Full Year 2022 Mount Gibson Iron Ltd Earnings Call West Perth, WA Aug 25, 2022 (Thomson StreetEvents) -- Edited Transcript of Mount Gibson Iron Ltd earnings conference call or presentation Thursday, August 25, 2022 at 1:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Peter W. Kerr Mount Gibson Iron Limited - CEO ================================================================================ Conference Call Participants ================================================================================ * Jon Scholtz Macquarie Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you for joining today's teleconference for the release of Mount Gibson Iron's financial results for the year ended 30 June 2022. Mount Gibson's Chief Executive Officer, Peter Kerr, will be leading the discussion and is joined by Chief Financial Officer, Gill Dobson; 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 the time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via the Mount Gibson website shortly after the completion of today's teleconference. Thank you, and go ahead, Peter. -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [2] -------------------------------------------------------------------------------- Thanks, Lisa. Good morning, all, and thanks for joining us to discuss Mount Gibson's results for the '21/'22 financial year. As usual, I'll give a brief overview and then hand back to Lisa for any questions. Our results for the year reflected the significant investments made at Koolan and set the operation up for the next 4 to 5 years of the mine life. And as you know, they also reflected a number of adverse factors that occurred during the year, including the iron ore price movements, COVID-related labor availability shortages, general inflationary pressures and some supply chain issues. Despite all this, however, the benefits of our investment at Koolan started to flow in the last part of the year in the June quarter, in particular, and to provide Mount Gibson with confidence going forward, as high-grade mining performance steadily improves, and I'll talk more about that shortly. At a headline level, we reported a loss after tax for the year of $174.1 million, and that was after previously guided pretax impairments totaling $184.6 million. Of this impairment amount, the Koolan component of $147.4 million reflects a conservative approach we've taken for the impacts of recently lower iron ore prices and the Shine impairment of $37.2 million, which was recorded in the December '21 half year period reflects the suspension of the operations at that time. Cash and investment reserves reduced by $239 million over the year and closed the year at $125.6 million, that was the value at 30 June '22. This was driven by investments in waste stripping and key capital projects at Koolan Island, including the crusher upgrade and the upper footwall ground support works. Importantly, in the latter part of the year, the benefits of these investments commenced, being realized, and we had a significant turnaround in operating cash flows in the June quarter, as I mentioned, as ore production, quality and sales at the Koolan operation all lifted substantially and the mining strip ratio declined rapidly as planned. So while repairing damage from the recent fire at Koolan Island, which I'll talk about in a minute, will temporarily constrain our improvement trajectory in the current half year, the operation remains robust, and it's underpinned by growing high-grade ore production. We continue to expect the strong performance over this coming '22/'23 financial year. In relation to the Koolan plant fire within its screening section as we reported on 12th of August, a fire occurred in the product screening circuit of the Koolan Island processing plant and that was during a routine maintenance shutdown. Obviously, a disappointing event, but most importantly, the prompt efforts of our emergency response team meant that there were no significant injuries and the fire was promptly extinguished. Since then, we've commenced assessing the damage and work to determine the best way to start the crushing plant again in the shortest possible time and to try and increase our crushed volumes. The fire damaged the upper levels of the product screen area of the plant, and that's where oversize material out of the front end of the plant is screened and redirected to the secondary crusher for further processing and sizing. And the rest of the plant is unaffected and will be utilized. And this as part of our interim crushing solution. Mining and other site activity was also unaffected by the fire and continues to ramp up as planned, meaning we'll have substantial high-grade ore stocks ready for crushing as processing capacity increases. We expect to resume crushing at about 30% capacity within the next 1 to 2 weeks. And that's using the front end of the processing plant, so the jaw crusher and the first scalping screen. This will be augmented by the addition of mobile crushing equipment to site, the first part of which will be mobilized next week, enabling a further increase in crushing activities up to approximately 70% of our normal capacity around the end of September. So that's our target we're trying to achieve is that 70% level, whilst we have this temporary processing configuration in place and that should return us to shipping rates of initially 2 and then around 3 shipments per month from that time. In parallel, we're sourcing materials and planning the necessary repairs to the damaged section of the plant. And subject to detailed assessment, the repairs are presently anticipated to be completed in late '22 or early '23, and we'll, of course, provide updates as we progress. To date, within the September quarter, we've completed 5 high-grade shipments for almost 0.4 million tonnes and are targeting to deliver 2 more high-grade shipments by the end of September. So subject to the process -- or progress rather of the recovery plan, we expect shipping rates to increase in the December quarter. And then rise further from early '23, at which time we expect to be crushing at full capacity and able to consistently ship our targeted levels of 4 to 5 cargoes per month. Retention of the mobile crushing equipment that we're using in this next little while may further support a production catch-up in the June '23 half year. As indicated in our guidance, although our near-term shipment volumes will be impacted, we're still targeting high-grade ore sales of between 3.2 million and 3.7 million tonnes from Koolan during the '22/'23 financial year. And that is still a significant increase, well over double over the last year. Cash operating costs for '22/'23 financial year will be dependent on our recovery progress. But the initial target for the year is being -- is an average of between AUD 70 and AUD 75 per tonne FOB and it's before royalties. Costs are likely to be a bit higher in the first half and lower in the second, as the repair and recovery activities are completed and as the waste-to-ore stripping ratio continues to fall over the year. And as we've noted before, the mining stripping ratio will average about 3.5:1 in the current half and then fall to around 1:1 in the second half. So across the full year, we're expecting somewhere around 2:1. The stripping ratio for reference averaged over 10:1 in the year we just completed. So moving on to more general market matters, I just wanted to say a few words about the iron ore market. While we're seeing some divergent views regarding near- and medium-term iron ore prices from our perspective, and this is based on conversations with our customers and other market participants, prices have obviously been supported around these current levels at the moment, and in particular, as we head into the traditionally stronger seasonal period for infrastructure investment in China and also towards this year's National Congress, where economic growth will obviously be a key focus, so whilst we're a price taker at Mount Gibson and we're obviously monitoring the market closely, there are some reasons why we see that prices will be supported around these current levels, potentially higher. Importantly, for us, however, the high-grade premium for 65% material relative to the benchmark 62% material, is now sitting at around 7% to 8% on a grade adjusted basis, and we've expected it to rise, should steel demand increase or, in particular, should steel produce profitability and margins increase in China. And that's the pattern that we've seen consistently on a historical basis. So sales from Koolan Island under our long-term offtake agreements capture this premium, and that's historically offered solid pricing benefits for us. In relation to dividends, you will have seen that the Board has not declared a distribution for the '21/'22 year. And this decision was obviously based on the substantial operating investments that we made in the last year and on our current priority of resuming the growth trajectory in high-grade sales at Koolan Island and building our cash reserves. The company is pursuing a plan to drive substantial production and cash flow growth at Koolan. And the Board has a stated intention to pay dividends as and when the company's performance justifies and that's entirely consistent with the approach adopted for many years now. For reference, the company has distributed over AUD 330 million in fully franked credits -- dividends, fully franked dividends rather over the last 10 years. So in summary, we expect the '22/'23 financial year to be much stronger operationally and financially for Mount Gibson than last year and that's even with the near-term impacts as we deal with the recent processing plant fire, and that's driven on the benefits of the previous year's investments as they flow through to our increasing high-grade ore production and sales. So with that, I'll hand back to you, Lisa, for any questions that anyone may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you very much, Peter. (Operator Instructions) We have Jon Scholtz from Macquarie. -------------------------------------------------------------------------------- Jon Scholtz, Macquarie Research - Analyst [2] -------------------------------------------------------------------------------- So just touching on that ramp-up or getting back to crushing capacity. So the guidance currently that you have out there account for that? And is the cash cost as well included -- the mobile crushing is that included in the cost, adjusted out? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [3] -------------------------------------------------------------------------------- Jon, yes, the answer is yes, there. So we're obviously (inaudible) targeting levels in excess of what we've given for guidance. That incorporates our assumptions at this stage for how we will deal with the aftermath of that fire in the screening circuit and the costs likewise reflect how we're dealing it. So they will reflect -- they do reflect the mobile crushing cost that we will be adding to the business to deal in this short period now. -------------------------------------------------------------------------------- Jon Scholtz, Macquarie Research - Analyst [4] -------------------------------------------------------------------------------- Excellent. And product quality coming out, what do you expect, especially in the first half, given the constraint, compression in that period? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [5] -------------------------------------------------------------------------------- Yes. No change, Jon. So the product quality has been consistently now for some time, 65% Fe product and sometimes actually a little bit higher than that. And the silica content in our material is sitting around the 4.5% to 5.5% silica area. Alumina remains low in this product, as you know. So that's sort of 0.8% to 0.9%. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question is from Angus at Barrenjoey. -------------------------------------------------------------------------------- Unidentified Analyst, [7] -------------------------------------------------------------------------------- I think I was going to ask about whether the mobile crushing costs were built into your cost guidance as well. So it appears you've addressed that. But just looking into the second half, assuming everything is resolved in line with expectations, I mean I get your current shipping rates to fall in line with the bottom end of guidance, that's sort of 3.2 million tonnes. How should we think about your ability to catch up the tonnes between the bottom and upper end of guidance in the second half? And what are the constraints to getting more of those tonnes on ships? I mean you're obviously going to build your stockpiles through this period, but I just want to try and get a sense for how we should think about what that second half could look like? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [8] -------------------------------------------------------------------------------- Sure. Well, look, maybe the way to answer that is in shipment numbers, Angus. So our average shipment size is between 70,000 and 80,000 tonnes on a vessel. And during this period, whilst we're using mobile crushing units to basically supplement the front end of the existing crusher, we're expecting to do 2 and then rise to 3 per month, is our target. And then once the -- that's 3 shipments, I should say, and once the main plant is repaired and comes back online and so we've made some conservative estimates on that at the minute, so that would be early next year, then -- as in early next calendar year, then our -- that plant is capable of processing the needs for 4 or possibly 5 shipments per month. So that will be our target to run through. And then if we keep the mobile crushing facility on site, there is potential to add to that baseload target to try and catch up the deferred shipments that we have. So we'll obviously be trying to maximize that and do everything we can as long as that's cost effective. But that hopefully gives you a profile, if you model it, that's sort of 4 to 5 shipments per month in that second half. -------------------------------------------------------------------------------- Unidentified Analyst, [9] -------------------------------------------------------------------------------- Okay. Great. And just thinking about -- I mean, obviously, costs are going to be higher in the first half for reasons, but in terms of pulling some of those second half costs forward, while part of your operations down, should we think there's further benefit in the second half? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [10] -------------------------------------------------------------------------------- Sorry, just explain that again, Angus, what do you mean second half costs forward? -------------------------------------------------------------------------------- Unidentified Analyst, [11] -------------------------------------------------------------------------------- So, I'm just working on the basis that you're going to be stockpiling ore. So when things start to recover, then you'll be just processing the ore at a lower cost or maybe I'm thinking about it the wrong way? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [12] -------------------------------------------------------------------------------- I know what you mean. Yes, so we've got to continue mining at our current rates and the quantity of ore that's coming out will obviously process a reasonable proportion of what with the mobile crushing circuit. What we will do is we'll end up building stockpiles, which will then chew into with the main plant back online next year. So that's what you're referring to. So that's (inaudible) -- yes, our cash cost -- so cash operating cost of tonnes sold. So that investment in building that inventory will be obviously cash flow that we put for that purpose, and then we'll draw that down as we process next year. But we won't pull back on mining. We'll still be going at the mining rate. So that will continue consistently for several years yet. -------------------------------------------------------------------------------- Unidentified Analyst, [13] -------------------------------------------------------------------------------- Yes. So the cash flow generation in the second half could be better as a result. But obviously, you wear that in the first half? -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [14] -------------------------------------------------------------------------------- Correct. That's spot on. Yes, sorry, that's where you're going, correct, yes. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Thank you. And Peter, we have no further questions in the queue. -------------------------------------------------------------------------------- Peter W. Kerr, Mount Gibson Iron Limited - CEO [16] -------------------------------------------------------------------------------- Okay. Well, thanks all. Thanks for the questions, Jon and Angus. And if there is anything further, please contact us directly as you do and have a good day. Thank you.

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