Edited Transcript of RMS.AX earnings conference call or presentation 24-Feb-20 10:59am GMT

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Timothy Peter Manners, Ramelius Resources Limited – CFO [3]

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Thank you, Mark, and welcome again, to those joining us this morning.

I’ll start on Slide 5. We have a high-level summary of some of the key financial metrics for this half year compared to those of the same period last year.

As Mark mentioned, there was a significant increase in net profit after tax in the 6 months to December 2019, up 329% to $20.5 million. Whilst the revenue line is 13% lower on the back of lower gold sales, as the earnings figures shown here would indicate, the margins made on the ounces sold are considerably higher than those made last year. The improved margins have come about from both a higher realized gold price and a lower cost of production for each ounce sold. Our lower cost of production stem from a number of factors, but the key areas really come down to 2 points. Firstly, there was an increase at Mt Magnet’s — the head grade through the mill of 18% largely due to some excellent performances from both Shannon underground, Eridanus open cut as well as Milky Way. And secondly, there was a considerable drop in costs for each tonne of ore that was milled by approximately 15%. The biggest single contributor here again is Eridanus. The mine has significantly outperformed the reserve model and as such produced a lot more ore tonnes than expected, which simply leads to a lower cost per tonne through the plant. Therefore, good grades and lower costs have more than offset the slight decrease in volume of products sold.

I think, and as Mark mentioned, it’s also important to note that whilst Mt Magnet produced the largest share of gold, and indeed this translated to the lion’s share of earnings, Edna May, despite battling some permitting delays in Greenfinch, has managed to remain both earnings and cash flow positive during this lean period. With Greenfinch now essentially permitted and development about to start and with Marda ore being stockpiled on site, the future bodes well for Edna May as a long-term contributor of value to the group.

If we look at the bottom half of Page 5, Slide 5, you can see that cash generated by the operations has been reinvested into the long-term future of the company. Strong operating cash flows, particularly when you notionally adjust for the increase of inventories, which I’ll talk to in a moment, were $73.4 million. These were invested entirely into projects like Hill 60, Shannon underground at Mt Magnet, the development of Eridanus, the project start-up at Marda and our continued commitment to exploration. Furthermore, we invested in 4.9% of Spectrum Metals, and the dividend that was declared at the end of last financial year was paid out in October. The first half of FY ’20 was always planned to be a period of heavy development spend, and the benefits of this, we would expect to see return quickly in the second half of FY ’20 and into FY ’21.

Moving to Slide 6. This chart, hopefully, supports my earlier comments around the significant improvement in margins of the business. There was a slight reduction in ounces produced and sold, as mentioned, mainly from Edna May, but the profitability of each ounce was greatly improved from both sites.

Slide 7 shows a little bit of history for both NPAT and EBITDA for Ramelius going back to the FY ’15 year. Whilst this half year was not quite a record period for the company, it certainly reflects the stronger profile and earnings potential that exist given the gold price environment we are in and the solid focus on cost control that we have across the business. And I think Slide 8 demonstrates that cost control quite well. The chart on Slide 8 has 3 key components like gold production, which has risen 97% over the past 5 years. It also shows our average realized price, which has been steadily increasing particularly over the past 12 to 18 months. And it also shows significantly our very stable operating cost per ounce profile, which has varied by less than 9% on a cost per ounce basis over the time frame shown. The bar on the far right illustrates where our second half production sits at the mid guidance point as well as the midpoint of our all-in sustaining cost guidance too. Assuming we see the continued strong spot mill prices, then as you can see, the all-in sustaining cost margin will continue to grow, and the second half looks to be a promising period for us.

Moving to Slide 9, which shows the cash flow for Ramelius for the 6 months just gone. The way I’ve presented this is slightly different to that shown in our statutory cash flow, but the aim really is twofold. Firstly, it shows that the cash margin generated above the all-in sustaining cost is significant at $72.7 million. And this amount is prior to the buildup in inventory of $19.1 million, which I’ll talk to on my following and last slide. Secondly, it underlines the investment made over the past 6 months, as Mark mentioned, into the future of the Ramelius asset base, including the inventory buildup, which are essentially mill feed for tomorrow. We have invested over $80 million into the future mines and projects that you will see reaching steady-state production or indeed providing first ore to our mills over the coming short to medium term.

Finally, on Slide 10, I’ll leave you with a quick snapshot of the balance sheet of Ramelius as of the end of December 2019.

We have cash and bullion on hand worth $87.7 million. We have current assets totaling $134.2 million, with around $61 million of that attributable to the building inventory position I mentioned earlier. That inventory holds approximately 80,000 ounces of gold either on hand or in rolling stocks. It has, if you pardon the expression, a street value of around $150 million.

We have no debt, but we have opportunity for up to $35 million if we need it.

So in closing, we are set to not only continue to grow our business and improve our margins, but we’re also set to act on any other investment opportunities, be they internal or external in nature.

Thank you.

We’re now happy to take questions if there are any.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brian Chu from the Australian Gold Fund.

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Brian W.B. Chu;Australian Gold Fund;Analyst, [2]

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Mark, thanks for the presentation and a very wonderful set of results in many respects, and I’m quite excited to hear about where it goes with Spectrum — with the addition of Spectrum minerals. What I’d like to ask is in terms of the hedge position you currently have, which is at about $1,943 an ounce, and the gold price has just risen above $2,000 as of this morning, is there any chance that you are willing to classify from the cash immediately to close off on the balance of money hedge position in order to take advantage of the rising gold price?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [3]

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I’ll answer that one. Our policy, hedging policy, obviously along with a lot of our gold peers, is probably a subject of much discussion at the moment with the Aussie dollar gold price running very strongly. (inaudible) explain our policy is very simple in that it outlines the minimum and maximum hedging levels as a proportion of expected production we have to maintain over a sort of a 3 months to 3-year time frame. In short, those levels reduce the further out as you go.

As an indication, the early periods permit us to hedge between 40% and 60% of production, and the latter periods anywhere between 0% and 40%. We review this policy, at the minimum, annually; and the — obviously with the gold price doing what it’s doing, more regular than that in recent times.

So that is our policy. It’s our policy at the moment and we will continue to look at that, but at the moment, we’re happy with the policy as it stands. We are not disappointed with the gold price going up because therefore our — the remainder of our production is exposed to that spot gold price. And it’s the old story. If you put in place a hedge, what do you want the gold price to do? Do you want it to go up such that your spot production is exposed to that? Or do you want the price to go down to make your hedges look good?

So that’s, I suppose, our policy in a nutshell. I’m not saying we want to change it. We’ll review that as a Board and as a management team on a regular basis.

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Brian W.B. Chu;Australian Gold Fund;Analyst, [4]

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Okay. And the second question I want to ask, if it’s okay, is, is there any plans to accelerate the exploration and the feasibility studies for Spectrum minerals given the cash balance you currently have and also the high grade in the Penny West mine?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [5]

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We’ll — like all of our projects that we purchase or acquire, we will look to put it into production as soon as possible. We don’t buy projects to land bank for a rainy day, if you like. We will put that into production as soon as we can. And currently, we’ve said to the market that production in late ’21 is our plan. So that’s as soon as we can see reasonably put that into production. In terms of exploration, we will hit that tenement with exploration drilling and our target is not harder than what Spectrum had done in the past. We expect to keep that within our $20 million to $25 million exploration budget at this stage. Obviously, budgeting is something that we do on a financial year basis, and we’ll look to incorporate that once. All going well, we will obviously acquire the Spectrum assets.

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Operator [6]

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Your next question comes from Nick Evans from The Australian.

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Nick Evans;The Australian;Resources Reporter, [7]

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Congratulations on a good set of results in here. Just one slightly from less field. In relation to, I guess, the supply chain and the coronavirus out of China, a bit of chatter around the market that some mining companies are starting to struggle to get reagents and sort of grinding materials out of the Chinese — out of China. Are you noticing any sort of supply chain partners in any of your operations on that front?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [8]

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That’s a new one, Nick. It is less field. You’re right, but it’s something we will make a note of and keep an eye on. But it’s not something that’s come across our desk at this point in time. It’s interesting that you say that almost guaranteed with some intel leaks coming in from other areas, but it’s not something that we’ve seen.

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Nick Evans;The Australian;Resources Reporter, [9]

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I guess just on the Spectrum stuff. I take what you said, that the acquisition is still yet to close. But you guys are obviously fairly active in that market at the moment, looking to sort of expand your own footprint and add some [early-side stuff]. And how are you seeing the sort of the market and the, I guess, valuations continue throughout that are out there in terms of your expectations on sort of price and that kind of thing?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [10]

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Obviously, with the gold price doing what it’s done, the valuations are much higher than 2014, when we had our last major purchases in the area, in the sector — so prices are pretty high, but I suppose margins along with that are very high. So if you look at Spectrum, for example, on a per-ounce acquisition, it’s a high per-ounce acquisition cost, but it’s a very low per-ounce operating cost. That’s the full picture that you have to look at when you’re looking at these acquisitions. We think that it’s a quality asset. There are opportunities around, but they’re obviously becoming more expensive and [people would note that].

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Operator [11]

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Your next question comes from [Richard Hart from Top Wheel].

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Unidentified Participant, [12]

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Mark, congratulations on spanking the golden horse into a gallop.

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [13]

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Thanks, [Richard].

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Unidentified Participant, [14]

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Okay. First question is about Marda really. Firstly, when are you hoping for that ore to hit the mill? And secondly, has the ore been tested? And if so, how does it stand up to early expectations in grade?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [15]

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My understanding on grade expectations are in line with what we expected and swings and roundabouts in terms of it’s a little higher density, which is good. There might be a few less tonnes in the upper areas of the deposit. So after the about equivalent to what we expected. We’ve got quite a healthy stockpile on site at the moment. And we’d like to think that we’re going to get that trucked down to Edna May very shortly, ideally by the end of the month. It’s just finalization of the trucking route. We have to deal with 2 shores and main roads. So it’s just the devil in the detail around that and having obviously water bores so that we can keep the gravel section of the road, which is effectively from Marda down to Bullfinch, well maintained once we start trucking.

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Unidentified Participant, [16]

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Right. So I assume you’re relying on that for the 70,000 ounces in the next quarter.

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [17]

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While that’s part of the picture, I would say that it’s only a small proportion of the total 70,000 ounces. Outside Mt Magnet, it’s got a bigger play in production. As it has in the last 6 months, I think Mt Magnet is going to be the lion’s share of production. Marda is a relatively small amount, but it’s part of the picture, yes. You’re right.

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Unidentified Participant, [18]

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Okay. Well, nothing else, except to say, Mark, I hope your next omelet goes really smoothly, and we all see the success of it.

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [19]

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Thanks, [Richard]. Appreciate that.

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Operator [20]

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Your next question comes from [Ashley Chen], a private investor.

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Unidentified Participant, [21]

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Mark, Tim, well done again for the another, I think it’s 3, 4 years in a row of good set of results. I’ve just got a question on your 2 or 3 favorite subjects again. With the — if I may ask, with the higher gold price, how quickly can you get reserves revisions out there?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [22]

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That’s one thing that is a challenge. You don’t want to spend all your life redoing reserves and resources because of gold price moves. And we tend to — unless we have a project-specific reserve like an Eridanus larger pit, for example, we tend to leave that annually. And otherwise, you’re forever having different gold prices for different projects, and it becomes a little bit messy. So we try to keep it annually and not try to take some of the volatility out of the gold price as well.

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Unidentified Participant, [23]

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And then just revisiting the hedging methodology within your policy, just from the first question. It’s because your — because if you can see your [neighbors], Westgold, have similar amounts of hedging, but their reserves are out for probably 10 years. They’ve got a lot of greater annual production, 300,000 ounces projected, and yet a similar amount of hedging. What’s your thinking behind the level of hedging relative to, say, your peer group?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [24]

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We don’t quantify, look at our comparison to our peers in that way. One thing I can say is we may, as a proportion of production, have slightly more than our peers in terms of weeks of production, but it accounts for, let’s say, 20% of our 5-year mine plan of over 1 million ounces, at 200,000 ounces roughly. And we have one of the best average gold prices of our peers. That’s probably the 2 things that we compare. We compare total proportion of production and average price. The other thing you need to compare if you’re going to compare with Westgold is compare the profit performance. If you want to look at comparisons, you’ve got to look at everything.

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Unidentified Participant, [25]

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Okay. And then the third question is more, I guess, less field, as in the mergers and acquisitions. When you look at all the gold companies, when we’re producing 200,000, 300,000 ounces per annum, your ratios, I guess, your price to earnings or enterprise value to EBITDA, tends to be around the 3x, 4x, but when you get to scale 600,000, 700,000 ounces per annum, you’re getting towards the — the ratios go up. So the value of your company effectively doubles by — just by merger. So not being specific, but in general terms, would — personally, do you see — would you be happy for a merger that brought you up to the 600,000-plus ounces per annum? And then the secondly is, I guess, would you prefer to be a co-CEO of a 600,000 per annum ounce company that’s doubled in value per ounce than a single CEO of a 300,000 per ounce?

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [26]

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On the first question, we have kind of stated it a few times over the last several years. We are on a journey from being a — for a long time, Ramelius was a 80,000 to 120,000 ounce a year producer. We’ve made a conscious decision to go to — to look to go to 300,000 ounces because we recognized exactly what you mentioned, the uptick in value you get as a plus-5-year, 300,000 ounce producer, as opposed to just being a 100,000 ounce producer. So we’re on that journey. We’re probably 3/4 of the way along that path to being a longer-term 300,000 ounce producer and [the rewrite] that comes with that.

Your second question about me personally: My job is to get maximum value for shareholders, so I’ll do whatever is best for shareholders. And if it’s a merger or an offer that makes sense for Ramelius shareholder but cost me my job, then my job is to accept that offer. But I think the question is a little loaded, but hopefully, I’ve given you the right answer there.

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Operator [27]

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Your next question is a follow-up from Nick Evans from The Australian.

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Nick Evans;The Australian;Resources Reporter, [28]

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Just a question on costs. This is again a broader one. Are you seeing any sort of wage inflation or cost inflation in WA on sort of the labor front? And if so, I mean, is it sort of your traditional heavy diesel sort of that kind of area where we know there’s a lot of labor market partners? Or is it getting a bit broader than that?

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Timothy Peter Manners, Ramelius Resources Limited – CFO [29]

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Nick, it’s Tim here, if I may answer that one. I guess, in short, yes, there are some wage pressures that are creeping through. We wouldn’t regard them as material at this point in time. We’ve factored them into our internal budgeting and planning processes, but no, we are seeing them through. Diesel price obviously fluctuates a little bit, so there’s some occasional movements there, but I think elsewhere the costs are reasonably static, reasonably manageable. And we don’t give a lot — a huge amount overseas, so the currency doesn’t have a big impact on that. So certainly wages still remain our biggest single cost. And yes, other than a small rise, it’s certainly manageable at this point in time.

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Mark William Zeptner, Ramelius Resources Limited – MD, CEO & Director [30]

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It’s Mark. I might just add to that, Nick, it’s not in specific areas like you mentioned diesel. It is both technical and trades are equally difficult. We’re talking mining engineers, [GOs],even in some areas, accountants. And then you try it as well, but it’s been drilling blocks and machine operators, so it’s pretty broad. It’s not as niche as maybe you’re suggesting.

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Operator [31]

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(Operator Instructions) There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.