Taseko Mines Limited (TGB) Q1 2020 Earnings Report, Transcript and Summary

Good morning. My name is Colin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines Q1 Earnings and Production 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. Taseko, you may begin your conference.

Thank you, Colin. My name is Brian Bergot, the Vice President Investor Relations for Taseko. Welcome, everyone, and thank you for joining us today to review Taseko's financial and operational results for the first quarter 2020. News release announcing our financial results were issued yesterday aftermarket closed and are available on our website at tasekomines.com. With me today in Vancouver is Russ Hallbauer, Taseko's CEO; Stuart McDonald, our President; John McManus, our COO; and Taseko's Chief Financial Officer, Bryce Hamming. After opening remarks by Management, which will review first quarter and business and operational results, we will open the phone lines to analysts and investors for our 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 will now turn the call over to Russ for his remarks.

Thank you, Brian. First of all I would like to wish everyone on the call good health for yourselves and your families and that we get back to some form of normalcy in our lives in the not too distant future. We're talking about business in these chaotic times seems to be misplaced. Businesses of all sorts will be very important aspect of our return to normalcy. Taseko has been very fortunate in many ways in the past few months. First, our [indiscernible] mine is a community-based mine. Our employees sleep in their own beds every night, not confined to a cafeteria and/or a camp. This allowed us early on and the onset of the COVID pandemic to be able to immediately begin health protocols to protect our employees and to continue to run our operations. Secondly, we have a battle hardened workforce. We've been through this before. We survived the great financial crisis of 2008-2009, we survived the copper price drop in 2016 and we survived the central VC wildfires three years ago. We were on our health protocols at the end of February well before the government protocols came out and we've gotten to this point at this juncture in very sound shape with respect to all that. As we go forward and we get to this point, I think the balance sheet and cost structure we now have in place in going forward illustrates all of that and Bryce and Stuart will speak about that in a few minutes. With our site cost now anticipated to drop by $0.40 to $0.50 cents U.S. going forward, we're in very good shape to weather whatever is thrown at us. The great thing about Gibraltar that likely many people don't really understand is that it's a collection of ore bodies at surface, unlike so many others that are just one big ore body. They are all connected at depth, but the pits we are developing all come to surface. So we have the Granite pit, the Pollyanna pit, the Connector pit, Gib West pit and the Gib extension pit. So it's much different than many other big open pit mines. So when we get into these types of situations we're into right now, we go back to basics; what is over in the context of the day? What can we do to access and develop quickly newer releases? And can we provide continuity and consistency of operations year over year going forward? This time, we really focused on the rest of 2020 and out into 2021, 2022 and 2023. Our immediate concerns was we generate operating profit. So for 2020, we'll get our cost to the $1.40 per pound range, well without newer release push backs in in some of these pits that I spoke about. This exercise that we've undertaken is proven very insightful, and further gives us confidence and ongoing lowered costs going forward. As well, we are in the higher grade as we've spoken about in the past through the cyclical nature of our ore body development. And then we're at the lower portion of the granite push back, so things are presently going the way we expect to be and we expect to be at the high end of our guidance based on graded production, which is obviously timely in these times. And John can take those questions on the operating side in a few minutes when we get later into the program. I'd like to now turn the call over to Stuart to talk first about the financials.

Okay. Thanks, Russ, and good morning, everyone. I'm now going to give an overview of our first quarter operating results and some of the recent initiatives that we've put in place in response to the current environment. Yes, at Gibraltar in the first quarter we produced just over 32 million pounds of copper and a total operating cost of $1.82 a pound. The first quarter production and costs were generally in line with our expectations that we had at the beginning of the year and as Russ noted, the COVID-19 virus has not impacted our operations. We operated continuously through the quarter and up-to-date. But as we know, the virus has had a major impact on the global economy and the copper prices fell dramatically in the second half of March, ending the first quarter at about $2.17 a pound. And that price has had a significant impact on our financial results for the quarter. Adjusted EBITDA was $5.3 million and adjusted net loss was $21.6 million, which is $0.09 a share. Both of those amounts include negative provisional price adjustments of $13.6 million related to the declining copper price and some of those provisional adjustments have already reversed in the second quarter with the improving copper price. In late March, we took quick and decisive action to respond to the lower copper price environment. As Russ described, we have a lot of operating flexibility at Gibraltar and we've made adjustments to our 2020 operating plans which will reduce costs significantly without impacting the long term plan requirements. We're lowering mining rates, which saves money as well as deferring major equipment rebuilds, where possible, and we're also realizing input cost savings and a number of other areas. Most notable is the diesel prices, which are now 35% lower than the average price last year, which is equivalent to a $10 million annualized saving. The Canadian Dollar is also weakened, which benefits us with our Canadian dollar cost structure. We're also expecting higher grades in copper production over the next few quarters, which will further reduce our unit cost. We're reiterating our annual guidance of 130 million pounds of copper plus or minus 5% and actually, we now expect to be at the higher end of that range based on the revised plan. Taking into account the cost reduction initiative and the increased production, we expect total site spending will fall by $0.40 to $0.50 per pound for the coming quarters and that's compared to Q1. That will ensure that Gibraltar maintains a solid operating margin and continues to produce free cash flow. Our cash position remains strong. We ended the quarter with $50 million in treasury and in April we added $8.5 million to that through a transaction with Osisko Gold Royalties. We've amended our existing silver stream agreement with Osisko to eliminate the delivery price of $275 per ounce of silver. So it's a good transaction for us and we're happy to further develop our relationship with a supportive partner like Osisko. We have a number of other levers available to manage our working capital this year, including opportunities to defer BC Hydro power costs and equipment lease payments. We'll also be receiving additional cash proceeds from our April put options that expire this week. So we're quite comfortable with the balance sheet and we continue to advance our growth strategy with the near term focus on development of the Florence copper project. The production test facility operated as planned throughout the first quarter. We've been producing copper there for over a year now and the operating results continue to validate the assumptions in our feasibility study, and also provide valuable operating experience for our team with the institute mining process. Permitting for the commercial facility is progressing well with the Arizona State regulator. We expect a draft offer protection permit to be issued in the coming weeks with a public hearing to follow 30 days later. Discussions are ongoing with potential JV partners and we believe that the sale of a minority stake in the project could represent a significant portion of the overall financing package for the commercial phase. We're also planning to recommence discussions with lenders in the summer with the objective of having a committed financing packaging place prior to receipt of permits. In the background, we continue to quietly advance our other long term growth projects and that includes permitting and First Nations Initiatives to both Yellowhead and New Prosperity and we expect further news on those initiatives in the coming weeks and month. And with that, I'd like to now hand the call over to our CFO, Bryce Hamming.

Thanks, Stuart. Good morning. I'd like to cover in further detail the first quarter financial results. The results of our operations this quarter are best seen in our cash flow statement. Despite the dramatic drop in copper prices in the second half of March, we had cash flow from operations of $18 million and really, $21 million if you include the $3 million net proceeds from our copper puts that we purchased in January. This operating cash flow funded our ongoing capital spend at Gibraltar of $15 million and our debt service on equipment loans of $5 million. The overall decrease in our cash of $3 million in Q1 from $53 million to $50 million is therefore really attributable to our continued investment in our near term growth prospect forums, which totaled $5 million. For the first quarter we reported earnings from mine operations before depletion and amortization of $5.9 million. Earnings were clearly affected by the lower copper price in the timing of our shipments in the quarter. We also had $13.6 million in provisional price adjustments, half of which related to the 2019 shipments that were revalued in the first quarter. At the end of March, we still had 18 million payable pounds per share that was repriced in the second quarter. The recovery of the copper prices in April will result in at least $3 million of our $30 million provisional price adjustment reversing in Q2's earnings. We had concentrate inventory of 6.4 million pounds at the end of March. We did receive advanced payments on half of it and we'll be working to reduce inventory in subsequent quarters by working on a shipping schedule with our customers, especially given the higher production and sales expected under the revised mining plan. Site operating costs were slightly reduced from the prior quarter and came in at $1.82 per pound due to the weaker Canadian dollar, diesel costs and other site cost savings that we're beginning to see in greater capitalization of stripping costs in the quarter. We did purchase some fuel call options to provide a ceiling price on fuel at Gibraltar for the rest of this year. This will lock in a minimum $0.12 a liter savings for the remainder of 2020 compared to 2019. This is significant given that we consume about 30 million liters of diesel at Gibraltar, but we still fully participate in these low prices we're seeing. Depreciation at $27 million means higher compared to historic levels, but it's generally in-line with our previous guidance and should be at similar levels for the next two quarters. Adjusted EPS was a loss of $22 million or $0.09 per share due to the higher depreciation from granite's ore and the provisional price adjustments mentioned previously. GAAP net loss for Q1 was $49 million, which includes the $30 million unrealized foreign exchange, unrealized on our senior secured bond given the weaker Canadian dollar in the quarter. Finally, we did do some housekeeping on the regulatory front and just updated our base shelf perspectives which expired earlier in the year. This was not filed in relation to any planned financing -- just housekeeping and in-line with our Q1 earning, timing and filing of our AIF, so it's in the normal course and that we renew it every two years. So, I'll now turn it back over to Russ for some closing remarks.

Thank you, Stuart and Bryce. In closing before the Q&A, there's something I'd just like to add. Most folks, they have little understanding of filling a concentrate stream and how long it takes. Certainly very few understand what it takes to ramp up a mining operation back up after a closure. There are two core factors missing in the copper supply demand discussion right now. First is scrap and you're starting to see it emerge as a point of contention. It's just beginning to be spoken about and it will have a major impact on the supply side throwing through to the final copper metal market. Secondly, everyone just thinks when the subventions are lifted in places like Chile and Peru, and the big mines is just back to business as usual. Well, I'll tell you, shutting down is easy, starting up is long and difficult. Simplistically, if we look at it, end users of concentrate like China are starting to run out of concentrates. We're starting to see that and the spot TC/RC market is telling us this. Yesterday a spot tender out of Escondida sold for 43 and 4.3 [ph], which indicates the tightness of the market. So the whole block of concentrate, shut down a month and-a-half ago is now being used up and depleted. It's either in transit or docks and inventories and is being used. Remember, freight time from Chile to China is over three weeks. So now a large portion of the stream is empty from the mine, to the port, to the ships, to the smelters. Some may still be in transit, but likely 90% cleaned out at source. And how long to fill up stream back is the real question and it's not 'press the green button and away you go' immediately. Simplistically if you look at it, if you take one to two weeks where we call a personnel, one week for a restart if you have supplies, if you don't, then it's taking longer -- if ore depleted before shut, you need to strip an expose ore maybe one to two weeks. So anywhere between two to four weeks before you ship concentrate in a pipeline or a truck or a port. Then, you have to fill the port up. So to get a ship for 40,000, 50,000, 80,000 tons, that can take two, three to four weeks to fill the port to resume, then three weeks to get it to a smelter. So best case if you work back from that, you're talking 10 weeks at best, so two and-a-half months and worst case could go over 14 weeks, so almost four months. So there's going to be no concentrate in the pipeline or limited concentrate and that is what's going to happen next. First indications is watching the spot TC/RC, which as I said two days ago or yesterday, the Escondida spot contract went for 43 and 4.3 and we're seeing smelter closures in China because of the lack of concentrate and the lack of spot or scrap metal. So that's telling us a lot of what may happen the next little while. Yes, you see inventories dropping slowly, but as concentrate dries up, that should accelerate. That's just a little insight from my years in the mining business. So now I'd like to open the lines, operator, to questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] So your first question comes from Craig Hutchison of TD Bank. Please go ahead.

As a potential cost savings this year. Can you provide an approximate breakdown of how much of those savings is related to falling input costs? And how much is related to deferred spending on discretionary items and maintenance? Trying to get a sense in terms of as we return into better copper prices, how much of that be bit of a catch up in terms of cost maybe next year or the year after?

All right. Craig, we missed the first probably 30 seconds or more of your question, but I think I got the gist of it. It's John here.

Okay. I could repeat it. John, in terms of the cost savings you guys quoted that the $0.40 to $0.50, I'm just trying to get a sense of how much of those cost savings are related to input costs? Like diesel and lower Canadian dollars and how much is related to a cut to discretionary spending and maintenance?

Okay. Well, first off, none of it is related to Canadian dollar. We're just talking about spending at the mine site. Second, it's a blend of a whole bunch of different things that we're doing. We're working with our suppliers to reduce costs. We have reduced the stripping in the Pollyanna pit because we just don't need to do it right now. So the strip ratios since we bought two for the next while as we watch the copper price and we're also in higher grade, so we produce more copper with the same amount of effort. So that's what brings our operating costs down. The stuff which is deferrals, we've included those in the costs of, if there's a deferral like the BC Hydro, we're taking that. That's not in the $0.40 saving, that's part of the of the spending because it's just a deferral. Then you have lower diesel prices, there are some natural input decreases, diesel explosives, steel, things like that. I don't have each one quantified. It's a blend of the total.

So, I guess you guys haven't taken advantage of the Hydro deferral program as of yet. But if you do, can you give us a sense of how much those cost savings would be on a monthly run rate?

Yes, we have actually applied it. There's a special tariff that's been put in place by BC Hydro given the COVID situation. So we get a three-month minimum 50% deferral. But that, I think just to reiterate what John is saying is that's not the benefit. The first bill payment, we're saving about for Taseko share about $1.5 million, but that savings isn't being quoted by John when he's talking about $0.40 to $0.50 savings because that is just a deferral. So it's a three-month deferral and we start paying that back in March next year over nine months. And then on top of that, we have our long standing deferral program where the copper price is below CAD340, that will kick in, but at present, we're just looking at the 50%. But if copper prices stay weaker, we'll use the program longer or have the option to...

That program he's talking about, Craig, was established in 2016 when there was a copper price crunch and the industry went to government and said, 'Hey, you guys are charging us a lot for hydro'. And that program still exists. There's two in place for mining.

Are you guys still there?

Yes. Can you hear me?

Yes, you cut out on me. It could be my phone, and I guess everyone's working from home. Maybe if I could, just one last question. If you guys structure a deal, I know you're working on a potential minority sale for Florence. If you were to do a deal, would you look to use some of those proceeds at the corporate level, at the current level, or do will it all be for any future spending at Florence itself?

Well, the details of any deal are still being negotiated, but generally, partners are going to want to see their money going into the project that they're investing in. And so my expectation is that any proceeds we get from that sale will be reinvested into Florence and will fund a big part of Phase 2 CapEx. It could also potentially fund PTF operations in the near term, but those are relatively small dollars anyway. But no, generally speaking, we don't expect they will cease to be brought to the corporate level because we don't really need proceeds at the corporate level. We're pretty comfortable with the balance sheet that we have and the operating margins that we have at Gibraltar. So that's basically where we stand today.

Okay. Thanks, guys. Thanks for taking my questions.

Thanks, Craig.

Your next question comes from Edward Montgomery from Canaccord, please go ahead.

Thank you. Well, I just had a quick question in relation to the Florence project in terms of just upcoming news flow. I know Stuart in your relation [ph], you mentioned the environmental permitting and everything. I know you mentioned on the call, but a bit more color on that and how things are being impacted in the current markets, or anything to articulate on that place?

I guess the question was for a bit more color on the permitting process in Florence. I think in the Arizona Stateside they're moving expeditiously. They're moving on a pretty clear timeline. Draft permits should be coming in the next few weeks so that'd be a public hearing. I don't know John, if you have anything to add on.

There's two permits that we need. One is from the state and that's the aquifer protection permit and the other is from the U.S. Environmental Protection Agency. That's called an underground injection certificate. The Arizona process is a little easier to foresee. They have timelines that they follow and the state is very optimistic and they're very supportive of this project so we expect that draft permit in about a week or two to go public. Then there's 30 days wait, then public comments, then there's a hearing, then the state alters the draft to what they need to satisfy any public comments and then the final permit is issued. We're seeing that probably September. With that in hand, the PTF, the Production Test Facility just continues on. We don't need a new URC from EPA to continue at the Production Test Facility. The EPA is a little more complicated and a little more--It's good to see through on how long things take but we're working very closely with EPA in San Francisco. They're very attuned to the project. They're also supportive but they've got a process to go through. We see that coming. It could be by the end of this year but again, it's a little harder to predict.

Okay, understood. Thank you.

Your next question comes from Yuen Low from Shore Capital. Please go ahead.

Hi, I'm not sure whether I missed any of this because I had some interference in my line. Could you go a little bit more into the mine play? I think you said the shipping is going to be down to about two for the next few quarters and that you're into higher grade. Are you intentionally targeting higher grade parts of the ore body? Well, the shipping has to be caught at some point. Could you also talk to us about iron and recovery for the next few quarters? Thanks.

Okay, that's a lot of questions in one question. As Russ mentioned, we've got a great deal of flexibility at Gibraltar because we have a number of different working faces. In a normal course, we put all of our equipment to work and set ourselves up to maintain as much flexibility as possible, which gives us the opportunity to do what we're doing right now is reduce the mining rate. What that does is we reduce the mining rate in the high strip ratio area and we actually accelerate the mining rate in the lower strip ratio area which is the Granite pit. Most of our ore will come out of there for the next while till the end of the year, and it is higher grade than what we would have gotten from a Pollyanna pit at the same time. Not a lot, but enough to push us towards the high end of the guidance. We also by accelerating the Granite pit it gives us an opportunity to move water from the Gibraltar pit into the Granite pit because it will be done sooner and then we can develop into the Gibraltar pit. That's really the key to what we've been able to do here so that we've got to 2023. We see no effect on production from Gibraltar and continued lower costs. We also don't have to move the crusher, which was scheduled to be moved in 2022. So that's a big capital expenditure that we can push out for a few more years. Iron in the ore, to get higher-end content, you have to try and depress that to maintain your concentrate grade. When you do that, you end up losing a bit of the copper too so your recovery goes down. Does that help?

Yes, I was just wondering what the levels of iron you will be seeing in this revised hindsight. Will we see recoveries back up to the more usual levels for the next few classes or will they remain at one level?

In this portion of the granite pit, the iron is higher than normal. It's not a lot higher but it's enough that it gives us some issues. In the flotation process, we are working with different reagents to get a better response so I wouldn't say that we expect to see a recovery soon. Actually, with the grade going up, the recoveries go up naturally too so I think will be more normal recovery for the foreseeable future.

Thank you very much.

Your next question comes from David Barilla from BSP. Please go ahead.

My questions have been answered. Appreciate that. Thanks.

Okay, so your next question then comes from Matt [ph] from Jeffries. Please go ahead.

Thanks. Good morning. I can see that you guys are doing a lot of work to obviously to lower cost spending. Just curious if you can talk about whether you think Gibraltar can generate enough cash to cover its interest in unexpected CapEx. I know you said you thought it would be cashflow positive but just want to be clear, are we talking about being able to cover fixed charges interest in CapEx this year? I understand that copper price is a big variable there, but I guess just for the sake of argument if copper were to stay here today, do you guys think you could be -- do you think you could preserve the liquidity you have today at Gibraltar?

Yes. At these copper prices, we're going to probably generate cash over the remainder of the year with this new plan we have at Gibraltar, and that's cash at the corporate level. As I said, we've taken $0.40 to $0.50 out of the cost structure here. We're pretty comfortable with where we stand. I think in Q2 we should see the cash grow a little bit, maybe stay around where it is. It's dependent on copper prices, obviously, which are moving every day but we ran our plants a month ago at 220 copper, and that's the kind of scenario that we're planning for so we're pretty comfortable.

Okay, good to know. Thank you. Then, just on Florence and the financing there, I guess it's potentially two components. One selling an interest in the project and secondly, some sort of debt financing. Given where some of your corporate debt trades today that would imply a high cost of capital for corporate debt. Are you contemplating then project-level debt and if there's any way to kind of quantify the two pieces? You still need to raise roughly the $200 million. Is that mostly a JV stake sale and maybe a small amount of debt and then again, just where might that debt sit?

In terms of where it might sit and the current expectation is that it would likely be project-level debt. That's where lenders can be comfortable with their secured right at the Florence level and not be impacted by the bonds or anything else. Florence, as you know, under the bond is not part of the bond security package so that's an unencumbered project at this point. In terms of our financing expectations, obviously, a lot of that will depend on how the negotiations go with potential JV partners. If we can get a good valuation and the valuation that we want, we could scale that investment up higher. If we don't, it could be a smaller piece but I would estimate anywhere from $100 million to $125 million potentially from a JV partner and the remainder would be filled with project debt or potentially royalties as well. That's another option that we will look at. Those are moving pieces and subject to a lot of further discussions.

Thank you.

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

Thanks very much, everybody. Have a good summer. We'll talk to you soon. Bye.

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