off. And then at Extension Hill, how long can we keep punching out sort of 0.5 million tonnes a quarter of this stuff?

[Peter W. Kerr, Chief Executive Officer]

Good questions. Okay. So on the first one, Hayden, which is the key one for Koolan, so you're spot on in that the life of mine plan stripping requirement actually does step up and the ore steps down a little bit in the second year. So we're basically heading into that second year now. What we, though, have had is that the ore quantities that we had targeted to get out in the first year weren't quite there, so that will fall over into the second year. The life of mine plans we're working on now, and they're continually being optimized, indicates we've basically got another 12 to 18 months of the elevated stripping requirements. Towards the end of that 18-month period, it might fall a little, but that's the kind of time frame, that's exactly the same as that life of mine plan we published some time ago.Re: Extension Hill, that's a never-ending question. We're actually still looking at options for material that is on the fringes of the Extension Hill pit and also historic stockpiled subgrade material that were adjacent to the Iron Hill deposit that we mined a year or 2 ago. And so we may well have the possibility of another 3 to 6 months after 30 June. It's difficult to really reliably predict because we sell in batches of 2 or 3 months ahead because we are selling at fixed prices. And we don't want to be in a position where we've got a price that's diverging wildly from what the market price might be. So that seems to have worked for a number of our customers. So that's the current plan, and we can't really say any more than that because at this stage, we're not quite sure.

[Hayden Bairstow, Analyst]

Yes. Okay. And just back on Koolan. I mean it's an 18-month extended stripping, but it's not a flat profile either, is it? It's sort of -- it's a bit more down, then it eases off next year?

[Peter W. Kerr, Chief Executive Officer]

That's right. So the 2021 financial year has a reasonable amount of waste, certainly in the first half of the year. The second half of the year, we're looking at optimization of that, but that's exactly per that mine plan that we had. So the way we think of it is the 12 months ahead of us now does require a fair waste movement, and that's what we want to try and synchronize with as smooth an ore delivery as we can give now. We will update on guidance for that, not at the moment, but once we've done that work early in the new year, like we normally do.

[Hayden Bairstow, Analyst]

Okay. And just lastly, on the lump, does that start coming in after these big strip's done? You get a little bit of lump out there or not?

[Peter W. Kerr, Chief Executive Officer]

Look, we hope so. The lump, I think, will be a function of -- there are some -- along strike of the Main Pit, there are some slightly lower-grade areas where the material is harder, and there are also satellite deposits that we're looking to access. Now that could provide some input into lump product. So at the moment, the little bit of lump that's coming out is, in effect, being crushed to deal with fines -- they're crushed down to fines. So our fines product is a good sizing distribution within it, but we're looking at when that lump will be. But at this point in time, it's not certain as to which month or quarter it will be in. It's something that's in our plan.

[Operator]

Next, we have Paul McTaggart from Citigroup.

[Paul Joseph McTaggart, Director and Metals & Mining Analyst]

So I just want to follow-up, what do the -- how do the additional federal government security requirements come about at Koolan? What's driving that? Is it a particular biodiversity? What are the [ things ] to be checked and what's behind that?

[Peter W. Kerr, Chief Executive Officer]

It's not specific for Koolan, Paul. It's actually the Kimberley region at WA is 1 of about 4 regions in March in the country that were identified as being biosecurity sensitive. And so because we're flying people through Broome, we immediately had the shutters go up, in effect, from the state government and needed to provide a whole lot of information regarding what we do to ensure that our people who are transiting through Broome, and ensure that our people who are working on Koolan Island remain, in effect, separate from or minimize their links with people from the Kimberley. And at the same time, the state government here announced some quite stringent protections for a number of remote aboriginal communities in the Kimberley. So there are actually quite a few restrictions about people not allowed to go into, in 2 of those communities, or even if they live in them and they go out of them, there are restrictions on them going back at times. So it's just an added set of rules on top of the travel restrictions within the regions of Western Australia that the WA government has introduced.

[Paul Joseph McTaggart, Director and Metals & Mining Analyst]

And all of those said, those restrictions, they obviously add to costs, trying to fly -- specific managed flights, et cetera. Can you give us some kind of sense of how much that might have added to your cost structure?

[Peter W. Kerr, Chief Executive Officer]

Look, it will certainly add something. Part of the reason for the guidance withdrawal is it's quite hard to estimate because we are having a period of time where the rules are changing for us and finessing of our practices every few days. But for instance, I wouldn't say there's one big identified hit on cost. It's a whole range of things. So instead of transporting peoples up to Broome on commercial airline flights. Those flights actually ceased and now are only -- 1 or 2 are being put back in place. But those flights that we now take, people have to be spaced out on the airplane. So instead of 5 people on a row of seats, you get 2 or 3. So it means that the unit cost of transport rises. The other thing that's happening is we are trying to separate out our teams on the site, change a number of practices with meal times, all those kinds of things that you would expect. So those types of changes just impact productivity more than higher costs directly. But obviously, the productivity change is important for us because a large cost on the island is fixed. So if we're just moving fewer tonnes or selling fewer tonnes, then it goes over those areas. So I know it's a long-winded wordy answer, but I don't have a specific percentage for you now. We're doing that work to try and minimize the change. It may not be much in the end, but we want to make sure that we've got it properly planned. We've made these changes really quickly in the matter of a few weeks. And so when that happens, you just simply do things to ensure we can continue to operate and deal with finessing the costs later.

[Operator]

There's no further questions, Peter.

[Peter W. Kerr, Chief Executive Officer]

Okay. All right. Well, thanks, Brie. Thanks all. Thanks, Hayden and Paul. And if anyone does have any questions, please do come through either John Phaceas or myself. Details are on the quarterly report, and we'll speak to you next time. Thanks.