IGO Limited (IPGDF) CEO Peter Bradford on Q3 2022 Results - Earnings Call Transcript May 02, 2022 10:33 AM ETIGO Limited (IPGDF), IIDDY
IGO Limited (OTCPK:IPGDF) Q3 2022 Earnings Conference Call May 1, 2022 8:00 PM ET
Company Participants
Peter Bradford - CEO
Matt Dusci - COO
Conference Call Participants
Daniel Morgan - Barrenjoey
Matt Greene - Credit Suisse
Peter O'Connor - Shaw and Partners
Tim Hoff - Canaccord
Mitch Ryan - Jefferies
Kaan Peker - Royal Bank of Canada
Lyndon Fagan - JPMorgan
Levi Spry - UBS Investment Bank
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Peter Bradford
Good morning, everyone, and thank you for joining us on the call today for a discussion of our operating and financial results for the March quarter, which we released to the market on Friday afternoon.
With me on the call today is Matt Dusci, our Chief Operating Officer, who will be available during the Q&A session at the end of the call.
I note that Scott Steinkrug, our CFO, is on leave and will not join us on the call today.
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Slides 2 and 3 highlight our cautionary statement and disclaimer and our competent persons' statement.
Of note, all currency amounts in the presentation today are in Australian dollars, unless otherwise noted.
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Moving to Slide 4. As always, the safety and well-being of our people comes first.
We are, therefore, pleased that our focus on continuous improvement in this area has continued to result in improved lag and lead indicators, as shown on the slide.
Our care for people was reflected in very strong responses to the safety-related questions in our recent engagement survey, which once again also reflected high levels of engagement by our people across the business.
We are proud of this outcome and the strong culture that we have cocreated with our people at IGO.
We are also proud of the way our people have responded to the high COVID caseload environment which has emerged in Western Australia over the quarter.
While this period has not been without its challenges, our people have demonstrated outstanding adaptability and resilience as together, we have managed increased restrictions and higher absenteeism due to the pandemic. Pleasingly, our systems and risk management procedures have proved effective, and we have not experienced any material disruption to our operations.
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Moving to Slide 5. We are also proud of our commitment to sustainability, both in performance and transparent reporting. It was, therefore, great to see IGO being included in the S&P Global Sustainability Yearbook for 2022. This was IGO's second consecutive year as a member of the yearbook, which in 2022 assessed the ESG scores of over 7,500 companies globally.
Of these, only the top 15% are recognized as members, and IGO was the only Australian company to be recognized in the Mining & Metals category in 2022, a fantastic achievement.
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Moving to Slide 6 and to some key highlights from the quarter.
Firstly, and as mentioned previously, we kept our people safe and engaged, both of which reflect the strong culture we continue to build at IGO.
At Nova, strong nickel prices and consistent operational performance drove excellent financial results and margins. Similarly, strong spodumene prices and a solid quarter of production at Greenbushes resulted in a significant uplift in the financial results for the lithium joint venture.
At Kwinana, trial production of the lithium hydroxide facility proceeded towards production of the first battery grade product.
Together, the strong performance of our nickel and lithium businesses resulted in materially improved financial results for IGO for the quarter, highlighted by stronger margins and higher net profit after tax.
Finally, post-quarter end, we negotiated a revised scheme of arrangement with Western Areas and now expect to complete the transaction in June.
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Moving to Slide 7, where we summarize our key financial results for the quarter.
Nickel and lithium realized prices were sharply higher for the quarter. In the case of lithium, this is driven by continuing strong demand from the battery sector and for nickel, was precipitated by supply concerns arising from the conflict in Ukraine.
Materially higher prices have resulted in a sharp increase in group sales revenue, up 31% quarter-on-quarter to $245 million, and underlying EBITDA which is up 89% to $233 million.
I note that the underlying EBITDA result includes IGO's share of net profit after tax attributable to our investment in the lithium joint venture. Net profit after tax for the quarter increased to $133 million.
Of note, we made a cash payment of $171 million -- a cash tax payment of $171 million during the quarter, which is primarily attributable to the taxable gain on the sale of our interest in Tropicana last May.
This payment drove the lower quarter-on-quarter net cash and free cash flow results.
We also paid $38 million in respect of our fully franked interim dividend during the quarter.
We finished the quarter with a strong balance sheet with closing cash of $440 million and no debt.
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Moving to Slide 8, where we reconcile net profit after tax for the quarter.
I note the contributions made by Nova and, most significantly, the lithium joint venture, which contributed an additional $43 million and $52 million, respectively, to the overall net profit after tax result for the quarter.
There was also an $11 million positive variance in the value of our listed investment portfolio.
______________________________ Moving to Slide 9 and a reconciliation of cash flow.
As shown, stronger free cash generation at Nova partly offset fully franked dividend and income tax payments that I mentioned earlier.
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Moving to Slide 10 for a discussion on Nova performance for the quarter.
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Moving to Slide 11. Nova delivered a solid quarter with no material impact to operations as a result of COVID.
As guided, lower plant grades resulted in marginally lower production for all metals quarter-on-quarter, resulting in nickel and copper production of 6,290 tonnes and 2,760 tonnes, respectively, for the quarter.
For the reasons discussed earlier, realized nickel prices for the quarter were materially higher at AUD 37,600 per tonne, up 38% quarter-on-quarter.
Cash costs of $1.86 per payable pound were marginally higher quarter-on-quarter with key drivers being lower production volumes, which were offset by continued high by-product credit pricing.
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Moving to Slide 12, where, on the left-hand chart, we set out the last 4 quarters of production and costs for Nova.
Importantly, and thanks to the continued focus from our site team at Nova, production remains on track to meet full year production guidance, while cash costs are expected to end the year better than our guided range of $2 to $2.40 per pound.
On the right-hand chart, I note that we built some working capital during the course of the quarter, largely due to the timing of shipments, and we expect this to unwind in the June quarter.
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Turning to Slide 13 for a brief update on the Silver Knight development project, where early in the quarter, we released an initial mineral resource estimate for Silver Knight, which was informed by historical drilling results.
As part of the current work program, further infill drilling will be undertaken to inform an updated resource and reserve as well as supporting the feasibility study into the development of Silver Knight as a secondary ore feed source for Nova.
In addition, the team have identified several high-priority exploration targets in close proximity to the Silver Knight deposit, which will be tested during the June quarter.
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Turn to Slide 14 for an update on the lithium joint venture with Tianqi Lithium Corporation.
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Moving to Slide 15. The lithium joint venture delivered a stronger quarter with higher realized spodumene prices delivering stronger financial performance.
The chemical grade spodumene transfer price for the quarter was USD 1,770 per tonne FOB, up from USD 592 per tonne for the 6 months to December 2021.
I do note, however, that the average realized price for the quarter was marginally lower than this due to December spodumene shipments being booked in January and different pricing for technical grade spodumene.
The same chemical grade spodumene transfer price will apply to the June quarter.
The transfer price is then expected to reset from 1st of July 2022 for the 6-months period July to December 2022, and this will be informed by the benchmark price for the June quarter.
Using April benchmark prices as a guide, we expect the transfer price to be materially higher again for this coming 6-months period.
IGO's share of the lithium joint venture net profit after tax for the quarter was just over $60 million, up from just shy of $9 million for the prior quarter.
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Moving to Slide 16, where we illustrate the various elements that make up the lithium joint venture net profit after tax result for the quarter.
Of note is the significantly higher contribution by Greenbushes in the quarter to IGO's account of $75 million, which was partially offset by IGO's share of commissioning and expenditure at Kwinana of $7 million and IGO's amortization costs for the lithium joint venture investment of $7 million.
The contribution from Kwinana is expected to increase once battery grade lithium hydroxide is being produced at or near commercial quantities and sold into the continuing strong battery supply chain market.
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Moving to Slide 17 for more details on the Greenbushes mine. Quarter-on-quarter spodumene production was higher despite a period of production downtime in February when a nearby bushfire resulted in a loss of power to the site.
No doubt, we all remember the ferocity of these bushfires, as reported widely in the media, the impact to people and property and the threat that the fire posed for a number of communities in the Bridgetown-Greenbushes area.
We note the contribution that the Greenbushes team made to support those fighting the fire and to support the community following the fire.
On a 100% basis, production for the quarter was 270,000 tonnes of spodumene concentrate, bringing year-to-date production to just shy of 800,000 tonnes.
IGO expects the June quarter to benefit from an increased contribution from the recently commissioned tailings retreatment plant and CGP2, both of which continue to ramp up to full production.
This quarter, we have reported a cost of goods sold with and without state government royalties.
This is to provide the market with better visibility on the consistent performance by the site team with respect to their controllable costs.
As shown, cost of goods sold for the quarter, excluding royalties, were $235 per tonne, which is in line with the prior quarter and within our full year guidance.
IGO expects cost of goods sold, excluding royalties, to be within guidance for the full year.
By comparison, materially higher benchmark prices, upon which royalties are calculated, has driven a higher cost of goods sold result, inclusive of royalties, of $476 per tonne.
The higher realized spodumene prices resulted in higher EBITDA, up nearly 250% quarter-on-quarter.
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Moving to Slide 19, (sic) where we illustrate the installed production capacity at Greenbushes. Construction of the tailings retreatment plant was successfully completed in the quarter and commenced commissioning and ramp-up.
Maiden production in the quarter was just over 15,000 tonnes of spodumene concentrate.
We expect the tailings retreatment plant to ramp up towards full capacity over the coming quarters, resulting in total nominal production capacity at Greenbushes increasing to 1.55 million tonnes per annum.
At CGP1, higher feed grade and improved recovery performance generated a stronger result.
The Greenbushes team have also made considerable improvements in recoveries at CGP2, which continues to ramp up to full production.
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Turning to Slide 19. Following completion of front-end engineering design studies, or FEED studies, by Lycopodium during the quarter, the joint venture approved the construction of CGP3, the third chemical grade plant.
Based on the FEED study, CGP3 construction is expected to be completed by early 2025 at a remaining capital expenditure estimated at $507 million.
However, with continuing cost pressures in the construction sector in Western Australia, IGO expects that this could potentially be in the range $500 million to $550 million.
Once commissioned and ramped up, CGP3 is expected to increase nominal production capacity at Greenbushes by an additional 520,000 tonnes per annum by early 2025.
Moving to Slide 20.
At the Kwinana lithium hydroxide refinery, trial production is continuing.
The Kwinana team, along with a high level of assistance and support from Tianqi engineers from China, have made solid progress towards the production of first battery grade lithium hydroxide.
IGO's observation is that the team are very close to delivering battery grade quality products and that there are no fatal flaws that would prohibit this from happening.
In parallel, the Kwinana team had progressed various work streams towards their commitment to the recommencement of the construction of Train 2.
This decision is expected sometime during the second half of the calendar year.
Turning to Slide 21 and a brief summary of some select exploration activity for the quarter.
Moving to Slide 22.
In a near Nova environment and excluding the work being done at Silver Knight, which I discussed earlier, our primary focus has been on the Chimera target.
Chimera remains prospective for large-scale nickel-copper-sulfide accumulation.
And despite recent testing of an EM conductor not bearing fruit, the majority of the interpreted extent of the anomaly remains to be tested.
This will be our focus in coming quarters in addition to further testing of the Elara and Orion targets.
Elsewhere on the Fraser Range, the team will be testing multiple targets over the coming quarter, as set out on the slide.
Moving to Slide 23 and to a brief update on the proposed acquisition of Western Areas.
Moving to Slide 24.
As announced in December 2021, IGO and Western Areas agreed to a scheme of arrangement, whereby IGO was to acquire Western Areas for $3.36 cash per share.
As a result of significant nickel market volatility following the announcement of the initial scheme, IGO and Western Areas agreed to increase the scheme consideration to $3.87 per share.
We note that the independent expert has concluded that the scheme consideration of $3.87 is not fair but reasonable and is, therefore, on balance in the best interest of scheme shareholders.
We also note that the Western Areas Board of Directors have recommended the scheme to Western Areas' shareholders on the basis that the IGO offer is within the Board's own view of value on a risk-adjusted basis.
Following a review by ASIC and the first court hearing, the scheme booklet is in the process of being mailed to Western Areas' shareholders.
And we expect that subject to Western Areas' shareholder approval at the scheme meeting scheduled for the 1st of June, that the scheme will complete on 20th of June 2022.
The transaction rationale and structure remains the same, and IGO is funding the transaction via new debt facilities and existing cash reserves.
Moving to Slide 25 and a short summary of today's presentation before we move to Q&A.
Moving to Slide 26.
IGO has delivered another safe and strong quarterly result. In large part, this is attributable to our people who have shown great resilience and flexibility in managing COVID, resulting in no material impact from COVID to our operations.
Our people remain highly engaged, motivated and proud to work at IGO.
Nova has continued to deliver with higher nickel prices driving improved margins and free cash flow.
Our investment in the lithium joint venture also benefited from materially higher prices, resulting in sufficient cash flow to fully fund planned expansions and return a dividend to IGO in the near term.
At Greenbushes, the production rate continues to increase.
The tailings retreatment plant is in ramp-up, and we have committed to the construction of CGP3.
At Kwinana, we continue to commission Train 1 towards first battery grade lithium hydroxide production, and we expect to commit to the recommencement of construction of Train 2 later this year.
Subject to shareholder and other approvals, the Western Areas transaction is now expected to complete in June. This transaction is on strategy, will expand our nickel portfolio and is expected to provide a pathway to future production of battery grade nickel sulfide.
Finally, we have continued to deliver strong financial performance with higher net profit after tax of $133 million for the quarter while also maintaining a strong balance sheet with $440 million net cash.
Thank you for joining us on the call this morning. We will now hand back to the operator for questions. Thank you, operator.
(20min delay)