Taseko Mines Limited (TGB) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Brian Bergot, Investor Relations. Sir, you may begin.

Thank you, Sayeed. Good morning, ladies and gentlemen, and welcome to Taseko Mines Third Quarter 2013 Results Conference Call. My name is Brian Bergot, I'm 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 Stuart McDonald, Taseko's Chief Financial Officer. After opening remarks by management, which will review third 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. Thank you for joining us today to discuss our third quarter results. As illustrated in our review of operations in our MD&A, milled tons in Q3 increased to 6.8 million tons from the 5.8 million tons achieved in Q2 and a whopping 62% increase over that achieved last year in Q4 of 2012. These throughput numbers clearly illustrates we have our ramp up complete and now we can focus on fine-tuning our overall operations. As a result of the throughput increase is the mine produced roughly 36 million tons of copper in the quarter, a nearly 73% increase over that achieved in Q4 of 2012 with quarter-over-quarter increases of 30%. This has resulted in earnings from our mining operations of $19.5 million before depreciation. Stuart will talk about the financials later in the call. Going forward, we know where we need to focus our attention now and that is to have a more consistency and increase run time in our mills and attaining our 93% availability target. As we push tonnage our recoveries have lagged somewhat, what we would expect, but that will be resolved as we move forward as our new concentrator personnel become more comfortable with the integration of the 2 systems and the grind we need to boost recoveries to predicted levels. We definitely have work to do in our moly plant, and that has been somewhat dictated by what has happened in the bulk copper circuit, but only just a matter of time and effort until we get moly recovery to design parameters. The concentrators are running at a combined rate of over 90,000 tons per day -- per calendar day -- excuse me, 92,000 tons per calendar day and has been for the past nearly 6 weeks. In October, the mills have processed nearly 2.8 million tons of ore. This throughput, while it's something we're extremely happy with, will create its own issues with upstream stripping requirements in our mining operations. As it stands now, we are right around our reserve grade strip ratio, however, we'll likely have to step on the gas if we want to keep ahead of our concentrator that continues to perform the way it has. We are doing our 2014 budget as we speak, and we will evaluate our go-forward options into 2014. Actually, it's a nice problem to have actually. Cost per pound going forward will decrease as we optimize the moly plant and produce more moly and increase availability on the mills attendant with those initiatives regarding truck productivity, drill blast activities, and other mine-related productivity improvement in mine-to-mill efforts. First, we turn to Slide 4. You will see that the mill availability I've spoken both in the past increased by 3 points over that achieved in Q2, but we are still 5 points behind of Q1 performance and well below our budgeted level from 93.5%. Pushing tons will obviously affect recovery, but we managed to stay pretty consistent with 2 Q2 recoveries 85.9% versus 85.8% but again, we are striving for close to 89%. As discussed, gross moly production is up from 2012. But as you can see, recovery is well off, but we believe it's achievable. Turning to Slide 5, pretty self-explanatory as I spoke about a minute ago. In terms of recovery and throughput, usually when you put recovery or push throughput, you'll suffer recovery. So we're pretty happy we've been able to push the tonnage to the levels we have and achieved similar recoveries as we have in Q2. This bodes well for us in dealing with the increased metric in the month ahead. Slide 6 just shows the step changes that occur once one solves operational issues. We saw a significant step change with throughput in April. You can see the immediate jump up to over 3,500 tons per operating hour in our mills. And then again in October, to be truthful, we're not quite sure at this juncture where we may settle out on daily throughput, but it can certainly be ahead of design expectations. If we step to Slide 7. Based on our performance in October, we expect to see further advances in mill throughput. And then turning to Slide 8 is the end result in terms of cost per pound that we are now experiencing. We're down from $2.30 a pound in Q4 of 2012 to $1.91 per pound this quarter. And once we get our by-product credits situation back towards what we expect even at the moly prices we're seeing today, we expect we can anticipate total net operating cost of production to decrease further from the $1.91 per pound. Stepping ahead now and looking at our Aley Project. Our Aley project is moving ahead nicely. We anticipate being able to develop the full sheet off of other recoveries we've been able to achieve, and we anticipate releasing the 43-101 report later this year or early in the new year. With respect to New Prosperity, earlier this week, we put out an information update on the process with the upcoming release of the panel report. To refresh everyone's mind, once we completed the British Colombia environmental assessment report, the provincial government recognized 1 adverse environmental affect and that was the loss of the Fish Lake. Of the many number of areas regarding the environment that we ruled, that was the only area that was recognized as being an environmental issue. The provincial government who constitutionally has ownership of the mineral rights within the boundaries of the provincial jurisdiction approved our project irrespective of the effect on Fish Lake because of the overwhelming aspect on the social economic well-being that this project would bring to the Cariboo, and that our mitigation measures would offset the loss of the small body of water known as Fish Lake. In the latest federal panel review, we as a company went one step further and saved Fish Lake its huge expense to the project economics. In the context of the panel review, we have determined there is no significant adverse environmental effect. If the panel follows this mandate and the criteria laid out in the Canadian environmental assessment act in terms of reviewing projects. The panel review is a design level planning tool to advise the Minister and government. I want to make it perfectly clear, it makes no decisions. The decision in this matter lies solely with government of Canada, and we expect it will follow the law prescribed CA-12 and that the outcome will be the granting of the federal environmental certificate. To put Prosperity in perspective for everyone, it is the 10th largest undeveloped copper-gold [indiscernible] in the world and the largest in Canada. We have a 13.3 million ounces of gold and 5 billion pounds of copper in the resource and 7.7 million ounce of gold and over 3 billion pounds of copper in its mineable reserves. Reserves, which I might add, was calculated using $1.60 a pound copper and $650 per ounce gold. Based on what we've accomplished at Gibraltar, we believe we can build New Prosperity for approximately $1.1 billion less equipment capital costs and produce 5 300 ounces -- 300,000 ounces of gold for the first 5 years and 130 million pounds of copper over the similar period. We also believe there is no adverse environmental effects as I indicated earlier from the project after what we plan to do with mitigation around wildlife, fish and other environmental related activities. This is a simple open pit mining project, only complicated by outside influences that have nothing to do with environmental protection or sound public policy. We expect the federal government to grant us a federal environmental certificate in the near future, and then we will proceed to the next steps in the process. Earlier today or tomorrow -- either today or tomorrow, we will see what the panel has said, and then we can move forward in the next leg of this journey. I will -- I, myself or John will answer questions on this later. But now, I'd like to turn the call over to Stuart McDonald, our CFO, to discuss the financials. Stuart.

Okay, thanks, Russ. And good morning, everyone. Overall in the third quarter, we saw continued positive trends in the financials as a result of the ramp up of the second quarter -- or the second concentrator at Gibraltar. Earnings from mine operations before depreciation were $19.5 million, a significant increase over the second quarter figure of $12.9 million and primarily attributable to lower unit operating cost and increased realized copper prices. Revenues for the third quarter were $66.8 million from copper sales of 20 million pounds. Our share of copper inventories increased by 7.6 million pounds over this period as copper production significantly exceeded sales volumes in the period. The recent inventory buildup was due in part to a vessel delay caused by adverse weather conditions at quarter end, and we expect inventory levels to decline again in the fourth quarter. So it's important to note that the third quarter revenues and earnings do not fully reflect the increased covered lines produced at Gibraltar in the quarter. Turning to cost now. Gibraltar saw a significant reduction in unit production cost in the third quarter resulting from higher production volumes. Total operating cost for the quarter fell to $2.21 per pound, and this is the third consecutive quarter of declining unit cost, so that's certainly a positive trend. G&A costs were $3 million in the quarter, down from $3.7 million in the same period last year primarily due to lower stock-based compensation expense and other cost reductions. Exploration and evaluation expenses were $2.7 million in the third quarter, which included $1.6 million for permitting initiatives at New Prosperity and $0.9 million of expenditures on the Aley niobium project. Where some of our peers may capitalize these types of cost, we have continued to take a conservative accounting treatment and expense them through the P&L each quarter. This may change in the future, and we may begin capitalizing cost for these projects after permitting and feasibility milestones are achieved in 2014. Other expenses in the quarter include realized and unrealized losses of $3.5 million related to our hedging program. We're maintaining our strategy of purchasing out-of-the-money put options as protection against the copper price downturn. And in fact, recently in October, we purchased additional put options to extend the program out to the second quarter of 2014 at a strike price of $3. GAAP net earnings were essentially breakeven in the third quarter. Adjusting net earnings for unrealized foreign exchange gains and certain other noncash items yield an adjusted net loss of $1.9 million for the third quarter or $0.01 per share. In terms of cash, we raised -- or we maintained a strong cash balance of approximately $80 million at quarter end. Cash flows from operations totaled $13.6 million in the quarter. However, this was offset by cash outflows for capital items and debt service cost resulting in a net $13 million decline in the cash balance over the quarter. The main cash outflows or capital items in the quarter included $10 million for final payments for concentrator #2 construction work and a $4 million infrastructure prepayment to BC Hydro. The level of spend on capital items should drop off significantly in the fourth quarter. So in conclusion, the third quarter earnings and cash flow continue to show positive trends from the ramp up of GDP3. We ended the quarter in a strong financial position with $80 million of cash on hand, positive cash flows from Gibraltar, down side copper price protection from the put options and no significant capital programs in place. So that being the end of the financial section, I'll turn it back to Russ for a wrap-up.

Thank you very much, Stuart. Operator, we can now open the phone lines to questions.

[Operator Instructions] And our next question comes from Tom Meyer from CIBC.

Russ, I'm just curious, do you guys have a handle on why exactly the recoveries of molybdenum are so low?

Well, I'm glad we've got John here. Yes, we do. We talked about that quite a bit. Tom? He will give you a clear, technical explanation.

While trying to keep things understandable. Yes, what's happening there is we still need to do some work to get our moly plant working the way we want it to. But really, the guys have been focusing so much on getting copper production and copper grade with the new concentrator and #1 concentrator and #2. The moly is not making it to the moly plant. We're losing it in the flotation and bulk concentrator 1 and 2.

And when you say you're losing it, is it a liberation issue, a reagent issue, or a combination of the 2?

No. They're pulling too hard on the copper circuits, and we're losing the moly into tails.

Okay, all right. Okay. And then I think we were waiting for some information on the Aley flow sheet by now. I guess we're going to have to wait until the New Year, or will we see something before the end of this year?

Well, we've achieved 40% recovery.

Yes. So what we're doing now is we're into log cycle tests, and that takes -- just the process takes 6 to 8 weeks to do. So that's -- if everything works well and we haven't seen any reason that it won't, but we have to finish this log cycle test to get the confidence to be able to say the metallurgy will work at Aley before we can come out with a 43-101 report.

Okay, and then just finally, as you -- do you see any constraints in pushing tons at Gibraltar between the 2 mills and maintaining the higher recovery rates, or are you going to get capped at some point or are there any bottlenecks to higher throughput and potentially better recoveries on the copper side?

Well we should get better recoveries than we are at these throughput rates, and you can see the improvements happening now. We're coming up steadily. Will We be able to run at those higher rates and keep an 89% recovery rate? Probably not. You do go past your grind ability at those high rates but - and your retention time will close. But our target is 85,000 tons a day and 89% recovery.

Okay...

[indiscernible] that we get ahead of is the mine.

Our next question comes from Steve Parsons from National Bank Financial.

Few quick questions. Maybe a few, Russ, on the milling. It looks like you have another step change in tons per operating hour in October. What happened there? Did you make any mechanical changes, or process changes to allow for that? And will that be sustainable through the balance of the year?

It's John again. No, this really -- it's a function of rock type that we are in right now in the pit, and the operators' really learning and having the faith that those mills can run at their designed capacity. So there's been no physical changes or operational.

Okay, so at the moment, you're in some rock -- softer rock that -- will that persist until 2014?

The ore body varies and so we go into the softer and harder. Right now it's really not softer. It's more fine. So the fine gets throughput quickly.

Okay. Next question. I guess, Russ, you alluded to the fact that the mill is doing well, and it sounded a little bit to me like maybe you got to catch up and accelerate the strip to make sure the mine can keep up. Can you just add a little bit more color on this? Would that be a sort of a more substantial pit lay back, or would you have to buy any sort of trucks to achieve this strip that you need to keep up with the mill?

Yes. The engineering department is just continuing to do the work now. We're just working on our budgets for next year. And one of the things that we really want to look at is we've got some pretty big gear out there, Steve. We've got 330-ton trucks, 60 70-yard shovels. We need a lot of digging room, and the open area's up for productivity, and we've been a little bit constrained. So what we like to do is find out where we can do some bigger pushback. I don't know whether you call them lay backs. But just open up the mining area some more and give the operator the opportunity to really hammer down the rock movement cost because right now, between we McManus and I, we think they're too high and that's some of the constraints we have is tight operating room.

And your pit -- your strip ratio in Q2 is about, I think about 2.6 to 1. Just for guidance, would you suggest the strip ratio would be north of 3?

It's a 3 to 1 pit.

It's a 3 to 1 pit, so we've been averaging for the year, I think, right around 3, 3.1.

Yes, right around 3. But like I said, what we need to do is get some open areas. I mean we're moving the rock, but we need to -- if we're going to get 90,000 tons a day or 85,000 on a steady basis, we need to move more. So we need to be more productive, which means we need to accelerate on the mine site that we've got, like on the sequence. You've got to change the sequence.

Okay. And so excluding any capitalized strip for next year, where do you think the sustaining CapEx should shake out on an annual basis?

Well, our old formula, we do it cost per ton mined. We give a nominal -- we give about $0.15 per million tons. So we're going to move 110 million tons. So $15 million, $16 million, somewhere in that neighborhood.

And our next question comes from Mark Turner from Scotiabank.

Actually, a bunch of my question there on -- in terms mining have been asked and answered. But I guess just for clarification. In the very short term here, you've been mining at about 26.6 I guess million tons over the first three quarters. And at the, I guess, 3 to 1 strip ratio, you need to be doing about 30 million to 32 million tons. Irregardless of being able to push 90,000 tons through the mill, is there anything in place to see sort of that step function up from the 26.5 million to, call it, 30 million, 31 million tons being mined.

You mean you're looking for just more mill throughput?

No, no. Sorry, just in terms of the mine being able to even supply enough ore at the 85,000 ton per day rate. Because I think the math works at 85,000 tons per day, 3 to 1 strip, and you'd be moving about 30 million, 31 million odd tons. And over the first 3 quarters of this year, you're doing about 26.5 million tons. I'm just wondering if everything, like the mining equipment all the year phases are open enough to see that difference in sort of Q4, Q1 of this year.

Yes, Mark, it's John here. It's one of the things that we're doing steady basis is maintain an eye on making sure that deliveries comes when it comes. We are a little behind on stripping right now for various reasons that we've already discussed. So we've got a little bit of cash to do it, and we need to stay on strip. So the mill ramped up quickly, and now we need to get the mine to match it. It's not a big deal. It's just accelerating the sequence that we've got.

We have lot of stripping capacity. It just how we utilize the property. And then we probably have -- if you look at it in an ideal situation, we probably have the digging hardware to move 400,000 plus a day, John?

Yes.

Yes.

[Operator Instructions] And our next question comes from Adam Low from Raymond James.

The BC Hydro connection, you guys paid a little bit prepayment there in the quarter. How much is remaining to go?

I think that's done, isn't it? I think we paid -- what did we pay? $20 million?

I forget the total, but that comes back pretty quickly, too. The total amount's paid out now. The line is essentially in.

Okay. So this $4.3 million was the last of the $21 million.

No, it's $25 million actually. I'm sorry, that was a mistake. Yes, it's kind of a little ass backwards. It is kind of like, it affects our cash but it comes back pretty quick.

Yes, it reduces our power cost over the next 2 years by that amount, so we get it back.

Okay. And I think I saw on the notes somewhere that you also have about $9 million remaining in capital commitments. Just wonder what that was related to. I'm guessing still a little bit of GDP3 stuff?

I think we've got a drill coming in.

There's a drill actually on site being erected. That will be financed, so it's not a cash issue. And then there's a couple of other projects that we're just finishing off this year.

Okay, all right. and can you guys give us any sense as to what you're budgeting for exploration or project evaluation money for Aley or Prosperity over the next -- in 4Q and then over 2014?

We're at the budgeting process right now, and a lot of that's going to depend on -- we've got -- how much commons we've got in Prosperity is going to be colored by the panel report. Of course, and how much we do with Aley also depends on how much cash we generate next year. So we're just in the process of determining that now.

And is the Aley budget, is it somewhat dependent on what happens to Prosperity here?

Yes. This project cash that we need to extend to keep those projects advancing. So if we really get going on one, the other one will probably be reduced.

Okay, and just one last accounting question for me. You guys have rolled forward your hedges here a little bit. It looks like you spent about $1.5 million. So I'm just wondering, where do you account for the hedging costs of those? Do those get slotted into the OpEx, or do they end up somewhere in the cash flow statement?

They hit earnings. So we set them up on the balance sheet, and each quarter, we revalue those put options. So any changes in the value each quarter go through earnings. They go through other expenses on the P&L.

I think what I'm referring to is the upfront cost of buying the hedges.

It's capitalized. It's on the balance sheet.

And our next question comes from Tom Bishop from BI Research.

With regards to the moly recovery, what is the goal there? And do you have any rough idea when we might get to it?

The goal is 50%, Tom. That's what it was designed to do, and...

Where are you know? What's the number currently?

Well that changes day by day. It's improving. About 20%, yes. So the problem right now is in the concentrator, not the moly plant.

And what would that contribute on a cents per pound basis then? Would you be back up to that $0.20 credit or...

Well, look at the -- Tom, look in the -- go over that slide there that I had, where it got the Q3 2013 versus 2014, or 2012 cost. You can see in Q3, we had $0.04 by-product credit. And in Q2, we had $0.15, so -- and then Q1, $0.21. So it's somewhere between $0.04 and $0.21.

Right. So I mean ultimately, you'd be hoping to get back up to $0.21 or...

Well, we sure like to.

Yes.

That's the plan. So it's certainly $0.10 to $0.15 there.

Okay. And as far as Aley goes, you said you're at about 40% recovery and doing more testing. You go -- do I recall that it was 50% there, too?

The goal is 50%, but the goal is also to deliver reserve statement. So we're running a log cycle test right now, and we may only reach 40%, but the project is still economic at that level. But so we're working through that right now.

And what's normal globally? I mean I'm not sure if your reserve is a little challenged or -- 40% to 50% is normal around the globe?

The reserve isn't challenged at 40%, and global is about 50%. But you can't go to a book and look up a niobium circuit that we have for ourselves.

Okay, so you're saying you'd like to get -- at 40%, you're still economic?

Yes. Yes.

And the copper recovery, it's -- at one point, I though you said you probably won't be 9% maybe that was on a per -- by year-end level. I'm not sure what that comment was, but I thought your goal is to get to 89%.

Yes, it is.

Okay. What was the comment about probably not getting to 89%? What did I miss there?

No, that was a question on whether we will still get to 89% at the higher throughput, and maybe not. If you're over 85,000 tons a day, it does affect recovery at some point, but our goal is 85,000 tons a day and 89% recovery.

Okay. And I don't know if you've looked at this already, if it's in the MD&A. I didn't get to read it all. But how could we estimate the impact of the bottom line had these pounds that were left on the dock shipped? And I don't trust myself to do it on my own, but do you have some either rough idea on that?

It's Stuart here. Yes, I'll just make some general comments, I don't think we want to quantify that. But it was 7.5 million pounds of -- that was our share of the inventory build in the quarter. So 7.5 million pounds at our operating margin, right? at a $3.20 copper price. So that's really what our earnings would have benefited from.

Okay. Final question, just trying to get a handle on seasonality, all of the things being equal. How does the cold-weather months impact recover you see on material mines? I assume it's all a little worse, but maybe not.

Actually, we took all the secondary crusher stuff and so we still have a little bit of material handling issues, but nowhere near what we used to. There's very little effect on cold weather. In fact, some of it is good, the roads harden up, minus 20 is nice mining actually.

Okay. and recoveries are unaffected by the temperature? I guess you keep it warm inside?

Yes. The mills aren't affected. You're affected outside with some of the materials handling. That's all.

It's good for Eskimos and miners.

Yes. If it gets cold every winter, we know what to do about it now.

Okay, operator, that looks like the end of the question period. Thanks very much, everybody. Look forward to talking to you in the New Year and hope everything goes well with you. Thanks very much. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.