Metals Acquisition Corp. II Q3 FY2024 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Metals Acquisition Limited Q3 2024 Conference Call and Webcast. The conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mick McMullen, CEO of Metals Acquisition Limited. Please go ahead.

Thank you, and thank you, everyone, for joining. I'll be presenting the slides today along with our CFO, Morne Engelbrecht. This is our Q3 quarterly results presentation, and we'll also give a bit of an update on our exploration activities. As usual, we've got our disclaimer at the front that this presentation has been lodged on the ASX platform and you can read that at your leisure. I would characterize the quarter as another business as usual quarter. The team delivered a very strong result of just over 10,000 tonnes of copper at a head grade of 4% milled. After our very strong Q3, there were some questions around whether we could sustain that sort of 4% plus head grade and the answer is yes. C1 came in at the bottom end of the range. We recently guided to USD 1.90 a pound, which is continuing a downward trend and Morne will talk about how we managed to arrive at that. We have a clear pathway to 50,000 tonnes plus of copper out of this mine here within the next couple of years. We again had a very strong EBITDA margin through the year, about 50% and we convert about 77% of that margin to cash. Post the recent equity raise, we've got pro forma liquidity of about USD 226 million, which is well over AUD 300 million. Again, all numbers in this presentation are in U.S. dollars unless we specifically call them out. It is a very large liquidity position for a company of our size, providing us with a lot of optionality. It was a good quarter, another business as usual quarter. Despite production being down slightly quarter-on-quarter, our C1 was also down. We guided the market to Q3 just with the scheduling of the stopes down slightly and then we expect Q4 to be the strongest quarter of the year for us. We realized broadly the spot price. Copper prices went down a bit during the quarter-on-quarter periods, but we broadly get spot. We expect Q4 to be our strongest quarter. We have a very strong liquidity position. We ended Q3 with about USD 81 million of cash after paying off some debt. We are tracking towards the midpoint of guidance around that 40,500 tonnes of copper. Copper grade is hanging in there strongly at around about 4%. On the exploration front, QTS South Upper continues to confirm some high-grade copper hits as well as some zinc. We are drilling out much of the inferred, which allows us to incorporate that into our reserves. We've had some really good success in stepping out into virgin countries to expand the resources. We spent about USD 2 million in Q3 on exploration. Our big capital projects, the Vent project is well underway and integral to getting our production up well over that 50,000 tonnes of copper level. QTS South Upper commenced development this morning where we took the first cut out of that takeoff drive to head out towards that deposit. We invested just under USD 13 million in capital projects and we've guided the market to USD 52 million for the year, tracking bang on where that number was. Post-quarter, we raised AUD 150 million in equity, which deleveraged the balance sheet and gives us a lot of flexibility to pursue strategic opportunities and retire that mezzanine debt. I'm going to hand over to Morne, our CFO, to talk about a couple of the financial slides.

Thanks, Mick. Good evening, morning, everybody. I'll be taking you through, as Mick said, this slide and the next slide as well, covering the cash flow waterfall for the quarter, again, in U.S. dollars, and a recap on the recent equity raise. Also, please note that all these numbers are unaudited, and we have more detail in our operational and financial performance noted in the quarterly report released today. Overall, we have very healthy pro forma liquidity, as Mick mentioned, as of 30 September of around $226 million. This includes the successful equity raise completed after the quarter, providing a boost to the MAC balance sheet of around AUD 150 million, USD 103 million before costs. This positions us strongly and is further boosted by the fact that we had an undrawn revolving facility of $25 million, unsold concentrate ready to be shipped, outstanding QP payments, and also successful listed investments in Polymetals totaling around USD 17 million contributing to that liquidity. Looking at the operational drivers impacting cash flow for the quarter: firstly, you will remember that in the previous quarter, we sold concentrate that was ready for shipment after a material buildup of inventory. This meant that over 2,000 tonnes of copper sold in the June quarter shipped in the September quarter, with all of that cash flow recognized in the June quarter. As such, we captured around $25 million less cash in the September quarter. Despite that, we still had a very healthy free cash flow from operations of around $30 million for Q3. An important note is that we have now largely worked through the backlog of concentrate we mentioned in the previous quarter, with the closing volume of unsold concentrate representing about USD 9 million as of 30 September, aligned with where we saw it reducing to by the end of this quarter. For the December quarter, we expect the copper tonnes sold to match the tonnes produced for the quarter, all things being equal. Additionally, we reduced our senior debt by another $8.1 million over the quarter with our senior facility now at around USD 166 million, down a further 5%. With the equity raised, we also have a pro forma net gearing ratio at 30 September of around 16%. The third point I wanted to make is we paid interest of around $9 million over the quarter, with about USD 5 million related to the mezzanine debt facility, which is the high-cost element of our debt stack that we've focused on in the recent equity raise. Overall, we are in an excellent position from a balance sheet strength point of view, with the ability to reduce our high-cost debt and continue generating strong free cash flow from operations.

Thank you, Morne. I think you've only got to look at the cash waterfall to understand the interest that has gone out the door. That's why we've taken proactive steps of raising equity in order to get a debt facility in place that reflects our high credit quality today versus when we closed on the acquisition. Moving on to the operational side, again, a strong quarter, business as usual for us. Just over 10,000 tonnes of copper. C1 again, came down. We saw a reduction in mining unit rates with a total cash cost of about USD 2.70 per pound, which is pretty consistent with the previous quarter. We broadly achieved the spot price, give or take a few cents a pound, at times slightly better, sometimes a little worse. We had USD 30 million of operating free cash flow, showcasing the strong cash flow generation potential of this asset. We expect Q4 to be the strongest quarter of the year, exiting the year at the midpoint of guidance for next year. The grade remained strong around that 4% head grade for the quarter, which aligns with our plans. We have been achieving better dilution control due to improved mining practices. We've seen some commentary that we're mining above reserve grade, and yes, we are. The areas we're mining are yielding better grades than planned. The 2023 reserve was the first new reserve this mine has had in a long time. In the 2024 R&R, we will address the modifying factors which could have a positive impact on reserve grade. Development meters picked up, and we expect to continue this trend as we've moved to the new plan. Morne, I might let you take the cost section of the slides.

Great. Thanks, Mick. On Slide 10, we're covering the process and mining costs per mill and mine tonne, respectively. The processing cost per tonne milled in Q3 was around $26 per tonne, approximately 18% lower than Q2, with processing rates for Q3 being stable at 261,000 tonnes for the quarter. We expect this to stabilize at the Q3 levels as we maintain operational consistency. The mining cost per tonne comparison was 7% lower than the previous quarter, mainly due to a higher portion of development meters incurred in the quarter, up 64% from Q2. Moving to Slide 11, we cover G&A and the development cost per meter. G&A is becoming more consistent. The slight increase over the previous quarter was due to one-off adjustments. For the development cost per meter, the slight increase reflects a combination of both higher development meters and an increase in the workforce for the new developments. Sustaining CapEx decreased slightly over the quarter, driven by diamond drilling and vent expansion drilling. We continue to spend capital in accordance with our guidance, around USD 50 million for 2024, maintaining consistency and focusing on operations which assist in driving down costs and increasing efficiencies. Overall, the goal is consistency in operations while commencing key development projects to materially drive production increases over the next couple of years.

Thanks, Morne. Just to note about tonnes milled, better dilution control allows us to haul less tonnes of higher-grade material, which is preferable. If we can continue to drive dilution down and maintain that higher head grade, we may not need to mill as many tonnes. Moving on to Slide 13, we delivered a significant resource and reserve upgrade last year. We're continuously drilling, and as noted, the reserves are based on measured indicated. We are specifically focused on converting inferred mineralization while expanding reserves. Our continued drilling is yielding high-grade results, with several drill holes showing significant copper percentages. We believe this ore body has not closed off, and we will continue to expand the resource. The drilling in QTS South Upper is also showing promising results with high grades. We commenced development this morning and expect about 10 months to first ore production from this new area. Notably, this development plan excludes zinc material, which will become upside when we reach it. We've agreed with Polymetals for toll treating that zinc material. Safety-wise, we're tracking TRIFR improvement, and we have no recordable incidents this reporting period. We are on track to deliver at the midpoint of guidance for this year and are excited about increased production from QTS South Upper, which is not constrained by existing operational challenges. So we feel great about our position overall.

Thank you. We'll now begin the question-and-answer session. Our first question is from Sam Catalano with Wilsons Advisory.

Yes, very good quarter. It's nice to see the operations showing a bit of stability. Just a couple of questions. Firstly, just on your development meters. The last two quarters are still a bit below the prior two quarters before that. Is that just the mine plan rather than development limited?

Yes. It is mine plan related. The double lift stope strategy requires less operating meters per ore tonne.

Okay. Fine. And just with regards to QTS Upper, you've mentioned a few times that obviously, it's inferred. It's not included in your guidance. Would material from that potentially add to your nearer-term guidance or just displace other material from your 2-3 year guidance?

The benefit of this is that it's completely additive. We're not mill constrained, and this would be on top of the current guidance.

Okay. And then last question, Mick. There's been a little bit of press regarding your involvement in Neves-Corvo. Are you in a position to say anything about that?

We look at every opportunity. If it's copper in a decent jurisdiction, we consider it. However, not everything fits our value criteria, and some opportunities are competitive processes.

Have you initiated discussions with Sprott over the mezz facility change out? I appreciate it's a short time since you raised the equity.

Yes. There are ongoing discussions with all the lender group. This was not a lender-driven equity raise; it was a proactive opportunity for MAC.

Would you think that you will conclude those discussions after the Sprott discussions or in parallel?

Both, actually. Having the liquidity provides many options. We want to be in a position of strength for those conversations.

You've guided for a better year in 2025 and beyond, but is the production growth expected primarily from tonnes?

Similar grade, slightly more tonnes. We expect to exit Q4 this year near the midpoint of next year's guidance.

That would imply that tonnes this coming quarter should lift compared to what we've seen in September?

We expect to see slightly more tonnes sequentially. However, if we can continue reducing dilution, it's metal tonnes that matter.

Can you quantify the dilution outcomes you've experienced versus what you've embedded in the reserves?

We're seeing 10 to 15% less dilution than expected. Initially, reserves were at 4%, but we're now achieving better than that.

What is the expected timeline on drilling cut-offs and the next resource reserve update?

We'll aim to get our R&R out towards the end of February, with cut-off at the end of October this year.

First question was just around the mine tonnes versus mill tonnes. Is that a draw on stocks? Just talking about lifting mine tonnage next quarter?

It will be milling a bit of stock. We have about 40,000 tonnes of stockpile between the bins and underground stockpiles.

What revisions to the June quarter numbers can you provide?

In June, the quarterly report timing was before the half-year report, missing presold tonnes. We've updated the quarterly numbers to match the half-year report.

Is QTS Upper cash burn expected to be a couple of million dollars a quarter?

That's probably accurate, around $2 to $3 million when it starts picking up. We'll be self-performing the work.

Nice to see the results. Just quickly on zinc mineralization in the upper zones, what's the plan for mining that?

We'll mine that with our crews as we focus on QTS South Upper first. It will be easier to do with our own teams.

Any additional detail on tailings and additional lifts?

We're about to start Stage 10 lift with a split approach for capacity until around 2030-2031. We're in discussions about the North facility for future lifts.

What is the current capacity of the mill? How does growth arrive in the next couple of years?

The wet end can manage 80,000 tonnes of copper a year. We can realistically expect to see mid-50s in production.

Do you pay a fixed TC/RC rate through the year? What are the expectations?

We are on annual benchmark TC/RCs. We could settle lower, potentially around $40 for next year, which would save around $0.09 a pound on our C1.

Can you elaborate on the capital raise, the timing, and its purpose?

This cash is earmarked for repaying the mezzanine facility, although if an amazing opportunity arises, we might consider that as a independent exercise.

Can you discuss trucking and your tonnes up the hole? Where are you at and what's the plan going forward?

Trucking and having available tonnes is key. We’re achieving better dilution control and expect gradual increases in trucking volume. We’re looking at operational consistency. In QTS Upper, the zinc material is a separate lens that doesn't need tackling immediately. No rush as development plans are set.

This concludes the question-and-answer session. I'd like to hand the conference back over to Mick McMullen for any closing remarks.

I want to congratulate the team at site for another strong result. We're in that consistency phase, and the exploration results indicate this is a phenomenal ore body with a lot more to give. We expect production to continue to tick up. The QTS South Upper is a whole new mining area that we’re exploring. It's disconnected from existing constraints, allowing for significant opportunities moving forward. Thank you for your time, and we’ll talk again next quarter.

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.