Resolute Mining Limited's (RMGGF) CEO Stuart Gale on Full Year 2020 Results - Earnings Call Transcript

Resolute Mining Limited (OTCPK:RMGGF) Full Year 2020 Earnings Conference Call March 1, 2021 4:00 AM ET

Company Participants

Stuart Gale – Interim Chief Executive Officer

David Kelly – Chief Operating Officer

Conference Call Participants

Unidentified Company Representative

Welcome to the Resolute Mining Limited 2020 Preliminary Financial Results Conference Call. [Operator Instructions] I would now like to hand over the conference to Mr. Stuart Gale, Interim CEO. Please go ahead.

Stuart Gale

Thanks, Ali, and good morning, everyone. Thank you very much for joining us for this results presentation. As you will have seen on Friday, we released our full year results for the year ended 31 December 2020. Of course, we all know that 2020 was a pretty challenging year. We obviously had the impacts of COVID, which we were dealing with pretty much for the whole year, and as well as that, we also had a few challenges in Mali just in relation to the political situation there and also some labor disputes which arose sort of in the back half of the year.

But pleasingly, throughout that whole period, we were able to maintain our safety performance. And we, in fact, not only maintained, but improved our overall safety performance. And we lowered our TRIFR to 0.87 across the whole of the year, which was a really good effort given the environment in which we are operating. In terms of the results, Ali, if you wouldn’t mind just clicking across to Page number two. And I should also mention, sorry, we’ll obviously be following through the corporate presentation here, and we’ll have that up on the screen. But obviously, that was released on Friday so people will have access to that.

But that good safety and operational performance in keeping everything going throughout the course of the year resulted in our revenues for 2020 increasing by 15% to $618 million, which ultimately had an increase – a significant increase in our EBITDA to just under $250 million. The $250 million and the increase on EBITDA really is reflective of the – not only the revenue impact, but also a good performance from a cost standpoint as well, which we can touch on a little bit later in the presentation.

Underlying net profit after tax was $37 million, and we lowered our net debt to $230 million. So that net debt is made up of $336 million of gross debt and $106 million in cash and bullion balances. A couple of the key points, I guess, on the next slide, Ali, really is around our safety performance, which I’ve discussed. But what was really pleasing is that we were getting the performance from the Syama underground that we’re expecting, particularly towards the latter part of the year, where we achieved our nameplate production of 2.4 million tonnes for that last quarter. So 2.1 million tonnes in 2020, and we’re obviously looking to improve on that through to 2021.

The Mako mine just continued to kick goals, so it was a really positive outcome from Mako. Again, they produced just under 170,000 ounces for the year and generated some really good cash flows. Our exploration activities enhanced the mine life at Mako. So we added an extra couple of years at Mako, which, again, is very pleasing. And in addition to that, more recently, you will have seen the updated Tabakoroni underground resource and PFS. So very pleased with that. We continue to drill at Tabakoroni from an underground perspective, and I’m sure that, that will continue to grow as we get those drill results come through.

And really, that’s our focus over the next sort period of time is to make sure we capitalize on all of those near-mine exploration activities, and particularly at Syama, on the oxide side of things. Perhaps if we just turn to Slide 5 now. It just gives a quick snapshot in terms of the production profile of Resolute as we move forwards. So now we really have fulfilled the strategy of being an African focused gold miner with the sale of Ravenswood at the start of 2020. And you can see the production profile there dominated by the Mako production, but also an increase from the Syama underground and with Syama Oxides at 91-odd-thousand ounces there.

Of course, Tabakoroni oxide production was outstanding in 2019, and that came to a conclusion around the middle of 2020. So we’re operating now from various satellite pits, and we’ll operate from various satellite pits for the next couple of years from a Syama Oxide production perspective. Margins, on the next slide, Ali, remained pretty reasonable, increasing to 40%. Obviously, that was impacted by an improvement in our revenues and our average price realization, which came in at $1,562 per ounce. That $1,562 per ounce was also a – also incorporated some rather untidy hedges that we had in place at the start of the year. So it was nice to see the back of those, and I’ll touch on the hedge book in a couple of slides as we go forwards.

Turning to Slide number 7 now. It’s a little bit of a detailed slide, but really just tries to bring everything together on a group basis. And there’s a couple of things that I really want to just point out to you all here. Number is Ravenswood. We’ve got a separate column for Ravenswood, and we generated a $42 million gain on Ravenswood, which was essentially calculated based on the AUD 50 million that we received in cash proceeds, plus a AUD 50 million promissory note that we’ve also received. That promissory note earn a 6%. We also had upside sharing payments associated with the gold price and also on the monetary outcomes of any liquidity event that EMR might go through.

So those two events have the potential to max out up to AUD 200 million. We only have value, $20 million of that. So we’ve got a bit of upside there from a valuation perspective, and obviously, from a cash flow perspective, as those two notes ultimately settle, which is probably in around three to four years' time, just depending on how things go with EMR. But there’s certainly value there that I don’t think we get much recognition for on our balance sheet. I just want to touch on depreciation and amortization as well. Obviously, a really significant increase in D&A in 2020. And that’s really reflective of the fact that we’ve had a full year of operations from both Syama and from Mako.

So both of those operations came online mid-2019. So a full year’s worth of depreciation there. And as well as that, we’ve really sort of managing the accounting requirements. And as again, we need to reflect $200 million worth of future development expenditure at Syama. So we haven’t spent that $200 million, but it’s just the way the accounting rules require us to manage that future spend. So you can sort of see where that $175 million worth of D&A is coming from. A couple of other points on here, fair value movements, essentially is the write-down of all stockpiles that we’ve had at Syama. So those stockpiles have been sitting around for a long time and fluctuate depending on the net realizable value. We’ve written a lot of that off during the course of 2020, and we also had some unrealized FX gains of $16 million as sort of just settle that down a little bit, but all of those are non-cash movements in the 2020 year.

If you’ve been following the story at Resolute for the last couple of years, you know that we’re having some discussions with the Mali Tax Office in relation to VAT and other withholding type taxes. We’ve received more demands from the Mali government very late in 2020. And as a result of that, we’ve provided another $24-odd million worth of tax and VAT. That brings our total provisions to $66 million for Mali contested amounts. So we’re fully provided for, and we will be contesting those. We’re working with our advisers, our teams in country and the Tax Office in Mali to get all of that sorted out. It’s been pretty tough going.

Obviously, the government in Mali, we suffered from the coup, and the hiatus that, that brought on activities from a governmental perspective. And we’re now sort of working with an interim government, which means that it’s just difficult to get decisions made. So we’ll continue to work through all of that, and we’ll continue to push our calls on that front. I should also note that we have a receivable for VAT amounts which we have paid and are yet to recover from the government of about $70-odd million. So that’s something which you’ll see flow through onto our balance sheet also as an asset. We are offsetting our royalties and other taxes from the Syama Sulphide business against those receivables.

So that’s something which we reinitiated in October last year, and the government’s accepted that position. So I think just jumping on to the next slide, please, just sets out a bridge of our cash flows for the year. We started the year at about $106 million, and we entered about $106 million. There was a lot of moving parts through the course of the year, in particular, at the start of the year where we raised some equity, we’ve repaid some debt, and we did a lot of refinancing work. So a big part of the focus for 2020 was just to clear and clarify our position from a balance sheet perspective. As we look at the operating cash flows, which is purely the revenue.

So $618 million, that’s all of our operating cash flows, excluding any taxes and royalties and VAT and all that stuff. We’re sitting at $200 million. Again, it did include the impact of those, those at well and truly out of the money hedges. So that’s – as we look at that, we should see an improvement from those operating cash flows. VAT and taxes, again, just discussed, that’s those provisions that we’ve made as well as the taxes that we’ve had to pay in both Mali and Senegal. And one final point that I’d just like to call out here is the government dividend and withholding tax, which we spoke about briefly in the quarter. That’s – it’s actually a really good story because it reflects the fact that the Mako mine has repaid all of the intercompany loans that were provided to by its parents to get it up and running.

So it’s repaid them very quickly. And now for us to repatriate funds out of Senegal, we need to do so by way of dividend. And of course, as the government owns 10% of Mako, then they’re entitled to 10% of the dividend. So that reflects a dividend and also a dividend withholding tax payment in there for $16.5 million. Next slide is just in and around some of the points which really we’ve already touched on, but really just looking at the simplification of our capital structure, a number of the things that we’ve put in place, in particular, the establishment of a flexible and low-cost funding facility for $300 million. We’ve got a revolving credit facility in there, which we can utilize to draw down or repay or whatever it is that we need to do over the next little period.

So that’s a neat facility and the other $150 million is in amortizing one. So that $300 million has come together through six international banks. We’ve got good relationships with them. And all of that is working well. On the right-hand side, you see a snapshot of our hedge book at December 31. So this has vastly improved from this time last year. We’re still looking at how we can improve this. And we’re looking at the options that we have out there that are available to us, whether they’re forward contracts, zero cost collars. We’re just putting in place some cuts potentially. But we’ve got to manage our hedge book to ensure that we can meet our obligations under our funding regime. And that funding regime requires us to have a minimum of 30% over the next 18 months' worth of production hedged at any point in time. So just with that, I think, Dave, I’ll hand over to you for a quick snapshot on how things are going from an operational perspective.

David Kelly

Thank you, Stuart. I will primarily refer to Slides 10 and 11 for the listeners. So as Stuart pointed out, there’s been quite a change in the mix of our production between 2019 and 2020. We had a particularly high-grade zone at the Tabakoroni oxide open pits that we primarily exploited during 2019 and 2020. And you’ll see that, that fell away from a very high level of production in 2019 to a more typical level in 2020. On a positive front, we’ve had a very strong year at Mako and the sulphide operation, in particular, has started to contribute at a level closer to our long-term expectations. And so you’ll see that we essentially doubled production in the course of 2020 compared to 2019 at the same sulphide operation.

And that was driven by the fact that the cave is now up and running pretty much at full speed. It also reflects the fact that development costs are starting to fall as our mining costs because we’re able to increase the draw of tonnage, we’re extracting from the cave relative to the volume that we have to develop and then blast. We’ve got a significant increase in process recoveries over the last year. We want to consolidate and further improve upon that. And we got our processing rates up to around 2 million tonnes per year and more like around 2.2 by the end of the year. And the expectation, again, is further increased that in 2021.

The important thing is that whilst we’re not quite where we need to be overall at Syama, we’ve made significant progress both in the underground operation and in the open pit. Some – our processing operations are a big part. So much so that our focus is very, very heavy on the processing plant now to achieve throughput and utilizations, consistent with our long-term expectations because we’re confident in the capacity of the underground mine to provide the necessary tonnages. As mentioned, the oxide production was lower than in 2019, reflecting essentially a reduction in grade. We enjoyed about five grams a tonne grade from the Tabakoroni open pits, June 2019. That fell away in 2020.

And we moved on to other projects, including the Cashew mine that we’re operating in percent, but we will be back at Tabakoroni this year, and we continue to see opportunities for further extension of open pit operations there. I might ask, I’ll move on to Slide 11, which is similar picture of a Mako. Mako obviously had a full year of production for us the first time, performed very strongly, as you can see, the mine has well-established the predict very reliable and very predictable. And our focus now is on waste stripping to ensure that the extensions and mine life that we secured in 2020 are achieved and that we can sustain throughput of the play through for the next six years at Mako, our throughput and our recovery and our upgrade.

We’re all marginally ahead of budget, but very much on target. And whilst we’ve enjoyed very high grades for the first couple of years, that will fall away in the next couple of years. As a consequence, we’ll be running at higher costs and lower production of around 120,000 ounces per annum for the next two years, while that CapEx in progress. That progression is very much in line with the life of mine plan. It’s always existed for Mako. And clearly, we took advantage of higher-grade material in the first few years, but we will sustain an average of about 140,000 ounces over the next five years. Which reflects the overall difficult grade and tonnage that we can expect to achieve from Mako over the life of mine.

With that, I’ll maybe pause the operations and just talk a little bit about one of our key developments, which is the Syama power plant and further in the presentation, there’s some reference to it. That power plant comprises in the first stage, the development of a 30-megawatt HFO station and an accompanying 10-megawatt battery system. That battery system is now commissioned, and we’ll be commissioning the first of the HFOs in the next few days. We expect to have the first two commission by the end of this month, which means that as of the end of the first quarter of 2021, we will have the benefit of pretty much 100% of the site power being generated from that lower cost source. That largely flows through to the sulphide business, that’s where the majority of the power is consumed.

So again, it’s part of our initiatives that we’ve been assuming for some time to reduce energy costs and then that flows through to operating costs. So that’s an important development that will occur almost immediately. With that, I might hand back to Stuart.

Stuart Gale

Yes. Thanks, Dan. So I think just turning to – there was a slide that was – that follows on from Mako just around our portfolio consolidation, which is Slide 12. Again, we’ve touched on this, but we’ve touched on the points within Ravenswood. So I won’t go over that again, but I think it is worth just pausing for a second on Bibiani. So we obviously entered into an agreement with Chifeng to sell them at Bibiani. I have the opportunity to travel to Ghana and introduce Chifeng to the authorities, the local communities, our employees, in January. So that was a very good trip. And importantly, with all of that, I think we were able to make some good progress in terms of the process that ultimately needs to be cleared in order for this transaction to complete. Key to that will be the approval from the Ghanaian Minister of Mines. Again Ghana, the elections occurred late last year – I’m sorry about that.

You wouldn’t believe that we’re just having a thunderstorm in Perth at the moment, and that’s just been this whole clap of Thunder over my head. So if you heard that, you’ll appreciate what we’re experiencing here today. Anyway’s quite nice to have some rain. The Ghanaian approvals will only occur once the minister is warning.

So we know who the new minister is, but the cabinet is yet to be officially sworn in. So hopefully, all of that will occur, and we’ll be able to achieve our March 2021 target. But look, all things from an approval process and completion process are moving along pretty well. And it was pleasing to get the Australian FIRB approvals just before we were just after New Year in actual. So look, I’ll probably wrap up on Slide 14, if we just jump to that, which is really looking to 2021. And really, it’s about the fundamentals for us, and it’s really about ensuring that we continue to look after our people and manage the safety and well-being of all of our people, particularly in the COVID world that we’re living in.

We’re uncertain around what the vaccines are going to mean for our people, but we’ve just got to keep all of our mills operating and turning over. So we’ve done that successfully, and we’ll continue to follow the process that we put in place throughout the course of the year. Last year. So with that, that means the fundamentals are really around getting Syama to operate consistently day in, day out and improve the sulphide processing activities there. It would be great to have the power station up and running in March.

And we can get the benefits from a lower fuel cost, obviously, an improved emissions profile. So looking forward to that occurring as well. And as I said before, we continue to look at our near-mine exploration activity to be focused on ensuring that we prove up and extract all of the gold we possibly can, particularly from an oxide perspective. Syama, we’re working at cash. We have other satellite pits, which are lined up beyond Cashew at the supply in the gap, which is heading back down towards Tabakoroni.

But then we’ve also got Tellem and Paysans, and we’ve got some opportunities to head further north. So Syama, for those of you who know it, it’s a significant tenement package that we have, and we must make sure that, that’s fully explored. So that’s going to be a key for us as we move forward. Of course, Mako as well. We’ve done well. We’ve been able to add an extra couple of years of life at Mako, but we’re also doing more near-mine exploration activity to ensure that we can get the very best out of that plant that’s at Mako. From a balance sheet perspective, we obviously want to improve our balance sheet. And the key thing with all of that is to focus around debt repayment. So we’re targeting $150 million worth of debt repayments this year. As I said, we’re at $131 odd million at the moment. $150 million will leave $180 million worth of gross debt.

And we’re operating at any particular point in time with around $100 million worth of cash and billing. So we’re getting pretty close by the end of this year as we deliver $150 million worth of debt reduction to being net neutral from a debt perspective, still a bit of work to do on that front. And that’s obviously pretty important, and that’s one of the reasons that, as we sat down with the Board, we’ve contemplated the dividends and the allocation of capital and decided that it’s more appropriate to focus on the balance sheet at this point in time rather than continuing with the dividend payment.

So let’s get the balance sheet in a bit better shape, and then we’ll revisit the dividend expectations. So look, I think with that, Ali, we obviously have – the next page just sets out our guidance for 2021, which would have been over in the quarter, but key things to pick up here is the increase in Syama Sulphide activity and the Mako cutback. So a – the Mako cutback and slightly lower grades as a result of that, I mean that Mako production is going to be a little bit lower relative to where we were in 2020. But that’s all important so that we can get an extra couple of years worth of life out of Mako. So with that, there’s – I see that there’s a couple of questions that have come through. So I can publish these questions, I believe, Ali, can I? And just make a response to them.

Question-and-Answer Session

A - Stuart Gale

So the first questioner was just around Kilo assets. And – but yes, the Kilo assets were rolled into our investment in Loncor. So that now appears just in our activities and published on Loncor. So that’s – what happened there, Dave? When did that happen actually? Was that last year? Was the year before?

David Kelly

The transaction commenced late 2019. I can’t recall when that was concluded. Probably early 2020, stretching like that.

Stuart Gale

Yes. Okay. So it’s happened a little while ago. We’ve got a question as well on the operating gold price conditions and when would that lead to a resumption in dividend payments. And then follows on to ask about progression of the dividends. So I think I probably answered that question in as much as, really, we’re focused on the balance sheet at this stage of the game. So the important thing is for us to get that balance sheet into a net neutral position.

I don’t think that will give everyone a lot more comfort around dividends. What’s our reporting calendar look like? So – in relation to the next range of announcements, as I – if I – for some reason, if I publish this, I can’t actually see the question. So just I’ll answer the question and publish this sort of in reverse order.

So in terms of the calendar, we’ve drilled out Tabakoroni, and we obviously, the Tabakoroni underground operation. So well – we’re in a much better position now to look at publishing a Syama life of mine. So Syama life of mine is probably the next thing that you could expect to come from resolute in terms of an announcement. That, hopefully, within the next couple of weeks now that we’ve drilled that out, we’ve got our oxide position more well understood. So updating Syama life of mine is the next one.

And then we’ll have Bibiani hopefully by the end of March, subject to how things transpire with the Ghanaian government and the appointment of ministers and such. This is probably the next one outside of our usual quarterly half and normal reporting time frame. So I’ve just answered that question asked what the current sulphide recoveries look like, Dave. So I’ll publish that, and you can answer that.

David Kelly

At this stage, year-to-date, they are high 70s, around 80, in that range, comfortable with what we were getting in second half of last year and in line with our internal forecast. We have some work underway in the sulphide plant, particularly the reinstallation of an onstream analyzer to get us better control over sulphide plantation, including concentrate grading recoveries, which we expect will further enhance those recoveries. That’s due for installation in around May, June. So we’ve got a slightly higher expectation for recovery in the second half of the year.

Stuart Gale

Okay. We also have a question here on why the lower gold output forecast year-on-year for 2021, as released earlier. Essentially, that if we see – where is it – sorry, bear with me. If we flip back to Slide 5, reasonable explanation around that. So the key on that is that we’re running at around 120,000 ounces of production from Mako because we’re undertaking a cutback which results, first of all, in cutback activity, but also slightly lower grades.

So you’ve seen quite a decline in Mako, that is really only because of that cutback work that we’re doing to give us an extra couple of years and greater gold production through the longer term. That’s been offset to some degree by an increase in production from Syama. And so we moved from 123,000-odd ounces at Syama to between 253,000, 175,000 ounces. So they are the key differences, obviously, Ravenswood goes away, we hold Syama Oxide broadly constant.

David Kelly

Can you clarify your budget? Sorry. This is the next question. Can we clarify what our budget is in terms of cash flow movements for VAT, and how much cash you ought to be modeling? So look, I won’t go into our budget. But from our perspective, we are owed about $70 million worth of VAT from the government. It’s going to be very difficult to get a refund of $70 million from the government of Mali so – despite the fact that we’re entitled to it. So the way that we are modeling that rolling off is to offset our royalties and other taxes associated with the Syama Sulphide’s against that royalty, sorry, those royalties against that VAT recoverable. So effectively, that’s what we’re doing at this point in time, and that’s what you should expect us to do as we move forwards.

As I mentioned before, we have maintained our – we maintain our position that from a tax demand perspective, and I’m not sure, whether you’re talking about payments or taxes or are you talking about recoveries. I think you’re talking about recoveries of the VAT. But we’re going to hold our line. And we’re working, as I said, with the – with our advisers and the teams on the ground to get our position straight in terms of the demands that we’ve received from the government of Mali. Okay. Sorry, guys. It just takes me a second or one to read some of these questions. So bear with me. I’ve got the question here on the promissory note. So the question is, on the promissory note for Ravenswood, is this non-cash until settled in 2024? Yes, it is. It will just be one payment at that point in time. So we’re talking about this is the 6% interest on the promissory note.

We’ll get the $50 million plus the 6% interest over that period of time. Yes. So look, the – we have talking – so the next part of the question is what’s occurred to other miners in West Africa when dealing with VAT issues or other businesses in Mali which have had these types of issues? We have been working with a couple of our peers in Mali around the VAT position.

And obviously, that’s something that is important for us to all be on the same page when it comes to how others have dealt with VAT and setting a precedent moving forward. So we’re taking some guidance from others. But again, this is not an uncommon occurrence is my understanding in terms of VAT. And just to back up for a second on VAT.

Every single invoice we received from a supplier or from a contractor or from a consultant is required to have VAT on it. So it’s an 18% VAT. So every single invoice that we pay, we add 18% VAT on to it, that VAT is collected by the supplier or a contractor or a consultant and is paid to the government. Because we don’t have – we don’t charge VAT on the gold that we produce, we should then be able to recover that 18% VAT that we paid to our suppliers. Unfortunately, that hasn’t been occurring. And I think it’s – I think if you look back in history, and you look back through other suppliers, it’s something that we haven’t been able to see evidence that there’s been a good recovery process that’s been put in place. So we’ve just got to figure out other ways to deal with this.

And one of those other ways is, as I’ve said a couple of times, is to offset that through royalties and other taxes that occur over a period of time. And the third part of the question is that you can’t find the sustainability report on the website. I’m sorry about that. We have done the sustainability report and it’s getting ready for – to be published with our annual report. So our annual report will be out in the next couple of weeks and the sustainability report will follow. So both of those documents will be out at the same time.

The guys have done a fantastic job in terms of pulling it together. That’s Jordan Morrissey and his team. So it’s a really good read. Can we provide a bit more color about working capital movements in the half? Would appear inventories de-stopped? Should we be modeling a working capital build in H1?

In terms of where we are, you’re always going to have working – some working capital movements, but it’s certainly not going to be anything as dramatic as what we experienced in the first half of 2020. So in terms of our creditors, in particular, and in terms of the inventories, we’re pretty comfortable around all of our working capital positions. So look, you might see $10 million one quarter positive and $10 million over the next quarter negative, but we’ll keep you updated.

But net-net, I just can’t envisage that we should be seeing too significant swings. If anything, we’re probably operating with a slightly higher levels of consumables and inventory than maybe what we’d like to, but they’re also important to ensure that we don’t run out of anything as we’re bringing the plants up and as we’re getting consistent performance through those plants. So I think if you look at it, then we should be pretty steady from a working capital perspective. Yes. three questions on Bibiani. And as I said, we are expecting that Bibiani will close at the end of March. But again, it’s going to be subject to the appointment of the new Minister of Mines in Ghana, and at the point, that has not yet happened.

So the government was dissolved post the election and has yet – and the new government is yet to be sworn in. So the key with all of this is to ensure that we have – well, we can’t ensure. The government in Ghana will do that. But that is – that’s what’s dependent on Bibiani closing or not to ensure that we get signature from the new Minister of Mines by that point.

We’ve got Australian Foreign Investment Review approval, that’s already been ticked off. And there’s a Chinese approval which we think should be ticked off as well, but that’s really a matter for Chifeng. So now look, with that, that’s the last of the questions. So I’d just like to wrap it up by saying thank you all very much for joining us for our call.

As I said, it’s – 2020 was a little bit of a challenging year. There were a number of external factors that impacted Resolute during the course of the year. But what was really pleasing is the team’s approach in the way that we ultimately managed through those challenges. We kept our operations progressing all the way through the year. And I think as we look at it now, we’ve got a really strong asset base from which to grow our production and our cash flows as we look forward. So we’re starting 2021 on an even playing field, and we’re looking to do to deliver on our fundamentals, and the key to those fundamentals is production. So thanks again for joining us. And Ali, I think we can wrap it up. So we can all disconnect.