Imperial Metals Corp
TSX:III
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Imperial Metals Corp
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Ladies and gentlemen, thank you for standing by, and welcome to the Imperial Metals Corporation Second Quarter Financial Results Conference Call. [Operator Instructions] Before we begin, let me remind you that certain statements during this conference call may constitute forward-looking information within the meaning of securities laws. For reference, please read the forward-looking statement included in the SEDAR filing. It applies to this conference call as well. I will now turn the call over to Brian Kynoch, President of Imperial Metals Corporation. Please go ahead.
Thank you. Good morning, everyone. Welcome to our conference call for our second quarter results. I'm going to start with a few brief updates on our major projects and then I'll go have Andre Deepwell, our CFO, go through the highlights of the financial statements. And then after that, we'll have a question-and-answer period. So I'll start with Mount Polley. At Mount Polley for the second quarter, we milled 1.58 million tonnes, down from 1.69 million tonnes in the same quarter in 2017. The production for the quarter was, of course, impacted by a strike that lasted from May 23 until August 2. On August 2, the unionized employees ratified a new collective agreement. It will last for 3 years. We recalled all the workers immediately. But they have a couple weeks to return to work. And we expect to have full staffing levels in about a week at the mine. And we would expect to be back mining in the Cariboo pit about the 1st of September. During the strike, milling operations continued to the extent possible with staff operating the plant but at a lower throughput rate. And they did take some rest breaks during the period, so it -- for rest and to complete required maintenance. So we did mill at a lower throughput rate than we had planned for the period. And we traded nothing but low-grade stockpiles for the materials. There was no mining activity during that period. The daily throughput for the June quarter was 17,395 tonnes a day compared to 19,554 in the comparative quarter in 2017. And during the period of strike -- before the strike action, the mill was averaging 18,736, and after, during the quarter, 15,000. So we actually maintained a fairly good rate of throughput in the month -- in the quarter during the strike. And the grades were lower than we had planned because all of the stuff we milled was from low-grade stockpiles, and with the lower grade, came lower recoveries as well. Metal production for the June quarter was 3.82 million pounds of copper, down from 5.6 million pounds in the comparative quarter of 2017. As I said before, that's due to the strike action of the loss of tonnage and the treatment of lower grades. There is about 900,000 tonnes of ore remaining on the bottom bench of the Cariboo pit. And we plan to return to mine this, as I said, on about September 1 once the full complement of crews return to work. After that, we plan to return to milling low-grade stockpiles after that's completed until the Springer pit is available for mining. The dredging of tailings from the Springer pit continued. And we're now about 40% complete on that and still target having the tailings removed from the Springer pit by about the end of this year. At Red Chris, metal production for the June quarter was 11.51 million pounds of copper and 8,614 ounces of gold, both down from 2017 comparative quarters on lower grade and throughput. The lower grades were expected as mining of the lower benches of the Phase 3 Main zone pit was completed in the first quarter. And during the second quarter, all the ore fed to the mill was from the upper benches of the Phase 4 pushback. Copper recoveries were lower for the June 2018 quarter with those lower grades and the treatment of the near-surface mineralization that tends to be clay-ier. However, gold grades and recoveries both improved compared to the same quarter in 2017 with the gold grade and recovery up about 25% and 20%, respectively. Throughput was down from 2.7 million tonnes in the 2017 second quarter to 2.52 million tonnes in the 2018 quarter. And this was largely a result of the failure of a trunnion bearing in the ball mill, which resulted in about 6 days of unplanned downtime in May. The mill throughput in July so far in -- or in July was 990,000 tonnes, averaged 31,940 tonnes per day. So if we can keep the mill running, we should be able to exceed our target throughput. The new electric shovel that we purchased took longer to arrive than planned and was delayed in commissioning and now is expected to begin digging in the next couple days, about a month later than planned. It was originally planned to be operational in early to mid-July. And this is the piece of equipment we need to be able to increase our mining rate and access the deeper higher-grade ores sooner. The wildfires in BC's Northwest, and actually all over BC, have had some impact on Red Chris operations with some of our employees being impacted by evacuation orders, especially from the fire that passed through Telegraph Creek as we have a number of employees that live in that town. And I think we've actually had 4 or 5 employees lose their homes in Telegraph Creek. Also flights into [these] lake and from places like Williams Lake and other places have been canceled due to smoke. So we've had some delays in shift changes due to airports being closed due to smoke. One of the 5 -- one of the things we've done to advance, first time in a long time, we've advanced the deep East zone. We drilled 1 of the 5 geotechnical holes that's been recommended to gather the required rock quality data to further assess the potential of utilizing block cave methods to mine the deep East zone. We drilled one of those because we're going to be mining in the area where its collar is for the next couple of years. And it takes about a month to grow one of those holes. And we wouldn't have been able to do it while we're mining in that area. The completed hole, RC18-588, was drilled using orientated core diamond drilling. And the preliminary results from the geotechnical engineers indicate that the rock quality and strength in this area tested is very positive and is conducive to block cave mining. They were happy with the results they got. It also hit the upper part of the planned block cave that was intersected in this hole. And it hit about 167 meters, grading 0.7% copper and 0.84 grams per tonne gold as it kind of crossed the top part of the block cave. Just in summary. With the strike at Mount Polley and the lower copper recovery at Red Chris, it will be hard for us to meet our production targets for Mount Polley and hard to meet the copper targets at Red Chris. With the higher-than-anticipated gold grades and recovery at Red Chris, the gold target should be met. We've not adjusted our guidance for the rest of the year, but plan to do that in the near future. With the strike now over at Polly, we can develop a plan, knowing that we'll have crews to start operating the mine, as I said, about the beginning of the first week of September. And then we'll try to adjust that plan to get production back on target to mine as much high grade as can during the year. And we can see if we can get a bit more out of the Cariboo. At Red Chris, as soon as the new excavator is up and running and that should be in the next couple of days and we run it for a week or 2 to prove that its capacity will increase our mining productivity, we'll generate a new mining plan for the rest of the year and we'll look at adjusting that plan to try to reach the higher grade sooner. And then when we have all that done, then we'll give an update on our production targets, update our guidance. With those brief summaries, I will have Andre go through the financials and then we'll move to the question period. Andre?
Thank you, Brian. Revenues in the June 2018 quarter were $80.1 million versus $106.7 million in the comparative 2017 quarter. The decrease was the result of lower shipment volumes, partially offset by higher copper prices compared to 2017. Red Chris had 2.6 concentrate shipments in 2018 versus 3.5 shipments in 2017. Mount Polley had 0.7 concentrate shipments in the June 2018 quarter compared to 1.3 shipments in the 2017 quarter. In the June 2018 quarter, Imperial recorded a net loss of $36.6 million compared to a net loss, excluding the $109 million gain on bargain purchase of Huckleberry mines, of $10.3 million. The change in the net loss was primarily due to foreign exchange losses on debt of $9.2 million in the June 2018 quarter compared to foreign exchange gains on debt of $12.4 million in the June 2017 quarter. Including the gain on bargain purchase of Huckleberry, the revised net income was $99.5 million in the June 2017 quarter. The revised June 2017 quarter net income results from the finalization of the accounting for the acquisition of the 50% of Huckleberry mine not owned by Imperial. This was completed in the December 2017 period. And the accounting rules required that the final adjustments be recorded in the period of acquisition, which was June 2017. The impact of the revision to the June 2017 quarterly income was all noncash and resulted in an increase in net income of $35 million in that quarter compared to the originally reported net income for that quarter. The June 2018 quarter loss from mine operations was $15.4 million compared to a loss of $5.9 million in the comparative 2017 quarter. Revenue in the June 2018 quarter decreased by a $5.9 million negative revenue revaluation as compared to a negative revenue revaluation of $0.5 million in 2017. The company has no derivative instruments for copper, gold or foreign exchange at June 30 or today. Imperial's capital expenditures were $15.8 million in the June 2018 quarter, down from $28.8 million in the comparative 2017 quarter. Capital expenditures in the June 2018 quarter included $8.5 million for tailings dam construction and $5.4 million for mobile equipment. Expenditures on a number of capital projects budgeted for the first half of 2018 have been delayed to the second half of the year or into 2019. A new $15 million shovel for Red Chris is currently being commissioned and will be financed by long-term debt. The company reports 4 non-IFRS measures: adjusted net income, adjusted EBITDA, cash flow and cost per pound of copper produced. The adjusted net income/loss removes nonrecurring and unrealized items from reported net income/loss. The adjusted net loss in the June 2018 quarter was $27.8 million compared to an adjusted net loss of $21.8 million in the comparative 2017 quarter. Adjusted EBITDA was negative $2.2 million in the June 2018 quarter compared to positive $12.9 million in the comparative 2017 quarter. Cash flow was negative $2.6 million in the June 2018 quarter compared to positive cash flow of $12.3 million in the 2017 comparative quarter. The cash cost per pound of copper produced is calculated for the company's 2 operating mines. For the June 2018 quarter, these were USD 3.14 per pound for the Red Chris mine and USD 1.25 per pound for the Mount Polley mine for a composite total of USD 2.69 per pound. At the Red Chris mine, the cash cost per pound of copper produced increased from the USD 74 per pound in the March 2018 quarter due to decreased copper production volumes, lower byproduct revenue from lower gold production, partially offset by a lower Canadian-U.S. dollar exchange rate. The decrease on the cash cost per pound of copper produced at the Mount Polley mine from the USD 39 per pound in the March 2018 quarter was primarily the result of lower operating expenses and a lower Canadian-U.S. dollar exchange rate, offset in part by lower quantities of copper produced and lower gold byproduct revenues. At June 30, 2018, the company had cash of $15.5 million, available capacity of $15.6 million for future draws under the senior secured revolving credit facility and $10 million undrawn on the 2017 line of credit loan facility. The company had a working capital deficiency of $791 million at June 30, 2018. The working capital deficiency is primarily due to debt of $723 million related to the senior credit facility and the second lien credit facility, which mature in the fourth quarter of 2018, and the senior unsecured notes, which mature in March 2019. We are in discussions with our lenders and continue to work on financing alternatives and solutions for this debt. However, we cannot make any definitive comments at the present time. During 2018, payment of interest for certain debt facilities is being paid in common shares of the company until December 31, 2018, resulting in cash savings of approximately $16 million per annum. Those are my comments. Brian, back to you.
Okay. So if we can move to the question-and-answer period?
[Operator Instructions] Your first question today comes from the line of Nick Jarmoszuk of Stifel.
Nick Jarmoszuk from Stifel. Regarding the nearing maturities of the entire capital structure, I was hoping you could discuss any discussions you've had with your vendors on the payables balance and how they're thinking about the nearing maturities.
Well, we're in constant communication with our vendors. And at this point, we haven't experienced any change from their part in terms of reducing the credit or anything to that effect. There's been no change as a result of the impending maturities.
Do you have any -- given the payables balance, do you have a sense as to when they would like to see any sort of resolution here? And can you give any update as to what your largest -- 2 largest competitors are thinking and what sort of timeline you guys are working on to address the capital structure?
Well, I'm not certain about what their thoughts are on it. Obviously, the sooner we can resolve the capital structure, they'd probably feel better about that. But at this point, there's really been no change in terms of our dealings with our major vendors.
And then just on Red Chris with the -- I know you're going to be updating production guidance in the -- probably coming weeks or months. But can you just give us a little sense for what sort of ore is going through the mill in terms of the grades and how recoveries are looking presently?
Yes, as I said, we're still having a hard time with the copper recoveries. But the majority of the ore now is again back from upper benches again, headed on the way down. And the grades are lower than planned because we're not as far ahead as in the stripping as we planned. So we would like to be about 2 benches deeper than we currently are now. So we had targeted 130,000 tonnes a day for this year. I think we've actually achieved a little bit over 100,000. So that has kind of backed us up and we are higher up than we thought we would be. So we don't get as much of that good grade. It's not that the grade has disappeared. It's just we've got to get down to it. On the plus side, we've actually been getting better gold grades. The model has actually been, I'd say, maybe underestimating the gold grade. And the gold recoveries, our current gold recovery formula underestimates the recovery of that material. So on the gold side, it's been quite positive. But on the copper side, it's a little bit lower grade than we anticipated and a little bit -- and lower recovery. So that's why I'm so keen that we get that big shovel going and pick up the pace on excavating and see if we can dive down and get into some better ore sooner.
And as you get into the deeper benches, are you guys expecting there to be continued clay issues? Or does that resolve in the upper...
I think on the deeper benches, the clay issues are going to be restricted to the fault -- the part of the ore that's within fault zones. So there still is some clay down there, but it's not as ubiquitous as it can be on the top benches. So it's focused in faults. And we've instituted a program of trying to define the volume, where all the faults are, the volume of them and so that we'll discount the recovery we're going to get from the faults. And that will allow us to focus our mine plans on the better ore, maybe try to stay out of some of the fault zones if we can.
And then with the block cave opportunity, can you discuss any discussions that you've had with strategics in terms of developing that opportunity? Or is that something that has not been -- the process hasn't started yet? I think 2 quarters ago, it was mentioned you're showing the opportunity...
Right. [indiscernible] we're working on it. And that will certainly be part of the solution for getting our balance sheet straightened out, is the opportunity with the deep. So I can't really talk about it anymore right now. But the deep East zone is really the best ore body on the site. And it would be something that -- anyways, I would love for us to start advancing that sooner rather than later because it really is the biggest value up at Red Chris.
Your next question comes from the line of Howard Goldberg of Janney Montgomery.
Just following up on the prior line of questioning, I wanted to get a better sense of urgency of how you see the upcoming maturities that you have in front of you. But starting with the interest payment -- the cash interest payment that's due on September 15, that's presumably going to make some dent in your liquidity. And of course, the bank maturities, the revolving credit facility matures a little bit more than 2 weeks after that. And so my question to you, if you can help me understand, is whether you think you'll have the wherewithal to be able to make the interest payment on September 15.
Well, I think you said urgency. So yes, this is a very -- now that we have this quarter out, we've been discussing it with our shareholders. It's a very urgent issue and we need -- both issues are intertwined. And we need to get going on this issue and get it settled.
Okay. And do you think that is likely to take place in the next -- a little over 4 weeks? Or do you believe you have more time than that?
No, I think we should try to get something -- maybe it's not done, but at least an idea and a path forward within the next 4 weeks.
[Operator Instructions] Your next question comes from the line of [ Tom Litke ] of Citadel.
I just wanted to see what the mine plan, what you feel will be the date or the timing of getting into the East zone and when you'll be up and running there. You went through Mount Polley clearly. But I'm not quite sure when you think you'll be at production in the East zone.
Well, I'm not sure of the exact date. But the East zone, we're heading back in there actually to do some stripping as soon as that shovel comes up. But one of the things I'm looking at doing is kind of slowing down that stripping on the East zone and going faster to get better grade ore in the Main zone. So yes, anyways, that's one of the alternatives of making the grade better earlier this year is to focus more on the Main zone rather than doing stripping on the East zone, where you're going to get the benefits of that sometime probably late next year is when you get the benefits of the stripping in the East zone. We try to focus more on doing Main zone and getting as deep as we can as soon as we can and get access to higher grade ore sooner.
Okay. So it makes sense to postpone the East zone to focus on the Main zone?
That's my inclination. I'm having the guys work on that. And like I said, one of the key factors on that is exactly when this PC7000 gets up and running and then run it for a week and see how it does impact our productivity and that we get the extra productivity we're hoping for. And like I say, my inclination is that we will focus on the -- it will be better to focus on the Main zone and get higher grade sooner this year rather than looking at the higher grade, say, third quarter of next year.
Okay. And then a second question, on the convertible, I understand that you described drilling that hole as important both for the fact that you don't have any activities there and you can do it without worrying about screwing up the drilling. And also it appears to be part of a restructuring attitude of where you're headed. But given that there are no collars that I'm aware of on the payment of shares instead of interest, it seems like it's an extremely expensive thing to be doing on the idea that this is out there a few years, given that, as the tone of the call, everyone is concerned about the immediacy of the debt coming due. What type of -- you're really not running an austerity program here as far as I can see. What type of attitudes do you have about paying debt in cash as opposed to shares because of its highly dilutive nature at these prices? I mean, with the stock at $1, it's a lot different than when it was at $6.
Right. Just to be clear on the reason we drilled that one hole, we drilled that hole because there are 5 holes that were recommended by the geotechnical engineers, I think, I don't know, maybe $3 million worth of drilling. We drilled that one because probably -- basically, we wouldn't be able to drill it. We would have to move the collar and change the thing because once we get back into that East zone, we're going to be there for years, not months. And you can't have a drill sitting in the middle of a bench for a month and try to -- it's almost impossible to work around and mine around that. So everybody really wants to drill the 5 geotechnical holes and the 12 exploration holes that are required to basically get the core of the deep East zone up to a level that we could do a pre-feasibility study at. The only reason I gave on the one, as you say, austerity prog -- gave on drilling one hole is because basically after August, we wouldn't be able to do it for a couple of years. And I'm hoping that we can get that done in the next couple of years. And as I say, I'm keen to advance that deep East zone as fast as possible.
Okay. But are you -- there is no collar on this payment of shares in lieu of cash on the interest, correct?
Right. It could go -- what he's saying is it could -- you can talk to that. But it could go -- it's whatever the share price is.
Oh, yes, there's no limit either up or down on what the per share amount is in terms of the share...
This is all part of the thing. As we said, we've got an urgent thing the next 4 or 5 weeks. We need to do something and that would be part of it.
Your next question comes from the line of Craig Hutchison of TD Securities.
You mentioned a strategic partnership for the development of the Red Chris deep zone as a potential source of financing. Is that something that would come ahead of a refinancing of your line of credits and credit facilities?
I suppose it could. But the way I am seeing it now is it's more part of it. We could maybe do those things together.
Your next question comes from the line of Doug Schaller of Schaller Equity Partners.
Do you consider now that you bought the other half of Huckleberry for practically nothing, and you say it's worth $100 million, do you consider that 100% ownership now permanent or transitionary, where you would then maybe look for another partner for the property?
I would prefer to keep 100%, but it is -- and it's certainly another asset we have that we could partner. But my preference was if we somehow settle our balance sheet issues, then we get it so that we can -- I think it will take about $50 million to get that going again, is the amount of money we need. And I'd love to be able to do that with our own money and keep 100% of it.
Okay. And the restructuring plans that you ultimately come up with, the debt restructuring, is it limited? Is holding on to Huckleberry versus letting half of it go meant that there was a tremendous reduction in shares that were issued? That would make a big difference in that decision.
Yes. While I said I'd love to keep it, it doesn't mean we have to. If it comes and then we get a really good offer, it becomes part of something that's important to make to kind of finalize the deal on restructuring our balance sheet, then you have to look -- you have to add up all the facts. So if it becomes an important part of that deal, well, then, of course, we'll consider it.
Well, my biggest issue is that we have controlled shareholders. And the interest of controlled shareholders now are different than the minority shareholders. And so where there's a situation where there's a lot of shares issued, so the controlled shareholders in a reduction in their debt versus a transaction that may occur with Huckleberry that would mean less shares issued to the controlled shareholders, it should be beneficial to the minority shareholders. How does the controlled shareholders overcome that conflict of interest?
Well, I think we have to -- as I said, we would consider that as part of the package. And if it was an important part, we want to do what's right for all the shareholders.
And at this time, there are no further questions in queue. I turn the call back over to Mr. Kynoch for any closing remarks.
Okay. Oh, we've got one more questioner there if you want to.
We do, yes. It's from the line of Marcus [indiscernible] of Kingfisher.
My name is Marcus, and I'm a shareholder, a disappointed one. Of course, $6.50 a year ago and now it's under $1 basically. And I'm looking at the insider filings. And I don't see anything else than owner purchases under plan. So my question, my first question is do I interpret the situation correctly when I say that insiders are disappointed or there's no believers in the company anymore?
In what way?
Are you asking about the employee share purchase plan?
No, I mean, if I believe in your stock, I'd buy more stock. But I don't see that the insiders are buying more stocks. I see that Fairholme is selling. The only purchases I see from insiders is basically that they're buying under a plan, which is not the same as free money coming in. Any comment on that?
Right. I think I understand what you're saying. Look, people -- I think whether you're -- many of us are insiders and there's restrictions on when we can trade. So often, we can't trade. And then I would say also if we're -- the minute we're in the middle of discussions on any deals, then now we can't trade again. So there are huge restrictions on insiders trading. And I don't think it's quite...
Okay.
Lately, there's been a lot of time where we can't trade.
Yes. But the question is very simple, right?
No, I think we need to work out -- we, of course, got a problem to solve. We have a balance sheet we have to solve. And we're -- as you can hear in my voice, when we talk about the deep East zone, that's a wonderful deposit and we just need to get from here to there. So we're all working on it. And I think we're keen to get a solution and move on.
Okay. So the argument that your arms are tied, you can't buy, that is not correct, right? Because Murray Edwards...
No, that's largely correct that we can't trade. I can't remember the exact [blackout period], but that's a lot of the year. And the minute we start doing any dealings on critical things, we can't trade. Look, many of us are -- we're all insiders here. So there's lots of times when we can't trade.
Okay, Murray Edwards has been able to trade. Fairholme has been able to trade. But you have not. Okay, next question, please. You're talking about making more money by operations. What about saving some money? Have you thought about doing some cutting in the management and cutting in the compensation to managers? Because the track record is not very good. We can agree on that, right?
Well, it depends how much history [indiscernible]. But lately, I think you would find, if you look at our organization, we're already fairly lean and are already relatively -- I don't think the people here are overpaid.
Okay. And what about selling properties? You're talking about company holes, mineral properties and marketable securities. They're convertible to cash, but they are not considered.
If you look at the last couple of -- last year, was it last year this time? When did we -- we sold Sterling in the last [indiscernible]. So yes, we will consider selling assets when it's appropriate. And that's largely what the last caller was talking about, would we consider selling part of Huckleberry? And at the end, I said if the deal is right, of course, we'll consider that.
Yes, I like that idea, too.
And I now turn the call back to the presenters.
Okay. Well, thanks, everyone, for participating on our call. Thanks again. Have a good afternoon. Bye.
And this concludes today's conference call. Thank you for joining the call today. You may now disconnect.