Taseko Mines Limited (TGB) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Britney, and I'll be your conference operator today. At this time I would like to welcome everyone to the Taseko Mines Fourth Quarter and Year-End Earnings Conference Call. [Operator Instructions] Brian Bergot, you may begin your conference.

Thank you, Britney. And thank you everyone for joining us today to review Taseko's fourth quarter and annual 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 closed 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; and Stuart McDonald, Taseko's Chief Financial Officer. After opening remarks by management, which will review our latest quarter as well as our annual 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 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 fourth quarter and annual MD&A, and the related results, news release, as well as the risk factors particular to our Company. I would now turn the call over to Russ for his remarks.

Thank you, Brian. Good morning, everyone. I’d like to thank all of you for joining us today especially considering the fact that it’s a major reporting day for many mining companies and I’d like to thank those who are on the call. First off I'd like to speak briefly about Gibraltar after an up and down year in terms of quarterly financial performance, we ended the year in uptick with cash flow of $44 million in Q4 with adjusted EBITDA of $26.5 million. As a result we had cash flows for the fiscal year of $94 million and adjusted EBITDA at just under $100 million yet $98.2 million. I think this is something that seems to be a little bit understood in volume mining companies, and that is the quarterly swings in production that could make materially affect quarterly financial performance. For example, in 2017, our quarterly cash flow from operations ranged from a low of $31 million to a high of $80 million over the course of the year. And this year it ranged from a low of $12 million Q1 to a high of $44 million in the most recent quarter. It's an ebb and flow business, we're not like ketchup factories where no matter what, those ketchup drugs just keep coming out at a steady state, there's a lot of issues that affect our overall quarter-by-quarter production. A real bone of contention for myself over the years is being judged a 90 days of operations quarter-over-quarter when you're mining a million in the kind of volumes a big mine like Gibraltar is. As I said earlier, nearly one-half of our cash flow came in the fourth quarter and that just illustrates this point. Folks really need to take a holistic 40,000 foot level that companies like ours that have a single large mine. It is not a 90 day business, it's a year-over-year 20 year plus business. Also I am in the Warren Buffet camp, he likes quarterly reports but he does not like guidance. So the only thing we have done and will continue to do is provide rough yearly production estimates and not give quarter-by-quarter guidance. Gibraltar is doing what it's supposed to do and that is to generate cash for us to be able to invest in our growth projects. It is slow methodical work that doesn't happen in weeks or months but over the course of years and that is where we find ourselves to date. The cash we've generated from Gibraltar has helped us move our Florence project forward, and I'd like to speak briefly about Florence. First, we completed our build out of the production test facility on time and on budget, and that is a hallmark of our operations and development teams. It took a little longer than anticipated to debug things in terms of data collection information from the injection wells. But that's well under control and now that we are operating, we have complete control over the hydraulic gradings in the [Aquafer] and in layman terms, we've established a cone of depression and that means the solution is running downhill to recovery wells. So we're well into the injection operations. At this juncture our injection rates are as planed and once we've begun recovering copper in the next short while, we'll be able to ascertain if assay consumption meets design. This is an important facet of the PTF as assay is one of the major cost component related and that's consistent in either open pit heap leaches or in the in situ process we're undertaking at Florence. And in the Florence case, asset will be somewhere in the neighborhood of 40% of our overall costs. This whole undertaking and understanding is important in terms of how we'll approach the commercial operation once it's up and running. As important it appears our timing for bringing Florence into production. Once we've begun the commercial production we'll definitely coincide with this looming copper deficit that many are predicting. So our growth in copper production continues to move ahead as it has since 2005. With respect to our acquisition of Yellowhead, the proxies have well been tabulated with over 99% favor the acquisition and I believe it will close on Friday. With respect to this project, we expect to see - I don't think many people really appreciate how this - how accretive this acquisition is to this Company. A project with feasibility level studies, shovel-ready projects such as Yellowhead, and there aren't many of them in the world if you look at it holistically are often acquired for anywhere between $0.05 to $0.09/pound. We acquired Yellowhead for less than CAD1/0.5 per pound. Everyone believes Yellowhead is a low grade ore body. That's a discount, it is not a material asset. When it is looked at more closely and when one digs into the feasibility study, well as portrayed from the projected yearly production estimates that it has an average head grade, corporate grade of 0.26, that is very deceptive when in fact the copper head grade for the first 7 years is approximately 0.32% copper equivalent; meaning the in situ ore value over that period is worth roughly US$22 per ton. That works out a pretty good margin in terms of large open pit mining rates. In fact with the very low strip ration that we see in the feasibility study less than one-to-one, we will have minor operating cost of less than CAD10 per ton milled, in fact those with the new technology will be lower than the ones we're experiencing at Gibraltar. So that is positive. We're just starting to recheck the mine plans and the multitude of inputs with respect to cut up rates, throughput rates and cost graded design, and soon we will be able to illustrate that more to the public markets. At present, metal prices and operating mine rates, this mine will generate approximately $400 million a year in mine operating margin based off the present feasibility, something that we're going to reengineer and redesign and there are plenty of opportunities for further economic enhancements. If you look into the feasibility study, the pit operations design use 240 ton trucks and hydraulic shovels. We will use larger equipment probably in the 330 ton range and cable shovels. McManus and I are both cable shovel guys, and we believe that we can move muck a lot cheaper with those pieces of equipment. Speaking about the concentrated flotation cells, presently they're currently designed at 160 cubic meters. The new design is common throughout the industry. Now we're over 300 cubic meters. So we believe we'll be able to reduce the footprint of the concentrator and contain the capital costs and it's still undetermined at this juncture what maybe the ultimate throughput rates that we may see in our new design. So we're just in the process of submitting an updated project description and reengaging in the BC environmental and federal review process and we believe that will take somewhere between 18 to 24 months to complete, and in that time we should have an updated environmental assessment. But that timing is important in terms flowing out from the completion of the commercial planet at Florence and in the construction of the mine at Yellowhead. The Company, which I think is very important and has been significantly overlooked has over 7.5 billion pounds of reserves exclusive of new prosperity, which we plan on building a couple mines around in the next 3 to 4 years. So our operations and development guys are very excited about all these initiatives. With these types of reserves, we'll be able to crack many different types of financing options from JV partners, to off-take financing through various forms of alternative financing and that is going to be the focus of our group and certainly Stuart's group over the coming year. So, stay tuned. We've got lots of exciting things over the next year. I'd like to now turn the call over to Stuart.

Okay, thanks Russ and good morning everyone. Yesterday we reported Taseko's fourth quarter and annual financial results. And 2018 was a successful year on many fronts, the highlight being the significant progress that we made at Florence, advancing that project towards production. We generated $98 million of adjusted EBITDA for the year and $94 million of operating cash flow continuing to push forward on our growth strategy. In terms of the fourth quarter financials, we had solid results again with earnings from mine operations before depreciation of $28 million, and adjusted EBITDA of $26 million for the quarter. Revenues were $111 million, and all these results are based on our 75% share to Gibraltar sales volumes which were 43 million pounds of copper and 738,000 pounds of molybdenum. The excess copper inventory that we built up in the third quarter as a result of rail service issues was sold off in the fourth quarter until copper sales lines were higher than normal in the quarter. The average LME copper price for the period was 280 per pound, but the price dropped off in December, ending the year at 270 per pound. So that decline in copper price actually had a pretty big impact on our quarterly earnings, as we reported negative provisional price adjustments of $3.2 million, and also $1.7 million write-down to the value of our ore stockpile inventory as a result of that lower price at year end. These two items negatively impacted earnings by $0.02 per share. Gibraltar molybdenum production has remained strong as well, and prices are average US$12 to pound in the period generating revenues of $8.7 million and a byproduct credit of $0.30 per pound of copper. On the cost side, the lower grades and copper production led to an increase in our unit operating cost to 2.11 per pound produced which reduced our operating margins and offset some of the benefit of the higher sales volumes. Other significant items on the fourth quarter P&L, included a 17.9 million unrealized foreign exchange loss on our U.S. dollar GAAP, and a $0.7 million unrealized loss on copper put options. GAAP net loss for the quarter was 19.7 million. And after adjustments for foreign exchange and derivative, we're reporting an adjusted net loss of $1.3 million, or $0.01 per share. Operating cash flows for the quarters increased to 44 million and that was used to fund CapEx and debt service. Fourth quarter capital expenditures included 6 million for cash payments at Florence for that project’s development and 18.9 million for capitalize stripping at Gibraltar. We also used 18 million for debt service including the semi-annual interest payments to bondholders in December. And we ended the year with a cash balance of 46 million. Our strategy of using copper put options to protect against short term volatility worked well again in 2018. The 280 strike put options that we acquired in the second quarter last year have now paid out cash proceeds of 1.1 million. And we recently purchased additional for protection for 15 million pounds also at a strike price of 280 per pound and that covers at April 2019. So we’ll continue to be prudent about protecting the downside also very optimistic about the upside both in the copper market and in our project pipeline. And we think Florence in the near term and Yellowhead in the longer term both represent exciting growth opportunities. As Russ mentioned a focus in the coming year we’ll be financing for Phase 2 of the Florence project development. We're assessing all of our options including debt financing, royalties and streams, offtake financing and venture opportunities. This work is in the early stages, but we have time and don't need to make any immediate decisions. We'll be able to provide everyone an update later in the year. And with that I'll turn it back to Russ.

Thank you very much Stuart. Operator, we'd like to open the lines to questions please.

[Operator Instructions] Your first question comes from Don DeMarco from National Bank Financial. Please go ahead.

Couple of questions on Florence, what do you guys expect to spend on a quarterly basis in 2019?

It's roughly $1 million a month…

Okay.

And 10 million to 12 million for the year.

Okay, it’s sounds good. And obviously I mean when I saw the project in the fall it showed well on the site tour and couple of things you highlighted were permitting is underway. So maybe if you could give us a little refresh on what milestones you expect and the timing in 2019 as you progress to permitting?

Don, it’s John here. Yes, we've got all our permits obviously for the PTF after all in place. Our EPA permits are and state permit, federal and state permits need to be amended for size for the area from where the PTF is to the commercial construction. And we're working on those amendments with the state and with the EPA as we speak. So the permit doesn't really change much, it's just the area that it covers so we're not expecting to have a whole lot of difficulty with that but we've begun early. We expect to have those permits in hand well before the end of the year.

And in terms of financing on the site tour you mentioned a number of different options that you could use to raise the CapEx develop it. Have you narrowed that down, do you have any more preferred options at this point?

Don, it’s Stuart here again. No I don't think we've really narrowed it down, I think we're still looking at all the options. Obviously a key component of this is the operation of the PTF which we think is going to derisk the project and give us a lower cost of capital ultimately. So that has to play out over the year and we’ll just continue to kind of be engaged with all the different financing options and not have to make any real decisions until later in the year or even early next year. So everything is kind of on the table right now whether that’s debt financing, royalties.

Yes, we want the best and there's a lot of interest Don.

Yes.

So we're playing it cool in what we can get though the best cost of capital, it’s our approach there is no immediate rush. We're generating enough cash out of debts so we'll try and get the best deal we can.

Your next question comes from Craig Hutchinson from TD Securities. Please go ahead.

You noted in your MD&A that you made a bunch of mine plan adjustments in spending curtailments, I guess at Gibraltar to address the current weaker pricing environment. Can you talk about what some of those cutbacks are and maybe gives a sense of what we're looking at in terms of CapEx both on a sustaining in annual capitalized strip basis?

Craig, it’s John here. It's more of making sure we're managing all of our assets that we have in any one big issue. We make sure that this overtime is under control that our warehouse inventories under control, working with our suppliers to make sure that there's not any thing being spent that doesn't need to be spent. It’s normal course but when you're in a situation like this where we're funding project in Arizona it becomes even more critical so.

And I think one of the things Craig lot of people forget and they don’t when they're looking at these and see your cost incrementally increase per pound, people lose sight of what actually are non controllable costs that have been I don't like to say poised and honest, but they have been put upon us by government. There was a big change in the health spending accounts with added a 1.5 million to our costs this year when the new provincial government added certain cost to our employee costs. The carbon tax has gone up by $0.10 a tonne or $10 a tonne, hydro rates have increased. So overall there's probably about anywhere from $0.08 to $0.12 a pound year-over-year that we have to mitigate for. And so we look at all these kind of things that protect any of it that's $0.10 a pound on 130 million pound is a lot of money so $1 million a month. So those are the kind of things that John and his team are working at. So we try and figure out how to mitigate those and hope that the price of copper rises and that we can get that margin back.

Some of the things we do as we lock in longer term contracts to like we did a contract for Ocean Shipping we got a good price on that for the next three years. So those are the type of things that Russ has mentioned in the MD&A.

Any sense on CapEx for this year?

Well we bought a loader, it will arrive in the middle of the year, but other than that there's nothing specific this cash is stripping – Yes, obviously it’s very late your CapEx I mean we basically replaced all mine fleet and rebuild the mill at Gibraltar over the last 5 or so years. So there's not a big capital replacement of any. The loaders coming in three places quite an old shovels that has come back in the old Gibraltar days. So that's it for this year.

So I think I've talked here in the past about John and I basically use about $0.10 a tonne moved for our ongoing capital expenditures for budgeting purposes and sometimes that might be it might spend $6 million a year and some years we might spend 15. But major capital if you're looking for major capital 30 million or 40 million bucks or for something it's not there we’re not.

This is the same thing with the projects we’re not looking at any major expenditures on Aley or Florence the expenditures in place which is operating. So there's not much more than normal operating expenditures with Gibraltar and Florence now for 2019, very little CapEx.

Craig in terms of capital strip, we're going to see Q1 likely continue along the same levels that we saw in Q4, roughly $18 million or $19 million-ish, let's call it $15 million to $20 million as a wider range but then it should drop off later in the year back to more normal levels, $5 million to $10 million a quarter maybe. But that particular number is a little harder for us to give guidance on it. It does tend to fluctuate on a number of different factors in accounting

The operative word is accounting.

And maybe just, Russ, you touched on a couple of milestones for Yellowhead once it closes but can you just kind of reiterate those just maybe timing on a possible updated feasibility study? You said you're updating the project description. I would imagine feasibility study would come first possibly but maybe just give us a sense of what you're looking at for the next 12 months for milestones.

I'll let John do that because it's his crew doing a lot of hard work.

Yes, we're ready to submit the project description to both the federal and provincial governments. And the project description just describes what is the project, and it says it's a mine. So we in the same time we will be working on redesigning and redoing all the things that Russ spoke about earlier and then we'll do an updated 43101 report later in the year. And then that will go into what is actually in the environmental assessment what's called an EIS, Environmental Impact Statement, which is where you get more specific about things like throughput rates. It's mostly to get the process started in the end.

But we've only started to really illustrate to the investment community what a good project this is. I mean when you get the opportunity come up and visit us, you know it's only I think 12 or 14 kilometers from bay would be that's - the power line is only I don't know 20 kilometers long. We already got a rail load out facility. The Yellowhead - the previous Yellowhead management had purchased a rail site just in - or concentrate shipments. The railway goes right by. There's just a lot of positive things that really have not been. When I was a junior company it was really hard to get any traction on that and that gave us this great opportunity. And like I said this was a 6 or 7 year process for us to get our toll on the door and really evaluate the opportunity that presented itself and then ultimately because of this demise of the junior marketing, Canada gave us this opportunity to get this great you know - how many people get a 700 million tonne asset or ore body to our account $15 million and when you take in some of the tax pulls, it virtually is zero cost acquisition to us. So it's going to be very accretive for our shareholders ultimately.

Thanks guys.

Okay everybody, I guess there's no more questions. So thank you very much.

There are no further questions at this time. Please proceed.

So, thanks very much, operator, and look forward to seeing everybody in the spring and everybody stay warm, cheers.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. I ask that you please disconnect your lines.