Taseko Mines Limited (TGB) Q2 2022 Earnings Report, Transcript and Summary

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to Taseko’s Second Quarter 2022 Earnings and Production Conference Call. As a reminder, today’s conference will be recorded. [Operator Instructions] At this time, I would now like to turn your conference over to Mr. Bergot. You may now begin your conference, sir.

Thank you, Sarah. Welcome everyone and thank you for joining Taseko’s second quarter 2022 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 President and CEO, Stuart McDonald; and our Senior VP of Operations, Richard Tremblay. Bryce Hamming, our CFO, is traveling and unavailable to be on the call, so Stuart will provide the second quarter financial review. 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 for taking the time to join us today. I will make some introductory remarks and then turn it over to Richard for some specifics on operations for the quarter. And then we will conclude with financial highlights before we open it up for Q&A. And I will start off today with the Florence permitting update as we know it’s a topic that shareholders are keenly focused on and we are as well. And we are hopeful, in fact, that we would have had an announcement by now. In fact, the EPA told us in June that they were aiming to issue the draft UIC permit and commence the public comment period in mid-July. That slipped to late July and then to August 7. And then late last week, we were informed the dates have been pushed another week to August 14. So, it’s imminent. And while the timing is definitely disappointing, the good news is there continues to be no issues raised by the EPA. We understand that all the documents are complete and expect the EPA’s final internal approvals this week. We certainly share your frustration with the length of time it has taken to start this process, but we remain optimistic that the extra time the EPA is taking today will pay off in the long run. There is no dispute that the U.S. needs projects like Florence Copper to supply their domestic needs and reduce reliance on foreign supply. And when you look at the project in terms of surface disturbance, energy and water consumption and GHG emissions, it’s clear that Florence has one of the smallest environmental footprints of any copper project in the world. So we are ready to get going on it. Now turning to the second quarter results. There is no denying that it was a challenging quarter at Gibraltar, which is reflected in our financials. Mining operations didn’t produce the expected grade from the upper benches of the Gibraltar Pit and therefore, copper production was lower than planned. As we have previously discussed, these upper ore zones are more complex and the already planned lower grade was further impacted by mining dilution. Simply put, our large shovels are not designed to mine small, patchy ore zones with irregular boundaries. So we end up taking a higher percentage of waste to the mill along with the ore. Lower grade leads to lower recoveries and we ended up with 21 million pounds of copper production for the quarter. That’s about 5 million pounds below our plan. We are expecting to see significant improvements in the second half of the year as we mine deeper into the Gibraltar Pit and ore quality improves. And in fact, we are already seeing that improvement early in the third quarter with copper production on plan for the month of July at 9.5 million pounds. So, that should be a sign of things to come. I will now pass the call over to Richard for a more fulsome update on Gibraltar operations and the Florence project.

Thanks, Stuart. Good morning, everyone. I will talk a little more about operations in the second quarter, but more about what’s ahead for the second half of the year. As Stuart mentioned, we definitely had our challenges in the mine. While all the Gibraltar mine pits have a similar profile with lower grade closer to the surface and the higher grade towards the bottom of the deposit, we had some additional issues which exasperated things in the quarter. We found in the second quarter that there were unexpected ore gaps or gaps in the mineralization related to patchy complex ore and which were not evident from our previous drilling and geological modeling. So, our mine plan had average grade for the quarter at 0.21%, but those gaps resulted in lower actual mine grade. This was compared – or this was compounded by the small ore zones, which are not ideal for the size of the equipment we run at Gibraltar. Blasting of these small zones mixes the waste ore boundaries and makes it very difficult for our large shovels to separate ore from waste, so we end up sending more waste to the mill than we otherwise would. Even with the MineSense technology we are using, which is designed for this purpose, it doesn’t take a lot of waste to lower the grade from 0.21% to 0.17%, which is where we ended up for the quarter. More importantly though is how will we deal with this in the back half of the year. First, the issue is naturally resolving itself as we dig deeper into the Gibraltar Pit, where the ore zones have become larger and more consistent. We have also done a significant amount of infill drilling over the last few months to confirm mine plan grades and ore continuity in the coming benches. What I can tell you is that the drilling is pulling up the grade for the coming months and July head grades were 20% higher than June with further increases expected as the quarter progresses. Another issue we have had to overcome in the first half of the year is increased absenteeism in the workforce, particularly from mine equipment operators. Our truck utilization rates have been lower than budget and therefore, tons mined have lagged. But over the last few months, we have ramped up hiring and training new employees to get our mining rates back up, which will then allow us to progress deeper into the pit and accelerate the release of higher grade ore. So, I feel confident the mine is set up very well for the back half of the year. Our copper production guidance of 115 million pounds plus or minus 5% still holds. Although based on our second quarter results, we are now looking to be at the lower end of that range. Mill performance did improve in the quarter with mill throughput at the design rate of 85,000 tons per day. This is a direct result of processing more or increased soft ore from the Gibraltar Pit. We continue to see upside opportunities for mill throughput over the second half of the year. In fact, for the month of July, we averaged 95,000 tons per day. The challenge with pushing tons is finding the sweet spot, balancing throughput and copper recoveries. Our operations team is currently working with a third-party on a system to optimize mill performance. Now, turning to Florence and Stuart already gave a permitting update, but I can make some additional comments about the process ahead. The issuance of the draft UIC permit will mark the start of a 45-day public comment period, which will include a public hearing. So assuming the EPA issues the draft permit in mid-August and the public hearing would then happen in mid-September and public comment period will wrap up at the end of September. The process is very similar to that followed by the state regulator in 2020. Following the public comment period, the EPA will then need to respond to comments received. We do not know how long that step will take and it will largely depend on the number of comments received. I expect we will have a better idea once the comment period wraps up and we see the extents of the comments. Regardless, we are optimistic about the process moving forward. And while it’s taken some time to get here, confident that EPA’s thorough process will result in an effective permit that ensures protection of the environment and it also allows us to operate the commercial facility as required. Meanwhile, the Florence site is starting to look more like an active construction site as components are arriving from the procurement, which began last year. We still have a number of key contracts awards such as the drilling contract for the initial well field, but we will not move forward with those until we have a final permit in hand. Our engineering team is also engaged with vendors for the remaining capital items and we see costs fluctuating on a daily basis. So, we won’t update the capital cost estimate until we get closer to starting construction. It’s a very exciting time for our company as we get closer to realizing the exceptional value of Florence. Now, I will turn things back over to Stuart.

Okay. Thanks, Richard. And as Bryce mentioned – or as Brian mentioned earlier, Bryce is traveling today. So, let me cover a few financial matters before we get to the Q&A. Revenue for the second quarter was down from the first quarter and that’s partly due to lower pricing, but mainly because of lower sales volumes. If you recall, our first quarter financials were boosted by an additional 6 million pounds of sales that carried over from the prior year. Also reducing revenues this period was $5.5 million of downward provisional pricing adjustments, which related to the drop in copper prices over the period. Actually, in the context of the copper price dropping by $1 in the quarter, our negative price adjustments are quite small and lower than some of the other copper producers this quarter. That’s because we’ve been minimizing QP exposure by fixing the copper price at around the time of shipment. We do that with customers directly and through banks. And that pricing strategy has worked very well for us in this last most recent downturn. On the cost side, our total cost – our total site costs, and that includes capital strip, is up slightly over the first quarter and about $11 million higher than the same quarter last year. The main driver of that increase is higher fuel costs as diesel prices averaged about CAD1.70 a liter in Q2. Prices have come down since the highs in Q2 and currently landing at site of around CAD1.50 per liter, and we hope that downward trend continues. We do have a short-term hedging strategy in place, which effectively caps our fuel price at between $1.65 and $1.70 per liter for the rest of this year. So we’re covered on diesel. And with the exception of grinding media, generally, we’re not seeing significant inflation impacts in our other site consumables. I think our team has done a good job of working with suppliers and managing through a difficult environment. Looking ahead, with increasing copper production in the second half of this year, we will see a big decline in our unit cost per pound potentially down into the range of $2.20 a pound for the rest of this year. We had a GAAP loss for Q2 of $0.02 per share. The copper price drop generated a $31 million unrealized gain on our copper options. We also saw a significant decline in the Canadian dollar FX rate, which resulted in an unrealized ForEx loss of $12 million on our debt. After adjusting for these two items, the adjusted net loss was $0.06 per share. The drawdown in our cash balance in the second quarter was mainly a result of spending at Florence and on capital projects, including the crusher move at Gibraltar. Spending on the crusher project will continue in the third quarter. We also have our bond interest payment upcoming in August. At the Florence project, as at June 30, we’d committed to about $65 million in commercial facility costs. Most of that was committed to late last year, but not all of that has been spent yet. Project CapEx incurred in Q2 was $15 million, and there will be an additional CapEx of about $20 million in the remainder of this year to complete the procurement that we’ve committed to. I don’t expect we will be making any significant new commitments until we’re much further advanced on permitting. Overall, I think we have positioned the project very well, and it’s become clear that we saved significant money in this inflationary environment by securing our equipment purchases last year. We will be ready to move into construction once the permitting process is complete. From a financing perspective, quite a few things have changed in the last couple of months, most notably the copper price. But with our cash balance of CAD176 million and our $50 million line of credit, we’re still in a very strong financial position. The project remains unencumbered, so we have a number of options available if we do need to do a small project-level financing, including equipment financing, a small royalty deal or a small debt facility. Florence is a critical growth project for Taseko, and we will ensure that the necessary financing package is in place before we begin construction. While the copper price has fallen by about 25% from its highs earlier in the year, the current price of around $3.60 is still at a very healthy level and sitting right around the new long-term consensus price. Given the copper price drop, our price protection strategy is providing us with considerable stability right now. Through collar contracts, we’ve protected a minimum price of $3.75 a pound for most of our production through to the middle of next year. A few weeks ago when the price of copper dropped, we made the decision to monetize a portion of our copper hedge position by repricing the $4 puts for the second half of this year down to $3.75 per pound. This transaction, combined with a payout on our July collar contracts, netted us about $15 million of cash. So we have that additional cash in hand, and we continue to have downside protection in place. Effectively, we just advanced the cash the options would have paid out for the balance of the year. And if copper prices recover, we will also capture that copper price upside. Just a few closing remarks now. Obviously, concerns about the global economy have weighed on the copper market and every other commodity, but we still believe the medium to long-term fundamentals remain intact. The accelerated transition to a green economy, combined with increasing challenges to bring new copper mines into production, indicate a supply deficit is on the horizon. Development timelines for new mines continue to lengthen and social permitting and political risks remain high in many key copper jurisdictions around the world. We continue to believe that Taseko is well-positioned, and we will remain focused on our long-term goal of building a North American multi-asset copper producer. And with that, operator, we can now open up the lines for questions. Thanks.

Thank you. [Operator Instructions] And we will take our first caller from Craig Hutchison, TD Securities.

Hi, good morning, guys. My first question is with respect to Gibraltar. Obviously, encouraging to see that the grades in July, I think you said were 20% higher than they were in the previous quarter. To hit the low end of guidance, will you not need to be at or above your reserve grade? And maybe a question is that what your expectation is here for the second half?

Hi, good morning, Craig, Richard here. So the grade will trend back up towards the reserve grade. The other factor really is the softer ore and the throughput opportunity or the upside that we’ve seen in July and how that will carry through to the second half of the year.

Okay.

I think we were rough – 95,000 tons a day, roughly, for July. So that kind of gives you an indication of what the mine is capable of.

Okay. And then in terms of just the total tons mined in the first half of this year, a fair bit lower than the average you had last year. Is that a function of just kind of where you are in the mine plan, trickier ore, more selectivity. And can we expect that number to sort of creep up here in the second half?

The tons mined is more a function of the haul distance. So with mining out of the Gibraltar Pit, we have a longer haul out to the waste dumps and over to the crushers. So that’s reflected in the truck productivities we’re able to achieve with the fleet. So we will see tons mined come up a bit as kind of the – mine the different stages of the dump development advances through the remainder of the year, but will not return to the levels we saw back in 2021, just again, based on haul distances.

Are there any trucks you guys need to add? Or...

Don’t have to add trucks. We are going to be trialing three Cat 794 trucks that will be coming in. I believe the last update was beginning of Q4 time frame.

Okay. Maybe one last question real quick just on Florence, just given obviously the weaker-than-expected first half this year, just thinking about financing. I mean, you mentioned sort of your thoughts on more small kind of financing requirements. But I mean, is there a possibility here that you need a much more substantial financing, something in the order of $100 million to $200 million or am I not modeling that correctly?

No, that’s not the way we’re seeing it right now. Obviously, Craig – it’s Stuart speaking here, by the way. There is a lot of moving parts on this, of course. Copper prices have moved. Gibraltar production is going to improve, which will improve our cash flow generation. We haven’t got to 2023 at Gibraltar yet. But obviously, our cash generation at the rest of our business will be a key input. And permitting timelines as well at Florence, which are – have slipped out a little bit. So, no, I don’t think we are looking at any financings of that magnitude, pretty comfortable with the balance sheet right now. And as I have said in my notes there, we do have lots of options if we need to add a small royalty or equipment financing in the range of maybe $25 million to $50 million. So, that’s how we are thinking about it right now. But obviously, as we get closer to that construction start date, we will get more visibility and the picture will become clearer.

Okay guys. Thanks. Good luck.

Thanks Craig.

Thank you. And next, we will move on to Ed Brucker with Barclays.

Hi guys. Thanks for taking my question this morning. First one, just on the EPA, I just wanted to get a sense for how long the post comment period took during the 2020 – or the previous EPA timeframe to get through those comments? And then what kind of negative comments that you get and then do you expect those to come this time? And are you confident you can overcome those?

Yes, Richard here. As far as the previous process, what I mentioned in my comments regarding the 2020 process that was actually the state process, ABQ process, for our APP permit, the other permit we require, which we have in hand now. And that was a 30-day public comment period. There was one comment received by one opponent that essentially got dealt with, and they withdrew their comments before proceeding through the process of dealing with that concern raised by them. As far as the other part of your question in terms of how long it will take, it’s really going to depend on the nature of the comments they receive and the validity of them. To-date, we have not seen any new concerns or issues raised. And previous concerns raised were more grounded around uncertainty on the technical aspects, whereas now, we have run the production test facility and demonstrated how the system performs and our ability to operate as we modeled and said we could operate. So, it makes concerns on the unknown quite a bit less for the regulators to have to deal with or field from potential components.

Got it. And then my next question, just on Gibraltar. I mean if the copper price is going lower. When – and I know you are hedged, but at what copper price generally does it start to get difficult? I guess thinking in the context of the $2.20 cost number that you gave. And then what do you have in your back pocket to squeeze out cash flows at lower copper levels?

Yes. I mean, Stuart speaking here, $2.20 a pound is our expected C1 cost for the back half of the year. And going forward, that’s a typical level that you could see. It does reflect higher fuel costs, which we are experiencing now. And what we have seen in the past at Gibraltar, and I guess across the industry, that if copper prices were to drop dramatically, that you will also see input costs drop, fuel follows typically and steel and all the other inputs. So, as copper prices drop, input costs also drop. So, yes, we are a long way from any kind of cash flow issues or margin issues at Gibraltar. We just got to get our grade up and we will be fine.

Got it. My last question, just on absenteeisms. In the hirings you have been doing, do you expect that to keep costs high throughout the year kind of as you train more people, hire more people, having to bring more people into the building?

Yes. Well, so Richard here. I don’t expect it to cause an increase in the cost, given it’s already baked into our operating model and operating costs associated with that. Where it does rear its head is just getting those people trained and operating at the qualified operator level. There is a bit of a ramp-up process that ensues. And that’s something that, the way we do our training and the training processes and systems we have is we are looking at ways for better deployment of those items and tracking of individual operator performance. So, the site team is very focused on that. It’s something that we have actually had to deal with in the past based on the cyclical nature of our industry. So, it’s really kind of dusting off those processes and getting a very well evolved training program in place to get people up to speed and qualified and operating the equipment at the levels we know they can be operated at. So, that’s probably the – I guess the biggest risk if we have one, getting into kind of the level of hiring that we are doing right now.

Great. Thanks for the time.

Thanks.

Thank you. Next, we will move on to Alex Terentiew with Stifel.

Hi. Good morning everybody. A couple of questions for you. First, I just wanted to – just maybe if you could clarify for me, give me some color. I think you said Florence, still about $20 million to be incurred capital spending over the rest of the year. So, I just want to see if you can confirm that. And then also at Gibraltar, can you give us just a bit more color on the capital spend there? Capitalized strip and others for the rest of the year? I mean these are both kind of related to, obviously, cash flow and financing. And then my second question, again, relates to kind of your ability to generate cash flow. I know 2023, you haven’t given guidance yet. But can you just kind of give us an indication for kind of what maybe throughputs and grades you are anticipating? I know the ore is getting softer now. Do you anticipate that carrying through into 2023, and reserve grade to kind of be maintained next year as well? Any clarity there would be helpful. Thank you.

Okay, sure Alex. Yes, Stuart speaking here. In terms of Florence CapEx, yes, you are correct. $20 million is roughly what we are expecting to spend on Florence capital project costs in the second half of this year. We have – on top of that, we have an ongoing much smaller amount that keeps the site team in place there. I think it was CAD3 million or CAD4 million a quarter. But that’s Florence. And Gib capital, we are seeing capital strip, you can expect that to continue along with historical rates. There is no – I guess the one capital project that’s in progress right now is the crusher move. That will – there will be more work on Q3, and then that will slow down as we get into winter, the construction season kind of will come to an end. And – but we could spend another maybe $10 million on the crusher move in the second half of the year. And then that project will wrap up in the first half next year. Yes. So – but other than that, as I said, no major capital requirements at Gibraltar. Looking ahead to 2023. As you noted, we haven’t put out guidance yet. We are working on our mine planning and budgeting right now. But generally speaking, it’s looking like it will be a higher production year than 2022, certainly, and trending back towards that kind of life of mine average of 130 million pounds. So, it’s moving – it will be moving towards that as a target. And I think as we get towards the end of the year here, we can give some more precise guidance. But it will be a stronger year next year for sure.

Okay. And strip ratio, I think from the last tech report, just kind of called around 2.5% for the next 3 years – sorry, 4 years or 5 years. Is that in the ballpark, again, of where you think stripping ratio will be?

Yes. Sorry, the strip ratio in the 2.5% range is – yes, that’s where it will be in the next couple of years.

Okay. Alright. Great. That’s it for me. Thank you.

Thank you. Next, we will move on to Edward Gooden with Panmure Gordon.

Thanks. Hi guys. Just a question on costs. What percentage contribution does diesel have to the total cost at Gibraltar? And then also on diesel, what’s the incurred cost for the hedge on the total diesel cost that you mentioned? Thanks.

Sure. Yes. I mean we generally – we use about 40 million liters of diesel a year at the mine. I mean maybe slightly below that, but that’s a round number. That’s on a 100% basis. As I mentioned, in Q2, the average price was CAD1.70 a liter, and that includes a delivery cost to site. So, that’s something like CAD65 million, CAD68 million of annual diesel costs on a 100% basis. But that’s kind of the math there. I don’t have the percentage off the top of my head, but that gives you an idea. And then sorry, I forget – the other question was about the hedge. What we do on hedging is we buy call options on U.S. Gulf Coast diesel. So, that – we pay a premium. I think we paid about $300,000 for that to purchase that contract for the second half of the year, and that effectively caps our diesel price at around between $1.65 and $1.70 a liter. So, we have really – we have effectively capped the diesel price at around our Q2 cost level. And actually, currently, the price is lower, the price right now is around $1.50, so which is a positive, we have seen that price come off.

Okay. That’s great. Thanks very much.

Thank you. And there are no further questions. I would like to turn this conference back over to management for any additional or closing remarks.

Okay. Thanks very much everyone for joining and we don’t have anything further. So, let’s end the call here and everyone enjoy the rest of your summer. We will talk to you after Q3. Thanks.

Thank you. And that does conclude today’s teleconference. We do appreciate your participation. You may now disconnect.