Metals Acquisition Corp. II Q4 FY2023 Earnings Call

Good day, everyone, and welcome to today’s Metals Acquisition 2023 Financial Results Presentation. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note, today's call will be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Mick McMullen, CEO of Metals Acquisition. Please go ahead, sir.

Thank you very much, and thank you everyone for dialing in from wherever you are in the world. My name is Mick McMullen, I'm the CEO of Metals Acquisition. Also, on the call we have Morne Engelbrecht, who's our CFO; we have Dan Vujcic, who's our Chief Development Officer; Chris Rosario, our General Counsel; and Sandy Noyes, who is Head of IR. Today, we'll be running everyone through the financial results for 2023, which as you would know, was a large year for us in terms of acquiring the CSA copper mine, in Western New South Wales in the middle of the year, and so we thought it would be useful to run everyone through the results to try and separate out some of the non-recurring and one-off items that are mainly related to that acquisition. Morne will be controlling the slides, so we'll just skip through the disclaimers. This presentation has been lodged with the ASX, so everyone can read that at your leisure. And if we go to the next slide, Morne for the Company overview. As I said, you've got myself as CEO, Morne, Dan and Chris all on the line, and this is the team that's been charged with taking this business forward. And as you can see, a significant amount of experience in both turnarounds and acquisitions. So I guess we've left acquisition in the name for a reason. Our view is to try and build this business. But right now, we are pretty heavily focused on sorting out the CSA copper mine. If we go to the next slide, please Morne, as most people would know, this is a mine that's been running for a very long period of time, since 1967 in this current format. It's been producing around about 40,000 tons of copper a year and sort of 400,000 or 500,000 ounces of silver. And again, as you would know, we have streamed the silver off to a Cisco. It currently has a reserve of about just under 8 million tons at 4% copper, and we've been working quite heavily on a new reserve and resource estimate, which should be coming out shortly. We have a significant amount of drilling that's gone into the new resource and reserve estimate, as we've announced to the market in recent past. We have around about just under 500 employees working out there. And again, it's been producing at sort of C1 of just under $2 a pound, and when copper's just hit $420 a pound overnight, it's obviously a good time to be in copper. Next slide, please, Morne. Again, for those of you who follow the Company, you'd have seen this slide before. The mine's out in Western New South Wales. It's a fantastic place to operate. Because it's been running for so long, it's got all of its infrastructure in place, and because we listed on the NYC first, we have a fairly standard North American cap structure, which is a low number of shares, high share price, as opposed to the usual Australian large number of shares, low share price. We've decided to differentiate ourselves on the ASX by maintaining that structure rather than doing a split. We'd like to be a little different from the rest of the pack, and we've got a fantastic shareholder base, very supportive, large equity holders. And as you would also know, we recently listed on the ASX, which brought a significant amount of capital into the business post the December 31 balance sheet date we'll discuss today. And as Morne now discusses, we've used much of that cash to pay down interest-bearing liabilities. Just under 70 million shares are in issue and again, as I said, very heavily weighted to large institutions, who are sort of backing us to build a mid-tier copper business. Next slide please, Morne. Our growth strategy is obviously organic initially. We believe that the CSA copper mine has the potential to carry on for significantly longer than its current reserve life, subject to the exploration results and conversion of resources to reserves, but we are also very focused on growing the business in general. Clearly, multiple assets larger business is certainly something that the market is open for, I believe. And we've got a track record in doing that. So again, this has been our strategy from day one. We've executed on part one of that strategy, but we still expect to have a few other things to carry on with him. Next slide there, Morne, we might move into your part shortly, I think. I'll hand it over to Morne, and he can discuss the financial results for FY ‘23.

Thank you, Mick. Good evening, morning everyone. My name is Morne Engelbrecht, and I'm the CFO of Metals Acquisition Limited. I'll mainly take you through the high-level results and some of the one-off and non-cash items that create some noise for a lack of a better term in the P&L. And then I see this is reported for 2023. These one-off non-cash items are mainly related to the acquisition of the CSA copper mine. Make the sort of our client and the associated financial instruments that are fair value through P&L. I will also cover some elements of the capital structure and liquidity. So just going through to Slide 11, and the main points to note and keep in mind when you read the results are one that the results reflect the first six months of the ownership and operation by MAC after the CSA copper mine that was acquired on 16th of June 23. And the underlying earnings therefore represent roughly half a year underlying operating results. Secondly, as I mentioned before and Mick mentioned as well, there are some significant non-cash and one-off items hitting the P&L with around US$71 million of one-off items and non-cash fair value adjustments of around US$47 million being recognized in the P&L. Going to the results for 2023, you would have seen that we recorded the statutory loss after tax of US$145 million. In that result you will also note the significant administration expense of US$79 million. Included in this number are a number of one-off items relating to the acquisition, namely, stamp duty of about US$48 million, advisor fees of US$13 million, redundancies of US$2 million, legal costs of US$8 million, and inventory movements of about US$10 million. Also, I should note that included in the cost of goods sold, the depreciation and amortization expense of non-cash of US$47 million. This is obviously based on the uplifted values of the assets in accordance with the purchase price allocation, which is closing the accounts. I am providing some guidance in terms of the depreciation expected for 2024 as well to be around US$90 million to US$100 million. This is obviously driven by production and the reserves and resources that drive the life of mine, over which the assets are depreciated, and will therefore be impacted by production levels in '24 and any changes to the reserves and resources, as Mick has outlined as well, which will be released shortly. The other key point to note in terms of the underlying cash generation of the Company relates to the renegotiated offtake agreements with Glencore and that the previous historical constraints do not exist under the current offtake agreements as reflected in the accounts and that the pricing came to industry indexes over a quotation period. The last thing to cover here is just to note that we do have a hedge book in place in the form of swaps, as struck by some US$3.72 per pound. This covers roughly 30% of the production in '24 and '25 and, obviously, less than 15 in '26. And we realized a loss of about $600,000 in the 2023 accounts for these contracts. Just going to Slide 12 now. We are showing here the reconciliation from the loss after tax to EBITDA, which you can find on Appendix A, and then where this graph starts and then through the underlying EBITDA to the right. The major adjustments here are relating to fair value adjustments of the non-cash stamp duty acquisition cost relating to the acquisition of the CSA Mine and the next fair value adjustments mainly relate to warrants. There's about US$22 million debt that mainly reflects the change in value of the warrants over the period. There's about US$9 million there that flows through the P&L. This relates to the valuation of some of the embedded derivatives in that, where the interest rate is tied to the LME cash settlement price and the voluntary repayment option there. Thirdly, there's some swaps there of US$13 million that have been recognized in terms of the change in value, which obviously is linked to the underlying contract value versus the future consensus copper price. But also noting that 70% of our production over that period of time, like I said, '25 and '26 is unhedged. We benefit on the other side in terms of where this liability is recognized. Contingent consideration, this relates to the fair value of the third and second contingent consideration payable to Glencore, if the daily LME closing copper price exceeds US$4.25 per pound over a rolling 18-month period and US$4.50 per pound for any rolling 24-month period. So again, noting that you need to consider the cash inflows of the Company under these copper price scenarios. Just moving to Slide 13. Here, I just wanted to cover the capital structure quickly. These are the shares including the most recent ASX issuance and then also showing the fully diluted securities at the 2nd of April ‘24. The main point to note here is that the private and public warrants can be called by MAC at any time through conversion for cash or on a non-cash list basis through the issue of max shares. With the conversion to max shares on a cashless basis, we based on a table published on a full in May 2023. For example, we had to call for the redemption of the private and public warrants today on a cashless basis, and the share price was US$13 per share then these warrants would be settled by issuing a 0.3 of a MAC share equivalent for every warrant for as per the table. Alternatively, for example, all the warrants would be called for cash, then this will raise an additional US$217 million and the full dilution as shown at the table would be the outcome. I also note the senior mezz debt on the table there, but I'll cover that in the next two slides. Moving to Slide 14, I just wanted to touch on the liquidity of the Company, which again, as Mick has pointed out, received the much-needed boost through the ASX IPO subsequent to 2023, which raised about A$325 million, an equivalent of US$214 million. The raising of the equity provides obviously greater flexibility for us and a much stronger balance sheet as a result. We have aimed to show here some of the subsequent year-end inflows and outflows of cash with the overwhelming use of funds dedicated to the reduction of interest-bearing liabilities. Of note, we repaid the deferred consideration to Glencore, which amounted to some US$83 million, which was done in February. We paid a revolving facility, which is around US$25 million. We settled a working capital facility, which was interest-bearing at US$9 million. We repaid a portion of the senior facility amounting to around US$8 million, and we also paid advisor and IPO fees of $10 million. And then we also started importantly the growth agenda in terms of commencing or continuing our exploration and development programs at the site. Looking to more recent material cash flows as well, we had a late delayed shipment in March, which will only receive the cash full in April, and then an early shipment planned for April as well. Both of these will bring in around US$48 million in cash to the Company. So, overall and subsequently year-end, we appraised significant equity, which is, as I said, provided us with greater flexibility and balance sheet strength. And this really gives us the opportunity to focus not only on reducing our interest-bearing debt but also keep growing the Company through organic means as our client. We also are beneficiaries in recent times of high copper prices, which we are definitely highly leveraged to. On our theme of reducing interest-bearing liabilities, we can move to Slide 15. We wanted to show the current repayment profile of our senior mezz debt facilities. Again, our ASX IPO credit provided much-needed flexibility and strengthened balance sheet. This coupled with the fact as Mick has mentioned, we are close to issuing a reserve resource statement and the exposure to rising copper prices. We have got funded capital expenditure obviously through the IPO as well. Increased revenue lowering costs, provide us with the ideal time to look at our financing structure and our capital structure.

Thank you, Morne. Again, we've lodged this presentation so for people you can sort of pull those graphs apart and try and really, we've tried to put some information out where people can look at what's cash and what's non-cash impacts on the P&L, because as Morne indicated, we do have a fairly large amount of the non-cash impacts of sort of re-evaluation of various instruments that do impact the P&L, and they are non-cash. We obviously acknowledge that we have got a few of those instruments on the balance sheet that perhaps we may not want to have in the longer term. I think, the copper price setting that we've sort of found ourselves in is significantly different to when we bought the mine. You will notice on that repayment schedule, on the liquidity slide, we've sort of backend loaded all of the repayments, which allow us to get up on our feet, build a significant cash balance; our cash balances or cash inflows are relatively lumpy. Each shipment is, as Morne indicated, around about US$24 million worth of revenue now, and when we bought the mine that was around about US$18 to US$19 million, and that's the same volume of copper in it, that's just the increase in the price. So, I think we're in a really good spot to renegotiate all of that lending. The first half that we own the mine had obviously a lot of one-off items with really closing costs, which we laid out in the prospectus at the time. Again, there's a fair bit of noise in those results that are non-recurring that we just don't have on a go-forward basis. We are working diligently with our teams to get a new resource and reserve estimate out, which will come out at some point during April. And we've always indicated, we felt that, this mine has had a four- to five-year reserve life for nearly 60 years. With a bit of extra drilling, we believe that we can push that reserve life out a reasonable amount, which clearly is beneficial for, A, the market. But, B, when we're having discussions with them, there's clearly a longer reserve life that is beneficial. With that, I'd like to thank the team. There's been a lot of work put into pulling these results together. Clearly, we've got many things underway having not that long ago closed off the ASX IPO, doing the R&R, and then, obviously, operational improvements. We're very busy, but happy to take questions at this point from anyone.

We'll move first to David Radclyffe with Global Mining Research. Your line is open.

My question is on operation one, actually. I was just wondering if we could get a bit of an update on how plans are progressing to debottleneck the mine and specifically the initiatives around improving the level of ventilation and the stoping sequence there. When we can start to maybe see that coming through in terms of the production data?

Sure. It won't be this year in terms of the impact of it. The work is underway. We are out there geotech drilling at the moment to put in those return air rises. It's obviously a not a quick fix in terms of doing it in the space of a quarter. Really, you won't see any benefit during the course of this year. It'll be into next year before you really see the benefit. But I think as you've correctly spotted, return air rises at the very bottom of the mine is actually a key limiting factor.

Okay. And then maybe just a one follow-up on the cash flow. Obviously, this quarter, there was one deferred shipment, but how many shipments actually did go this quarter?

Good question. Morne?

We had one late last year and then we had a couple this quarter. As I said, the last one in March just slipped over into, we'll recognize the revenue from an accounting point of view, but from a cash point of view, that cash will only flow in April at US$24 million. And then we've got an early shipment in mid-April as well, that sort of follows like a week-and-a-half after the last shipment in March. That's sort of a question of US$48 million there.

Okay. Brilliant. Thanks. I'll pass it on.

Yes. That one that that ship got loaded in March, but of course, you get paid about 10 days later, so loaded in March, paid at the start of April.

Thanks. We'll move next to Eric Windmill with Scotiabank. Your line is open.

Hi, Mick and team. Thanks very much for taking my question. I just wanted to ask a little bit about the drilling results that came out. Obviously, some pretty good grades, especially relative to the current reserve grade. And I know you mentioned the release, they won't be included in this update in April, but just wondering how you should think about that after you applied dilution or what's the nature here in terms of what you think the mineable grade is? And possible impact on tonnage, if you can speculate on that at this time.

It's a bit early to make predictions since we haven't incorporated it into the new block model yet. However, it's clear that the material is significantly above reserve grade now. We won't exclusively mine the high-grade core because even lower grades, such as 3% copper, are still economically viable for us. Our strategy will be to extract as much as possible. We are examining how to prioritize mining the higher-grade core in our scheduling while planning to return for what we consider lower-grade material, like 3% copper, later on. In an open-pit scenario, we would first extract the highest grade and highest margin material and stockpile the lower-grade material for milling at a later stage. We are assessing the mine plan with this approach in mind, and I believe that's the direction we will take. However, it is still too soon to determine the impact of the drill results on the forthcoming resource and reserve upgrade, as they came well after the cutoff for this new resource and reserve update we plan to release. That said, these results highlight the quality of the ore body. Additionally, if copper prices were to drop significantly, we would still consider mining this material.

And maybe just one more follow-up too. I know there was some zinc and lead in there as well, which isn't really a focus for you guys, but any comments on that? Any additional work that you're doing in that respect?

Yes, the short answer is yes. For those who remember, the CSA Mine initially operated as a very high-grade zinc mine. We've been reviewing the historical data from the property, which is not compliant with current standards due to its age and lack of quality assurance and control. Nonetheless, this old data indicates significant zinc mineralization in the upper areas of the mine. We have commenced drilling in that section. While we don’t yet know the results, preliminary assessments suggest a notable amount of high-grade zinc, along with some lead and copper. As is standard in this field, we need to complete the drilling to understand what we have before formulating a plan for managing that material.

And well thanks for that. I'll hop back in the queue, but great to see the results and look forward to seeing the new reserve update and the production.

It seems there are no further questions at this time. I would now like to hand the call back to management for any closing remarks.

Well again, thanks for everyone for dialing in. We will have a conference call around Q4 where you'll get the opportunity to ask more questions after we put a bit more information into the marketplace. And we'd just like to thank everyone for their time this morning, evening.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful evening.