Taseko Mines Limited (TGB) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Brian Bergot. Sir, you may begin.

Thank you, Shannon. Good morning, ladies and gentlemen, and welcome to Taseko Mines' third quarter 2012 results conference call. My name is Brian Bergot, and I am the Director of Investor Relations for Taseko. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko; John McManus, Senior Vice President, Operations; and Peter Mitchell, Taseko’s Chief Financial Officer. After opening remarks by management, which will review the third quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. Accompanying management’s discussion will be presentation slides for our webcast participants. Alternatively, the presentation can be found in the Investor Relations section of our website. I would also like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Please refer to the bottom of our latest news release for more information. I will now turn the call over to Russ for his remarks.

Thank you, Brian. Good morning, everyone. Thank you for joining us today to discuss our third quarter results and to provide you with an update on our various corporate activities since the last time we spoke. Continuing with the formula we developed for this call a few quarters back, both myself and Peter have some slide to walk you through over the course of the presentation to help everyone get the best possible understanding of our activities. Gross profit for the quarter was approximately $12 million, generating an adjusted net earnings of roughly $0.01. Our operating profit in the quarter was affected by spending more dollars for roughly the same copper production in Q2 as a result of a number of factors tied to the GDP tie-in and exacerbated by a number of other issues, with the primary one being recovery, of which I will speak about a little later in the presentation. There is more to this explanation than just that however, and rather than go through all those points, I urge you to go to our MD&A for the quarter and the review of operations and projects on Page 4, which really gives a clear explanation of what has occurred as far as our costs went this quarter. You should be able to glean where the opportunities exist going forward, as well as get an appreciation of how the forward -- the go-forward aspect of our business in terms of mine profitability is going to be over the near term. As an executive group, we are comfortable with where we have gotten GDP2 at this time, and we're really looking forward to firing up GDP3 and getting to work on it. Starting on Page 4 of the presentation, looking at Slides #4, 5 and 6 on mill throughput. We're effectively, in Slide 6, at design capacity. Exclusive of those periods where we've been down for GDP3 tie-in work, and you can see those as a little dip in the daily throughput tonnages. The SAG mill is not, at this time, being worked very hard. In fact, we're only at 90% power drawn at electric motors as we've idled back somewhat as we work on our downstream recoveries. There's no sense pushing throughput at the expense of recoveries as you can see in the following slides. Our focus now is ensuring our recoveries as per budget levels of 89% across all different mineralogies that we encounter. And as you can see in Slide 7 from this production chart, you can see that we had 82.8% recovery for the quarter. So obviously, we have some work to do with respect to the recovery issues. Although over the past few weeks, we made some significant headway in ramping that percentage up towards design targets. The primary reason for reduced recovery is when we struggled with throughput months ago, we effectively overgrind material in the SAG. Now that we have the material getting to the SAG mill because of new grate slot sizes and pulp lifters and discharge ports being now optimal, we now need to concentrate on the ball mills downstream to sort the recovery issue out. And each day, we are resolving those bottlenecks, and John and I can either talk to that about those issues later in the presentation in the Q&A. The next slide, the Page 8, shows our SAG mill in early completion. This was a picture taken in the middle of the last quarter. Slide 9 shows the flotation cells in a similar time frame. So you can see that the guts of the SAG mill building and the internal workings of the -- of our new concentrator are coming through construction very nicely. A big component of the construction timeline has been tied up with obviously the wiring. And then in the next slide, on Slide 9, you can -- sorry, Slide 10, you can see the wiring trays and the plethora of wire that needs to be pulled through those trays for the automation business of the flotation and the grinding circuits. In approximately 3 weeks, we'll be wet commissioning our new moly plant, and a month after that, GDP's new SAG mill should be in line taking pit speed, we expect, somewhere near the year end. Slide 11 is our updated forecast for GDP3. Again I want to reiterate, we're on time and on budget with $220 million having been spent or committed so far. We see minimum risk to our budgeted number. In fact, if you look at the far right, you can see that as of August of this year, we said the risk of the budget was approximately $20 million. We've now reduced that to $14 million. So we expect by the time that we're completed, that we will be virtually on budget. So that's a pretty significant accomplishment. As you can imagine, we're extremely pleased with these results we've achieved at GDP3, from approval to production, on time and on budget in under 18 months. And in retrospect so should our shareholders in terms of project completion and ensuring that we adhere to proper capital spend. In fact, we have built the lowest cost production capacity increase per ton of installed capacity of any large mine development in the world over the last 5 or 6 years. So that's -- I think that's pretty impressive for a little company like ours. For example, Highland Valley Copper, 100 miles to the south of us, recently announced the $475 million upgrade to adjust their flotation circuits. They have been at it for less than 6 months and already inflated that cost of $550 million. So with this project maintaining capital discipline has been very important, and the end result is our projected 35% internal rate of return on this buildout. So we're doing a lot of things correctly in this organization. If you look at the next slide, you can see the construction highlights that we've completed. The overland conveyors are completed and tied in and have been turned over to operations. Our switchyard is ready to commence testing, and I believe it's been energized already, John? Yes. We've -- all our prefabricated mill electrical rooms and our grinding mill installation is nearly completed as you saw in the previous picture, and our piping and electrical installation has commenced and is proceeding as we speak right now. On Slide 14, looking -- if we look at the next slide, you can see the construction timelines. And as I said, we're on time and on budget. On Slide 14 looking forward to 2015 or '14 -- '13, we have estimated mill throughput targets for both the 2 SAGs, depending on GDP3 debottlenecking, of 12 million to 14 million tons in the first half of the year followed by 14 million to 15 million tons in the second half of the year. We believe that is a completely doable set of criteria and like I said, we look forward to unlocking the capabilities of our new SAG mill and having the flexibility that having 2 completely independent grinding and flotation circuits will provide us. By this time next year, we'll have a run rate of approximately 85,000 tons per day, which will make Gibraltar the fourth largest copper concentrator in North America. Only Bingham Canyon, Highland Valley Copper and Cerrito, owned by Freeport-McMoran, being larger. So frankly, I don't think many folks really appreciate that aspect of what has been accomplished at Gibraltar. Stepping forward, in Slide 15 is some outlines on our New Prosperity project. We submitted our final EIS in September 20 of this year, and as illustrated, the panel has the following maximum timelines before them. We expect the panel to wind up its work in the new year and its report ready to be filed with the management environment and the federal government for a decision in mid-2013. The path forward on Prosperity will be we will finalize our offtake agreements, as illustrated in Slide 16, over the coming months. We complete the financial arrangements to ensure we're fully funded for this project, and once we receive federal approval, we will commence detailed engineering. If we look at the next slide, Slide 16, our Aley project is moving ahead very nicely. We will have our metallurgical work and process flowsheet completed by the end of this month. We will be submitting a Project Description to the government in December, and this will begin the environmental review process. We will likely make ferroniobium metals in the pilot plant in early 2013, and we will file a 43-101 reserve complementary with that undertaking sometime in early half of next year. Our market research has indicated that we can sell all the ferro we produce, which we expect to be somewhere approaching 12 million pounds annually. So if one wants to figure out the merit or magnitude of the profitability of Aley going forward, just look at Iamgold's Niobec mine because we have -- we will have roughly the same production capacity, and you'll get some idea of what Aley could mean to the company in the next few years. The project economics will be released once we complete our 43-101 report. Suffice it to say, the development of Aley will have a similar economic impact on this company as our 75% interest in Gibraltar. We will begin offtake agreements likely during 2013. And any questions on that -- on Aley or Prosperity, we'll be happy to take in the Q&A. I'd like to now turn the call over to Peter to discuss our financial results. Peter?

Thanks, Russ. Revenue for Q3 2012 was $61 million, a 28% decrease compared to Q3 2011, and that was the result of decreased sales volume and lower average copper selling price in the 2012 period. Our finished goods inventory or copper concentrate was just shy of $9 million, up from $5 million at the end of the second quarter. Gross profit was $11.7 million for the third quarter, 26% lower than the previous quarter, again due to the higher production costs and lower selling prices. G&A costs were $3.7 million in the third quarter, and they are tracking below last year due to the lower stock-based compensation cost this year. Exploration and evaluation costs were $6.8 million in Q3 2012 and $16 million on a year-to-date basis based on our spending on New Prosperity and Aley. For clarification, all of these exploration costs related to the projects and the evaluation costs are expense, and that equates with $0.08 per share on a year-to-date basis. Despite following this accounting approach, we believe that we are creating enduring value for the company with these expenditures. A recent KPMG mining financial reporting survey reported that 60% of the 20 surveyed companies, not including Taseko, capitalized a portion of these expenses, which is acceptable under IFRS rules with obvious the short-term benefits to their earnings. Taseko has opted for the more conservative approach with the unfortunate near-term unfavorable earnings impact. Other operating expense of $8.9 million include unrealized gain from the copper hedge mark-to-market of $8.5 million. The unrealized component is subject to constant fluctuations and doesn't affect cash. Finance expense of $3.2 million includes our bond interest and accretion on our provision for environmental rehab. We continue to capitalize a portion of the bond interest during our GDP3 construction phase. Income tax recovery in the quarter was $3.3 million, reflects an effective tax rate of 46%, at a net loss of $3.9 million or $0.02 per share. Adjusting earnings for the various items that we include, yields quarterly earnings of $1.5 million and adjusted earnings of $0.01 per share versus a loss of $0.01 on an adjusted basis for Q3 last year. Cash and net working capital were $200.8 million and $194.2 million, respectively, at the end of Q3 2012. In addition to cash, longer-term money market investments, included in other financial assets, totaled $20.1 million at quarter end. We continue our buyback of Taseko shares under our NCIB and spent $20.9 million on year-to-date basis to buy back over 6.6 million shares. In addition, we extended our copper hedge into the second half of 2013 with the purchase of $2.75 per pound puts for about 2,000 metric tons per month. We will likely augment this position once production budgets for 2013 are finalized. The cost of the puts was slightly less than $0.17 per pound. In conclusion, from a financial perspective, Taseko remained strong through these turbulent times. We have over $200 million in cash, long-term capital in place, a fully funded Gibraltar expansion on budget and copper hedged through 2013. Russ?

Thank you, Peter. Operator, I'd now like to open the call for Q&A. Thank you.

[Operator Instructions] Our first question is from Orest Wowkodaw from Canaccord Genuity.

I wanted to get a little bit of color on the recoveries. Clearly, they were -- they came down quite a bit in the third quarter to just below 83%, and I realized that's related to the tie-in. But how do you see that increasing kind of on a go-forward basis or should they stay at those levels in the fourth quarter? And then should we anticipate a gradual improvement back up to that 87%, 88% by the end of next year? Any color would be appreciated.

Orest, it's John. Yes, actually the recovery drop didn't have anything to do with GDP3 tie in. It was about getting the throughput up in the current concentrator. So when we put in the large opening grates back in June, July -- discharge grates, what happened is we've got a much coarser grind coming out of the SAG mill, but that's actually what it was designed to do. Then that coarse grind reported to a 6 ball mill circuit and we ended up with a distribution issue where some of the ball mills were receiving a larger portion of the coarse grind. So it's taken a while to work our way through that. We're back up in the 86%, 87% recovery now and plan to take that back up 88%, 89%, so -- and we're maintaining our throughput.

Okay. So we shouldn't expect much impact at all then from tie-in in early next year with the new concentrator going up?

Not to the current concentrator, no, they're separate circuits. But we're using a ramp up in both throughput and recoveries as we learn to run the new concentrator, which is a lot less complicated than the current concentrator. It's one SAG mill, one ball mill, one flotation circuit rather than the one that we've put together, the original concentrator. So...

Okay. And then just a follow-up. So you've issued guidance for throughput for next year. Earlier this year, you gave guidance in a copper production of 160 million pounds. Is it fair to assume that the throughput guidance kind of assuming average grades and decent recoveries, your new guidance is implying something around 140 million to 160 million pounds. Is that fair?

Yes, that's fair. And that is the issue we're trying to provide guidance in pounds when we're really -- with recoveries, there's so many different levers, we make the throughput, we've maintained the throughput and recoveries in the GDP2 mill, for lack of a better term, and bring the GDP3 mill up to design by the end of the year. So that's where you get the range.

[Operator Instructions] I'm showing that we have a question from Steve Parsons of the National Bank Financial.

Quick question. I guess maybe comment a bit on the expansion of GDP3. If I'm understanding now, you've got one SAG mill sensitive processing, call it, 55,000 tons a day. You're going to go to 2 SAGs with the downstream stuff processing 85,000 tons a day. Are you going to be -- is SAG #1 essentially which is currently processing 55, are you going to be pulling that back to 42? In other words, you'll be seeing...

No, in the new mill, the SAG will actually have smaller opening grates, and we've only got half the secondary grinding power in the new concentrator, with one SAG mill there versus 6 small or one ball mill, sorry, versus 6 small ones in the concentrator #1 at the GDP2 mill. So if we wanted to go to another 55,000 ton line on GDP3, we'd have to add another ball mill, and then we could take that SAG mill up to 55,000 tons.

Okay, I just thought that you're processing less tons to that one mill that would -- that's going to be addressing the grind size issue and hence, help with recoveries but...

No, we'll get the #1 line figured out, and we'll run it harder. You don't want to idle -- you don't run these things at 3/4 capacity, Steve, as you well know. Drive it hard and then we'll make up. We're going to have lots of flexibility in this mill. I mean, if you look at it, in both the mills, you look at it, I mean, we thought that one juncture a couple of years ago, 3 years ago, that we may have to put a pebble crusher on the back end, but we're not doing that. We've got so much flexibility. So we have lots of flexibility in getting increased tonnages out of both these mills now. It's going to be a pleasant addition to what we've been undertaking for the last few years.

Okay, and just another question on -- actually, on Prosperity, if you're going to be going out for financing and presumably offtake deals and associated debt along with that, does that then imply that you'll have to be putting out an updated mine plan and releasing that early in the new year?

We're not putting an update out. No, we've got reserves. We have 43-101 compliant reserve.

Yes.

So we won't be updating the mine plan.

Okay, sorry, I just thought you might have to come out with updated costing from the last study.

Oh, yes. I mean, we've finished the Environmental Assessment Certificate and we've got that confidence than we'll go through a costing exercise. But the mine plan itself, there's no major adjustments to it. And we were always looking for ways to improve it, but there's no need to redo the mine plan itself.

And I think on the costing side, Steve, I mean, we just -- we were pretty conservative when we moved that up from $800 million for the New Prosperity to over $1 billion. And in reflection, looking back in terms of what we've done at GDP3, we know the cost of concrete, we know the cost of labor. I mean, there shouldn't be any aberrations. I mean, we've got a perfect comparable here. So it's all about execution, and it's all about changing your scope. And if you don't do that, then you should be right like we were with GDP3, on time and on budget. Where people get out of the whack is they start changing the scope or they start -- we should have this, or maybe we didn't see that or they hadn't done enough engineering on the front end, and they don't have the right -- they have some issues maybe on material movement where their concentrators is going to be or they can't find rock, we've had some pretty intense investigations on those things and at this juncture, we don't see a risk to that capital cost. I know a lot people are talking about it, but hey, proof's in the pudding, we just did a $300 million expansion. We did it on time and on budget. So...

We have a follow-up question from Orest Wowkodaw of Canaccord Genuity.

Just a financial question. Earlier this year, I thought you guided to around $30 million of exploration expenses to run through the P&L. You're clearly running way below that. Where do you see that number in the fourth quarter? And what could we expect next year?

Well, that's a good question, Steve, because...

Well, who would like to do that?

Well, it's actually overlapping question. I think John will probably -- he's managing that area, but your assessment is correct. John?

So for 2012, yes, we did not end up expending as much as we thought we would. I think for this quarter that we're in now, most of the work that we're doing is finalizing engineering work. So we're going to be $3 million or $4 million in this quarter. For next year, between New Prosperity and Aley, we've budgeted $15 million for the year, which is down quite a bit from the $30 million that we have for this year. So it's going to be both below our budgeted amounts and below our actual amount for 2012.

Okay, and the 2012 amount, is it that much lower because you didn't spend it or because you capitalized it?

Because we didn't spend it.

Yes, per my comments, Orest, we didn't capitalize here related to either project.

And then going forward, Orest, all -- we've spent enough money now, now we've got to make the asset perform. So if we look at our mine site capital, probably in terms at the sustaining capital, we're probably somewhere $5 million, $6 million, we're going to be spending there. Any of the other stuff they've been, capital has been allocated under the GDP3 expansion. So effectively, that's why I think Peter was referring earlier, you're going to see an increase on our earnings because of all those associated undertakings that we're doing in 2013.

I'm showing no further questions at this time. I would now like to turn the conference back over to the management for closing remarks.

Okay, gentlemen, and everybody on the call, thanks very much for joining us. We look forward to talking to you in the new year, and I know it's a long way from Christmas, but have a happy holiday season. Okay, bye-bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.