BHP Group Ltd Q4 FY2021 Earnings Call

Good morning. My name is Pam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Capstone Mining Q4 and Year-End 2021 Results Conference Call. Thank you.

Good morning. I'd like to welcome everyone on the call today. Please note that the news release and regulatory filings announcing Capstone's 2021 fourth quarter and full year financial and operational results are available on our website and on SEDAR. If you are logged into the webcast, we will be advancing the slides of today's presentation, which is also available in the Investors section of our website. I'm joined today by our CEO, Darren Pylot; our President and COO, Cashel Meagher; our Chief Financial Officer, Raman Randhawa; our Senior Vice President, Risk, ESG and General Counsel, Wendy King; and our Senior Vice President, Exploration and Strategic Projects, Brad Mercer. Following our brief remarks, there will be an opportunity for questions. Please note that comments made on the call today will contain forward-looking information within the meaning of applicable securities laws. This information, by its nature, is subject to risks and uncertainties, and actual results may differ materially from the views expressed today. For further information on the risks and uncertainties pertaining to our business, please see Capstone's most recent filings, which are available on our website and on SEDAR. Finally, I'll just note that all amounts we will discuss today are in U.S. dollars, unless otherwise specified. Now I'll turn the call over to Darren Pylot.

Thank you, Jerrold, and good morning, everyone. On the title page, you will see a recent photo of Pinto Valley's tailings thickeners, which were just upgraded last year to improve water recycling capabilities and have lowered our overall water consumption. Turning now to Slide #6. 2021 was a strong year for Capstone as we achieved the top end of copper production guidance and with C1 cash costs at the midpoint, despite the backdrop of industry-wide cost pressures. We benefited from cost controls and optimizations at both Pinto Valley and Cozamin, which will be discussed later in more detail in this presentation. In January, we announced provisional 2022 guidance for both mines of a combined 82,000 to 90,000 tonnes of copper at a C1 cash cost of $1.85 to $2 per pound. We will update this for Capstone Copper following the completion of the combination with Mantos Copper. Moving on now to Slide #7. We realized record financial results on the back of high copper prices and optimized operations. Specifically here, you can see adjusted net income of $242 million, adjusted EBITDA of $432 million, and operating cash flows of $376 million, which were all record numbers. Our net cash position at year-end grew by $56 million to a total of $264 million, which was a $389 million increase from a year ago. That's truly transformational and positions us to fund future growth projects that we will have throughout the Capstone Copper portfolio. On to Slide 8. This graph shows how significant 2021 was for Capstone as we generated over 3.5 times more cash flow than the average of the previous 13 years, fueled by high copper prices and solid operational performance. Slide #9. In January, we released our annual production and cost estimates and gave a preview of how we performed in Q4. Our adjusted EBITDA of $113 million met Street expectations, and our adjusted earnings per share of $0.18 was also a beat. It's worth noting that Q4 EBITDA would have been $8 million stronger had it not been for the lower expected sales of 46.8 million pounds sold versus the payable production of 49.8 million pounds. These sales were impacted by COVID-related logistics issues that caused problems with border crossings and overall trucking availability in December. However, we have since caught up on these deferred sales in this current quarter. Now I'll pass it over to Raman.

Thanks, Darren. We are on Slide 10 now. So Darren walked through how last year was transformational. You'll see on this slide that our liquidity is currently sitting at around just under $500 million. When the Mantos Copper combination is complete, we will have the ability to expand our revolver credit facility and total liquidity. Our Capstone Copper growth profile is shown on the graph on the right at different copper prices. What excites me is to see a pathway to over $1 billion of annual EBITDA in 2 years. Now on to Slide 11. This slide captures just how fantastic 2021 was from my perspective. A 48% increase in copper prices, coupled with a well-timed 19% growth in production, underpinned by our capital investments, led to the expansion of gross margins to 59% and a 209% boost to EBITDA to over $430 million. That brings me to the next slide, Slide 12, to discuss cost containment strategies in the current inflationary environment. Back in 2020, we seized an opportunity to lock in lower fuel prices for Pinto Valley, which saved $6.3 million in 2021. We expect to save another $4.5 million in 2022 at current diesel prices. The ramp-up of the moly plant in Q4 went well, and we're expecting important byproduct credits of $5 million to $8 million per year. Additionally, the pyrite plant is an exciting low CapEx, quick return project as it diverts acid-generating pyrite minerals away from our tailings storage facility and adds them to our dump leach, where we will be able to self-generate acid over time, saving over $5 million in acid purchases a year. At Pinto Valley, between contracted pricing on fuel, power, and labor, we have approximately 50% of our costs fixed. At Cozamin, FX hedges led to $2.6 million in realized gains in 2021. During Q4, we took the opportunity to layer on a few more collar hedges to protect the FX rates for the Mexican peso and the Chilean peso. Now I'll hand it over to Brad Mercer.

Thank you, Raman, and good morning, everyone. We're now on Slide 13. Pinto Valley had record quarterly mill throughput of 58,500 tonnes per day, benefiting from the completion of the PV3 optimization effort in Q3. Copper production of 37.1 million pounds at $2 per payable pound was the best quarter of last year. The mine generated an impressive USD 270 million in operating cash flow last year, which I believe underscores the significance of this mine's contribution to the future of Capstone Copper. Speaking about the future, the PV4 PFS expansion study is on track for a Q4 release. The Jetti catalytic column test work is ongoing, and we are now about to commence pilot scale leach pad testing this week at the site. The pilot test will provide additional leach data for the study. And recall, positive leach results would support a strategy of expanded dump leaching and a higher mill cutoff grade. The study is also considering some modest investments in the mill to boost further throughput by 5,000 to 10,000 tonnes per day. Specifically, upgrades to mill motors, grinding circuit hydrocyclones, flotation circuit, and concentration filtration are the key areas under review. As you just heard, Raman discussed the pyrite agglomeration earlier. I would just add that we expect to proceed with this project in the second half of 2022 following formal Board approval.

Thank you, Brad. We are now on Slide 17. Capstone continued the development of our company-wide ESG strategy. In Q4, our senior leadership team outlined Capstone's sustainability vision, which includes reducing our carbon footprint, focusing on water stewardship and tailings management, investing in our workforce, and integrating sustainability throughout our value chain. In 2022, we will undertake a company-wide initiative to develop our strategy to reduce greenhouse gas emissions and build target setting processes. We are also committed to enhancing our ESG disclosures. This year, we will start incorporating the TCFD recommendations into our annual sustainability report in addition to the GRI and SASB reporting standards. On the environmental front, at Cozamin, construction began in November for the new tailings filtration and paste plant, which is needed for conversion to a dry stack tailings storage facility and underground paste backfill system. This project will reduce our tailings footprint, support tailings safety, and reduce water consumption. We look forward to providing updates as this project advances throughout 2022. Pinto Valley completed the purchase of new dust collector units and began the installation process in Q4. The new and more efficient units will reduce dust emissions and do not require the use of water. We are also improving our health and safety system. We are proud to share that we've implemented our 9 pillar safety management system at our operations. In Q4, we conducted internal audits of the management system at Pinto Valley and Cozamin with peer participation from all sites.

Thanks so much, Wendy. Good day. We're now on Slide 19. I want to share my thoughts on the Capstone-Mantos combination as this was the driving factor that made me want to join this group. The combination offers significant growth and incredible optionality, backed by strong cash flow from recently expanded and optimized mines, plus a pristine balance sheet. No other copper company offers the immediate prospect of growth, synergy, and enthusiasm that exists between Santo Domingo and Mantoverde. I visited Chile 2 weeks ago, and I found the excitement there infectious as integration steps are in progress, and the synergy studies are well underway. It's rare in mining to find opportunities to create a district approach with decisions made by one company. I can't think of another company that has two transformational projects within close proximity to one another, fully permitted with one underway and fully financed. Some of the value-added work being conducted at Santo Domingo, like the cobalt feasibility study, will ultimately benefit Mantoverde, unearthing their own hidden cobalt value in its resource. Byproduct acid from cobalt processing will create an opportunity not yet accounted for in reduced acid costs at Mantoverde's ongoing leaching operations and the possibility of adding oxide reserves at Santo Domingo. The value of some synergy options is an output of ongoing processes, which are measurable and obvious. Most evident is the infrastructure sharing, be it desalinated water, power, port, or logistics, all of which will materially benefit and quantify the development of Santo Domingo. Mantoverde will pave the way for Santo Domingo project delivery, shared services, experienced management teams, and embedded systems and processes, which can be categorized as softer synergies but greatly reduce the risk of project delivery. There will also be some synergies that require more time due to the nature of strategic integration, like mine plan sequencing and process plant location. These projects will ensure organic in-house growth of copper production of over 100% over the next several years.

Thank you, Cashel. Before I open the call for questions, I just want to thank Capstone's team for their unwavering commitment to the company and the resilience they demonstrated over the course of last year. Despite the ongoing COVID pandemic and extreme weather events affecting Arizona, we managed to produce record-breaking results by creating much more resilient operations, generating value for all of our shareholders while assisting and contributing to the growth of the communities that host us. I would also like to welcome Cashel Meagher to our team. Cashel brings the right skill set and a wealth of experience that's required to take us to the next level of growth and project execution as we become Capstone Copper and continue to execute on our peer-leading transformational growth strategy. Additionally, I'm really looking forward to welcoming John MacKenzie and the entire Mantos team to Capstone very soon. Finally, I'd like to reiterate how excited we all are about the next chapter as Capstone Copper. We have the assets with long mine lives, all with exploration upside combined with a strong balance sheet and team, which positions us to take advantage of this strong copper cycle we're currently in. As the world looks to a future with cleaner energy, we will be the go-to name for responsible copper sourcing. With that, operator, the formal part of the presentation is complete, and we're ready to open it up for questions.

I'd like to start off by wishing Cashel all the best in his new role with Capstone Copper. Cashel, it sounds like you've had a chance to visit all the assets. I'm just wondering, do you see, a, any more low-hanging fruit for optimization on the existing operations? And b, what are your thoughts in terms of the brownfield projects that have been proposed at each of the assets?

Thanks, Dalton. Yes. I'll tell you what, like in what we spoke about earlier, I sort of spoke about the pending transaction. But I am extremely impressed with Capstone's current assets. Having a chance to review some of the opportunities there and also the track record of what they've done over the last number of years is truly impressive. The management teams are super strong. They're doing great work. There are things they're working on that I wasn't aware of that I think are going to yield results. As those things mature, there will be opportunity. What's going on at Cozamin with the underground mine and how they've increased and now their concentration on recycling water, the reinforcement of the tailings, and the paste backfill will yield great results in the reserve. They are executing on those things. Certainly, at Pinto Valley, this work that they've embarked on with BHP and the prospects of Copper Cities and the expansion of PV4 can really move Pinto Valley from its current position to a higher throughput producer, and perhaps there are some synergies with Copper Cities where we can really lower our cash cost per pound. I'm encouraged by what I've seen so far and by the way the teams are engaged in those ever-improving processes.

And then speaking of Copper Cities, you guys are working on PV4 as we speak. Are there some or all elements of PV4 that are waiting on the drill results from Copper Cities, or are you pushing forward on PV4 as if you don't have access to Copper Cities and will work that in later?

Yes, Dalton. We are proceeding with PV4 as if Copper Cities is not there, but we do fully expect to be looking at optimization between the two sites shortly. We do not want to slow down what we're doing at PV4 and wait for Copper Cities. There are obvious things we need to do at Pinto Valley regardless of whether we have Copper Cities. But certainly, I believe that post the PV4 study, we will be announcing further synergies.

Dalton, it's Darren. We continue to believe Chile is a top mining jurisdiction. We produce a significant amount of copper. We are confident that taxes are going up in Chile, as they are increasing all over the world. We accept this reality but expect it to be done conservatively and meaningfully.

With respect to Pinto Valley, you guys had a nice spike in grades in Q4 and a corresponding drop in recoveries, I guess, related to some of the soluble copper. What can we expect as we move into Q1? Should we expect grade to remain elevated through Q1 and then taper off, or are you seeing more reversion back to reserve grades at the start of the year?

Craig, Cashel here. Look, there's always work towards optimization and NPV maximization with any sort of grade optimization. I think Q4 was a bit higher grade than we expect for the rest of the year, but there are ebbs and flows. We'll trend more towards the reserve grade going forward. You'll see more even production and expectations towards what we have already released as guidance for PV.

Yes. I think, Craig, you'll remember, our guidance for 2022 to 2024 was like 0.33 to 0.34 grade.

Yes. And that’s what we expect for 2022, but we don't provide guidance on a quarterly basis. This year, what went into the guidance was 0.33 to 0.34.

And maybe just a follow-up question on Pinto Valley. The expansion capital you guys are investing includes upgrades to the mill motors and cyclones for, I think, 2 of the 6 lines. Do you expect that to translate into higher throughput this year or is it more of a reliability kind of investment?

Yes. Over time, as that project yields results, the capacity of the mine will increase. This year, we're forecasting higher throughput at around 58,000 tonnes a day. This will reduce the risk of delivering that as there's capacity in the system to handle it. As we replace the rest of the mill shells and other motors, we'll consider the opportunity to expand in the future.

Yes. Craig, as you mentioned, it's still early days, and Cashel outlined a lot of the synergies under discussion. Currently, nothing is off the table. However, we have a construction camp situated between Mantoverde and Santo Domingo, housing all the construction workers from Mantoverde. Logically, those workers can move to work on the other side after ramping down on Mantoverde. The construction camp does exist and is fully occupied with construction workers right now.

Just one last question for me. Chile seems to be an ongoing overhang on your stock. I'm just wondering what the latest you guys are hearing regarding both the new mining fiscal regime and constitutional redraft.

As you mentioned, it's early days, but Chile, in our view, remains a top mining jurisdiction. We produce a significant amount of copper. We are confident that taxes are going up, as they will globally. We accept this, but expect it will be executed in a more conservative manner than what we're reading in the press.

Yes. Stefan, I mean, inflation is a reality when we look across the mining industry or all industries. Our cost structure at Pinto Valley is 50% locked up, so we're seeing inflation in the 4% to 6%. When you consider that 40% of your costs are exposed, you might see something closer to 3% inflation compared to the mine site level. It'll be similar in Mexico. But fixed costs like labor and contracted power keep much of our expenses stable.

Raman, can I ask you what the strategy might be when the two companies come together on foreign exchange hedging? Would you prefer to maintain the same proportionality regarding the Chilean peso exposure?

Yes. Historically, when we see a rate that's disconnected, especially with the current copper price driven by Chile politics, we do see the opportunity to set a floor and collar. We've done this on the Santo Domingo side and on the Cozamin side. It's definitely something we would apply to the Mantos assets as well to protect our Chilean peso exposure on the operational expenditures. For capital expenditures, we are already hedged.

In an ideal scenario, we see this as a consolidation opportunity. We recognize a lot of potential in the district. This mine was closed over fifty years ago because of the copper price. With the current environment, we have historical data of more than 300 holes, so we are not operating under uncertainty. We have a very good idea of what this target looks like. However, for disclosure, we need to drill it to modern standards. We can see great potential in the district, and seeing this as a standalone, with capabilities linked to Pinto Valley, just makes sense. We have significant resource potential. The drill program is advancing quickly and as of Friday, we've completed 11 of 19 crucial holes for our due diligence.

Well, thank you, everyone, for joining us today. I would like to remind shareholders to vote by February 24 at the 10 a.m. Pacific Time cutoff mentioned by Wendy. The meeting materials are available on SEDAR and on our website. In the meantime, as always, don't hesitate to contact any of our Capstone team with any questions you may have, and have a good day. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.