Earnings call: Stanmore Resources reports mixed Q1 results amid coal price drop

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Earnings call: Stanmore Resources reports mixed Q1 results amid coal price drop
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Stanmore Resources Limited (SMR.AX), in its 1Q 2024 quarterly activities report conference call, presented a robust operational performance with production and shipments meeting the set guidance. Despite this, the company faced a challenging market environment as low-volatility hard coking coal prices saw a significant decrease.

Nonetheless, Stanmore remains hopeful, anticipating a positive shift in the coal market in the latter half of the year, driven by seasonal factors in India and the commissioning of new coke ovens. The acquisition of the Eagle Downs Project was a highlight of the quarter, alongside the company's inclusion in the ASX 200 index.

Safety incidents were reported; still, the company reassured that safety standards are still strong. Stanmore discussed strong operating cash flows, though a reduction in net cash was noted due to dividend payouts and capital expenditures. The earnings call also included updates on ongoing projects and the potential refinancing of the company's debt facility.

Key Takeaways

  • Stanmore Resources reported consistent production and shipments, aligning with guidance.
  • Coal prices fell by approximately 32%, but an improvement is expected later in the year.
  • The company completed the acquisition of the Eagle Downs Project and joined the ASX 200.
  • Safety incidents were noted, but overall safety remains a priority.
  • Cash flow remained strong, with a decrease in net cash attributed to dividends and CapEx.
  • Ongoing work at the Lancewood project and Eagle Downs project development was discussed.
  • A planned shutdown at South Walker Creek is accounted for in the production guidance.
  • The Millennium mine faces profitability challenges due to current coal prices.

Company Outlook

  • Stanmore anticipates a positive impact on coal prices in the second half of the year due to Indian market dynamics.
  • The Eagle Downs and Aquila acquisitions are expected to contribute to the company's growth.
  • Guidance figures for the company remain unchanged despite market challenges.

Bearish Highlights

  • The coal market has seen a decline in prices, which has affected profitability, particularly at the Millennium mine.
  • The company is considering various options for the Millennium mine, including temporary suspension or care and maintenance.

Bullish Highlights

  • Recent spikes in PLD prices and potential demand from the Indian market could lead to a favorable pricing environment.
  • The company is optimistic about the future development and capital requirements of the Eagle Downs project.

Misses

  • Net cash decreased due to dividend payments and capital expenditures.
  • The Millennium mine is not profitable at current coal prices and requires additional capital.

Q&A Highlights

  • Marcelo Matos provided updates on the Lancewood and Eagle Downs projects, including ongoing work and future development plans.
  • The South Walker Creek shutdown is strategically planned and should not impact annual production targets.
  • Refinancing of the debt facility is being explored, with market testing planned after the non-call period in May.

In conclusion, Stanmore Resources Limited is navigating a challenging market with strategic acquisitions and project developments. The company's optimism for a market rebound is tempered by current coal price trends and profitability concerns at specific mines. Stanmore's leadership is focused on maintaining strong operations and exploring financial options to ensure continued growth and shareholder value.

Full transcript - Stanmore (SMR) Q1 2024:

Operator: Thank you for standing by, and welcome to the Stanmore Resources Limited Quarterly Activities Report 1Q 2024 Conference Call. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Marcelo Matos, Chief Executive Officer and Executive Director. Please go ahead.

Marcelo Matos: Thank you. Good morning, everyone, and thank you again for joining us today to go through our first quarterly activities report for 2024. It's been another strong quarter for Stanmore operationally with production and shipments tracking on plan and in line with the guidance run rate with good recovery from the weather events experienced in the quarter. Market conditions were clearly weakening with the headline premium low-vol hard coking coal prices reducing by around 32% over the quarter as demand conditions softened and some recovery in global supply materialized. Nonetheless, we take a little bit of comfort in a relatively lower impact to PCI prices, as PCI prices found some support and relativities to prime low-vol hard coking coal improved slightly from the previous levels of low 50%. We also remain optimistic that both seasonal factors in India, such as the monsoon season and the unfolding of elections as well as further new coke ovens commissioning together may provide a positive catalyst to prices in the second half of the year. The March quarter has seen some exciting developments on the corporate and M&A side, including the acquisition of 100% of the Eagle Downs Project and the addition of Stanmore to the ASX 200. Starting with safety, unfortunately, we recorded 1 incident that was categorized as a serious accident during the quarter, which was a result of a finger injury requiring hospital admission that occurred during the assembly of an exploration drill at Poitrel. The operator is well and recovering well. We also have seen a spike in hand and finger as well as musculoskeletal-related non-severe injuries, which are, of course, always a concern. We are committed to continuously improving our safety standards to maintain our track record, include implementing the learnings from any injury and continuously improving our standards. Overall, our safety track record remains robust with our rolling 12-month serious accident frequency rate of 0.35, remaining well below the latest industry average. Moving on to operations, South Walker Creek had a solid first quarter with record quarterly dragline stripping, enabling a strong pit setup and prompt recovery from wet weather early in the quarter. Combined with healthy opening stock levels, this ultimately delivered ROM production to move above the quarterly plan in March. CHPP performance was bolstered by above average yields of 78%, driven primarily by the timing of feed mix. With the roll out of the additional ultra-fine recovery sequence last quarter, we expect that overall yields are set to be benefited by approximately 1% improvement over the course of the year. Project-wise, South Walker Creek expansion project continues to progress well with the mobilization of additional fleets, commencement of strip mining at [Life South] and the awarding of the majority of the construction packages for the CHPP expansion. The tie-in of the dense media cyclone module to the CHPP is expected to occur in the fourth quarter this year, aligned to a planned major shutdown to minimize any additional downtime. MRA2C remains ahead of schedule and well below budget, with 45% of both works now complete, equating to around 2.9 million cube [indiscernible].Poitrel co-production returned to normalized levels quarter-on-quarter following strong coal mining volumes late last year, which have been brought forward into Q4 2023, starting 2024 with very healthy warm spots. We took the opportunity to return focus on catching up on stripping activities with the optimization and lengthening of those push backs and increased gas volumes, driving a 32% increase in stripping compared to the same period last year. Saleable production shipments were strong with strong utilization of the wash plant and fine-tuning of feed blends to improve yields. In the last quarterly, we were pleased to report that the Southern Levee had reached the milestone hike to manage a one in a thousand-year flood event and that was below budget and ahead of schedule. I can now confirm that the Levee is almost complete with the final certification and project completion expected in the second quarter. Finally, [spill at] [ph] Poitrel, stripping and coal mining at Ramp 10 North are progressing well and ahead of plan despite the wet weather with much less impact compared to the same period last year. Lastly, at Isaac Plains, despite the fact we don't have many mining areas and less flexibility compared to the other 2 open-cut operations, co-mining trended up through the quarter overcoming challenges with wet weather, dragline availability and geotechnical challenges in January to exceed plan overall and rebuild stockpiles to healthier levels. CHPP performance was impacted by the timing of coal flow concentrated later in the quarter, which resulted in below run rate saleable production and sales. We don't foresee any issues and believe we should be fully caught up to our expected annualized levels by the end of the first half. Pit 5 North is now well established and expect coal flows to increase in that satellite pit through 2024 and early '25.Before I hand over to Shane, I just wanted to give a quick update on the other development projects and exploration going on across the portfolio. Development activities at Millennium have experienced some challenging conditions with the remnants of non-geotechnical issues and water management impact on development coal in the Southeast Mains area of the mine where the second production panel was set to be established. Productivity of the first production panel has been encouraging, culminating 119,000 tonnes of ROM coal and 90,000 tonnes of saleable production for the first quarter, though still below our expected plan levels. Across the portfolio, we commenced exploration at Nebo West next door to South Walker and studies at Lancewood are progressing well with the processing and analysis of seismic data and planning for field works during the second quarter as well as continuing work on infrastructure options to support the project. Obviously, we are yet to complete on the respective Eagle Downs transactions, but we're excited to getting our hands on the assets to commence further optimization studies and build our understanding of how this opportunity may form part of our long-term strategy. I'll now hand over to Shane for an update on cash flow and corporate activities.

Shane Young: Thanks, Marcelo. While our Q1 production performance drove strong operating cash flows for the quarter, cash was used in funding our USD 76 million dividend payment in March and the delivery of our extensive CapEx program, which you may recall, we're guiding to between USD 165 million and USD 185 million over the course of the full year in 2024. The timing of sales and cash receipts also saw a working capital build towards the end of the quarter, which when combined together with the dividend and Q1 CapEx, ultimately reduced consolidated net cash by USD 40 million over the course of the quarter. It should be noted, however, that this working capital build has already started to unwind with strong cash receipts from Q1 receivables in the first week of April, contributing to a net cash improvement of USD 63 million in just that week alone, corresponding to an increase in net cash to USD 149 million by the 5th of April, as highlighted in our report. This, along with the receipt on the 16th of April of USD 136 million from the recently completed Wards Well South transaction with Peabody, sees the balance sheet well positioned for upcoming cash requirements in the second quarter. Financing cash flow sweep for 2024 of USD 77.5 million was paid against the SMC acquisition financing facility in February, which, together with USD 15 million of scheduled amortization in Q1 has reduced the principal balance of that facility to USD 225 million. Remarkably, total repayments to date of note facility amounted to a reduction of 64% in the principal balance of the debt and just under 2 years since it was taken out to fund the BMC acquisition in May 2022. Of course, a large highlight of the quarter has been the successive announcements to separately acquire both 50% interest in the Eagle Downs' metallurgical coal project in South32 (OTC: SOUHY ) and Aquila, respectively. This will ultimately bring Stanmore's ownership to 100% of Eagle Downs and provide Stanmore with full control of the projects. We look forward to completing on those acquisitions and providing further updates to the market as we build our understanding of the project, including opportunities to leverage our unique infrastructure and logistics portfolio to facilitate its development. Finally, we are pleased to report there's no change to our guidance figures released with our annual results. This demonstrates the resilience of our portfolio and is a credit to our operations team in the way that they have continued to maintain strong production performance following on from 2023's outstanding performance. I'll now hand back to Marcelo to close out the report with an update on coal markets.

Marcelo Matos: Thanks, Shane. As highlighted earlier, you should be not surprised that it has been a softer quarter for met coal prices overall with the headline premium low-vol hard coking coal prices falling approximately USD 80 over the period. There have been a number of factors driving this trend, mainly persisting softness in the steel demand in China and generally improved global supply conditions from met coal. Meanwhile, in India, despite stocks of Australian coal running low, steel producers were observed to be delaying purchasing decisions at the comparatively higher prices early in the quarter. Nonetheless, interest was seen coming back late in the quarter, which provided a price report around USD 225 per tonne for prime hard coking coal and around mid-140s for PCIs with prices having already improved since. We remain optimistically cautious as key seasonal factors, including the Indian monsoon season and upcoming elections play their part. We have continued [indiscernible] commissioning and a recovery in demand, together with the interplay of historically lower inventories should theoretically provide support for prices thereafter. On PCI specifically, whilst prices also trended down in the quarter, the relativities have improved with a premium low-vol CI index sitting at 65% of PLD as of today, which is an indication that the PCI market has found some support at these levels and has been more balanced with the new rolling out of sanctions in markets like Korea, having potential to play also a positive role in creating additional demand for Australian PCIs. We are also encouraged by the recent uplift in overall demand and prices through the middle of April, showing signs of improvement sentiment in China as well as increased demand from India. I'll now hand over to the moderator so we can take your questions before we conclude the call.

Operator: [Operator Instructions] Your first question comes from Brett McKay from Petra Capital.

Brett McKay: Another solid result. Just a couple of quick questions for me. Just the timing of the studies on Lancewood and Eagle Downs. I know that we've sort of had a very, I guess, loose idea of the expected timing of more detail on both those projects. But are you in a position to give us any more granularity at this point or not yet?

Marcelo Matos: Brett, look, it's, lots of work going on in Lancewood as we speak, not only on actual data interpretation, okay, we've done -- I mean, we've ramped up exploration and seismic quite a lot. And, of course, that will include a bit of coal quality work as well. So that, of course, takes a bit of time. But in parallel, as we explained in previous discussions, there's a lot of work going on or the option nearing around infrastructure solutions for the project. That's progressing. Obviously, with the conclusion of the Wards Well transaction, I think, let's say, the study of options now we can really contemplate using the Centurion, which is [indiscernible] complex as part of the option studies, given that the transaction now is done and dusted. But our focus is more towards the, let's say, the second half of the year for us to be able to update the market more with more -- a bit more flavor on what we expect in a way that we can narrow down the development path for the project around the infrastructure. So that's going to be the key, let's say, the key direction that we expect in the second half as in I mean what is the appropriate infrastructure path to support development of the project. As far as Eagle Downs is concerned, I think we closed the 2 deals in a sequence. So they will be completed. We're expecting also to be completed in a sequence. The Baowu transaction also requires some regulatory approvals in China, okay, by regulators like the SASAC, the State Assets Supervision and Administration Commission. So that's, I would say, a third quarter story in terms of completion timetable possibly. And we are now, of course, working on setting up ourselves to do all the, let's say, the optimization studies. More realistically, it's -- as I explained before, it's probably going to be more early 2025 type of timing as to when we should be able to understand the -- I mean, what the project can look like, especially around the start-up development of capital.

Brett McKay: Thanks for clarifying, Marcelo. Just another couple of quick ones, if you don't mind. Just on the South Walker Creek shutdown in Q4, can you remind us how long that time is expected to take?

Marcelo Matos: 14-day shut. We would be shutting -- we will be doing the shut anyway. It was planned as part of the main CHPP plant maintenance. So, it is critical that we take the opportunity to shut together for the time to avoid to have to do a second shut if, for any reason, we experienced any delays, okay? So as you know, the wash plant South Walker is the bottleneck. So if we need to stop the plant once again in early '25, that would be -- it will have production implications. So, we are working hard to make sure that, that happens. So far, so good. I think everything is on track. And now, of course, we will avoid as best as you can to have to do a second shut. But it's a 14-day shut.

Brett McKay: And just clarifying, clearly, that's been baked into the production guidance for the year for that asset?

Marcelo Matos: Correct. Yes.

Brett McKay: Just maybe one for Shane quick [Technical Difficulty] and the receipt of the money from Peabody in early and mid-April, respectively. It looks like that net cash balance, all else being equal, is now at USD 285 million, up from that USD 86 million that you report at the end of March. Is that a fair representation of where you might be around that middle of the month of April?

Shane Young: Yes. I think that's in the ballpark, Brett, following the turnaround in some of those receivables as well as the cash coming in from Peabody, it's, so there, thereabouts.

Brett McKay: And just finally on Millennium, can you just remind us how long you expect that difficult portion of the deposit to be around for before you sort of get both of those panels up to the full production rates?

Marcelo Matos: It was always approximately around a 3-year story at Mavis, Brett. So, it is it's a short-life asset and the idea is always to move that set up into the Millennium A pit. It's been challenging, okay? I think for initially geo-tech, water and conditions around the first series of panels, I think we -- the major contractor is experiencing labor constraints as well. I think, I mean we've really have been able to man both panels to have all the, let's say, the uptime, the operating hours we would have expected. So multiple challenges, it was always a project as we've discussed before, it was always very co-priced and production dependent, given that the setup with that contract is mostly like say, a fixed cost type of structure. So, we are now expecting -- I mean the plan was to start secondary extraction from late May, okay, during June, which will, of course, improve recovery because now we are not going through that extraction yet. But of course, we are now doing a good review, Brett because we need to understand what we can expect okay in terms of tonnes at a difficult price is to make sure that we are managing that project prudently. I mean it is requiring additional working capital injections to continue to grow. And -- but as I said, I think we're always going to be making sure we have a lot of discipline on how much -- I mean, how much cash we keep, let's say, investing in the project depending on how the market landscape looks like, okay. It's -- we are producing at the moment around 40 -- a little bit more than 40,000 tonnes of ROM at this sort of rate. And if we were to introduce secondary extraction, we could expect probably another training class. But I think we -- the plan was always to do a lot more than that. It was always to do closer to the 800,000 tonnes of ROM per year or above that. So, at lower coal prices, it becomes a much less attractive value proposition. So of course, we need to make sure we manage that asset with a lot of discipline.

Brett McKay: If you made the decision to, let's say, placed on care and maintenance because of coal prices, would there be any material financial impact?

Marcelo Matos: Look, I think we are reviewing all options, Brett. I think care maintenance, whatever way we want to call it, it's -- I mean, if anything, if we were to do something, it would be a temporary suspension of production, but I think we are not there yet. I think we are considering their options. And of course, stopping it needs to be a lot worse than continue to mine it. And I mean, I don't think it's going to be a material impact for Stanmore as a whole given our size at the moment on how that project compares to our overall size. But as I said, we always look at that relatively to continue to mine with coal prices being a very important input getting to that this year.

Operator: Your next question comes from Jim Xu from Barrenjoey.

Jim Xu: Just a couple of questions from me. So, despite the rain in the quarter, you still measure out a pretty strong quarter for production. Should we expect to see that run rate maintained in the June quarter? Or did you provide prioritized saleable production in the quarter given the heavy rainfall?

Marcelo Matos: Well, look, we've done 3.3, right, Jim. So, it's right on the mark around mid-range in that guidance range. So actually, we were originally planning to do a lot more than that. Our original plan for Q1 was a lot higher, which -- I mean, with [indiscernible], we are basically now back to, let's say, mid type of the range. I think Q2 will be a strong quarter. We will find that this year, in the first half of the year will look a lot stronger from both coal flow and sales than, for example, relatively to last year. We will have a slightly lower second half this year compared to last year, simply by the fact that we did bring a lot of coal forward into Q4 last year. We started the year with a very healthy inventories as well.

Jim Xu: Maybe just following on the Millennium and Mavis conversation, can you give any guide for kind of break-even price at that mine?

Marcelo Matos: It all depends on tonnage we can get Jim. It's always been, let's say, a very thin, let's say, balance between tonnes and coal price, okay? And that is the tonnes was always critical. It was always an opportunistic project given that was, let's say, it wasn't a large amount of CapEx to start. And the prolonged ramp-up and the challenge experienced of course, brought some additional headwinds at the current pace of production, which is around 40,000, 50,000 tonnes of ROM. At current prices, we are not making any money, okay? We're actually having to put more cash to sustain operation. We obviously expected tons to go up. What we are doing now is, of course, a lot of trade-off and sensitivity analysis to understand different production levels and different prices what we can expect because for every month, we keep going at this sort of production rate and price, we are putting actually more working capital into the project, okay? But what I can tell you is that at current prices, even if we were producing a bit more, it would still be like a very marginal outcome for us given the effort required, okay? We needed a substantial increase in production relative to where we are today at current prices to be, let's say, for you to be a bit more meaningful as an operation for us.

Jim Xu: And maybe just a question on the market. We've seen a big step-up in the PLD price last week to about [250]. You've mentioned that demand conditions have improved, the Indians are coming back in into the market as well. Have you seen -- has the Indian restocking demand passed? Or is there still a bit there left?

Marcelo Matos: So we have monsoon coming, right? So, I think that's something we need to still wait and go through. There's been some controversial reaction from [indiscernible] from buyers around that big spike we saw from [225] to above [250] a few days ago. It was a premium fresh cargo out of Queensland that brought prices up $25. So, we need to see if that's going to hold. I think interestingly, a lot of the previous activity that brought prices down significantly was not fresh tonnes being offered by producers. We saw a lot of activity in the parts of the trade as you know with unlocking positions and even steelmakers offering cargoes. So, this was probably one of the first times we've seen a fresh cargo offer that had a meaningful impact to price. So, I think the good news. We saw that there wasn't a lot of fresh tonnes activity that was driving prices down. I think PCI, we haven't seen any significant, let's say, offering as well. I mean, you see the PCI just following hard coking coal, hopefully, now at a higher relativity. If price were to move now on the premium coal side of things, we might be seeing PCI moving together at hopefully at a higher relativity as well. So, see why a bit early, Jim. I think we need to see if that's going to hold. As I said, there's been a bit of reaction from steelmakers questioning whether the market was there at that level for this target that was built and brought prices up to [250].

Operator: Thank you. [Operator Instructions] Your next question comes from Tom Sartor from Morgans Financial.

Tom Sartor: Thanks, Marcelo and team. Most of my questions have been answered. Just one on the debt facility. You mentioned you've been doing some planning on testing that market for refinancing once the window opens in May, after which it can be done at par. Just curious if you've progressed on that and if we can expect some news on that during the calendar year, perhaps?

Shane Young: Yes. Thanks, Tom. Look, we are starting to explore options in that regard. As previously mentioned, it's a good opportunity with the non-call period expiring in just a couple of weeks. So it's an opportunity for us to reconsider our facilities and have been more right-sized for a company of our complexity and our size. And so yes, we've started exploring that in earnest and we'll see where that comes out over the next quarter or so.

Operator: Thank you. There are no further questions at this time. I'll now hand the conference back to Mr. Matos for closing remarks.

Marcelo Matos: Well, thanks, everyone, for your questions and joining the call today. As always, I would like to thank our teams, employees and contractors, who are the key drivers for our business success operationally and the ongoing support of our investors in the equity markets. It certainly continues to be a big and growing period for Stanmore and we look forward to continuing to update the market on further developments. Thanks, everyone. Thanks for your time.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.

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