Q3 2019 Aurelia Metals Ltd Earnings Call - Final
23 April 2019
Source: CQ FD Disclosure
Presentation
OPERATOR: Thank you for standing by, and welcome to the Aurelia Metals Limited March Quarterly Results Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Jim Simpson, CEO. Please go ahead.
JAMES BRUCE SIMPSON, MD, CEO & DIRECTOR, AURELIA METALS LIMITED: Welcome, everyone, to the Aurelia Metals quarterly results conference call. Thank you very much for your attendance. I'd like to say that we -- I won't go through this report as I'll take it as read, but I'd just like to talk about the high-level points.
It would seem to be a disappointing result for us with lower gold grades and production, but this quarter was always going to be our midyear in Peak's turnaround. Our focus has and will always be ensuring we implement our operational strategy, which is transitioning to contract mining, installing the lead/zinc plant upgrade and continuing exploration. There are key points that we would like to say to all investors in terms of where we are in turning the Peak operation around.
We had quite a low throughput, less than half the plant's capacity. But even so, we're able to maintain reasonable costs, and with the increased throughput over the next year, especially with the lead/zinc plant upgrade, we'll see significant mining unit cost reduction.
It's been very busy for us on the growth side as well. We've certainly been putting a lot of work into the exploration side, both at Peak and Hera. And mind you, we've only been at this 8 months, and I think the results so far have been exemplary. We certainly got a lot more results to come. And over the next month or so, we'll have more results coming from Chronos and Federation-Dominion. Peak Deeps will continue to be drilled, and we'll also be focusing on pushing the exploration or mine declines down to access those lower high-grade areas of Peak.
The key issues that we had during the quarter for Peak were the Chronos lead/zinc/gold zone, which we've been mining over the last 12 months. This quarter saw a poorer reconciliation than we would hope, but there's been lots of swings and roundabouts on this orebody, and we still expect it to perform well in the next quarter. But unfortunately, with these swings and roundabouts and the very negative effect of this orebody, it wasn't such a good quarter for us at Chronos.
In other areas, we've been doing a lot of work in the plant at Peak, certainly refurbishing the leach tanks, improving the water circuit, doing a lot of the structural replacement that was required when we bought the operation and certainly working in with the tie-in of the lead/zinc plant upgrade.
The contract transition has been difficult but successful, and that certainly saw a reduction in our production over the quarter. But on the positive side, Pybar has increased the development by 50% over the last couple of months, and we expect to see that increase. And followed by that development improvement, we'll start to see production improvement. So with the key planks of our operational strategy being improving the productivities from underground and bringing in the lead/zinc plant at the end of the year, we'll start to see steady state going into next calendar year.
Moving on to Peak -- sorry, to Hera. Hera has had a pretty steady quarter. We have missed a second shipment for lead/zinc, which has an impact on the all-in sustaining costs. But the Peak unit costs have been very good, and that's enabled us to mine some gold-only stopes on the fringes of the orebody that we would not necessarily have taken. So Peak has been moving along quite well. We expect the North Pod to come in, in fuller production over the next couple of quarters, and certainly the base metals will start to increase over those couple of quarters.
The promising thing at Hera is that we've had a number of targets that we've been drilling, and they've been successful, and certainly, we have a lot of expectation on continually getting some good results from the exploration of Hera.
So all in all, it has been a difficult quarter for us, but this is a rebuilding phase, especially at Peak, and certainly an exciting phase for exploration.
I'd like to hand over now to Tim Churcher, our CFO, to go through some of the results.
TIMOTHY SHEM CHURCHER, COMPANY SECRETARY & CFO, AURELIA METALS LIMITED: Thanks, Jim. As Jim has outlined, the March quarter results reflect the combination of a number of factors which have delivered a weaker-than-normal quarter for the company. We had reduced gold grades at Chronos. We had some delays in accessing high-grade stopes at Hera. We had only one base metal shipment in the quarter from Hera, together with we had lower copper con shipments from Peak.
So this made the group production for the quarter of just over 23,000 ounces delivered at an all-in sustaining cost of 3 -- $1,302 an ounce. Whilst this still provided a significant margin over current spot prices, it's not the sort of margin we plan to deliver.
Looking at Peak. Its performance in the March quarter was driven by 29% reduction in throughput quarter-on-quarter. And as Jim has said, this is partly due to ore supply issues relating to the changeover of the contract mining. The other large impact was a 33% reduction in the gold grade also, as Jim has outlined, due to volatility from the Chronos zone and current restrictions on ore sources underground at Peak. And as commented, as underground development is increasing rapidly, we would plan to increase development to prepare the mine for more consistent levels of ore production in the future.
This lower production led to lower sales. We recorded a $13 million reduction in sales revenue at Peak for the quarter of just over $32 million in total. Pleasingly, total operating costs were actually down slightly in the quarter, and this is despite the increased underground activity as noted previously. However, the reduction in revenues served to reduce the site operating cash flow to around $10 million. After capital of $14 million, of which $5.6 million was growth capital related to the lead/zinc upgrade, Peak recorded negative cash flow of $3.3 million for the period.
The full year production target for Peak is 70,000 to 80,000 ounces at an all-in sustaining cost of $1,000 to $1,100 an ounce. Peak will work hard to hit its guidance, but it will need to deliver a very strong 20,000 ounces in the June quarter, and this will be dependent on grade performance from the final stopes of the Chronos gold/lead/zinc zones. Production guidance for next year's plan will be provided in the June '19 quarterly report once site budgets for FY '20 have been finalized and approved by the board.
Turning to Hera. The mine continues its recent high levels of ore throughput, but we did experience a 10% reduction in gold grades and a slight reduction in gold recovery, which led to a 13% reduction in gold production quarter-on-quarter. The low base metal grades experienced in the quarter contributed to low concentrate production. The low concentrate production meant we could only deliver one base metal shipment in the quarter. We are planning on 2 shipments in the June quarter. The expectation is that, once production from the higher base metal grade portions of the North Pod increases, then concentrate production will increase accordingly.
In discussing Hera, it is worth highlighting the anticipated increase in zinc treatment charges. In 2018, we had historically low zinc treatment charge of USD 147 a tonne, and there are expectations that the rate in 2019 has been agreed at $275 a tonne, although this has not been yet confirmed. If this rate is finalized, it will increase treatment charges at Hera by around USD 3.5 million over the course of the year.
Site costs were relatively flat quarter-on-quarter and indeed a very pleasingly low about $146 a tonne on a unit cost basis with key variations relating to the accrual of the increased treatment charges and lower byproduct credits due to the zinc shipment in the period.
Hera recorded revenue of $34 million, which after site costs and $3.7 million of capital, it delivered a net site cash contribution of $11.2 million. Full year guidance for Hera is 45,000 to 50,000 ounces at an all-in sustaining cost of $650 to $850 an ounce, and we expect Hera to achieve the higher end of this guidance range with costs within target.
At the group level, we increased our cash balance by $700,000 in the quarter with a net contribution from the mines of approximately $8 million offset by tax payments of $6.5 million, hedging losses of around $2 million, corporate costs and other working capital changes. As we've previously noted, with the depletion of all tax losses last year, we are in a full taxpaying position, and we would expect to pay in the order of $9.5 million in tax installments in the June quarter. Lastly, on hedging. The position is being delivered into according to the group schedule, and we maintain cover of approximately 56,000 ounces out to November of this year.
With that, I'll hand back to Jim for his closing comments. Thank you, and back to you, Jim.
JAMES BRUCE SIMPSON: Thanks, Tim, for that detailed summary. Again, I'd like to just reinforce what our program will be over the next couple of quarters, and that's really focusing on building Peak's performance, and that means increasing its production rate and lowering its unit costs. The lead/zinc project is very key to the success of the operations for the future, and we're fully focused on delivering that on time.
Exploration is, obviously, very exciting for us and has had promising results to-date, and we'll continue to focus on exploration over the next 6 months and certainly into the next year.
With that, I would like to hand back to the convener. Thanks very much.
Questions and Answers
OPERATOR: (Operator Instructions) Your first question comes from [Brian Zhu], a private investor.
UNIDENTIFIED PARTICIPANT: Thanks very much for your reports. And I understand that the results don't look particularly good, but from your explanation, it seems like there's reasons for it. To what extent do you think the Peak operations will be back in line? And what other types of problems that you are facing in terms of changing to contract mining so that we can kind of understand the causes behind the drop in the production and the rise in the cost?
JAMES BRUCE SIMPSON: Thank you for your question. The way the contract mining has been a very integral part of our plan, and certainly, when you're bringing in a new workforce, about 1/3 of our workforce went to the contractor, but there was a lot of business interruption during that process. And we and Pybar are rebuilding the numbers to ensure that we have manning across the whole operation. So that comes with time and getting people onboard, so there's a slow building process there, but they've hit the ground running. But there's still a lot of operational efficiencies that we can see and improve on. And when Pybar get properly settled into the operation, and so they -- sure they're going to do an even better job than what they're doing at the moment. To the question of -- about rebuilding, we expect to continually -- to build on the production side. The production was hampered during the transition period. We're also taking the opportunity to refurbish the plants that we've got a number of bleach tanks off-line doing a lot of structural engineering improvements so that the plant is in good nick for the next 10 years. So we're playing a lot of catch-up from when Newgold left the operation and let the place run down, especially in development stocks and also some of the refurbishment that needed to happen in the Peak plant. So this is a rebuilding story. And certainly, as I said before, I think this is an [idea] in Peak's performance.
OPERATOR: Your next question comes from Mike Millikan from Hartleys Limited.
MIKE MILLIKAN, RESOURCES ANALYST, HARTLEYS RESEARCH: Just a quick question on Chronos in regards to grade. What was the model? And coming at 6.3, obviously a long, long away from the reserve grade. And equally, are you still doing roughly 10,000 tonnes per month from the orebody?
JAMES BRUCE SIMPSON: Yes, that's correct. Looking at around about 10,000 tonnes per month, we did mine -- it wasn't quite the ore reserve grade that we mined from these particular stopes. It was a bit less than that. It was more around about the 10, 11 mark. And so the reserve is an average. Certainly, we're looking at the stopes above, and we have confidence that it's not as variable as we've seen in the past. And certainly, there's high lead/zinc grades coming in to the upper levels of Chronos. So yes, it was just a very, very variable section of the orebody that we went through in the last quarter.
MIKE MILLIKAN: Okay. Got you. And just obviously reserve and resource update. Midyear, Chronos obviously being depleted. When will we expect, on the current mine plan, Chronos to finish up? What's the current plan there?
JAMES BRUCE SIMPSON: Well, we don't have any plans of finishing up the high-grade Chronos. We've got exploration results pending, but we have said to the market that we've done another 100 meters of vertical drilling and seen some good base metal intersections, and those results are halfway through from coming back. So we're not too far off from being able to release those results, and we've also got a surface program drilling another 100 meters above that. So we can confirm that Chronos continues upwards. And certainly, we see that orebody continuing, although it's lower goal but higher base metals but still very valuable in the scheme of things.
MIKE MILLIKAN: Yes, cool. And just finally on the lead/zinc circuit, obviously, it sounds like it's all progressing pretty well. Completion commissioning, early new year, 2020, is that the kind of -- still the plan?
JAMES BRUCE SIMPSON: Yes. Our plan is to commission in the first quarter of 2020. We've been doing some trials as well as on the lead/zinc, and it's very promising in terms of how -- the metallurgy of the lead/zinc. So we're very confident that there'd be no surprises in the metallurgy. It's really just getting the plant into a position where you can do it efficiently.
OPERATOR: (Operator Instructions) Your next question comes from [Mark Labor] from [Aurelia ANI].
UNIDENTIFIED ANALYST: Yes, I just want to know why these results weren't telegraphed ahead of time?
JAMES BRUCE SIMPSON: Well, we can only sort of play the ball in front of us, so when we were going through the December quarter, we did flag that there was going to be a transition to contractor, and we did flag that we were doing refurbished work in the plant. So you can only really disclose what the results are at the end of the quarter.
UNIDENTIFIED ANALYST: Right. So I saw that, but surely, a month ago, you would have had a pretty good idea we would have been well down on previous production levels.
TIMOTHY SHEM CHURCHER: And I would just add. Mark, it's Tim Churcher speaking. We've never adjusted. We set the company's production guidance about 8 months ago at a group level, 115,000-130,000. So if you looked at the run rate at the midyear, we're obviously running well ahead of that, but we never chose to decrease or increase that guidance. So by inference, the company is sticking to that guidance. It was indicating that the second half is likely to be weaker than the first half.
OPERATOR: Your next question comes from Andrew White with Curran & Co.
ANDREW WHITE, RESOURCES ANALYST, CURRAN & CO: Actually, the question I was going to ask was asked by the first questioner, but I just wanted to get a little bit more detail on some of the difficulties that you had in transitioning to the contract miner. Was it -- is it a lack of personnel and a lack of operators? Or maybe you can point me to where difficulty was. And then also just in relation to the lead/zinc grade at Hera, is that simply due to the areas that you're mining through at the moment? They are planned lower grade areas? And what's the likely outlook for lead/zinc grades in the next quarter and beyond?
JAMES BRUCE SIMPSON: Okay. To answer the first part of your question, as you can imagine, with a fairly entrenched workforce of 26 years, the fact of going to a contractor was going to be pretty difficult for them. And so through January, there was certainly a lot of needed action and interference and certainly, there's a lot of people who decided that they didn't want to continue as the contractor. Some people did. So there was a lot of HR concerns or issues that we had to deal with. And as it turned out, probably only 1/3 of the workforce transitioned across to the contractor. So the contractor was left short in February to man up. So that was the essential reason why we had especially a drop in production, and hence, we took the opportunity to do some plant maintenance as well. To your second part of the question, with the reduction of costs at Hera, we've been able to sequence stopes which are gold-rich but not lead/zinc-rich in the mine, and they've been on the extremities to the orebody. So if we don't take them now, then it's very hard to get back to them. So if they still make good money but they're mainly gold dominant ores, so they didn't have a lot of base metal in them. So hence, we had to change our mining sequence to accommodate that. And our plan is, going forward, is that more and more of North Pod will start to dominate the schedule. And we're also going to split the North Pod into 2 and start a second horizon. So we're going to certainly start building up the base metals in the feed.
OPERATOR: (Operator Instructions) Your next question comes from [Jesse Lou], a private investor.
UNIDENTIFIED PARTICIPANT: So just wanted to clarify something because there's been some rumors flying around in terms of AMI potentially wanting to look at acquiring CSA. Could you just talk me through the validity or, I guess, the lack of validity of those rumors?
JAMES BRUCE SIMPSON: I can say that there was a process that was running with Aeris as was publicly announced. Aeris has certainly put a considerable bid on the table for CSA, and that deal has fallen through. I'm not sure what Glencore intend to do with the asset now. And we're just sort of waiting and watching as to where they move next. But certainly, at those prices, we didn't see the value in it. So we haven't been going into any process with Glencore to buy the operation. At the moment, we're doing a standing-and-watch process.
UNIDENTIFIED PARTICIPANT: Okay. And would you be able to, I guess, give me an indication as to what might be potentially a price range of value that would, I guess, make AMI want to get back on the potential bidding table?
JAMES BRUCE SIMPSON: Look, I can't really comment on our view of the value, but certainly, we saw the price that was put up by Aeris as well over what we would pay.
OPERATOR: Your next question comes from Stuart Dodd with Renaissance Asset Management.
STUART DODD: Two questions, both about Peak, just to sort of get perhaps a bit more perspective. Has the disruption associated with the transition to contractor passed? So what I'm really trying to get at there, can we expect throughput rates at Peak to go back towards say December quarter levels in the next quarter? Is that a reasonable expectation? Or is that too bold?
JAMES BRUCE SIMPSON: No, I believe that's a reasonable expectation. We were hoping to build on the September and December quarters in terms of production. But we were certainly confronted with a very difficult situation through this quarter with the unions and the -- certainly the settlement of the workforce, so hence, the production was affected. But now that we're past that, and I can say we are, it's a rebuilding phase, and we expect to continually build the production of Peak up to those points that we were talking about around the 800,000 tonne mark in the next year. And that comes with 2 things. One is obviously building the stocks underground with Pybar in terms of production and stocks and sources but also having the lead/zinc circuit ready to go and being able to explore an orebody that's just sitting there.
STUART DODD: Okay. And maybe a question for Tim so he doesn't feel left out. In terms of the transition, I presume there would have been one-off costs associated with the transition. Is that the case? And if that is the case, are all those costs now, are they included in the cash flow details you've given for this quarter. Or is this still going to be some impact going forward?
TIMOTHY SHEM CHURCHER: No, the majority of the transitional costs were included in this quarter, Stuart. There is some equipment sales that we're doing with Pybar, so you'll see some inflows from that next quarter. But in terms of outflows, no, the majority of it. For those employees that didn't come across that were legitimately made redundant, we've paid those people out. So the majority of those, all material aspects, they've been down this quarter.
OPERATOR: (Operator Instructions) Your next question comes from Michael Evans with Acova Capital.
MICHAEL EVANS: Can you give me a bit more color on the TC? The increase -- is that the zinc TC you're talking about. I mean, just remind me the relationship between that and the bulk TC? Is it the same thing?
JAMES BRUCE SIMPSON: Most bulk lead/zinc contracts are reference to the zinc treatment charge. So the Hera treatment charge is referenced to the zinc TC. There's a slight premium, but I can't disclose what that number is. But it's a slight premium to the zinc TC.
MICHAEL EVANS: Okay. And I think in the quarterly, you referenced about 50%, but if it gets confirmed at, say, 75%, it's obviously a bit more than that. Is that correct?
JAMES BRUCE SIMPSON: That $3.5 million variation is based on what we expect to pay. So I'll just disclose what is essentially in the market, what people I think take as agreed with some Japanese smelters, around $2.75 million. But I need to get confirmation obviously from our offtake partners around that. So I've looked at that zinc TC. I've added the premium that we know that we're going to pay, and that's where I've come to the $3.5 million variation based on last year.
MICHAEL EVANS: And does that play into your mind on whether you spend some capital on splitting the con here? Or is that just not a priority at the moment given other things going?
JAMES BRUCE SIMPSON: All right. Look, certainly, TC RCs have an impact on speeding the concentrates because we pay a premium of USD 30 a tonne on the bulk con, and that would drop to benchmark if we were to, say, split the lead/zinc cons. What we are doing is looking at the Nymagee feasibility work and seeing what we need to do for Nymagee in terms of copper, lead and zinc because it will be some type of polymetallic circuit. And then we need to say, "Well, what's the benefit to Hera on that?" But it's really just the treatment charges if we were to split the cons. There's a lot of other benefits in terms of payables, and then there's recovery reductions. So it's a balancing act. But certainly, we take into account the NSR value and whether it's better or worse to split the concentrates.
MICHAEL EVANS: Yes, okay, okay. And the $30 a tonne premium for the bulk con, is that at the old $147 per tonne? Or is that at the new $275 per tonne? Like, is that premium doubled from 15 to 30? Or is it still 30?
TIMOTHY SHEM CHURCHER: No, that's fixed.
OPERATOR: Your next question comes from Michael Orphanides with Tribeca Investment Partners.
MICHAEL ORPHANIDES, INVESTMENT ANALYST, TRIBECA INVESTMENT PARTNERS PTY LTD.: Jim, Tim, my question is around Dominion and Federation. I think when you originally released the results, there was just Dominion. Is Federation sort of some new area around Dominion?
JAMES BRUCE SIMPSON: Federation's in the vicinity of Dominion. And whilst we're doing some electromagnetic exploration, Federation certainly lit up a bit or a lot, and we wanted to have a look at that as well. But it's always been in the region, and it's not that far from Dominion. So we sort of call it the Dominion-Federation area, and we've done some drilling on that Federation target. And as we've stated in the quarterly, we've had some very promising intercepts of lead/zinc mineralization.
MICHAEL ORPHANIDES: So Dominion, I think, when you released, sort of one of the discovery holes was 100 meters at 1% copper, and Federation is looking more lead/zinc. Is it -- does it look like a different type of mineralization?
JAMES BRUCE SIMPSON: Look, all I can say is that the Dominion is a copper oxide style deposit sort of from surface down to the base of weathering. So that was certainly an interesting target, and we've got a lot of work to follow up on that in trying to understand its genesis. The lead/zinc is primary ore. So again, we're following up an IP target.
TIMOTHY SHEM CHURCHER: And it's just in the results, mainly...
JAMES BRUCE SIMPSON: We mentioned lead/zinc because we just based on -- visible analysis of the RC chips at the moment. We're still waiting for assays. So there might be precious metals, we don't know.
MICHAEL ORPHANIDES: Okay. Also, just on the throughput rates of Peak and Hera. So with Peak, in terms of -- what development rates do you need to hit or want to achieve to sort of put you on the path to getting to 800,000 tonnes per annum? So basically where are you at now? And what sort of -- if you can give it, what kind of incremental growth in development rates would you be expecting?
JAMES BRUCE SIMPSON: Development rates are sort of pushing up around 600 to 700 meters per month, but that's a bit of a spike in terms of getting ourselves production sources in the short term. I mean one of the key things is that when we get the lead/zinc circuit in place, there's a whole lot of inventory that's already available to us from the Chronos lead/zinc orebody. We've done a lot of capital development, and the ongoing capital development is mainly focused around the Perseverance Deeps has been completed. We will start the Chronos incline with more results, and there's exploration results at the Peak Deeps, which we will start looking at putting a decline into that. So we have scheduled that out. Obviously, that's very recent information because we've been going through our ore reserves and resources and building our life of mine development schedules around the 800,000 tonne per annum mark. So that information will certainly be delivered over the next 3 or 4 months.
OPERATOR: Your next question comes from [James Cooper], a private investor.
UNIDENTIFIED PARTICIPANT: Just a quick one. I'm sorry, I actually came into the call a little bit late and I've missed the discussion largely about the average grades at Chronos coming down so significantly. But I did hear -- I think I heard said that it was just an unusually low-grade area, and it's a bit negative. It's difficult to predict. But how confident are you that you won't be producing the reserve grade there?
JAMES BRUCE SIMPSON: Look, again, we're reasonably confident of the reserves. We are doing a little bit of sample drilling just to confirm various areas, but in the upper levels, it's more consistent across the width of the orebody. Whereas in the area that we're at the moment, there's a lot of very low grade and some very, very high grades, so you do have trouble modeling that. But we believe and we're confident that, as we move into a more well-distributed gold, lead and zinc, that we'll certainly be seeing close to the ore reserve grades.
UNIDENTIFIED PARTICIPANT: Okay. I mean, the corollary is, I suppose one could think, do you have any expectation that you'll be hitting things well above the reserve grade to bring it back to the average, I think, at a much lower level this quarter?
JAMES BRUCE SIMPSON: Yes. Look, we've had some significant ups, as you know, from last year. And as with the ups or the swings, there's roundabouts with these very negative orebodies. But the ore reserve takes into account the whole orebody and how it reconciles. And yes, look, we've just had a roundabout on this quarter, but we're still very confident that the ore reserves are well predicting and accurately reconciling over a long period of time.
OPERATOR: Your next question comes from [William Mar], a private investor.
UNIDENTIFIED PARTICIPANT: I was wondering what value you'd put on a shipment of Hera lead/zinc concentrates? Just a ballpark number would be interesting in the fact that you only had 1 shipment this quarter instead of the normal 2.
JAMES BRUCE SIMPSON: You're asking for the value of the lead/zinc shipment?
UNIDENTIFIED PARTICIPANT: Yes.
TIMOTHY SHEM CHURCHER: You can think of it as sort of circa 3 million to 4 million.
OPERATOR: There are no further questions at this time. I'll now hand back to Mr. Simpson for closing remarks.
JAMES BRUCE SIMPSON: Well, again, everybody, thank you for listening on our quarterly results, and there's a lot of opportunity in these 2 assets going forward. And I believe that, again, we're going to build this business, and we've got certainly a lot of organic opportunities. So thank you very much for sticking with us.
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All the best
KKR
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