Sandfire Resources (ASX:SFR) Q1 2027 Earnings Call

0:00 I would now like to hand the conference over to Mr. Brendan Harris, Chief Executive Officer and Managing Director. Please go ahead.

0:09 Good morning everyone and welcome to our quarterly call. Look, I plan to keep my opening remarks very brief, given we're only three months into the new fiscal year and we're tracking very much to plan. As you'd expect, our executive team is here with me today and we're looking forward to answering your questions. But before we start, I'd like to acknowledge the traditional custodians of the land on which we stand, the Whadjuk people of the Noongar Nation, as well as the First Nations peoples of the lands on which we conduct our business. We pay our respects to their elders and leaders, past, present and emerging. As always, we'll start with safety. We finished the period with a group drift of 1.8 compared to 1.6 at 30 June, having reported seven high potential incidents in the quarter.

0:59 We do have an extensive and connected program of work underway across the organisation, led right at the top by Jason Grace. It's designed to further enhance a system of risk management while creating an environment where all of our people feel safe to speak up and stop work when something doesn't look or feel right, irrespective of their title or level in our organisation. Of course, that's because nothing will ever be more important than the health and wellbeing of our people. More broadly, I'm sure you've seen we've made a very, very solid start to the financial year with group production tracking bang in line with full year guidance and our strong commitment to exploration delivering very exciting results. During the quarter, we achieved copper equivalent production of 38.9,000 tonnes, including 22.7,000 tonnes at Matza and 16.1,000 tonnes at Mateo. I note with the A4 pit now contributing around 15% of all feed to the crusher.

2:01 You've also seen that we've maintained group production cost and capital expenditure guidance with volumes still expected to be evenly weighted across half one and half two. While our operations have also retained a very competitive position on the global cost curve, of course, we're watching energy markets closely given the potential to further exacerbate inflationary pressures. and we're looking forward to taking your questions. As you might imagine, there are many moving parts which will be good to work through with you. Suffice to say, our cost guidance looks good. Out Kalkaroo, we have completed the first 8.7 kilometres of our planned 130 kilometre infill and extension drilling program, despite losing around three weeks of site access because of wet weather. We're in the process of adding drilling capacity and remain on track to complete the pre-feasibility study in the second half of FY28, which we expect to identify a low-cost and long-life copper-gold development opportunity with an optimal scale of at least 10 million tonnes per annum and likely more.

3:09 At MATSA, follow-up drilling has confirmed the potential of the prior La Juliana discovery hole. with further high-grade polymetallic massive sulphide mineralisation identified on both sides of the initial intercept, extending the mineralised horizon across some 160 metres of strike. What's more, downhole EM indicates that the massive sulphide horizon may extend across a strike of at least 350 metres within a prospective geological horizon which has an interpreted strike length of up to two kilometres. Consider in the first four and a half short years since we've acquired MATSA, our team has now discovered San Pedro, Olivo and La Juliana, which really only serves to highlight the incredible prospectivity of both the Arperium Pyrite Belt and more broadly within it, the corridor that extends from Aguas Tanitas through to Concepcion and Pedrosa.

4:08 As we like to say, the identification of new high-grade reserves within close proximity of our modern processing hubs is likely to deliver the best economic return to our shareholders. It's also why we're mobilizing additional resources and plan to allocate additional funds, some $10 to $20 million to accelerate drilling at both La Juliana and our April underground project. And with that commence concept level studies to help us better understand the scale and economic potential of these exciting opportunities. And finally, at the other end of the spectrum, we continue to view the Black Butte project as a compelling development opportunity given its relatively high or grade environmentally sustainable design and minimal surface footprint and have confirmed our ongoing financial support for Samphire America as their board undertakes a review of their strategic alternatives including but not limited to a sale of the company.

5:09 So when we bring this together as I've said before we're set up well operationally and we've put early runs on the scoreboard, having generated group sales revenue of $480 million for underlying EBITDA of $272 million and an operating margin of 57%. To finish the quarter with an audited net cash balance of $342 million after returning $117 million to shareholders in the form of a fully franked final dividend that was effectively funded out of quarterly free cash flow. We believe we have the right strategy and the right team. We have a strong balance sheet and we're investing in opportunities that have the potential to unlock significant long-term value for our shareholders.

5:54 And you can be sure that we'll keep you working hard to do what we say we will do. So with that, let's go to questions. Thank you. Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from James Redfern with RBC Capital Markets. Please go ahead.

6:26 Hi, Brendan. Team James here. Thank you. Just want to ask about the unit cost, please. $95 a tonne in the quarter compared to guidance of 90. Just wondering if you could please run through your exchange rate assumptions in the guidance and then also at Mateo in terms of the diesel cost there, just in terms of what your guidance assumes for Mateo costs as well, please. Thank you.

6:50 Yeah, look, thanks, James. Look, we might take a chance to explore some of the costs in a bit more detail. I'm sure that's where a number of the questions will go. Look, our guidance for the euro across the year is 1.15%. and it's really a shape of a curve as you might imagine. We don't forecast, we take it at 30 June and we look at a 30 day moving average as we do with the commodities and other uncontrollables. So again, you'll hear us talk in a moment, the Euro today is sitting under 112, it's in the 111. So of course, with 90% of maths as cost base exposed to the Euro, that's a really important driver as we look to the second quarter and obviously the remainder of the year, depending on how that continues to play out.

7:36 What I might do is then just quickly turn to Matteo. I'll come back to Matt, sir, and I want to talk about power. But Matteo, in terms of diesel, the right question to ask, it's around 15% of our cost base. And I'll pass to Megan to give you a bit of a sense as to how that can flow through into our numbers, but also to talk about some of the offsets that we're seeing, which again, as I mentioned earlier, when you take everything into account and you look at our unit cost guidance on a spot basis, we actually think that the current guidance holds for both Mateo and MATSA within materiality. In fact, MATSA, if we run a spot scenario, is probably running slightly below our guidance. Mateo is fractionally above, but nothing material. Megan?

8:20 Yeah, thank you, Brendan. And hi, James. Maybe just to start off with Mateo, overall cost of tracking well relative to plant. So across the quarter, just at a headline level, Matteo ran in excess of a 70% EBITDA margin. So we're still very much seeing margin expansion at that macro level, which is great. Nonetheless, as an open pit operation, there is exposure to diesel prices. In terms of diesel as a sort of percentage of our total cost, it's about 15% as Brendan touched on. and effectively our guidance for financial year 27 does assume that the price of fuel gets down about 25% in the second half of the year relative to the first half of the year. And if we sort of flow through current prices that we're experiencing at Mateo, important to note that the prices of fuel in Botswana are set by the regulator.

9:27 by Berra. So there is typically a lag with what you see in terms of the global oil prices then flowing through into refined product and Berra then passing those prices on to us. But if we take the sort of current prices we're experiencing and sort of play that out for the remainder of the year, there is a sort of, you know, we're talking at 2% to 3% of our operating cost base that is an exposure but so relatively Insignificant is how we think about it, James. So in dollar million terms, around $8 million effectively, potentially higher fuel costs in the second half if current prices remain for the balance of the year. Now, as Brendan touched on, there are some, I guess, benefits going the other way that we're also seeing.

10:19 One of them is TCRCs. which are really helping. We're maintaining our position on the cost curve and we're seeing that play through into our margin expansion. What we've seen in the first quarter is strong TCIC performance around minus $90 per tonne. We're expecting that to improve yet again in the second quarter. We have a number of spot sales that we've locked in at very favourable market terms and I'm expecting that we'll see, you know, on average TCRCs increasing to in excess of minus $200 a tonne in the second quarter. So there's some of the things coming through on the other side of the ledger that are really helping to take off some pressure that we're seeing coming through across the fuel base. The other one is probably just freight rates.

11:09 So we've been securing some favourable freight rates over the first quarter, really benefiting from our cargoes at 10,000 and Drametric Tons or thereabouts. And so with that size, we can really opportunistically secure what we call stranded vessels that have excess idle capacity that are going past Walvis Bay. And so that is providing some relief on the other side.

11:34 Yeah, and I think so, James, hopefully what helps there is if you look at unit costs, but then right through to C1 and you take all of that into account, as we've said, from Mateo's perspective, things are are playing out broadly as we'd hope with some, as we said, offsetting factors. If I go to Matt, I just want to touch on this because while we're on costs. So, you know, you would have seen that European power prices have gone almost somewhat vertical in the last literally number of weeks, given what's going on in energy markets globally and obviously what's going on in the Middle East and obviously Ukraine. So just to give you a sense, and I'm hoping this isn't a surprise to many of you, We have around 70% to 75% of our electricity prices very much locked away across three PPAs at the moment, and that's what you've seen flow into the recent quarter.

12:25 So we have a relatively limited level of exposure to the spot market. That persists out into the end of the first half. Ironically, as we move into the second half, we end up in a very similar position with slightly less coverage in the first quarter and even more in the second quarter. We run around an open position in the first quarter of around 35%. That's of the calendar year, 27. But that then goes back closer to just over 20% because our solar facility starts to ramp up and we get actually some of the cheapest electrons available to us. What that means, suffice to say, is, again, if you look at power, power's historically been around 10% of the cost base. In fact, that's roughly what's built into our budget and guidance. If you then look at that sort of level of exposure, you know, it's plus or minus 2% of our costs that we think, you know, the sort of level of increase we could see if current spot rates persist.

13:23 And that's around 200 euros a megawatt hour. Just to be really clear, on the flip side, 90% of our cost base is Euro denominated. The Euro is trading, as I mentioned earlier, below 112. It's in the 111s as we sit here. So in fact, that more than offsets the impact of power. Again, lots of moving parts and I just encourage you to think through all of them and not look at things in isolation. We're regularly running spot scenarios to understand where we're at as a business. You can see in our margins that we, as Megan mentioned, continue to see margin expansion. But hopefully across the two business in terms of some of the factors that we don't have a lot of control over, it gives you a real sense of what's going on in the costs within the business, James.

14:02 Yeah, it does. Okay, Megan, thank you very much. Can I ask one more question, please, or hand over?

14:07 Yeah, go for it.

14:09 Thank you for that. I just want to ask about the zinc production from MATSA. Zinc was around about 19% of guidance and the recovery was below plan as well. So just wondering, in terms of achieving the zinc guidance at MATSA, is that a function of grade recovery or sequencing? Thank you.

14:29 Yeah, look, I'll throw to Jason. Look, I've mentioned other assets historically, other polymetallic Open Stoves, Paceville Operations and talk to the level of volatility that they see and one reported only recently where I think we saw 20-30 plus percent variability quarter on quarter. We've always said there's a lot of variability in these operations depending on the stoves that we're actually extracting and most importantly as a path to Jason from my perspective we continue to see our guidance being met across the business and we are just seeing that usual variability and in fact relative to what we've seen historically and relative to what others often see, this is a really low level of volatility if I can stress that.

15:11 Jason? Absolutely and thanks James. If I look specifically at zinc for the quarter and then we can talk about the full year. So we saw an average head grade there of 3.4%. If I look at, and with reference to Appendix A as well, if I look at basically the next three quarters I expect to see that zinc grade increase so up to around about that 3.7% that we have in our FY27 estimates and in some quarters even sneaking up close to 3.8%. If I touch on recoveries and just looking at zinc specifically there as well, we had 66% metallurgical recoveries there for Q1. We do expect that to increase over the year to around about 77% on average and if you look at the impact that we have, particularly in Q1, it's simply a combination of lower grades. So lower grades, inherently we do get lower recoveries and that's a consistent theme at MATSA and most other ore bodies that I've worked with.

16:15 But we also have the other factor there as well is that we have quite complex or a reasonable amount of complexity there in our metallurgical domains. And particularly what we saw in Q1 was we had a higher proportion of Castilejitos ore and Sotiel ore, which we know is metallurgically less favourable and we do get lower recoveries and low NSRs from those oil sources. I expect we'll see significantly lower volumes of that material come into the blend in the next three quarters.

16:49 Thanks, Jason. Thank you very much. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. We will now pause a moment to allow any final questions to register. There are no further apologies. We have another question. This is from Stephen Hansen with Macquarie. Please go ahead.

17:24 Hi Brendan and team. Just a quick one while I've got the opportunity. Just on Black Butte, I know it's only a small part of the business, but could you just outline what you see as the delay in coming to a resolution in this one? I think previously you talked about last quarter the strategic review would be done. Just talk us through that.

17:48 and thanks Stefan we were feeling a little unloved for a second there so I really appreciate the additional question look no really good one and again I'll be intentionally careful because we're talking about a publicly listed company of which one of our executives is the chair so we're very mindful of that I would suggest you read their announcement as well as ours and don't try and read too much nuance into it it is intentionally plain and direct. And what I think it makes very clear is that the board of Samphire America is looking at its alternatives, including selling the company. Now, you can imagine in a public announcement, you don't say you're looking at selling your company unless you have clear intent to test the market.

18:36 We know the work they've been doing has given them a level of encouragement that there's a lot of interest in this project. What I would say is Because I've seen a few notes where people have said, and I know David Wilson, our head of IR here with Tom, has spoken to a number of people this morning. And I think it's fair to say that people had possibly expected that things might have moved a bit more quickly. I just encourage you to look at the markets. If you look around global equity markets today, they're not as open as they were to new equity issuance, capital raisings. There's been some high profile examples of that in recent weeks. and even though we're in copper and copper clearly having just returned from LME week is still a commodity that people are on average I think looking to get exposure to rather than the other way around.

19:25 I think it's still difficult to raise capital in these markets and Black Butte as we've said in our announcement in my quotes and other areas and I've just mentioned in my introductory remarks we think it's a compelling development opportunity the type of company that I expect to be looking at that, it's not BHP. It's most likely going to be someone at the smaller end which sees it as a foundational asset that can fit within a broader strategic appeal. It's likely therefore that those sorts of companies I would envisage, this is not certain by any way, but those sorts of players are likely going to require the support of their own equity holders and potentially new holders. And I think therefore part of this gets back to the market dynamics. Just to be really clear, we have a valuation on this asset as an 87% shareholder.

20:17 The valuation is in the market on a set of assumptions from the recent PFS. You can run spot scenarios. Our balance sheet is strong. We're patient. We've said we're going to support Sandfire America. It's a difficult process to work through. We're supporting the team. They're obviously doing the right thing and being very mindful of the rate of spend that they incur whilst they work through this process but it's really important that both the equity markets understand, their shareholders understand that their major shareholder, the 87% shareholder who's historically been the sole financier for that business is standing behind them while they work through this process. Does that help Stefan?

20:56 Absolutely, it does. While I've got the opportunity, can I ask a couple more? Just on Juliana, some good drill hits, can you just sort of outline just a broad timeline that you're thinking about to bring this to resource into the mine plan?

21:15 Yeah, look, I'll pass to Jason because he really should have the right to shout from the rooftops about this one. but I will just say as an introductory sort of in an introductory way that as an old geologist I've often said the worst thing you can do into prospects is often drill them because we've seen many a dream shattered. The good thing here is the polar opposite is true. This has come out over the last three months since we last spoke to you after the discovery hole almost as well as we could have ever imagined. So not only are we seeing The drill holes extend the strike extent substantially, but the grade profile, albeit more zinciferous, is almost remarkable. I mean, if you look at the photos I think that we've got in one of the releases, it's effectively a block of sphalerite.

22:10 For those geologists out there, it's like a block of metal. Now, of course, you'll also see that as we're moving across that strike extent, we're starting to see more copper. So we're seeing upwards of a percent copper. which is not uncommon for these redox boundaries. So look I'll stop there because otherwise I'll say everything Jason probably wants to say but suffice to say there's a lot of excitement in the organisation about this. There's still a lot of work to do. It's very close to existing infrastructure so it's something that really can change the landscape for MATSA very quickly. Jason?

22:42 Absolutely and your statement about excitement particularly in the exploration and geology teams at is certainly a very fair statement. We're very, very, very encouraged and very excited about these drilling results. And I might take a step out, and we've been talking about this for a while, that whole northern corridor that goes from Aguas Tanitas out to the east towards Concepcion and Poderosa, we think the prospectivity of that whole zone or that, I won't call it a region because it's not that big, it's around about 15 kilometres in strike length. and Brendan touched on it earlier about our approach to systematic exploration on there. The prospectivity of that area is just astounding.

23:28 And the historic mining in there, if you've walked it, like I have, is just amazing. So we continue to be excited, not just about La Juliana, but also the broader potential in that whole corridor, which we will continue to focus on. with our exploration strategy throughout FY27 and beyond. Coming back to La Juliana, and particularly if we look at our approach to the drilling program there, we truly are testing the extent of this as we move out. So if I link towards our drilling strategy, we've had one drill rig on there, surface drill rig operating. We will be mobilizing a second drill rig very soon. and following basically approval from the regulator of our drill pads, we expect that we'll step out, we'll do a progressive step out program on this, looking at around about 160 to 200 meter centers, which based on our knowledge of Aguas Tanitas, that would support an inferred resource estimate.

24:32 So I would think as we start to step out and we start to build up a bit of knowledge or more knowledge about the geology, I would expect that we're able to progressively provide the market updates through inferred resources and that will be a big part of our thinking and doing that progressively as we move through the drilling program. Moving beyond that and looking at how it can come into a mine plan, its proximity to both Castillejitos and also Aguas Finitas gives us a lot of flexibility in terms of how we would access it from an underground point of view. and if you look at our existing program, we will be testing extension of this mineralization to within 200 meters of surface. So we probably have three options in how we could access this ore body, either from Castelia Heardots, Aguas Tenedas or if it gets close enough to surface, a complete new decline.

25:29 So one of the things we do wanna do is understand the geometry, the extent of this zone of mineralization and then be in a position to look at underground access in an optimal way that allows us to potentially ramp up to production very, very quickly. But at this stage, these are all conceptual, not ideas, but conceptual plans. The key thing for us is this step out drilling and defining the extent of this high-grade massive sulphide zone.

26:05 Yeah and I think maybe if I can just add one thing Jason, well actually two things so I think it's strike extent but one of the really interesting things is depth extent as well so what are we seeing down dip because we know how the likes of Magdalena were discovered where you had very high grades but you drill at depth and you know these things pinch and swell what we do know is the geophysics actually points upwards much better than it looks down so you know one of the plans in the drilling program is actually to drill some deep holes so we can really get a a good sense of the geophysics and I think you know that leads to a key part of it's getting the geometry the drill pads and Jason sort of alluded to this but you know you've heard us talk about the Dermaseas which effectively is the approval process for these postage stamp areas of tenure legacy areas of tenure that were open we were the only party that could successfully apply but the Spanish processes call it arduous and lengthy all of those postage stamps were granted in the recent quarter and so now not only have we had these hits but we're actually able to move forward and apply for approvals into these areas which enables us really to drill geometrically into this what is steeply dipping target zone much more effectively so it is very interesting and I think that's you know again just to round out what Jason said It just shouldn't be underestimated. Not only has there been limited exploration in this prospective belt across decades, but there really hasn't been the application of modern geophysics. These new EM tools that we're using are incredibly good.

27:37 And so as we drill systematically down towards, you know, fences down towards Pedrosa, Concepcion, not only is it about learning where we're in the stratigraphic column, but it's actually using the geophysics to look Out and around to understand where the conductors are and then we can chase them. So it's certainly exciting. And, you know, again, given the grades, we're seeing it's something like La Juliana. Don't underestimate to substantially extend the life of MATSA. You don't need one for one. So it's not like you've got a, you know, 4.6 or 7 million ton per annum processing plant and you need to identify 4.7 million tons of La Juliana or to add a year. You can add roughly a quarter or much less than that and that adds a year because it really increases the NSR of your blending operation And so that's why we look at something like Lihuliana as a potential game changer for that aspirational objective of getting 15 years of reserve life in front of the face So hopefully that helps Stefan Absolutely, it does

28:37 Look, just one more quickly. I mean, you gave a lot of detail on diesel and you probably addressed this question back in March, April when the Middle East conflict began. But could you remind us how much fuel, not really price, but more fuel security at Mateo, how much diesel you've got on site in days in the country and sort of readily available?

29:03 Yeah, look, so maybe I'll pass to Jason, but just so we avoid any doubt, I'm going to just reiterate the Spanish situation. We see Spain as being a very low risk destination relative to Botswana, but also relative to a place like Australia, given they have a very large integrated refining industry. It's also low risk for things like plastics and so on. So Spain's actually a really good place, plus the fact that Nats has got very, very, very low diesel intensity. Botswana is There's a couple of things. Ships are loving passing Botswana at the moment, moreover Namibia. So we actually, that's one of the reasons the freight rates are lower. So we're actually finding that, you know, again, the country, our major provider has been very successful in keeping us well informed with real visibility, you know, months ahead in terms of fuel supplies, diesel supplies, etc.

29:51 So that's worked very well. We talked historically of well over 20 days of coverage, but visibility out months. Jason, maybe just for a quick update. Yeah.

30:00 So Brendan, building on the 20 days there, so we have the capacity to hold approximately 20 days on site. At the start of this, of the Middle Eastern conflict, we actually were able to store mobile tankers on site to increase that and make sure that we were mitigating any potential risk of supply. What we've seen is we actually use a Botswana-known company called Kwanukeng, and they supply our diesel and particularly for that part of Botswana out of Namibia. And as Brendan touched on, supplies and nominations going into Namibia, particularly through Walvis Bay, have been particularly strong throughout this whole period. And we do get regular updates from Kwanu King and the outlook for those nominations and confirmations is very strong, at least for the next month, going out to the second month as well, which is about as far as they look going forward.

30:57 So in short, at this point in time, we have no concerns whatsoever about ongoing diesel supply.

31:04 Great. Okay. Thanks very much everyone. Cheers. Thank you. There are no further questions at this time. I'll now hand back to Mr Harris for closing remarks.

31:16 Thank you very much and thanks for your interest. Look, as I mentioned, the operations are set up as well as they have been in at least my four years of tenure. The assets as we sit here today are both tracking over a thousand tonnes ahead of our internal plans so we've got a little bit of fuel in the tank so to speak and the team's hard at it. We're going to stay very focused, focused on the basics and again with the main intent of doing what we say we will do. So have a good day, appreciate the interest and look forward to seeing you all again before the end of the new year. Cheers.