Taseko Mines Limited (TGB) Q3 2021 Earnings Report, Transcript and Summary

Good morning. My name is Kelsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines' Third Quarter Earnings Production Results 2021 Conference Call. [Operator Instructions] Mr. Brian Bergot, you may begin your conference.

Thank you, Kelsey. Welcome, everyone, and thank you for joining Taseko's Third 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 today with me 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 third 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. Thanks, Brian. Good morning, everyone. Thank you for joining us on the call and the webcast today where we'll be reviewing the operating and financial results that we released yesterday. And to start off, I'll say we're very happy with the third quarter results from our Gibraltar mine. As a combination of strong production results with the ongoing high copper prices has resulted in record revenues and EBITDA for the quarter. In the first 2 quarters of this year, we mined below average head grades, and so the full benefit of the high copper price environment wasn't reflected in our earnings. But in Q3, everything fell into place. We had higher grades as expected and a copper price that traded consistently in the range of $4.25 per pound, which is about 50% higher than the average price last year. Copper production of 35 million pounds was right on plan and nearly 30% better than the second quarter, mainly driven by higher grades but also improved throughput and recoveries. Quarterly moly production also increased to 570,000 pounds, which helps as a byproduct credit. Our spend on site operating cost was very similar to the previous 2 quarters, but the higher metal production resulted in a steep decline in unit operating costs as our total C1 fell to $1.57 a pound from about $2 in the previous quarter. All of these favorable factors led to adjusted EBITDA of $76 million, which is actually 50% higher than our best quarter over the last 10 years. Cash flows from operations was also strong at $68 million. And as always, with these numbers, I remind people that Taseko only reports its 75% share of the mine's earnings and cash flow. We expect the strong operational and financial results to continue into the fourth quarter with copper prices remaining above third quarter levels, and we continue to have access to higher grade ore in the Pollyanna Pit. Copper production should be similar, again, in Q4, and we expect approximately 120 million pounds of total production for the year, in line with our previous guidance. Looking ahead to next year, we'll transition away from ore mining in the Pollyanna Pit and the new Gibraltar Pit will become the primary source of ore. While we're not giving formal production guidance yet, our current expectation is that 2022 will be a similar year to 2021 in terms of copper production. We've spoken in the past about the potential benefits of softer ore in the Gibraltar pit. Based on a small amount of initial Gibraltar pit ore that's been processed in the last month or so, we continue to see that as an upside -- potential upside to production forecast next year. One area that we're watching closely right now is input costs, where we're starting to see some inflationary pressure. The most significant increase to date has been related to diesel, which makes up about 10% of our site costs at Gibraltar. We've seen prices trending upwards in recent months and the current price is approximately 10% higher than the current year-to-date average. Another area of note is ocean freight where we've been protected from recent cost escalation by a long-term freight contract. At current market rates, we're at risk for a cost increase of a few cents a pound when that contract expires early next year. We'll continue to monitor costs closely, but believe that, overall, these are very manageable items [indiscernible] which are at record levels in Canadian dollar terms. The shift in market sentiment for copper over the last year has been dramatic, and we're seeing that reflected in analyst long-term price forecast. When thinking about Gibraltar, it's important to keep in mind that the current 500 million ton reserve is based on the long-term copper price of $275 per pound. Given the recent shift in the price outlook, we're now considering updating our reserve estimate at a higher copper price. The mine has an additional 500 million tons of resources on top of the reserve, and there's potential to bring a portion of that into reserves to extend the current 17-year mine life. So we'll be doing that work, that engineering work in the coming months, but it's clear to me that Gibraltar remains a very valuable long-life asset. Turning to Florence now. Capital expenditures increased at the project this quarter as we awarded a key contract for major processing equipment for the SX/EW plant. While we're still waiting for the draft UIC permit to be issued by the EPA, we have confidence in their permitting process, and we're continuing to advance other aspects of the program. Procurement of long lead time items helps us reduce the risk of supply chain issues and delivery delays, which are impacting other projects and operations around the world. We want to have secured key components on site to minimize any impact to the construction schedule next year. We expect the draft permit to be sent to us very soon for an initial review, followed by the public comment period in the public hearing. The additional time waiting for the permit is certainly frustrating for us, and I'm sure for investors as well, but we remain confident that it will be issued soon and the construction will begin in the new year. As we've talked about in the past, this is not a process we have control over, and the EPA will take the necessary time to complete a very thorough process. Detailed engineering at Florence is now approximately 85% complete, and we'll be in a good position for the start of construction. And we certainly have the balance sheet to execute the project as well. Our cash balance grew again this quarter even with Florence CapEx and the semiannual coupon payment on our bonds reflected in the third quarter. We added a $50 million revolving credit facility, and Bryce will talk more about that in a minute. So that brings our available liquidity of about CAD 300 million at quarter end. And don't forget, we have a copper price protection program in place through the first half of next year [indiscernible]. So to wrap up here, I continue to believe that Taseko is uniquely positioned with a solid base of cash flow from Gibraltar and a fantastic low-cost environmentally-friendly copper project at Florence. With the scarcity of new copper projects on the horizon, existing mines and projects are becoming increasingly valuable, especially when they're located in high-quality jurisdictions, like ours. We're in a great environment today. and we'll continue to remain disciplined in our approach to operations, capital spending and environmental and safety performance. And with that, I'll now pass the call over to our CFO, Bryce, for some additional comments before we move up the line for questions. Bryce?

Thanks, Stuart, and good morning, everyone. I'll try to keep this relatively brief as the financial results this quarter really speak for themselves. We've given pretty good guidance this year that the second half of the year would be significantly better than the first half, and we are extremely pleased that our financial results this quarter were in line with that expectation and guidance. With the strong copper prices prevailing in the quarter at an average of $4.25 per pound, we did realize record revenue for Taseko at $133 million based on 32 million pounds of sales. Copper price and sales volumes, coupled with C1 costs of $1.57 per pound also contributed to record quarterly adjusted EBITDA of $76 million and adjusted earnings of $27 million or $0.10 per share. And this adjusted EPS figure is net of $21 million of deferred taxes as cash taxes were only $1 million in the quarter for our mineral tax. So really adjusted earnings after cash taxes was $0.17 per share. We are very pleased to have closed $50 million revolving credit facility with National Bank for a 3.5-year tenure in early October. As many of you know, the pursuit of a revolving credit facility has been in the works for some time, and we worked closely with National Bank team to structure one that would complement our capital plans at Florence while also providing us enough flexibility on covenants to meet our strategic objectives and allow alternative financing sources should we need them. We have not drawn on it and have no immediate plans to -- other than possibly some small letters of credit to free up some restricted cash. This [RCF], coupled with our ending cash position at $239 million and future cash flows from Gibraltar give us sufficient liquidity to fund Florence's construction costs at current copper prices. You'll also see that investment at Florence began increasing in Q3 with $90 million in expenditures being capitalized. In addition to site spend, we incurred $5 million for detailed engineering and design, which is now about 85% complete and $9 million for first deposits for procuring the lead order equipment for our SX/EW plant. With outstanding Florence capital commitments of $31 million at the end of September, we will continue to make progress payments on these lead orders into Q4 and make further capital commitments to protect the construction schedule against supply chain and inflationary pressures. Our concentrate inventory also increased in Q3 up to -- just shy of £5 million pounds due to some port congestion in the late summer months as sales was less than production. We expect those inventory levels to come down by the end of the year to further bolster Q4 revenue and cash. Cash flow and earnings will also be supported by our hedging program, which provides a $4 floor into mid next year, which will assist us if we face any demand or price volatility in the near term, and we will look to add further callers or puts when it's cost effective for us to do so while keeping significant upside for our shareholders. So we expect to grow our cash balance and decrease net debt into the fourth quarter even with spend at Florence ramping up. I'll now turn it back to the operator, Kelsey, for any questions. Thank you.

[Operator Instructions] Your first question does come from Ed Brucker from Barclays.

So the first one I had, just with the EPA decision, could you explain the public comment period and kind of what that entails and how long that will be? And then is there any worry that, that could be kind of another speed bump in the permitting process?

Yes. And this is Richard Tremblay here. So the public comment period, what we're informed by EPA is envisioned to be 45 days. And during that 45 days, anyone -- the draft permits available for review and anyone can provide comments into EPA on the draft permit. There's also a public hearing that will be held roughly 30 days into the 45-day public comment period. And that's a virtual -- it will be a virtual hearing and anyone can ask to speak. And it's not -- the way that works is participants basically get their opportunity to speak and voice their position on any issues with the permit or support for the permit in any of those aspects. And essentially, at the end of the 45 days, EPA takes all the comments received, the comments made at the public hearing and then decides or reviews if they need to make any changes or updates to the draft permit based on those comments.

Got it. And then if you do get the EPA decision, which sounds like it's progressing, can you remind us kind of what the factors are needed for in situ mining to be effected for copper specifically? I know it's used for uranium quite a bit, just from a geological perspective -- geography perspective. And then how confident you are that it's going to work in scale?

It's Stuart speaking here. I think the big thing we have going for us at Florence is it's -- and it's somewhat unique for a copper ore body, is we have a highly fractured deposit, and that is required for in situ mining. And that's what we have. As I said, it's quite unique. It's a very unique situation in copper. And the test work that we've done really over the last 8 years, including lab scale work and then ultimately, with the test facility that we built in 2018 and operated for 2 years has really proven to us that it works and that we're highly confident in moving forward with the commercial facility. So we're pretty excited about it. It's low cost. It's a very environmentally friendly way of mining, as I mentioned. And so we're optimistic here for the coming years and the growth that it's going to provide us.

Got it. And then it's not base case, I don't think, but I just wanted to get a sense if the EPA decision comes back negatively or something goes wrong in the public comment period, what's the contingency plan? Do you plan to just run Gibraltar? Look at improvements there? Or look at other projects like the Yellowhead projects or maybe even use the opportunity to deleverage at that point?

Well, I mean, we're not really thinking in that lens at this point. I mean, we're going ahead on Florence. We're very optimistic that it's going to get permitted. I guess, the one comment I would add on -- in terms of the public comment period that Richard described is we've been through a public comment period already a year ago, which -- for the state permitting process, and that went very smoothly and there weren't any significant issues or opposition raised. So we're optimistic about the permitting process. We think we're going to get permitted and start construction next year. You're right. We do have other projects in the pipeline. We've got potential at Gibraltar to expand the mine life, which you talked about in -- on the call on the script a minute ago. And of course, Yellowhead coming in the future, too. So we've got other projects in the pipeline, but really we're confident that Florence is going to be the next mine for Taseko.

Got it. It makes sense. And then just one cleanup real quick, if I could sneak this in. But that $19 million that you spent on Florence this year -- or excuse me, this quarter, is that included in the total project spend, which I think was $230 million? Or is that on top of that $230 million?

Yes. We have in that $19 million, there is site spend. So that's site spend, which is about $4 million to $5 million a quarter is not included in the CapEx, but the $15 million that has been paid for both detailed engineering and the lead orders would be.

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

Just a follow-up question on Florence. Just as you guys are waiting at the final permits, you did mention you're going to spend some more here in Q4. Like any sense of the capital you guys plan to spend this quarter in terms of Florence, maybe kind of a breakdown between long lead items and detailed engineering.

Yes. Craig, I can take a shot about one. I mean, essentially, where we are today, we published our commitments at end of September. But sitting here today, we've committed roughly $35 million towards long lead time items. That spend will, as Bryce described, will triple in over the next few quarters. We may -- we are looking at potentially -- an additional commitment of around $10 million. And that again is to hedge or to protect ourselves in some respect on some items that we think are at risk for inflation. Beyond that, we will continue at similar spend rates, you may see a little bit of a ramp-up in kind of the 2 or 3 months early next year as we prepare for site construction activities. But those are -- that's kind of the general framework of how we're thinking about it.

And is there any sort of set time lines for the EPA to kind of get back in terms of the post public commentary period? Are they sort of like mandatory 30-, 45-day periods? Or do they have the flexibility to take all the time they need?

They have flexibility, for sure. There's no time line or no mandated time line but certainly something we've talked about with them. And a lot of that will depend on the magnitude of the comments and that come out of the public comment period at the end. If it's -- if it follows the state process, which we're hopeful it will, we believe that, that review should go fairly smoothly. So that's the way we're thinking about it.

Yes. And maybe just at Gibraltar, we've seen CapEx come down the last couple of quarters here. Any guidance you can give for Q4? Do you see kind of spending being similar to the Q3 levels? Or we think it continues to decline here?

Yes, Craig, Richard here. So CapEx in Q4 between capitalized stripping, capitalized components as general investment will be actually coming down a bit from where we were in Q3.

Okay. And on next year, you haven't, obviously, provided guidance, but you did state that production will be sort of similar levels to this year. Can we assume throughput's going to be a little bit higher because of the softer ore, the grades will probably be similar to reserve levels?

Yes. So we're not -- I mean, definitely there's some upside in the throughput. As we sit today, we're in the very -- we've had initial production of that ore process through the mill, and it looks pretty good. But it's early days, and we're not going to kind of give greater throughput guidance today. But I just -- generally that we think it's going to be a similar production here, and I think we can give certainly give more color on specific guidance next quarter.

Great to see the free cash flow.

There are no further questions at this time. You may please proceed.

Okay. Thanks, everyone, for dialing in, and we will talk to you again at year-end -- at our year-end call in February. Bye now.

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