Taseko Mines Limited (TGB) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines 2018 Q1 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 be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Brian Bergot, Investor Relations. Sir, you may begin.

Thank you, Ashley. Good morning, everyone, and thank you for joining us today to review Taseko’s first quarter 2018 financial results. 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 the first quarter business and operational results, we will open the phone lines to analysts and investors for question-and-answer session. As usual before we proceed, 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 risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. I encourage you to read the cautionary note that accompanies our first quarter financials in MD&A and the related results, news release as well as the risk factors particular to our company. 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. As we indicated in our year-end conference call, we expected production in Q1 to be roughly comparable to that of Q4 of last year, with metal production being affected by the drop in head grade as we developed our new major pushback as lower grade ore is on the top of the Gibraltar ore body. Mine production can best be described as being somewhat lumpy over the past few months, as our operating team experienced those pushback lower grade ores as well as inconsistent metallurgical ores. The ore feed has also had more oxidation than we normally experience when develop these new pushbacks. And as we are still pulling from supplemental ore from the stockpile along with the pit ore, our recoveries went down significantly because of those mineralogical changes. The copper – and we’ve experienced in the past, the copper mineralization is a little bit different than we’ve experienced in the past and it’s taken us some time to work through that. Historically, recovery has been around 86%, 87%. As you all well know, in this quarter, we were 76% as a result of both grade and recovery. So that was unfortunate. As I said at year-end, it would take a number of months to get through this period of lower head grade ore. However, we did not recognize the degree of oxidation we would have – we have encountered. We are now though seeing higher grades from the pit and our recoveries are slowly coming back to normal levels. On the positive side, throughout the – throughput has been excellent as our concentrators are continuing to perform very well. And we rate – ran right around design at 85,000 tons per day and our cost per ton mills has remained relatively constant as it has in the past. And that’s considering our head grade was 0.2% copper. We still manage to generate roughly $12 million of cash flow from operations. We expect Q2 and Q3 and into Q4 to be much improved, as we move back up the grade curve to reserve grade. And as grade improves, recovery will improve and the outcome will be returning to good cash flow and operating earnings through the remainder of the year. For example, yesterday, head grade was 0.25% and we produced over 400,000 pounds of copper for the day. Unfortunately, aberrations are normal course of the business in this – in the mining process. And as in the – and we’re trying to get through these times the best we can when presented with them. And – but as we’ve seen the events of last summer, have continued to linger on operations. Generally, I’ve always spent a lot of time discussing Gibraltar. Obviously, it is our most important asset, presently. However, with our growth strategy coming to fruition with both Florence and Aley in the not too distant future, Gibraltar could be our least important asset, as our group plans unfold. For a number of years, I’ve spoken about the quality of Florence. And generally speaking, I’m not sure if the general investment community give it the respect it deserves in terms of intrinsic value. I guess, I can somewhat understand that considering the length of time it’s taken us to permit the project, the nature of the extraction process in general unfamiliarity of the technical process we will be using. Well, Florence is getting closer to reality than I think most appreciate. As I’ve said before, the overall process is an innovative copper extraction process. However, it’s very common in the uranium business, and our engineering test continues to support those similarities. I urge you to go to our website and see the work that has been completed on the drilling and our plant, and you will see the effort going into this project. We are on-time and on-budget, and we expect to be injecting solution later in the summer and expect to see pregnant copper solution being presented to the plant in Q4 of this year, a few short six months to seven months from now. There is obviously a lot of discussion around greening up the mining business as all businesses, and it’s important topic at this time. To give you an idea about Florence in this regard here a few facts. Energy consumption at Florence will be 2 kilowatts per pound of copper produced versus a conventional open pit mine of the same versus seven for the conventional open pit mine of the same metal production. Fresh water use will be 3 gallons per pound of copper produced versus 41 gallons for a big similar size open pit mine. An important consideration will be the kilograms of CO2 per pound of copper produced and that will be 1 kilogram at Florence versus six for a conventional open pit mine. We will have no tailing bonds, no changes in [indiscernible] (6:24) to the land and the land can be used after operation and with no environmental concerns. It all adds up to the attractiveness in this asset and other aspects beyond just financial, and the value Taseko – to the values Taseko as carbon and water becoming increasingly bigger issues in the future of mining operations. Not only will our overall weighted cost of production drop, so will our overall carbon footprint in other green footprint initiatives. We have invoiced. Stuart will speak about it briefly later, roughly $15 million of the $25 million budget. So we’re more than half done. In fact, probably on the GAAP curve, we’re significantly done more than the dollars indicate. Important aspect is the recent changes to the U.S. corporate tax rate have boosted the NPV of this project by US$80 million to roughly CAD 760 million or $700 million or nearly CAD 1 billion. The question over the next few months may be raised with Stuart in terms of how we finance the permanent SX plant and extraction of wellfield. But with the compelling economics of Florence, we expect that we’ll be able to complete normal debt projecting – project financing. Stuart plans to kick that work off in the fall with the commercial banks. With respect to Aley, we have continued our engineering work aggressively. And the more you engineer a project, the better project one will have. As a result of this work, we have enhanced economics at a lower niobium price and this – and have increased the NPV and the IRR from those in our 2014 technical report. And also, we have engineered in the stage development process dependent on market conditions. The full details of which will be in our technical report update that we will be publishing shortly. We can continue to speak the steel mills around the world on offtake agreements, and we are extremely pleased with the progress we are making in that area. We believe Florence can be operational by late 2021 or early 2022, and Aley shortly thereafter, if all pans out. I would now like to turn the call over to Stuart for his remarks.

Hey thanks, Russ, and good morning, everyone. I’m happy to provide some further details in our first quarter financials that we released yesterday. And as we described in the release, our copper production and grades this quarter were well below normal levels. Credit score has a knock-on effect on earnings, although we still generated $13.5 million of earnings from mine operations before depreciation and adjusted EBITDA of $7.5 million for the quarter. Gibraltar’s copper sales volumes were just under 23 million pounds, which was the same number as our quarterly production as we are able to maintain a low inventory level at quarter end. The average LME price in the period was US$3.16, which is higher than recent quarters, but we didn’t get the full benefit of that as the copper price dipped at the end of the March. And for accounting, we revalued our receivables at the quarter end price of $3.04 per pound. Total provisional price adjustments on copper were negative $4 million over the quarter, resulting in a realized copper sales price of US$2.98 per pound. Moly prices strengthened significantly in the first quarter, rising from about $10 a pound at the beginning of the year to well over $12 by quarter end. Our byproduct credit in the first quarter increased to $0.23 per pound of copper. Based on our 75% share of Gibraltar volumes, our total revenues for the quarter were $64 million, which is obviously a lower amount than recent quarters and is the main reason why earnings are below normal levels. On the cost side, our total site spending continues to be fairly consistent from quarter-to-quarter, but our operating cost per pound increased this quarter to US$2.33 because of the lower copper production and lower capitalized stripping. We also drew down our lower grade ore stockpile in the quarter by processing approximately 2.5 million tons of the stockpile. When we do this, we take the accounting book value of the stockpile ore to earnings and this resulted in a non-cash inventory expense of $3.9 million and additional depreciation expense of $1.3 million in the quarter. We’re continuing to pursue an insurance claim related to Cariboo wildfires from last July, and we advanced work on the claim in the first quarter, but the amount hasn’t been annualized. We estimate that our 75% share of the claim will be in the range of $4 million to $10 million, and we recorded a $4 million insurance recovery in the quarter, which is at the low end of the range. Other significant items on the first quarter P&L include an $8.3 million unrealized foreign exchange loss on our U.S. dollar denominated debt and a $1.2 million unrealized gain on copper put options. The GAAP net loss for the first quarter was $18.5 million or $0.08 per share. After adjustments for the unrealized foreign exchange loss and derivative gain, we’re recording an adjusted net loss of $11 million, which is $0.05 per share. Operating cash flows for the first quarter were $12 million and were offset by cash outflows for investing activities of $24 million. As a result, our cash balance reduced to $64 million at quarter end. CapEx in the first quarter included $15 million of capitalized stripping cost in the new section of the Granite pit, and we also spent CAD 14 million or USD 11 million on construction of the Production Test Facility of Florence. That project is on budget, and we have about USD 10 million of remaining CapEx to spend this year. Looking ahead, we expect to return to normal reserve – we expect the return to normal reserve grades will lead to significant improvements in quarterly earnings and operating cash flows. As I noted on the year-end call, we may see a small decline in the cash balance in the next few months as the majority of the Florence project spend is weighted towards the first half of the year, and we also have a bond interest payment in June. And then we expect to begin growing the cash balance again in the remainder of the year. And with that, I’ll turn it back to Russ.

Thank you, Stuart. Operator, we will open the lines for questions please?

Thank you. [Operator Instructions] Our first question comes from Alex Terentiew of BMO Capital. Your line is open.

Hey, good morning, guys. Just two quick questions. First is on Aley. Interesting to hear that you guys are advancing that one. Is that – or I know, you’ve always had it kind of under your belt in doing some work there, but is the plan to do this technical report updated, is that driven by the increased interest from steel mills? Or is this just something that you guys – you have this deposit, you think it is more valuable and you want to kind of get it out there and show that – show what – show the potential of it?

Yes, I think that’s probably pretty accurate.

Okay.

But it also helps in discussions. We need technical report updates if you’re in discussions with steel mills. They don’t have to be public documents. We can publish a technical report and give it to them with inside a nondisclosure agreement.

Okay. Yes, I mean, I don’t know a whole lot about the niobium market, so looking forward to kind of seeing that report when it comes out. Second thing, I know grades in Q1 were low as planned, and you kind of talked about how grades are coming up. I mean, for the quarter on whole, I mean, is it kind of point – you said, yesterday it’s 0.25%. And obviously, you guys understand this more than anybody, but 0.25% versus 0.22% or 0.23%. I mean, that little bit on a low grade makes a big difference. So should we expect kind of a transition over the quarter up to 0.26%? Or I’m just wondering how quickly that transition from the 0.2 to 0.6 is going to happen, I guess?

I don’t know. It depends on how quickly we access the ores. So I think it’s a general rise. I see – we see it rising across this quarter and into Q3 and Q4.

Yes, we’re in the better ore now, Alex, so for the rest of the year, we expect to see the average on the – deposit average of about 0.25% or 0.26% for the rest of the year, total.

Okay. and I…

So I could – it’s effectively an arithmetic average, right? So if you have a quarter at 0.2 to get back to 0.25%, 0.26%, you got to go higher and then back lower, and that’s pretty much the – it’s almost like a sinusoidal curve, for lack a better words. Hey, John, in terms of how our grade goes up and down like that?

Yes, it’s through mine planning. We’re trying reduce the amount of the swing, but we can’t eliminate it. So – and this is what we said, with Gibraltar, how long is it. It tends on a quarter-by-quarter basis to be 10% above or below the average. So for the rest of the year, I expect to be the average, not including the first quarter.

Okay. All right, makes sense. Thanks guys.

Thanks, Alex.

[Operator Instructions] Our next question comes from Craig Hutchison of TD Securities. Your line is open.

Hi, guys. Just a question on the insurance claim for – you guys mentioned $4 million to $10 million. Have you gotten any feedback from your insurance company? Whether $4 million is a reasonable amount? And what would be the timing of the payment for that claim?

Yes. In terms of the amount, absolutely, we have had some back and forth with the insurance companies in order to kind of report that range and record that $4 million through our P&L. We’ve got a high comfort level in that. In terms of the timing, that’s – I would say, it’s certainly going to be settled in the next two quarters, but they kind of put a specific date on it. It’s – again, not quite sure, but certainly, I would say by the fall we’ll have this settled in any of the bank.

It’s – I’ve been involved in a couple of insurance business and roughly in insurance claims, Craig, and they take a long time to negotiate and work their way through. Specifically, you have to get in and show – actually do some pretty – John had to do some pretty detailed engineering and show us what the impact was on our cost, why it affected production? All those kind of things. And then the insurance companies, Mr. Bruff ups the rates as soon as they have to do any payout. So they’re not – they’re reluctant to do payouts. And I mean, I’ll tell you if we had completely shut down, then we would probably talking about a $50 million or $60 million claim here. So the fact that we’re working through it, it takes many, many months. And – but Stuart and I have been talking about a lot. And we have this range that we’re pretty comfortable with because – there’s a number of items that have been ticked off the list that support our claim.

And was that insurance claim included in your adjusted EBITDA number?

Yes, it would have been included in adjusted earnings and EBITDA, correct.

Okay. And just [indiscernible] I think you mentioned the CapEx to be spent there, but what’s the cash component of the remaining CapEx for 2018?

The cash component? Well, we got…

Yes, is there going to be actual cash to go out the door?

Yes. We spent – I think, if you look at our expenses in Q1, the CapEx incurred was CAD 14 million. I think, we’ve got unpaid bills at quarter end, and I would say about CAD 7 million of that in Q1 went out as cash, though Canadian dollar. So you could say maybe USD 15 million remaining to be spent.

In cash. Okay?

In terms of cash over the remainder of the year, yes.

Perfect guys. Thank you.

Thanks, Craig.

Our next question comes from CJ Baldoni of Principal Global. Your line is open.

Yes. Hi, thanks. Could you talk maybe a little bit about what you expect for production for the next quarter and for the year?

Well, we just – we gave guidance on the grade. So depending on what throughput is, depending what head grade is, depending on what recovery is, that’s how it works out. So you can run those numbers as easy as we can.

Okay. With respect to cash, you said that you think it will dip a little bit. I know I can run these numbers too, but I like know what your number suggest with respect to your cash balance over the second half of the year? And where do you think it will grow back to range?

Well, yes. It’s not going to dip much. It might dip a little bit in Q2. And then going forward from that, obviously, it depend on copper prices. Is it foreign exchange? I know there are so many variables. Our stripping rates, as we head into 2019.

How much copper we produce?

How much copper we produce? It’s hard to put a precise figure on it. But at these copper prices, we should be growing that in the second half.

Do you have any intention to supplement liquidity via revolving credit facility?

We don’t have any immediate plans, but as Russ mentioned in his comments, we’re starting to think ahead to phase II of Florence. And we’ll get into those discussions with banks towards the end of the year. We’re not exactly sure how that will play out, but it could be – as a piece of that Florence financing, there could be a revolver piece to that as well as a credit facility on the Florence asset. So – but at this time, we don’t have any immediate intention to put in a revolver.

Okay. And then lastly, could you talk about – you mentioned some components of your CapEx, but I’m curious, do you have a number for that the full year all-in as well as the breakdown capitalized stripping?

Yes. Well, capitalize stripping is going to drop off as we kind of complete the transition into the new pushback. We had $15 million for the quarter. And I think, last quarter was $17 million or $18 million. That will drop down to a more normal in $5 million to $10 million range per quarter. And then sustaining CapEx at Gibraltar, kind of no – John, I mean, no surprises coming there. I don’t think.

No, we’ve got some big – several rebuilds, but that’s all. It doesn’t add up to a whole lot in this. I think we’re $10 million for the year.

$10 million for the full calendar year, yes.

Okay, thank you.

Thank you.

And I’m showing no further questions in queue at this time. I would like to turn the call back to management for closing remarks.

Okay. Everyone, thank you very much for joining us, and we look forward to talking you later in the summer after the next quarter. And we believe that things will be significantly better. So have a nice next three months. Cheers. Bye.

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