Taseko Mines Limited (TGB) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines 2017 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll 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 turn the conference over to your host, Mr. Brian Bergot. Please go ahead Sir.

Thank you, Christen. Good morning, ladies and gentlemen, and welcome to Taseko Mines' 2017 second quarter financial results conference call. My name is Brian Bergot. I am 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'd 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 financial 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, and thank you for joining us today. My comments as they were last quarter are going to be brief as our results clearly speak for themselves. This quarter Gibraltar sold roughly 40 million pounds of copper and concentrate approximately the same as we did in Q1. Moly production was down slightly as a result of lower head grades. Freight spending continue to be well-maintained at just CAD8 per ton mill and has been consistently under CAD10 per ton mill since Q2 2015. As a result, we generated $62 million of cash flow from mining operation in Q2, which resulted in adjusted EBITDA of $43 million and adjusted earnings of $0.06 per share. Over the last nine months, the company has generated approximately $192 million of operating cash flow and $147 million of earnings for mining operations, which is a pretty stellar performance for the company with a margin capital of $400 million. We anticipate our financial performance as exhibited over the last three quarters to continue in the quarters ahead. As it appears, the copper price wants to advance well above the prices we've received in Q1 and Q2 and that's reflected in the price today of approximate US$2.88 per pound. While the copper market appears to be balanced at this time, the anticipated deficit so long talked about is beginning to present itself and we anticipate higher prices in the months ahead based on no shocks to the macroeconomic system of the world and in particular China. Thus, fluctuations are a head grade quarter-over-quarter and quarterly metal production will largely offset by strength in copper and moly prices. As most of you know the water fire situation in around Williams Lake resulted in evacuation of orders for many communities, including Williams Lake itself. These evacuation orders affected our employee’s ability to come to work. This in turn affect Gibraltar and our production in July. We've effectively returned to normal operations over the past week as evacuation orders have been lifted and I might add, our staff at site has done a stellar job in keeping the operation running over that very difficult period of time. While we made production for most part of the month by mining mostly our stock pile, we were nonetheless effective. It's too early at this juncture to tell the effects on our mine plan as we need to reconcile overall head grades with ore mine -- with the ore we mine from the pit during this period, along with the stockpile feed and those interactions of the two previous feeds. However, looking forward at a 40,000-foot level, we anticipate being able to sell roughly 36 million pounds to 37 million pounds of copper and concentrate in Q3 and as a result of the rise in copper prices, we have seen recently revenue in Q3 and our operating margins to be similar to those generated this quarter. Projects; we're continuing the events flowing with on the ground activity. We've approximately $9 million worth of equipment on site for the PTF (Production Test Facility). We've completed a number of point of compliance wells and we look through on where copper prices are going, our balance sheet looks as we do and develop our 2018 budget, I anticipate asking the Board for approval to be in construction of the plant facility sometime in the next quarter or so. So, we're excited about moving forward on that project And new prosperity, we're working with the BCEO on our permit amendment and we've just been given a permit from the BC Ministry of Mines, Energy mines to do more investigative work on the site there and the basin, which will help us develop a better understanding of the geotechnical aspects of the basin and the ore body, so we can advance discussions in a pass forward for prosperity. With that, I'd like to now turn the call over to Stuart.

Okay. Thanks Russ and good morning, everyone. It's certainly been another quarter, another strong quarter in terms of financial performance and I can provide a few more details on the second quarter numbers as well as our recent debt refinancing. Earnings from mine operation before depreciation were $46 million in the second quarter and adjusted EBITDA was $43 million. We've now had three consecutive quarters of strong earnings with $135 million of adjusted EBITDA over the last nine months. That's the result of increased metal production and prices. Second quarter revenues were $100 million from the sale of 30 million pounds of copper for approximately 600,000 pounds of molly and those amounts are reported on a 75% basis, based on our share of Gibraltar. The realized copper sales prices was $2.61 per pound for the second quarter and since the end of the quarter, copper prices had a great run and are currently 11% higher than the average LME price in Q2. Total operating costs were US$1.31 per pound, which is similar to the previous quarter and 37% lower than the second quarter of 2016 due to increased copper and molly production and a higher allocation of capitalized stripping cost. We capitalized $18 million of shipping cost in the quarter, which relates to waste stripping activity in a new section of the ground pit. Other significant items on the second quarter P&L include a $6.2 million unrealized foreign exchange gain on our U.S. dollar debt, a $13.1 million loss related to the refinancing of our lunch and a $4.9 million loss in a copper call option that was previously issued to a lender and canceled this quarter. GAAP net income for the second quarter was $5.2 or $0.06 per share. Adjusted net income was $14.3 million or $0.06 per share and that excludes the unrealized foreign exchange gain, the accounting losses on the settlement of debt and the copper call option and related tax adjustment. Turning to the cash flow statement now, Taseko has generated a $102 million of cash from operating and investing activities in the first half of this year, which includes $44 million from the sale of a silver stream in Q1. In June, we used $72 million of our cash along with the proceeds of a new senior secured note offering to redeem our $200 million U.S. senior notes at par value to repay the right type secured credit facility and the related copper call option and for transaction cost and fees. The net effect of this transaction is that we've reduced our long-term debt and other financial liabilities by $63 million since the start of the year and we've also extended the maturity date of our long-term debt from 2019 to 2022 and of course, we continue to maintain a healthy cash balance as we ended June with $97 million in the bank. The balance sheet's in good shape. We've also taken advantage of the recent run-up in copper prices and extended our Price Protection Program by adding put options at a strike price of $2.70 per pound for 30 million pounds spread over the fourth quarter of this year and the first quarter of 2018. I think it's important to repeat that this is downside protection only and shareholders continue to have full exposure to the upside of the copper price. And with that, I'll turn it back to Russ.

Thank you, Stuart. Operator, I'd like to now open the lines for questions.

[Operator instructions] Our first question comes from the line of Matt [Verderosa] from Jefferies. Your line is open.

Yeah. Good morning, guys. Thanks for taking my questions. I guess first just on capital spending can you tell us what you're planning for the full year and then maybe just reiterate or give a little more detail around the capitalized stripping, you said I think $18 million in the second quarter. How much are you -- how much are your full CapEx will be capitalized, strip and what exactly does that pertain to again when do you plan to move into that zone that you're stripping currently?

Sure. Yeah, hi Matt. It's Stuart here. Capitalized stripping, yeah, that's an accounting allocation. I think we capitalized $18 million in the quarter. Going forward obviously, what we tell people, we don't give specific guidance on that, but what we say is that our total site spending will remain at a consistent level when you include operating costs and capitalized strip. The allocation itself is a pretty complicated accounting function and we don't really give guidance on the outcome, but as you said it relates to stripping in a new section of the ground pit. Other sustaining capital, I don't think there's any big items on the horizon as expected to continue at the rate we've been seeing, which is $2 million or $3 million a quarter going forward.

And Matt, we're right in the process of developing our new 2018 budget, so it's a little bit influx in terms of where we want to allocate any capital spending, but the likelihood like I said in my comments will probably be towards moving forward.

Okay. And so just to be clear, just for modeling purposes, the first half of the year, capital expenditures through the cash flow statement something in the order of CAD40 million, what's the expectation for the second half of the year?

Indeterminant right now.

Indeterminant. Okay. Maybe just one more for me than, what's the current expectation? I know you said you got to go back and take a look at the mine plan given some things that have taken place, but you've been able to get a plus 0.3% head grade through the mills in the first of couple quarters here. What's the expectation for the second half there. Is there -- are you still gravitating back towards 0.25 at some point or how do you see that playing out over the next few quarters?

I think what we have to look at is the guidance we gave on how much we're going to sell and once we figure out our mind plan going forward, then what you are going to do with it in terms of developing our 2018 budget and that will dictate the path forward. I know you guys get focused on head grade. We get focused on how much money we're going to make.

We like looking at the money you're going to make too, but we got to try to forecast that going forward. So, the more information you can provide, we can talk about all the money you're going to make, the better off we'll all be. So, appreciate your time, I'll pass it on thanks.

Our next question comes from the line of [indiscernible] from Scotiabank. Your line is open.

Hi. Good morning, guys. Furthermore, the same line of questions to be honest here. I think you previously guided this year of a head grade of point 3, you've been above that in the first half by quite a bit. Do you expect that to trend down in the second half of the year or could we stay above the 0.3 level for the rest of the year?

Well we're definitely not going to stay above 0.3. So, we'll be trending down. I think -- but like I said, we haven't figured out where it's going to head and now it's been further exacerbated with this fire situation. This part of the issue with the second half of the year with blending of the stockpile, using the stockpile and stripping of the bottom end of the ground at pit and then how that blends into the new push back and when we access ore there. So, it's in a little bit of block, but we know the average copper equivalent head grade for the ore body of 0.275. So, it will be somewhere around there going forward at some point.

Okay. And the earlier comment there about production and cap stripping like on a total base is not really changing much. So, I believe the two combined with something around $65 million in the second quarter that was up I guess by about $10 million from the first quarter. But is something around the $60 million a quarter the right way to think about it, forgetting about the allocation between cap stripping and production cost?

For the whole site operating cost, you're in the right range.

Okay. And then just on your comments about refocusing a little bit on moving Florence forward, can you give us an idea of how much capital that could be with respect to building I guess the test facility if that does get approved?

About $25 million I think.

Yeah about that rough and ex U.S.

$25 million U.S. and that would be I assume over like 03, 2018 or I don't know how quickly that would happen?

If we push the green button it'll take about 10 months.

10 months, okay. All right. Thanks a lot.

It would be just -- it would be just like upgrading at $25 million cap tomorrow will be normal course of construction type, where you probably see the maybe the bulk of spending in Q1 of 2018 or something Q2. Depends on when you push the button, but yes. So, sort of three or four months into the just when you hit the peak spending and then it peaks out. Until you finish, how can you start running.

Okay. Thanks very much guys.

[Operator instructions] Our next question comes from the line of Alex Terentiew from BMO Capital Markets. Your line is open.

Hey. Good morning, guys. I am going to go away from the capitalized stripping questions this time I think most of my questions on that have been answered but two other things about molly production, you guys have had two pretty solid quarters or two or three anyways on molly there. What sort of -- and you said grades have been coming down, they came down in Q2, what sort of grades are you looking at therefore I guess for the next couple quarters and what sort of recoveries are you seeing in that circuit?

It's pretty steady on grade Alex and we've got the recoveries figured out, planned. So, I expect to see similar production quarter-by-quarter basis. It might swing a little bit on grade, but it's not significant for your model. You can just take in the same number going forward.

Okay. Makes sense. I know before you guys were talking about prior to the shutdown I think you were in the 40%-odd recoveries and I think 50% plus or 50% is kind of what you were hoping for but it sound like you're hating those numbers now then?

Yeah, 50% is steady-state.

Okay. Another question on I know you said your mine plan is influx, but I just wanted to know your thoughts? I think you mentioned a quarter or two ago and I guess this even goes back to what you guys did, you implemented I guess it was maybe two years ago now, where copper prices fell, you adjusted your mine plan with the cut off grades and strip ratios because you said about maximizing cash flow. With copper prices now going back up, are you guys looking to do a bit of a reversal there and change that at all or what's your -- just trying to gauge what you're thinking at the moment?

Yeah, we're always looking at that Alex and there might be slight adjustment where you strip more and give slightly better head grades. It's one of the reasons it's difficult to answer the detailed questions what's your head grade is going to be next year. It doesn’t really work that way. We've got some flexibility in how to deal with it. So, we're looking at that all the time, like I said we're trying to maximize our cash flow and maximize our profitability and those are the things that mine engineers are supposed to do in these type of circumstances. So just like you said, when we moved our cut-off rate down, we've turned move marginal stock pile material in the ore and now going forward if we can increase that head grade, just marginally, you can see the impact that it has on our profitability.

Okay. That's it for me. Thank you.

Thanks.

And I am showing no further questions at this time. I would like to turn the call back over to the presenters.

Okay. Folks. Thanks very much for joining us today and have a nice rest of the summer cheers.

This concludes today's conference call. You may now disconnect.