Taseko Mines Ltd
TSX:TKO
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Taseko Mines Ltd
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Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines Third Quarter Earnings and Production Results Conference Call. [Operator Instructions] Thank you. Mr. Brian Bergot, you may begin your conference.
Thank you, Joanna. Welcome, everyone, and thank you for joining Taseko's Third Quarter 2020 Conference Call. The news release announcing our financial results was issued yesterday after market close and is available on our website at tasekomines.com. With me today in Vancouver is our CEO, Russ Hallbauer; our President, Stuart McDonald; Taseko's Chief Financial Officer, Bryce Hamming; and Richard Tremblay, our VP of 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 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. After opening remarks, 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. Thank you for joining us today for this Q3 update on Taseko. A lot of things have been happening in the world over the last 6 months, as we all know. And the copper metal market is no exception. Global copper concentrate production, actual metal production from China and other locales, smelter TCRCs, Chinese import, export data, hidden stocks emerging onto the LME are a few of the myriad of details, a company like Taseko has to keep an eye on. For the most part, the mining business has not been immune to the general volatility that is embracing the world today. Anyone that says we know what is going on or they know what is going on, from where the price is going, what the supply is like and the constraints on it and how the coronavirus could affect this whole business are in my opinion, very naive. When it comes right down to it, it's just a big guess. No one knows at this time where the market might be in 1 month, 6 months or a year. Folks try to forecast supply and demand and pricing, but it's all just sophisticated guessing. All we know as a company is what Donald Rumsfeld, the old Secretary of Defense for the U.S. used to say, we know there are unknown unknowns, and that pretty much sums up where we as a company are at. Even after nearly 4 years in the business, there is no -- there is plenty of knowns, unknowns for myself. Most of what is in front of us is unknown, so plan to protect the downside and let the upside take care of itself. However, we firmly believe that the copper business is the place to be for the long run -- the long term. And to be specific, for Taseko, the place we want to be is in North America, which has all the key components to support high-quality mining ventures. It is a secure political jurisdiction, which has rule of law, fair taxation, high-quality workforces, modern infrastructure and much, much more. In early 2020, when the price of copper come up to a 2-year -- to the $2 level, we reacted quickly and with great purpose to protect our business and balance sheet. This is not the first crisis we have faced, and we've shown in the past our ability to successfully navigate challenging times. I think everyone would agree that we did this very well, first with our Q2 results and now followed by these Q3 results. Did we think the copper price would rise from the lows of March to a 2-year high of $3.19 per pound last week? Not a chance. But what folks should understand is that our business is not driven by the copper price, it's driven by our cost and how we maneuver them to ensure Gibraltar can deliver the results we want to so we continue to build out our business. Basically, we don't want to stop work on our projects just because the copper price moves up or down. We would in extreme circumstances, but we've never had to do that. From the 2000 financial crisis onward, over the last 15 years, we have managed through thick and thin to run our business and advance our projects. And this period over the last 8 months has been no different, both Florence and Yellowhead are moving ahead, and we are very excited about where these 2 projects will lead the company in the very near future. If we look at 2020 versus 2019, through 9 months, our revenue was up by $17 million. But more importantly, our earnings from mining operations is up from $47 million in 2019 to $92 million year-to-date, a staggering 100%, while our cash flow from operations is up from $15 million in the same quarter in 2019 to $31 million this quarter, a similar percentage. And our year-to-date cash flow from operations is up from $53 million -- is up $53 million from $33 million to $86 million. Bryson, and Stuart, I'm sure will talk about those numbers in their presentation. So those are pretty impressive results in this very volatile market, I would say. But let's put this into context. Taseko is mining the lowest grade ore deposit in the world, and we are achieving these kinds of results. When I speak about our growth projects just around the corner, just imagine what we're going to be able to do when we have Florence up and running with cash cost of $1.15 per pound and Yellowhead, which has a 0.34% copper equivalent head grade versus Gib's 0.25%. The future is bright for this company based on where we are with our pipeline of projects, where we believe copper is going over the next 3 to 4 years, both on the supply side and the demand side and how that will be reflected in the metal price. Our 10 billion pounds of copper in reserves in just those 3 assets that are or near in production are going to be very accretive for our shareholders. I'd like to now turn the call over to Stuart.
Okay. Thanks, Russ. Good morning, everyone. I'll give some more color on our third quarter results and outlook that we published with our earnings yesterday. And certainly, the headline this quarter is a good one. We generated $32 million of adjusted EBITDA. We grew our cash balance again, and we did that in a quarter where head grades at Gibraltar were below our reserve grade average. So we're happy with the results, proud of the way our team has managed the business through a challenging and volatile year so far. Our health and safety protocols have continued to operate effectively. And we haven't had any operational disruptions as a result of the COVID-19 situation. Gibraltar produced 29 million pounds of copper and 668,000 pounds of moly in the quarter. Copper head grade averaged 0.23%, which was slightly less than we expected as we had anticipated higher grades in the final benches of the Granite pit. But we're still on track for our annual guidance of 130 million pounds plus or minus 5%. Mining in the Granite pit was recently completed and Pollyanna pit will now be the primary source of ore through the middle of next year. On the cost side, I think we've demonstrated this year the flexibility that we have to respond to short-term price changes. The operational plan that was implemented in April has served us very well and allowed us to reduce mining rates temporarily without impacting the long-term mine plan. We think about costs in terms of total site spending, which includes operating cost and capitalized strip. And while our third quarter spending was slightly lower than Q2, it was still below where we were in Q1 and 19% lower than the third quarter last year. So for us, it's about managing margin, both in the short term and for the long term. Our total operating cost per pound increased to USD 2, but that was mostly driven by lower copper production, a strong Canadian dollar and the low capital strip allocation this quarter. So it's not a reflection of increased spending. Russ talked about copper prices already, and they have been strong, averaging USD 2.96 for the quarter. We continue to be very optimistic about long-term prices, but we don't take a view on the short term. We focus on the aspects that we can control being the cost side of the business. We also protect the downside by buying copper put options. This is a strategy we've had in place for many years, and it continues to serve us well.In the first half, we spent $700,000 on out of the money put options, and those generated over $6 million of cash for us. We've just extended the put protection into Q1 next year at a strike price of USD 2.80 a pound, again, at a relatively low cost below $1 million. The copper price upside remains open for shareholders. And as we've seen this year, our stock price has incredible leverage to that upside. Our equity is up over 4x since the lows in March. And year-to-date, we're one of the top-performing copper stocks on Toronto, New York or the London exchange. Russ talked about jurisdictions where we operate, and we like the low -- these low-risk jurisdictions. We don't have to manage uncertainties in Chile, Peru, the DRC or Mongolia. We have a great growth profile right here in North America. The Florence project in Arizona is a low-cost, world-class near-term growth project with an after-tax IRR of 40%. We've been producing copper at the test facility for over 18 months and has been a valuable derisking step. In August, the Arizona state regulator, the ADEQ, issued a draft APP permit which was followed by a public hearing in September, where we saw strong community support for the project. Out of 30 speakers at the hearing, 29 of them spoke in support of the project, including local community members, business owners and elected officials. Public comment period is now closed, and the ADEQ will review and respond to comments before issuing the final permit. The EPA is the other key regulator and is following a similar process. No significant issues have been identified to date, and we continue to expect the project to be fully permitted in early 2021, at which time we expect to move into the construction phase. Detailed engineering is progressing. Negotiations with potential JV partners and other finance providers continue to advance and are tracking well with the permitting process. And we've talked about this in the past, but important to note again that the in situ mining method of Florence makes it a green project with low energy and water consumption, minimal surface disturbance and a carbon footprint that's 90% lower than a conventional mine. There's also no smelting required as we produce refined copper right on site. So this will be a U.S.-based supply of green copper that can be used for electric vehicles, renewable energy and other infrastructure. And with that, I'd like to now hand the call over to Bryce to talk about the Q3 financials.
Thanks, Stuart. Good morning, everyone. For the third quarter, we reported earnings from mine operations before depletion and amortization of $36 million and adjusted EBITDA of $32 million. Earnings this quarter continued to benefit from the recovering copper price, coupled with our revised mine plan implemented in April to reduce site cost. Taseko also had a further $4.4 million in upward provisional priced copper adjustments included in revenue, resulting in an average realized price of $3.15 per pound in revenue. We were also successful in keeping our concentrate inventory at the end of September lower with a continued focus on our shipping schedule. Ending inventory was 3.6 million pounds of copper and concentrate compared to 3.8 million pounds at the end of Q2. We had sales of 29 million pounds, which was similar to our production at 29 million pounds. As Stuart noted, site operating costs came in at USD 2 per pound and were higher compared to Q2 on a per pound basis as a result of the lower copper production and higher mining rates. We also capitalized less cost in Q3 compared to Q2 as we mined the remaining ore out of the last benches of the Granite pit, with an inherently low strip ratio. The strengthening Canadian dollar by $0.06 over the quarter also contributed to higher site costs in U.S. dollar terms as substantially all our costs at Gibraltar are Canadian dollar based. But the year-over-year savings in site costs in total dollars, including capitalized stripping, was a 19% improvement compared to the prior quarter in 2019, and we are very pleased with that. We continue to see some ongoing cost savings heading into Q4, including diesel costs at site still $0.23 less today than we forecasted at the beginning of the year. As Stuart mentioned, we purchased copper puts in July to protect against economic downside risk for Q4. In October, we purchased 280 strikes for 15 million pounds for a significant percentage of our share of production for Q1 2021. We will continue to review opportunities to purchase further downside protection for 2021 in the coming weeks and months. Depreciation at $24 million was consistent with prior quarters and our prior guidance. With mining in Granite pit completed, we expect depreciation for Taseko to be approximately $20 million per quarter going forward as mining now moves to the Pollyanna pit. GAAP net income was $1 million and EPS was nil per share due to the higher operating margin, driven by the stronger copper price. We also had another unrealized gain of $7.5 million due to the strengthening Canadian dollar since June on our U.S. dollar-denominated bond. After adjustment for this unrealized gain, adjusted net loss was $5.8 million or $0.02 loss per share. Our cash flow statement, as always, illustrates our sources and uses of cash and continues to highlight how Gibraltar continues to support our investment into our development properties. We generated cash flows from operations of $31 million which funded $15 million in CapEx, of which $4 million related to Florence and just over $1 million related to Yellowhead. After payment of equipment debt service payments, we were able to increase our cash position by a further $9 million to $73 million. We also concluded a $9 million revolving credit facility in October, with the Canadian bank with the backing of export development Canada to assist Gibraltar with trade finance and working capital needs. The facility will allow us some additional flexibility and the potential to use letters of credit to support key suppliers, which can provide additional liquidity, support in uncertain times. I'll now turn it back over to the operator for any questions.
[Operator Instructions] Your first question comes from Joel Brown at TD.
Congrats on another strong quarter. My question is, just on grades over the near term. It was mentioned previously that grades in Q4 and Q1 and 2021 expect to be somewhat lower than what was seen in the second quarter. Do you expect grades to be somewhere near or at what they were for Q3? Or should we expect something between the grades in Q2 and Q3 going forward?
Yes. So this is Richard Tremblay, Vice President of Operations. Grades for the next few quarters will be similar to Q3 and within the normal variations that we see quarter-over-quarter.
Okay. Great. I guess my second question here, just on -- it was mentioned in the MD&A that there had been preparations to had they gone for incorporating this historical Gibraltar pit. Just given its expected productivity and cost improvements, I was just wondering if you could provide an estimate on the capital required to restart operations at that pit.
So Richard Tremblay, again. Really, the main portion of capital is associated with the dewatering of that pit, and it's in the $8 million to $10 million range.
Okay. And then my final question here. Just looking forward to next year, should we expect copper production to be roughly at the same ballpark for guidance for 2020? Is there any expectations on a change in general 2021 the capital expenditure program at Gibraltar?
Yes. Joe, it's Stuart here. Yes, we haven't given -- we're not giving any guidance for 2021 at this point. We're still working through our budgeting process which we always do, and we do focus on margins, as we talked about in the call, not just on maximizing production. But generally speaking, at Gibraltar, we've talked about for the long term, producing about 130 million pounds a year, plus or minus 5%. Those are kind of long-term numbers that we can expect. And so we don't expect anything dramatically different than that next year. But as I said, not giving kind of official guidance at this point. Did you have a question -- sorry, you had a question about CapEx as well? Could you repeat that?
Yes. No, I was just wondering if you could provide color on that for next year, but I understand if those numbers aren't set yet.
Yes. I mean, generally, there's no major CapEx requirements to execute our long-term plan. I think there's -- as Richard mentioned, there is a little bit of CapEx required to dewater and open up the Gibraltar pit, which will become one of our sources of ore later next year. But no, normally, I think, generally speaking, you can expect similar types of CapEx as to what we've seen in the past anywhere from maybe $15 million to $20 million on an annual basis, something like that.
The next question comes from Nick Jarmoszuk from Stifel.
I just wanted to get a little better understanding on the grades. So you're moving to the Pollyanna pit. Can you talk about what the low and high grades are through the pit? And what sort of variation there is in this -- in the ore body?
Yes. So Richard Tremblay, again. So grade in Pollyanna pit varies anywhere from the -- coal pit at 0.23 but there'll be lows in the mid-grade range and the 0.17 and the zones that are high grade up to the 0.3 range.
And then on a quarterly basis, should we assume that it should be in the sort of 0.24 range on a -- just -- as the ore gets processed?
We don't give quarterly guidance. We stick to the annual 12-month periods. And so you can kind of refer to the previous comments on annual guidance, but we're not going to get into too many details on quarterly production. I think what we have said is that you can expect, plus or minus 10% type grades on the reserve average in any particular quarter. But over a 12-month period, it's been pretty stable. So that's probably as much as we could -- we would want to say on that.
Okay. And then it seems like you've got 3 major things that need to be addressed. First one is permitting. You have the JV, and you've got the nearing maturity of the 2022 notes. Are those items able to occur independently? Or is everything hinged upon getting the permitting, so you can get a JV, so you can refinance the notes?
No. I mean, the way that we're thinking about that, first, on the Florence financing is we don't believe we need the permits in hand to get a Florence financing package in place. Certainly that we don't need to draw down funds until we have the permit and start construction. But we can get the package in place, and that's our plan to do that so that we have it prior to permits. We think once we have a financing package in place and potentially permits, obviously, that puts us in a strong position for the bond refinance, but bond markets are strong as well and so that's moving independently. So we keep an eye on bond markets. We believe that we'll be in a stronger position when we have a Florence financing package in place to go there. But as I said, kind of keep all of our options open.
[Operator Instructions] The next question comes from Don DeMarco at National Bank Financial.
A question about the $9 million credit facility. Can you tell me what the terms of this facility are? And also, how does it rank relative to the first lien bonds? Is it ahead of these bonds or on like a pari passu on equal to these bonds?
Yes. It's Bryce Hamming. The $9 million facility was entered into by Gibraltar joint venture. So it's structurally senior to the bonds. It is a demand facility. It doesn't have -- it's a revolving term. And it's use or it's intended for issuing letters of credit to suppliers as part of our trade finance working capital needs. So that's something that we'll look to deploy as needed in that context. It doesn't -- yes, it's a specific carve out under the bonds for supplier trade finance needs.
Yes, exactly. And so what is the -- what are the terms on this facility in terms of the cost?
It's around -- it's a relatively cheap facility. It's our cheapest one. Our equipment loans and leases are in the sort of 5% to 6% range, and this one will be a few percent cheaper than that. It's only -- there's no standby cost to it. We only pay when we issue letters of credit. So it's something that we're keeping as a tool to manage over the coming months and quarters.
Yes. Okay. That makes sense.
Yes. And it's back to 100% guarantee by EDC on an unsecured basis, but it is structurally senior to the bonds.
And the next question comes from Ben Davis at Liberum.
Just a quick one on Florence. I was just wondering what's happening at the test facility there. I think the last we heard it was going through a rinse phase. How long will that take? And are you planning doing any ramping that back up on another -- on another set of boreholes? Or is there anything else that can kind of prove up the efficacy of the in situ model? What are the plans?
Okay. So Richard, here again. So at Florence, we're still in the rinsing phase and will be throughout 2021 as required under the temporary APP permit that we have. So one of the requirements is to demonstrate to regulators, the rinsing process and how it works and the effectiveness of it.
Okay. Okay. Great. Actually, just as a left field one, I was just wondering if anyone had any fair color on molybdenum prices at this point. I mean, now it's been a small recovery, but it's still clearly the laggard out there versus the rest of the sort of commodity spectrum. I was just wondering if you guys have any further thoughts on it.
Ben, yes, Stuart here. No, it's not an easy market to track. I think prices have dropped down to around $8. But we don't have any particular insight into it. We're happy to sell the products. It gives us good byproduct credits. I guess it's -- the demand is tied somewhat to pipeline. And obviously, oil and gas has struggled. But yes, nothing -- no great insights for you there, unfortunately, sorry.
Thank you. There are no further questions. I will now turn it back over for closing comments.
Okay. Thanks, everyone. Yes, well thanks for everyone's attendance on the call, and we will talk to you again in February for year-end results. Bye now.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.