Taseko Mines Limited (TGB) Q1 2021 Earnings Report, Transcript and Summary

Good morning. My name is Andis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines first quarter earnings and production results conference call. [Operator Instructions] Thank you. Mr. Brian Bergot, you may begin your conference.

Thank you, Andis. Welcome, everyone, and thank you for joining Taseko's First Quarter 2021 Conference Call. The news release announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com. On the call with me today is Taseko's CEO, Russ Hallbauer; our President, Stuart McDonald; John McManus, our COO; 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 first 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 a question-and-answer session. I would now like to turn the call over to Russ for his remarks.

Thank you, Brian. Good morning, everyone. Hope you are all doing well. As you can see from our quarterly results, it's been quite the ride for us over the last year. With the price volatility we've seen over the last year, it's been a tough environment to operate in. When you produce 10 million less pounds of copper as we did this quarter within in the comparable quarter or year ago to make $25 million worth of operating profit, that's a good thing, I suppose. In simple terms, our plan last year were to get through the early stages of the pandemic when copper dropped just over $2 per pound. And we accomplished that by managing our mining plants to maintain positive cash margin at Gibraltar in the same way -- in the same manner that we got through the global financial crisis in 2008, 2009 and then copper price crash in 2016. As we've spoken about many times in the past, Taseko Mines moved quickly to adjust our whole mining plan to ensure we get by whatever was going to happen, and that was no different during the pandemic. They were uncertain times. [indiscernible] copper [indiscernible] steel around $2 further to $1.50 or lower or recover quickly, who knew? And our large mining operation at Gibraltar, where we're moving in excess of 100 million tonnes of waste in our year, it's a complex engineering undertaking. And if you move in one direction, it takes a lot of time to rectify once the metal prices sort of develop. And thus, here we are a year later giving ourselves as a whole we [indiscernible] into 12 months ago. But things have turned out pretty well with the operating profit we made in our operating results, and financials will continue to improve over the rest of the year. As we've seen in the past, when we resequence the pits and the resequencing of the pits occur, we encountered lower grade in the upper benches of these pushbacks. And that's been a historical function of the type of ore body we have. And what's gone over the past 6 months is indicative of that. Grades are below reserve rates, and that effect [indiscernible] metal we produce. And lower grades equate to higher C1 costs, however, going forward, as we transition through the resequencing, we will have to re-mine higher grades and lower strip and ultimately lower C1 costs. So as we talked about, as we move forward through the rest of the year, we'll see grades rise quarter-over-quarter to above our average reserve grade later in the year. So that explains in simplistic terms our mining sequencing results. Now some folks think we should have really creamed it with copper prices, what we have seen. And we did with respect to where we were a year ago. So now we just have to look forward to how things unfold for the rest of the year. And hopefully, with higher copper prices, we will continue to have very good financial results. One thing I'd like to mention is that as we sell metal at ever-increasing prices, the cost of everything else goes up, including our input costs. I guess a lot of people are talking about inflation, and this could be classified as inflation. But as we see at this juncture, input costs have not been increasing, but it's hard to say how long that will last. We've managed to maintain our cost at relatively stable levels over the years because we've taken a long-term view of the business and lock down our input costs with long-term contracts wherever possible to try to take out as much variability as possible. For example, ocean freight from Vancouver to Asia in normal times costs anywhere between $60 to $90 per tonne. And if you look at feasibility studies for Western Canadian or other mining operations, you'll see that in most of the feasibility studies. Fortunately, we had a contract that is less than half of that price or roughly $30 a tonne for a number of years now. However, the Dry Baltic rate has been very poor for the past 5 or 6 years. However, that is all changing. And as you can see from the graph of the Dry Baltic, it's running up to rates not seen for a decade. So producers will come under pressure from those increases in terms of total C1 costs. Our freight rate lock-in lasts for over another year. So we are sheltered from increases in our property costs to some degree for the foreseeable future because of the approach we have taken to lock in things we can't control, but many companies are exposed big time. Managing the cost implications of a 2 to 3x freight increase in your ocean freight costs, say, going from $0.03 to $0.04 to $0.08, $0.09 or $0.10. And that's just freight costs hitting your bottom line. The same is going to occur with refining and treatment charges. Everyone knows that the benchmark prices are in the neighborhood of $60.06 a pound, which are the lowest of the past decade as well. However, spot rates are down around $10 to $20 per ton and $0.01 to $0.02 per pound for high-quality copper we likely will produce out of Gibraltar. We recently sold a spot cargo of 45,000 tonnes in that range for delivery later in the year. And with our long-term contract ending at year-end, we believe that all TC/RC costs will climb. The shortage of concentrate will now allow us to renew with terms like we have now, well below benchmark. And those savings are in the millions of dollars a year which flows straight to our bottom line. Gib has over the course of the past 15 years had the best refining treatment contact of any mine in the world, bar none. And that has a lot to do with the type and quality of concentrate we produce, and our spot terms confirm that. It is a sought-after concentrate. So while we will face the added pressure with respect to grinding media, reagents, diesel, we believe we can mitigate those with what we're doing in some of those other areas, as I've spoken to above, which gives us a distinct advantage over many other producers. We're also in the process of looking at what we may be able to do with the next evolution of Gibraltar in the context of what appears to be the future of the copper market over the next year or so. As we know, Gibraltar has a long mine life, predicated off its 500 million tonnes of reserves, but its resources are large as well with an additional 500 million tonnes. We are now planning a property-wide geophysics program, followed by a detailed drill program, to find out more about what we have and what the future may hold for the Gibraltar Mine. As it stands now, just changing the projected long-term prices for our reserves, we can bring in between 90 million to 100 million tonnes of incremental ore, which would extend the mine life by over 3 years. And while that tonnage would support an increase in just throughput from -- to 110,000 tonnes a day from roughly at 25% increase from the current level, we feel like having something in excess of 200 million additional tonnes would support a concentrator expansion, and that's what we're planning on doing, trying to add another 150-million-plus tonnes to our reserves, and we believe that, that is more than feasible. So by this time next year after geophysics drilling and a new technical report, we should see a new updated path forward for Gibraltar. So we'll see what happens after the Florence build-out, but we may be in a position to invest something that Gibraltar all had. We have many, many options. I'd like to now turn the phone over to Stuart for his comments.

Okay. Thanks, Russ, and good morning, everyone. It's hard to believe that the copper price today at just around $4.58 a pound, $1 higher than at the beginning of the year. And that's a 30% increase on what -- on top of what was already a strong price, a great situation for an unhedged producer like Taseko, certainly feels like there's been a shift in how many analysts and industry experts are thinking about the market over the next few years. And we started seeing the impact of that strong market on Taseko share price, which has doubled again over the last 6 months. Strong markets also allowed us to refinance and upsize our bonds in February at attractive terms. And looking ahead with the large reserve base we have at Gibraltar and low-cost growth coming from our Florence project, we're in an excellent position to benefit from strong copper prices in the coming years. In terms of the first quarter results that we released yesterday, copper production from Gibraltar was 22 million pounds on head grade of 0.19% and recoveries of 82%. We knew that grades would be lower in the first half of this year as ore mining transitioned into the upper benches of the Pollyanna Pit. The grade was lower-than-expected, and that impacted recoveries as well. On the positive side, we mined a total of 32 million tonnes, which is more than 20% higher than the previous quarter as we benefited from shorter hauls and high productivities. Because of the strong performance in the mine, we now expect to get into the higher grade that was forecast for the second half of the year later in the second quarter. So we see improved production in the second quarter and then higher again in the second half of the year as we get deeper in the Pollyanna Pit. We have seen an unexpected delay in a routine permit amendment that we need to access the Gibraltar pit. And unfortunately, that delay resulted in 34 layoffs. We believe that situation is temporary and expect to receive permits and begin mining in Gibraltar pit this quarter with ore release from that pit beginning later this year, which will also contribute to improved grades and production in the back half. So while we were 25% below reserve grade in Q1, that will reverse, and we expect to be above reserve grade in the second half. Those of you that have followed our company know that this is not an unusual occurrence as we do have quarterly fluctuations but revert back to our average grades over time. At current copper prices, we're forecasting over $200 million of operating margin over the next 9 months. And if copper prices go higher, then so, too, will our margins. With that level of cash flow coming from Gibraltar, we would be in a position to fund Florence with internal sources and without any additional financing or JV partner. While we're continuing discussions with a few potential financing partners, retaining 100% ownership of Florence is definitely something we're comfortable with as we see good copper prices ahead. On the regulatory side of Florence, we've continued to make progress in recent months. The APP permit was issued by the state in December, and the last remaining appeal was withdrawn in the first quarter. So that permit is in place. In March, we received a favorable appeals court decision, which has finally resolved the remaining litigation with the town. While we never doubted a positive outcome on that legal matter, it's good to have it behind us. We've also now reached a full settlement agreement with the town of Florence, which their counsel just approved on Monday, and we view that as a very positive development as well and indicative of the public support that we received through the APP permitting process last year. The final remaining permit will come from the EPA, and their work continues to advance, albeit more slowly than we expected. We have a regular and ongoing dialogue with EPA. And based on what they've told us, we expect to issue the draft UIC permit in June. There will then be a public comment period, including a public hearing, which we expect will lead towards issuance of the final permit later in Q3. At that point, we'll be ready to move into construction of the commercial facility, and the detailed work -- the detailed engineering work is on track to support that time line. As we've talked about in the past, Florence will produce copper with a sustainable and green production method, and that green growth story was a big focus of our 2020 sustainability report, which we released a couple of weeks ago. We're very proud of our achievements and successes related to ESG initiatives, and those are outlined in the report. For the first time this year, we published Gibraltar Scope 1 and 2 greenhouse gas emissions, which we had independently verified by Skarn Associates, a U.K.-based consultancy. And based on their analysis, Gibraltar ranks in the first quartile of global copper producers for GHG emissions intensity. And when copper production starts at Florence, Taseko will drop even lower in the first quartile. So that report is available on our website, and I suggest you give it a read. I think you'll be surprised of the work our employees do every day to create value for all of our stakeholders. So lastly here, I wanted to take the opportunity to congratulate our team at Gibraltar as we learned this week that the mine has again won the John Ash Award for 2020. This is awarded by the provincial government of BC to the mining operation with the lowest injury frequency rate. So it's great recognition, and we've won it now 5 years out of the last 7. So that's definitely something to be proud of. And with that, I'll pass it over to Bryce to review the financials.

Thanks, Stuart. Good morning, everyone. For the first quarter, we reported earnings from mine ops before depreciation of $30 million and adjusted EBITDA of $24 million. Earnings this quarter continued to benefit from the recovering copper price, which averaged $3.86 per pound for the quarter. Taseko also had a further $4 million in upward provisional price adjustments included in revenue, resulting in an average price of $4.09 per pound. We had sales of 22 million pounds, which is similar to our production, as we continue to keep our concentrate inventory low at the end of March. Ending inventory was 3.6 million pounds and was similar to prior quarters. C1 total operating cost came in at $2.23 per pound and remained higher than the life of mine average as a result of lower copper production. The total spending on the site costs, including $21.5 million in capitalized strip, were generally in line with previous 2 quarters since ramping back up to full mining rates in Q4 last year. The Canadian dollar continued its strengthening trend in line with commodity prices, which is also impacting our cost per pound in U.S. dollar terms. But at a $4.09 realized copper price, we still made a notable operating margin of $30 million before depreciation which increased from Q4. Cash flow from operations, which was negative $3 million compared to adjusted EBITDA of $24 million, was simply impacted by an increase of $27 million in working capital due to the timing of one shipment and the AR balance we carried at the end of the quarter. We did not collect on a provisional invoice February shipment until early April, which resulted in the AR ending at -- the quarter at $31 million compared to $6 million last quarter. Depreciation at $16 million was a little lower than our expectation of $20 million per quarter, but that was due to the greater processing of ore from stockpiles, lower throughput and higher waste stripping activity in the next pit sequence in Pollyanna. GAAP net loss was $11.2 million or $0.04 per share and included a $12 million -- or just $13 million loss on settlement related to our 2022 notes which we refinanced in the quarter. That was partially offset by a $4 million net foreign exchange gain on our U.S. dollar-denominated debt. After adjusting for these 2 nonrecurring items, including tax effects on that settlement loss, our adjusted net loss was $5 million or $0.02 per share. With our December 31 cash balance and the net proceeds of the bond refinancing, we started the year with pro forma cash of $250 million. We ended the quarter just shy of $200 million. The working capital decrease of $27 million, which will reverse in Q2, accounted for about half of that use of cash. We also had increased CapEx at both Gib and Florence, and $11 million was used for the purchase of copper put options to protect our Florence price in the second half of this year. We also paid our debt service, including interest. That was around $10 million. So our cash position is set to increase now given the higher copper price. That's over $4.50 per pound, coupled with the copper production expectation in the coming quarters that Stuart and Russ mentioned. Finally, investment in Florence increased to be approximately $10 million in Q1, reflecting the ongoing but increasing detailed engineering work being performed. Loans expenditures will begin increasing further in the coming quarters as we prepare for receipt of the final UIC permit and get ready for construction of the commercial facility. In addition to detailed engineering, this could include deposits on ordering items and initial payments on key contracts to secure pricing. So we are beginning to strategically deploy some of the funds raised from our equity and bond financings for Florence, which begins chipping away at the $230 million capital cost we estimate to build a commercial facility there. I will now turn it back to the operator for any questions. Thanks.

[Operator Instructions] Your first question comes from Ed Brucker with Barclays.

So my first one, just want to ask on the potential infrastructure deal. Do you think you have an advantage kind of being the North America copper producer with a potential infrastructure deal, especially with the Buy American stance the administration is taking? And then on top of that, has it kind of made you want to speed up the time line performance, if at all possible?

Yes. It's Stuart speaking. Yes, absolutely. I mean we are moving, I think, as fast as we can on Florence. We think it's the right time to be bringing on a new mine like that. As you say, it fits perfectly into the Buy American approach out there and delivering a product that's going to be required for some of the infrastructure spending that's planned in the U.S. So we think we're -- it's perfect timing for this project. We're moving as quickly as we can. The constraint right now, as I said, is that EPA permit. But we get that permit in the third quarter, and we'll be -- which is our expectation, and we'll be ready to move into construction as quickly as we can after that.

Got it. That actually brings me to my next question. Was there any specific reasons for the holdup in the EPA decision, given your talks with them? I think the previous expectation was that it was going to be mid-2021 decision. I'm just trying to get a sense for why the final decisions seems to be pushed back or at least lower than expected and then wondering if that could be pushed back any further.

Yes. I mean it's definitely -- the process has moved a little more slowly than we would have liked. It's unfortunately a process where there aren't any clearly defined deadlines or time lines. And so the EPA just has to get through their work. I think they're moving slowly and prudently and cautiously, and the important thing I think is that there's no major issues coming up in the process. So they're making progress. It's just taking time. And yes, that's our expectation at the current time is it we'll get that permit sometime later in the third quarter, but no major issues there.

Got it. Got it. And then my last question. I just wanted to get an update on where you are in the process at Yellowhead. And the preproduction CapEx, I think I read it was $1.3 billion. It seems pretty big compared to Florence Phase 2 at kind of the $230 million level. So I just wanted to get a sense if you thought about how you're going to pay for that. I know it's further down the line, but would you look at JV partners for that? Or do you think we'll be building free cash flow, et cetera?

Yes. I mean it's -- you're right. It's definitely a bigger CapEx bite for us, and it's a few years down the road. We've got obviously some permitting and community work to get done first, which we're focused on right now. But looking ahead, a couple of years when we have Gibraltar and Florence both running, we're going to be a different company. We're going to be a much stronger -- from EBITDA and cash flow generation. So it's a project that we like, we're interested in. And if we can take it on a few years down the road with a JV partner, we think it could be -- we think it could work for us and fits into the whole copper story as well because you're going to need projects like that to be built to fill the supply deficit that's coming. So yes, that's the way we're thinking about it. It's not a decision that needs to be made anytime soon, but it's -- as I said, it's a couple of years down the road.

[Operator Instructions] Your next question comes from Craig Hutchison with TD Securities.

You touched on earlier that you need a permit to access the Gibraltar East Pit. Just curious, when do you need this permanent place to avoid having any potential impacts on your guidance for 2021?

Richard, would you be able to take that question?

Yes, yes, for sure. Craig, Richard Tremblay here. Really, we're looking to require that permit here before the end of May. If it goes longer than that, then we'll start seeing impacts in 2021.

Okay. And obviously, I guess you're expecting higher grades from this portion of the pit. Is that correct?

Grades from the Gibraltar pit will be in line with the life of mine average. So yes, it will be higher than what we've seen in Q1. And the other, I guess, comment I'll make is not getting into the Gibraltar pit, we see impacts from that, if we're not in there before the end of May, but there's also opportunities to do some things in the Pollyanna Pit to potentially offset it. So we're currently looking at those variabilities or optionalities as a worst-case scenario. But our expectations is that we should receive that permit here shortly in the coming weeks.

Okay. And just on grades, you guys were pretty clear in the opening commentary that you expect grades in the sort of second half of this year to be above reserve grade. But any clarity you guys can provide on Q2, what kind of grades we're seeing right now? And the same kind of question just on throughput, are you into some softer ore? Can we expect throughput to sort of increase over the Q1 levels?

Yes. So as mining continues here in Pollyanna, we see less reliance on stockpile material. And with the ore coming out of the pit, we don't expect or don't see throughput as being a restriction anymore as it was in Q1. So we'll see that come up. And then grades, as has been said previously, will start increasing as the quarter progresses. And then into the second half of the year, we'll see the higher grades.

Okay. Just on Florence, I asked this question on the last conference call, but I feel like I had to ask it again. You guys did mention that you're not seeing much inflationary pressure in your existing Gibraltar operation. But just given steel prices in the U.S. are up 50% through Q1, based on the engineering work you're doing, are you starting to see any inflationary pressure in terms of your cost estimates for that project?

Craig, it's Stuart speaking here. And I think the short answer to that is no. We're not seeing major cost increases at this stage in Florence. That's -- we just haven't seen it.

Okay. Great. And then maybe last question for me. You mentioned almost a willingness to go 100% interest in Florence or keeping 100% interest. Can you maybe talk about the partnering interest at this point? And is it your preference to pursue 100%? Or are you still looking at potential JVs?

Yes. I mean it's -- there's still parties that are interested. I think it's just -- we're fortunate with the financings that we have behind us and the copper price environment that we're in that we now have the ability to build it ourselves. If there's an accretive transaction there that's available to us, we could still do something like that. But at this stage, I think we're leaning -- I would say leaning towards a scenario where we own at 100%. But certainly, all options are still on the table.

[Operator Instructions]

Okay. Yes, operator, if there's no further questions, yes, thanks, everyone, again for joining, and we'll talk to you next quarter.

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