Taseko Mines Limited (TGB) Q2 2021 Earnings Report, Transcript and Summary

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

Thank you, Michelle. This is Brian Bergot, and welcome, everyone, and thank you for joining Taseko's Second 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. With me on the call today is Taseko's President and CEO, Stuart McDonald; Taseko's Chief Financial Officer, Bryce Hamming; and our Senior VP of Operations, Richard Tremblay. 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 second 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 will now turn the call over to Stuart for his remarks.

Okay. Thank you, Brian, and good morning, everyone. Thanks to you all for joining our second quarter earnings call and webcast. Yes, it does feel a bit odd to not be following Russ' remarks today. But very excited to be in the expanded role and certainly committed to filling the void left by his retirement in June. I'm fortunate to have worked with Russ over the last 8 years. And we've worked particularly closely in the last 2 years since I became President to ensure that we have a seamless transition here. Also today, I wanted to welcome Richard Tremblay, who has been promoted to the role of Senior Vice President, Operations. I'll let him introduce himself in a minute. But he's certainly not new to Taseko, having been with the company now for 7 years, including 5 years as General Manager of our Gibraltar Mine. And for the last 2 years, he's also been responsible for all aspects of our project pipeline, including the Florence project. So we fully expect a seamless transition on the operations side of the business as well. Turning to the second quarter now, and it was another strong quarter for copper prices, with the LME price averaging $4.40 per pound. And in recent weeks, the price has pulled back slightly to the $4.30 range, but that's still a very attractive price for miners. The last time copper was above $4 was back in 2011, and we appear to be in a very different environment this time around. It's more than just a China story now. We have a global economic recovery underway with huge stimulus spending, new demand coming from electrification and transition to green economies. So we're now seeing a growing realization in the market and among metals analysts that copper prices are going to average above $4 for the next few years. And I personally think that's where they need to remain in order to incentivize miners to build the capacity that we need to meet demand over the next decade. As we've talked about in the past, developing a new copper mine of scale is a risky endeavor and many of the required projects are in challenging jurisdictions with political, environmental and social risks at the forefront. And even now in Chile and Peru, the top 2 producing countries, we see risks of delayed investment decisions because of political and tax uncertainty. So with our portfolio of copper projects located in Canada and the United States, we believe we're very well positioned for the future. Our second quarter operating performance at Gibraltar was generally in line with our expectations. We had seen 2 lower production quarters in a row. And as communicated to the market, we expected to see an increase in grade in Q2. The higher grade ore was accessed in the latter part of the quarter, and along with steady throughput and copper recoveries, the mine produced 27 million pounds of copper. That's a 20% increase over the prior quarter. And the improved production drove significantly higher financial performance in the quarter. Adjusted EBITDA of $48 million was a 100% increase over Q1 and almost half of what we generated all of last year. Earnings from mining operations of $54 million was up 80% over the prior quarter, and we also had $72 million of cash flow from operations. But the improved results in Q2 are just the beginning as we expect even higher grades for the balance of 2021 as we get deeper into the Pollyanna Pit and also begin to mine initial ore from the new Gibraltar Pit. We're expecting copper production in the second half to be at least 40% higher than the first half, and that will lead to lower unit costs, improved cash flows and earnings over the rest of this year. Because of the slower start to 2021, it looks like total copper production for the year will come in around GBP 120 million, which is within the typical plus or minus 5% of guidance range that we give. Some of you may be aware of the wildfire situation in B.C. right now this summer. To date, we haven't seen any fire activity near our Gibraltar mine. Although some of the fires to the south of us have disrupted rail service and the flow of our concentrate by rail to port in Vancouver was temporarily interrupted. But traffic is moving again and we've been able to add trucking capacity to offset the lost rail time. So at this point, we don't see any significant impact on our Q3 sales volumes. Looking ahead, we're planning an exploration drill program at Gibraltar to follow up on some interesting anomalies that were identified under recent geophysical survey. So expect to hear more on that in the coming months. We currently have 17 years of reserve life remaining, and we expect to be able to add to that with additional drilling. We also have a number of exciting productivity and technology initiatives underway at the mine, and Richard can talk more about those in a minute. At Florence, we're continuing to advance detailed engineering, and that work has progressed to the point now where we're ready to order key components for the Essex CW plant. We're planning to do that in the coming days and expect related CapEx of roughly USD 20 million over the remainder of this year. By making financial commitments now, we can ensure that these long lead time items don't impact our construction schedule later on, and we can maintain early 2023 for our first copper production. On the permitting front, the EPA has indicated that they expect to issue the draft UIC permit next month. Later than we would have liked, but the important point here is that there are no issues arising as the agency completes its final internal reviews. That announcement will be an important milestone for the project, and we look forward to the commencement of the public comment period in the coming weeks. And as a final note, we recently announced the sale of our Harmony Gold project. Many of you may not be aware of this project as Taseko hasn't done any substantial work on it in a number of years. In our view, it's a project with lots of potential, a 3 million-ounce gold deposit located on the main island, Haida Gwaii off the West Coast of British Columbia. But we expect Florence and Yellowhead will be keeping us busy for the foreseeable future, and we felt the sale of Harmony was the best way to realize value from a noncore asset at this time. JDS Energy & Mining is a well-respected mine developer with a solid track record in Western Canada. They'll be the new operator, and we'll take a project forward in a new company, JDS Gold, and we'll participate in their success through a 15% equity interest in the company, and that's a carried interest through the IPO, and we'll also keep a 2% NSR royalty on the project, which could also become a valuable asset for us as the project is derisked. So we see this as a potential win for Taseko shareholders, and we'll continue to look for other ways to create value from our pipeline of projects. With that, I'll turn the call over to Richard for an introduction and a few additional comments on Gibraltar.

Thanks, Stuart. Good morning, everyone. To start with some additional background on myself, I came to Gibraltar from Coalspur, a junior thermal coal company looking to permit, build and operate a thermal coal mine Southeast of Hinton, Alberta. As Vice President of Operations there, I was responsible for all operations and permitting activities associated with the project. Prior to Coalspur, I worked in the Elk Valley for 20 years with Teck Coal and associated precursor companies, Elk Valley Coal and Fording Coal. During that time, I was a General Manager of the Fording River operation for 6 years and Line Creek operation for 2 years. And prior to that, I worked for Noranda Falconbridge at the Kidd Creek operation and Matagami operation back east. My background is in processing and over the course of my career, I've developed strong open pit operational and engineering knowledge. Shifting to the operating results for the second quarter. As Stuart mentioned, we are pleased with the performance of Gibraltar. Overall, the mine performed to plan during the quarter, and as expected, grade improved as well as copper recoveries. In the mine, we continue to see equipment productivities at or above planned levels as we optimize and improve our fleet management system performance. Copper feed grade improved through the quarter as mining in Pollyanna progressed to deeper benches and the higher grade ore resulted in higher copper recoveries. So between grade and recoveries, production increased by 20% over the first quarter. Now as Stuart highlighted, I would like to touch on a couple of business improvement initiatives underway at Gibraltar , which we believe have the potential to improve performance and efficiencies in the mine and mill. For the past couple of quarters in the mine, we have been evaluating the MineSense system, which analyzes ore grade real-time while mining, thereby allowing us to maximize ore recovery and minimize dilution. To explain in more detail, the system, which uses x-ray fluorescence tubes mounted on the shovel bucket, estimates a greater material in the bucket ensuring only ore is sent to the mill. We are quite excited about the increased capability this system provides to selectively mine and transition zones and appropriately categorize ore from waste and vice versa. In the mill, our operations team continued working with McKinsey on trialing their Optimus AI solution. This proprietary system leverages artificial intelligence to optimize plant operations and enable our operating teams to make better timely decisions. This project is entering the proof-of-concept phase this quarter. In closing, as Stuart mentioned, we are also undertaking exploration work at Gibraltar this summer. We have recently completed a deep induced polarization study, which identified a number of interesting targets. The plan is to drill some of these targets later this summer and into the fall. With that, I will now pass things over to Bryce.

Thanks, Richard, and good morning, everyone. For the second quarter, we reported significantly improved financials from Q1. Earnings from mine operations before depreciation was $54 million, an 80% increase over the first quarter; and adjusted EBITDA was $48 million, a 100% increase over the prior quarter. The increased average copper price in the second quarter, along with Gibraltar's higher production were the main drivers to our improved financials. Additionally, the higher copper pricing trends provided $3 million of positive provisional price adjustments resulting in a realized copper price of $4.48 per pound for the quarter. Copper sales for the quarter were 27 million pounds resulting in $100 million of revenue. Sales were in line with production. So copper and inventory remained relatively flat at 3.5 million pounds. Increased production in the quarter resulted in C1 total operating costs declining to $2.02 per pound. Cost per pound were lower than Q1 despite lower capitalized stripping of 15 million. Decreased mining and stripping rates contributed to the lower cap strip as shorter hauling distances were more of a factor in the first quarter. These stripping rates and quarterly dollar amounts for capitalized stripping should continue for the balance of the year. We achieved a very strong off-site cost per pound in the quarter of $0.25, which was attributed to some great concentrate tender results we have for Gibraltar concentrate earlier this year and the low TCRCs we achieved in awarding those contracts. Gibraltar concentrate is sought after and is a great example of how we keep inflationary cost pressures in check at Gibraltar. We also extended our long-term offtake contract in the quarter for about half of Gibraltar's production starting in 2022 for up to 5 years, achieving a discount ranging between 40% to 50% off of the TCRC benchmark. This should help control off-site cost inflation pressures in the future. Cash flow from operations was $73 million, a large jump from the previous quarter due to the higher copper price, sales and also from the $24 million working capital adjustment due to the timing of shipments from the previous quarter. That working capital adjustment is reflected in the reduction in accounts receivable at June 30. GAAP net income for the quarter was $13 million or $0.05 per share. After adjusting for the unrealized foreign exchange gain on our U.S. dollar denominated debt, our adjusted net income was $10 million or $0.04 a share. As far as investing activities in the quarter, CapEx at Gibraltar was $8 million, higher than the previous quarter due to our scheduled fleet and shovel maintenance. Florence CapEx was $6 million, similar to our spend in Q1, which also includes the detailed engineering for the commercial facility, which is now 60% complete. We should see an increase in Florence spending in the coming quarters as we begin to secure contracts and lead -- long lead times for the Essex CW plant and make some initial deposits as Stuart just spoke about. We also invested a further $5 million for copper price collars we put in place for the first half of 2022. We did this near the top of the market there in May. We now have most of the production for the next year secured at a minimum price of $3.75 per pound for the balance of 2021 and $4 per pound for the first half of 2022. We will continue to look for hedging opportunities in the coming months for H2 2022 and beyond to support our capital program at Florence, which is picking up momentum. With the higher copper grade and production in the back half of the year and the continued strong copper pricing environment we're seeing, we do expect robust financial performance to round out a remarkable 2021 for the company. With our cash balance of $226 million, Florence Copper should now be substantially funded if these current copper price is in the low to mid-$4 range prevail or increase further. If any residual funding is needed, we still have all the options available that we've spoken about on all these calls over the last quarters. Flexibility to various financing options is key in this market to ensure we unlock the maximum value for our shareholders on Florence and our other development assets. I'll now turn it back to the operator for any questions. Thank you.

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

So the time line for the EPA has been pushed back. Obviously, it's been kind of topical and top of mind. But I was wondering if this pushed back the time line of commercial production for Florence versus what you said kind of during the deal in January and February? And then can you give us your confidence that the EPA won't push it back again?

Sure. Ed, it's Stuart speaking here. Yes, certainly, the EPA schedule, I would say, has moved more slowly than we would have liked for sure. But as I indicated in my comments there, we really don't see any issues coming up, and we remain highly confident that the permit is going to be issued. So we see now the EPA and their final reviews of that document and expecting to see that in the next few weeks, likely in September. So that's our view. That's what the EPA is telling us. And yes, we remain pretty confident in that schedule now. So as we get closer, I think, to that date, our confidence, obviously, increases. I think what -- and sorry, you touched on the rest of the schedule, I mean heading out to commercial production. I think early 2023 is still very achievable. We have some -- obviously, some construction schedule -- roughly an 18-month construction schedule to fit in there, and we're doing with some of the procurement that we're doing. Right now, we're ensuring we protect that schedule. So early 2023 is still the target.

Got it. That's very helpful. And then it's been in the news this morning that Biden put a kind of EV mandate, what you call, electric vehicle mandate that half the cars could be electric by -- or, I guess, clean by 2030 versus what looks like it's about low single digits now. So is there -- probably not, but how would you quantify the demand for copper, I guess, in general or more broadly? And then more specifically, how do you look at that versus Taseko over time?

I mean yes, we're excited to build the market, excited to build the demand growth. The new sources of demand are great for copper miners. And particularly in the U.S., like we're seeing even in the last couple weeks, evidence of real shortages of copper domestically there in the U.S. I think we saw a 13% -- or sorry, $0.13 COMEX premium over LME within the last couple of weeks. There's clearly demand for copper in the U.S., and our Florence project is going to fit perfectly into that market with a major new supply of refined copper in the Southwest. So yes, we're excited about that growth, and we think our story fits very well into it.

Got it. My last one, I just wanted to know -- get a refresh on the timing of Yellowhead and then thoughts around financing the $1.3 billion of capital costs there?

Yes. Yellowhead, we've got some work to do still on the permitting. We've got probably 2 to 3 years of permitting work before we have a construction decision there. It's work we can advance at a relatively low cost over the next year or so. We don't have major expenditures planned. But yes, as we get out to a construction decision in 2 or 3 years, it's USD 1 billion of CapEx, give or take. Would obviously be a bigger -- much bigger bite for Taseko. But hey, when we have the 2 mines running, we think we're going to be a different company in terms of EBITDA and cash flow generation with Florence and Gibraltar. And with potentially with a JV partner at Florence, we think it's something that we could take on potentially down the road. So we'll see how it goes, but it's definitely a good growth option that we have going forward.

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

Can you provide some additional color in terms of the capital spend you guys are looking to spend here at Gibraltar over the back half of this year? It seems to be trending above, certainly my expectations, for the first 2 quarters. If you can provide maybe break it down by sustaining CapEx and then deferred stripping, that would be helpful.

Yes. I think capital strip, this is definitely a higher capital strip year. I think we did $15 million in the second quarter, and I think that's probably a reasonable number to see continuing in the second half. So the second half, the stripping activity will shift more towards the Gibraltar Pit, but something in the range of what you saw in Q2 is reasonable to expect going forward for cap strip. And then on the sustaining CapEx, I think probably the first half of the year was a little higher than normal. The activity we saw there was in -- some of the prep work that we had to do to set up the Gibraltar Pit and the dewatering and a pumping system that we had to put in there. That's behind us. So I would expect on the sustaining CapEx to kind of revert back to more normal run rates in the second half. So that's helpful.

And just in terms of the milling rates at Gibraltar, it seems to be trending a little bit below design. Is that a function of just a higher strip you guys are more matching your mining rates? Or was there something particular in sort of the first half in terms of your overall mill throughputs?

No mill throughput in the first half. We did encounter harder to mill ore coming out of Pollyanna. And we took operating -- we adjusted some operating variables to essentially improve the milling performance, and we saw that kind of come into effect at the latter part of the second quarter here and don't expect any issues for the remainder of the year. So really looking for the mill to perform as per design for the second half of the year.

Okay. And maybe 1 last question for me guys. Are you guys -- now that you're 60% done the detailed engineering for Florence, are you starting to see any inflationary pressures in terms of cost?

Yes. It's a good question. I mean it's certainly topical. We've done a pretty recent review of the CapEx, at least on the plant infrastructure side, and it looks pretty good. We're not seeing any inflation there at this point, and the number of $230 million that we've put out publicly, I think, is still a reasonable estimate. But as we get further along here in the fall, we will be going out for proposal on some of the big contracts, the drilling contractor, the GC, general contractor work, and we will probably be able to refine our estimates later in the year. But at this point, yes, we're not seeing any changes to our previous estimates.

If there are no further questions at this time, I will turn it back now to Brian Bergot.

Thank you very much, everyone. Have a great summer, and we'll talk to you again in the fall.

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