Ramelius Resources Limited (RMLRF)
Q4 2022 Earnings Conference Call
August 28, 2022 09:00 PM ET
Company Participants
Mark Zeptner - Managing Director
Tim Manners - Chief Financial Officer
Conference Call Participants
Andrew Hines - Shaw
Alex Barkley - RBC
Presentation
Operator
Thank you for standing by, and welcome to the Ramelius Resources Full Year Financial Teleconference. [Operator Instructions]
I would now like to hand the conference over to Mr. Mark Zeptner, Managing Director. Please go ahead.
Mark Zeptner
Good morning, everyone. Thank you for taking the time to dial in to our full year 2022 results conference call. Alongside is Chief Financial Officer, Tim Manners. He will drill down into the numbers after I have covered off on the highlights. Now there have been a number of releases related to the full year results loaded on to the ASX platform this morning. So Tim and I will be talking more broadly to the results presentation itself. Hopefully, you do have that handy. Once we've done that, there will be an opportunity for listeners to ask questions.
So if we go to the presentation and start with Slide 3. That mainly shows you the flexibility that we've built into our Western Australian operations over recent years with 6 mining operations now feeding into our two processing hubs at Mt Magnet and Edna May. Production was evenly split between the two hubs in FY '22, but Mt Magnet looks to resume the flagship mantle in FY '23, where we will see the first contribution from the Penny underground mine, which will be one of the highest-grade mines in the country.
Turning to Slide 4, which shows that in terms of mining in FY '22, we actually moved a record 4.5 million tonnes of ore. And given the slightly higher grade, this also translated into a record 312,000 ounces mined. These figures are both significant increases on the previous financial year and an excellent outcome, not only given the challenges that COVID posed in terms of workforce availability, particularly in the second half of the year, but also the fact that FY '21 was a record year for the company in many respects. This over-mining, if you like, has led to an increase in stockpiles generally, which Tim will no doubt go into more detail on.
Turning to Slide 5 now where we have our key production figures. As we have discussed previously, the closure of the WA border created difficulties for our trucking contractor in terms of finding drivers and those difficulties weren't entirely alleviated once the border opened in early March. It is partly for this reason there was a gap in contained gold mine as per the previous slide and our final production number of 258,625 ounces. It needs to be noted that this value is not loss. The golden stockpiles will be worked through as we expect to see a gradual return to normal levels of trucking activity over the financial year.
Like many of our peers, we saw an increase in all-in sustaining costs to $15.23 an ounce as the effects of inflation filtered through, noting that we're one of our needs few to come inside our original cost guidance for the year, a 5% increase in our average realized gold price up to $23.99/oz per ounce offset to somewhat and helped ensure that our all-in sustaining cost margin remained high at 37%. Now maintaining all-in sustaining cost margin and EBITDA margins that are among the best in our peer group continues to be a focus for the company and it is pleasing we've been able to achieve that despite a pretty challenging environment.
Before I hand over to Tim, I'd just like to comment on the dividend and in light of ongoing uncertainty around cost inflation, the Board deemed it appropriate to reduce the full year payout this year. As our cost base has been reset, there has been a flow-on effect into other areas such as dividends. We are proud of our track record in dividends since we set in place an official policy 4 years ago, and we will continue to seek to strike a balance between providing sustainable returns to shareholders and prudent capital management. You'll also note this year we have established a dividend reinvestment plan for the first time. Tim will provide more detail.
There is a slide on dividends as we move through his part of the presentation. And with that, I'll now hand over to him.
Tim Manners
Thank you, Mark. So moving to Slide 6. If you do have the presentation in front of you, we see a snapshot of the key underlying results for the last financial year. To be clear, when we refer to underlying, we are essentially backing out the large nonrecurring items, both favorable and unfavorable in an attempt to communicate what we believe to be a more reflective result from the operations for the year. I will, of course, discuss those one-off items shortly. Also, and for reference, we have provided an appendix that compares both statutory and underlying results with those of last year, which you can refer to as needed.
So we achieved a top line revenue of $604 million from gold sales of 251,355 ounces. Despite achieving a higher gold price, the slight drop in gold sales led to a 5% drop in revenue over the same period last year. The underlying EBITDA of $292.8 million represents a margin of 49%, which still compares very highly in our peer group. The underlying NPAT of $73 million also represents an excellent return in what was a very challenging year. I will discuss cash flow and our balance sheet in later slides. But importantly, the operating cash flow of $36.2 million was after $150 million in capital and mine development, but also an approximate $70 million cash investment in the buildup of inventory, which will likely all be monetized in the coming 1 to 2 years.
Moving to Slide 7. This puts those underlying results into the context of a 5-year time horizon. Whilst a number of our financial metrics this year were down on FY '21, it needs to be viewed on the back of a very tough year for the industry over COVID, people and cost challenges and at least from RMS' perspective, we are also coming off in FY '21 that broke almost all physical and financial records since the company was established. So yes, the results are down on last year. But when looked at over a 5-year period, we continue to see year-on-year sales growth running at over 15% per annum and a total shareholder return that has reached over 20% per annum over that same time frame.
Moving to Slide 8. For those who want to get a little bit more into the detail, what this chart seeks to illustrate is how the statutory EBITDA reconciles all the way through to the underlying NPAT. The first 4 steps in this waterfall chart represent those one-off items I mentioned earlier. And when you notionally back these out of the statutory results, you get to an underlying EBITDA of $292.8 million, as noted earlier. After then adjusting for D&A and tax, we come to the underlying NPAT of $73 million.
On Slide 9, I'll now discuss those material one-off items that were recorded this financial year. The biggest item was the noncash impairment to the Edna May CGU. Now briefly, the CGU or cash generating unit comprises the Edna May underground, all plant and infrastructure on site and also the satellites that feed that mill being Tampia and Marda and of course, the mining and administrative infrastructure at each of those sites. The other CGU held by Ramelius is Mt Magnet, which includes the mines and infrastructure on site plus Vivien and Penny. I don't plan on going into the details behind the impairment calculation itself, but in short, the calculation is done to compare the present value of future after-tax cash flows from each CGU to the carrying value of that CGU.
In circumstances where the carrying value materially exceeds the cash flows, then an impairment is required. And there's important things to note here. The adjustment is noncash. The adjustment does not mean that there are no future cash flows from the CGU. Indeed, for assets such as Marda and Tampia, where a lot of capital has been sunk, the future cash flows are still very reasonable. The calculation is generally conservative in its nature, given it's a requirement to ensure your assets are not overstated, typically conservative assumptions are applied around items like conversion of mineral resources and key inputs like gold price. The calculation environment for unit cost was also projected forward in the calculation and continued inflation is also applied by the use of a declining real gold price.
The practical issues behind the impairment were largely twofold. Firstly, the Tampia deposit has not performed as expected, as shown in the table. Now this table incorporates our current view of the remaining life, having factored in the actual performance of the mine so far. As noted, we expect positive cash flows from the Tampia project. However, what this impairment tells us is that the original return on investment may not be as high as we had originally projected. You may recall that Tampia was acquired by the takeover of Explaurum. The cash flows, therefore, must support not just the direct capital cost of the Tampia project development, but also the acquisition costs of Explaurum. Without any notable exploration success at Tampia thus far, the mine cash flows have to cover the majority of the approximately $65 million acquisition cost of Explaurum as well.
The second part of the impairment relates purely to Edna May itself. Given we are not able at this juncture to include the stage 3 cutback in our recoverable amount tests, the plant and infrastructure at Edna May needs to be supported by the underground mine only. While the underground is a cash positive asset, it is not sufficiently positive to cover the full value of sunk capital at Edna May and the full rehab provision, so an adjustment was required. This impairment calculation will need to be reassessed once a decision around stage 3 has been made later this year. The other material impairment item was around exploration carrying values, where we recognized $16.7 million in a further noncash impairment. In short, the majority related to some of the Tampia prospects that we now feel have limited potential to produce an economic project.
The last point on this slide, which was recognized in the half year December 2021 accounts was the cash we received for the cancellation of the lithium royalty we owned over Liontown's Kathleen Valley project. The $30.2 million in cash was received in the first half of this year and has also been recognized as a one-off item. The lithium royalty had no value in the accounts, so the full cash receipt has been recognized in our statutory pretax profits. Lastly, but very importantly, all of the same impairment tests were carried out on the Mt Magnet CGU, and there were no issues. The impairment issue is isolated to the Edna May CGU only.
Moving to Slide 10. We look at cash flow, which we still believe is the most important measure of any business. Whilst our cash flow was not as strong as it was in the previous record year, there are some points that need to be highlighted. Cash from operations pretax was $184 million. After capital and exploration, the operations generated $36.2 million in free cash flow. However, and I'll illustrate this shortly, there was a cash investment of over $68 million in inventories during the year. So another way to view this is that from $100 million cash generated by the operations, nearly $70 million has been reinvested and will be recovered in the next 12 to 24 months as stockpiles are processed, timing issue only. The building stocks came about at 3 main sites being Tampia, Marda and Mt Magnet.
Also, we made a long-term investment during the year in the Rebecca exploration project via the acquisition of Apollo Consolidated. We view Rebecca as one of, if not the most exciting exploration assets in our portfolio and the $71 million outlay was a big reason behind the cash flow profile shown on the slide. We also paid $50 million in tax, which was basically for 1.5 years. This can happen as you transition away from being a tax loss company to one that is a taxpayer as we did in FY '22. We don't expect that level of tax payments looking forward. Lastly, there was a $20 million return to shareholders in the form of a 0.025 fully franked dividend. We finished the year with cash of $147.8 million and $25.1 million in gold giving a cash and gold balance of $172.9 million.
Moving to Slide 11. We show the impact of those investments in gold and in ore stockpiles that have had on the cash flow for the year. When you look at the FY '21 operating cash flow as a starting point, we certainly had some real reductions in cash flow through lower sales volume and higher cash operating costs. But as you can see, there was also the $68 million investment into ROM stockpiles and bullion that reside on the balance sheet for monetizing in coming periods. Our contained gold in stocks rose 83% to nearly 121,000 ounces. Indeed, our entire inventory of gold in a currently unsalable form rose 88% to 135,000 ounces. This goes some way to protecting the business against unforeseeable events that may impact mining operations with over 3.5 million tonnes of ore available for processing at year-end.
On Slide 12, we show some balance sheet extracts, which I won't dwell on. Suffice to say that we remain well-funded, debt-free with significant gold inventories on hand. While debt-free, we have established the option to expand our financial capacity through an undrawn fully committed facility of $100 million. This is available for use if and when we see the opportunity to utilize either for organic growth or M&A opportunities.
One point I will make in relation to the working capital position is that given the size of our stockpiles we have, for the first time, we have reclassified $66 million of ROM stocks from a current to a noncurrent asset, which is a large reason for the drop in working capital from FY '21 to FY '22. Our hedge book sits at 196,000 ounces at an average price of 2,512 per ounce. That was as at 30 June. Currently, those ounce levels are similar. The price remains higher. In short, we are very comfortable with our balance sheet and believe that it can provide the platform for our next step in our growth aspirations.
Lastly for me is the dividend Slide 13. All I will add to Mark's comments is that capital management is front of mind with the Board and the executive and our commitment to maintaining a dividend return as part of the investment proposition has not changed.
With that, I will hand you back to Mark. Thank you.
Mark Zeptner
Thanks, Tim. So if we can refer to Slide 14 being the last slide. These are our focus areas for FY '23. We continue to strive for operational excellence by achieving guidance, managing costs and continuing improvement in safety. We are focused on the production ramp-up at Penny, where we are, in fact, in the process of intersecting the main Penny North ore-body, and this will have a significant impact on good costs once it reaches full production as the lowest cost mine in the portfolio. Continue to manage our capital in a disciplined manner and retain a strong balance sheet whilst recognizing the dividend, including the one announced today are an integral part of the mix. We do remain on the lookout for accretive acquisitions and have made no secret of our desire to add a third production center.
Again, we are maintaining discipline in this search and will only move when the right opportunity presents. We have budgeted to invest another $25 million exploration this year, including a significant spend at the newly acquired Rebecca project and at Mt Magnet, which continues to deliver new discoveries and resource ounces. And finally, we have the near-term milestones of underground production commencing at Penny and Galaxy to look forward to whilst we will also provide updates to the market on the progress of mining studies at Mt Magnet and Edna May, plus we'll put out our annual resources and reserves statement next month.
That concludes the presentation. I'll now hand back to operator Darcy to open the line for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Andrew Hines from Shaw.
Andrew Hines
First of all, just on the build in inventories that we've seen. Can you just talk us through the -- is there an operational reason why that's occurred? And how quickly do you think inventories come back to more normal levels? Or is this now a permanent sort of shift in the level of ROM stockpiles that you're going to -- I do know you've pushed that from the current to the noncurrent. So obviously, it's not just a short-term phenomenon. Maybe answer that one first, and I've got a second as well.
Tim Manners
Yes, sure. Andrew, it's Tim here. There's a few things. Obviously, with the issues around haulage that we experienced earlier this calendar year, that's the main reason why there were stockpile increases at Marda and Tampia. At Mt Magnet, the main stockpile of note is Eridanus. We run and always have done the most efficient mining model. We strive to obviously get the best efficiencies through the operations and that obviously leads to the lowest operating cost. We view the holding cost of large stockpiles as relatively immaterial in that sense. And striving for those mining efficiencies is our primary goal and that is one of the reasons why Eridanus has increased in size or the stockpile has increased in size.
There is, I would imagine, a 1- to 2-year window where certainly Marda and Tampia stockpiles will reduce. We also believe Eridanus will turn the corner and will start to reduce as well. However, the mine still has some decent life in front of it. So that may take at the longer end of that 1- to 2-year time frame. It's not a permanent sort of shift. It's just the nature of where things are and it's been compounded by the effects of COVID and manning levels on trucks.
Andrew Hines
That's great. And then the second question I had is just on your cost guidance for FY '23, which is currently at $17.50 to $19.50. And I know how proud you guys are of meeting all your guidance levels. And as you pointed out in the preamble, Mark, you're one of the few who actually met your original cost guidance last year. That number, though, I think as we discussed at the quarterly, that was a surprisingly high cost guidance number for FY '23. And you're now 2 months into the financial year. How are you tracking with that? Are you confident that you'll come in in that range? Are you hoping you're coming out at the bottom end of that range, just give us any more updates on that?
Mark Zeptner
Thanks, Andrew. It’s a bit hard to comment. I suppose it is early days. So so far, so good, I suppose, you could say. I think people are talking a little bit about the market flattening and things normalizing a little bit. But it is pretty early in the piece. Obviously, the September quarterly will be pretty informative. So you’re just going to have to wait, I think, on that like most people unfortunately, Andrew.
Operator
Your next question comes from Alex Barkley from RBC.
Alex Barkley
Just on the exploration impairment and not being any underlying numbers, what's your typical strategy around capitalizing and expensing of exploration? And what might you expect is a typical impairment each year? Or are you just hoping that's going to be 0 every year?
Tim Manners
Alex, Tim here. We did pull it out as sort of a one-off just simply because of its size and also because of the link it had through to the Edna May impairment. As I mentioned in the script, most of that impairment does relate to Tampia projects or prospects. The company's policy is to capitalize all exploration expenditure and review that on a 6-monthly basis to determine whether we feel prospectivity still resides and we hold good tenure and all those sorts of things. I guess, a normal year is probably somewhere between $3 million, $4 million, $5 million. That would be probably what we would expect to adjust. So the reason why the $16 million is being highlighted is simply because of, as I say, the quantum and the link through to the Edna May CGU.
Operator
[Operator Instructions] Your next question comes from [Richard Hart] from [Topwheel].
Unidentified Analyst
Everybody probably dislikes entirely the whole year because of the hard times. As a contrary and of course, I'm doing the opposite, but that's just me. The question I have is, if you could perhaps clarify to me, the all-in sustaining costs already mentioned for '22-'23, average at $18.50 say. And as I understand it's an unknown, but that's your best guess. I'm a bit confused with the stockpiles with $300 million plus worth of gold in the stockpiles, is there any allowance for that in the all-in sustaining cost estimate as we might -- you're going to feed in? Or is it just that we process that at a cheaper level? The all-in sustaining cost is simply from ore in the ground to gold bar?
Tim Manners
Richard, Tim here. Look, the movement in the value of inventory is factored into the all-in sustaining costs. And obviously, when you build a stockpile, you spend a certain amount of money and the amount that you've put on the balance sheet comes out of that when you determine your all-in sustaining cost. However, all of -- all ROM stocks, so ore, if you like, that we stockpile is fully costed. So it carries all mining costs, a proportion of overheads, et cetera. So whether or not it's stockpiled in theory shouldn't necessarily impact the all-in sustaining costs over the longer term.
We will expect, as I mentioned, with Tampia and Marda, we'll probably draw down those stockpiles in the coming year. It doesn't mean though that that's going to be a cheap all-in sustaining cost just because there's no mining associated with it because all of those mining costs sit in the carrying value of that stockpile that will get written off as it's milled. It does have swings and roundabouts. It is probably the most confusing part of the all-in sustaining cost calculation unfortunately. But nonetheless, it's how we have to apply the accounting rules. But in short, our forecast all-in sustaining costs has full allowance for stockpile movements as we expect them to be looking forward. I hope that answers your question.
Unidentified Analyst
Well, yes, I think the thing I was next going to ask, you won't be able to answer the question, I had in mind was I know it's difficult because they're all at different locations. So the ongoing cost to process are going to be quite different because of trucking costs. I was hoping you might come up with a percentage of cost that having a stockpile of ore represents compared to the finished product. But I imagine that's too difficult. Is it?
Tim Manners
Off the top of my head, it's -- yes, very difficult I'm afraid. But I'm more than happy to have a chat to you offline, Richard, if I can share a little bit more color on that.
Unidentified Analyst
No, I understand it's going to be difficult because they are all in different locations, so trucking costs are different. Look, I appreciate both of you taking the time to do it.
Tim Manners
No problem.
Mark Zeptner
Thank you.
Operator
There are no further questions at this time. I'll now hand back to Mr. Zeptner for closing remarks.
Mark Zeptner
Now we would like to close the conference there. Thanks, Darcy, if there are no other questions.
Operator
Thank you. That does conclude our conference for today.
Mark Zeptner
Thanks, everyone.
Operator
Thank you for participating. You may now disconnect.
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Ramelius Resources Limited (RMLRF) Q4 2022 Earnings Call Transcript