Taseko Mines Limited (TGB) Q3 2022 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, my name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to Taseko's Third Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Brian Bergot. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining Taseko's third quarter conference call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com and on SEDAR. I am joined today in Vancouver by Taseko's President and CEO, Stuart McDonald, Taseko's Chief Financial Officer, Bryce Hamming; and our Senior VP, 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. Following 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.

Thank you, Brian, and good morning, everyone, and thank you for joining the call today to Taseko's third quarter operational and financial results. But before we get into those details, let's start with an update on our Florence Copper Project as there were a number of positive developments this quarter. In mid-August, the U.S. EPA issued the draft Underground Injection Control permit. This is the final key permit required for the commercial production facility. Although the timing was several months later than we would have liked, the permit wording was as expected. No surprises. The public comment period ended in late September and the feedback from local residents, community leaders and statewide organizations was overwhelmingly positive. 98% of the written comments were supportive and there was no negative commentary at the public hearing. The positive response we've received through both the state and EPA processes as a direct result of the prudent approach that we've taken in developing the project. The efforts we've made to inform the Florence community and, of course, the low impact nature of the mining operation. Our next steps is back to the EPA now to respond to the public comments received. We've reviewed all the comments and have had initial discussions with the EPA. And based on that, we're confident they'll be able to address all of the comments before addressing the -- before issuing the final UIC permit in the coming months. And we'll be ready to begin construction at that time. Switching to Gibraltar now, and the improved copper production in Q3 drove a significant rebound in financial performance. $34 million of adjusted EBITDA and $19 million of earnings from mining operations, both much stronger than the last quarter. Copper production at Gibraltar increased to GBP 28 million, which is nearly a 40% increase over Q2, mainly a result of higher copper grades but also from an increase in mill throughput. In fact, the 2 mills averaged over 89,000 tonnes a day for the period. That's 5% above design capacity and our best quarter yet in terms of throughput. We're definitely benefiting from the softer Gibraltar pit ore as we expected. Head grade on the other hand, while it did improve over Q2, was lower than where we expected it to be, and that also impacted recoveries. We're seeing higher than normal mining dilution in the Gibraltar pit, and we have a number of operational initiatives underway to reduce that going forward. But it's a work in progress, although we do see an improving trend, and we're now into larger, more consistent ore zones. Production in the fourth quarter is forecasted to be roughly 10% higher than Q3, and we'll continue at those higher rates for the next few quarters. Gibraltar pit will be the primary source of ore now through the end of 2023. Waste stripping out of the new connector pit has begun and will continue through next year. In order to get full access to that new ore zone, we need to move an in-pit crusher. That capital project started this summer and is well advanced. We're planning to complete the crusher move in the third quarter next year. Operating costs in the quarter declined quite dramatically, but were still being impacted by the same inflationary pressures that the rest of the industry is facing. Diesel costs were up about 50%, 55% higher than the same period last year, and that added $0.26 per pound of copper to our cost structure. We have some diesel hedging in place now to protect against further price escalation. Capitalized stripping was also unusually low this quarter, which drove up our unit operating costs. In the present environment, we're obviously very focused on cost control and managing copper price risk. We have a long-standing strategy to opportunistically acquire downside copper price protection through both copper puts and collars and that approach again paid large dividends this quarter. We realized cash proceeds of just under $19 million from copper put options and we have price protection in place at $3.75 per pound until the middle of next year. On top of that, we have a pricing strategy where we fixed prices at around the time of shipment. So it's notable we have very low provisional price adjustments this quarter, whereas many of our peers have larger losses. We're well positioned for when copper prices rebound, which they inevitably will do. And as we see with markets today, when prices move up, it happens quickly. Global inventories are low and physical demand fundamentals are strong. So we remain optimistic about our copper business long term. We have a great portfolio of assets here in North America and focused on copper. But in the meantime, with the global economic uncertainty, we are managing CapEx carefully. At Florence this quarter, we spent a further $27 million, mainly related to procurement of major components for the SX/EW plant and a few other long lead time items. Those items were ordered earlier this year and are now being delivered to site. We won't be making any more significant capital commitments now until we have a clear view on permit timing. We've been successful in locking down pricing on long lead items, but we are seeing inflationary pressures on other project costs, including drilling contractors and construction labor. Arizona, in particular, has been a hot market. But it's also a very volatile market, and we'll wait until we have a firm review of the construction schedule before updating our CapEx estimate. The balance sheet remains in a strong position with available liquidity of $210 million. That includes the undrawn revolver. We have a solid hedge position in place and improving production from Gibraltar. We're also seeing a lot of interest from royalty providers, which is a potential additional source of funds for Florence. And on that note, I'll pass things over to Bryce for a financial update. Bryce?

Thanks, Stuart. Good morning, everyone. I'll provide some further details on our third quarter financial results. Sales for the quarter for Gibraltar on a 100% basis with 27 million pounds of copper at a realized price of USD 348 per pound which was similar to the LME average price. We only realized negative provisional price adjustments of $0.5 million in the quarter, and this was attributed to a relatively range bound copper price prevailing between $330 and $370 and our long-standing practice and discipline in fixing the price of substantially all of our concentrate shipments at the time of shipment. This practice reduces copper price exposure and volatility over quotational periods with our customers. We either fix that price directly with the customer or we enter into a QP hedge with banks, which has reduced the volatility in our revenues this quarter compared to some of our peers. Total site costs, including capitalized strip reduced by $5 million from the last quarter, but it's still up $10 million over the same quarter in 2021. Higher costs are mainly due to the elevated diesel prices and, to a lesser extent, steel and reagents used in the milling process. We also only capitalized $1 million of mining costs as capitalized stripping to the balance sheet this quarter as mining was focused in the Gibraltar pit. Gibraltar C1 operating cost per pound of copper dropped 22% to $2.72 per pound in the quarter. And this was due to the higher pounds produced and in spite of the fewer mining costs that were capitalized. Earnings from mine operations before depreciation were $19 million. We also recognized gains on our copper put hedges of $60 million. So those together resulted in adjusted EBITDA of $34 million. We have in place copper price protection, as Stuart mentioned, of $3.75 to the middle of next year, which still gives us copper price upside if copper prices recover as they are today. Value of this protection is shown on the balance sheet of $30 million within our other financial assets. During the quarter, we also purchased diesel call options, which will protect us from further diesel price escalation through to mid-2023. So with our expectations of further increased production in the fourth quarter and into next year, we should see a further decline in operating costs on a per pound basis. Adjusted net income for the quarter was $5 million or $0.02 per share and benefited from the $16 million of realized gains on the settled copper put options in the quarter. We had a GAAP net loss of $24 million or $0.08 per share. That was mainly impacted by the unrealized foreign exchange losses associated with our U.S. dollar-denominated notes. The offsetting translation of our U.S. dollar investments in Florence are obviously not put through the profit and loss statement. And so we don't have a perfect match. We continue to invest in Florence this quarter with further spend of CAD 27 million. We still expect to incur about U.S. -- in USD 15 million for Q4 as we finish receiving the last shipments of our SX/EW equipment by the end of the year. Our cash balance declined over the previous quarter, but that was really attributed to the continued spending at Florence and certain projects underway at Gibraltar, including the crusher move that feeds mill 1, which is expected to be moved in Q3 next year. By the end of this year, Taseko will have incurred about $18 million in total on this project for its share to date. We ended the quarter with $142 million in cash and $210 million of available liquidity. We stand in a good position to manage any volatility in the macro environment ahead as we prepare for Florence. Lastly, on the topic of Florence financing, as we mentioned on the previous earnings call, we are continuing to look at ancillary financing opportunities with copper prices pulling back since the first half of this year. We've been very successful to date since acquiring Florence not to encumber it. So we have all financing options available to support our own cash and our cash flow. With that, we are now ready to take questions over -- back to the operator. Thank you.

[Operator Instructions]. Your first question comes from Orest Wowkodaw of Scotiabank.

I have some questions about Florence. Your -- I guess, the old feasibility is now 5 years old, and the capital cost estimate for that project was USD 230 million. Can you give us how much of that $230 million has been spent as of the end of Q3? And can you -- obviously, we're in an environment of high inflationary pressures. How much -- I'm just trying to get a sense of how much has been incurred versus how much is left and what the risk could be to a materially higher estimate than that?

Orest, it's Stuart here. No, you're absolutely right. We're in an inflationary environment, as I noted in my comments. Yes, the original fees from 2017 is definitely a dated number now. We did update that actually in 2019 prior to our London listing, which was a similar number. But since then, we have definitely seen inflationary pressure. As we sit today, we've committed approximately USD 80 million of the project spend. That hasn't all been spent yet. But in my mind, it's committed. It's gone and the price is fixed. But yes, on that remaining piece, and the spend is primarily on equipment, SX -- major components for the SX/EW, steel and the like. So that's been priced. And that came in similar to budget -- similar to the original budget actually. But on the remaining piece, inflation on -- we're however seeing inflation on labor -- construction labor in Arizona. As I noted, it's a volatile market. We're not going to put out a new number at this point. Things are changing from week to week and from month to month. So you don't see a point in putting out a number now and then having to update that again in a few months when we have a construction schedule. So we'll wait here. We'll let the dust settle. I think that as we move into next year, it will be -- who knows, we could be going into a recessionary environment and the number could change. So we'll see. But yes, on a whole, some of the other projects, as you know, you look around, there's inflation in the range of 30%, give or take, on these -- on some of these capital projects, and that's the type of number you might expect to see on Florence as things sit today. But we're -- again, we're not -- a little bit cautious in not putting out anything firm at this point.

Okay. What about the operating cost as well? I mean, we've heard a lot about acid pricing being a lot higher over the last couple of years. Any sense on where given current input costs like acid and labor and everything else, like where would the cost profile move to on Florence?

The acid right now is up around $200 a ton, I believe, in the Arizona market. I think our original fees was at $120 a ton. So yes, again, it's a volatile market. As you know, prices move up and down. We have actually seen some new supply -- potential new supply coming into Arizona. There's actually potentially a new acid plant being built by a third party, quite close to Florence. So that's positive. But yes, if acid prices are moving, I think as a whole, though, we have, obviously, a very low-cost operation at Florence. I think our 2017 study called for $1.10 operating costs roughly. So we've got lots of -- lots of wiggle room there without jeopardizing the economics -- without jeopardizing the overall economics. We'll use about 200,000 tons a year of sulfuric acid. So when we reach full run rate, so you can kind of run a sensitivity off that.

Okay. So is the -- I mean, upon final permits is the plan then to put out a completely updated sort of feasibility technical study that would have updated CapEx, OpEx, production expectation?

Yes. Yes, that will be the plan.

Your next question comes from Ed Brucker of Barclays.

First one, just on some of the additional funding needs. I just wanted to get if you're able to provide your favored source of funding. And then just using kind of the base of the $230 million and I guess the $150 million left you have to spend on that. How much additional funding are you looking for?

Yes. It's still obviously a bit of a fluid environment. I think we're still not absolutely clear exactly when Florence is getting the -- the final UIC permit, so that's a bit of a moving target. Obviously, copper price is the other factor, how much cash flow we make from Gibraltar. We -- again, we finished the quarter in a good liquidity position. We had $210 million. We do have an undrawn revolving credit facility there. I think as far as preferences, I think, again, it's not an encumbered asset. We don't have any financing to date at the Florence level. And so we have a number of options. And I think probably 1 that we're looking at, and we've had -- we've just seen development in the market over the last few years is on the royalty and stream market. So we think naturally that would be a market we look to first, which would be a good source of flexible capital. We also have some equipment that we've procured that would be eligible for some equipment financing. So we're looking for sort of smaller tranches of financing and really, we'll look to tap those depending how those other variables play out.

Got it. That's helpful. And just on Florence, is the timing from the final UIC permit, given to production. Is that still 18 months that you had given previously? Or does that timing change or your thoughts around the timing change given the -- what's going on in the market more uncertain times and I guess, what are copper prices still?

Ed, it's Stuart here. It's -- yes, I know it's an 18-month construction schedule. That hasn't changed. In fact, it's probably been de-risked to some extent because of some of the procurement activities that we've done. So we're comfortable with that time line still.

Your next question comes from Craig Hutchison of TD Securities.

Just a follow-up question. You mentioned potential for royalties and streams on Florence. Can you give us a sense in terms of what percent of the metal you'd be willing to stream?

Again, we've got a few legacy royalties on the property. And so there's quite a bit aside from that, and that's included in our inter costs that we speak of when we talk about $1.10 per pound from our 2017 report. So I think when we're talking about royalties, I think we're talking about sort of in that 2% plus range of potential encumbrance. It obviously depends on how much we need in that, but that would be something like $0.07 a pound.

And if we do go into weaker markets next year in potential recessionary situation, is there a price for copper, which you would not hit the kind of green light for Florence just considering, obviously, there'll be pressure on the margins at Gibraltar at that point?

Craig, no, it's -- I mean, we look at Florence as a standalone project, right, with a strong IRR. I think even at $3 copper, it had an IRR in the range of 35% on the previous feasibility. So there's -- as I said, there's lots of room for copper price movement on the Florence project. Obviously, Gibraltar, we want to make sure that we do have levers to pull that Gibraltar too in downside scenarios, as we've talked about in the past. But the most important thing we have now, I think, which is giving us comfort is the hedge position, which covers us through the middle of next year.

Okay. Maybe 1 last question for me. You guys have mentioned the stripping activities will commence at the new connector pit next year Gibraltar. Also, you've got the primary crusher for mill 1 that will need to be moved. Are those fairly capital-intensive projects? Any sense you can give us in terms of overall stripping for next year costs and the movement of the mill 1. Appreciate it.

I guess maybe on the mining rate as a whole, we are thinking about -- there will probably be a small increase in our mining rate as we move from 2022 to 2023, which -- but beyond that, it's really on the mining -- in terms of mining costs, it's an allocation between operating and capital in terms of operating cost and capitalized strip. We just came off a quarter with a very low capitalized strip allocation. Next year, we'll have a much higher portion of our costs being capitalized. But the overall site costs won't be that different. The crusher project -- do you want to maybe talk about that, Richard, the timing and the costs around the crusher CapEx?

Yes. So the crusher work started this past summer and the crusher will actually move next August or next -- Q3 next year. In terms of capital, cost looking in the $40 million to $45 million range for the total project to be completed.

A good portion of that's already been spent, right?

That's correct. Yes.

And that's on a 100% basis?

On a 100% basis, yes.

Your next question comes from Alex Terentiew of Stifel.

I have a bunch of -- a lot of questions on Florence already asked and as I got answers here, but one of my questions is, if you get the permanent UIC permit, say, Q1, are you ready to hit the ground running right away? I mean, I would imagine you've already done a lot of the internal studies on updated CapEx and so forth, but you're just -- I understand kind of waiting to update the market based on timing. But should the permit be received in the next few months? Are you ready to begin immediately thereafter?

I think operationally, we're ready. We have our engineering well advanced. We have our procurement well advanced. As we've noted here, we have a bit of likely a financing to complete here in the next few months. But yes, then we'll be ready to go.

Okay. Okay. Good. And then you -- I just want to follow up the question you -- sorry, a comment you just made on the crusher spend for next year. Well, $40 million, $45 million is the full cost of the project, you said a good portion of that has already been spent. So I'm just trying to get a sense of spending on that event for next year. What sort of number should we think about?

Yes. I think as Richard said, it's on a 100% basis, the total projects in that sort of $40 million to $45 million range, and we will have incurred about half of that this year. I think at the end of this year, it will be around $25 million completed on a 100% basis.

Your next question comes from Alex Bedwany of Canaccord Genuity.

Good to see the grades up again in the last quarter. Congratulations. I think all of my questions have been answered, except one. Just on the amount of ore that's being milled. So that was obviously up quite a bit in this quarter. How sustainable do you think that is? And what was the key driver of the uptick in that? Is it that the ore is softer that you're going through at the moment? And it's the conditions going to go back to what you would call sort of steady state or normal in the coming quarters?

Yes. So this is Richard. The ore from Gibraltar pit is softer, which allows the higher throughput rates. So with 2023 being the source of ore, for the site going to see continued high throughput continue into 2023. And as long as we're mining -- the Gibraltar pit ore is much softer and it processes through the grinding circuit quite well.

Okay. And how does collected look in comparison?

Sorry, say it again?

How does the collected pit look in comparison to Gibraltar?

Connected pit will not be as soft as Gibraltar pit, but it will be more typical of our historical granite Pollyanna pit areas.

Your next question comes from Mike Kozak of Cantor Fitzgerald.

You've already answered all the questions I had on Florence. Just 1 left for me on Gibraltar. On the mining dilution you flagged in the quarter, what -- what exactly is that? Is that a rehandling issue, something maybe related to blast pattern design or just more selectively mining with smaller excavators? Could you give more detail on what you mean when you say initiatives are underway to lower the mining dilution?

Yes. It's really around which is a process we began early in Q3, just reviewing all our controls and procedures and seeking to identify opportunities to reduce the dilution that we're incurring. It is a function of the ore cuts, the ore orientation. We're actually going to bring in a third party to assist us to ensure we're not missing anything or there's not improvements or better tools that we could bring into play and assist us with just dealing with this. And we've already seen some improvements and I'm hopeful we're going to be able to continue to see further improvements as we go. And we also benefit as we mine deeper, the ore zones become more consistent and less irregular in terms of what we have to deal with when we make the ore cuts.

At this time, there are no further questions from the telephone lines. I would like to turn the conference back to management for any closing remarks.

Okay. Thanks, everyone, for joining us. So we'll wrap it up there and talk to everyone next quarter. Okay. Thank you. Bye.

Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank you all for participating, and you may now disconnect your lines.