Taseko Mines Limited (TGB) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Jessica, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines First Quarter Earnings and Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Brian Bergot, you may begin your conference.

Thank you, Jessica. Welcome, everyone, and thank you for joining us today to review Taseko’s first quarter 2019 financial results. Our financial results were issued yesterday after market closed and are available on our website at tasekomines.com. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and a Stuart McDonald, Taseko’s Chief Financial Officer. After opening remarks by management, which will review first business and operational results, we will open the phone lines to analysts and investors for question-and-answer session. Before we proceed, 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. For further information on these risks and uncertainties, I encourage you to read the cautionary note that accompanies our first quarter MD&A and the related news release, as well as the risk factors particular to our company. I would now like to turn the call over to Russ for his remarks.

Thank you, Brian. Good morning, everyone. Thank you for joining us today. The first quarter of 2019 has begun like we began 2018 with cyclically lower head grades as we began a new pushback at Gibraltar. Copper recovery of 85% was very good considering the head grade of 0.22%. We estimate we lost roughly 4 million pounds of copper metal over the quarter because of difficult operating conditions. We have pretty abysmal shell hole availabilities during the quarter for a number of reasons. But in general, those were tied to cold weather issues, which remained in the minus 30 Celsius range for six weeks. If we add the equipment issues along with the hard ore in the – top of pushback, the combination of those saw our concentrator throughput drop dramatically to 76,000 tons per day, the lowest in many years in a quarterly basis. However, on an upbeat note, we saw performance out of our moly plant increase 67% year-over- year with over 720,000 pounds of production for the quarter, up from 437,000 in the same quarter last year. If the throughput pounds have been produced, we would’ve had a very good quarter. However, even with lower production, we still managed to generate an operating profit of just under $16 million and adjusted EBITDA of $10 million off of a 0.22 head grade. So overall, our efficiencies were good. I would like to think if copper moly prices stay in this range for the year, we will have similar financial results by year-end as we have 2018. If, however, either metal prices increase in terms of moly or copper, our leverage to the price is great, and we could do much better financially. As per previous commentary, Gibraltar continues to generate cash, allowing us to invest in growing the company and specifically, Q1 has seen a lot of activity with the company. In February, we closed our acquisition of Yellowhead Mining. This purchase will add over a 3.4 billion pounds of copper to our reserve base, which has now been expanded to roughly 9 billion pounds. We’ve begun the process of applying to the provincial and federal governments where we started the environmental assessment process for Yellowhead and have submitted a project description to them. We are currently working on a new development plan that, first class will improve the project NPV while lowering overall cost. We should be able to provide expanded details in the months ahead. One of the many initiatives we take before we acquire an asset, especially one as advanced as Yellowhead, is to methodically digest the feasibility study or any studies available. If anyone remembers, we invested in Yellowhead many years ago, and the dollars we put into it went into drilling and reserve definition. With that information over the course of a number of years, we ascertain what the Yellowhead asset could actually become. We knew we could raise the cutoff, slightly increase the strip ratio, flew with mill throughout and increase NPV dramatically because we’d ascertain a large amount of ore that runs approximately 0.32% copper equivalent was available to us. Enough of 0.32% to run a 90,000 ton per day concentrator for five years of operation at a high head grade. Many folks confuse head grade with profitability. What needs to be looked at is gross margin. We have a high head grade resulting in rock value of, say, $30, but your cost of $25 a ton, there isn’t enough margin to run your business properly. The reason we bought Yellowhead is because it has high margins even with proceed low head grade. The Yellowhead ore is at long-term metal prices worth approximately CAD 22 per ton. The estimated operating costs are roughly $8 per ton. The gross margin is $14 per ton. On a 90,000 ton per day concentrator, that’s approximately $1.3 million per day in operating margin or over $400 million annually. No one should be distracted by head grade if they understand the operating side of the equation. For us in Taseko, investing mining progress means looking at the whole economic picture, not just a portion of it. We have a plus $1 billion NPV asset, which we know will grow in value. We acquired it for less than $15 million. We believe it can produce up to 200 million pounds of copper per year during its first five years of production at very low and competitive C1 cost. And as we continue our engineering work, we know that the project will get increasingly better. As I said, combine this with the $8.22 estimated cost per ton mining cost, and you have a world-class asset that actually no one knows about it. If someone looks – wants to look at comparable valuations in ore body, I think one needs to look little further on the valuation that the recent Sumitomo Tech deal in Quebrada Blanca was done. Sumitomo invested a little over US$1.5 billion to get roughly $170 million or – sorry, 170 million pounds of annual copper production. We have an asset that will cost roughly CAD 1 billion to build out and produce more pounds of copper than the Sumitomo interest. At present, there’s not a company our size that has the reserves we have purchased at bargain basement prices that have decades of wealth generation ahead of us. Having long-life reserves gives us another opportunity, which gives us great financial flexibility as we sell off – we’re able to sell off portions of these after we have unlocked value to other companies. And I go back to the fact that we sold Gibraltar – interest in Gibraltar to a Japanese trading company many years ago that allowed us to expand and increase production at Gibraltar, and that will continue on these other assets. And so we’ve had many interested parties that are looking for investments, and this will allow us to avoid shareholder dilution while maintaining the strong balance sheet. So we are in a very enviable position. If you don’t have reserves, you don’t have assets. So point of example, we are excited about our Florence – about our flagship Florence copper project. As you’ve seen in the press releases. We are now operating our wellfield and Essex plant and producing LME-grade copper metal. And we’re very excited about that. We expect – John expects to be in a position shortly to modify our permits for the final operating permits for the commercial facility, and the path forward appears to be a clear runway. Stuart will speak about that path forward with respect to Florence financing and other matters, and I’d like to now turn the call over to him. Stuart?

Okay. Thanks, Russ, and good morning, everyone. I’m happy to provide some further detail on the Q1 financials and also, a quick update on the Florence financing progress. As noted in our earnings release yesterday, we see copper production improving in the remainder of this year, and we’ve not changed annual guidance. And although Q1 was a lower production quarter, we still reported earnings from mine operations before depreciation of $16 million and adjusted EBITDA of $10 million. Revenues for the period were $70 million based on our 75% share of Gibraltar sales volumes, which were 23 million pounds of copper and 770,000 pounds of molybdenum. Copper production was slightly higher at 25 million pounds, so we had a small inventory buildup in the quarter. Our realized copper price was $2.91 per pound and included positive provisional pricing adjustments of about $0.04 per pound. Moly production was a bright spot again this quarter, and the price remained in the range of US$12 a pound. With that, we generated almost $9 million of moly revenues and a byproduct credit of $0.32 per pound of copper. Total spending on site operating costs and capital strip was 7% lower than the previous quarter, but operating cost per pound were slightly higher than Q4 last year because of changes in the amounts allocated to capital strip. The first quarter P&L included $6.7 million unrealized foreign exchange gain on our U.S. dollar GAAP and a $0.3 million unrealized loss on copper put options. GAAP net loss for the period was $7.9 million and after adjustments for the foreign exchange gain and derivative loss, we're reporting and adjusted net loss of $14.4 million or $0.06 per share. Turning to cash flows now, we had just over $7 million of operating cash flows for the quarter, which was used to fund CapEx and debt service. Capital expenditures included $8 million for capitalized stripping, $3.4 million for other items at Gibraltar, and $2.1 million of Florence for the PTF operations. The acquisition of Yellowhead closed in February and other than legal and other fees associated with the acquisition. We didn't have any other significant spending on the project. We ended Q1 with a cash balance of $34.5 million. And subsequent to quarter end, we completed an equipment loan for additional cash proceeds of $12.5 million. The new loan is secured by existing mine equipment at Gibraltar. And repayable over five years at an interest rate of just over 5%. This is relatively low cost financing for us and we're currently looking at other proposals for equipment loans. And it's notable, that we still have $36 million in restricted cash and deposits, which are being held as security for reclamation bonding at Gibraltar. We're actively pursuing other forms of security that we can put in place which would release that cash to Taseko and further boosts our working capital. We'd like to build our cash balance as we look ahead to a capital program at Florence next year. And in terms of the Florence project financing, we are seeing a high level of interest from finance providers including lenders, streaming and royalty companies and potential joint venture partners. Initial feedback has been positive on all fronts and with the PTF royalty was now operating in producing copper. We're in a good position for more advanced discussions and due diligence in the coming months. We're not in the rush, we have sometime and we're targeting to have committed financing in place by late this year or early next. And we'll be able to provide further updates on financing progress next quarter. And with that, I'll turn it back to Russ.

Thanks very much, Stuart. Operator, we just like to now open the lines to calls.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Orest Wowkodaw of Scotiabank. Please go ahead.

Hi. Good morning. I'm just wondering, if you could maybe give us some details on what the strip ratio and the capitalized stripping look like this year at Gibraltar

Yes. The strip ratio itself is deposit standard, it's a long – John here, Orest, good morning. It's a long life mine, we run it in the average strip ratio of 2.5 to 1. The capitalized strip varies depending on where you are in the deposits. But really, what matters is the stripping ratio itself and it's going to be about 2.5 to 1. Always is.

Okay, so you're just above that in Q1, but that will come down later.

Yes. That Q1 strip ratio is a little bit distorted because with the shovel problems we had, we pulled from the stockpiles to feed the mill, that's was one of the reasons that grade was lowered to, we just didn't have shovel ability to keep the ore going, but we kept stripping so it's going to hold it going forward.

Okay. And in terms of the copper grade, obviously Q1 was quite low. Do you expect that to just sort of steadily increase through the year or is it going to be kind of pretty volatile like it was last year on a quarterly basis?

Well, it wasn't planned to be as volatile, Q1 this quarter was low as Q1 last year, but we see the average for the year being right on what we expected. It should be the average the same as last year.

About 0.25, 0.26?

Yes, 0.25, 0.26, average – so it'll come up.

Okay. Great. And then just finally on Florence, can you give us maybe an idea of what the asset consumption's been like so far or is it, I don't know if you have that number handy, but is it in line with your expectations or how is it going so far?

We're really not there yet. I mean, we're treating the entire block of rock. So it was like 2 million times that we're treating right now [indiscernible] we did our third harvest yesterday. So asset consumption per pound, if I measure it right now would pretty high, but it's over the long run. It's going to be about 5 pounds of asset per ton of copper.

Okay. So just too early to tell.

Yes. everything indicates that all of our assumptions are correct. We don't see anything indicating anything other than that, there's – it's not an asset.

Okay. Thank you.

Yes.

Your next question comes from Craig Hutchison of TD. Please go ahead.

Hi guys, you mentioned you started the amendment process for the permits for Florence and you anticipate that commercial scale production could start as early as the first half of next year. Can you just sort of walk me through what those amendments are? Have you already applied for the amendment for the act for protection permit and the UIC? Or you just ….

We're in discussions with both the federal and the state governments on that. And preparing the amendment applications now. We should be in commercial skill, construction in the first half of – next year production.

Sorry. And in terms of receiving those permits, you expect to receive those by year-end?

Early next year, in the discussions with both governments. That's what we're targeting.

Okay.

I guess the similar process up here, Craig you get your mines act permit. If you build a mine in Canada, where particularly in British Columbia and then you apply to the federal government for your mine effluent permits, right? So it's sort of– they are running kind parallel. So, it's like we've got a housing permit to build a house and now we're planning for the electrical permit putting the wiring. So it's put it in simplistic.

The good thing is we've got the production test facility running and so we're not going in with theoretical activities in these permits. We've got hard proof that we can do what we say we're going to do. So both governments, federal and state are quite positive on the permitting process, they're not seeing any major hurdles, it's just a process we have to work through.

Okay. And in terms of the financing options, I mean, what type of leverage are you guys comfortable with?

On the project, Craig, it's Stuart here. We're – well first of all, we're limited on the amount of additional debt we can take on under our bonds. I think we're limited to $100 million of secured debt and $50 million of equipment leasing. So we'll be somewhere – we're targeting somewhere in that $100 million, $125 million range for debt. And we think that’s a reasonable amount of leverage and going forward when Florence ramps up and generates significant EBITDA, that's gonna delever company as a whole in terms of our metrics, our debt-to-EBITDA ratio should come down. So we think that's the right – roughly the right amount of leverage.

Are you guys considering joint ventures as well?

Yes, that's definitely one of the options we're pursuing, we are out talking to various parties. I think people recognize that it's a unique asset and an attractive asset with roughly CAD 1 billion NPV. And if we can sell a small stake in that at based off of now then that's going to be a very accretive thing for us to do, so we're definitely open to that.

Okay. Thanks guys.

Thanks, Craig.

Your next question comes from Mike Kozak of Cantor Fitzgerald. Please go ahead.

Yes, good morning guys. Thanks for hosting the call. Two questions for me. The first being, are there any tax losses or tax loss pools within, I guess what is now the Yellowhead subsidiary? And if so, could any of those potentially be implied to profits at Gibraltar?

Yes, absolutely, mike. It's Stuart speaking here. There's – I don't have the exact number, but roughly, CAD 50 million of tax pools in Yellowhead. And we'll certainly be looking at ways that we can utilize that at Gibraltar in the coming years. So it's another – I know kind of another one of the potential synergies that we see coming out of that deal.

Thanks. Did you say 50 or 15?

50, actually the exact number is in our financials somewhere, but I think it's approximately $50 million, yes.

Okay. Thank you. And the second one is at Florence, I mean in your discussions with potential JV partners or streamers or traditional – more conventional project lenders, do they in general want to see the permit amendments first? Or are they kind of prepared to move ahead with project finance ahead of any permanent amendments?

Well I guess, certainly if you're talking about bank lending and that's going to come in after permits. And then – and that's, frankly, the lowest cost for us as to finance it afterwards it's been derisked. And then similarly on – in our JV partner discussions, it's just a matter of value and what people might be willing to pay at different phases. But whether it's been – whether that permitting has been received or not, I guess it's something that will weigh into the negotiations. But frankly we don't see, as Russ described, we don't see the permitting as a huge risk here, it's really just an amendment process. So…

Got it. Thanks guys. That's it for me.

Thanks, Mike.

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

Thanks very much everybody. See you next quarter. Bye-Bye.

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