Taseko Mines Limited (TGB) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Taseko Mines Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Mr. Brian Bergot, Investor Relations. Sir, please go ahead.

Thank you, Liz, and thank you, everyone, for joining us on the call today to review Taseko's third quarter financial and operational results. My name is Brian Bergot and I am 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 third quarter business and operational results, we will open the phone lines to analysts and investors for a 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 to 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 third quarter MD&A and the related results news release, as well as the risk factors particular to our Company. I would like to now turn the call over to Russ for his remarks.

Thank you, Brian. Good morning, everyone, and thank you for joining us today. The trend of higher grades and better recovery which began in Q2 and which saw Gibraltar's metal production rise from 23 million pounds in the first quarter to 34 million pounds in the second quarter continued into Q3, and has resulted in third quarter production of 43 million pounds of copper and 700,000 pounds of molybdenum. As a result, site operating costs net of byproduct credits were USD 1.34 per pound with C1 costs coming in at $1.58 per pound. Unit costs were obviously positively impacted by higher grades and higher concentrator throughput. As I indicated in our Q2 call, we expected the second half of 2018 to be good from a production and cost position, and that is evident with this quarter's results. This quarter's financials, however, were affected by the inability of Canadian National Railway to deliver our production to port for ocean shipment. We unfortunately left 18.5 million pounds of copper and concentrate in our concentrate storage facilities at site and at our rail load out at quarter end. We expect the bulk of this inventory will be delivered to our customers by year end. Normally, we have between 2.5 million to 4 million pounds of inventory scattered through the system at quarter end. So that means we will be shipping and selling in Q4 an additional 14.5 million to 16 million pounds of copper and concentrate over our mine site production. At present day prices of copper, that is approximately $40 million in revenue to our account and $30 million in cash flow. We expect from this that our 2004 financials to be very robust and by the end of the year our cash position will strengthen appreciably. With respect to mine operations, during the quarter we were able to steepen the high walls of our final bench designs near the bottom of the Granite pushback, and we were able to extract extra high grade ore from these benches. And this helped head grade for the quarter to average roughly 0.31%. I have to give kudos to our mine operations group for getting that work done and that ore processed. Q4 will return to more normalized production. But as I said, we expect to ship and sell a record amount of copper and concentrate in the quarter, if everything goes according to plan. Our Florence Project has been completed on time and on budget and we are now in the final stages of determining asset adjustment rates and refining the technical aspects of same, and expect to begin full scale operations of the test facility in the near future. All of our pre-testing is supporting our bench scale testing and engineering, and as a result we expect a seamless startup of the plant and our ability to understand and quantify further technical operating parameters. While the nomenclature of this plant is classified as a production test facility, it is in fact a fully operational well field and SXEW plant. Actually, a mini-replica of our commercial plant. The data and performance of the plant will significantly reduce our commercial plant ramp up, both from the well field development aspect and the SXEW plant operation. So we're looking forward to this operation over the next few months. I'd like to now turn the call over to Stuart for his comments on our financials.

Okay. Thanks, Russ, and good morning, everyone. I can speak to some of the financial details from our third quarter earnings that we released yesterday. So earnings from mine operations before depreciation were $34 million and adjusted EBITDA was $32 million for the quarter. Despite the lower copper prices, these numbers are generally in line with the prior quarter. But as Russ described, the financial results do not fully reflect the strong performance that we had at Gibraltar this quarter. We recognize revenue when product is loaded onto a ship at the port. And shipments were delayed this quarter by poor rail service between the mine and the port. So production results were very strong at 43 million pounds, but we were only able to sell 29 million pounds, and inventories increased significantly. Third quarter earnings were also affected by lower copper prices. And after declining in early July, the price remained in the $2.70 to $2.80 range for most of the quarter. Our realized price of $2.63 per pound was affected by negative provisional price adjustments of $3.7 million, or $0.14 a pound. Moly prices have remained strong in the period and sales volumes are not affected by rail service. Gibraltar sold just over 700,000 pounds in the period, resulting in a byproduct credit of $0.16. Total revenues for the quarter were $74 million, based on our 75% share of Gibraltar sales volumes. On the cost side, our total site operating costs increased in the third quarter due to the increased mining rate, as well as a reduction in the proportion of mining costs that are capitalized. But the higher copper production led to lower operating costs per pound of USD 1.58. That's 20% lower than the previous quarter. We finalized an insurance claim for the wildfires last year, and our 75% share was $7.9 million. So third quarter earnings included an insurance recovery of $3.9 million, as the other $4 million was recorded earlier in the year. The cash is expected to be received in the fourth quarter. We also recorded $20 million of depletion and amortization expense in the third quarter, compared to $18 million in Q2 and $12 million a year ago. Those increases relate to amortization of capitalized stripping costs related to the new section of the Granite pit. Other significant items on the third quarter P&L included a $5.2 million unrealized foreign exchange gain on our U.S. dollar-denominated debt, and a $0.5 million unrealized gain on copper put options. GAAP net income was $7.1 million. And after adjustments for foreign exchange and derivative gains, we're reporting adjusted net income of $1.5 million, which is $0.01 per share. Operating cash flows for the third quarter were $18 million and were affected by working capital adjustments related to the increased inventories. As Russ noted, the shipping delays and inventory build affected our cash flow by approximately $30 million at current copper prices. And we're expecting to sell the excess inventory by year end, as long as there aren't any issues at the port or with vessel scheduling. Investing cash flows in the third quarter included $6.8 million of cash payments for construction of the test facility at Florence, $7.6 million for capitalized stripping, and $3.7 million of other capitalized expenditures for Gibraltar, and also $2.8 million in other project costs at Aley in Florence. We're benefiting from the copper put option contracts that we acquired earlier this year, and those have paid out about $1 million over the last two months. We continue to have put protection in place at a strike price of USD 2.80 per pound through the fourth quarter and we'll look for the right opportunity to extend that protection into 2019 at a reasonable cost. We expect strong earnings and cash flows in the fourth quarter. We could sell approximately 45 million pounds of copper. So we'll end the year with a healthy cash balance. And with that, I'll turn it back over to Russ.

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

[Operator Instructions] Our first question comes from the line of Craig Hutchison with TD Securities. Your line is now open.

Just a question. I mean, you notice in your financials that you've only partially mined the high grade benches from the Gibraltar pit pushback. Will any of that material flow into Q4?

Hi, Craig. It's John here. No, that material will go into 2019.

2019? Okay.

Yes. A little pushback will pick that up.

So if your guidance is for adding 130 million pounds for 2018, you've implied about 30 million pounds for Q4. Would it be fair to say that the grades are going to drop below reserve in order to sort of be in that 30 million pound range?

No. Grade will be back around reserve level.

Around reserve? Okay. Any potential - are there any shutdowns of the mill anticipated for Q4?

Nothing extraordinary. We do our usual mill liner changes, which is a day or two here and there. But that's normal. We do that all year, every year.

We had pretty good throughput. The credibility was a little easier in the third quarter. It's going to be a little harder in Q4. We're experiencing some of that now, I think.

Yes, that's right.

So that could be - that could have some effect. But we think we're going to be right on that 130 million pound range.

And can we assume similar CapEx spending for the fourth quarter as well?

Yes. I mean, it's going to be capital strip. There's nothing specific on the sustaining capital for - no equipment, anything like that.

And maybe just a last question. Aley. Are there any kind of discussions going around now? Any strategic reviews going in terms of trying to sign a kind of JV for that asset?

We keep working on it. We're talking to a lot of people. It's difficult, but it's - we just take our time and keep looking for the right partner. So sooner or later it will happen, Craig. I'm not sure when. I think if we look at we have done a bulk sample in there. We are going to make metal. I mean, I think we're going to do a - probably a test plant on that that's going to actually allow it to produce some metal in 2019. And then, once we have that, we'll see how it goes. But we're not spending much money on it. We have, obviously as you know, an important project at Florence and that's where we'll be putting our efforts.

Our next question comes from Mike Kozak with Cantor Fitzgerald. Your line is now open.

Just one question for me. The steepening up of the Granite pit high wall that you kind of - that you were able to do in Q3. Can that be replicated at all in other areas of the pit if you continue to bench down? Or was this just kind of one discrete area of just particularly favorable rock mechanics?

Hi, Mike. John here. We design our walls fairly conservative, which occasionally gives us an opportunity to do something like this. And just the conditions, the weather conditions, the timing, that section of wall is more rock mechanics stable than we had expected. So we took advantage of that.

We'll take advantage of it whenever we can see that, I think.

Yes, that's right. So that's the bottom of the pit. You design your walls up at the top, then when you get down to the bottom you adjust.

[Operator Instructions] We do have a question on the line from Don DeMarco with National Bank. Your line is now open.

I was just wondering, on the Florence site tour there was mention of getting a permit to do the - that portion of injecting the asset. Is there any updates on that? Not a permit per se, but just approval. I think you've already got all the permits in place.

I think they're still reviewing - remember when we showed that green stuff coming across on the cross section? Remember on the cross section we showed the fluid flows across there?

Yes.

I think the ADDQ and the EPA are just evaluating some of the technical data around that. So we should see that sooner than later. So you never know when it goes into a government agency how long that's going to take. But we anticipated getting it about a week and a half ago, two weeks ago, when you guys were down there. And now it's been delayed. But I don't think there is anything critical about it. It's just crossing all the T's and dotting all the I's. That right?

Yes, that's right. We've got to check every box. And the permit that we have gets amended to what was actually observed in the pre-tests and they're very precise and thorough. So it's taking them longer than we expected.

And we do have a question from the line of CJ Baldoni with Principal Global Investors. Your line is now open.

So you mentioned that you expect to be able to ship out the extra ore or copper in the fourth quarter. But then, you also caveated it with respect to ship availability and what not. So what level of confidence do you have that you're going to be able to ship that extra volume?

We have good confidence.

And could you provide some indication where you think your cash balance will end the year?

Well, CJ, yes, it's Stuart here. We've given pretty good guidance in terms of production and sales volumes. 45 million pounds we think we can ship. Of course, we've got the insurance claim, which we think we're going to collect as well. Offsetting that, we've got a bond interest payment in December, as you know. So it's something - we think the cash balance is going to grow. I don't want to put a number on it. But we think it will - we'll see appreciable growth in the cash balance in Q4. But it's hard to put a precise number on it.

Okay.

And one of the factors that's hard to control is the exact date when our customers will pay an invoice. Right? So every shipment that goes out is about a $15 million invoice. So if we receive a customer payment in the last week of December or the first week of January, that can drive the year-end cash balance. But - so we're comfortable talking about sales volumes, but cash balance is a little harder to put a number on.

Well, that's true. Yes, we've got copper prices as well, which we hope are going to improve.

Well, thanks for adding that extra little bit. Will you put out a release once you I guess get the final indication after the EPA is reviewing the asset results at the PTF in Arizona?

I guess we'll have to talk about that. We probably will just give a market update.

I'm not showing any further questions in the queue. At this time, I'd like to turn the call back to Management for closing remarks.

Okay. Thanks very much, everybody. Look forward to seeing you and talking to you later in the year. Bye-bye.

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