Metals Acquisition Corp (NYSE:MTAL) Q3 2024 Earnings Call Transcript

Metals Acquisition Corp (NYSE:MTAL) Q3 2024 Earnings Call Transcript October 22, 2024

Operator: Thank you for standing by. This is the conference operator. Welcome to the Metals Acquisition Limited Q3 2024 Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Mick McMullen, CEO of Metals Acquisition Limited. Please go ahead.

Mick McMullen: Thank you, and thank you, everyone, for joining. I’ll be presenting the slides today along with our CFO, Morne Engelbrecht. So, this is our Q3 quarterly results presentation, and we’ll also give a bit of an update on our exploration activities. As usual, we’ve got our disclaimer at the front that this presentation has been lodged on the ASX platform and you can read that at your leisure. I would characterize the quarter as another business as usual quarter. The team delivered a very strong result of just over 10,000 tonnes of copper at a head grade of 4% milled. I think after our very strong Q3, there were some questions around whether we could sustain that sort of 4% plus head grade and the answer is yes. C1 came in at the bottom end of the range.

We recently guided to USD 1.90 a pound, which is continuing a downward trend and Morne will talk about how we managed to arrive at that. We have a clear pathway to 50,000 tonnes plus of copper out of this mine here within the next couple of years. We, again, had a very strong EBITDA margin through the year, about 50% and we convert about 77% of that margin to cash. Post the recent equity raise, we’ve got pro forma liquidity of about USD 226 million, which is well over AUD 300 million. Again, all numbers in this presentation are in U.S. dollars unless we specifically call them out. But it is a very large liquidity position for a company of our size, provides us with a lot of optionality. So, I’d say it was a good quarter, another business as usual quarter.

And despite production being down slightly quarter-on-quarter, our C1 was also down. And we guided the market to being Q3 just with the sort of scheduling of the stopes down slightly and then we expect Q4 to be the strongest quarter of the year for us actually. We realized broadly the spot price. So, copper prices went down a bit during the quarter-on-quarter periods, but we broadly get spot. And as I said, we expect Q4 to be our strongest quarter. We have a very strong liquidity position. As I said, we ended the quarter Q3 with about USD 81 million of cash after paying off some debt. We are, again, tracking towards the midpoint of guidance as we’ve guided people towards around that 40,500 tonnes of copper. And again, copper grade is hanging in there strongly at around about at 4%.

On the exploration front, I’ll talk about, we’ve had some really good success here. QTS South Upper continues to confirm some high-grade copper hits as well as some zinc. We are drilling out much of the inferred, which allows us to incorporate that into our reserves. And we’ve actually had some really good success in stepping out into virgin countries to really expand the resources. We spent about USD 2 million in Q3 on exploration. Our big capital projects, the Vent project is well underway and that’s integral to sort of getting our production up well over that 50,000 tonnes of copper level. And QTS South Upper to commence in Q4, well, actually, it’s commenced this morning where we took the first cut out of that takeoff drive to head out towards that deposit.

We invested just under USD 13 million in capital projects. Again, we’ve guided the market to USD 52 million for the year and we continue to track sort of bang on where that number was. And then post quarter, obviously, we raised AUD 150 million in equity. That’s delevered the balance sheet, gives us a lot of flexibility to pursue strategic opportunities and also to retire that mezzanine debt. I’m going to hand over to Morne, our CFO, to talk about a couple of the financial slides. And over to you.

Morne Engelbrecht: Thanks, Mick. Good evening, morning, everybody. I’ll be taking you through, as Mick said, through this slide and then the next slide as well, which covers the cash flow waterfall for the quarter and again, in U.S. dollars and a quick recap on the recent equity raise as well. And then I’ll cover some productivity slides later on. Also, please note that all these numbers are unaudited and we have more detail in our operational and financial performance noted in the quarterly report released today as well. On Slide 6, overall, we have a very healthy pro forma liquidity, as Mick mentioned, as at 30 September of around $226 million as indicated there. This includes the most recent successful equity raise completed after the quarter end, which provided a boost to the MAC balance sheet of around AUD 150 million, USD 103 million before costs.

This position us in a position of strength and further boosted by the fact that we had an undrawn revolving facility of $25 million, unsold concentrate ready to be shipped, outstanding QP payments and also successful listed investments in Polymetals, which totaled around USD 17 million that contributed to that liquidity. If we look at the operational corporate side of the quarter-on-quarter movements, there are a few key drivers there to keep in mind that impacted the cash flow for the quarter. Firstly, you will remember that in the previous quarter, we sold concentrate that was ready for shipment after a material buildup of inventory. This meant that more than 2,000 tonnes of copper was sold in the June quarter that shipped in the September quarter with all of that cash flow recognized in the June quarter.

This meant that around $25 million of cash was captured in the June quarter that would have otherwise been recognized in the September quarter. In saying that, we still had a very healthy free cash flow from operations of around $30 million for Q3. An important point to notice is we have now also largely worked through that backlog of concentrate that we spoke about in the previous quarter with the closing volume of unsold concentrate representing about USD 9 million as at 30 September, which is in line with where we saw it reducing to by the end of this quarter. So, for the December quarter, we would expect, again, that the copper tonnes sold should be in the same ballpark as the tonnes produced for the quarter, all things being equal. Secondly, we further reduced our senior debt by another $8.1 million over the quarter with our senior facility now sitting around USD 166 million, down another 5% over the quarter.

And then with the equity raised, we also have a pro forma net gearing ratio at 30 September of around 16%. The third point I wanted to make here is that we paid interest of around $9 million over the quarter with about USD 5 million relating to the mezzanine debt facility, which is the high-cost element of our debt stack that we focused on, specifically in the recent equity raise, which I’ll cover in the next slide. The other key elements of the cash flow note is the sustaining CapEx, as Mick mentioned, at around $13 million, which is largely in line with Q2 and also in line with our broader CapEx guidance for 2024 of around that sort of USD 15 million. So in summary, we are in an excellent position from a balance sheet strength point of view where we’ve delevered the balance sheet and have the ability to reduce our high-cost debt and continue to generate strong free cash flow from our operations as well.

On Slide 7, as we outlined earlier in the year, a couple of our strategic goals for 2024 were to not only simplify but also delever the balance sheet. We have delivered on these goals, but by not only reducing our net gearing by more than 6% since the start of 2024, but also simplifying our balance sheet by redeeming our private and public warrants early in the year. Furthermore, as we announced on the 9th of October, we completed our successful placement, as we noted, of around AUD 150 million, USD 103 million. The placement, as I said, was extremely well supported from both new and existing institutional and sophisticated investors, both in Australia and offshore, which we are very thankful for. We are now well equipped to further optimize our balance sheet through the retirement of the existing $145 million mezzanine debt facility at the earliest practical date with 16 June 2025 being the backstop date for that.

So, while also providing additional flexibility to pursue strategic inorganic growth opportunities. I suppose a key piece of feedback, as we noted during the call with the equity raise as well from investors over the last year was around our cost of debt and in particular, the mezzanine facility, which carries a minimum interest of around 13% — and with that increasing to 17% of the copper price had to reduce to below $3.40 a pound. So, at 13%, this takes up around $19 million of our cash every year. So definitely, worthwhile in terms of being accretive from a capital raise point of view to obviously raise the equity and pay that debt back as soon as we can. So — and to put this in context, we currently pay around 7.8% on our senior facility.

So, quite a big difference in terms of opportunity for us to reduce our overall debt cost. We do need consent from the mezzanine debt provider to repay the debt before the 16th of June ’25. So failing that, we will definitely be targeting the repayment of that debt on the 16th of June next year. So either ways, the debt will be retired by then. So in summary, with the great support from our new and existing shareholders, we’re now in a very strong and commanding position. And arguably, I mean we are in the best position from a balance sheet point of view since the inception of the company. And as we noted, we’ve got some USD 226 million of pro forma liquidity, pro forma net gearing down to 16%. And we have the cash in the balance sheet to retire that high-cost debt and also provide that flexibility if and when we need it.

So with that, Mick, I’ll hand back to you.

Mick McMullen: Thank you, Morne. And I think you’ve only got to look at the cash waterfall to see the interest that’s gone out the door to understand why we’ve taken the proactive steps of raising that equity in order to, I think, get a debt facility or a series of debt facilities in place that are more reflective of the high credit quality that we are today versus when we closed on the acquisition. So, moving on to the operational side. Again, a strong quarter, business as usual for us. I think just over 10,000 tonnes of copper. C1 again, came down. We saw a reduction in mining unit rates, total cash cost of about $2.70 a pound, which is pretty consistent with the previous quarter. And as I said, we broadly achieved spot price, give or take, a few cents a pound, sometimes a little better, sometimes a little worse.

So, we had USD 30 million of operating free cash flow, which just continues to show the strong cash flow generation potential of this asset. And again, Q4, we do expect it to be the strongest quarter of the year. We sort of expect to exit the year in the fourth quarter, more or less at the run rate of midpoint of guidance for next year already. So that’s an encouraging sign, I think. Grade, again, after sort of a weaker grade in Q1, which was sort of partly planned because of the stopes, the areas we were mining, then we had the change of mine plan to focus our efforts in areas that gave us the best bang for our buck, I suppose, you could say. And again, around that 4% head grade for the quarter, which was sort of as planned. We are getting better dilution control actually due to better mining practices.

And so that’s helping a bit on the grade as well. I have had some commentary that we’re mining above reserve grade. And yes, we are, that’s sort of the plan. But the areas we’re mining, we are seeing better grade out of it than the plan. If you recall, the 2023 reserve was the first sort of new reserve this mine has had in a very long period of time. We did adjust the modifying factors quite a bit. And perhaps we’ve been a little bit heavy on the dilution modifying factor because we’re not seeing that amount of dilution when we mine this stuff now. And so in the 2024 R&R, we’ll look to address that and perhaps that has a positive impact on reserve grade. The other interesting thing on this slide to note is development meters picked up. Again, we’ve had some commentary around Q1 and Q2 that perhaps we aren’t doing the development that’s required just given the drop in the development meters, we had guided to development meters picking up in the third quarter and that’s precisely what’s happened.

And partly the reduction in development meters that’s required is the new mine plan where we’re focusing our efforts in a couple of areas. We’re also, as you’ll see in the exploration section here, seeing significantly more strike length on the ore body in QTS North and therefore, tonnes per vertical meter are picking up, which means you actually need less development to get your ore tonnes out. And then the last impact, obviously, is the Vent project. So, as per the plan, we expect to see development meters continue to pick up a little bit, but good result by the team to have a 60-odd percent increase quarter-on-quarter as we’ve moved to the new plan. Morne, I might let you take the cost section of the slides here.

Morne Engelbrecht: Great. Thanks, Mick. So on Slide 10, we’re covering the process and mining costs per mill and mine tonne, respectively. First, the processing cost per tonne milled in Q3 was around $26 per tonne, which was around 18% lower than Q2 with the key difference being the 10-day shut in Q2, which impacted the previous quarter, while processing rates for Q3 were pretty stable at 261,000 tonnes for the quarter. Going forward, we would expect this to stabilize at the Q3 levels and as we maintain operational consistency. On the mining cost per tonne comparison, we were 7% lower than previous quarter, mainly due to a higher portion of development meters incurred in the quarter with development meters, as Mick has mentioned, up 64% from Q2.

Again, going forward with the commencement of both the QTS South Upper and the Vent project, I would expect the level of development meters to increase, which will drive further the level of capitalized costs from that perspective. Going to Slide 11, we cover G&A and the development cost per meter. On the G&A side of things, it’s worth noting that we’re getting more consistent on this metric with the main driver for the G&A being slightly higher than previous quarter being the one-off adjustments we made in the previous quarter, which was the reallocation of some of the consumables that were captured in G&A that should have been captured in mining and processing costs. So, we are now better managing and reporting those costs from an operational point of view.

So again, going forward, I would expect these costs to be consistent with Q3, all things being equal. So on the other side, the development cost per meter, albeit increased from the previous quarter, represents an average of the previous 3 quarters and is slightly elevated due to not only the higher development meters, as mentioned before, but we also have a slight increase in the equipment and workforce to cater for the new developments that has commenced, but also obviously increasing the production rates as well or keeping that consistent while we develop the QTS South Upper and the Vent project as well. Slide 12. So, this is moving to tonnes milled per employee. We do note the decrease in the metric, albeit this is due to increase in mining headcount, as I mentioned previously, by around 5%.

This is to ensure the coverage from all positions to keep production consistent to carry out — as we carry out the higher levels of development. Sustaining CapEx decreased slightly over the quarter, again, largely driven by diamond drilling and vent expansion drilling. We continue to spend capital in accordance with our previous guidance, as we said, around that sort of USD 50 million for 2024, so consistent quarter-on-quarter. So overall, the main focus here is on consistency in our operations and that’s assisting to drive down our cost, increase efficiencies while we commence the key development projects that will materially drive and increase our production of around 25% over the next couple of years. So really, consistency is the key. And as we previously mentioned, we do have a large component of fixed costs.

So, the more consistent you can get and the more you can increase production, the better from a cost per tonne point of view, obviously. With that Mick, I’ll hand back to you for the remainder.

Mick McMullen: Thanks, Morne. And I would just note in terms of tonnes milled, as we get better at dilution control, I’ll always rather haul less tonnes of higher-grade material up the hole than just hauling barren dirt up. So again, if we can continue to drive dilution down and maintain that higher head grade, we may not actually mill as many tonnes. But as long as we get the copper out, that’s a better outcome for us actually. Moving on to the next slide, Slide 13. And we’ve just put out a more fulsome exploration release that has these diagrams in a broader format, so you can see them. So, we have delivered a significant resource and reserve upgrade last year. What’s still to come? Well, we continue to drill away. Obviously, our reserves are only based on measured indicated.

We have a significant amount of inferred and then that green material there, which is mineralized, so it doesn’t quite make it into a resource. Of note, I’ll run through a few of these slides. But of note, you can see there, there’s a couple of drill holes that have skewed off to the left, which is the southern side of QTS North. And if you refer to the exploration release we put out, you can see the impact of those. They have extended the strike length of QTS North by 25% and one of those holes, the furthest one out managed to get 13.3 meters at 9.2% copper and another 4.9 meters at 10.9% copper. So, pretty exciting stuff actually that the team at site are discovering there. And look, this ore body clearly has not closed off in any way, shape or form.

And we’ve been very successful at expanding that resource. And it continues to throw up the kind of high-grade results that we’ve become a bit accustomed to, but perhaps are actually still quite special if you aren’t working at CSA. So, just looking at the slide, so the drilling has very much been focused on converting that inferred mineralization and pushing the reserve or the material available for reserve down. And again, super high-grade material. You can see that our red material is the measured. Our orange is indicated and yellow is inferred, and they just cut off at RL, so they’re flat lines. As we drill sort of at the bottom of the indicated into the inferred, that just pushes your measured indicated further down. And again, we continue to see very strong results.

We always have something that’s around 10 to 15 meters at 10-plus percent copper, which is exceptional. And that high-grade core that is present there allows us to mine all through the cycle, right? We always have a very high-grade zone that we can always mine no matter what. So, QTS Central is our other ore body, 20-odd percent of our metal. Again, you can see here that we’ve — it’s a very lateral sort of classification system. And we’ve been quite successful at drilling down into the inferred and towards the bottom of the inferred and getting those sort of — well, in fact, there’s an interval there that’s about 25 meters at 5% or 6% copper, which is probably 15 meters, but still it’s a probably broader interval than we’re used to seeing at QTS Central.

And then you’ve got your more typical 6-, 7-meter intervals at 10% or 11% copper, which in most other mines, people would be doing — getting very excited about. For us, it’s just another day at CSA. So, the drilling has gone very well. We continue to sort of expand, both expand the resource, but also convert all this inferred material to indicated and measured. QTS South Upper, we’ve talked about this for a while. We’ve been drilling it. It is narrow, 3, 4 meters wide, but it is very high grade. So again, you can see there that drill result of 3.8 meters at 17%. It’s shallow, 150 meters below surface. It’s about 600 meters laterally from the decline to access QTS North. And you can see here, we’ve elected to self-perform this work. We have all the fleet on site.

And I’m told that we took the first cut out of that this morning actually. So, we’ve started development. We expect around about 10 months to first ore production out of this thing. It is not connected to the rest of the mine. It is not included in any of our guidance. The majority of that material is in inferred, but it’s sort of, we expect to be mining 100,000-ish tonnes of ore out of this thing at sort of, 5%, 6% copper. So, you can work out what we think we’re going to produce out of this thing in about a year or just under a year. So, pretty exciting stuff. First new ore body that’s been opened up here at CSA for some time. So, we’re pretty excited about this thing. We do have that high-grade zinc mineralization up near surface. So, over the East and West loads, the old mine, which we continue to drill out.

We do have a zinc load that sits over the top of QTS South Upper. Again, it’s narrow, but very high grade and we intend to access this through this development that we’re actually just starting today. And we have an agreement with Polymetals to be able to toll treat that material up at the Endeavour mill. And it does look like Polymetals are funded to get going and should be going sometime in Q2, I think, next year, which will give us an outlet for that zinc material. So, as some of you would know, we produce a very clean copper concentrate at high recoveries, 97%, 98% copper recovery. We don’t want to send the zinc stuff through our plant. So, this was a great solution for us actually. As Morne noted, our little investment in Polymetals is well in the money.

So that’s pretty pleasing as well. Safety and TSF update. So safety, we’re gradually turning the corner on the TRIFR. We would like to see it lower. I would note that in terms of recordable injuries, the TRIFR is being driven by the rates that we had back in sort of March and April. Pleasingly, we’ve significantly cut the number of recordable injuries in the last 4 or 5 months. It’s just the 1-year trailing annualized effect that sort of is continuing to sort of, see it up. So, as we move forward and we move out of that period from earlier in the year being countered, we expect to see this thing come down fairly quickly. No recordable incidents or pollution events or license breaches or anything during the reporting period. I think that’s evidence of the very strong community commitment that we have.

We are about to commence Stage 10 lift, which will sort of see the capital that we’ve indicated sort of start flowing through. We’ve been spending a little bit under on where we thought we’d be for capital, but we expect to be back on the trend line for that, which is really this TSF. So, in terms of what’s the look forward, everyone thinks about, well, that’s great. You’ve delivered a good quarter again. We keep getting told consistency is the key. So look, we are delivering consistently. We’re well on track to deliver at the midpoint of guidance for this year. And we have, obviously, the productivity improvements that we’re doing, the Ventilation project and sort of midpoint of 2026 guidance is just over 50,000 tonnes. QTS South Upper is not currently in our guidance and I’ve sort of given you some indications of where that might come out, but we have now started that project.

So, we’re feeling quite confident about that pathway to plus 50. And we do know that the processing plant will handle what we run at an annualized 80,000 tonnes of copper, which is nameplate. Our infrastructure will handle it. It’s just a question of getting the ore out of the mine and that’s why we’re doing some of these projects. So Ventilation is really critical for us, but also QTS South Upper, which is not connected to the vent at the bottom of the mine is also quite critical for us as well. So, in terms of our potential, this is where we see our production going. Clearly, our C1 as volume goes up, should come down a bit further from where we are. And as Morne indicated, our net gearing right now is around about 16%, which is a very comfortable level for us.

We think we’re in a great position actually. Having options is great. Having lots of liquidity gives us lots of opportunities to do things. But clearly, we would like to retire that mezzanine debt at the first possible opportunity we can. And so with that, in terms of summary, I think we’re operating the mine very safely. We’ve got a 10-plus year reserve life. I think we’re looking at the mine a bit differently than what has been the case for the last generation really. We have significantly delevered the balance sheet and we managed to get into the ASX 300 last quarter and the previous quarter into a few of the Russell indices in the U.S. So, we are delivering on our strategic goals. I think, as I said, Q4 should be a little bit stronger quarter.

And again, I keep getting told that it was a little disappointing when we delivered a very strong Q2 and sort of we had some commentary, well, you can’t repeat that. Well, actually, we can repeat that. Not only can we repeat it, but we can do a little better now as we get our arms around the mine. And I’d say Rob and the site team have done a great job stabilizing the business now. That’s the phase of operations we’re in. We’ve gone through the sort of the large turnaround and significant change at site. I would say we’re now in the stabilization phase of the operation and it’s just consistent delivery is the key from here. With that, I’m happy to turn over and take questions.

Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question is from Sam Catalano with Wilsons Advisory.

Sam Catalano: Yes, very good quarter. It’s nice to see the operations, as you say, sort of showing a bit of stability. Just a couple of questions. Firstly, just on your development meters. Obviously, the stat that you’re mostly talking about is the capital development meters. But in your release, if you add in the operating development meters, the last 2 quarters are still a bit below the prior 2 quarters before that. Is that just the mine plan rather than sort of development limited? I’ll leave it there and ask the second question in a second.

Mick McMullen: Yes. It is mine plan related and partly related to the double lift stope strategy that the team have implemented at site. It actually requires less operating meters per ore tonne. So yes, like the short answer is we’re doing the development that we have to do to get the ore tonnes there.

Sam Catalano: Okay. Fine. And just with regards to QTS Upper, you’ve mentioned a few times that obviously, it’s inferred. It’s not included in your guidance and your waterfall chart makes clear the potential for upside to overall capacity from material coming out of there longer term. But in the medium term, once you sort of get out there in, I think it’s the back end of next year. Would material from that potentially add to your nearer-term guidance or just displace other material from that sort of 2-, 3-year guidance type figures?

Mick McMullen: No. The benefit of this thing is it’s completely additive. We’re not mill constrained. And so yes, this would be on top of the current guidance.

Sam Catalano: Okay. And then last question, Mick. Obviously, there’s been a little bit of press around sort of talking about your involvement or otherwise in Neves-Corvo. I wonder if you’re in a position at all to say anything about that?

Mick McMullen: Look, I think we’ve been clear that we look at every opportunity. If it’s copper in a decent jurisdiction, we look at everything. I’d say not everything fits our criteria in terms of sort of, value and sometimes things are competitive processes. And so we’re very value focused, right? So, as I’m sure you are aware from another process, hard to say where you land on any of these things, right? I would say we’re active across lots of different things, but our fundamental thing is value for shareholders, right? So, when things are very competitive, it’s difficult to get to value.

Operator: Your next question is from Daniel Morgan with Barrenjoey.

Daniel Morgan: First question is just simple one, have you initiated discussions with Sprott over the mezz facility change out? I appreciate it’s a short time since you raised the equity.

Mick McMullen: Short answer is yes. There’s ongoing discussions actually with all the lender group. And again, to be clear, as we said when we launched that equity raise, this was not a lender group-driven equity raise. This was a MAC proactive opportunity. We felt that by having the cash in the balance sheet, put us in the best position to have that conversation with Sprott. So yes, it’s a work in progress.

Daniel Morgan: And you mentioned just then a discussion broader with the rest of the lending group. Would you think that you do that after the discussions with Sprott and mezz piece are concluded? Or is it a parallel?

Mick McMullen: Well, both is the short answer. Like you — when you have the amount of liquidity we have, I guess, you have a lot of options. So, I think we want to be in a position of strength when we have those conversations. And look, when we put the current lending stack in place, I’m not sure we’re in a position of strength. And so you end up with — I think the feedback we’ve had from investors has been the cost of the mezzanine debt, senior not so much, but also the complexity on that debt stack, right? So, what we’re trying to solve for is, a, cost; but b, we’d like to solve for simplicity. So, I know what Morne would like to see on the debt stack. But yes, look, they’re ongoing live conversations, right? So, I can’t really go into the detail.

Daniel Morgan: I appreciate that. Just pivoting to the ops. So, you’ve obviously flagged and guided for a better year in 2025 and beyond. But in 2025, simply, is it going to — is the production growth expected to come from mostly tonnes? So far, the better production, as you highlighted, has come from grade.

Mick McMullen: Similar grade, slightly more tonnes. But as I say, we expect to sort of exit Q4 this year more or less at the midpoint of next year’s guidance already, right? So, it’s not like we’re sort of having to do a huge step change in order to get there.

Daniel Morgan: Yes. So that would imply that tonnes this coming quarter should lift than what we’ve just seen in September.

Mick McMullen: Well, it could be grade as well. Let’s see how we go. But yes, I think sequentially, we’d expect to see slightly more tonnes. I would note, though, if we can continue to get dilution under better control, it’s metal tonnes that I’m worried about, right? So, you may not need to get more ore tonnes out if we can continue to squeeze that dilution in.

Daniel Morgan: Sure. And just on that dilution, is there any way you can quantify the dilution outcomes you’ve been experiencing recently versus what you’ve embedded in the reserves, just to give a feel for the potential upside we’re talking about with the grades that we’re looking at on the reserve grade?

Mick McMullen: Yes. We’re probably seeing 10% to 15% less dilution than expected. So, we — the previous reserve was at 4%. We were typically mining 3.7%, 3.8%. We then reduced the reserve grade to 3.3%, give or take. And now we’re sort of seeing a bit higher grade. So yes, I think we’re likely to — the work hasn’t been finished yet. But if we squeeze that dilution in a bit, you will expect to see the grade go up a bit.

Daniel Morgan: And then last question, just what is the expected time line on the cut-offs for drilling and the next resource reserve update? Could you just reiterate that?

Mick McMullen: Yes. Like all North American companies, we will aim to get our R&R out towards the end of February, just in time for that other company’s large conference. So, typically, yes. So the cut-off, we will cut-off at the end of – I think we’re going to try and cut-off at the end of October this year.

Operator: Your next question is from Tim Hoff with Canaccord.

Tim Hoff: First question I had was just around the mine tonnes versus mill tonnes. First quarter, I guess, it’s been lower. Is that a draw on stocks and just noting that, I guess, from previous site visits, it didn’t appear like you had a whole of stockpile capacity, but just talking to lifting that mine tonnage next quarter?

Mick McMullen: Yes. It will be milling a bit of stock. We can — between everything we’ve got, I don’t know, we’ve probably got 40,000 tonnes of stockpile between the bins in front of the mill and the stockpiles underground, probably. Yes, in an ideal world, we’ll mine exactly the tonnes that we mill. It doesn’t always quite work out like that.

Tim Hoff: Yes. And in terms of — I think it’s the June quarter numbers that you’ve reported, I think there’s quite a few revisions to those numbers, recoveries, copper sold, what else is in there? There’s a few other bits and pieces. Would you mind stepping through some of those? I think TC/RCs went up.

Morne Engelbrecht: Yes, I can maybe cover that. So, in the June quarter, as you remember, we brought out our quarterly, which was in terms of the timing was before sort of the half year report and reporting the additional presold tonnes. So, when we reported the quarter, it didn’t include those presold tonnes and obviously, the associated costs that go with that. So, if you look at the half year report that we issued for the June half year, you will note that those have been updated in that June half year report. So, all we’ve done is basically just roll back those in terms of the quarterly numbers as well to make them match up to the half year numbers in terms of that sort of timing difference with the presold tonnes.

Tim Hoff: Yes. And then I think perhaps finally, in terms of QTS Upper cash burn that we’d expect on a quarterly basis is a couple of million dollars a quarter, sort of fair to look at there?

Mick McMullen: Yes, that’s probably not far off the mark, $2 million to maybe $3 million when it starts picking up. It will be — that takeoff point is it does interact with the rest of the mine for about the first, I don’t know, 125, 150 meters. Once we get out there a bit further, we can tie into an event raise out there and that allows us to go independent firing. So, it will be quite slow for that first, I don’t know, 150 meters of development. And because we’re self-performing the work, we can sort of use that fleet in other parts of the mine and use some of those people in other parts of the mine. So certainly, a significantly lower cash burn than if we were using a contractor for it because it’s actually going to be relatively inefficient for a while until we can get out there. And actually, because we can use those people and other things, it will be relatively nominal for a while anyway.

Operator: Your next question is from Eric Winmill with Bank of Nova Scotia.

Eric Winmill: Nice to see the results out. I think a lot of my questions have been asked already, but maybe just quickly on the zinc mineralization in the upper zones, I assume you’ll be mining that with your crews. Are you going to use contractors there? What’s the plan?

Mick McMullen: Yes. Well, that actually is one of the reasons we’ve gone on to mining in QTS South Upper because it’s all up in the same area, right? So, we’re not quite ready to sort of get going on that zinc mining yet. We just want to focus on QTS South Upper first. But yes, that’s the plan as we can flick those crews and that fleet between those 2 opportunities right in the upper part of the mine eventually. And look, we couldn’t scope that up for a contractor right now. So, just easier to do it ourselves and we’ve got full flexibility at that point, right? So yes, that’s the short answer is we’d like to do that with our own teams.

Eric Winmill: And just on Slide 17, you talked about the tailings. Any additional detail there in terms of additional lifts or you mentioned here this northern tailings facility?

Mick McMullen: Yes. So, we’ve got the Stage 10 lift that we’re about to start on. You can see in the background of that photo, there’s a sort of a light brownie looking thing over on the top right there. That’s the North facility that the state government owns. We don’t actually own that. So, there is an ongoing conversation about — I think they’d quite like to see us take that. I think subject to the agreement we can get around historical liabilities, that potentially is an option for us for the next lift after Stage 10. So that’s an ongoing conversation. It will take some time, but that’s why we’re building Stage 10 now. We’ve split it into 2 lifts, but the full Stage 10 takes us out to about 2030, 2031 capacity. And then that gives us the time to see whether we can do something on that North facility out there.

Eric Winmill: Congrats on the quarter.

Operator: [Operator Instructions] Your next question is from Paul Hissey with Moelis Australia.

Paul Hissey: Just a couple of questions from me. Just what is the, I guess, the official sort of capacity on the mill at the moment? I know you’ve resolved some constraints with access to water, et cetera. Just trying to think about how the growth arrives over the next couple of years. Clearly, there’s some more ore sources coming online and better underground productivity. What’s the plant currently capable of doing?

Mick McMullen: Yes. Well, it depends which bit of the plant. But I guess the wet end, the back end can do 80,000 tonnes of copper a year. And look, we have — when we have the ore and the grade, we have run at that rate for days on end. So, it’s not like a theoretical capacity. So 80,000 tonnes of copper is the short answer. Front end, 1.8 million to 2 million tonnes a year, depending on what we’re feeding into it. Water capacity is actually our first constraint. With the water that we’ve got from Polymetals now, about 1.7 million tonnes a year is where we could get to. And if you look at the guidance that we put out and the tech report that’s out there, which is a year and a bit out of date now. So, the current guidance has us getting to about 1.45 million tonnes a year.

Additive to that would be QTS South Upper, which is 100,000, maybe 150,000 tonnes of ore a year, pretty high grade that doesn’t come up the shaft, goes completely separate. So yes, so do I think we can get to 80,000 tonnes a year? I’m not sure I can see that today. Can we get into the mid-50s and maybe a little higher? Yes, I think that’s where we can see us going.

Paul Hissey: Okay. Just a quick question on TC/RCs. Maybe this is a bit mechanical, but do you guys pay a fixed rate through the year and then that sort of gets reset at the start of every new year with benchmark discussions? Or can you just talk us through TC/RCs?

Mick McMullen: Yes. Look, that’s actually a very good question. So, we are on a — as people know, we recut the offtake agreement to a very proper market arm’s length offtake. So, we are on annual benchmark TC/RCs. We were in LME Week a few weeks ago. Hard to say where TC/RCs will settle, lower is the answer. So, we’re currently benchmark for this year was [ $80.8 ]. In my mind, I’m thinking [ $40.4 ] for next year, could actually be lower. We’ve seen negative TC/RCs in the spot market. But at $40.4, Morne, I think we worked out we’d be saving around about $0.09 a pound off our C1 come January.

Morne Engelbrecht: Yes, that’s right. Yes.

Paul Hissey: And that number — and wherever you guys settle, that’s the number you pay for the whole 12-month period, right?

Mick McMullen: That’s right. Yes. And it’s the normal benchmark TC/RC that settled with China. It could well settle lower than that, quite frankly. Would I be surprised if it’s [$30.3] or [$25.25]? No. But in my mind, I run $40.4 just to be conservative. But look, clearly, we’re going to see a pretty substantial clip of our C1 come January, right, $0.09 a pound, maybe a little more.

Paul Hissey: Yes. Great. And then just one last question for me, and it’s around — just around the capital raise and the funding, I guess. I was just wondering if you could chat a little bit more about the timing. I mean, I think you perhaps answered the question partly earlier when you said having this money in the bank puts you in a stronger position to go and talk to your lenders. But I guess I was particularly interested in the comment you made around having the additional capital to provide greater flexibility to pursue strategic inorganic growth opportunities. Do I take that to mean that the cash is there to pay the mezzanine finance when you can? But if an amazing deal comes along beforehand, then repaying the mezz debt goes back down the priority list and you utilize this CapEx for a deal? I just want to try and unpack, I guess, the priorities there, particularly in light of your commentary.

Mick McMullen: I think this cash is earmarked for repaying that mezzanine facility. And again, I wouldn’t want to presuppose anything. But if we were to find an amazing opportunity and if it was great value and if it required capital, we probably view that as a sort of stand-alone exercise, I guess. Because you wouldn’t want to come out the other side of something, whatever you did, if you did something. And you still haven’t sold for the mezzanine debt package. So, I think we’re pretty clear that’s what it’s for. Obviously, we’re always going to want to maintain optionality, but I think there’s a very clear use of proceeds for that funding. And it’s just a question around timing, whether we can negotiate something earlier or as Morne said, the long stop date is June of next year. That’s what it’s there for.

Operator: Your next question is from Hayden Bairstow with Argonaut.

Hayden Bairstow: I just wanted to just clarify on the trucking and your tonnes up the hole. I mean you sort of talked about this quarter after quarter really, and it does seem to be still the limiting impact. Just maybe more around your confidence of what you’ve actually done. And obviously, you’re having more people on site probably helps a bit, but just getting those tonnes out of the hole and the pathway to increasing that over time. Just get a feel for where we’re at now and where you can get to by middle of next year, say, on trucking tonnes? And where can you push the capacity limitation to can it go away from that to something else?

Mick McMullen: Yes. Well, it’s trucking the tonnes, but it’s also having the tonnes available, right? So, it’s that whole combination of development and stope availability. I think we’ve had a big focus on dilution control because there’s just no point trucking barren waste up the hole, right? Like you just — ultimately, we will become ventilation constrained and so trucking barren dirt up the hole just takes ventilation away from trucking ore, right? Like it’s pretty simple. So, we’ve got a big focus on it and it’s consistency. I’d say the quarter was pretty good from that point of view. I’d always rather truck less dirt at higher grade than the other way. I think they’ve got the bottom of the mine, the development caught up.

When we got the mine, they’re a bit behind in development. We’ve sort of caught up. We’ve got the vent established down the bottom, the secondary vent down there. So that’s quite helpful. These double lift stopes have been actually a bit of a game changer for us just in terms of actually cutting the amount of operating development that’s required per ore tonne, which speeds up our cycle, which allows us to get more dirt out. It’s also reduced dilution. So yes, we just expect to see a gradual tick up in trucking movements going up. But I do — I’m always telling people, no point trucking barren dirt up the hole, right? Like if we can not truck it, we shouldn’t do it. So yes, I think we’ll just expect to see over Q4 and into 2025, just a gradual increase in volume, trucking volume.

But again, if they can continue to squeeze that dilution down and keep the grade at or above 4 or a bit increase it, that’s a pretty good result I reckon.

Hayden Bairstow: Yes, for sure. And then just on the QTS Upper stuff, the zinc mineralization is not in the way or anything? You have to mine some of it in stockpile if Poly is not going? Or does it — is it just totally separate or doesn’t matter?

Mick McMullen: No, it’s a separate lens that sits out there that – no, we don’t have to tackle it. In fact, the mine plan that’s done for QTS South Upper admittedly based on [indiscernible], but clearly, we’re not developing it without a mine plan. Specifically, excludes that zinc material. So that will just all be upside when we get there. I think Polymetals, I think by mid next year, they’ll be ready to take material and we won’t be out there before then.

Operator: This concludes the question-and-answer session. I’d like to hand the conference back over to Mick McMullen for any closing remarks.

Mick McMullen: Yes. Look, I think I’d just like to congratulate the team at site. With a strong result, again, it’s all about consistency. We’ve moved into that consistency phase, squeezing increased production out of this thing. And look, as you can see from the exploration results, this is a phenomenal ore body that has a lot more to give. And so we expect to be able to be here for a long period of time mining this thing. And I hope that people are starting to get a feel now that Q2 wasn’t just a sort of a one-off. We continue to be pretty strong here in delivery and just expect to see this production tick up. And we’re very excited about QTS South Upper. This is a whole new sort of mining area that we’re opening up, completely disconnected to the rest of the mine.

All of those constraints we’ve talked about, vent, trucking, access, et cetera, all don’t apply to QTS South Upper. So actually, we’re pretty excited about that thing that this time next year, we should have some production coming out of and it’s completely additive to our current guidance. So thanks, everyone, for your time and we’ll talk to you again at the next quarter.

Operator: This brings to a close today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.