Mount Gibson Iron Limited

Thank you for joining today's teleconference for the release of Mount Gibson's Iron FY 2024 financial results. Mount Gibson Chief Executive Officer Peter Kerr will be leading the discussion and is joined by Chief Financial Officer Jill Dobson and External Relations Manager John Facius. Mr Kerr will provide a brief overview after which there will be an opportunity to ask questions. Due to time constraints, only institutional participants will be invited to ask questions at that time. A recording of the call will also be available via the Mount Gibson website shortly after completion of today's teleconference. Thank you and go ahead thanks Peter.

Thanks Lisa. Good morning all and thank you for joining us to discuss Mount Gibson Owns financial results for the 24 financial year. As usual I'll give a brief overview before handing back to Lisa for any questions you may have. And also as usual, any dollar references we make are to Australian dollars unless otherwise indicated. So the business delivered a solid operating and financial performance over FY24, particularly in the first half given the benefit of previous investments made at Coolman Island in overburden removal, plant improvements and the build-up of high-grade stockpiles which were monetised during the period. The second half was more challenging as iron ore prices weakened and mining was completed in the western half of the pit after which we commenced the planned transition to the eastern half and that will be the main source of ore over the mine's remaining two to three year life. Overall, sales were near the upper end of our guidance at 4.1 million wet metric tonnes, grading 65.3% iron. generating full-year sales revenue of just under $668 million free on board. Unit cash operating costs declined, but given inflationary cost pressures and the high proportion of fixed costs for the remote Kulin operation, we were 5% above our targeted range at $74 per tonne shift FOB before royalties and capital projects. Notwithstanding this, the Kulin Island operation generated a solid cash flow of $284 million, which was three times more than in FY23. Together with the proceeds of our Midwest divestment to Fenix Resources early in the financial year, as well as interest and other income items, the company's cash and liquid investment reserves increased by $280 million to $442 million at period end. And that excludes the share and option holdings in Fenix, a stake of 8.6% worth over $20 million at 30 June and which we've since increased to just over 10% through the exercise of the $0.25 tranche of options received as part of the divestment. Including our Fenix interest, our total cash and investment reserves balance at 30 June equated to an effective cash and investment backing of $0.38 per share. The current share price below this level is not a reflection of the true value of the business at this point given the additional cash flows anticipated from future production at Kulin Island, notwithstanding weaker iron ore prices. Hence the board's decision to implement an on-market buyback of up to 5% of the company's issued shares, which is expected to commence in mid-September. Turning to earnings, profit before tax and impairment doubled to $211.6 million from $105.9 million previously. However, given the weaker iron ore price towards the end of the year, this result was eroded by non-cash accounting impairments totalling $159.1 million of the carrying values of the Kulin Island operation and a tax expense which also reflected the accounting derecognition of deferred tax assets. While these impairment expenses are unfortunate, they're reflective of the recent weaker iron ore prices and outlooks but they are non-cash adjustments which effectively bring forward depreciation and amortisation charges that we would otherwise incur in the next few years. As a result, net profit after tax for FY24 was a modest $6.4 million. So turning to Coolen Island in a little more detail, firstly to mining performance. The waste-to-wall stripping ratio reduced in line with the mine plan to average 0.6 to 1 compared with 2.2 to 1 in the prior year. Total material movement in the year was 5.9 million tonnes, and that included 3.7 million tonnes of iron ore. And that compared with the prior year's total movement of 12.9 million tonnes, including 4 million tonnes of iron ore. The stripping ratio will increase in the year ahead as we reconfigure the primary ore grant access, which is actually now substantially complete, and move the mining focus from west to east in the main pit. Removal of the now defunct eastern haul ramp and the underlying waste material has commenced, and that area will ultimately enable access to the deeper high-grade ore in the eastern floor of the pit. As noted in our recent quarterly report, we've also commenced the remedial ground support works required on the upper central footwall area to facilitate the safe recommencement of iron ore extraction below that area where we had a rock fall in August 23. This work is advancing well. Processing volumes increased by 12% over the year to 4 million tonnes compared with 3.6 million tonnes in FY23 and it was weighted to the December 23 half-year period in which we processed the remaining high-grade stockpiles generated in that prior year. Since December, processing has been more closely aligned with all production which will remain the case going forward. The addition of a tertiary crushing circuit is complete with commissioning underway and this will reduce our unit crushing costs as contract crushing services will no longer be necessary. As noted, Kulin Island generated an operating cash flow of $284 million and a profit before tax and impairments of $181 million in FY24 and that was up from $118 million in the prior year. Unit cash operating costs reduced to $74 per tonne sold FOV in the year before royalties and capital projects, and that compared with $77 in FY23. After accounting for substantial negative provisional pricing adjustments in the June 24 quarter as iron ore prices declined, and we've previously reported the detail of that, Kulin Island was still able to generate an attractive cash margin of $69 per tonne sold. In the year ahead, we'll be continuing to target cost reductions at Kulin, which are a function of both cost out as well as increased physical volumes given the high proportion of fixed costs at the remote operation. And lastly on Kulin, I also note that last week we announced the finalisation of the business interruption claim relating to the August 22 processing plant fire for $27.3 million which we expect to receive in this September quarter. These funds are in addition to the $10.4 million previously received for the property damage component of that claim. Regarding the Midwest business, for completeness we again note that the sale of the majority of our Midwest assets to Fenix Resources was completed in July 23. That divestment delivered a pre-tax gain of $35.9 million, as well as $1.2 million in subsequent dividends. You may have also seen that we've recently exercised one of the option tranches received as part of the sale consideration, as I mentioned earlier, and that has increased Mount Gibson's shareholding in Fenix to just over 10%. I'd now like to just briefly touch on iron ore market conditions and the outlook. Recent iron ore price movements has clearly been challenging. While prices in the first half of FY24 were reasonably strong, they have retreated since that time and remained depressed due to ongoing global geopolitical tensions and, of course, uncertain Chinese economic conditions, particularly with the Chinese property and infrastructure sectors. The stronger first half meant that prices actually rose year on year on average terms, with the Platts Index price for 62% FE fines averaging US$119 per tonne CFR, compared with $110 in FY23. Of more relevance to Mount Gibson, however, the high-grade 65% FE price averaged US$131 per dry metric tonne CFR, compared with $124 previously. Australian dollar weakness also provided an additional buffer, averaging 65.6 cents, versus 67.3 cents in the prior year. Meanwhile, shipping freight rates from Kulin Island to Chinese ports have remained relatively stable between 13 and 15 US dollars per tonne shipped. As a result, Kulin Island finds consequently realised an average free on board, i.e. at Kulin Island, price of US $109 per dry metric tonne FOV in FY24, and that was up from US$103 in the prior year. Prices for 62% FE fines are today sitting at around US$95 per tonne, and for high-grade 65% material, they're currently around US$109 per tonne. That differential is obviously very important for us. While we welcome any improvements in Chinese steel and iron ore demand and obviously prefer prices to be higher, The quality of Coolman Islands Fines products continues to provide an important buffer with a high-grade premium widening from a grade-adjusted average of around 5% in FY24 to around 10% currently. This brings us to the outlook for FY25. As previously indicated, we're targeting sales of 2.7 to 3 million tonnes in FY25. lower than our sales in FY24, and that reflects the prior depletion of surplus ore stockpiles and the reduced shipment volumes as we shift the focus of mining to the eastern end of the main pit. Shipping rates are anticipated to increase as the year progresses and then further into FY26 and into FY27. We're targeting unit cash operating costs of Aussie dollars 95 to 100 per tonne FOB, in FY25 and that is inclusive of capitalised mining costs relating to the setup of the eastern end of the pit. It also reflects Kulin Island's high proportion of fixed costs being spread over the reduced sales volumes whilst we do that. However, as noted earlier, we're working hard to achieve volume increases and unit cost savings during the year as various initiatives take effect. While we retain our core focus on maximising cash flow from Kulin Island, we've also accelerated our search for opportunistic resources investments. We've added new investments in a number of operating and development companies with the equity positions valued at $18.5 million at year end. At the same time, we're actively evaluating material investment opportunities in Australia, primarily focused on bulks, and those areas are iron ore, coking coal and bauxite and also on conventional base metals projects, in particular copper, lead and zinc. Recent market volatility and in particular the lack of funding readily available for many mining projects in Australia and our healthy cash reserves puts Mount Gibson in an advantageous position for a patient mid-tier mining company seeking to act on the right opportunity whilst also generating cash flow from its existing operation. And finally, I want to highlight the Board's decision to commence an on-market share buyback of up to 5% of the company's issued shares, reflecting confidence in the company's outlook. This underlying value is not presently reflected in the company's share price, making a buyback an effective value-accretive capital management initiative. The buyback will commence in mid-September 24, and be undertaken over a 12-month period unless it's completed or terminated earlier. So with that, I'll hand back to you, Lisa, for any questions that anyone may have.

Thank you very much, Peter. If anybody would like to ask a question, please press star 1 on your phone now.

So star 1 if you would like to ask a question. We do have a question. Our first question is from Hayden Desetto from Argonaut.

Go ahead, please.

That's close. Hey, thanks guys. Just on the capital management strategy, I mean, the size of the buyback's probably more, I guess, the question. I mean, obviously you talked about doing M&A deals, but you have to add up to some of the dividends we've had in the past in sort of dollar-million basis. Why that wasn't a bit bigger?

Look, this is the board-approved percentage, Hayden, and potentially it could go and be bigger in the future. But we're looking at a range of options, and this was just the start for trying to build some fair value recognition back into the share price. So that's the assist at this point. The other aspect is obviously to try and preserve the cash for opportunities, but it's recognised on the board level that there are a range of things we can do, and this is a way to start.

Yeah, OK. And just on the Fenix stage, we obviously exercised those options where that was all just as planned or were you sort of sitting with that equity stake?

The equity stake is from the divestment of the Midwest assets and those options were a 25 cent tranche and a 30 cent tranche. We were looking to do that 25 cent tranche and so it was part of our plan. And then the objective being that if Fenix is in a position where it is to pay dividends, then we'll pick up some of the dividends on the shares that we've received, given that dividends don't accrue to the options. So that's really the investment logic for it. And the company or the people at Fenix are doing a good job in looking at opportunities in the Midwest. So we're trying to support that.

Do you think that strategy will be reviewed if you do go and buy base metals or something, as you mentioned before? in terms of holding on to more equities as well?

Look, it's a possibility, but this one interests us, so that's why we separately disclose it now, really.

Yeah, OK. All right, we'll leave it there. Thanks, guys. OK, thanks, Glenn.

Thank you. Our next question is from Glenn Lawcock at Barron Joey. Go ahead, please.

Oh, Peter, morning. Hi. Hi. Just on the buyback, a little bit more to Hayden's question. I mean, if you are looking to do M&A, I mean, you're buying back stock, and then you may be issuing it again to do M&A, or do you think whatever you're looking at, you'd do all with cash, not with stock? Just trying to understand, buying it back and then maybe issuing it if we're going to do something.

So the view, and it's a good question, Glenn, the view is pretty simple, and this share price, doesn't fairly reflect the value we have left in Kulin and what we've got in the business. So buying it back hopefully sends a message and recognises that and for those shareholders who remain, that's accretive. In terms of M&A, then at these types of share price levels, it's difficult to be arguing that we should be issuing many shares and so we'd be focusing on cash transactions. But if we could have some value better reflected in share price at a higher level, then there's always the potential for equity issue as part of a transaction. But at the moment, the focus is on just getting that fair value reflected.

And do you have any indication from your major shareholders whether they'll participate in the buyback?

No formal indication, but I don't expect them to participate.

You don't? So you mean shrinking liquidity, unfortunately, as well? Yeah, and so the...

5% is part of that too, although the liquidity hopefully won't change too much.

Yeah, sure. Just talking about your major shareholder, I mean, how are they, what sort of feedback are they providing you with on the state of the China market? I mean, you called out in your preamble, you know, a little bit of uncertainty across China, but I mean, what colour are they giving you as this is a Just a seasonal weakness, structural weakness? I mean, obviously, Balwoo's chairman last week scared a lot of people with his commentary. Just wondering what feedback you get directly from your major shareholder and customer.

Look, feedback so far has been probably not as negative as Balwoo's comments, but it's been cautious, but with an expectation that the steel demand is still there and therefore the demand for seaborne iron ore will continue. So the pricing around where we have been, that $100,000 to $110,000 has always been the area where they viewed equilibrium and a fair price. That view hasn't seemed to change at this point.

Okay. So more seasonal, not structural yet.

Can I ask you, but fair degree of equilibrium might happen in terms of that.

Fair degree. Yeah. And where does that then leave you, Peter? I mean, you talked about a cost you got last year at the mine gate or, I guess, at your port of, I think you said $109. What are you actually receiving today versus that $109 a tonne 65 index at the port?

So the price we receive for our 65% material, if you just break it down roughly as follows, is the 65 index, which sits at $109. And our shipping freight, sorry, I should add before that, penalties are around $5 to $6 per tonne for 65% material. And that generally relates to minor deductions for silica and sizing aspects. So take off, say, $5 or $6 for that. Shipping freight rates currently around $14 a tonne. And you get that's our FOB price for 65% material and translate that into Aussie dollars. So we're good at reasonable Aussie dollar prices at Kulin Island. And Mount Gibson sales are all on FOB terms. So everything we do is our customers are responsible for the shipping. We're focusing on FOB costs and revenues. Oh, okay.

And then so how would that translate then through if prices do continue to weaken? Where does that leave your thoughts on the buyback? Like if prices drop another $10 and your margin gets shrunk, does the buyback get shelved?

Look, that's a consideration for the board. I don't think it does at this point because what we have left at Coolen Island over the next two to three years sees us with this first year ahead have higher costs because of what we're doing with the set-up of the east end of the pit. And then in the following year or two after that, then our oil volumes increase. And so anything that has the effect of increasing volumes helps us on a unit cost basis. So we should have a stronger run in fiscal 26 and 27 as far as our performance and cost go. So that comes into the consideration of then, well, is a buyback still appropriate at that point in time? So at this point in time, that's where the board set it and is keen to pursue it.

Yeah, at today's price, it's fine. All right, that's great. Thanks, Peter, for the comment. Okay, thanks.

Thank you, Peter. We have no further questions.

Okay, well, look, thanks for the questions, gents, and thank you to everyone for listening. If you do have any further queries, please reach out to us. Contact details are on the releases, and have a good day.