Taseko Mines Limited (TGB) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Taseko Mines Q3 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 follow at that time. [Operator Instructions]. As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Mr. Brian Bergot. Please go ahead sir.

Thank you, Kristie. Good morning and thank you for joining everyone. Welcome to Taseko Mines’ Third Quarter 2015 Results Conference Call. My name is Brian Bergot, 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. As Brian said, thank you for joining us today to discuss our third quarter results. During the third quarter, the company generated $20.1 million in earnings from mining operations, slightly lower than that achieved in Q2, mostly as a result of lower copper price. Adjusted EBITDA was $19.5 million and cash flow from operations came in at $19.6 million. These results were generated from the production of 41 million pounds from Gibraltar, with 32 million pounds attributable to Taseko. Our cash on hand has grown from $53 million at the end of 2014 to $91 million today. We’re one of a small group of mining companies worldwide that have actually increased the cash and balance sheets over the last year, in the first metal price regime seen in the seven or eight years. We’ve done a lot of things right and we continue to expect to do them. A lot of folks get confused quarter-over-quarter our throughput changes, well it will. We look to manage our year-over-year throughput not quarter-over-quarter. And many factors come into play in that regard, ore access, ore grade, pit development sequencing, ore stockpiles and how we may or may not grow them, cut up rate, copper price, you name it, we look at all of these. As I said many times before, this business is not a 90-day business, it’s a 25 year, 9,125 day business. The variables we encountered dictate how we approach, what we do and the goal of the company which is to make money. Last year, i.e. 2014 as we all know was very difficult. We had to dig our way out of a big stripping pool causes by the combination of our high wall issue and frankly, the worst performance I’ve experienced in 35 years in this business. And it took frankly a year to clear that away, but during this period, we continue to generate ongoing operating profit in the face of pretty dire hardships, and here we find ourselves. So where we are today is about continuing to grow our operating profit and cash flow, building our cash reserves and setting ourselves up for the next time when copper prices rise. Our management team has the experience to see us through and out the other side and this quarter is an example of that. In fact, the last three or four quarters are example of that. We’ve all seen and experienced $0.65 copper, $0.30 zinc, $40 met coal. We know how to get through these times and frankly, we have the 20 plus year mine life ahead of us to look forward to when this metal price regime turns and it will at some point. I’ll concentrate on throughput as I’ve spoken to, has varied slightly for the quarter. We average to spend 83,000 tons per day, slightly below design as a result of scheduled maintenance requirement. The operating team managed however to offset the lower tonnage to slightly higher head grade in Q2 which allowed the operation to maintain similar metal products as achieved in the second quarter. The ore body at times presents us with some pleasant surprises as we drop down in the lower benches and as a result, we’ve exceeded our grade expectations for the quarter. Our site operating costs this quarter were US$1.40 per pound, with our C1 costs coming in at US$1.77 a pound which is pretty impressive considering we’re likely mining one of the lowest grade core – bodies in the world. All of these thoughts have been achieved with byproduct with only $0.03 and I believe Stuart speaks briefly about that in his presentation, as we shut down the moly circuit and have just sold off the remaining moly concentrate. If we look at moly, we expect moly prices to range down for the foreseeable future, primarily because it’s my belief that most mining operations do not really completely understand, they’re all in costs of producing and treating byproduct moly. And in fact they don’t know if they are making any money in the process, but producing it. Once they do get to that point, in understanding the cost structure, more moly production will offline. And we could see a somewhat increase price regime may be back to the US$5 to US$6 price range. However, so much of that will be dependent on the steel industry and where it’s going and new moly supplies coming on stream from the operations like [indiscernible] and others. Should the price rise, we will at that time to decide if ferrying up circuit makes sense, but I think our thoughts are that price needs to be higher than say US$8 per pound for it to be meaningful to us. With our site milling costs stabilizing at roughly $10 per ton, I believe we can achieve another lake down in that area and our operations team will be look at. Every $0.10 per ton decrease in milling costs is $3 million to the bottom-line, $1 per decrease is $30 million. And if we can push our operations costs with any fraction of those dollars down, all flow to our bottom line. While grade will fluctuate if we concentrate in lowering our costs per ton milled, we’ll be in good shape and that is what we are focused on. We have no idea where oil prices are headed, nor the Canadian dollar, but we expect that we can see further weakness in exchange rate which should help us on U.S. -- on our site costs in US dollar terms. Many of you are likely to read about concentrated market this year and the fact that mining companies of smelting goods are having a tough time coming to settlement on 2016, the refining and treatment charges. We are on a slightly different position the most because of the quality of our concentrate. If you’ll remember, we have operated for the last nearly decade under effectively fixed market terms. Our last contract expired which was for six years and nearly 1 million tons of concentrated fix terms over that period. Having said that, we expect to conclude a similar agreement with fixed terms -- just in future. Along with, and I’ve spoken about that in the past along with depressed ocean, freight rates are off property costs will be at or near all time lows for us in contrast with higher benchmark rates for other producers. And that will definitely affect our C1 costs going forward. We continue to spend very little on capital, as per our guidance, a few quarters ago. In terms of Florence, our engineering, legal and environmental groups are continuing to work with the government agencies in the U.S. for the permits for our test facility and we expect them to come late 2015 or early 2016. We are pleased with our liquidity and we see operation engaged crate debt per off-take and frankly I’m generally pretty pleased with our overall corporate performance in a pretty tough market situation. We continue to be in good shape to whether this metal prices that we expect in or significantly change in the next 12 to 18 months. I’d like to turn it over to Stuart

Okay, thanks Russ. As Russ already described, earnings from mine operations the board were chasing $20 million in the quarter and really as a result of lower operating costs that allowed us to generate good operating margins despite the challenging price environment. Third quarter revenues were 89 million compared[ph] to 30 million pounds at payable copper which was our 75% share of Gibraltar’s volumes. Sales volumes closely matched production in Q3 so there was no significant changes in inventory. Revenues were also impacted by 4.9 million of provisional price adjustments which include adjustments to prior quarter sales price as a result of decrease in copper price this quarter. As a result, our realized sales price was US$226 per pound for the quarter which was down from US$266 per pound in the previous quarter. The weakening US dollar profit price certainly impacted our operating margin. The impact was at least partially offset by the weakening Canadian dollar during the quarter. Third quarter revenues also includes $300,000 of revenue from the final sales of moly concentrate, that was produced before we placed the moly circuit on care maintenance in July. In terms of costs, we’ve maintained our site operating costs at the low level achieved in the first half of the year, and the increased copper production in Canadian dollar weakness is driven down, our total operating costs per pound to a US$1.76 for the quarter. The other significant item affecting our P&L this quarter was an unrealized foreign exchange loss of 15.8 million. That relates to our US dollar denominated long term debt and the impact of the weakening Canadian dollar. The gap net loss for the quarter was 17.7 million or $0.08 per share, adjusting for the unrealized foreign exchange loss and unrealized derivative gain and the write-down of marketable securities result in an adjusted net loss of 1.6 million or $0.01 per share. Adjusted EBITDA was 19.5 million for the quarter, and cash flow from operations was also strong at 19.6 million for the period. We ended the quarter with a cash balance of $91 million, which is $16 million increase over the previous quarter. As reported in our financials, we have a loan up pertaining to our mine finance which matures in May 2016. The current balance is approximately US$30 million and we’re confident that we’ll be able to refinance that with lower cost debt. We continue to carefully manage our capital spent protect liquidity. CapEx remained at a low level in the third quarter with a total spend of 4.8 million. That amount includes 2.6 million for capitalized stripping, 400,000 of other sustaining CapEx at Gibraltar and 1.7 million for the Florence and Aley budgets. Our hedging strategy remains in place. During the third quarter, we acquired copper put options for 30 million pounds. Those options are spread evenly over the fourth quarter and first quarter of next year as strike prices are 240 pounds Q4 and 205 pounds for balance of this quarter. We also received 1.4 million of cash from copper put options in the third quarter and a further $1 million of proceeds since quarter end. We’ll continue to look for opportunities to increase and extend our protection further into 2016. And with that, I’ll turn it back to Russ.

Thanks very much, Stuart. I’d like the operator to now open lines to calls.

Thank you. [Operator Instructions]. Our first question comes from the line of Mark Turner with Scotia Bank. Your line is open.

Good morning guys. Russ, just first I guess first an operational question here looking out to next year, because you made comment in the MD&A about cycling back to the lower grades for next year. Are we talking closer to the new reserve grade of 0.26? And then just, in combination with that you had improved recoveries like again this quarter up to 87%, the 87% in this quarter was that a function of the may be the higher head grade or the lower throughput quarter-over-quarter? Just trying to think of should we expect the 87% or above that going forward as the grade cycle backed down a little bit lower here?

Yeah, thanks for the question Mark. I think we’ll be cycling back close to the average reserve grade and then I think our recoveries are – they are a little bit higher obviously with copper grade you get better recoveries. But we think we still have some ways to go in the concentrator, so I think you can use that as a – that recovery of 87% is reasonable to expect for next year.

Okay, so we’ve been making some actual – there’s range or changes or some sort of optimization it’s not just obviously it’s related to grade but not just increase the head grade in the quarter?

Yeah, I think so.

And just, I guess my second question is more on the financials, the additional I guess cash flow from the loan against, I believe it’s some of your wholly owned equipment before it is, is there any sort of more detail or sort of thinking on that at the current time? You took it now because it’s available or are you looking to sort of maintain cash balance around that $90 million to $100 million mark and that’s why you head down that specifically in this quarter?

Yeah, Mark, it’s Stuart, that was a capital lease that we put on, we had a shovel and a drill that had, that just had their leases mature. And so we refinanced it since -- actually $7.5 million inside the JV and we took our 75% share of that at the – level. And so yeah, that’s a good form of financing for us, it’s low cost, it’s secured on the individual pieces of equipment. So we took the opportunity there.

Okay, so it was on something that was maturing at the time, so it’s just more driven by that as opposed to sort of some other thinking in terms of cash balance that type of thing?

No, it’s as huge. But yeah, we thought it was worth doing.

Absolutely in the context of the current market. Great, thanks guys. That’s all the questions I had at this time.

Thanks, Mark.

Thank you. Our next question is from Craig Hutchison with TD Securities. Your line is open.

Good morning, guys. Thanks for taking my call. Russ, you mentioned about your off-take agreement is expiring, is it at the end of this year or early next year? And that was I think you said 1 million tons of concentrate is that correct?

Yeah, give or take. That’s what we produced what we sold them Craig, for the last six years, John?

Seven.

Seven years, six terms but now we’ll enter into another one. I think we’re looking at what is it, between five to six years?

Five.

The contract actually, that original contract actually expired at the end of this year and we gave them an evergreen an extension and while we were negotiating an extension to it.

Okay, great. So you mean – so that you can use as a form of security new debt for next year for pay off the RK financing, correct?

Yes.

Great. And just in terms of the life of mine strip ratio looking out to 2016, would you guys think of the above or below the 1.9 next year?

It’s John here, Craig. We’re running through a final mine plans on 2016 right now, but we’ve got lots of alternatives but staying on strip ratio is focus for us because we need to stay there for the long-term so you can look at that 1.9 to 2.1 is where we’re going to be at.

Okay, that’s helpful.

Yeah, we’re not going to do anything stupid.

And may be just one question on Florence, the spending this year for this quarter I think 1.6 million, can we expect there’s similar spending levels until you receive the permits in hand or should that drop off materially?

I think that was a little higher than usual, John here, but it’s going to be in the million dollars a quarter, is what we foresee until we get going on the PTF then of course it will step up.

Okay, thanks guys.

Thanks.

Thank you. [Operator Instructions]. Our next question is from John Tumaso [Private Investor]. John Tumaso is an independent researcher.

Good morning. Good to chat again. You’re not hunting for new assets now that a lot of commodity prices are below 2009 averages?

Well, I’m not sure whether hunting would be the word, but we certainly look around, but we evaluate, we’ve always evaluated the opportunities that present themselves, but we have to have a financial word for all and number of other things and you have to have parties that are open to discussions. So, in that respect I guess we’re looking, always have been.

How much do you think the cost to complete the Niobium and the Florence Copper projects with the best estimates?

In this environment, Jesus. John’s working on that with the engineering team. We believe that obviously the capital costs are going to come down because of this environment that we are in here well, throughout North America in terms of construction costs and labor availability, and that kind of stuff. Certainly, I think the big one for us in Florence is the largest percentage of the capital costs is for the drilling of the access and recovery wells. And obviously we know what’s happened, we’re using effectively pretty similar type equipments that was used in the gas and the oil business. So, I think the rig count is a third of what it in terms of operating so there’s a lot of available rigs out there. And we haven’t really fully – constantly had but we expect the costs side of that capital side is going to come significantly down when we decide to move forward on the PTF. Can’t give you an exact number here, John.

We respect the 43 101 rules and your legal constraints. Well, best of luck. Thank you.

Thanks, John.

Thank you. And our next question is from Alex Terentiew from Raymond James. Your line is open.

Hey good morning guys. Just want to start by saying, a good job in getting your costs down and generating some cash. Question related to that, I don’t know exactly if there’s been any mine plan adjustments or if any of it made it all to help on the cost side. But do you expect to be able to keep costs down at these levels or is there some sort of push back or increase in the strip ratio coming up I know you guys just addressed 2016, but anything like that coming up that will limit how long your good results can go on for?

I guess John can speak more to that, but obviously the costs per pound will vary with our head rate, but like I said in the commentary, we want to look at our costs per ton milled. So if we can more effectively – operations both in the mill and the mine and push down the costs per ton mill, that would mitigate any head rate fluctuations. Then that’s the new basis for what we anticipate are milling and operating costs to be going forward. So as the grade rises back to – you’ll see reduced costs per pound of copper and stable costs per ton mill. John?

Yes that’s right Russ. Alex, we can maneuver in the short term but like Russ said, this is a long term fit and we’ll try not to do anything stupid. So we can do some short hauls for a while, before getting into long hauls. But I think if you go to the 43-101, layout for grades, recoveries, strip ratio, that’s in the longer term, we need to maneuver within that.

And there’s no big change in hardness expect in the next couple of years or may be or you guys have been mining here for quite a while so you got a pretty good handle on that, but no big changes in that front expected either, I would imagine?

Not in the near term, not for the next couple of years.

Okay, great.

It differs quarter-over-quarter. It’s kind of different, but generally speaking we got a pretty good handle on it.

We’re in the Granite Pit for the next couple of years and it is the hardest, so as we move out of the Granite Pit, so we actually get softer increase throughput but we won’t see that for couple of years.

Okay, great. Just one follow up question then on Florence, sure you guys you get your permits for the production test facility early next year, can you give me just a bit color on what the next steps are? I mean what do you actually plan on doing there and what sort of costs are associated with that and timeline to get this thing set up and going?

Well, the green light on the Project Test facility, we’re looking at techniques and costs but let’s talk about costs changes on a daily basis. But $20 million to $25 million to get the process facility up and running, take about nine months to do that from the green light, whether the green light’s from the regulators or from our board.

I see, okay. So that answers my question, that’s fine. Thanks.

Thank you. Our next question is from CJ Baldoni with Principal Global Investors. Your line is open.

Yeah, I have a few questions, thank you. Do you have – can you give us some timing around the new off-take agreement and the associated financing and would you expect that financing would be secured?

Yeah, hi, it’s Stuart speaking here. We’re kind of – we’re fairly advanced on our financing discussions. We’re not on the point where we can kind of announce terms obviously today, but it is looking promising and I think we could have something in place in the next couple of months. But yeah, other than that don’t really want to get into the details of it at this point, a little premature I would say.

Are the prices of your bonds are impediment to locking that down?

Not at all, no it’s unrelated. It’s not form of financing, it’s really the demand for a concentrate which is a clean concentrate as Russ mentioned, and that’s kind of the driver.

And regarding – it will likely be secured then right?

Yeah, that side of financing, that would be secured through the delivery of concentrate.

Okay, and is it too soon to provide CapEx for next year?

Yeah, it will be small.

Okay. And then I’ve been wondering about this, I’m just curious about the levers, in your third quarter production report, you mentioned how in 2008 you were able to dramatically lower your C1 costs over a period of time to deal with that market environment. And I was kind of wondering specially with the mine plan that you have now, I mean could you just talk about, if that is necessary again like what would be involved.

I don’t want to go into all the iterations of mine engineering, the circumstances in 2008 were significantly different from circumstances presented us today. There was obviously how you capitalize waste stripping with respect to or development was quite a bit different. They have changed those rules over the years. In those days, we were taking all our over-strip costs, our cash costs and we were effectively over-stripping over the average life of the Granite Pit. So that gave us a lot of opportunities to deal with that and still keep operating effectively. But yeah, it’s a big explanation to try and explain that on a conference call.

So the leverage this time around, it’s necessary would be different, is that what you basically just said?

Yeah, there’s all – there’s just like a multitude.

Okay. I can follow up offline with Brian.

That would be good

Thank you.

Thank you. That concludes our Q&A session for today. I’d now like to turn the call back over to Taseko for closing remarks.

Okay, everybody thanks very much for joining us today. Have a very Merry Christmas and we’ll speak to you sometime in the New Year.