Taseko Mines Limited (TGB) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines' First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today's program Brian Bergot, Vice President of Investor Relations. Please go ahead.

Thank you, Jonathan. Good morning ladies and gentlemen and welcome to Taseko Mines' first quarter 2015 results conference call. My name is Brian Bergot, and I'm the Vice President, Investor Relations for Taseko. Our financial results were issued yesterday after market closed and are available on our website at tasekomines.com. Before we begin, I would like to introduce everyone on the call today. We have Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and Stuart McDonald, Taseko's Chief Financial Officer. After opening remarks by Management, which will review first quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. I would 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 first quarter 2015 results. During the first quarter the company generated $2.3 million in earnings from mining operations, net adjusted EBITDA of $11.2 million. These results were generated from production approximately £28.4 million of copper. This copper production was achieved by processing 7.8 million tons through our concentrators and roughly 86,000 tons per day. Head grade was 0.22% copper and 0.6% moly. As a consequence of spending reductions, cost per ton mill decreased form $11.49 per ton in the first quarter of 2014, a year ago to $9.66 per pound in the first quarter of this year. And down from the $10.13 per ton achieved in the Q4 of 2014. State operating cost net of by-product credits came in at $2 U.S. per Pound. As head grades continue to increase through the rest of the year from the 0.22% seen in Q1, these costs will continue to decrease and we expect as per our previous discussions and guidance to be well below $2 per Pound in the coming quarters. As illustrated in our press release, our cost per pound of copper productions continued to decline in a relatively linear fashion from 206 in January to 177 per pound in March. And as I said earlier, we expect state cost to be in the U.S. $150 to $160 per pound range by the end of the year. The total cost of production at this time, well we know is going lower is somewhat indeterminate as we continue to more efficiently run both our mining operations and our concentrators. As well our off-property costs are in the state of flux. At present because of a surplus concentrate over – on the market over the last 18 months refining the treatment charges moved up dramatically with respect to what has been seen earlier in the decade. If you step back a few years, one would see TCRC is considerably lower. For example, for most of the time from 2010 to 2013, TCRC's charges averaged approximately $0.15 a pound for those producers that have long term contracts based upon benchmark with smelters. Last year for example, those TCRC costs were roughly $0.29 per pound. TCRC cost appear to be on a crux of moving lower with currently as being reported in the low 88 down from well over 110. Our TCRC costs in 2010 to 2013 because of our contract were approximately $0.16 a pound and today our off-property costs vary between $0.26 to $0.28 a pound. And this cost is I say primarily driven by their refining and treatment charges, and other property costs basically around ocean shipping rates. Presently the benchmark TCRC processing costs are $107 per ton and $10.07 per pound, and like I said earlier significantly higher than the long term rates of $80 per ton to $85 per ton and $8.85 per pound. So we expect those to change dramatically as copper concentrates shortfalls begin to appear as there is a shortage of copper concentrate to fill new smelter capacity coming on stream. To add to this important discussion, clean concentrates with lower or no arsenic antimony, mercury or other contaminants are being sort out by creators and smelter groups. And we are beginning to see a significant difference in TCRC prices for clean concentrate such as the concentrate with producer Gibraltar. As opposed to benchmark terms -in fact we believe concentrates that we produce from Gibraltar can command a significant premium off a benchmark terms which could equate to roughly $3.05 per pound. Ocean freight costs were at a multi year lows as the surplus of shipping capacity is chasing the smaller seaboard market and everything from iron ore, and coal to other bulk commodities including copper concentrates, the rates are declining and will have an immediate impact on our go-forward total cost of production. Many do not fully understand is often in the copper business, operating costs such as refining a treatment charges working complete opposite direction to the copper price, i.e. low copper prices, high TCRC costs and other operating costs. So we are entering a period of time where there appears to be changing with copper increasing or pull with increase, site cost decreasing and operating costs and OPC costs decreasing, Each having a material impact on profitability. So not only do we expect lower site costs in the months ahead, we also expect lower property costs. As per our notice last week, we've completed a new reserve update on Gibraltar, and the 43-101 will be released shortly. We're very pleased with the work our engineering group has completed and the impact of reduced reconfiguration of our pit development sequencing is going to have on our operations, and we will reap many operational improvements moving forward. As well we will reduce our near term and mid term capital costs in terms of pick crusher moves, and our fleet size, and generally be in a much smaller workable and productive mines sequence. John and myself can speak in greater detail during the Q&A on this matter. The concentrator is performing very well as [indiscernible] press release and over the past four weeks actually we've averaged roughly 90,000 tons per day, achieving a recovery of 84%. And for the past 18 days specifically we have processed 95,000 tons per day. This throughput and recovery has been achieved with a reduced water supply that affects both throughput and recovery. Once we complete it, a project of – a reclaim waterline which is imminent in fact I think it might have been done yesterday, we expect it will have a noticeable impact on metal production and certainly will affect recovery. Our fluent personnel continue to work on permit modifications that the Arizona Department of Environmental Quality wish to see in our final permit, as well we are continuing to do preliminary environmental assessment work in Aley. However we are keeping all spending on all projects to a minimum. Both projects to be advanced actually required just small amounts to push them. I'd like to now turn the call over to Stuart.

Thanks and good morning everyone. Earnings from mine operations before depreciation were $2 million in the first quarter which is an improvement over the 900,000 loss in the prior quarter and that's due to reductions in site operating cost as Russ described. Revenues in the quarter were just under $62 million from the sales of £19 million of copper and £280,000 of molybdenum and those amounts are reported on a 75% basis. Sales volumes were lower than production volumes in the quarter, as a concentrated inventories levels increased by those £3 million due to shipment timing around quarter end. And the U.S. dollar copper price of copper has been very volatile so far this year falling to a low point of $2.45 per pound in late January and now it's since recovered through March and April and actually the U.S. dollar price is back to where it was at the beginning of the year. Our realized sales price for the quarter was $2.57 per pound but there was a Canadian based operator we’re really focused on the Canadian dollar price of copper, which has also dropped in January, but has otherwise remained fairly stable over the last year, as changes in the Canadian exchange rate have offset a lot of the volatility in the copper price. As Russ explained, site operating costs fell to $9.66 a ton milled in the quarter and as a result we’re able to increase earnings from mine operations over the prior quarter despite having lower sales volumes and lower copper prices. First quarter earnings also include a gain on derivative of $11.8 million, which was offset from the sale of the copper put options that we acquired last year to protect against the short-term decline in copper. And the put options achieved the score by providing us with an additional $17 million of cash during the first quarter. There's been no change in our hedging strategy and in fact in early April we acquired put options for £30 million of copper for Q2 and Q3 at a strike price of 250 per pound. The cost of these options was $1.1 million, which is about $0.04 a pound. Like many of our peers we carry U.S. dollar denominated long-term debt. The impact of the weakening Canadian dollar during the first quarter resulted in an unrealized foreign exchange loss of $21.5 million was against to our US dollar debt. The GAAP net loss for the first quarter was $25.2 million, and adjusting for the unrealized foreign exchange and unrealized derivative losses results in an adjusted net loss of $2.4 million, which is $0.01 per share. Turning to cash flows now. As we brought to your mind was cash flow positive during the first quarter, but after taking into account corporate G&A costs, and working capital movements, total cash flow from operations was negative $3.3 million. There were some significant movements in working capital this quarter. We received an $18 million tax refund but this was more than offset by increases in inventories and receivables and changes in accounts payable over the period. Cash flows from investing activities included $17.4 million of proceeds from put option settlements and that was partially offset by capital expenditures. CapEx for the quarter included $2.5 million for capitalized stripping, $0.5 million of rather sustaining CapEx that we brought in, and $2.5 million of capitalized costs for Aley Florence and the Curis acquisition. We’re continuing to carefully manage our project spending to protect the cash balance. We ended the first quarter with $58 million of cash in the bank and at current corporate prices, we should be able to grow this balance over the remainder of the year. And with that I’ll turn it back to Russ.

Thank you, Stuart. Operator, we'd like to now open the lines for calls.

[Operator Instructions] Our first question comes from the line of Mark Turner from Scotia Bank. Your question please.

Good morning guys. First wanted to apologize, I wrote a note this morning that you would not previously given me a production guidance for 2014, but you had done that in Q1 and then a great guidance before which had known, so want to apologize for that first. And then my question pertains more in the short-term here. In the MD&A you've given an outlook for cost per ton milled for Q2 at about $10.80 for tons, but it’s roughly 12% higher than what you achieved in Q1. So just wondering if there was something specific that you could speak to that maybe driving that, because I guess I back in about being about an $8 million increase quarter-over-quarter, like at a time when you’re expecting strip ratio and that to come down. So I’m just not sure if I'm specifically driving that or [indiscernible] big gains that you achieved in Q1 if those are potentially - gain in Q2.

Mark, that's actually pretty straightforward one for us because we can see it. As the ore holes get longer, we brought more trucks back into the fleet, we brought more trucks back into the fleet at the end of this month and so we got to run those through quarter that’s most of it.

Okay, perfect. So it’s little lower strip but more trucks and potentially guess few more tons being moved?

Yes that's right. And it will continue to vary like that from quarter-to-quarter.

Okay, perfect. And then maybe just quick and then follow up on that, in terms of the deferred stripping or the capitalized stripping in the first quarter and the strip ratio 2.4. I guess is that being capitalized now versus for the new mine plan that's out there. So I guess just trying to get a sense of maybe what will be capitalized in terms of stripping in Q2 before we get a look at the new mine plan?

Yes Mark, its Stuart here. We capitalized about $2.5 million in Q1 and that - although the strip ratio was fairly lower around two, we still divide the mine plan into different components and so that capitalized strip related to the E side of the ground not the main zone. So there will always be little fluctuations from quarter-to-quarter on that as we capitalize based on the ratio of different components in the mine plan. So that’s the way it works going forward, could expect similar amounts of capitalization for the rest of the year.

Okay. Great, understood, and congrats on a strong operating quarter particularly like the February throughput.

Thanks Mark. Another thing just to throw in before the question gets asked, does it also gets blurred a bit on top strip and strip ratio when we’re running a stockpile like we were in Q1, we are no longer in stockpile, so that will be a little easier to understand going forward.

Okay. And I guess that's probably part of the increase in the cost of per ton on a mill based just not being joined from a stockpile and the longer hauls?

Yes, that's right. The stockpiles are certainly crushers, and that has to come off the hill. So an increase there.

Okay. Great. Thank you.

[Operator Instructions] Our next question comes from the line of David Olkovetsky from Jefferies. Your question please.

Hi good morning guys. I just want to understand a little bit better, I think you threw out a bunch different numbers for TCRC, can you just clarify for everybody what are you paying right now and when does that - what are your contracts going to adjust and then when are you begin engaging in new contract negotiations for future TCRC?

We're engaging them right now and it's the terminal of where this will sort itself out in the competitive bidding process.

Okay. And right now you’re paying what 110 or what's the number that you guys are paying?

Yes actually we have - we get a premium over bench and that's from our original contract that we signed in 2000 - in which year did we sign that - 2008,we signed a six year fixed term contract with certain escalations in premiums off of bench. So we’re not at the tonnage that goes to our Japanese partners is fixed at bench but everything else has a different reason, it has a premium off of bench.

Got it, okay. And then - so as I look at the highlights that you guys provided a few days ago on the improved economics at Gibraltar. One of the things I noticed was that says that your average strip ratio is going to go down to 1.9 from 4.3 and then elsewhere you guys indicate that every point in reduced strip ratio equates to around $57 million annual savings. So what that sort of tells me is that, if not all but maybe the vast majority of the improvement, the $100 million EBIT improvement that you guys talked about is coming from the strip ratio, is that a right way to think about this, this is primarily a strip ratio adjustment that's driving the improved operating performance?

Yes, when you get - as the ratio between mill operating cost and mine operating costs changes, the way the Gibraltar deposit is great tonnage, curve is flat so you move back, run more material through the mill and less to the waste, - and you get a better economics, doesn't work at every mine but works at Gibraltar.

Okay. But just to be clear, I mean is the change here the lowest strip ratio is that what's driving this improved annual profit?

That's the largest driver but it is also throughput and recovery.

Can you guys give us sort of sense for your view of the 100 million, how much is throughput, how much is recovery, how much is strip ratio?

Not really it's a sliding scale, the process that we went through took four or five months to pick the optimum and there is many, many adorations running different scenarios and this is one that came out as the most profitable for this mine.

Okay. And then can you talk a little bit about timing, give us your view on how long - when is this really going to start because obviously you guys are already making some changes to the mine, when should we start to expect to see this 100 million number start to flow through?

Well I think you will start to see it in the first quarter here and our forecast the second quarter. It's consistent if you look at what we are effectively forecasting in Q2, its effectively near what our new mine plan model will be. And I think the first quarter 2.2, 2.2 to 2.5 there you go, there is the ballpark number. So depending on what we do for throughput, what we do - John and the guys do for, more cost containment what we do on recovery, that go forward cost $1.50 per pound is most certainly achievable until if you encapsulate it all, TCRC - where TCRC is going to work, where is ocean freight going to go, where is site operating efficiencies going to go, then that's the framework we put it in.

All right. Yes, that's very helpful. Thank you guys, really appreciate it. And best of luck.

Thanks very much.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

Okay. Thanks everybody. Thanks for attending today and we look forward to talking to you next quarter. Cheers, bye.