Taseko Mines Limited (TGB) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines 2016 Third Quarter 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 conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Brian Bergot, Investor Relations. Mr. Bergot, you may begin.

Thank you, Andrea. Good morning, ladies and gentlemen, and welcome to Taseko Mines’ third quarter 2016 results conference call. My name is Brian Bergot. I’m the Vice President, Investor Relations for Taseko. Financial results were issued yesterday October 27 after market close, and are available on our website at tasekomines.com. Before we begin, I would like to introduce the Taseko management 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 third 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 will 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. Also as the operator stated, this call is being recorded and will be available for replay. 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 Q3 results. With increasing head grades from those experienced in Q1 and Q2, along with better recoveries, we saw copper production increase for the quarter by 8% quarter-over-quarter to slightly over 33 million pounds in Q3, with a corresponding decrease in our cost per pound of production by 9% to US$1.89 per pound from the US$2.07 achieved in Q2. Adjusted EBITDA increased by $16.9 million to $9.3 million and earnings from mining operations increased by $14.7 million to $11.6 million. Cash increased because of a number of factors related to accounting matters, which Stuart will discuss in greater detail later in the call. Concentrator throughput was similar to other quarters, and was slightly below our internal targets as a result of some issues with one of our SAG mill motors and harder primary order. We expect to have increased mill throughput going forward. Copper recovery continues to be a focus on mine-site management, and it’s up nearly 2% compared to prior quarters. And with the re-commissioning of our moly plant and improvements in its operation, we expect to see increasing byproduct credits going forward. Our outlook has not changed regarding what we expect to produce over the year. Our focus though will continue to be to reduce the cost of our production. In the past 24 months, we have taken the cumulative $150 million out of our operating cost structure, and we believe we are not finished yet. Going forward, with raising head grades, increased throughput, increased recoveries, and better moly production, with spending being consistent or falling based on ongoing operational improvements, we expect our C1 cost to continue to decrease. As a matter of note, it was interesting to note that Teck this quarter purchased the 2.5% interest in Highland Valley Copper owned by a third-party. Teck purchased this interest with $33 million, equivalent to roughly $0.40 per recoverable pound of copper. If the same evaluation metric is used on Gibraltar for our 75% ownership stake, it will equate to roughly $960 million, considering that many analysts have us trading at 0.5 to 0.8 of our NAV, obviously, under this Teck evaluation metric, we are actually trading at 0.2 of NAV net of debt. I have to reflect back a number of years ago, when this company faced the similar issue. A serious disconnect between the value of our operating assets i.e., Gibraltar and our stock price. When Sojitz purchased their 25% of Gibraltar, which at the time was operating at 55,000 tonnes a day for nearly $200 million, the market was surprised at the transaction price. And our stock re-rated immediately to reflect this third-party validation of our value. The HVC sale just reconfirms what old is new again, $0.40 per pound of recoverable copper reserves in the ground on producing assets is the value of these mines, and on that metric our 75% is worth roughly $960 million. Turning to projects. Florence, our work on Florence continues to move forward. We have one remaining permit to receive from the EPA, as we have now received the Arizona State permit and we expect the EPA permit to be issued in the near future. While we’ve been going through this permitting process, we’ve been actively working on engineering and testing, and to continue to increase our technical understanding of the ore body. As a result of this, we have continued to improve the project’s economics both on the capital and operating side, and we will share that progress with our shareholders in the weeks ahead. At Aley, we continue to re-engineer Aley. The work has again resulted in significant cost decreases in both capital and operating cost. Once this work is finalized, we will incorporate into a new technical report, which we expect to put out in early 2017. With respect to New Prosperity, we were in the final stages of our submission to the federal court regarding the judicial review on the panel’s findings. While the legal process is long and arduous, the argument is straightforward and simple. The panel concluded that our tailings dam design; we have a seepage rate 10 times or an order of magnitude greater than what we and our hydrological consultants predicted. As a result of that, the panel concluded significant adverse effects would occur. Well simplistically, someone added up the numbers wrong for the panel. They used NRCan’s total seepage rate versus the component of our seepage rate, and we had no opportunity to rectify that mistake before the panel issued their reported. We believe the court will see the error and rectify it. Earlier this week, we applied for a notice of work to undertake detailed hydrological work required for British Columbia mine permit - permitting process. We expect this work to begin in the New Year and that impact [ph] approximately four to six months. Expiration at Gibraltar, we’re excited about our newly discovered copper, gold and silver zone on the northwest of our property. We’ll shortly have a drill rig drilling holes on the discovery and anticipate further drill results towards the end of the year. I’ll now like to turn the call over to Stuart.

Okay, thanks, and good morning, everyone. As Russ has already noted, our third quarter financial results were a significant improvement over the first-half of the year. Earnings from mine operations before depreciation were $11.6 million for the period and we reported adjusted EBITDA of $9.3 million. Revenues of $56 million were generated from sales of 22 million pounds of payable copper and 75,000 pounds of molybdenum. Those amounts represent our 75% share of Gibraltar sales volumes for the period. Our realized sales price in the third quarter was $2.15 per pound, which was in line with LME averages. We maintained our total site operating cost at the low levels achieved in recent periods. And so the increased copper production over the same cost base led to lower unit costs. Total operating costs fell to a $1.89 per pound produced, which is 9% lower than the previous quarter. And we expect that downward trend to continue as we get into higher grades in Q4, and as we realize the full benefit of moly byproduct production. The GAAP net loss for the period was $15.6 million or $0.07 per share. After adjusting for a $5 million unrealized foreign exchange loss, we’re reporting an adjusted net loss of $10.4 million, which is $0.05 per share. Although, we had positive operating margins for the quarter that did not translate into positive operating cash flow as we had $20 million of negative working capital adjustments. These working capital items relate to three things. A $7 million increase in accounts receivable, due to the timing of cash receipts around quarter end; a $6 million increase in copper concentrate inventory due to shipping delays; and a $6 million increase in ore stock pile inventory, as we added some lower grade ore tons to the stockpile in the quarter. These working capital movements are a normal part of our business, and they should all reverse in future periods. But for this quarter, they were the main reason that we had negative operating cash flow of $7.5 million. CapEx for the period includes $2.7 million at Gibraltar and $1.7 million of capitalized cost at the Florence and Aley projects. And third quarter cash flow has also included $5 million for equipment lease payments. We also had an accounting reclassification of $7.5 million of cash on current to long-term assets. This is cash in a Taseko bank account that has been pledged as security for a letter of credit for reclamation obligations. This isn’t a new arrangement. It’s just an accounting reclassification, and a comparative balance sheet has been adjusted as well. At the end of the third quarter, we held cash and cash equivalents of $64 million. Looking back over the first nine months of the year, we had net cash outflows of $26 million from operating and investing activities, that’s due primarily to lower than average head grades at Gibraltar, lower copper prices and working capital adjustments. And this was all funded by proceeds from the new credit facility entered into in January. As Russ described, we’ve now moved into a period of higher grades at Gibraltar, and cash flows are expected to improve significantly over the next year. At current copper prices and exchange rates, we expect positive cash flow from operations will cover all of our working capital requirements and debt service costs over the next year. Looking ahead to 2019, the company has significant debt maturities in that year, as our $70 million senior security credit facility and the $200 million senior notes will both mature. At current copper prices cash flows from Gibraltar may not be sufficient to meet these repayment obligations, and we may need to arrange refinancing prior to the maturity dates in March and April 2019. Company may seek to raise additional capital through new debt or equity financings, through asset sales, including joint ventures or royalties, by renegotiating terms with the existing vendors, or by redeeming or repurchasing senior notes on the market. The debt maturities are still 2.5 years away, but the company does evaluate these alternatives from time to time. And our objectives are to ensure we address capital requirements, minimize our cost to capital and maximize shareholder value. And with that, I’ll turn it back to Russ.

Thank you, Stuart. Operator, I’d like to open the line for calls, please.

Thank you. [Operator Instructions] Our first question comes from the line of Brett Levy with Loop Capital. Your line is open.

Hey, guys. Have you repurchased any bonds in the open market recently, and can you give a rough sense as to sort of where and your appetite kind of going forward? I mean, it sounds like fourth quarter will be a better quarter.

Hi, Brett, it’s Stuart here. We’ve not repurchased any notes on the market. I think priority one right now is maintaining liquidity and protecting our cash balance. So it’s not something we’ve done to this point.

And then in terms of like - I mean, you guys have made tremendous progress on the cost front. Are there additional initiatives to take your cost down further or is that just going to be more of a play on moly prices and byproduct credits and that sort of thing?

I think we just have to continue to keep looking for areas that we think we can make improvements on and we have a list of them to be able to keep working on, Brett.

Got it. All right, I’ll pass the baton. Thank you.

Thank you.

Thank you. Our next question comes from the line of Wayne Lam with RBC Capital Markets. Your line is open.

Hi, just a question on the new zone to Northwest, just wondering if that area falls under the existing permitting. For example, like if you guys did confirm the higher grades there, would you be able to start mining right away or would you need to get a permit?

Well, you just have to put - we have a mining lease and then it’s included in the mining lease, and - but even if you - the way permitting works these days, you still have to apply to the government to do what they call Notice of Work applications. So for the last, we put a Notice of Work to drill these holes, what, about two month ago, John?

Two months ago, yes.

And received - we just received the permits about two weeks ago, that’s why we are going and drilling there. But certainly if there is something that looks like it’s a minable reserve, then we will cross that permitting bridge when we come to it. But certainly on a brownfield site like we at Gib, it’s significantly easier than if it was a greenfield.

Okay, thanks. And then, just wondering on the copper grades that you guys are expecting going into 2017, are the grades expected to be somewhat in line with this quarter or are you guys expecting even higher grades from what we’ve been seeing this past quarter?

I think, they’re like anything, they’re little sinusoidal. So but - they’re like a slinky, they’ll go up and down quarter-over-quarter, but generally speaking, will be around 0.3.

Okay. And I guess you guys have just briefly mentioned just on the, I guess, outstanding debt. Have you guys looked into any asset sales or shoring up the balance sheet a little bit?

No, it’s not something we’re actively looking at right now. But we just - certainly an option as we move forward, but there is still lots of time. We still have two-and-a-half years for those maturities and there are other things that we think we can do before we get to that point.

Okay. And then just last question, is the strategy to continue to keep purchasing the - or hedging the copper production with the put option?

Yes, yes, that’s right. And in fact, we’ve got put options now, the 2.10 strike price which cover us out to January, so for the next four months.

Okay.

And, yes, our plans will be to look for opportunities to continue that further into 2017 when we get the chance.

Okay. Yes, that’s all I had, thanks.

Yes, thanks.

Thank you. Our next question comes from the line of Derick Ma with TD Securities. Your line is open.

Good morning. In terms of mill throughput at Gibraltar, I was just wondering what kind of initiatives you guys have or currently being undertaken, and is there any concern in terms of hitting mine capacity heading into Q4 and into 2017? Thanks.

Well, Hi Derick, it’s John here. The goal is to reach the target tonnages. There is not anything that we need to do to increase capacity other than hit our targets. We had some mechanical issues this quarter. I believe those are taken care of. So we should be back up in the 85,000 tonnes a calendar day average moving forward. And then, more importantly, we’re really focused on getting our recovery back and we’re seeing that over the last couple of months. There is been a bit more of operation strategy change doing at a steady pace and get the recovery out of the ore to extract as much as we can from what we get throughput.

Okay, thanks.

Thank you. [Operator Instructions] Our next question comes from the line of CJ Baldoni with Principal Global Investors. Your line is open.

Yes, hi. Did you take full advantage of the power deferral that you have available to you and do you expect to continue to do that?

Hi, CJ, John here. Yes, we did and so there is a deferral of about $1.5 million a month that’s been going on for - when did that start, Stuart, March?

Since March.

Since March, yes.

Yes.

Okay. And you expect cash flows to improve. Could you maybe layout what you think the cash balance will be at the end of the year and maybe into early part of next year?

Well, I mean, obviously subject to copper prices and exchange rates and all kinds of variables. But where we sit today with current prices, we expect to generate a little bit of cash in Q4. And we expect to grow the cash balance through 2017. So, yes, it’s pretty much where we are. Unit costs are coming down and our cash flow breakeven point is dropping with that. So we really - as we noted, really expect improvements in our cash flow.

And it changes. As you can appreciate, pretty dramatically the Canadian dollar goes US$0.70 and the copper price goes to US$2.25 or US$2.30, it’s just like a double-whammy. So everything changes. So to predict what potentially we could generate is pretty difficult.

Yes. I was really just meaning at current prices. I understand. And then lastly, so you haven’t - you answered the question about asset sales, but which you - JVs fall into that bucket too or is there anybody you’re talking with. We have some projects that look like they have some pretty good potential. They’re advancing nicely. At what point do you seek to kind of move those forward and are you thinking bringing on a partner might be the way to go?

Yes, that’s exactly what we’re thinking, and that’s exactly what we’re doing.

Are you speaking with people now or you haven’t really engaged anybody.

Yes, we’re speaking with people.

Okay, all right. I’ll turn it over. Thank you.

Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to management for any closing remarks.

Thanks very much, folks. And we look forward to seeing you next quarter.