Taseko Mines Limited (TGB) Q2 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Taseko Mines 2016 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today’s conference, Mr. Brian Bergot. Sir please go ahead.

Thank you, Nisi [ph]. Good morning ladies and gentlemen and welcome to Taseko Mines’ second quarter 2016 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 close 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 second quarter business and operational results, we will open the phone lines to analysts and investor 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 to discuss our Q2 results. During the quarter, we effectively mirrored our Q1 performance, with weakened profit basis and Canadian dollar denominated terms, our revenues decreased in Q2 to CAD55 million versus CAD58 in Q1 with effectively the same metal sales. Our revenue was directly impacted by the exchange rate between the Canadian and U.S. dollar quarter-over-quarter. In Q1, for example, our Canadian denominated real copper price was $2.88 per pound versus Q2 of $2.73 a pound, a $0.15 per pound differential, which effectively took the operating breakeven achieved in Q1 to a $3 million operating loss in Q2. The strength of the U.S. dollar over the past few weeks, this is reversed and presently copper at $2.25 per pound at today's exchange equates to roughly CAD4 per pound. Looking forward, on a GAAP basis, we lost approximately $0.09 per share. Concentrate availability performance affected overall mill throughput. While we had strong performance per operating day per calendar day was lower in budget. We expected with the 0.25 head grade versus Q1 head grade of 0.23, we would produce more pound. Mill availability was down for the quarter in both mills into the 80s versus budgets of over 92%. We have our upgrade completed and we've returned to prescribed mills availability and throughput tonnages. So, we should see better recoveries in tonnage going forward to year end. We expect head grades to average 15% to 20% higher over the last half of the year and looking forward into 2017, we expect head grades to be 0.3% copper. Although, we're still working on the details of the 2017 budget and plan. We continue to be aggressive on site operating cost per ton mill and with the efforts we've undertaken over the last year around the mine plan that worked rationalization and vendor initiatives we have continue to help stabilize our cost structure. And important productivity improvement that began in Q1 that has accelerated in Q2 has been the shortfall backfilling a mined out portion of the Granite Pit. All productivity factors relating to shovels and trucks are way up. The truck productivity nearly 25% above historical averages. As a result, you'll see from our production results, we mine 26.2 million tons of total material in Q2, versus 21.5 million tons in Q1. An extra 5 million tons while maintaining our overall spend. This additional stripping in order stockpiling will event the higher grade ore release earlier and help us set-up a softer Q3 and Q4 and into 2017. With the current stabilization of both the metallurgical coal and steel business, we believe we can foresee a sustained price from moly in the not too distant future. Sierra Gorda operations, a serious technical issues around its moly production. And its undetermined how they will solve that technical issue with moly plant having operational issues, basically 30 million pounds of projected moly production from Sierra Gorda is in limbo. This likely production certainly will have an impact on the market. And added to the fact that Los Bronces [ph] will not be building a moly plant. We expect moly price in the not too distant future to increase and a result, we're actively moving forward on restarting our moly plant. In the past quarters, I spoken about our off-property costs and treatment and refining cost to ocean freight, to railways, and you can now appreciate in this quarter's result, the impact those are having. In the last year, we have reduced these costs from $0.43 a pound to $0.33 a pound. On a 140 million pounds annualized production that is roughly CAD19 million to CAD20 million flowing through the bottom-line today as opposed to year ago. When copper prices turn up, these savings will stay intact if we have a long-term contracts in place on these contracts for fixed terms. So, we're extremely happy with what we have accomplished over the past 18 months. We've reduced our overall operating cost per ton mill from over CAD11 to roughly CAD950. That equates $45 million per year. Plus we have saved a further $20 million in other areas. Effectively, we have eliminated nearly 65 million in operating expense in this period and this is why we're continuing to operate today. We'll keep our noses to the grinding stone, rather improvements in the month ahead. For example looking back on a year-over-year basis, for the six month we have reduced corporate G&A by $1.1 million, most of that being salaries as we've reduced bank [ph] over headcount like 10 in all areas, from accounting to engineering. Looking at our project, Providence of British Columbia has accepted our request to amend a new prosperity EA certificate and we've applied for an order support from the Mine Ministry to go and perform work in advance of mine permitting. This work will help inform areas of concern. The Federal government raised, and the Federal panel raised regarding water discharge from our tailing response. A lot of folks continue to be conserve -- confused about Federal and Provincial jurisdictions on mine development. We're doing work on BC legislation, which has no relationship to Federal legislation. The Province is responsible for mine improvement. They and they alone. The Federal government has to grant authorizations under Federal statutes. Authorization under [Indiscernible] waters, authorization to use explosives, and authorizations under fisheries, which are mine [ph] regulations and pad, which is a harmful alteration of fish habitat. The only issue really we have to deal with are fish and fish habitat, i.e., creeks, which will be effected and [Indiscernible] schedule too. This were from mine permitting will clarify those two authorization with the Federal government. I'd like to now turn the call over to Stuart.

Thanks Russ, and good morning everyone. Company realized the loss from mine operation before depreciation of $3 million for the second quarter, that's on cost of revenue of 60 million. Revenues are generated from sales £22 million of payable copper, which is our 75% share of Gibraltar. Our average realized sales price for the period was $2.13 per pound and that's in line with the average. Sales volumes and the U.S. dollars realized sales price were both in line with the previous quarter, but as Russ described, the Canadian dollar exchange rate was stronger this period than in Q1 and as a result, the revenues were $3 million lower. On the cost side, we were able to maintain total site operating cost at a low level --. Total operating cost were 207 per pound produced, which was lower than the previous quarter due to higher head grades and would have been even lower if not for the stronger Canadian dollar. Unit operating cost should trend down, as we get into higher grade later this year. Other significant items affecting the P&L this quarter, included 1.9 million of cost related to the proxy contest and a Special Shareholder Meeting that as [Indiscernible] in January. $2 million unrealized foreign exchange on a U.S. denominated debt and an unrealized derivative loss of 300,000. The GAAP net loss for the second quarter was 19.4 million, which is $0.09 per share. Adjusting for unrealized ForEx and derivatives and the cost of proxy contest over an adjusted net loss of 19.8 million, was also $0.09 a share. Adjusted EBITDA for the period was negative 7.6 million. I'm turning to cash flows for a minute. This is an area that we're obviously focused on. Operating cash flow is for the period for the quarter went negative 4.2 million. This amount includes the Gibraltar operating loss, corporate G&A and project cost, and also cost related to the proxy contest. Our operating cash flow benefited from the new power rate deferral agreement with BC Hydro. We entered this program in March at 3.6 of electricity payments were deferred in the second quarter, that's equivalent to about $0.16 per pound. CapEx for the period was just over 4 million and includes 2 million of capitalized stripping, 1.1 million of other sustaining CapEx at Gibraltar, and 1.2 million at Florence and Aley projects. In the second quarter, we drew additional loan proceeds of 47 million under the new secured credit facilities, signed earlier this year. The $70 million facility is now fully drawn. Second quarter cash flow also included 15 million of debt service payments which includes a bond interest payment in April and ongoing monthly payments for equipment leases. We ended the second quarter with a healthy cash balance of 89 million, which is up from 66 million at the end of Q1. Looking ahead, the current copper price and exchange rate, we expect cash balance to decline slightly in the third quarter and then stabilize and begin to grow again as we move into the higher grade later this year and into 2017. So, overall, we're comfortable with our liquidity. We also have a put options in hand for the third quarter at a strike price of 2.20 per pound, which provide some downside detection in the short time as well. And with that I'll turn it back to Russ.

Thanks Stuart. Let's now, operator, open the lines to questions.

[Operator Instructions] And the first question will come from the line of Craig Hutchison from TD Securities. Your line is open.

Good morning, everyone.

Hi, Craig

You mentioned the grades ending this year at above 0.3% copper and you are having firmed up your plants for 2017 but the 0.3 or something that you could have carrying to good balance of 2017 or is that a optimistic target just giving that and I guess the grand picture for next few years?

Yeah, I think well, that's reasonably good at it.

Okay

I think we could just plan on that for 2017.

Okay. Is there a shift in your plan? You're trying to target higher agreements material just to consider current prices is that always sort of part of the plan?

Well, this is part of plan, I will say from the ore body. So it's for two of this --we get this agreed when we do we were probably looking at what four to six good quarters of that kind of grade, certainly through 2016 and into 2017, yeah.

Yeah, Craig, what we're doing is we are trying to move some of that grade forward in Q3 and Q4 2016. But 2017 pretty steady. It's Gibraltar it cycles back and forth 10% above or below the average. So, we're going to go into above average cycle.

Great.

The more pounds we produce the lower cost per pound would be.

Great. Okay. If I could shift to Florence for a moment, just can you provide an update on the permit. I know that the underground injection control permit the EPA has done -- issued a public hearing I think last year and for comments where are they with that process? And if that contingent on the Arizona actual protection permit?

Hey, Craig, John here. No, they two are separates. All they related I mean they got the same information and then the EPA did their UIC common period over the last year. They keep telling us they are almost prepared to release, the permits, and we’re expecting it. Soon the Act for Protection Permit has been to review common period and we should see that certainly also.

Okay.

So, those are two major permits they left to complete for the PJF [ph]

All right. Thanks guys.

And continuing upon that Craig as we have been doing a lot of technical work on the project as we speak. And we're refining the economics on an ongoing basis based on information. We have not stopped doing technical work on that project while we waited for the permitting -- the finalization of the permitting process.

Is it like bench scale metallurgical work or?

It's more than bench scale. What we’ve done is scale up from what it was done in prefeasibility study by about 10 times. So, we're running a sample which is essentially 22 feet in length and this is confirming all of the assumption that were in prefeasibility study so we are just coming to the end of that. Set the [Indiscernible] to do, that simple.

Okay. Thank you.

Thank you. Our next question will come from the line of Pierre Vaillancourt from Laurentian. Your line is open.

Hi guys. Could you address your strategy for dealing with your total debt increased quarter-over-quarter and so just wondering how you planned to deal with that going forward?

I think that we’ve too keep this debt in perspective, Pierre. Stuart is been working on it, obviously trying to understand the whole debt structure and what’s happening in the capital market and other things. But we’ve to look at -- this debt does not come due till basically three years from now. So, there is -- as you well know, you’re going to run the business maybe not long as I have, but pretty near as long and certainly lot of things can change very quickly in this business. And so in our respect if you look that we're going into higher profit production next year and lower cost of pound of production. We need a very small entries in copper trades and decrease in our operating cost of pound and we can generate some pretty significant cash flow in a very short period of time. So, we have to keep that off balance with maturity of these various debt instruments we are looking at. So, we're balancing the whole lot accordingly. You want to add anything on to that, Stuart?

I guess [technical difficulty] and moving into higher grades, we're going to generate more next year [technical difficulty] time to be having more discussions. Just kind of wait and see and find a right opportunity that works for shareholders and bonds.

Okay. Thanks. So, you're going forward with the additional funds that you've drawn down in the last quarter, what is the interest going forward and what can we expect in the next couple of quarters here in terms of the ongoing payments there and other debt repayments if you are going to make any?

Well, in terms of interest payments, we pay semi-annual interest payments from the bond, so the next one or the last one was paid in April in second quarter and next one will be in October. Those are roughly CAD10 million. And then we pay -- we'll continue to make monthly payments on the equipment leases. Buying with historical rate, that’s it. And then on the Senior Secured Credit Facility, the interest is being capitalized so there is no debt served on that, so there is no payment facility until 2019. So, that’s [Indiscernible] for going forward.

Okay. All right. Okay, thanks very much.

Thank you. [Operator Instructions] Our next question will come from the line of Orest Wowkodaw from Scotia Bank. You’re line is open.

Hi, good morning guys. I was wondering if we would get a bit of more color in terms of what happened in mill at Q2, just in terms of the low throughput number. I mean it seems like 7.2 million tons -- seems like the lowest number in quite some time. Bit surprising just given the time of year weather wise. Thanks.

Hi Orest. This is John here. Yeah we had a couple of break downs which were one-offs, which has to be repaired -- nothing significant in and of itself, but at the same times. But those are running smoothly now I don’t think they would be problem. We did some planned maintenance due, so we coupled them and we ended with those any operating cases we've emplaned.

It's probably best, give or take 2.5 to 3 million pounds of production for the quarter.

Yeah. And were those issues related to mostly the new mill or the old mill?

We had problems in both.

Both, okay. Okay, thanks a lot.

Thank you.

Thank you. And our next question will come from the line of CJ Baldoni from Principal Global. Your line is open.

Yes, hi, regarding the Moly restart, when do you think that that will occur and have you not made the decision yet?

We’ve made the decision CJ, so we're now were -- we’re going to re-hire some people by reagents get the Molly plant started it up -- probably will take us two or three weeks before operating and then another two or three weeks before we got product for sale.

Near the end of this quarter.

Near the end of the quarter.

Okay. And you touched on some of the agreements that you have put in place is the shipping agreement -- is that fully reflected in the off property cost now any benefit to that?

Yes. I would say so. For Q2 it was effectible quarter.

Okay. And the power deferral that shows up on your -- that's accounted for in your cost of production, right?

Correct.

Correct.

Okay. All right. Thanks. That’s all I have.

Thank you. Our next question will come from the line of Alex Terentiew from Raymond James. Your line is open.

Hey guys. Just one quick question I know you accelerated some mining or some stripping of some material to get better access to higher grade ore for later half of this year, which seems to have brought up your strip ratio just a little bit. I think you guys had 2.4 in the quarter. What sort of that number for stripping should we look at for the rest of this year, may be in the next year?

Well, normalize around 1.7 to 2, Alex.

Okay, that’s good. Thanks.

Thank you.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Russ Hallbauer for any closing remarks.

Thank you very much everybody for joining us. Hope you have a good rest of summer and will look forward to talking to you in the fall. Cheers.

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