Taseko Mines Ltd
TSX:TKO
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Taseko Mines Ltd
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Good morning. My name is Jessica, and I will be your conference operator today. At this time I would like to welcome everyone to the Taseko Mines first quarter earnings and results conference call. [Operator Instructions] Mr. Brian Bergot, you may begin your conference.
Thank you, Jessica. Welcome, everyone, and thank you for joining us today to review Taseko's first quarter 2019 financial results. Our financial results were issued yesterday after market close and are available on our website at tasekomines.com. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and Stuart McDonald, Taseko's Chief Financial Officer. After opening remarks by management, which will review first quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session.Before we proceed, 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 first quarter MD&A and the related news release as well as the risk factors particular to our company.I would now like to turn the call over to Russ for his remarks.
Thank you, Brian. Good morning, everyone. Thank you for joining us today. The first quarter of 2019 has begun like we began 2018 with cyclically lower head grades as we began a new pushback at Gibraltar. Copper recovery of 85% was very good considering the head grade of 0.22%. We estimate we lost roughly 4 million pounds of copper metal over the quarter because of difficult operating conditions. We had pretty abysmal shovel availabilities during the quarter for a number of reasons. But in general, those were tied to cold weather issues, which remained in the minus 30 Celsius range for 6 weeks.If we add the equipment issues along with the hard ore in the top of the pushback, the combination of those saw our concentrator throughput drop dramatically to 76,000 tons per day, the lowest in many years on a quarterly basis. However, on an upbeat note, we saw performance out of our moly plant increase 67% year-over-year with over 720,000 pounds of production for the quarter, up from 437,000 in the same quarter last year.If the throughput pounds had been produced, we would have had a very good quarter. How even -- however, even with lower production, we still managed to generate an operating profit of just under $16 million and adjusted EBITDA of $10 million off of a 0.22% head grade. So overall, our efficiencies were good.I would like to think if copper and moly prices stay in this range for the year, we will have similar financial results by year-end as we had in 2018. If, however, either metal prices increase in terms of moly or copper, our leverage to the price is great, and we could do much better financially.As per previous commentary, Gibraltar continues to generate cash, allowing us to invest in growing the company, and specifically, Q1 has seen a lot of activity with the company. In February, we closed our acquisition of Yellowhead Mining. This purchase will add over 3.4 billion pounds of copper to our reserve base, which has now been expanded to roughly 9 billion pounds. We've begun the process of applying to the provincial and federal governments, where we started the environmental assessment process for Yellowhead and have submitted a project description to them. We are presently working on a new development plan that at first blush, will approve the project NPV while lowering overall cost. We should be able to provide expanded details in the months ahead.One of the many initiatives we take before we acquire an asset, especially one as advanced as Yellowhead, is to methodically digest the feasibility study or any studies available. If anyone remembers, we invested in Yellowhead many years ago, and the dollars we put into it went into drilling and reserve definition. With that information over the course of a number of years, we ascertained what the Yellowhead asset could actually become. We knew we could raise the cutoff, slightly increase the strip ratio, flow with no throughout and increase NPV dramatically because we'd ascertain a large amount of ore that runs approximately 0.32% copper equivalent was available to us, enough of 0.32% to run a 90,000 ton per day concentrator for the first 5 years of operation at a high head grade. Many folks confuse head grade with profitability. What needs to be looked at is gross margin. We have a high head grade resulting in rock value of, say, $30, but your cost at $25 ton, there isn't enough margin to run your business profitably.The reason we bought Yellowhead is because it has high margins even with perceived low head grade. The Yellowhead ore is at long-term metal prices worth approximately CAD 22 per ton. The estimated operating costs are roughly $8 per ton. The gross margin is $14 per ton. On a 90,000 ton per day concentrator, that's approximately $1.3 million per day in our operating margin or over $400 million annually. No one should be distracted by head grade if they understand the operating side of the equation. For us in Taseko, investing in mining progress means looking at the whole economic picture, not just a portion of it. We have a plus $1 billion NPV asset which we know will grow in value. We acquired it for less than $15 million. We believe it can produce up to 200 million pounds of copper per year during its first 5 years of production at very low and competitive C1 cost. And as we continue our engineering work, we know that the project will get increasingly better.As I said, combine this with the $8.22 estimated cost per ton mining cost, and you have a world-class asset that actually no one knows about. If someone looks -- wants to look at comparable valuations in ore body, I think one likes to look no further on the valuation that the recent Sumitomo - Teck deal of Quebrada Blanca was done. Sumitomo's investing a little over USD 1.5 billion to get roughly $170 million or -- sorry, 170 million pounds of annual copper production. We have an asset that will cost roughly CAD 1 billion to build out and produce more pounds of copper than the Sumitomo interest. At present, there's no -- not a company our size that has the reserves we have, reserves we have purchased at bargain basement prices that have decades of wealth generates ahead of us. Having long-life reserves gives us another opportunity, which gives us great financial flexibility as we sell off -- we're able to sell off portions of these after we have unlocked value to other companies. And I go back to the fact that we sold Gibraltar -- the interest in Gibraltar to a Japanese trading company many years ago that allowed us to expand and increase production at Gibraltar, and that will continue on in these other assets. And so we've had many interested parties that are looking for investments, and this will -- allowed us to avoid shareholder dilution while maintaining the strong balance sheet. So we are in a very enviable position. If you don't have reserves, you don't have assets. As a point of example, we are excited about our Florence -- about our flagship Florence Copper Project. As you've seen in the press releases, we are now operating our wellfield and SX/EW plant and producing LME-grade copper metal. And we're very excited about that. We expect -- John expects to be in a position shortly to modify our present permits for the final operating permits for the commercial facility, and the path forward appears to be a clear runway. Stuart will speak about that path forward with respect to Florence financing and other matters, and I'd like to now turn the call over to him. Stuart?
Okay. Thanks, Russ, and good morning, everyone. I'm happy to provide some further detail on the Q1 financials and also, a quick update on the Florence financing progress. As noted in our earnings release yesterday, we see copper production improving in the remainder of this year, and we've not changed annual guidance. And although Q1 was a lower production quarter, we still reported earnings from mine operations before depreciation of $16 million and adjusted EBITDA of $10 million. Revenues for the period were $70 million based on our 75% share of Gibraltar sales volumes, which were 23 million pounds of copper and 770,000 pounds of molybdenum. Copper production was slightly higher at 25 million pounds, so we had a small inventory buildup in the quarter. Our realized copper price was $2.91 per pound and included positive provisional pricing adjustments for about $0.04 per pound. Moly production was a bright spot again this quarter, and the price remained in the range of USD 12 a pound. And with that, we generated almost $9 million of moly revenues and a byproduct credit of $0.32 per pound of copper. Total spending on site operating costs and capital strip was 7% lower than the previous quarter, but our operating costs per pound were slightly higher than Q4 last year because of changes in the amounts allocated to capital strip. The first quarter P&L included a $6.7 million unrealized foreign exchange gain on our U.S. dollar debt and a $0.3 million unrealized loss on copper production. GAAP net loss for the period was $7.9 million, and after adjustments for the foreign exchange gain and derivative loss, we're reporting an adjusted net loss of $14.4 million or $0.06 per share.Turning to cash flows now. We had just over $7 million of operating cash flows for the quarter, which was used to fund CapEx and debt service. Capital expenditures included $8 million for capitalized stripping, $3.4 million for other items at Gibraltar and $2.1 million of Florence for the PTF operations. The acquisition of Yellowhead closed in February, and other than legal and other fees associated with the acquisition, we didn't have any other significant spending on the project.We ended Q1 with a cash balance of $34.5 million. And subsequent to quarter-end, we completed an equipment loan for additional cash proceeds of $12.5 million. The new loan is secured by existing mine equipment at Gibraltar and repayable over 5 years at an interest rate of just over 5%. This is relatively low-cost financing for us, and we're currently looking at other proposals for equipment loans. And it's notable that we still have $36 million in restricted cash and deposits which are being held as security for reclamation bonding at Gibraltar. We're actively pursuing other forms of security that we can put in place, which would release that cash to Taseko and further boost our working capital. We'd like to build our cash balance as we look ahead to a capital program at Florence next year.And in terms of the Florence project financing, we are seeing a high level of interest from finance providers, including lenders, streaming and royalty companies and potential joint venture partners. Initial feedback has been positive on all fronts, and with the PTF oil field now operating and producing copper, we're in a good position for more advanced discussions and due diligence in the coming months. We're not in a rush. We have some time, and we're targeting to have committed financing in place by late this year or early next, and we'll be able to provide further updates on financing progress next quarter.And with that, I'll turn it back to Russ.
Thanks very much, Stuart. Operator, I'd just like to now open the line to calls.
[Operator Instructions] Your first question comes from Orest Wowkodaw of Scotiabank.
I was wondering if you could maybe give us some details on what the strip ratio and the capitalized stripping look like this year at Gibraltar.
It's -- the strip ratio itself is deposit standard. It's a long -- John here, Orest. It's a long-life mine. We run it at an average strip ratio of 2.5:1. The capitalized strip varies depending on where you are in this -- in the deposit. But really, what matters is the stripping ratio. So it's going to about 2.5:1. Always is.
So you -- okay. So you're just above that then in Q1, but that'll come down later?
Yes. That Q1 strip ratio is a little bit distorted because with the shovel problems we had, we pulled from the stockpiles for -- to feed the mill. It was one of the reasons the grade was lower too. We just didn't have the shovel ability to keep the ore going, but we kept stripping. So -- but we'll hold our own going forward.
Okay. And in terms of the copper grade, obviously, Q1 was quite low. Do you expect that to just sort of steadily increase through the year, or is it going to be kind of pretty volatile like it was last year on a quarterly basis?
Well, it wasn't planned to be as volatile, and it's -- Q1, this quarter, was low, not as low as Q1 last year. But we see the average for the year being right on what we expected. It should be the -- average the same as last year. About the same. That should be...
About 0.25, 0.26?
Yes. 0.25, 0.26, yes, average. So it'll come [ off the risk ].
Okay. Great. And then just finally on Florence. Can you give us maybe an idea of what the asset consumption's been like so far? Is it -- I don't know if you have that number handy, but is it in line with your expectations? Or how is it going so far?
We're really not there yet. I mean we're treating the entire block of rock. So it's like 2 million tons that we're treating right now. [indiscernible] we did our third harvest yesterday. So asset consumption per pound, if I measure it right now, would be pretty high. But it's over the long run. It's going to be about 5 pounds of asset per ton of copper.
Okay. So it's just too early to tell, okay.
Yes, with everything indicates that all of our assumptions are correct. We don't see anything indicating anything other than that. There's -- it's not an asset...
Your next question comes from Craig Hutchison of TD.
You mentioned you have started the amendment process for the permits for Florence, and you anticipate that commercial-scale production could start as early as the first half of next year. Can you just sort of walk me through what those amendments are? Have you already applied for the amendment for the act for a protection permit and the UIC? Or you just...
We're in discussions with both the federal and the state governments on that and preparing the amendment applications now. The -- it's -- we should be in commercial-scale construction in first half of next year on production.
Sorry. And in terms of receiving those permits, you expect to receive those by year-end?
Early next year in our discussions with both governments. That's what we're targeting.
I guess a similar process up here, Craig, is you get your mines act permit. If you build a mine in Canada, where -- particularly in British Colombia, and then you apply for the federal government for your mine effluence permits, right? So it's sort of a...
They run in parallel.
They run in kind of parallel. So it's like we've got our housing permit to build a house, and now we're applying for the electrical permit to put in the wiring. So to put it in simplistic.
The good thing is we've got the Production Test Facility running. And so we're not going in with theoretical activities in these permits. We've got hard proof that we can do what we say we're going to do. So both governments, federal and state, are quite positive on the permitting process. They're not seeing any major hurdles. It's just a process we have to work through.
Okay. And in terms of the financing options, I mean what type of leverage are you guys comfortable with?
On the project, Craig -- it's Stuart here. We're -- well, for first off, we're limited on the amount of additional debt we can take on under our bonds. I think we're limited to $100 million of secured debt and $50 million of equipment leasing. So we'll be somewhere -- we're targeting somewhere in that $100 million, $125 million range for debt. And we think that's a reasonable amount of leverage and going forward, when Florence ramps up and generates significant EBITDA, that's going to delever the company as a whole in terms of our metrics. Our debt-to-EBITDA ratio should come down. And so we think that's the right -- roughly, the right amount of leverage.
Are you guys considering joint ventures as well?
Yes, yes. That's definitely one of the options we're pursuing. We are out talking to various parties. I think people recognize that it's a unique asset and an attractive asset with roughly CAD 1 billion NPV. And if we can sell a small stake in that based off of NAV, then that's going to be a very accretive thing for us to do. So we're definitely open to that.
Your next question comes from Mike Kozak of Cantor Fitzgerald.
Two questions for me. The first being, are there any tax losses or tax loss pools within, I guess, what is now the Yellowhead subsidiary? And if so, could any of those potentially be applied to profits at Gibraltar?
Yes, absolutely, Mike. It's Stuart speaking here. There's -- sorry, I don't have the exact number, but roughly, CAD 50 million of tax pools in Yellowhead. And we'll certainly be looking at ways that we can utilize that at Gibraltar in the coming years. So it's another -- I know, kind of another one of the potential synergies that we see coming out of that deal.
Did you say 5-0 or 15?
5-0. Actually, the exact number in our financials somewhere. But I think it's approximately 5 -- $50 million.
Okay. The second one is at Florence. I mean in your discussions with potential JV partners or streamers or traditional -- more conventional project lenders, do they, in general, want to see the permit amendments first? Or are they kind of prepared to move ahead with project finance ahead of any permit amendments?
Well, I guess certainly, if you're talking about bank lending, then that's going to come in after permits. And then that's -- frankly, the lowest cost for us is to finance it after it's been de-risked. And then similarly on -- in our JV partner discussions, it's just a matter of value and what people might be willing to pay at different phases. But whether it's been -- whether that permitting has been received or not, I guess, is something that we'll weigh into the negotiations. But frankly, we don't see, as Russ described, we don't see the permitting as a huge risk here. It's really just an amendment process. So...
There are no further questions at this time. Please proceed.
Thanks very much, everybody. See you next quarter. Bye-bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.