Taseko Mines Ltd
TSX:TKO
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Taseko Mines Ltd
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Good day, ladies and gentlemen, and welcome to the Taseko Mines Fourth Quarter and Annual Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Brian Bergot. Sir, you may begin.
Thank you, Ashley, and thank you, everyone, for joining us today to review Taseko's Fourth Quarter and Full Year 2017 Financial Results. My name is Brian Bergot, and I'm the Vice President, Investor Relations for Taseko. Our financial results were issued yesterday after market closed and are available on our website at tasekomines.com.Before we begin, I would like to introduce everyone on the call today. We have 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 the fourth quarter and annual business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. As usual before we proceed, I would like to remind our listeners that our comments and answers to your questions may 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. I encourage you to read the cautionary note that accompanies our fourth quarter and annual MD&A and the related results and news release as well as the risk factors particular to our company. I will now turn the call over to Russ for his remarks.
Thank you, Brian. Good morning, everyone. 2017 was an excellent financial year for Taseko, as we generated $208 -- $211 million worth of cash flow from operations, and $164 million of EBITDA for the year. While our financial performance was excellent, we had some trying times during -- on the operational side, and I'd just like to say our operational folks led by our COO, John McManus and our General Manager at site, did an outstanding job keeping the mine running and cost under control during the fire disaster. And we maintained our total cost per ton milled in the $10 range, including capital strip over the course of the year. As a result of the undertakings we took the maintain copper production in Q3 and Q4, there were a number of accounting items that affected our earnings, and Stuart will speak to those once we get to the financial section. In my Q3 commentary, indicated we're working through over 2018 budget and attempting to determine the impact of drastically moving off our mine plan for the 7 weeks of the wildfires impacted Gibraltar. Those impacts were dramatic in Q4 in terms of metal production that continued into Q1 of this year, as operations worked to get our mines stripping sequences back into shape.We expect this quarter's metal production to be similar to Q4's, but we will move back up to normalized production over the next few months. Financial effect of lower production, we believe will be somewhat offset by the outlook for higher copper prices in the months ahead, particularly during the strong pricing season. That is why as shareholders, we have to think having a plus 20-year mine life in front of us is critical when these unforeseen bumps present themselves in the mining business.With respect to Gibraltar, we are investigating and doing some preliminary engineering work on increasing the throughput of one of our concentrators. We think it is important to continue to look at all opportunities to increase our copper production. And as we have seen in the past, Brownfield increases are accretive to NPV and created very good rates return. And with -- our ore body is large as it is, and mine life is so long, Gibraltar -- at Gibraltar we would remiss if we didn't evaluate the opportunities. Gibraltar is business as usual, and right now, our teams are intensively focused on unlocking the value of our Florence asset.The Florence test wellfield is nearly complete and the SX/EW plant is being constructed, we are on time and on budget. And as I've said before, I'm not sure the general market really appreciate the intrinsic value of our Florence asset. When producing it will be one of the lowest copper production assets in the world, in terms of having one of the lowest all-in sustaining cost of production, at roughly USD 1.30 per pound. Combined this with one of the lowest capital intensity metrics of copper capacity at USD 5,500 per ton, it is rivaled only by Mr. Friedland's Kamoa-Kakula project in the DRC of USD 7,000 per ton. The NPV 8% additional CapEx is a 4x that versus 3.4x for Kamoa, but one factor is missing, and that is the Florence in the United States not in the DRC. The development of Florence is going to have a fundamental and resounding effect in the future of this company. Most projects would be happy to have a 2x NPV versus CapEx metric, Florence is 5x. Of particular note, our technical report of February 2017, indicated a post-tax NPV of USD 680 million at a 7.5% discount. The new corporate tax rates that are just been recently announced in the U.S., will increase that NPV by roughly $100 million -- $120 million -- $100 million to $120 million to over USD 800 million, equating to over CAD 1 billion. And that would prescribe a value of just under $4 per share for Taseko's shareholders. While Gibraltar has been our cornerstone, company-building asset, Florence will be our near-term future. If we look back over the past year, we had significant accomplishments on the financial side that Stuart will also speak about in detail, but from my perspective, our management team has always focused as ahead of long-term focused outlook on increasing shareholder value by ensuring we are measured and meticulous in moving the company forward. Folks might not remember this, but we've not raised equity in 9 years. We've used the resources available to us to move the company forward, not at the expense of shareholders, but with shareholder always on our mind. If we look back, we sold the percentage of our assets, like the 25% of Gibraltar, when the time was right. Similarly, we did the same thing in the most recent silver stream sale. We have opportunistically tapped the debt markets while paying down debt. We've slowly and purposely worked to increase shareholder value, which in this business is a long process, and I believe with Gibraltar continuing to generate significant cash flows, as we begin the next cycle, the company is in an ideal position to capitalize on the value, which will be created by Florence and other assets in the coming months. I'd like to now turn the call over to Stuart.
Okay, thanks, and good morning, everyone. We're pleased to report Taseko's annual and fourth quarter results yesterday. As Russ noted, it's been a very successful year for the company. Adjusted EBITDA of $162 million and GAAP net income of $34 million for the year. Over the year, we saw strengthening copper prices, higher metal production and lower unit costs, and this resulted in operating cash flows of $211 million, including the proceeds of the silver stream in March. We applied some of that cash to complete a refinancing in June, which reduced our long-term debt while also extending the maturity date from 2019 to 2022. So it was a good year from a financial standpoint, although, the fourth quarter results did not match what we achieved in the first 3 quarters.The increased use of lower-grade ore stockpiles stemming from the wildfires in July, resulted in lower copper production and sales in Q4. And the drawdown of the ore stockpile inventory resulted in a noncash inventory expense and additional depreciation, which reduced earnings by $10.6 million or $0.05 per share. So overall, fourth quarter earnings for mine operations before depreciation were $33 million, and adjusted EBITDA was $29 million, which is lower than the average quarterly EBITDA of $44 million that we achieved in the first 3 quarters. Copper sales volumes were 32 million pounds, which was higher than mine production of 25.5 million, as we were successful in reducing our concentrate inventory levels. Our realized copper sales price was $3.30 per pound, which was higher than the LME average price of $3.09 because of the provisional pricing adjustments at quarter end. And molly prices also continue to strengthen, recently going over $12 per pound. This is an important byproduct for Gibraltar, representing a credit of $0.17 per pound produced for the quarter.Overall, gross revenues for the quarter were $103 million, based on our 75% share of Gibraltar volumes.On the costs side, our total site spending continues to be fairly consistent, but our operating costs per pound increase because of lower copper production, coming in at USD 2.11 per pound. We also capitalized $17 million of mining cost in the fourth quarter related to stripping activity, new section of the Granite pit.Other significant items on the fourth quarter P&L include a $3.8 million write-down of an investment, a $2 million foreign exchange loss on U.S. dollar denominated debt, and a $1.6 million derivative loss due to increasing copper prices. The GAAP net loss for the fourth quarter was $7.6 million or $0.03 per share. The adjusted net loss was $1.5 million or $0.01 per share, and excludes the unrealized FX, the write-down of the investment and unrealized derivative losses. Looking at the fourth quarter cash flows, we generated $32 million of positive cash flow from operating activities. This was offset by capital expenditures of $28 million, which include capitalized stripping costs of $17 million, other sustaining capital of $3.5 million at Gibraltar, and $5 million of construction costs at Florence, which primarily relate to wellfield settlement.In December, we also made the first interest payment on our senior secured notes in the amount of $14 million, and we made $4 million of capital lease payments in the fourth quarter as well. We ended the year with $80 million of cash on the balance sheet, down from $95 million at the end of Q3, and at current metal prices we expect to grow our cash balance over the course of 2018, although, Florence project spending is weighted towards first part of the year so we may see a temporary decline in our cash balance in the next few months. We're also working on an insurance claim related to the business interruption that we experienced during the summer wildfires, and while the amount isn't finalized yet, we expect the claim could be in the range of $3 million to $10 million. And with that, I will turn it back to Russ.
Thank you, Stuart. Operator, I'd like to open the line to calls please.
[Operator Instructions] Our first question comes from Orest Wowkodaw of Scotiabank.
I was hoping you could give us some more color on the impact here on the wildfires. I'm having trouble understanding how -- I think you said it earlier that there was about 7-week impact from the wildfires back in July, and I guess where I'm struggling is how does that result in almost 6 months of low-grade processing at the mill? We think of what you did in Q4, and what you're guiding to Q1 in terms of similar grades.
Well, I will let, John, the guy that -- to solve that -- answer that question. But yes, it's complex scenario, and it has to do with the development of our pushback, the sequencing, but I'll let John speak.
Orest, excuse my voice here, I'm coming off from bad cold. Yes, I'll try not to make it too complicated, but really, we didn't have the manpower to run with mine to plan for 7 weeks. And so what we did was we got the best ore we could and took it to the mill. Then when we do get back up to manpower you only have the equipment and manpower that you need to run the mine at planned rates. So it takes a long time to catch back up what we lost in those 7 weeks that we didn't. That's coupled with a couple of other things that didn't help, which are more normal, we had some equipment availability problems, a bit of wall movement we lost some of the higher grade, we aren't going to be able to get into, but far and away the biggest factor was the loss of 7 weeks of been able to follow the mine plan.
So if we stayed -- effectively if we stayed -- been able to stay in the bottom of the pit keep stripping down there, and moving with and accessing the higher grade material that we -- usually comes in the back end of these pushbacks at the bottom. And we had to move -- John had to move up top, start to push back, in normal circumstances you'd be sequencing that. You'll be into the poor-grade ore that's coming out that's oxidized, there was a bunch of different metallurgy with that stuff from the bottom of the pit, but because we had to just go into this pushback and try and keep stripping, because we couldn't have access to the bottom of the pit, it just -- it culminates itself. So I guess, a similar situation would be like what happened to us back in -- when we had the big wall failure back in what -- where was that 2014, 2015, and we get pushed right off our mine plan then.
Yes, we got pushed right off the mine plan that was combined with some real big equipment available problem, which we don't have now, we had some smaller problems. The other thing that doesn't show up in these very well is the effect on the recovery of the oxidized material, which comes out of the stockpiles, we had a good understanding of the grade that would come, but there is so much oxidation that really affected our recoveries. And so that was way down both in copper and molly. So it all is a compilation of all these things, and it takes a while to get out of it. So we're pretty much out of it now, but Q1 has already been affected so -- but the rest of 2018 should be good.
Okay. And when we think about cost for 2018, if we just look at your cost per ton, all and including capitalized stripping, they were close to CAD 11 a ton, I believe, in '17. Should we expect that to stay roughly flat in '18? Or should we anticipate some cost creep now that things like fuel, and we're seeing more inflation in the industry?
I think you run a number between CAD 10 and CAD 11 a ton would be pretty good, first. I mean, yes, you're correct, there are some extenuating circumstances that change the taxation basis, employee wage increases, other things, but we're pretty comfortable between. You'll see it -- you've seen it fluctuate from like CAD 10.25 up to CAD 10.75 quarter-over-quarter. So, yes I view -- you said CAD 10.50 is a good average?
CAD 10.50 is a good number, yes. And -- I mean, if you look at Q4, that was right in the range for the dollars per ton milled, I would include the capital stripping, too. So that's what we've been at for 2.5 years -- 2.5 to 3 years now. So even though we've added some more trucks last year, we still maintain that overall cost per ton milled.
Okay. And then final question for me, excluding kind of capitalized stripping, just how much should we anticipate sustaining capital this year at Gibraltar? And then growth spending at Florence for this year?
We're -- we run at about $0.12 to $0.15 per ton mined. So $10 million?
Yes $10 to $15 million this year on general sustaining that includes some capitalized large maintenance projects.
That's why we made budget, but remember that everything is got to be justified on a return. You just -- so we estimate, and we've been very consistent over the years or as we've said, somewhere between $0.10 and $0.12 per total ton milled.
Mined.
Or mined, excuse me. And then we just -- and then the operations guys, if they need a new dozer, if they need a new whatever they have to justify on a rate-of-return payback justification. But it's pretty minimal.
There is nothing major. We've got our new fleet. We have done all the upgrades in the mill. So there is -- it's truly sustaining capital that we're looking at now.
Okay. And then for Florence, what's remaining?
Well, Florence, the budget that we started off in the fall was USD 25 million, which took us through to the end of 2018, and in Q4 we spent about I think $5.5 million.
Yes.
So we're -- the differential around USD 20 million roughly as a spend for 2018.
And most of that comes in the first half -- almost all of it comes in the first half of the year.
Our next question comes from Craig Hutchison of TD Securities.
Maybe it's a follow-on question to ores talking about the strip ratios, but what was sort of the intended strip ratio you wanted to have in sort of the latter half of 2017? And what sort of the plan in terms of strip ratios looking out into 2018?
Well, the strip ratio varies at Gibraltar based on haul distance for waste and ore. So we've only got so much equipment, when we're deep in the pit, the strip ratio goes down, because you just can't move as much material, but we keep moving same amount of ore to the mill. So at the end of 2017 -- the second half of 2017 the strip ratio was planned to be low, because we're deep in the pit. Now we're up high in the pit, strip ratio will be higher, but that gets handled with Stuart's capital stripping calculations, so it evens out the cost at the end of the day. That's one of the reasons that we maintain the same cost per ton milled, because we've gotten a certain amount of mining equipment, and we run it all the time so our expenditure doesn't change as the strip ratio goes up and down.
The one thing we may look at is seeing the effect of strip as price of copper is going up. We will look if we can move the cutoff grade and the strip ratio up, and if you can produce more pounds going forward. So we are always engineering and trying to figure out how we extract the greatest amount of value out of the Gibraltar ore body. Before we lower the cut off for going [indiscernible] we cut the strip ratio down to 2:1, and we may very well take it up to 3:1, because the price of copper is going up and you generate more cash.
And our mining cost is going down at the same time. Per ton so it -- you move around within those parameters.
And just in terms of total tons mined that you guys can deliver in a quarter, I think in Q4, sort of 27 million tons, which is I think close to a record for you guys. Is that sort of the upper limit of what you guys can do on that basis?
Yes, probably. I mean we ended up with some -- we brought in some new trucks in the second half of 2017, and we're up at the top of the mine. So, yes, that's -- with the gear we've got, that's probably as much as we can do. If we go deeper it'll be a lower number.
So do you expect to see any stockpiled material, sort of, post Q1 in this year into the mills for the remainder of the year?
Yes. No those are live stockpiles. I mean we blend down stockpiles into all sort of things out of stockpile, but it's not going to be the high proportion that it was in Q4 and Q1. And it is not old stockpiles, I mean, some of the stuff that we're feeding the mill now got put there in 2011.
Yes. So you know what -- we mean, Craig, if you've got a big weight ore block in front of you, you're not going to displace higher-grade ore with lower-grade ore. So you'll just make it -- the guys will make the decision -- will make a decision, that say, hey, we're going to put that 0.2 stuff in the stockpile and use it later in the mine plan, and move that [indiscernible] head grade that is going to the mills at 0.29 or 0.3 or whatever it is. So we manage our stockpiles, like John said are live and they're part of the mining sequence.
Yes. So I mean even though the results -- because we're in stockpile, we're not as good as fresh ore, but sure a lot better than not having a stockpile.
And the stock -- it's changed a bit in the last how many years, with efforts on how you account for a stockpile.
Yes.
It affects earnings, doesn't it?
Yes. I mean, we had a big -- we had a fairly big earnings impact in Q4 form the drawdown of the stockpile. I mean this is money, as John said, this is money that was spent several years ago to put the ore there for accounting, you capitalize that. And then in Q4 when we drew it down we take that as kind of a noncash item through your earnings.
It seems like $10 million.
$10 million, yes.
$10 million impact, yes.
Our next question comes from Alex Terentiew of BMO Capital Markets.
Are you there, Alex?
We must have lost him.
Operator?
Our next question comes from Don DeMarco of National Bank.
When do you expect to be above the sort of annual run rate of 35 million pounds copper production. Are you there now or maybe by the end of Q1 or is it going to -- maybe not until at some time into Q2?
I think it is -- when it would be?
We're all on a quarterly basis, so yes, it is going to be in Q2.
Q2. Yes, we've been -- we'll be back to that range in Q2.
Okay. And is there any -- are there any steps you guys can take to mitigate the impact of forest fires in the future? I mean I don't know, quite frankly, I have all the trees in the area been burned already or is it -- or is there other stockpile strategies? Or would you expect to repeat of this possibly next year or the year after?
Well, Gibraltar has been running for what 50 years now, and this is the first time we've had this specific issue. So if it happens once every 50 years, we're probably not going to do a lot to try and mitigate the issue. It's not something that's expected. It was a disaster, I mean, the interior of British Columbia was evacuated this year, but that doesn't happen every year. And no, the forest doesn't burnt completely to help it. There is a lot of damage, why can't you live in a forest.
There was a little bit more of action after that. Then there was floods after that. After we get through the forest fires, the transportation quarters, both the road and the railway were shut down for how long? 2 weeks, John, or?
Yes, about 2 weeks we couldn't get to Vancouver at all. It's one of the reasons our offsite costs were high as we had to ship to trucking to help the rail to move the concentrate to the port because you just -- we went right from fires to floods over a period of about 2 weeks.
And then you couldn't get down to Fraser Canyon, so we had to take all the material over and down the Coquihalla, by truck. It was quite a performance. Like I said, it didn't -- we did more than a yeoman's job to keep things going in the quarter, which for last half of the year is pretty good really.
And we don't expect to repeat of that anytime soon either.
Yes certainly hope not.
Our next question comes from Alex Terentiew of BMO Capital Markets.
Question on Florence -- I have a couple of questions. First one on Florence. The production test facility is underway now or constructing of it. What sort of permanent activities can you do there in 2018 to prepare it for full-scale operation? Or do you really need to kind of wait until 2019, you've got an actual operation and some results from that before you can take it to the next level? Just trying to kind of ascertain how quickly we can move this forward to full scale?
Alex, this is John here. Yes, the -- really the main permit that's still required to go for the production facility, I mean, we've been really through most of the hoops already for the test facility. For the production facility we need to get a permanent Aquifer Protection Permit, right now we just have a temporary. And our guys down there are all over that. Now we're working best issue by the State of Arizona, the Arizona Department of Environmental Quality, and we're working with them on a regular basis to get as much of that permit prepared as possible. And then what we've learned from the test facility, we fill in the blanks basically on the strategy on the permanent Aquifer Protection Permit. So no, we're all over that. So the goal is to get the production facility up on time and on budget, and having the test facility up on time and on budget is part of that.
Okay. And then I guess you need to have this thing run for, what do you think 1, 2, 3 quarters or what sort of timeline before you could get that full permit and then...?
John and I were talking about this. There's plenty to mention. We're talking about the strategy around of all this, Alex, and they're still unfolding, because, obviously, as you're recognizing that the quicker we can do this the better we're going -- off to we're going to be. So we're trying to figure out all the nuances and how to move this axe, do we -- what do we do in terms of a wellfield development. Can we start building the main SX/EW plant a little earlier than we thought. So we're trying to refine this whole critical timeline, because 6 months or 3 months or 2 months is going to be pretty important in terms of the total undertaking of this project in terms of when it's going to be up and operating at capacity. So those are all things that -- we might be able to give you some more look through on the next -- at the next call, John?
Yes. I mean right now, we need to run the test facility for a year. So if we get it up and running injecting in Q3 of this year than we should be pretty much finished with the injections as part of the test by same time the following year. As you do that you learn things. And the big question in all of this permitting is our ability to control hydraulically the fluids as far as permitting goes that's the big test. I mean as far as economically, we want to make sure it works, and makes profit. But we're very confident in our ability to control the hydraulics in the wellfield. So we prove that we should be able to move forward with the permitting and have that hurdle behind us. Well, if that helps you makes...
Well, yes. And as John is saying, as we are seeing how these fluids react in the Aquifer and all of the hydrology then we'll be talking to the regulator it's not like you start today on day 1 and then you don't do anything until day 365. There's all this evolution of the understanding of the actions of these various engineering parameters.
Well, this is a test and all of the regulators will be watching carefully and closely as we move along. I think it's going to make the permitting production facility reasonably smooth, it should be.
That's make a lot of sense. Just a couple of questions again just on Gibraltar if I may. First one on molly, I know you guys -- it's lower grades and you talked about the grade impact in Q4 and Q1, and you gave some copper grade guidance for the year, but molly grades, and the molly prices are high now, $12 or so a pound. Should we expect molly grade to be in line with reserve grade? Or is there a deviation from that?
Yes. The molly grade is in line with reserve grade. It's about 0.09? It's 0.09, yes. In Q4 it wasn't, because of what we pulled out of the stockpiles. In the Q4, the molly grade was like 0.05. So that's why we didn't have very good production in Q4. In Q3 we didn't very good molly production, because we didn't run the plant for 6 months, we didn't have enough people to run it. So we're actually -- the molly plants is running very well in this quarter, we're getting good recovery of better grades, and we expect to see that through the rest of the year. So the molly production for 2018 should be what, 2.5 million to 3 million pounds.
Okay. Great and...
So at $12 a pound, that's worth doing.
Yes. That all makes sense. Last question, you mentioned earlier in the call at the beginning, I think I heard you correctly, Russ, about just looking at opportunities to expand Gibraltar. I know the mine has already gone through, I believe, at least 2 phases of expansion. I understand it's very early stages here, but maybe just run us through -- for me, I mean, if you can what sort of process that would involve and what sort of timeline or thoughts you're think about for that?
Well, again that's a little open ended because it's not the super duper focus of us. I think we've got some different ideas. When we originally finished the last -- we added the third -- the second concentrator. We did design it so that there could be another bolt-on for another ball mill. Now when we're looking at it, we don't -- we think because of some of the issues we've had with mill 1, because it was an old broad ball mill, concentrator that we attached the SAG mill to that maybe -- and then we got 6 ball mills in there, might be better to put another mill on the front end of those ball mills and do that scenario. But that would involve a little bit more engineering work and conveyer belt design and a few things like that. So we're throwing ideas and balls in the air. What could we add for capacity, John? Another 10,000 to 15,000 tons a day maybe and...
Yes. I mean there is a number of different ways to expand the capacity of the mill, and it's basically picking the best one that gives you the most bang for the buck. But there's also -- now do we take that capital and put it back into the pit, raise our strip ratio and our cutoff rate, maybe that's a better way to expand the capacity or the production from Gibraltar. So we're weighing all these different options right now. It's a big deposit like Russ says, it cries for expansion.
Our next question comes from CJ Baldoni of Principal Global Investments.
I think you may have touched on this when you were talking about having to a switch from rail to truck. Is that the reason for the step up in the off-property costs into low 40s.
It's a part of it, but it's also because we sold more than we produced, and off-property costs are based on sales rather than production so unit cost gets kind of skewed by that.
Okay. And is that expected to kind of come back down to the range that it has been in for a while?
Yes, yes. CJ, it's Stuart here. Yes low 30s is kind of a reasonable number to expect going forward. And when we sell the same quantity that we produce in a quarter, that's the type of number that you'll see going forward.
Okay. And I know it's early, but similar to the last question with respect to the Florence project, you said that you expect to build cash, in advance of that assuming that it moves forward, could you talk about what you're thinking with respect to funding for the project? Would you bring in a partner? You mentioned, typically a raised equity, could you just talk a little bit about that?
Yes. CJ, as I've mentioned in my comments, we are going to build cash this year, so we will get out into 2019. And at the time when we have a PTF test facility that is running properly, and it's permitted, and we think this is going to be a very -- the economics of this project are very attractive and we're going to be easy to attract conventional debt financing or a partner. But I think adding on good piece of debt will help us finance, and it should be very achievable for us next year.
Okay and...
But it's not really -- It's a bit early. We've got time and it's more of the 2019 activity.
Okay. I guess I'll follow up on that later, and then, just lastly, is your work force now kind of fully back in place or are there are still lingering aspects to the people that have been displaced or has that been all worked through now?
No, we've got -- everybody was back by the end of August. It's just -- we have a finite amount of equipment, so it takes a while. If you're 10% behind, you can only catch up 1% a month it takes a lot to catch that all up. That's all.
And I'm showing no further questions at this time, I'd like to turn the call back to Taseko for any closing remarks.
Okay. Thanks very much, every one, and I look forward to speaking to you next quarter. And we were looking at $4 copper price by then. Cheers.
Ladies and gentleman, thank you for partnering in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.