Taseko Mines Limited (TGB) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Brian Bergot, Director of Investor Relations. Please go ahead.

Thank you, Allie. Good morning, ladies and gentlemen, and welcome to Taseko Mines Second Quarter 2013 Results Conference Call. My name is Brian Bergot, and I am the Director of Investor Relations for Taseko. With me today in Vancouver is Russel Hallbauer, President and CEO of Taseko. After Russ' opening remarks, which will be a review of second quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. Accompanying the 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. I'd like to thank you for joining us today. Hopefully, everyone is having a great summer, as we certainly are here in Vancouver. We just set a record for the most consecutive days without rain since records have been kept. So that's a pretty important milestone for Vancouverites. So rays of sunshines in an otherwise pretty dreary capital market for metal producers and explorationists. As illustrated in our review of operations in our MD&A, milled tons for Q2 increased to 5.8 million tons, up from the 4.3 million in the first quarter, a 1.5 million ton uptick. While profit production increased to 28 million-ton per pounds, we're still well short of expected mill operating availability and projected recoveries. But we are pleased with how the new integrated facility is now performing. As a result of the improved performance, our site operating cost declined from that of the previous 2 quarters and we expect that we will continue to reduce those costs, as recovery rates and mill availabilities improve and the copper head grade returns to life of mine average. With $28 million of cash flow from operations for this quarter, Taseko was a bright spot on the mid-tier copper production landscape. Our cash on the balance sheet continues to grow as a result of this quarter's performance, and we currently stand with $93 million on the books. This is also after a $21 million having been prepaid to BC Hydro for the hook up for our power facility for GDP 3. We will recoup 100% of those funds over the next 2 years. As Brian mentioned, there are only 2 of us on the call today, as our senior folks are in Williams Lake participating in the New Prosperity panel hearings. As well, we announced last week the appointment of our way CFO, Stuart McDonald, but he won't be joining us until September 1. So all of these folks will be back for the third quarter conference call. As we indicated in our Q1 presentation, we are getting Gibraltar set up for a long and sustained run, and I think we're starting to see the results. As we review our slide presentation over the next 10 minutes or so, I think you will all appreciate that we have achieved a step change in mill throughput, which has reflected in copper production and copper production costs. And while this quarter showed improved results, we expect these to get even better. We are confident in our ability to build up the recent operational accomplishments as we head into the second half of the year. This is illustrated by the fact that we have milled 2.3 million tons in July, producing over 12 million pounds of copper metal. If you turn to the first slide, Slide 4 of our presentation, comparing Q2 to Q1. Some important indicators pop out with respect to tons milled. We milled 35% more tonnage in Q2, with 9% less mill availability. While copper recovery increased from the 84.8% achieved in Q1, to 85.8%, it's still well below what we believe is an achievable target of at least 89%. Similarly, while we work on mill recovery improvements on the copper side, we also have a long way to go on improving the new moly circuit from its present operating recovery rate of 26.4% achieved this quarter, to the design rate of 50%. Both recoveries in the copper and moly circuit are a focus of our operational teams, and we expect them to have design parameters by the end of the year. And that is why we firmly believe we are only starting to see how well Gibraltar can perform going forward. I think, Slide 5 -- turning to Slide 5 -- is self explanatory. We've continued to increase mill throughput and copper recovery as we spoke of in previous quarters. And as you can see, a step change has occurred in Q2. Moving to Slide 6. You can see how we're performing relative with our internal targets, as the trend line increases week after week on hourly milling throughput and as we work to decrease the standard deviation between downtimes, as we achieved early in 2013. That will increase our overall productive capacity and certainly, copper production. Stepping to Slide 7. It basically shows the same metrics over the past 2 years. But on this scale, one can really appreciate the step change that occurred in early April, as we really began the ramp up of our new concentrator. So if you look at the back end towards June, there you could see those standard deviation ups and downs that I spoke about. But if you look back towards last year and into 2012, for 2012 and 2011, you can see they're much diminished. So that's the function of integration of the new concentrator. And once we get that under control, there'll be significant improvements. Stepping ahead, to keep up with increased mill throughput, you have to mine more, as shown on Slide 8. In Q1, the mining rate was ahead of metal production and one can appreciate that cost would be impacted by that. But in Q2, cost is significantly improved over Q1, as copper production is now equivalent to applicable waste mining rates. Slide 9 depicts mill throughput on what we estimated in Q1. And Slide 10 gives actual production in relation to those projections, a slight improvement. And that takes us to Slide 11, which shows how production increases affected site operating cost, net of byproduct credits, which are down by $0.36 since Q4 2012. So we're pretty happy with that performance, and we always knew that it would be coming with time and patience and the unlocking of GDP 3. We now step towards Prosperity. I'd like to speak for a minute about that. We're now into the third week of panel hearings. Things are going as we anticipated. NGOs and others are questioning our science-based findings on how we handle water seepage and mitigation measures to ensure the preservation of Fish Lake's quality. Our water model, however, has been corroborated by Natural Resources Canada as well as the Federal Ministry of the Environment and the Department of Fisheries and Oceans. The opponents of the project, commenting on the technical aspects have been very superficial and non-scientific. And if anyone is really interested you can find our comments and rebuttals on the Canadian environmental website related to the Prosperity Project. As important as the cooperation by the federal agencies, the panel hired 2 independent experts in the University of British Colombia. And they are to provide expert witness and understanding to the panel. And those 2 university professors have also endorsed our plan as achievable and effective. As it stands now, all our technical work has been corroborated by the various federal ministers and the panels on expert witnesses. So the panel hearings are now in the community, both native and non-native in the Western Cariboo, and they will be undertaking that process for the next 2 weeks, and then returning to Williams Lake, approximately, August 23 for the final closing remarks. With respect to Aley, we're continuing to work on the metallurgical flow sheet. And a while back, we reported that we have a ferroniobium metal from our concentrate. And just last week, we advanced that even further and produced a salable product of 64.5% ferroniobium versus our target of 65%. So we are pleased with that news to tell you that we've made a salable product. We are still advanced in the recovery work we have spoken in the past to increase recovery from the 30% initially achieved as we work on our flow sheets, trying to retain our target of 50%. And we believe it's just a matter of time that we do this. While we continue to believe we'll achieve that recovery target sometime over the course of this quarter, I would be remiss to say it may take longer if this is a complex undertaking. We do though expect to have our 43-101 reserve done by year-end and that will be driven off of those recoveries. If you -- well, a little historical background. We did a little research on this, lasted a while, if one looks at what went on with the Niobec mines, when Teck built it in the early 70s. They processed over 700 drill samples over a 4-year period to come up with your flow sheet and then spent 1 year on the pilot plant. However, we are on a tighter timeline than that process. We are well advanced. We're only 16 months into our metallurgical process, and we still have -- however, we still have a great amount of technical work ahead of us. But as it stands today, it's all going according to plan, and we're very excited with how that is slowly unfolding. As much as you'd like to push these processes more rapidly, the technical considerations far outweigh your need for urgency. Now, as you know, we have appointed our new CFO and he'll begin to work at the end of this month. So I will take questions on both operation and financial matters. But forgive me if I beg out to get too specific on some of the balance sheet questions and some of the complex tax things and other things. So operator, can you please open the line for questions?

[Operator Instructions] Our first question comes from Brett Levy of Jefferies.

Now that you've shifted into a cash flow positive mode, can you talk a little bit about sort of what the plans are? I mean, obviously, Prosperity -- you need to really leave room for Prosperity and that sort of thing. Any plans for bond buybacks, stock buybacks? Anything else along those lines as you guys shift into this cash flow positive mode.

To tell you the truth, we haven't thought about that. Our focus is just an operations and generate as much cash in this environment that we can.

So just build cash?

Yes.

Our next question comes from Steve Parsons of National Bank.

A couple of questions for you, Russ. Just wondering if you could provide some color on the grade profile through the back half of 2013 and into 2014?

Well, we should be trending back towards life of mine average grade, Steve. I guess it all depends on whether you have any mechanical breakdowns on your shovels and how our stripping goes or whether we encounter any other geotechnical issues. That's the plan looking forward for the next 6 months. It trends back to life of mine average.

Okay. And on New Prosperity, at what point -- are you thinking or are you going to start getting into the discussions on financing, joint ventures, offtake partners, are you going to wait for the permits for you to do that or are you start the processes there?

Yes. In fact, we are always talking to offtakers. Have been for a number of years. Certainly, when we were thinking that we're going to get approval the first time, we had some pretty advanced discussions. We are having discussions with a number of smelter groups. And we have a lot of options open to us, it's what we do. Do we raise equities, close the funding gap, do we sell the joint venture interest? Do we take -- just the standard task of undertakings that anybody would do in our situation. So we are always on the go with those kinds of discussions.

Our next question comes from Mark Turner of Scotiabank.

Just looking for -- I guess, a little bit more detail. When you look at your Slide 6, and -- so the tons per operating hour more recently, so since June and July, and then, I guess, the second half of July, where the standard deviation, I guess, of the your tons per operating hour has come down. And just wondering if you could provide any insight on sort of what was sort of debottlenecked or debugged during that period and if we can be looking for, I guess, sort of 83,000 tons per hour and higher as we go forward here.

Yes, it's a combination of lots of things. We pushed the old concentrator pretty hard before we had the new one running. So there is some -- we're doing -- as you can see, there was a pretty steep step change between April and July, Mark. There's lots of complexities. We've been wearing stuff out more prematurely than we had liked to. We've had some conveyor belt issues. So it's just a combination of both concentrators sort of sometimes they hiccup at the same time or sometimes they don't. So I think Dave's getting a pretty good handle on -- and the maintenance crew's up there on what needs to be done. So we think we'll get -- if you look back on Slide 6, I talked about when from February to March, you'll see those just little downs. That's what we want to achieve. So increase our runtimes, get up to that 93%, 92% availability. And then manage everything accordingly with predictive maintenance.

Okay. So it's sort of a split. Are we going to be sort of somewhat split between the 2 concentrators, the -- I guess, the variance that we saw in June and July, and now more consistent?

Certainly, and I think that everybody can appreciate that older -- the GDP 1 concentrator is a much more difficult machine to run than this new one. I mean, we have 1 SAG mill , we have probably 300 or 400 feet of distribution lines to the splitter boxes and the cyclones. And we have older technology with the old ball mills there. So unlike the new mill, which is just a beaut, it just got our SAG mill and 1 ball mill and the flotation cells that run beautifully. The other one is a little bit more difficult to operate and a little higher maintenance. So what we will try and do likely is displace tons out of mill 1 into mill 2 because we know that mill 2 is more cost-effective to run. So we -- but we're not sure whether the optimum rate of mill 1 is 52,000 and the optimum rate of mill 2 is 32,000. So we have to balance all that with mill feed, our cost to process, and that's going to be an iterative process over the next, I would say, probably 6 to 12 months, as we try and optimize this whole unit.

I definitely appreciate that and I think you've done a great job of balancing the 2 so far during the ramp up. Just, I guess, one last sort of question. More on the CapEx or, I guess, the -- another way for this is, what additional sort of equipment do you think needs to be added here or is planned for the second half of the year? I'm just trying to get a sense of sort of sustaining capital.

Geez, I don't think we have much. I think we may only have a few million bucks. I haven't actually looked at the budget though. Well, but I haven't -- no, I don't think we have much. I can't remember what we've said. Can you -- do you remember, Brian?

One drill coming.

Oh, yes, the drill's coming. The capital lease on the drill. Because unfortunately, we haven't been able to -- we got delayed in our drill purchase. Nobody could give us one. Probably, took us a year to get a drill. It's coming in the -- is it here yet? Or coming in October. So that will be up and so we've had to rent contract drillers which has been pretty expensive in the pit just to make up some of this tons. Because when that mill is hungry, you better be breaking a rock in front of it to be able to feed it. So we've -- unfortunately, we had to bring in outside contractors and try and keep the broken reserves in front of it. So that would be the -- that's the only thing, I think, the big the ticket item. But it'll be a capital lease.

Into the fourth quarter? Okay.

Our next question comes from Tom Bishop of ABI Research.

The marketable security thing, what was that? Was that just hedging or was there some actual investment you'd made that you sold for loss?

We haven't sold them. I think we just did an accounting write-down on them. And some of that was assigned to our investment in Yellowhead and a few other things. Pretty minor.

Okay. The Essex CW plant, is the commentary saying that this is not a seasonal shutdown; this is more of a -- kind of every 6 years, you got to take it down and do some maintenance to it or...

No, there was no maintenance. It's just -- we just got to let it dump season a little bit. We are getting less and less recovery out of the dumps. Just -- we weren't producing a lot of copper out of it, Tom. 3 million pounds a year. So we wanted to focus our maintenance and everybody on it, on GDP 3 and the rest of the concentrators. So we just said that's not worth it right now. The margins were -- a couple of million bucks margin is not worth it. We'll just fire it up next year.

Right. In the meantime, it just has to sit or you have to actually do something to it?

It just has to sit.

Okay. I see that consumables added at least a quarter to that chart on Page 6 or whatever it is, 5.

Tires, Tom. All truck tires. All truck tires and major spares were the -- critical spares for the new concentrator. So we have to buy...

That would add $0.15 a pound to your cost of production.

Yes, it's expensive. But it's also expensive if you go down if you don't have a main motor. The other issue was, in the old days, kind of 15 years ago, tire manufacturers used to put tires on-site as consignment inventory. Now you have to buy them. So, I think, we bought 52 truck tires, over USD 60,000 each for, a hit of $3.5 million nearly.

Did you get a good quantity discount or what?

Unfortunately, no. It's not like the old days. So that's...

You're in short supply and then, even hard to get tires 5,6 years ago.

Yes, well.

What's the problem with the moly circuit? I mean, that's really way below the targeted rate...

It's just -- yes, it's a much more complex circuit than the other one. We took our old circuit back offline and try and concentrate on this circuit. So we've got a bunch of the design engineers and the metallurgists in and out, working on it full time, trying to get -- figure it out. It's a finicky thing and we just try to got the -- it's fine-tuned. We produced moly, but unfortunately, it's been a little off-spec, it's had too much copper in it. So that moly that we produced, it had to sit on the sidelines there and we'll have to be reintroduce it into the system and clean it up and take the copper out, because you get such a big penalty for it if you have too much copper in it. So it's just an iterative process. We will get it, not sure when. But it is a relatively complex circuit.

With all these little things, like $0.15 on maintenance and the Essex CW not kicking in a few million pounds and the moly circuit and that, it all kind of chips away at that average cost of production. When -- what target do you -- are you shooting for as far as operating cost -- cash operating cost of production?

Target? As low as possible, how does that sound? I don't know, because there's so many things that affect it. Right now, crude is at $106 a barrel and it's nearly West Texas Intermediate it's nearly the same as Brent. So -- but the Canadian dollar has weakened a little bit. There's just so many variables there. So if -- usually, copper price is tied to -- if you track it, is tied to oil price, but it has, sometimes, disconnects. But I figured we can probably, if we get everything running properly, we can be in the $1.50 to $1.65, $1.70 range, depending on what happens with the Canadian dollars. But, again, I'm not going to come out and say, "Yes, we're going to get to $1.50." because if the Canadian dollar goes to the $1.10 then you're not getting to $1.50. So it's just a whole bunch of variables. We just got to run the place and get the lowest possible cost we can, irrespective of anything else.

Okay. Did you say that you hope to get to design parameters by the end of the year on the copper on...

Yes, we expect to be producing their design of 85,000 tons a day.

[Operator Instructions] Our next question comes from Adam Low of Raymond James.

My first question is with regards to the availability rate on GDP 3. You did focus a bit there on the standard deviation of the operating uptime. And you guys did provide the details that you had about 83% availability in 2Q. Where is that availability right now?

It's about 88%, 89%, I believe the last numbers I saw.

Okay. And when you guys do see some unplanned downtime, what kind of areas are you seeing it? And then, are there any major fixes that you're seeing that are recurring?

Major downtime? I think it might be the conveyor system. So for the conveyor systems, in terms of reliability and availability. So we're doing some big internal audits on that. We brought in outside folks to ensure -- I mean, if our conveyors go down, we got pretty good surge capacity. But if we lose the overland conveyor from the pit for GDP2, we don't have -- because we put in that direct feedstock pile, we don't have a real large surge capacity, we got 30,000 tons. So if you're cranking through it at 2,500 tons an hour, you don't have a lot of time if you have some problem that's blasted 10 hours or something, you're nearly out of ore, right? And then you got to fill the pile up so -- it's a little bit of a logistical problem. So we're working on that. Just preventive maintenance and just getting a real handle on the hours you'd need to replace pumps and all that kind of stuff.

And on the strip ratio, I think 3.3 is pretty lower, it look lower than what, I think, I was expecting for the first part of the year. Do you guys expect it to stay this low through the back half of the year? Or do you have a little bit of catch-up to do?

Well, our reserve is about a little over -- right around 3. So I'm not sure what you mean by low.

I thought that while you guys were preparing the mine to be able to provide the increased feed that's needed for the increased capacity, you needed to have higher strip ratio.

I think that's around to 3.3. If you -- the balance strip ratio right now with production, copper production, you see we're at 3.3. So we haven't gone ahead, but we haven't gone behind.

Okay. I mean, when I'm looking at -- I'm actually just looking at your life of mine reserve, and I think it's 4.2:1. Is that kind of still what you guys are expecting?

No -- that's -- you've got to -- are you a mining engineer? Adam?

Sorry. No, why do you ask?

Okay. We don't have enough time to explain it all to you on this conference call.

Okay, I'll move on then.

Yes, I can do it all offline for you, at the back end.

Sure, no problem with that. On GDP 3, do you guys have any remaining supplier or contractor payments, maybe for stuff -- work that was done in 1Q or 2Q, but where the invoice is just coming in now?

No, I think we're pretty well cleaned up. We might -- it's a couple of small, maybe a couple of million bucks of that, if not much. It's nearly all done.

Okay, got you. And then last question for me. Given the timeline you guys have laid out for the Prosperity hearings that are going on right now and then, yes, the panel recommendation and the ministerial review that comes in at the end of that, is the 1Q '14 decision for a ministerial outcome kind of the right timeline to be thinking of?

Yes, when they're finished, the panel's got 70 days past August 23 to rate and submit the report. We then the minister -- the government has 120 days to make their decision. They can make it in 10 days, they can make it in 90 days, they can make it in 120 days. But if you take it out of the 120 days, I think that becomes the middle of February or something. 15th to fifth? I can't remember that specific date, Adam.

Yes, I got the same calculation. I just wanted to double check.

Yes, so -- that's basically it. So somewhere from November to February. I mean, I don't see any reason why they have to take a full 120 days, but who knows? They're government.

Our next question comes from Chris Chang, Laurentian Bank.

I'm just looking in the quarter, and I think I saw that you guys converted about $20 million of the money market instruments this quarter. And I'm just wondering if most of your capital isn't spent and there's no payments due in the near term, what was the -- like, what was the decision to convert that based on this quarter versus any other quarter?

Geez. That was in some kind of U.S. -- we liked the rate, I think. That was kind of some kind of U.S. denominated deal that Peter put in, and we liked the rate. I think we've got -- I can't remember the specifics, Chris. But it was something to do that, converting into Canadian dollars. We weren't sure where the Canadian dollar was going to go. But I think we guessed right on it, actually, that it was going to strengthen and it did.

And there's no further questions at this time, I would like to turn the conference back over to management for any closing remarks.

Okay, thanks, everybody, for listening to us on this midsummer day and look forward to chatting to you next quarter. Have a nice rest of the summer. Bye-bye.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.