Taseko Mines Ltd
TSX:TKO
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Taseko Mines Ltd
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Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Taseko Mines Q2 Earnings and Production Results Conference Call. [Operator Instructions] Thank you. Mr. Brian Bergot, please begin your conference.
Thank you, Pam. Welcome, everyone, and thank you for joining Taseko's Second Quarter 2020 Conference Call. The news release announcing our financial results was issued yesterday after market closed and are available on our website at tasekomines.com. With me today in Vancouver is our CEO, Russ Hallbauer; our President, Stuart McDonald; John McManus, our COO; Taseko's Chief Financial Officer, Bryce Hamming; and Richard Tremblay, our Vice President, Operations. 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 by management, we will open the phone lines to analysts and investors for a question-and-answer session. I would now like to turn the call over to Russ for his remarks.
Thank you, Brian. Good morning, everyone. Since the last time we spoke 3 months ago, a lot [ have happened ], as you all know. I'd like to just spend a moment to quickly speak about the resiliency of our employees and determination to exceed across all our operations, from British Columbia to Arizona, during the very difficult times that CV '19 (sic) [ COVID-19 ] has presented to everyone. It's particularly encouraging that our Arizona operations have functioned so well in light of the grave issues with the pandemic in Arizona. Over the course of the past 15 years, myself running this company, our employees have always risen to the challenges before them, from the ongoing challenges with expanding Gibraltar 7 or 8 years ago; the impact of the great financial crisis in 2008, 2009 and '10; to the meltdown of copper prices in 2016; and to the forest fires in Central British Columbia of 2017 and '18; and now to the present challenges of COVID-19 and the effect on the commodity markets earlier this year. As a group, we've endured and have actually strengthened our business over this time. That's one of the primary reasons to have long life reserves spanning many decades because calamities arise and metal markets are affected. And if your ore bodies aren't of sufficient life, you can't regroup and regain your financial footing that has resulted by the ebbs and the flows of the business. The last 4 to 5 months have really given us real opportunities in implementing new plans and improving our mining sequencings at Gibraltar. And while this is always an ongoing iterative process to extract the maximum value from ore bodies, particularly that at Gibraltar, on an ongoing basis, we certainly became more focused because we weren't certain of how long lower copper prices would be upon us this time. This detailed work has resulted in some very positive aspects for the path forward, which will improve our cost of production, which we're already seeing and are evident in these quarter results, reduced our capital expenditures in terms of infrastructure development and, ultimately, approve our financial performance going forward. Certainly, we have done all of this by, first and foremost, protecting the health and safety of all our employees. Gibraltar's Q2 results speak for themselves. With site operating costs of USD 1.04 per pound and C1 costs of $1.34 per pound and with low cost per ton milled, one would be hard-pressed to find any mine in the world with those kind of costs processing a copper ore with 0.28% head grade. This quarter's $1.34 per pound, down from $1.82 in Q1, shows what can be done when the copper price takes a drastic hit like it did this year. So we are very pleased with where we are heading in the transition from the Granite pit to the Gibraltar pit and how it will be set up heading through the back part of this year, 2020, and into 2021. To get some insight on how we can perform financially, go to our Taseko website and look at our July 20th corporate -- 2020 corporate presentation. And on Page 8, there's a chart there, and it's very illustrative the impact C1 costs are to our margins at various copper prices. With our year-to-date operating cost averaging roughly USD 1.58 per pound and copper near $3 today, on a year-over-year basis, our operating margin will be roughly CAD 184 million. Our leverage to copper -- as we know, pricing in the Canadian dollar is very dramatic. 25% -- $0.25 increase in U.S. copper price equates to over $30 million in operating profit for Taseko. Thus, we are very excited about what kind of operating margin we can generate over the course of this year and into 2021, especially, as I said, in our transition to the [ GEP ] pit. This performance will allow us to soldier on and to provide ongoing financial support for all our growth projects. As we have informed everyone a few days back, we have received our draft APP permit for Florence this morning and await the final UIC permit from the EPA, which will come in due course. Obviously, CV '19 (sic) [ COVID-19 ] has slowed the regulators' work and time lines, but that isn't a concern for us as it gives us time to work on the best financing package for Florence. We look forward to the start of construction of the commercial facility in 2021 -- sorry, 2021, and the next step in the growth of this organization. Looking forward, many folks only appear to be focused on this company through how developers performed, while only superficially thinking about our other assets. Certainly, I find it strange that investors nor analysts really think about the large gold reserve base we have, especially in the world today where gold seems to be all the focus. I think everyone has completely forgot that Taseko has proven gold reserves of over 10 million ounces and total resources of roughly 18 million ounces. It seems strange to me that small junior companies with a few drill holes can have market caps of $200 million, $300 million or $400 million based on some hype if Taseko gets no credit for our ounces in the ground of proven reserves. I guess no one thinks either New Prosperity nor Harmony will ever be developed. The question is, why won't they? Projects all over the world run into obstacles. Some are social, some are technical, some are a combination of many factors. And while those may delay and sometimes stop advancement, most times those projects move ahead. Look at the projects at Ecuador, Guatemala, even Chile and Peru, those that were thought not possible to advance have now advanced. Our projects are different. Canada and BC aren't those countries. In fact, we have an EA certificate from the province of British Columbia for New Prosperity. And our recent standstill agreement accords with the local First Nations that government should be a signal that nothing remains the same forever. As you've all seen, projects move ahead in other countries that have been stalled. Please take note that Canada is no different, and sound projects ultimately move ahead when all the conditions are met. At some point, those 10 million ounces of recoverable gold ounces in our projects will be mined. On that, I'd just like to turn the call over to Stuart.
Okay. Thanks, Russ, and good morning, everyone. I can provide some more color on our second quarter results and also talk a bit about the outlook for Gibraltar and Florence. It's certainly been a volatile year for copper prices with the price falling dramatically and margin recovering in recent [ months ]. It's now at even higher level than at the start of the year. But all things considered, I think we've managed the business very well through this challenging period and demonstrated the flexibility that we have at Gibraltar and the quality of that asset.When the COVID crisis struck in March, we took decisive action to protect the health and safety of our workforce, to ensure continuity of operations and to adjust our business to the changing copper price environment. In our first quarter earnings release, we announced that a new operating plan and identified cost reductions would amount to over $0.40 a pound of savings. And that's what we've delivered in the second quarter as our C1 operating costs dropped by $0.48 to $1.34 per pound and Gibraltar's CapEx also dropped by an additional $0.27 a pound. At the same time, we've seen a relatively quick recovery in copper prices, which combined with the lower cost, has led to strong earnings and cash flow generation in the second quarter. For Q2, we're reporting revenues of $106 million, operating cash flow before working capital adjustments of $55 million and adjusted EBITDA of $51 million. Gibraltar produced just under 37 million pounds of copper for the quarter on head grades of 0.28% copper, recoveries of 85% and average throughput of 84,000 tons a day. The strip ratio was 1.9:1, which is a bit lower than recent quarters, but it's in line with the average life-of-mine ratio. So we certainly haven't done anything that would jeopardize the longer-term mine plan. Our 2020 production guidance remains unchanged at 130 million pounds of copper, plus/minus 5%, and we actually expect to be at the higher end of that range based on the strong performance in the first half. In terms of costs, we expect the lower site spending to continue in the coming months and expect overall spending in the remainder of 2020 to be generally in line with the first half of the year. Over the last 6 months, as I said, we've seen some major swings in the copper price and changing market is both on the demand side and the supply side. The current price of just over $2.90 a pound is about $0.50 higher than the average LME price in Q2. So that bodes very well for Q3 earnings, and we expect to continue to grow our cash balance again this quarter. That being said, it's an uncertain environment, and we'll continue to keep a close eye on prices and adjust our plans as required. We recently acquired put options at a $2.60 strike price for the fourth quarter. So we'll continue to protect the downside and keep the upside open for shareholders. And as Russ just talked about, we have a lot of leverage to that upside in the copper price. You can see that in our stock price performance as our equity value is up over 3x since March. But that stock price still doesn't reflect the value of our Florence project, which we continue to advance and derisk. The production test facility has operated continuously for over 18 months now and in June and July produced copper at a rate of over 1 million pounds per year. That production comes mainly from 1 well, being the center recovery well in the test well field. The data gathered over the last 18 months has validated many of the modeled assumptions in our feasibility study and has been used to refine operating plans for the commercial phase. The experience our team has gained will greatly assist in the production ramp-up when we expand to commercial scale. The PTF has also demonstrated that we can run the in situ leach operation safely and in compliance with the current permits. And the process for the commercial facility permitting continues to advance steadily. The ADEQ is publishing the draft to APP permit today, which is another significant milestone for the project. The next step is a 30-day public comment period, which ends with a virtual public hearing in September. The EPA is also near completion of their technical review for the UIC permit, which is the other major permit required. No significant technical issues have been identified to date, although the process has been slightly delayed by the COVID situation in Arizona. We believe this has pushed out EPA's time line by a few months but still expect the project will be fully permitted in early 2021, which leads to first production in 2022. Florence will provide Taseko with 80% growth in our production capacity and at a significantly lower cost. The in situ mining method also has environmental benefits, including low energy and water consumption, minimal surface disturbance and a carbon footprint that's [ 90% ] lower than a conventional mine. So it's green copper from a secure U.S.-based source, and we're seeing good interest from off-takers and financing partners in that green aspect. Negotiations with potential JV partners are progressing well. I think the COVID situation and the permitting time line are allowing us some extra time to secure the best deal for Taseko shareholders, and that's what we're working towards. We still expect to have a full financing package in place prior to permits. So with that, I'd like to now hand the call over to Bryce to talk about Q2 financials.
Thanks, Stuart. Good morning, everyone. For the second quarter, we reported earnings from mine ops before depletion and amortization of $50.3 million and adjusted EBITDA of $50.9 million. Earnings this quarter clearly benefited from both recovering copper price and higher burden and sales volumes in the quarter, coupled with our plan to manage and reduce costs. We also had $10.1 million in provisional price adjustments, of which $5.9 million was unrealized and will price after the quarter. As copper continued to recover after the quarter end, and as we have 13 million payable pounds for Taseko's 75% share at the end of June that will be priced in subsequent quarters, we could expect additional cash flow from Q2 production of $10 million at these current copper prices. We were also successful in reducing our concentrate inventory at the end of June, with focus on our shipping schedule. Ending inventory was 3.8 million pounds of copper and concentrate compared to 6.4 million pounds at the end of Q1, which led to sales of $39.3 million compared to production of 36.8 million pounds. Said operating costs came in at USD 1.34 per pound and were significantly reduced from the prior quarter due to the higher copper production, lower mining rates arising from the lower strip ratio as we mined more ore tonnes and waste tonnes from the Granite pit; lower diesel costs, which were 31% lower than budgeted; a weaker average Canadian dollar at $1.39 versus $1.34 in Q1; and other site cost savings. This number of $1.34 is also before any consideration of payment deferrals like the BC Hydro tariff program. We continued with purchasing fuel call options to provide a ceiling price on the fuel ex Gibraltar for the rest of the year and into Q1 2021. This will lock in approximately $0.20 per liter savings as oil prices recover. This remains significant given we consume about 30 million liters of diesel a year at Gibraltar, but we fully participate in the low spot diesel prices that we're currently seeing. This is an example of how we will continue to deliver on reducing unit cost in this COVID environment for the remainder of the year and into 2021. Depreciation at $26 million was generally consistent with the prior quarter and should be at a similar level for Q3 before we transition into mining and processing of ore from Pollyanna in Q4. GAAP net income was $18.7 million and EPS of $0.08 per share due to higher sales volume and operating cost savings. GAAP net income did not include the net proceeds from our sale of marketable securities of $7 million, which was recognized in other comprehensive income. We had an unrealized gain of $13 million due to the strengthening dollar at the end of the quarter on our U.S. dollar-denominated bond. After adjustment for this unrealized gain, adjusted net income was $8 million or $0.03 per share. Our cash flow statement illustrates the full story that we generated cash flows from operations of $37 million and free cash flow of $25 million. In June, we made the semi-annual interest payment on our bonds, and we were still able to increase our cash position by $14 million to $64 million at the end of June. With improving free cash flow into the third quarter from higher copper prices and continued lower costs, we forecast cash balances to grow further, reducing our net debt position and increasing our overall balance sheet strength as we prepare to finance Florence. I will now turn it back to the operator for any question. Thank you.
[Operator Instructions] Your first question comes from [ Max Kay ] with [ Limber ].
Just 3 for me. Firstly, on the cost cutting. So you expect to keep mine costs at this level for the rest of the year, but then how do you expect that to rebound back in 2021 and maybe going on after that? Secondly, do you intend to continue hedging your copper exposure? And if so, at what level? And lastly, how do you view the time line on refinancing the 2022 debt?
I'll take the first one. It's John here. It might not be morning where you are here. The -- I'll answer the question on the cost forecast. We had an opportunity just as the mine sequence was when the COVID pandemic hit and the copper prices came down to readjust our sequence and take our cost down for [ quarters ]. And I think Stuart framed it correctly that the second half of 2020 will be about the same as the first half of 2020 overall. And then going into 2021, we've got our more normal cost structure. There's nothing that we've done in this quarter that needs to be suddenly caught up or anything like that. There's not going to be a spike in cost efforts. We'll gradually return to the normal cost.
Yes. Max, it's Stuart here. I can take your other question, I think, was on our hedging plans. And I think we've over the years been consistent with our hedging policy and that we buy out of the money put options. We try to keep 4 or 5 months of protection on the downside in front of us, and that strategy has served us pretty well over the years. We try to keep the upside open. Right now, I think we have put options out. We have Q4 put options in place at a strike price of 2 60. And as we get later on in the fall here, we'll look for opportunities to extend that out into 2021. So no change in plans to expect there. In terms of the -- in terms of the bond refinancing, in terms -- on refinancing, I think first step for us really right now is to fund and show the market a financing plan for Florence. I think that when we have that prefinanced and permitted, that's going to really be a good catalyst both for our equity and also for our bondholders to show that there are 2 assets that support the bond. So that's step 1. And I think that's in place. We'll look for an opportunity to refinance bonds. But we still got June 2022, so just under 2 years, so we've got some time. With -- John, you had a further comment?
Yes. Max, it's John again. I missed an important aspect in the answer to your question is that part of the resequencing as we go into a different pit where the ore is considerably softer with this resequencing plan. And so although our cost per ton mined will stay the same, our throughput in the mill will -- should increase significantly, which is going to reduce our cost per ton milled and increase copper production. So based on that, our unit cost of -- per pound of copper should come down and stay down.
[Operator Instructions] Your next question comes from [ Nick Germashuck ] with Stifel.
[ Nick Germashuck ] from Stifel. I was hoping you can talk about the outlook for grade for the next couple of quarters.
Yes. This is Richard. So great for the next couple of quarters. It will be similar grades here in Q3. We'll see a slight reduction in grade in Q4 and Q1 and then return back up later in 2021.
That's normal for Gibraltar. It would vary up and down 10% off the deposit average.
Okay. And then returning to the high-yield notes. So if I understood what you said, you really won't look to pursue a refinancing until you have a JV in place. Is that the right way to think about it?
Yes, that would be -- that's our current thinking, yes.
Okay. And then in terms of the financing coming from the Taseko side, would the high-yield market be the -- would that be the preferred funding source for Taseko share?
Sorry for -- are you talking about Taseko's share of the Florence financing?
Yes.
Well, we thought -- yes. So I mean, ideally, if we have a partner that funds a good chunk of the equity piece, and then to fill in the remainder, and we've got several options we're looking at. We've got project level debt, which we're exploring and advancing discussions with banks. We've got royalties and stream, streaming option on copper, which we're also advancing discussions on. And lastly, I guess, there is a high-yield market, which is there as well. But as would be other forms of equity from Taseko, I mean Gibraltar is generating good cash flow at these levels as well so we could generate a bit of cash from Gibraltar, which can be contributed over to Florence. So there's a bunch of different options that we're exploring, and they're all open to us right now. We'll come up with a package that's the best -- that we think is the best, but we don't have to decide on that yet.
Yes. And then in terms of the JV discussions, can you give us a sense for -- are they still preliminary? Or are they pretty far advanced?
No. We're in negotiations. It's -- they are -- we've got several parties at the table, and we're trying to push forward and advance them and get the best deal we can. So I think still optimistic that we can have a deal to announce in the next few months here, but we'll see. Time will tell. We're not going to rush something just to get an announcement. We want to get value and get the best deal we can for shareholders.
There are no further questions at this time. Please proceed.
Okay. Thanks, folks. See you next quarter. Have a good rest of the summer. Bye.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.