Taseko Mines Limited (TGB) Q4 2020 Earnings Report, Transcript and Summary

Good morning. My name is Veronica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines Q4 and Year End 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, Veronica. Welcome, everyone, and thank you for joining to Taseko's fourth quarter and year end 2020 conference call. The news release announcing our financial and operational results was issued yesterday after market close and is available on our website, tasekomines.com. With me today in Vancouver is our CEO, Russ Hallbauer; our President, Stuart McDonald; Taseko's Chief Financial Officer, Bryce Hamming; and also, Richard Tremblay, VP of Operations. As usual, before we get into opening remarks by management, 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 fourth quarter MD&A and the related news release, as well as the risk factors particular to our company. I would also like to point out that we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release. After opening remarks we will open the phone lines to analysts and investors for question-and-answer session. 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. My comments will be relatively brief, as I'm sure you want to listen to Stuart and Bryce and both are operating and financial results, as lots have occurred in these areas over the last year. So I'll just generally speak a bit about where we are as a company. Generally, our strategic plan over the years has been to stay within our means. And I've spoken many times on these quarterly calls about that. We run our mining operations at the highest level we can and the lowest operating costs we can achieve. And on top of that, we ensure that our capital discipline is the number one priority for us. Over the years, this in turn should allow us to take advantage of the opportunities that come with a cyclical business such as the one we are in. We've had some pretty tough times. And during those tough times, we've acquired our pipeline of assets. We bought them when copper prices were low. And our entry costs were also low. So we've always looked for long-life low-cost assets. And we have a large stable of them. We have a plan to build out and develop them, when conditions present themselves. And we have waited for the correct time. And in this business that is - patience is difficult to come by, because of outside forces. But here we are, on the cusp of some exciting times with the metal prices. And those are exciting times for our management team and our shareholders, as we enjoy this present copper price regime we've been waiting for. I don't think generally that we're going to see anything like this in our lifetime. I've been in this business for over 40 years now. And while we have seen good prices, we've not seen price levels like this, which is expected to be sustained for a period of time. And so it's not just price, but I think ultimately it's going to be the longevity of the cycle. This is certainly not 2011 when we last saw $4.50 copper. So this company is perfectly positioned to take advantage of this once-in-a-lifetime event. While we're continuing to pump out cash, our Florence project transitioning to construction, our Yellowhead project advancing in the EEA process along with our First Nations friends, and New Prosperity sitting in the wings, our path forward is bright over the next decade. How is the mining company built? It's built on the back of long-term reserves. Between all of our operating and development assets, we have 15 billion pounds of reserves. I mean that's not resources, that's not - those are all 43-101 reserves. All with feasibility studies on them. So if we look at that in the context of the industry, those are more reserves than Lundin has, Hudbay has, Capstone has, and Copper Mountain. In fact, our reserves are 50% greater than Capstone's and Copper Mountain's combined. And those reserves are valued at less than $0.05 a pound in the ground. Well, Lundin has valued at $0.30, Capstone at $0.30, and Copper Mountain at a staggering $0.80. So some of the catch-up of these metrics by investors will occur in terms of growth - is our growth of our production continues. Frankly - and that's going to be in a pretty short period of time, next 36 to 48 months if we continue on this path of where we think copper price is. So frankly, I think we're the best growth story in the copper space. We've been [lined the clock] [ph], because we've had a low cost operation in Gibraltar. The Gibraltar's generated cash for the last 15 years, and it's put us instead where we now can develop our pipeline and production. So if you look at it conceptually, we grow with Florence, we have 185 million pounds of production by 2023, a further 170 million pounds by 2025 once Yellowhead comes online for annual production of over 355 million pounds annually at roughly US$1.60 per tonne C1 cost. So if we look at all your guys' estimation, all your analyst estimations with copper ranging well above $3. As you can see, these are going to be pretty accretive reserves in the ground. So this does not include any consideration of where we may find ourselves headed on New Prosperity discussions with our First Nations firm. So a year there has been very difficult in many respects for so many of us in the world, has set this company up for the future in many, many ways, everyone seems to be focused on Gibraltar as I said, but that's only a small component of this company, albeit as important for the past 15 years, and will go on for another 20 or 30 years. Copper is going over $5 a pound there's no doubt about it. Both Chile and Peru are in serious trouble on the pandemic front. [Coiabaceyo won't be coming on screen anytime soon nor will Qubee] [ph] or any other Latin American operations. To put into perspective, treatment and refining charges are slow and low, the smelters are shutting down because they can't afford to be open. No concentrate, no metal, but there is still metal demand. Highland Valley Copper, for example, just sold a spot cargo of 60,000 tons of concentrate for $23 a tonne and $0.023 a pound. So smelters will go down and demand will still be evident. And copper price will increase stay high for the long term. I'd like now to turn the call over to Stuart.

Okay. Thanks, Russ, and good morning, everyone. And thanks for joining our fourth quarter earnings call. We did actually announce our copper production and EBITDA estimated in early January. So that part was really news yesterday, but with copper prices now over $4 a pound number of other positive developments in our business recently. It's definitely an exciting time for us. And I wanted to start spend a few minutes just to review the last year and it was certainly a memorable one for many reasons. Firstly at Gibraltar, as always, our primary focus is on the health and safety of our employees. And our response to the COVID pandemic in March was evidence of that commitment to workplace protocols that we implemented, kept the operation running smoothly and our staff safely employed. And while we've had a few COVID cases recently within our workforce, we haven't had any issues and new operational disruptions. We're also proud of the fact that we had zero lost time incidents at Gibraltar last year. When the copper price dropped last March, we took quick action to adjust our cost structure. And those initiatives resulted in about $30 million of cost savings in Q2 and Q3. We made those operational adjustments without any impact on copper production, without any employee layoffs and without jeopardizing our long-term mine plan. So it definitely demonstrates the flexibility that we have at Gibraltar and the value of a long life stable operation in a good jurisdiction. We produced 123 million pounds of copper for the year at a cash cost of $1.92 a pound and that led to operating cash flows of $106 million and adjusted EBITDA of $108 million for the year. We also made very good progress at Florence over the last year. This is a very valuable asset that is going to dramatically change Taseko's copper production and cost profile in the near future. The test work that we've completed has been an important de-risking step and increasing our operational understanding and also validating many of the key assumptions from the feasibility study. In December, we received the state Aquifer Protection Permit, which was a key milestone and followed on public consultation process where we saw strong community support for the project. This support is now also being reflected the Florence town council voted in January not to appeal that permit. So the community support bodes well for the EPA permitting process, which is ongoing and we expect to receive that permit as well in the next few months. So we've had successes about Gibraltar and Florence. And with our recently completed financings, we also have a much stronger balance sheet than we've had in the past. The $400 million bond refi completed earlier this month was used to repay our $250 million bond which was due to mature in 2022. And the upsize provides a significant portion of the required funding for Florence at an attractive cost and with no maintenance covenants. We now have a cash balance of approximately US$200 million and no significant debt maturities until 2026. So we believe we're very well positioned. At Gibraltar, we expect to produce 125 million pounds of copper this year that's a slight increase over 2020. And we expect that production to be weighted towards the second half of the year as head grades increase as we advance in the Pollyanna pit and also begin to access or from the Gibraltar pit later this year. And, of course, copper prices are significantly higher than they were in 2020, which means improved financial results for us. To give you an idea of our leverage at these prices, we would have generated roughly $275 million of adjusted EBITDA last year, which is 150% increase. So with 90% of our revenue coming from unhedged copper production, the copper price recovery is very meaningful for us. We have the majority of the required Florence funding already in hand. And we recently announced that we're moving forward with final design engineering and procurement activities. This upfront work will allow us to move smoothly into the construction of commercial facility. And we're planning to move forward with on the ground construction as soon as we have the final EPA permit in place, which we expect to happen around mid-year. That's schedule would put us in commercial production in the second half of 2022. Florence is one of the lowest CapEx intensity copper projects in the world. It also has a low operating cost of $1.10 a pound and it's a green project that will produce refined copper cathode with 90% less carbon emissions in a conventional mine. This will become a new U.S. domestic supply of green metal that fits very well into government plans for renewable energy infrastructure and electric vehicle manufacturing. Lastly, I wanted to talk about our longer-term growth plans. Beyond Florence we have 2 other significant copper projects in the pipeline, the Yellowhead and New Prosperity, and we're actively engaged with - on both of those projects. The Yellowhead, we're focused on the environmental assessment process and engagement with local communities, including First Nations. We've also commenced discussions with potential JV partners for that project. And as a reminder, the New Prosperity we're engaged in a confidential dialogue with the BC Provincial Government and the Tŝilhqot'in National Government to try to find a solution to the conflict around that project. Over the last year, we've made progress in establishing a constructive dialogue with a Tŝilhqot'in. And in December, we agreed to extend our standstill agreement for an additional year so that that dialogue can continue. So this is important work that's happening in the background at both Yellowhead and New Prosperity. We understand that equity markets are focused on shorter term catalysts. But development of major projects like this takes time and patience. And with successful outcomes, either these projects could become very meaningful for shareholders in the near future. In a $4 copper price environment, there's also expansion potential at Gibraltar and that's something we're studying as well. As Russ already mentioned, Taseko has closed to 15 billion pounds of copper in proven and probable reserves. And that reserve base is unmatched in the mid-tier copper space. So we have a great base to build firm, and we'll continue to focus on organic growth to realize the inherent value of those reserves. And with that, I'd like to wrap up and hand the call over to Bryce to talk about our Q4 financials.

Thanks, Stuart. Good morning, everyone. For the fourth quarter we reported earnings for mine operations before depletion and amortization of $27 million and adjusted EBITDA of $20.5 million. Earnings this quarter continued to benefit from the recovering copper price, which averaged $3.25 per pound for the quarter. Taseko also had a further $8 million in upward provisional copper price adjustments included in revenue has resulted in the average realized price of $3.69 per pound in our revenue. We had sales of 25 million pounds, which is similar to our production, and we continue to keep our concentrate inventory low at the end of December, which ended at 3.4 million pounds. Total site operating costs came in a bit higher this quarter at US$2.82 per pound, and it was higher than the previous quarters on a per pound basis as a result of a few things. First, we had lower copper production. There was also $0.36 cents attributed to inventory for 4 stockpiles which grew over the quarter, actually throughout 2020. And we also had higher costs in our finished goods inventory. Those together increased by $8 million in the quarter. There's also less mining costs being capitalized as work focused in the Pollyanna pit, only $1.2 million that was related to work in the Gibraltar pit. And last but not least, the Canadian dollar also strengthened finished the year at $1.27 per pound. But at $3.69 realized copper price we still made a notable operating margin of $27 million before depreciation and generated cash flow from operations of $20 million. Depreciation is that $19 million and is consistent with our previous guidance of $20 million per quarter, which is what we expect going forward for the Pollyanna pit for 2021. With the higher copper price in the new mine plan, we also invest in the dewatering of the Gibraltar pit in Q4 was $7 million in procurement of the pumping and piping system to move water into the Granite pit in 2021. Now that we're finished mining in the Granite pit. We also spent $4 million on Florence. These CapEx programs were funded from our operating cash flow. GAAP net income was $6 million and EPS was $0.02 a share to the weakening U.S. dollar with the removal of the unrealized effects gain on our 2022 notes, which are denominated in U.S. dollars, we had an adjusted net loss of $7.5 million or $0.03 per share. Looking back on 2020, in particular, the cash flow statement you can see that with everything that COVID threw at us, which Stuart outlined. We finished the year with $85 million in cash, which is $32 million more than where we started. The modest equity raise we did in November for net proceeds of $34 million remains in our bank account today and improved our liquidity. We also generated $170 million Canadian of net proceeds from our bond refinancing in January that Stuart mentioned that bond was upsized to $400 million, but at a significantly lower interest rate. Our interest costs are only increased by $6 million a year. So today we have US$200 million of cash. While we watch the copper price attempt to break and surpass prices not seen for a decade. This is extremely timely as we plan for the construction of Florence in the second half of this year. We have a lot of options available for any remaining funding. And we know Florence is a very valuable asset in the current environment. Florence makes an extraordinary financial return to given its low CapEx intensity and expected to see one cost. Florence has a net present value of $680 million based on our 2017 technical report using a $3 copper price. With funding substantially in hand and removing that CapEx in that model that increases the funded NPV of Florence up to $900 million or US$3.25 per share. And if I run that funded Florence model using $3.50 copper price, it's US$4 per share, and that today's copper price to $4.30 per pound, I see an NPV of US$5.50 per share. So there's significant appreciation potential in the near-term for our shareholders as we prepare to build and operate Florence. This is all happening at a time when copper attempts to break new records. And the world is planning to recover from the pandemic, but finding itself critically short of copper. And with the backdrop of investors, hungry for ESG conscious companies and qualifying green investments, 2021 will be a transformational year for Taseko. I will now turn it back to the operator for any questions. Thanks.

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Mike Kozak with Cantor Fitzgerald. Please go ahead.

Yeah. Good morning, everyone. Thanks for taking my questions. A couple from me. First, is that, do you expect to have to wait for Michael Regan, who's I think the new head of the EPA and presumably his new incoming team, to have to review all the in-progress approvals before Florence receives the UIC? And, I guess, what I'm asking is that, when you say the UIC permit by midyear, is that the assumption that you're making?

Yeah, Mike. It's Richard Tremblay here. So we do not foresee any delays with EPA reviewing or finalizing the permit and commencing. Like the process is it gets issued for draft - gets issued on the draft, and then it's out for public comment. And then, those public - at the end of the public comment period, there's a hearing. Comments are made. EPA will adjust the draft permit if required, based on some of the comments received and then we'll issue it, but we don't foresee any delay or any issues there.

Okay, okay, that's helpful. And then, my second one is just on the Florence financing here. So I just look at the numbers. So initial CapEx $230 million. You got $400 million now, less than $250 million from the bond refi, so $150 million net. So call it an US$80 million funding gap, excluding what you have on your balance sheet in cash now or just from the last quarter. And just by my estimates at current copper prices, basically 2 quarters of cash flow from Gibraltar. So my question is that over - Stuart's been saying over the last probably 6 quarters, one of the financing options was either a JV partner or even selling a royalty to finance Florence. Can I - I want to confirm that, I mean, this is no longer being considered, I could imagine, right, given where copper prices are and the fact that funding gap is so small?

Well, I think you've got the handle on the numbers. I mean, we've got - as we said, in our script, we've got US$200 million of cash in hand today. We're generating good cash flow from Gibraltar. CapEx of Florence is relatively low, with only $230 million. So, yeah, we think we're in a very strong position. We definitely have the ability to fund this project on our own and own it 100%. We are continuing discussions with a few select JV partners. We're going to see how those discussions play out. We still think that the potential to maybe sell a minority stake at something based off of NPV, $700 million NPV or higher at today's prices, if we can do a very accretive transaction with a minority stake, then that's something we may consider doing. But if we don't get the valuation that we want, as you say, we have many other options to fund this and own it ourselves on a 100% basis. So we're in a much stronger position today, obviously. And frankly, kind of looking back, we're glad that we didn't do a transaction last year, because we're in a much stronger position today and have many more options. So sometimes it's the deals that you don't do that work out well for you.

I completely agree. That's good to hear. Okay. Thanks, everyone. That's all for me.

Thank you very much. Your next question comes from Craig Hutchison with TD Securities. Please go ahead.

Hi, good morning, guys. My question is on Gibraltar. We did see the mining rates pick up here in Q4. Can we expect similar mining rates through the balance of this year that we saw in Q4?

When you refer to mining rates, total material moved?

Yeah, total material moved. Maybe, if you can give me some context on strip ratios as well that'd be helpful.

Yeah. So, Craig, Richard Tremblay here. Yeah, mining rates will continue similar to Q4 rates for this year.

Okay. And in terms of grades, I know you guys are guiding for higher grades in the back-half of this year, but just kind of going into Q1, should we expect that somewhere into Q4 or are you guys already in a higher grade portion right now?

Yeah, so the production profile for the year, roughly 45% of our production will be in the first half of the year and 55% into the second half.

Okay, great. Thanks. And in Florence as well, just a follow-up question on the permitting, I know you guys target with your Q3 results to have all the permits in hand, so early 2021, now it's sort of midyear. Can you just provide some context of why that timeline is slipped on the EPA front?

Government.

The timeline really, it was impacted by a number of different things. But there is no set timeline, so it's a process that needs to be run through. And, best estimate is really what we look at. COVID-19 played a factor. Response is back on the treatment plan for the historic properties that are on site that we have to deal with, were slow in coming back from the consulting parties and a number of things like that impacted us. But the process continues to advance, just not as fast as we originally thought.

Okay. And then just last one question. I think that the CapEx guidance now is around US$240 million, is that correct?

US$230 million is the number.

US$230 million?

Yeah, yeah.

Okay. You guys are feeling pretty confident of that, just given where fuel prices have gone recently in the U.S.?

Yeah, we've looked at that. We're reasonably confident that that would include there is some assumptions in there about reclamation bonding. And a portion of those, of the bonding will be covered by surety bonds. And there is some working capital in there. But, generally, we're comfortable with that estimate.

I appreciate you guys.

Greg, the more engineering you do, the better refinement you get on your cost. So, although we've been delayed with the permitting, and last year, certainly, the delay in the permitting, like Stuart said, certainly just blended into the whole where we were in the copper price cycle and that kind of stuff. But at the same time, we were refining our engineering studies and getting more details in terms of overall engineering costs. And when that happens, you can really focus in on your capital expenditures.

Okay, great, guys. Thank you for taking my questions.

Thank you very much. [Operator Instructions]

Okay. Operator, yeah - operator, if there's no further questions, yeah, we can wrap up the call here. And thanks again, everyone, for joining and we'll talk to you again in May after our first quarter. Thanks again. Bye, everyone.

See you.

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