Sandfire Resources Ltd
ASX:SFR
Earnings Call Analysis
Q2-2024 Analysis
Sandfire Resources Ltd
CEO Brendan Harris opened the Sandfire Resources earnings call with a nod to safety, achieving a total recordable injury frequency of 1.5, emphasizing a commitment to a modernized risk management system. Acknowledging Indigenous communities, he outlined the signing of a crucial framework agreement geared towards cultural heritage protection. Sustainability intertwined with safety as a core value, with measures to ensure environmental wellbeing and community development. Operationally, the quarter witnessed robust numbers; the company reiterated its guidance for FY '24 projecting over 50% growth in copper production in the subsequent two-year period.
An increase in copper equivalent production to 32,400 tonnes resulted in revenues of $217 million and an EBITDA of $84 million, marking a solid operating margin close to 40%. Notably, net debt saw a slight increase to $476 million, attributed to the expansion efforts at the Motheo project. Here, the low-cost strategy for expansion was underscored. At MATSA, performance nearly matched plans with record underground mining rates, stability in operating costs, and a commitment to a solar energy agreement with Endesa to reduce costs in the future. Moreover, the exploration teams were actively pursuing to significantly enhance the material reserves at MATSA, which remains a prime area of potential value enhancement.
Motheo was highlighted as the growth engine, with recent commissioning of new infrastructure to support the ramp-up in production capacity. Amidst operations scaling up, the company reported an increase in underlying operating costs to AUD 37 million for the quarter. Keeping consistent with growth targets, Sandfire also celebrated the initiation of pre-stripping at the A4 open pit. Regarding exploration, Sandfire has reignited drilling activities at A4 and A1, indicating vast unexplored potential, particularly in the Kalahari Copper Belt.
For DeGrussa, following the cessation of processing activities, Sandfire chose to focus on retention and rehabilitation, a step which would result in a lasting presence in the region and enable extended relations with the Yugunga-Nya community. The outlook for copper was framed positively as market conditions point to a shortfall in supply versus expectations, placing Sandfire in a strategic position to address the burgeoning demand with significant production growth on the horizon.
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Hello, and good morning. I'd like to acknowledge the traditional owners of the land on which we stand, the Whadjuk people of the Noongar nation, as well as the First Nations peoples of the lands on which Sandfire conducts its business. We pay our respects to their elders and leaders, past, present and emerging.
My name is Brendan Harris, CEO of Sandfire Resources. I'm joined here in Perth by Megan Jansen, our Chief Financial Officer, Jason Grace; our Chief Operating Officer; Richard Holmes; our Chief Development Officer; and Cath Bozanich, our Chief Sustainability Officer.
Starting with safety, as we always do. We finished the period with a total recordable injury frequency of 1.5, up from our record low of 1.2 at the end of September, but broadly aligned with the injury frequency of 1.6, recorded at the end of the prior financial year. We are working hard to modernize and enhance our approach to risk management as we look to further define and embed the Sandfire way of working, and of course, nothing is more important than the health and well-being of our people.
An important approach to sustainability must emulate everything we do, from the way we ensure our operations are safe, take care of the environment, and work with our local communities to create lasting positive outcomes.
Within Australia, just before the end of the quarter, we were pleased to announce the signing of a framework agreement between Sandfire and the Yugunga-Nya. This agreement is an important step towards rebuilding our relationship with the Yugunga-Nya, and ensuring the ongoing protection of cultural heritage at our DeGrussa operation, as we finalize our closure activities and rehab the mine site across this decade and into the next.
We look forward to working with the Yugunga-Nya government and the broader community to implement the many initiatives proposed within this framework agreement.
Turning to our operating performance. Following another strong quarter, we have maintained our production cost and capital expenditure guidance for FY '24, and remain well positioned to deliver more than 50% growth in copper equivalent production from our continuing operations across the 2 years [ till ] the end of FY '25.
In the quarter itself, we've increased copper equivalent production to 32.4000 tonnes. This in turn underpins sales revenue of $217 million, and underlying operations EBITDA of $84 million for an operating margin of 39% or 40%, excluding DeGrussa.
As expected, our net debt increased by $22 million to $476 million, as we continue to invest in the rapid and low-cost expansion in the Motheo, albeit this would have been better, if not for the receipt of $22 million from Motheo concentrate shipment in early January.
I should note, all financial numbers are unaudited and preliminary given the status of our half year end process.
At MATSA, we are tracking largely to plan. Our underground mines operated at a record 4.6 million tonne per annum rate across the first half of the financial year. And for the quarter, we produced 13.7000 tonnes of copper and 24.2000 tonnes of zinc, for copper equivalent production of 23.1000 tonnes.
Given the strength of zinc production, which was up 31% quarter-on-quarter, following the prior resequencing of the mine plan and the deferral of copper into the second half, we now expect only a minimal skew in production towards the second half and unchanged copper equivalent production of 93,000 tonnes across FY '24. Of course, recognizing we produced 49% of planned metal in concentrate in the first half.
Suffice to say, it is really pleasing to see the improvement in consistency and predictability at MATSA, and that extends to costs, where we have continued to mitigate inflation, with mine operating costs remaining stable at AUD 72 per tonne of ore processed as we further optimized the use of consumables.
We're also pleased to confirm an agreement with Endesa, for the construction of a dedicated solar facility that will provide low-cost clean energy from CY '25.
On the exploration front, we have tasked our team to develop a multiyear plan designed to materially increase our reserves in MATSA. This is one of the biggest value leaders we have and we want to move forward with real intent, noting that the highly prospective San Pedro horizon, that extends another 1.8 kilometers along strike from 9 mineralization, and the 2 large geophysically anomalous plates identified down plunge at Magdalena, offer immediate potential.
So with that, let's talk about turning potential into tangible value. Motheo. It's our exciting growth engine where in December, we commissioned the new ball mill, the last major milestone in the rapid and low-cost expansion to 5.2 million tonnes per annum. The ramp-up of our processing facility continues to exceed expectations, achieving an annualized rate of 3.5 million tonnes across the quarter against an interim nameplate capacity of 3.2 million tonnes, producing 8.7000 tonnes of copper, for copper equivalent production of 9.3000 tonnes.
Underlying operating costs increased commensurately to AUD 37 million in the quarter or AUD 42 per tonne of ore processed, as we added temporary concentrate filtration capacity, and ramped up activity across Motheo's broader supply chain. The 5.2 million tonne per annum expansion project also remains on schedule, and the AUD 397 million budget remains unchanged. This next phase of growth at Motheo is progressing very well, having achieved a maximum daily throughput rate of 627 tonnes per hour on 21 December, and we expect to achieve the expanded nameplate rate on a consistent basis during the March quarter as planned.
Furthermore, pre-strip activities for the A4 open pit commenced in the quarter with first ore to be delivered to our centralized processing facility in the September quarter, again, as planned.
Turning to exploration. We are back drilling at A4, targeting dip and strike extensions to further increase the ore reserve, while additional potential has also been identified in the footwall of the T3 open pit leveraging the geological knowledge we are building as we expose the ore body, and this target is expected to be drilled across FY '24 and FY '25.
Similarly, at A1, we are completing follow-up drilling today and expect to declare a maiden resource with the March quarter results. There's still much to learn about the Kalahari Copper Belt. And quite frankly, we've only just scratched the surface.
Moving to DeGrussa. Having considered various alternatives following the completion of processing activities in May 2023, and we have determined that retention and rehabilitation will deliver the best outcome for all stakeholders. This decision also means we will have a meaningful presence in the area for many years to come, and we look forward to rebuilding our relationship with Yugunga-Nya, and working with the broader community as we undertake closure and rehabilitation activities.
So in conclusion, the medium and longer-term fundamentals for copper remain strong. As it becomes clearer on an almost daily basis that the industry will struggle to meet overly optimistic supply expectations which is why forecast surpluses are not eventuating, and we're exceptionally well positioned to deliver into this increasingly tight market with more than 50% growth in copper equivalent production projected across the 2 years to the end of FY '25 from our continuing operations.
Again, we appreciate your interest and value your time. So let's go to questions. Thank you.
[Operator Instructions] Your first question comes from Ben Lyons from Jarden Security Limited.
Brendan. Congratulations to the whole Sandfire team for another very strong quarter. I might start off with a more holistic question about how the company is thinking about the future of MATSA, and I guess, and how that compares to some facets of the equity market.
So specifically noting that you're pursuing the approval is to invest in the new tailings facility which I know it's largely consistent with the disclosure on the site visit a couple of years ago. But I'm also interested in the commentary around the potential for a second lift in the early 2030s, which will enable deposition until fiscal '42. So increasingly, it sounds like Sandfire are viewing this asset as a multi-decade producer. So I'm just interested in how that holistic view of the asset is coming together.
And then similarly, I just note that there was no material exploration updates to Olivo or San Pedro in the release. Is that because the rigs were demoed or maybe you just focus on the work on updating the reserve and resource statement at the present.
Yes. Look, thanks, Ben, a really good series of questions there. Maybe in reverse order. You can imagine that when you're working on areas like San Pedro, although, there are points where you take stock, you review all of the information you have and you then reset and go again. And that's really the work we're doing at the moment. And the challenge I pose to the team, and it really ties to your board of question, is that it's our biggest lever, is the capital that we have invested in the centralized processing facilities and very strategically positioned, I might add in both the Iberian Pyrite Belt and the Kalahari Copper Belt.
The most important thing is extending reserves. That's what brings real value. And so we have worked very hard and we're dotting the I's and crossing the T's. Now on the plan at MATSA specifically that is designed to significantly extend the reserve and resource life. Now, of course, the proof will be ultimately in the results that we deliver in time. But a big part of that relates to the work that we did downhole, you remember the 1,200-meter hole that we drilled into the depths of Magdalena down plunge from MATSA 2. We did the geophysical work. We talked about this, I think, on the last update, and we've identified 2 very large geophysically anomalous plates, one of those plates particularly holds significant promise. Again, we need to drill them. We need to target them. And again, you go to San Pedro, you've got 1.8 kilometers of untested strike length from what is now extensive mineralization. Those 2 areas, theoretically have a volume opportunity of somewhere between 30 million and 40 million tonnes, is the current estimate.
Now, is it mineralized? We don't know to what extent. What's the continuity? We don't know, but that's the work we need to do. And to your point, the approval of the Tailings dam and the process is just part and parcel of running a business diligently and that process at this stage is running well. But it is about creating that pathway and that option that gives us the potential to significantly extend the life of matter beyond currently known reserves. And again, that will be the major focus for the team, along with just running the business consistently and predictably. And of course, you would have seen that we've run at 4.6 million tonnes per annum.
As an annualized rate in the processing facility across -- in the mines, I should say, across the first half. That is a step towards getting to 4.7%, but I'd just reiterate that we won't drive to 4.7% until we see consistently the higher recoveries, the lower dilution. But particularly as we start to open up some of these areas that we're looking hard at now like San Pedro Olivo, et cetera, that give us more degrees of freedom, and it will obviously play into that greater consistency and predictability over time. So I don't know, Ben, if that answers your question, but that's really the strategic way we're thinking about MATSA.
Absolutely. Very comprehensive and very clear. Maybe the second one, just a 2 parter from a commercial perspective. So I think there was some previous commentary around the Motheo concentrate possibly attracting a discount because it was commissioning con. But then looking at the price realization during the quarter, it was actually very much in line with the prevailing benchmarks. So just wondering if that discount still applies?
And then more broadly on TC/RCs. Just wondering if you can provide any commercial perspective. I know there was some early talk around the potential agreement in the range of AUD 80 a ton and AUD 0.08 per pound, but then spot TCs subsequently really dropped off at [indiscernible], [ Copper Panama ]. It looked like it was dropping out of the market. So I'm just wondering if you've set your TC/RCs for calendar '24 and how that sort of -- on discount may play out at Motheo?
Yes. Look, maybe I'll take some TC sort of context very early, and then I'll throw to Jason. Motheo, obviously, has annual benchmarks. So it's tied to AUD 80 and AUD 0.08. But of course, we saw a benefit come through from the prior year, whereas Motheo really is floating and so will benefit from the reduction in TC/RCs that you're referring to.
Look, before I pass to Jason, perhaps to talk to pricing and penalties. Of course, it's early days for us still. I really want to just take the opportunity to acknowledge Jason, acknowledge Ian Kerr, acknowledge Dale Bergess, any in the broader Motheo team, for what's been quite a remarkable ramp-up and continues to be. The team has done such an incredible job. It's easy to forget that this is also a new country entry. And relations, I might add, with government remain very, very strong, and they've been very, very supportive, and we appreciate that. But Jason, well done to you and the team, but perhaps if you can just go through a little bit of the discussion we've been having around concentrate qualities and penalties and payabilities.
Right. Thanks, Brendan. And Ben, look, in terms of Motheo con, and particularly early on with commissioning con, we did see some lower grade material being produced very early on in the commissioning process. That was mostly last financial year and very early in this calendar year.
What we were able to do was actually stockpile that, and we're able to blend that in with our -- the rest of our concentrate to make sure that we actually had a very -- quite a good quality concentrate that we really started to sell there in Q1 and then throughout Q2 as well.
So in essence, what we're seeing at the moment is our concentrate quality is higher than we forecast in terms of copper grade. It is slightly elevated in lead and zinc, and we're taking minimal penalties on that. but everything else is as expected, that we're producing a very good quality concentrate out in Motheo. And we see no reason that, that will continue to build and further improve as the team learns more about the plant and processing of this ore body. In terms of TC/RCs, we're running on market at the moment for Motheo, so any of the benefits that we see coming out of TC/RC reductions that are currently out there at the moment, we should realize those gains. We haven't locked in any long-term sales contracts for Motheo. And the rationale behind that is that we want to build a strong brand for our concentrate. Now we believe it's going to be a good quality con, and we've demonstrated that already. But we do want to build that brand and build that history before we go out and lock in longer-term concentrate contracts so we can get the benefit of that high-quality concentrate. Hopefully, that answers your question.
Your next question comes from Mitch Ryan from Jefferies.
Brendan, if that's a bit strange to be asking about operation that's ramping up ahead of schedule. But I guess provide operating metrics from Motheo, which seems to pulling the direction after the end of December. But I was wonder wondering if you could provide any performance metrics for the month of January? What were the peak rates hit and what's been consistent to, like?
Look, we are certainly starting to see great stability. You can imagine as you come out of a commissioning process for a ball mill and you start running the plant hard, you start to see very quickly some a shift in the stability of the general circuit. If flow rates are higher, your pumps, your vessels, so on and so forth. That has settled quite quickly. And again, the team is doing a very, very good job. One of the things we saw through that period, again, it wouldn't surprise you, is a dip in recoveries. We've been achieving upwards of 94%, 93%, 94%. They dipped down in the low 90s for a period. We're starting to see those recoveries now coming back. And suffice to say, if we look at the daily throughput rates, we believe we're very much on track to get to that 5.2 million tonne per annum rate in the March quarter as we suggested. And that's really something I want to stress. I mean it's not that long ago. I remember people thinking that our Motheo guidance was aggressive, and I'm really mindful that we don't want people to get ahead of themselves. Please hold us to account the 5.2 and the numbers that we've put out there. But you can be sure we'll be doing our best, but it's been a very rapid ramp-up. And of course, there are always fits and starts with these expansion projects, but things are going as well as we could hope.
My second question, just, I'm -- again, short term, but on MATSA, you'd outlined our strategy to try and focus on building stockpiles over the course of this financial year. How is that strategy playing out? It doesn't look to have sort of come through, if I look at the numbers in this quarter?
Yes. Look, and I think you might recall, I said a couple of times on the last conference call that as much as we might like it to be mining, will never be a linear game. And so the business is doing well. You'd remember again in the September quarter, we did talk about a resequence already in the year about deferring some copper. That obviously has a marginal impact on the mine plan. And that's probably the key takeaway I hope we see from this quarterly, is we're going to have volatility at MATSA. It's an underground mine. There's 3 underground mines operating to deliver product to a centralized processing facility. But the level of volatility we're seeing is significantly less than what we have seen in the past, and we're starting to see that as a result of the investment in development and the other work that we've got underway. Now we've got to keep doing that, and we've got to get better, and we will get better. Part of that across the remainder of this year is we remain committed to building those surface stocks. I mean, Jason and I have this regular conversation and I see him smiling as I speak. And that is, well, if markets are a bit better than one had anticipated and prices are good, should we just drive hard and process the stock and the discussion we have is about playing the long game. The long game is getting that 100,000 tonnes of stock on the surface, which is not an excessive amount but around 100,000 tonnes, which enables us to just manage those blends better. Now Rob Scargill, now a leader at MATSA, with direct accountability for all aspects of that operation. And he often reminds me, we don't recover copper, we don't recover zinc, we don't recover lead. We recover chalcopyrite. We will recover sphalerite, we recover [indiscernible]. It's a mineralogical game. And so one of the things we've really done there over the last year is a much more integrated approach between the process engineers and the mine geologists such that they're regularly walking the ROM stockpile. They're regularly looking at the mineralogy that's being presented. They're managing that as well as they can in the blend, and they're then responding with the way that they're working through with their reagents and so on. That is a process of improvement that's going to take time. I'm confident we're seeing improvement, but there's still a ways to go. So again, over the second half, I'd like to see that stock build more so than it did in the second quarter. And again, we look forward to talking about that with you as the year progresses. I don't know, Jason, if there's anything incremental to add to that?
No. Look, I think you've covered that very well. As an operator, it almost cuts me to the bone to see the overall constraint, the mine as a constraint. And that is our challenge going forward is to make sure that we've got stability going into the plant. And the mine being able to match what the mill is doing at the moment. And that's kind of what we're seeing in this last quarter, in that the -- what we've done in the middle is means that we are rapidly tracking towards that 4.7 million tonne per annum capability. and being able to do that consistently. What we need to do is, like I said, like Brendan said, once we've got that stability, elevate mine performance and then match the two.
And it's probably worth just mentioning that part of the process as well as the team is looking at all elements just to improve overall performance that then translates to margin. And one of the things you might have seen we talked to is around consumables. So for instance, the team is now prioritizing the use of chrome-bearing grinding media which costs more is giving us a much greater wear rate, and it's actually significantly reducing our costs overall. So again, it's not just around the mine. It's not just about how we're presenting the mineralogy. It's also looking at all other elements of what's being done in the mill and the processing facility to try and give us better outcomes.
I appreciate the detailed answer.
I think the way I think about MATSA and I've said this many times, no matter what we may wish to believe we're not going to wake up tomorrow and MATSA is a fundamentally different business. MATSA is a material mine. If we look across many, many, many quarters now, it's performing well. It's about incrementalism. It's actually about incrementalism in all aspects of what we do there to deliver just consistently better performance over time.
Your next question comes from Kaan Peker from RBC.
Congrats on the quarterly. Two questions for me. One, maybe building on Mitch's question. Where is that ore mined on MATSA? Where is the ore mine going to come from? I mean how are you going to get into the second half, an increase in ore mine went backwards this quarter. I know you said it's not linear, but can you sort of identify the mines or the initiatives there that will result in additional ore mine being coming through in second half? And I'll circle back to the second one.
Kaan. And look, absolutely. Thanks for your question. And if you go back over a number of quarters now, you'll see that these numbers rise and fall, and it often ties in with ground conditions. It ties them with the degrees of freedom you have to keep your equipment productive when you have these challenges. And look, there's probably a little hint in this when we talked about the deferral of high-grade copper into the second half. We talked about that in September when you think about the various mines we operate.
But maybe, Jason, I'll throw to you to expand.
Well, Kaan. One of the things that we talk about a lot internally is the resilience in production that we're seeing in Magdalena, and that's been a step change that we've achieved over the last 6 months. So you would have seen it last year, every time we had a hiccup like stock stability, or some sort of issue around being able to maintain our planned schedule, we would drop tonnes fairly quickly out of our production rate. So what we're seeing, particularly as consistently, and Brendan touched on it before, there as well, we have been investing in orebody knowledge. We have been investing in better planning, and we've been investing in increased developments -- developed stocks to make sure that we are able to consistently deliver on our targets, and that's where we will get a consistent performance, continuing from the first half into the second half.
Yes. And I think, Kaan, if you look at the guidance on Page 13, for instance, it goes back to my comment about incrementalism, we're actually talking about at the margin here. It's part of that whole body of work we've talked about many times, and it's actually about how we choose to run the processing facility. If we believe prioritizing a degree of stock build is actually important in terms of the longer-term gain.
Sure. Just a second one is on zinc recoveries this quarter. It might be hard to split out, but just wondering the lift in zinc recoveries. Is that all grade driven?
It's -- I'd say it's largely mineralogy driven. And it's something we spend probably more time here talking about than we should. But it actually gets down to pyrite and the way pyrite presents itself. And we had quite a unique situation play out. It also actually gets back to the one around stocks. Ideally, we shouldn't see this level of volatility because if we've got the level of stocks on the surface, we'll be blending more and managing that such that we're more consistent through time. Maybe, Jason, again, it's something you and I have talked a lot about. So...
Yes, absolutely. The one thing we know with particularly our ore bodies at MATSA, think polymetallic, there's a level of complexity there that you see and say -- so compared to Motheo, so particularly around -- and we have done a lot of work on understanding our gem mineralogy, and pyrite and how it presents in different forms can have a big impact on our recoveries. Now we are getting better at predicting that in our mine plan, and we're doing a lot of work on that. But coming back to the core of your question, there is an incremental improvement in recovery associated with grade, but the large majority of the area is around variation in mineralogy of the ore body.
Sure. And if I can squeeze another one. Just any update on the timing of the concept study -- for study -- for Sotiel for the expansion?
Yes. Look, we're going through that process at the moment. The results are still in its early stages. We are looking to try and tie that up around the early next financial year. But overall, it's a big ore body. It's complex metallurgy and certainly studies at the moment are focusing on how we can process it and how we can get the most metal recovery from Sotiel economically.
Your next question comes from Levi Spry from UBS.
I'd like to [indiscernible] maybe just what's going on next door. So the First Quantum news. Is there a process being run there? What's your views on what could potentially play out there?
Levi. Very, very mindful not to comment on other companies and what processes they may or may not be running. So I appreciate the question, but I probably won't talk to that. I think the press has widely reported various aspects, and I won't go further into that. Look, suffice to say, I think Jason just talked quite directly about Sotiel. When you look at Sotiel. It's a very large resource with enormous potential. So we're always open to looking at additional resources beyond what sits within our current portfolio. but we're not [indiscernible] looking for more Sotiel-type ore today. But that doesn't mean that there aren't opportunities that we should look at. But I think the big one for us is really unlocking Sotiel, which is a combination of 2 things. It's one, really thinking through potentially, 3 things, thinking through the resource opportunity and where we have opportunity to maximize the way that we extract value from it. The second one is technology. What is the best way ultimately to unlock a higher rate of throughput, and/or processing rates. But the third one, which ties back to everything we've been saying before, is if we can identify the increasing life that make the leaner in Aguas Teñidas, that's really what opens up the opportunity to look at Sotiel potentially as a stand-alone operation. So all of those things are interlinked, and we'll work -- we'll continue to work very hard on them. We'll look at things outside of the portfolio, but again, I've always said, when you look at the opportunity that sits within Sandfire, anything that's outside of the business would have to pass a very high benchmark or have a very high bar to actually make the grade.
Yes. And maybe just an update on Black Butte. So what are the next steps there?
Yes. Look, I'm quite excited about Black Butte, if I'm honest. It's never going to be the world's largest operation. Critically, obviously, we need to get clarity around the approval process, and we're hopeful through this calendar year, that will happen. I won't try and pick a time, but we're hopeful in that sort of time horizon, we'll get necessary clarity. What we are doing at the moment is really focused on the back of that in understanding Johnny Lee to the best of our ability, because what we want to make sure is if we're in a position, but Johnny Lee is a stand-alone investable project. And when I say investable, it means it has an IRR that's going to be in the high teens that really demands capital as a minimum. And the work to do there at the moment really is around extending the reserve and resource that we know of in the high-grade zone at depth. We're drilling at the moment. I think we've just completed the second hole. We're pleased with how that's going. It's a 5-hole program. and we'll report on that in due course. So we may have some intercepts to talk to in March, but we're certainly able to say in June. We don't need a lot more tonnage given the grade at that depth to actually juice up those economics. So I guess it's watch this space, but we're becoming increasingly optimistic about how that's looking, but there's a long way to go.
Your next question comes from Adam Baker from Macquarie.
Maybe just one on the Motheo mill capacity. It's good to hear that the ball mill timely -- was completed effectively during the December quarter. Just maybe, I did notice during the quarterly result, you noticed that you had 1 year daily run rate of 627 tonnes per day. Just back calculating that, that gets you to a 5.5 million tonne per annum run rate.
Just looking through to the second half of FY '24, do we see any upside past that 5.2 million tonnes per annum capacity? And I guess, what are the key bottlenecks holding back the mill now?
Yes. Look, Ben (sic) [ Adam ]. So maybe just to be clear, to achieve 5.2 tonnes, once you take into account the sort of availability that we would anticipate the number is around 650 tonnes per hour. So we are pretty close. And hence, we're very confident that we can achieve that 5.2 million tonnes through the March quarter. Look, the thing -- and you may have missed it early on that I stressed is, we would really like you to hold us to account the 5.2 million tonnes. It's not long ago. I remember people questioning the aggressive nature of our guidance for Motheo for the full year. So please, let's not get too far ahead of ourselves. There's still a lot of work to do to get that consistency, that stability. It couldn't be going better but this is mining after all. I think beyond that, though, the truth is that we know that there are limited constraints as we continue to work hard to optimize the SAG mill itself. It's currently relatively underutilized from a current draw perspective. Obviously, the primary crusher has significant excess capacity. And so again, you can assume that just like any company that wants to be seen to be a good operator once we get the stability and the consistency, the 5.2 million tonnes, we'll be pushing hard. And you can expect us to provide a further update in March, but particularly in June, having completed our full year planning cycle, we'll come back and give you a better sense for next year. But thanks for the question. I understand the optimism, we appreciate it, but we just remind people that, as I said earlier, mining is never a linear game.
Understood. And the stockpiles on site, can you just remind me how many stockpiles you've got at Motheo? I guess, what the plan is for the low-grade stockpiles and when you would potentially build them through?
Look, I'll pass to Jason for more clarity, but you'll notice the wording in our report is quite delicate. We talked about these low-grade stocks. And I'd just stress as well that we -- I think our accounting approach most people would say is a prudent and conservative approach where we carry them at effectively a value that reflects the contained metal content. So we're not, if you like, disproportionately putting costs into stocks. So it's a relatively small amount that's going in that direction. And then that really ensures ultimately that those low-grade stockpiles will be economically viable to process. But we've been very careful not to pick a time because we've said we will process those stocks when it makes most sense to do so, again, from an economic perspective. Now that may be depending on ramp-up processes that we could supplement some of our, call it, mid- and high grade ROM stocks with lower grade stocks if it indeed makes sense to do so. If indeed, ultimately, as we move into next year, we find that we can unlock additional capacity beyond what's envisaged. Jason?
Yes, Brendan. Look, as part of the feasibility study, we did a lot of work on optimizing the best financial outcome of the project over the life of mine. And that was developing a cutoff strategy, as many open pit mines do, about prioritizing high grade and then deferring low-grade feed through the mill. So when it will come in -- so this has been a strategy that has been planned from the outset, and we are still executing that strategy. Now we have refined that somewhat as part of operations. So we stockpile our ROM ore, which is, let's call it, high grade. And then we split our low grade into low and medium grade. Now we expect that, that medium-grade stockpiles, which are slightly longer term will start to come into play and be processed there over the next 2 years, as A4 ore supply becomes more consistent. So we've announced there as well that we should expect to see the first ore there in the September quarter of next year. Now as we move through the rest of that financial year as well, we'll actually start to see some of those stockpiles, particularly the medium grade go into the old feed until we get a consistent feed ore supply coming out of both T3 and A4 at the same time. So as I said, this is part of a life of mine strategy and everything is on track and going very nicely for us.
And Mitch (sic) [ Adam ], in case you haven't [ seen ] on Page 6 of our report, we talked to the amount of low-grade stock that went to the balance sheet in tonnages, at 465,000 tonnes in the quarter itself.
Our next question comes from Daniel Morgan from Barrenjoey.
Brendan and his team. Just a quick question about the, I guess, the balance sheet financial metrics. Obviously, you've been building and optimizing assets for quite a period of time. My assessment would be net debt has peaked. Is that your assessment as well? And what is your plans for cash generation from here?
One of my lessons in life, Dan, and thank you for the question, is be very careful forecasting net debt profiles because obviously, there's been a -- one big thing that we don't control and that's the market. But look, suffice to say on the most reasonable projections, we wouldn't fundamentally disagree with you. We would expect that net debt is peaking at or around this time. And then depending on markets and obviously, the ongoing ramp-up of Motheo and consistent performance in MATSA, we start to move into a very healthy process of paying down debt. I've said many times, ideally, a mining company that's particularly a metals processing company would have a leverage to the cycle. I think running a very strong balance sheet is the best strategy and ideally, net cash. So again, as I've said many times, our first priority will be to run the business well, run it safely and pay down debt. One of the elements that we are working on is also to modernize our capital structure. Again, we're a multi-mine, multi-geography, multi-time zone business. that really, over time, needs to enhance a number of systems and processes, its approach to risk management. And part of that is bringing an element of our balance sheet, so to speak, back to the center to create a corporate treasury-type function. And that's something that we're working on in a very measured manner. And no doubt something we'll talk about over the journey. I don't know, Megan, if there's anything that you'd like to add to that?
Thanks, Brendan. Maybe just echoing, we do very much see net debt having reached its peak. But again, that's reasonable commodity prices. We're looking to draw out our final AUD 20 million on the Motheo, AUD 200 million facility over the course of the second half to support the needs of the A4 development. But given where current pricing is at, we anticipate we're close to the peak. And so I think that's a reasonable assumption based on the current economic conditions and market we're experiencing.
Your next question comes from Ben Wood from Wilson Advisory.
It's Sam Catalano here. [indiscernible] So good quarter, guys. I just wanted to push a little bit on the recoveries of MATSA from the poly line. Obviously, you've [ decided ] the loan, probably right to say that as behind the jump up in recoveries of zinc. But just [indiscernible] technical. Is there something to do with the season of -- as to why you didn't get the net recovery improvement in operating the poly line as well. So [indiscernible], you've slightly weaker rate there. So just wondering how the recoveries between zinc and copper interact in the context of that [ analogy ]?
Yes. Look, and I'll pass to Jason for a broader comment. And Sam, and good to hear from you. As you know, there's always a relationship to some extent between grade and recovery, but really, primarily here, it's around the way the mineralogy presents to the processing circuit. And that really was the impact in the period. We still haven't quite got the blending that we'd like to mitigate some of that volatility. I don't know, Jason, if there's anything further to add from what you said before, obviously, pyrite being a key piece in the zinc circuit, but perhaps a little bit more.
That's right, Sam. And look, from our point of view, Brendan touched on it there before. We don't actually recover copper or zinc. We are recovering sphalerite and chalcopyrite, predominantly there as well. So the response and the association between those 2 metals does vary given the polymetallic nature of the circuit.
Now particularly with poly line, we're looking at recovering both of those elements or those minerals, but is more targeted towards sphalerite often there as well. So the response does vary, whereas compared to copper, we are specifically targeting chalcopyrite and maximizing copper production and depressing zinc because it becomes deleterious. So the strategies are very different. The process is different and the response can vary depending on the mineralogy.
And really, again, it just goes back to what we're trying to do for the process engineers that give them the least variability in what they have to deal with, that we can, and than when -- it's this process, and it sounds so simple, but it didn't happen in the past of making sure our process engineers are walking the ROM stockyard with our geologists to understand the mineralogy of what's likely to present and then they're adjusting accordingly almost in real time.
Your next question comes from Matt Chalmers from Bank of America Securities.
Brendan and Megan. Just one quick question from my side is just -- it would be helpful if you could provide a strategy around the building of the stockpiles at Motheo, I know we discussed that earlier. And just around when you would expect to reach that kind of steady state level of ore on the ROM pad?
Look, that's an excellent question. Look, perhaps if we can take that on notice matter, that's something perhaps we can provide at the full year a bit more clarity around the way that plays out over time. Obviously, we provide quite a lot of detail in our report around deferred stripping. We provide obviously our full feasibility study. But let me think about how we might be able to bring a little bit more of that to life. As I said, we do it in a way where we don't allocate if you like, a disproportionate amount of costs to those stocks, but let us take that on board and bring that back to you, if that's okay.
[Operator Instructions] Your next question comes from Paul Young from Goldman Sachs.
Jason and Megan. I know Brendan we've covered a lot of ground on this call already. But -- so just a quick question on exploration at MATSA and Magdalena as it's your most valuable mine and just the drilling that you've done there. I know you've identified additional mineralization over 200 odd meters of strike and down depth. Have you done enough drilling to actually update and increase measured resource and therefore, the reserve? I know you've got a pretty high conversion factor at Magdalena. So just that's the first one. And the second one, what is the plan beyond that to drill, is it from surface? Or is it actually from underground?
Yes. Good question, Paul. And I know we've talked and good to hear from you, of course. I know we've talked about this with you in the past as well. So first and foremost, you're right, we've obviously identified significant strike length, 700-odd meters plus at San Pedro and Olivo in addition to that, and that really forms the basis of some of the work that Jason and his team are doing at the moment to update the resource estimate for MATSA, and we talked about that in our report. But we're hopeful in the next 3 to 6 months at the outset that we will actually be able to provide you some clarity as to what that may bring, and that's really the first part. And then whilst reserve tends to follow, as you mentioned, NSR, these ores tends to be quite high, so you do get typically very, very good conversion rates. So again, if I can ask just to watch this space, more broadly beyond that, it gets back to these 2 areas, over and above the work that Richard and his team are doing in the more regional setting, and that's this plate or plates that have been identified down plunge of [ MATSA 2 ]. That's the obvious target for us. It always has been. And then it's also really testing that extensive San Pedro. But we're also looking at other opportunities that exist in and around the mine site. So it's a significant amount of work. To your point, with those plates, ultimately, if you're going to drill them out, you're going to develop underground. What we probably need to do and this is part of the plan that's being refined is to drill additional deeper holes from surface, a small number to follow up on the initial 1,200-meter hole, to confirm we hope the geophysics and the logic of the geology confirmed that it's mineralized. If we were to get that confidence, we're fairly comfortable that not only would the economic case be compelling to develop out into that area so we can drill from underground. We think our shareholders will be pretty motivated for us to do that, too. And I think that applies for San Pedro as well, when we think about that medium and longer term. And that's really a big part of this planning process, Paul, because -- as you would know, there's always a risk with exploration that it can be sometimes always thought at the back end of a planning process, particularly in a budgetary sense. It's often [indiscernible] was discretionary. And one of the things I'm wanting to be very careful and clear about with our team is that this is a priority. And therefore, don't put constraints on it deeper in the organization, trying to, if you like, interpret what we may wish or not wish to do. if the economics and the value proposition is there, we'll be very happy to spend the money to get out into these areas underground. Again, it will very much be dictated by the type of intercepts that we ultimately see. And whether the proof of concept holds true. But maybe, Richard, I don't know if there's anything from a geological perspective that you'd like to add to that?
Look, you've covered the sort of the strategic aspects really well from a geology perspective, look, we're very -- we're confident that the places that have been identified as in good quality, and they sit in the right stratigraphic position. So geological wise, we've got a lot strong confidence that this is -- these are good down drill targets. The question will always be, what's the level of mineralization that you hit? So continuously been drilling.
Yes. And I think one of the things that we know from the 1,200-meter hole, that actually fell below the target zone was that the rock package is the right rock package. And as you know, when you're looking at these things, one of the primary considerations is whether there are any major structures of depth that actually mean that the sequence is lost. Not only did the geophysics come in, in a way that gave us comfort, but most importantly, we know we're still in the right rocks. We're just below the mineralized zone. So look, none of these things are certain. As you know, I always say, the worst thing you can do is to drill a target, you tend to have less success than you'd like. But when you've got all of the things that we have going for us here, your odds are as favorable as they're going to get.
I appreciate the additional detail. Just trenching the channel down looks pretty good. Maybe as a follow-up, the last one, sorry, just on a housekeeping question on CapEx and looking at your group, your CapEx guidance for the year at the group level and what you spent in the first half. It does look like CapEx is weighted 2/3 to the second half, Brendan. And I think one of the big drivers of that is probably back on to the questions on the stockpiles and deferred stripping at Motheo, it looks like you've got AUD 50 million of spend in the June half. Just curious, is that the peak deferred waste stripping and mine development for Motheo on a half year basis? Or could that continue into FY '25?
Look, I'll pass to Megan in a moment, but maybe just a couple of comments upfront. So if you look at the capital, there's a lot of moving pieces, of course, as always. At MATSA, we're probably tracking a little bit above in truth. So look, we haven't changed guidance because there's no material differences. But capital is probably tracking a little above, but then if you look at operating costs, slightly below. So from a cash flow perspective, they're sort of equal opposites almost. So that's -- and you'll also note from a cash flow -- sorry, from a noncash perspective, you also see depreciation is similarly tracking slightly above. The big thing with Motheo is really the ramp-up in the pre-strip activities at A4 that you'll start to see come through in earnest into next year, and sorry, into the second half. That's the key driver, Paul. But Megan, anything you want to add to that?
Yes, I think -- just to emphasize, I think the second half, we will see that step up in CapEx, Paul, on the deferred strip, the pre-strip on the A4. And then that together with the production stripping that we have ongoing at T3, we're expecting to be within 5% to 10% of our guidance provided. Does that help?
Yes, that does. Maybe we need to round back and just talk around sort of FY '25. I need to get back to the waste stripping profile. So I'll leave that with me and I'll talk post the call.
Yes. So look, just on that, if you -- yes, the waste stripping, T3 dropped significantly. I know Jason is probably getting eager to steepen up the wall at T3 if this opportunity comes through in the footwall. So that could be interesting. But of course, that only holds out to about FY '26 and FY '27, you see the pre-strip or the deferred stripping goes back up at T3 for that next major pushback, whereas A4 is sort of peaking through the current period to FY '25 before rapidly declining into FY '27 where it's effectively eradicated because you go below the life of mine strip. So that's the directional trend for deferred stripping there. Of course, as we mentioned, from a broader capital perspective, we really wanted to make sure that people are aware, we've got this additional tailings facility that come through at MATSA over the next couple of years. It's not a significant amount of capital in the scheme of the organization, but it's an important one from a perspective of cash flow.
We have another question from Ben Lyons from Jarden Securities Limited.
Just following on from Young's questions about exploration. But switching over to bots. Some encouraging comments around the [indiscernible] program at A1 and obviously punching some additional holes in there in the current quarter. Just wondering if you or Richard, can possibly flesh out those comments a little bit further as to whether your confident has increased that it will come in as the third ore body at Motheo. And then secondly, you've also relinquished the ground in Namibia. Obviously, no plans to build your only mine in the short term, but just whether you actually completed any sort of preliminary exploration works on that ground before you let it go?
Yes. And look, I will pass for Richard. But very simply, A1, we're hoping March quarter we'll be able to declare a maiden resource. I don't really want to call it in terms of size. We've said in the past 2 years is a -- plus or minus, I hope for a starting point and let's see from there. So that work is underway. There's work ongoing as a second phase in the program because the initial phase identified mineralization open in almost all directions. The T3 opportunity I was just talking to in the footwall, basically understand the structure and stratigraphy more because we're opening up the ore body. These large obstacles unfolds, that they're evident that we weren't really understood in the initial mine plan. That presents an opportunity, as I said, in that footwall. Is there a year there or not, we don't know. We're hopeful. And then April, we're back drilling to extend that high-grade resource. So again, if you look at all of those elements, if we can get a year here, a year there, we're already at around plus/minus 10 years, you can start pushing up towards 14, 15 years, which is sort of the market that I put in my mind, that I'd like to see in front of both of our processing facilities because I think then you move into the domain of long life. But of course, there's a there's a much bigger piece for us is in [ Butte's ] as well where we've got numerous targets within 70 kilometers of our processing facility and a lot of work underway to understand the base and depositional model. Maybe, Rich, if you can talk about that overarching strategy, that would be good.
With respect to maybe -- if you think about the work that we've done over the past 12 months, we've got a much better understanding of what controls, T3, A4 and A1. And we think we're in the right part of the basin there to really concentrate our efforts and build that concept of the Motheo hub. So balancing those exploration dollars, we see that the way to add significant value in the short term will be more deposits in around Motheo hub. You add that with a slightly different geological environment in Namibia, probably not quite the right part of the basin to develop bigger deposits, then it's really just -- it's a question of capital allocation and easier to focus where we can add value in the short term rather than going long-term conceptual in another country. So hopefully, that answers your question.
There are no further questions at this time. I'll now hand the conference back to Mr. Harris for closing remarks.
Thanks. Look, I know you've all got along. We really appreciate your time. Thank you for your excellent questions, and we look forward to speaking to you again later in February when we report our financial results until then, stay safe and go well. Thank you.