BHP Group Ltd Q1 FY2022 Earnings Call

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Capstone Copper Q1 2022 Results Conference Call. Mr. Jerrold Annett, you may now begin the conference, sir.

Thank you. Good morning. I'd like to welcome everyone to Capstone Copper's results conference call. Please note that the news release and regulatory filings announcing Capstone Copper's 2022 first quarter financial and operational results are available on our website and on SEDAR. If you are logged into the webcast, we will advance the slides of today's presentation, which is also available in the Investors section of our website. I'm joined today by our CEO, John MacKenzie; our President and COO, Cashel Meagher; our Chief Financial Officer, Raman Randhawa; and our Senior Vice President, Risk, ESG and General Counsel, Wendy King. 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. And 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 John MacKenzie.

Thank you, Jerrold, and good morning, everyone. I'm pleased to report our inaugural first quarter of Capstone Copper. And I'd like to take this opportunity to thank our entire organization and our stakeholders as we progress our integration efforts during what has been an incredibly busy period since announcing the transaction in November last year. Before we kick off the call with respect to our Q1 operational and financial results, I wanted to take a step back and briefly revisit the vision of Capstone Copper, as we continue to build a leading copper producer in the Americas. Our portfolio of four operating mines, the brownfields, Mantoverde expansion, and our fully permitted Santo Domingo project create the foundation of a truly peer-leading growth profile in the coming years. With the ambitions of building a world-class district in Chile while simultaneously improving the asset quality of our portfolio with higher grade, lower cost sulphides coming online. In Q1, we produced 22,500 tons of copper at a C1 cash cost of $2.31 per pound. Our quarterly results include a nine-day stub period for our Chilean operations, Mantos Blancos and Mantoverde. As a result of the Mantos Copper transaction closing towards the end of the quarter on March 23. Inflation has been a topical theme this quarter, not only amongst our peers but for the world more generally. Our operating costs were impacted by inflationary pressures felt in the last six months and further exacerbated more recently as the war in Ukraine and the associated sanctions on Russia have led to higher energy and input costs, which we'll speak to further on the following slide.

Thank you, John. We are now on Slide 8. Despite the inflationary pressures John referenced, we had a solid quarter, underpinned by higher sales and gross margins driven by a realized copper price of $4.78 per pound, resulting in adjusted EBITDA of $123 million in the quarter versus street consensus of approximately $95 million. Operating cash flow before working capital in the quarter was impacted by some one-time items, including transaction costs related to closing the Mantos transaction of $19.9 million, and the annual Mexican tax payment was higher by $23 million, which related to income from 2021. Turning to Slide 9, and with the Mantos transaction closed in the quarter, we highlight our strengthened consolidated balance sheet with available liquidity of $638 million, which includes our cash and short-term investments of over $400 million with an undrawn revolving credit facility of $225 million. Subsequent to the quarter, we enhanced our financial flexibility by amending our revolving credit facility from $225 million to $500 million plus $100 million accordion, at very attractive terms. This financing was about rightsizing our borrowing capacity for a company of our size, Capstone Copper, and the amended RCF is now expected to be in place before July this year.

Thanks, Raman. We're on Slide 10. At Pinto Valley, we produced 14,400 tons of copper at C1 cash costs of $2.60 per payable pound. Mill throughput was strong at an average of 58,400 tons per day, while grades and recoveries of 0.32% and 82% are expected to improve as we progress through the year. Copper production is weighted towards the second half of the year as we have taken some planned annual maintenance downtime in Q2. The waterfall chart on the slide shows the areas where we saw $0.37 per pound higher operating costs in Q1 compared to our January guidance, about $0.12 per pound or one-third of the higher costs is due to inflationary input costs, as John mentioned earlier, like fuel, explosives, branding media, reagents, and some contractors. The balance is mostly due to Q1 being a lower production quarter plus the impact of capitalized stripping. We'll comment more on Pinto Valley costs a bit later in this presentation when we cover our nine-month guidance.

Thank you, Cashel. We are now on Slide 16. We're pleased to announce our upcoming sustainability report that will be published in June. This is our sixth sustainability report prepared in accordance with the GRI standards and the SASB Mining & Metal Standards. We are also beginning to align our disclosures with the task force on climate-related financial disclosures. Tailings management was a key focus in 2021. Pinto Valley established and convened its independent tailings review board, a requirement of a global industry standard for tailings management. Our global workforce grew by 30% in 2021, mainly driven by growth projects. Women's representation in our employee base held steady at 11%. We created a diversity and inclusion committee, which will work across sites to develop an action plan in 2022. We are committed to taking action on climate change by reducing our greenhouse gas emissions. In 2022, we will establish a company-wide target and assess decarbonization pathways for all our sites.

Congratulations again on the transaction. I've got a couple of questions about your guidance, and I appreciate the detailed guidance for 2022. When we start to think ahead to next year, am I correct in thinking that your copper production consolidated will be fairly similar in '23 versus 185,000 tons in 2022 with really the step up beginning in 2024?

Orest, I can answer that a little bit. I mean, as you know, Mantos Blancos was the main asset that's ramping up this year. So when you look ahead to 2023, that will be the pickup in production that you'll see when you look through the four assets.

I think, Orest, the other thing that is important about it is it represents quite a significant shift at Mantos Blancos from oxides to sulphides. So that does have quite an important impact on our unit costs at Mantos Blancos.

If I may have two on Mantoverde, and just looking at the construction progress at 14%. And you talked about monitoring COVID-19 risks and logistic risks, but it does seem that inflation risks are pretty much in check just because of the Ausenco and the EPC lump-sum contract. So just wondering, of those three things, which should we be most concerned about in terms of stressing on either the CapEx number or scheduling? Is it COVID-19 or is it more of a logistics chain that brings in the incremental risks?

I'll take that. We've obviously been through two odd years of COVID already. And I think the procedures that have been put in place both at the operation, the project, and the country as a whole have proven pretty resilient to what COVID has thrown at us to date. And I think we did have the advantage of negotiating the contract with Ausenco taking into account COVID. So we assumed a full-blown pandemic for the full period of the construction. So I think COVID is well taken care of. I think we spoke quite a bit on inflation and how we've obviously been impacted just by diesel price increase and the pre-stripping, and that has now been accounted for in our estimates.

I've been to Chile several times since joining Capstone and it's incredible how that country is managing COVID. They have very robust protocols and procedures. Businesses are as usual, and they've adapted to it. Where COVID interrupts us is exactly where John is saying, is what might be happening in the various areas where parts and components are being manufactured.

Just a question on the ramp-up of Mantoverde, previously the intent was, I think, to have this in ramp-up mode at the end of 2023. Now it looks like the ramp-up is beginning in 2024. Is that a change or are you guys just being more conservative in terms of what you are showing now?

I don't believe we've made any changes on that. I think we're still talking about commissioning and commencement of ramp-up in late 2023 and obviously fitting into full stride in '24. I'd like to take this moment to thank our team at Capstone Copper for their huge commitment to our integration process, which I'm very pleased to say is going extremely well. With that, we are now ready to take questions.

And your first question will be from Orest Wowkodaw at Scotiabank. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Have a good weekend.