Taseko Mines Limited (TGB) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Taseko Mines 2015 Year End 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 conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Brian Bergot. Please begin.

Thanks, Shanice. Good morning ladies and gentlemen and welcome to Taseko Mines’ Fourth 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 2015 fourth quarter and annual business and operational results, we will open the phone lines to analysts 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 and thank you for joining us today. During the fourth quarter, the company generated $6 million in earnings from mining operations, before provisional price adjustments, the hedging program also resulted in gains of approximately $4 million for a total of $10 million of cash generated during the period. For the year, earnings from mining operations were $50.8 million, a slight decrease from the $52.3 million achieved in 2014. And this was achieved even though copper prices in 2015 averaged $2.40 per pound versus $3.10 per pound in 2014, 20% less than 2015. Over the course of 2015, our mining cost per pound of production has decreased from approximately $2.32 per pound to $1.65 per pound and our C1 costs net of byproduct credits from $2.50 a pound to $1.96 a pound. While at the same time our byproduct credit has dropped over the year by 75% from $0.24 per pound in 2014 to $0.06 per pound in 2016. Our management team across the board operations in the corporate office has done a fantastic job over the past year in very difficult times. Low metal prices as hard it is to believe in times like this helps set the direction for an organization when they ultimately go higher. Operating teams actually learnt many important lessons on how to manage and run a business in lien times and I think the results speak for themselves in that regard. We’ve reduced tens of millions of dollars in expenditures both capital and otherwise. We’ve reduced our capital requirements going forward without sacrificing safety or operational results. In fact we have just completed 800 days at Gibraltar without a loss time accident. In my 35 years in the industry I’d never seen any achievement like that. You’ve heard me time and time again speak about cost per ton milled. Cost per ton milled is the true efficiency of a mining operation. Most folks really don’t understand that metric, they always look at cost per pound and while cost per pound is the final arbitrary of your financials, financial success cost per ton milled is the indicator of the efficiency of your operations. For example, we have lowered the cost per ton milled from CAD$11.38 over the course of the year to CAD$9.83 per ton over the past year which equates to a CAD$1.55 per ton or just under 14%. And in fact the fourth quarter we were down a further CAD$9.41 per ton milled on a year-over-year basis which equates to roughly $61 million in annual savings from those dollars spent at $11.38 per ton. If we look at our periods with reported dollars the cost denominated in U.S. dollars for example, Capstone at Pinto Valley milling cost per ton milled is US$11.83 per ton versus ours at $7.44 per ton milled or stepping further afield at Candelaria in Chile at US$14.80 per ton milled. So for example if we have the same grade as Candelaria at Gibraltar, our cost would be roughly $0.90 per pound. And if you have the same head grade as reported by Capstone of 0.37% versus our 0.27% Gibraltar’s cost would have been a $1.15 per pound. So when the corporate price improves our leverage to the price is significantly greater than any other producer. How did we get to this point and where are we going? We developed a new mine plant that efficiently and effectively lays out the future for Gibraltar over the next 23 years by reducing our script ratio and approving our cost per ton milled which is evident in our last year’s results. And we are seeing that in our year-over-year operating performance, in particular Q4 performance at $9.41 per pound we can continue to push our overall operating cost down further. We invested in put options [Indiscernible] downside that have generated $21 million in cash. We recently entered into a 5.5 year off-take agreement to sell over 600,000 tons of Gibraltar concentrate through until 2020, an agreement that took us over 7 months to negotiate but will save us over $30 million over present ATCRC [ph] charges over this next time period going forward until 2020. In addition, we negotiated long term ocean freight contracts at rates that are the lowest in the last 20 years. This is why if you look at our review of operations in the MD&A you will see our off property costs have been reduced significantly from the $0.45 in Q4, 2014 to the $0.33 in Q4, 2015. We expect further savings in this area in the months ahead as we streamline, as we further streamline our logistics. Moving forward through this year, we have an adaptive and efficient mine plan, we have a cost structure that should see us through, we have adequate liquidity, we ensure we can get through these low copper price times. With respect to our projects, we are moving ahead slowly on, progressing our judicial reviews and several litigation on new prosperity and generally sticking to what we know best and that’s ensuring Gibraltar runs the best as it can in these difficult times. I’d like to now turn the mike over to Stuart to talk about our financials.

Thanks, Russ and good morning everyone. As already noted, we’ve had strong operational performance in 2015 and now it’s allowed us to maintain positive margins and grow our cash balance over the year despite challenging copper prices. Earnings from mine operations before depreciation was $51 million for the year. Cash flow from operations was $52 million and adjusted EBITDA was $56 million. And that being said, I’d like to focus the rest of my comments on the fourth quarter and recent events. Fourth quarter earnings from mine operations before depreciation was $2.2 million, which is net of $3.8 million provision of price adjustments which resulted from a decline in copper prices during the quarter. Q4 revenues were 67 million from sales of 25 million pound of payable copper which is our 75% share of Gibraltar’s volumes. Provision of price adjustments resulted in an average realized sales price of US$2.01 per pound which was significantly below the LME [ph] average price and also lower than the 226 per pound price realized in the third quarter. The impact of the lower copper prices was partially offset by continued cost reductions. In fact our fourth quarter site operating cost measured in Canadian dollars were lower than any other quarter in 2015. And the Canadian dollar also continued to weaken averaging 1.34 per US dollar and this also contributes to our operating margins. As Russ described off property costs continue to improve and we’ve recently been able to lock in a significant portion of our treatment and refining and ocean freight cost at fixed rate on long term contracts. We expect about CAD$10 million of savings on those two items in 2016. The other significant item affecting our P&L this quarter was an unrealized foreign exchange loss of $9.6 million which relates to our U.S. dollar to nominated debt. The GAAP net loss for the fourth quarter was $23.4 million or $0.10 per share, adjusting for the unrealized foreign exchange loss and an unrealized derivative gain resulting in an adjusted net loss of $13 million or $0.06 per share. CapEx remained at a low level in the fourth quarter with total spend of $6.6 million. This includes $4.1 for capitalized stripping, $1 million of sustaining CapEx at Gibraltar and $1.5 million at the Florence and Aley project. Our hedging strategy remains in place and we receive cash proceeds of $2.6 million in the mining adoptions in the fourth quarter and another $2.1 million of cash for the December put options, which was received in early January. We currently have put options in place for the first quarter of 2016 at a strike price of 205 per pound and we’ll be looking to extend its protection later into the year. We ended the year with the cash balance of $76 million which is a $23 million increase over the prior year. Gibraltar remained cash flow positive in the fourth quarter, but Taseko’s overall cash balance declined primarily as a result of debt service. We also recently announced a new $70 million credit facility with an affiliate of Red Kit mine plans. Facility has been used to repay the secured debt that was due in May and also provides us with an additional 40 million U.S. of liquidity. We now have over $125 million of liquidity moving forward which we believe is more than sufficient to see us through this period of low metal prices. Another positive development is a recent announcement by the Province of B.C. of a five-year power rate deferral agreement and this agreement could allow Gibraltar to defer up to $20 million annually on power cost. And with that, I’ll turn it back to Russ.

Thank you, Stuart. In closing, I also need to say a few words about the unfortunate proxy barrel which is initiated -- which was initiated by a decedent shareholder, a shareholder of less than two months. First these are activists not investors, or shareholders in the sense of creating long-term value for the bulk of our shareholders. We believe they’re attempting to opportunistically gain significant influence over the Company, the expense of a well laid out strategy by our board in the best interests of all of our shareholders. While we are unsure of the activist’s intension the fact they did not disclose their investment in Taseko bonds, an investment nearly three times larger than the stock investment should be a serious concern to all of our shareholders. They’ve created arguments of connivance around the service agreement we have with Hunter Dickinson. These services amounted to approximately 1% of our total operating cost since 2012. These services have assisted to seek advancing our growth projects and creating long term value. The company received exceptional value from Hunter Dickinson and the board has very stringent guideline and policies on how the company deals with the related party aspect of this business relationship. The service agreement with Hunter Dickinson has been filed on SEDAR since 2010 available for anyone to see. There is complete transparency on these matters unlike the decedent disclosures. For example, Taseko’s operating cost in 2012 to 2015 were $914 million. Fees paid to Hunter Dickinson during this time were $11.7 million and these fees are for flow through cost such as geological services on Gibraltar and Aley drilling program, engineering support, finance and tax support and importantly in the tax support area we’ve resulted in a $27 million of tax repay over the past few years. As well, [Indiscernible] for example, save the company over $100,000 recently. Another flow-through costs such as rent and direct [Indiscernible]. These costs are roughly 1% of our total expenditures since 2012 and we have result in the significant savings for the company contrary to the decedents of our RC [ph] The decedents have also question to Taseko’s corporate governing practice. We strive to ensure best practices are followed and continually look for opportunities to improve in that area as with every other area in the company. Over the past number of years, we have made a number of changes to strengthen our corporate governance including changing the composition of our board to be more independent and with the broader range of scale. The present board has five independent directors out of eight. While this conference call is about our earnings, I need to add we are preparing a detailed proxy circular which will address our comments that we believe shareholders will need to know before voting. This is a complicated matter, so I’m sure you all appreciate I can’t be giving superficial responses on a call like this. Everyone has to be patient until the circular comes out in a few weeks with all the particulars. I know it has been a challenging and a frustrating few years for our shareholder base. As a large shareholder myself, I completely understand your position. Our strategic plan for creating long term shareholder returns has been delayed due to the prolonged economic downturn, but we still strongly believe it is right strategic plan and going forward it will pay at par. Operator, I’d now like to open the call to questions.

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

Good morning, guys. Just hoping you could give an update as to where in terms of throughput, the operations are right now. I know the press releases and previous disclosures you had exited 2015 at 85,000 ton per day rate. I guess, just looking for any additional color on that, because as you mentioned per ton milled cost being an important metric, but then also there’s a significant I guess aspect of that which is fixed. So just trying to get comfort that throughput is sort of backup to that 85 or above rates sort of going forward here?

Hi, Mark. It’s John here. We started with the transition from Q3 to Q4. We made some changes in the mill, the guys struggle to get the throughput backup, but we’re back in the 85,000 to 90,000 ton a day range on a regular basis. And we see that going forward to stay in that range.

Okay. The disclosure on the MD&A was that -- that was primarily around the mill -- the mill itself. Just is that the case or just now seeing the strip ratio and the mining rates in the quarter again it has been a little bit below what would be required to feed the mill at 85,000 tons per user, but was there anything mining related there or have the mining rates are picked up as well?

No. it’s all according to plan. The mining rate will vary a bit depending on whole distances and where we are in the pit. But the biggest difference between what we have been doing and what we changed in 2015 is we did a slight reduction in head grade with lowering the cut up rate, but that really dropped the strip ratio. So, we’re right on the mine plan right now.

Okay. And I guess, just about mine plan in shorter term [Indiscernible] strip ratio so to speak is close to that 1.9 to 1 but higher in the first few years, so should the strip ratio, as your current thinking on the strip ratio is similar to in 2016 as there was in 2015, so maybe closer to 2.2 or 2.15 in that area?

No. It’s going to more in the 1.8 range.

Okay. So there is significant reduce. Okay.

It varies with whole distance and what we’re moving in and out of the stockpile too.

Okay. But 1.8 numbers looks helpful in terms of getting it or released tons they needed. And I guess just my sort of final question was I know you’ve refinanced the debt that was for Florence’s copper project that with Red Kite. And then you’ve also signed the new concentrate off-take, but previously your concentrate off-take I’m not sure it was disclosed but believe it was with the different off-take partner, the two, the two are not related this time like our. Just I guess what I’m -- its clearly looks like you got great terms for your high quality concentrate and just trying to understand why maybe locking it in at this point versus continuing to take sort of spot terms on that and being able to lock it in when maybe in the concentrated markets even a bit tighter?

You want to take that question.

We like to take it many variable costs out of the operating equation as possible. So I think we look at what we’re happy with in terms of our property cost and if we think we can lock those in and create a margin over the longer period of time. We’re not in here crack shooting whether PCR seeds [ph] are going to go lower. We get pretty comfortable with how we see the market out there. Right now, long-term or the bench is roughly 97 and 9.7 I believe somewhere around 100 and we’re significantly below that. We’re sort of in the spot range with respect to our with this longer term agreement. So we think that we’re pretty comfortable with those costs, yes, they may go up, they may go down, but I think we’re pretty comfortable and we’re not going to spot all concentrate. That’s a recipe for disaster.

Right. Absolute. Great. Thanks for the color.

Thanks very much.

[Operator Instructions] Our next question comes from the line of Pierre Vaillancourt with Laurentian. Your line is now open.

Hi, guys. Just wondering if you could provide some detail on the debt servicing cost this year?

Hi, Pierre, it’s Stuart here. Of course, two main types of debt that are in service, the one we pay on 7.75%, so it’s about workload of current exchange rates in the range of CAD$20 million a year on interest for that. And then the other piece would be the capital leases and I believe for 2016 including interest will be in the range of $17 million or $18 million of service. Of course the new facility, the Red Kite, the new loan does not have any debt service requirements. Those would be – that would cover in.

Okay. So on the income statement it will be actually you’ll have $20 million a year interest you’re saying and $17 million in capital leases that’s an extent of it?

Yes. We’ll accrue interest on the Red Kite facility. We’ll hit it down but it won’t be a cash outflow, but yes, otherwise your numbers are right.

Okay. And so the interest you’re accruing in the current environment would amount to what?

On the new loan it will be 8.5% on the amount of we drove down, drawn down about CAD$40 million.

Okay. So, 8.5 from 40 million that you’ve drawn down at this point?

Yes.

Okay. And the G&A cost of approximately 16 million for the year, is that in the range for 2016 as well?

Yes. I mean, we’re pushing that number, we’re trying to reduce it but I don’t think there’ll be any major changes, that number also include some stock-based comp, but yes, that’s a ballpark.

Right. Okay. All right. Thanks very much.

And our next question comes from the line of Alex Terentiew with Raymond James. Your line is open.

Hey, guys, I just got one question here. You note that – excuse me, you guys have done a pretty good job by getting your cost per ton down and Q4 you’re at 941 a ton Canadian. Is there a particular target that you have taking account the strip ratio you’ve noted and so forth is the Q4 run rate something we should assume for 2016 or there improvements you think you can make to that?

Yes. John here. I think run rate is pretty steady now. We’ve seen some improvement in throughput I believe and we saw some room in recovery improvement on cost, lot of it wasn’t realized in 2015, what we’re going to see in 2016 is the off-take agreement improvements, the ocean freight agreement and this BC Hydro deferral to copper price is low, we’ve got the opportunity to defer about $20 million in cost there, so you put all that together and you should see a significant cost improvement.

Okay. And then, can I assume that given where copper prices are, you guys will participate in that BC Hydro cost deferral program?

I think once we work on the details we’ll probably take advantage if it will make sense. At this point we don’t see any reason.

Yes. Makes sense. Okay. Thank you.

Thanks.

Okay. It looks like we’ve got no more questions folks. Thanks very much and we look forward to talking to you next quarter. Cheers.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.