Saracen Mineral Holdings Limited (OTCPK:SCEXF) Q4 2020 Earnings Conference Call July 20, 2020 9:00 PM ET

Company Participants

Raleigh Finlayson – Managing Director

Morgan Ball – Chief Financial Officer

Conference Call Participants

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Alex Barkley – Morgan Stanley

Daniel Morgan – UBS

Tim McCormack – Canaccord

Matthew Friedman – Goldman Sachs

Jason Mennell – Kalgoorlie Miner

David Radclyffe – Global Mining Research

Nick Evans – the Australian

Operator

Thank you for standing by and welcome to the Saracen Mineral Holdings 2020 June Quarterly Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Mr. Raleigh Finlayson, Managing. Please go ahead.

Raleigh Finlayson

Thank you, Rachel and thank you all for joining us. For context, this is much of an update to our shareholders as it is to our messages to our people. All of our people and no matter what logo is on your shirt. So please bear with me. This is not the hardest thing that I’ve had to do this week. But it’s right up there, so thank you in advance for your patience and consideration. I’m joined today by Morgan Ball and Troy Irvin and Simon Jessop remains on site, where I’ve come from last night and to where I’ll return on Thursday. We’ll continue to tag team for as long as the team needs us on site. These are indeed very sad days at Saracen with the passing of one of our underground contractor employees, but also one of our own. At least this is a sentiment from every person I’ve spoken to at Carosue Dam this week. Accident at the Dervish mine was an absolute tragedy and on behalf of Saracen’s Board and management, I extend my deepest condolences to his family, friends and colleagues.

There are no positives to come out of this, but we have something to cling on to. To enable us to carry on and for us the light of the end of the tunnel comes in a few forms. Firstly, the strength of our people. We are hurting. We’re hurting because we care. We’re a devastated close-knit unit. There are so many people to thank for your leadership and support. You know who you are but there are a few special mentions in particularly during the aftermath and getting back on the bike. Jimmy O’Donnell, [Chapi Bitsi], Simon Jessop, Sammy [Kassos] 5amongst many others.

Secondly, the professionalism of our ERT team, they’re courageously by Nick, team is unflappable in unmanageable and very trying circumstances. Thirdly, to the industry support. I’ve received texts and emails from just about every mine and company, mining company within a 500 kilometer radius of Carosue Dam wishing — they’re offering their best wishes and support. I’m very proud of the industry knowing that I have our backs. I’d like to make a special mention to our close friend at Northern Star who immediately sent two surveyors from Jundee to assist with the site survey with a drone. Thank you to those two individuals.

We spent the past week systematically pulling apart all aspects of our operations including those completely unrelated to the incident. To ensure, we review all principal hazards and critical controls led from the ground up from the operators. The department of mines remains ongoing with the investigation. I’d like to thank the investigation team for their professionalism and respect shown for our hurting people, whilst we all search for answers. DMIRS have issued Saracen with a notice to assist. Saracen will work on an industry solution to find new ways to improve our industry critical controls. Findings of the task force will be made available to the industry by DMIRS and other industry bodies.

Again, thanks to our close-knit peers for stepping up to assist literally immediately. We are in the midst of a soft restart, slowly, respectfully and carefully.

Now getting back on the bike. I’d like to thank, in particular those who played a pivotal role in the state during the restart in particularly Lee, Josh, Chant, Speedy, Jimmy O. They’re all waiting. They are illuminating the path forward for the rest of the team. Also resumed operations at Carosue Dam, it’s obviously not business as usual. It’s actually we will not be following our usual format today. I’ll provide a brief overview of the quarter and then I’m available for questions at the end. All the relevant production and financial information is available in the quarterly release. I’d also like to mention upfront that we’re releasing comprehensive updates on all of our assets this quarter initially with Carosue Dam and Thunderbox followed by KCGM.

Each of these will include drilling updates, annual R&R, production and cost guidance. Taking a brief look at the quarter report, specifically pages one and two. For the June quarterly production of 145,830 ounces at all- in-sustaining costs of $1,152 per ounce. Productivity is the main focus at KCGM with its pit mine, open fit mining increasing impressive 49% versus the March quarter. Underground ore tons increasing 25% and processing throughput increasing 7%. All in significant reductions in unit cost per ton as a result. FY20 group production of 520,000 ounces had all-in-sustaining cost of a nudge over $1,101 an ounce ahead of FY20 guidance of 500,000 ounces. FY21 guidance of 600,000 ounces remains unchanged. To reiterate, Saracen will update production and cost outlooks for each of its operations later in the September quarter.

Underlying cash flow generation for the quarter was $84 million after spending $91 million on growth and exploration. Cash and bullion was $369 million at 30th June, up from $339 million at 31 March, after making debt repayments for $39 million and paying $60 million in tax.

We return to a net cash position of $48 million at 30th June, 2020 up from a net debt position of $21 million at 31 March, 2020. FY20 unaudited statutory NPAT is in the range of to $190 million to $200. We’ve been able to refocus back on to future- proofing the business after the de-escalation of COVID in Western Australia which sets us up well that will for the future.

I’d now like to hand back to Rachel for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]

Your question the first question comes from Alex Barkley from Morgan Stanley. Please go ahead.

AlexBarkley

Thanks. Hi, Raleigh. And just a couple of questions on Carosue Dam from me. First thing is Karari-Dervish, the last couple of quarters of grades have sort of fallen a bit below 3 grams per ton. Were you expecting that to push a little bit higher to reserve at more like 3.2 of what you’ve done earlier in the year? And secondly, do you have a clearer picture of what kind of ramp up you’re expecting at Deep South given $1 million also coming online and perhaps it might be a slower quarter at Karari-Dervish right now. Thanks.

RaleighFinlayson

Yes. Thanks for that. Yes, so we flagged last quarter the grade did dip below reserve grade. So we have nudged back up to 12.8 grams this quarter. So we do expect that to continue. We obviously are seeing better grades of depth that both Karari and Dervish. We will see that revert back to reserve grade. Deep South, we’re very close to starting up within the next two or three weeks to really ramp up the starting with the mining method there. So that will see a pickup as we will see obviously mining has commenced at $1 million which will feed into the expanded mill.

Operator

Your next question comes from Daniel Morgan from UBS. Please go ahead.

DanielMorgan

Thanks, Raleigh and team and condolences for everything you’re going through. Just on the operations, can you just provide a picture of where the restart is versus the various aspects? So the mill, the mines and expectations from here?

RaleighFinlayson

Yes. Sure. Thanks for that. So the milling restarted on the day of the announcement whatever that was a few days ago. So that’s back up and running. Open pit mining started the same time so all other operations recommence start underground operations, it was around two days after that that we had finished all of our updated risk assessments, critical controls, principal hazards and we restarted jumbo development and over the last 24 hours, we’ve recommenced all other activities except for those around open holes which is obviously part of the task force investigation we’re doing at the moment which we’re envisioning will be completed by the 31st of July.

DanielMorgan

And that last comment on open hole, is that relates to both Karari and Dervish?

RaleighFinlayson

Yes it is. But just to be clear that remote bogging of a standard stop which is majority of our production will be restarting before that.

DanielMorgan

Okay. That’s very clear and on the accounting. I know you’ve called out a lot of stockpile issues in the quarter which will be a go forward concern, just trying to get a clear picture in my mind how that’s going to work and has worked. You’ve flagged, I think, about $60 million of non-cash items at the Super Pit from the stockpiles that has gone through the accounts. I think that might be separate to the tables that you provided in the release today. Is that true?

MorganBall

Hi, Daniel. It’s Morgan here. Yes, that is correct, obviously, the tables we show in the release relate to our cash accruals during the month in the P&L. We do have non-cash accruals in relation to our stockpiles and we’ve identified to give you some context, the cost of the KCGM stocks, we’re tracking it around $400 to $500 an ounce on a cost basis and in resetting the fair value that’s cut given the circumstances of the gold price and the purchase price that’s come up to about a $1,000 an ounce. So we — as we go down on those stocks going forward that will be the expense that hits our P&L. So we’re just giving people some context around that.

DanielMorgan

Yes. Awesome. I think it’d be very good to make it clear going forward the cash cost versus that accrual item because obviously it’s the cash that we care about. But thank you.

MorganBall

We’ll make that clear in the financial results on the 18th of august.

Operator

Your next question comes from Tim McCormack from Canaccord. Please go ahead.

TimMcCormack

Hi, guys and sorry to hear about everything in this past week. Two questions for me. Essentially one around paste plants, let’s say you’ve committed to an extension at the Karari plant to Dervish, how that might impact, how we think about extraction rates and things like that for that mine. And similarly I see you’ve committed to a paste plant to Thunderbox underground as well. And just on that are we assuming that it’s commercial production as from July 1 at the moment. The second part of the question is just around the Super Pit and what the go forward balance of stockpiles versus all mines should be in percentage kind of sense?

RaleighFinlayson

Yes. So just with your first question around Dervish, so we’ll obviously put out new obviously drill results, R&R and everything in early August on that one. So full details on how we see that asset ramping up will obviously provide in that release so not too far away from that one. As far as commercial production at Thunderbox underground looking at the 1st of April 2021 is a slated date for that as it stands at the moment. So that’ll be a little bit more of a ramp up before we declare a commercial on that asset. I am sorry, Tim, just your last question on KCGM?

TimMcCormack

Just looking at the proportion of stockpiles that are going into the blend out there it’s kind of a roughly a 1 million tons of the 1.7 you put through in the June quarter. Is it — what’s the sort of mine kind of stockpile in terms of — as a percentage we should think about go forward for that because it feels like it’s a little bit higher on the stockpiles at the moment.

RaleighFinlayson

Yes. Now I could pick up, the look if you — the simply look at the table on page 3, you can see that obviously everything we mine from open pit and underground being fed directly to the plant and then the delta through the mill is obviously stockpile. We deliberately targeted obviously looking at a long game here at KCGM. So we have targeted aggressive mining and that’s why we’ve had 49% increases in material moved ex-pit from the assets. So we’ve come back up the top and really hit that Brown Hill area pretty hard. So we’ll continue to do that. We’re taking advantage of the fact we have got a nice buffer with that 22 million tons of the low grade stockpile there, just a nudge over a gram and that’s really about making sure that as that starts to roll out, we’re really starting to pick up the open pit and all mining in sort of the next two and a half years.

So really targeting the sort of the medium to long term is part of our strategy at the moment and again full information will come out and that there’s that final release on KCGM.

Operator

Your next question comes from Matthew Friedman from Goldman Sachs. Please go ahead.

MatthewFriedman

Well, thanks. Good morning. Raleigh, thanks very much. Firstly to you and your team for taking the time to host the call today. Of course, our condolences and best wish from our team here as well. I just wanted to ask one question really around KCGM’s performance in the quarter. Just looking at cash cost, mining cost, processing cost in dollar million terms, looks like it’s down around 10% quarter-on-quarter and in absolute terms. And clearly that’s despite the higher levels of TMM as you’ve highlighted. Any particular drivers to that you think are worth calling out there. Any fixed costs that has already been taken out of that business or is that just a function really of the better productivity of the equipment that you’ve been able to achieve by opening up additional pits? Thanks.

RaleighFinlayson

It’s a bit of a latter. So, Matt, so obviously quite a heavy fixed cost site in my experience. So we’ve been able to increase ex-pit movement by nearly half again and as far as additional cost to do, so it’s next to nothing. So we have taken advantage of that. As far as absolute cost out a little bit of a COVID factor in this. Obviously, as we sort of wound down we looked at the areas that we could non-core and wind those down not necessarily saying they’ll all spring back up either because there’s been some genuine cost out of our business through it’s really assessing obviously for a period of time. We’ve been trying to unpack the business. We’re now turning our attention to elements like the processing plants a good example where we’ve got that down from around a $23 a ton last quarter to just under a $20 a ton now. That’s through a combination of obviously higher throughput but also getting some cost out. And I think there’s plenty of opportunities still through the business to take and try to grow and actually, trying to get some of the cost back to what makes sort of more sense relative to the size of the plants and mining fleet relative to what we’re seeing in the other operations. So probably more of that to come still.

Operator

Your next question comes from Jason Mennell from Kalgoorlie Miner. Please go ahead.

JasonMennell

Good morning, Rale and team. Congratulations on another good quarter which is unfortunately since been overshadowed by last week’s incident. Rale when talking about last week’s tragedy you sounded quite shaken. What impact has it had on you and the Saracen team?

RaleighFinlayson

Look, for Saracen should be reasonably obvious I suppose this is our first incident of such a matter and since we’ve started up so we are very close and it’s still very raw, so through the respect of the family was probably level of that but obviously working through it. And it’ll take some time.

JasonMennell

And, Rale, obviously you are working with the departments at the moment, have there been any developments since last week?

RaleighFinlayson

Yes. Well, we certainly have obviously at the first and foremost at the moment we’re making sure we’re dealing in facts and not speculation. So as I mentioned at the outset, they’ve been really well led from the investigation team on site and very respectful and obviously we’re working together to unpack all the information and dealing in facts. So we’ve a safe work environment. We’re not going anywhere near anything related to the incident but we are taking a holistic view and as we said we’ve unpacked our entire business through even completely unrelated areas just to make sure that we get our confidence back. And get the confidence back for the operators that it’s safe to do so.

Operator

Your next question comes from David Radclyffe with Global Mining Research. Please go ahead.

DavidRadclyffe

Good morning, Rale and but obviously like to have our condolences as well. Just a quick question really in terms of the growth outlook. You invested about $150 million last year, maybe if you could give us some color on what the key items could be in 2021 and whether something around the similar level is what you think is in terms of expenditure?

RaleighFinlayson

Yes. Thanks David. We are very, very close to putting all this out to the market. So probably can’t say too much at the moment, but there are two significant pieces of new flow coming through in August and September around all of that by asset reflecting on what we’ve done obviously what we’ll spend and then most importantly what it means in the future. So, yes, not much longer to wait now and we’ll be able to put all that into the market.

Operator

Your next question comes from Nick Evans from the Australian. Please go ahead.

NickEvans

Yes. Good day, Rale. Good day, Morgan. Just a quick one, Northern Star let its exclusivity lapse on the Newmont power plant that supplies KCGM. Have you guys interested in potentially picking that up or could it be possible for joint venture itself buys it from Newmont?

RaleighFinlayson

Yes. We’re open-minded to that but if we did anything it would be very much in consultation and liaison with Northern Star. So there’ll be one thing we won’t do is buy it ourselves but other options remain open to us.

NickEvans

Yes. Okay. So it’s more likely to be bought by the JV if not by a third party but it wouldn’t be Saracen, so you’ll be just breaking up a little bit down there, yes.

RaleighFinlayson

Yes. That’s right, Nick. 100% Saracen by its own, no, but other options, yes.

NickEvans

Yes. And just in terms of I guess COVID related costs, we sort of, are you expecting the costs that you’ve incurred in terms of additional staff or the difficulty of getting contractors from the eastern states that kind of thing to have any kind of material impact when you disclose your financials a bit later on or is it been relatively minimal for you?

RaleighFinlayson

Well, it’s been relatively minimal. We had obviously a period where we went to the longer rosters, which net-net didn’t make a huge amount of difference. We obviously had less people on a plane, but then we had more let’s say, let’s take on claim. But then we had less claims obviously to run with the rosters. So it wasn’t a massive change structurally, pretty well back to where we are now. So, yes, we don’t expect anything to major longer term there.

NickEvans

Thanks Rale. And my condolences to the Saracen team and to the bereaved family as well.

Operator

Your next question is a follow-up from Daniel Morgan at UBS. Please go ahead.

DanielMorgan

Hi, Rale and team. Just a question regarding KCGM and the milling and the grade of the operation is dropped quarter-on-quarter, just wondering if you could talk to that. What are the drivers there and what can we expect?

RaleighFinlayson

Yes. No, worries, Dan. So just if you have a look at open pit mining the main key there so you can see quarter- on-quarter we’ve actually — the head grades dropped from open pit mining and that’s simply because we haven’t been down the bottom at Golden Pike. So in very simple terms we are — we’ve got limited amount of fleet at the moment. There is a bunch being ordered and to be ordered longer term as part of our growth strategy which will articulate during the month of September. So we just got limited equipment available to us at the moment. So as I mentioned before we are looking at sort of the medium, long term as well as the short term. So simply we’ve just been prioritizing the fleet that’s available to us at the moment in the upper regions around Brown Hill particularly. That’s why we’ve seen a significant increase 15% from mining quarter-on- quarter. So obviously mining more waste material then getting that strip off the top of Brown Hill. So that’s really a strategic sort of path which we’ll be able to articulate very clearly to you. The rationale behind that very shortly as we get back into Golden Pike obviously that’s where the head grade jumps up materially. So we are mining there at the moment, but we had minimal mining in there last quarter.

DanielMorgan

Yes. So just to follow up on that I imagine that what you’re trying to do is hammer the material movements to get more and more access to the pit. And so that’s the focus near term and so maybe the grade we can expect more grade variability and potentially lower grades than what’s indicative of the medium and longer-term futures, would you agree?

RaleighFinlayson

Yes. Your first statement is correct. We are trying to hammer that down and obviously as we get more fleet coming to site, we can do both end we can maintain the right at the top as well as getting obviously a nice kicker of head grade around 2 grams from the bottom. So that strategy will be dual pronged. This is the equipment starts to come to site. We’ve literally finished the construction of an excavator two or three weeks ago. So that’s in their mining at the moment, so you’ll see more of an impact about this quarter. In simple terms, we’ve got a large stockpile around 22 million tons of low grade about 1 gram. We’re looking to utilize that as best we can over the course of the next two or three years, whilst we’re doing that hammer down the pre-strip as you mentioned such as that lower grade rolls off again into the next category of lower grade stockpiles. We’ve got significant ramp up the next pit material. So it’s just making sure very similar how we run our business Carosue Dam, Thunderbox, we’re thinking about the future-proofing then mining strategy with that trying to make sure it’s consistent over a long period of time. And we’re not trying to be heroes in the short term to then have a hole somewhere else.

DanielMorgan

Right and I imagine the format of the guidance that’s going to come, it sounds to me that it’s going to come in two parts. There’ll be a Thunderbox and Carosue Dam update which will be guidance and then the Super Pit is separate in September. So will you be providing Super Pit guidance in that like separately? I guess I’m trying to work out how that’s going to — the news flow is going to work?

RaleighFinlayson

Yes. You are 100% correct there, Dan. So, obviously, just with KCGM being after Northern Stars, it’s easy to put that out as a separate announcement. So that’s why we’ll do that. So we’ll do our separate Carosue Dam, Thunderbox information updated R&R guidance for FY21 and obviously all ingredients will be there through the reserve statement particularly about what that production profile looks like, updates on milling capacities those sorts of things. And then likewise at KCGM we’ll be doing our inaugural JORC resource and reserve statement. There’ll be a whole swag of information within that statement to enable analysts to sort of map out this project over its life of mine which is essentially what we’ve been doing as well, as well as providing more details around the shorter term as well.

Operator

Thank you. There are no further questions at this time. I’ll now hand back to Mr. Finlayson for closing remarks.

A -RaleighFinlayson

Thank you, Rachel and thanks again for everyone’s time and for your patience. So this is a closing comment and this is to our people and more broadly to the people in our industry. Just a message to stay safe and stay strong by staying together. And look after your mates. Keep up the comps. Keep asking yourselves are you okay? It’s a critical tool and keeps up your workplace inspections there to ensure your safety and know your critical controls around your principal hazards. And ensure that they are in place and effective. We’ve all learnt during our EAP sessions on site, particularly those at Carosue Dam. We know we’re going through stages of grief being denial, anger and bargaining and sadness. It’s okay to cry and then eventually we’ll get to acceptance in the months or years ahead.

EAP support is available for everyone and their families. Use it. I am. I learned during the week that I’m not a robot and sometimes you need help and to make sure you reach out for that help. This will ultimately galvanize us. It’ll make us stronger together and in the words of our on-site rock, Harvey. We’ve got this. Thank you.