Taseko Mines Limited
Q3 2014 Earnings Call Transcript

Published: 2 Nov 2014

[Operator:]

Welcome to the Taseko Mines’ Q3 2014 earnings conference call. [Operator instructions.] I would like to the conference our host, Mr. Brian Bergot. Sir, you may begin.

[Brian Bergot:]

Thank you, operator. Good morning ladies and gentlemen, and welcome to Taseko Mines third quarter 2014 results conference call. My name is Brian Bergot, and I'm the vice president, investor relations for Taseko. 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 third quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. I would also 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. Please refer to the bottom of our latest news release for more information. I will now turn the call over to Russ for his remarks.

[Russ Hallbauer:]

Thank you, Brian. Good morning everyone. Thank you for joining us today to discuss our third quarter results. Certainly earnings from mining operations before depreciation of $7 million for the quarter were disappointing, considering how we performed in Q1 and Q2, with $19 million and $27 million, respectively. And as I spoke about in the Q2 call, we expected to see those metrics stay the same or increase in Q3, as we moved back to higher head rates in the back half of this year. In our press release of October 9, 2014, discussing our production results for the quarter, we tried to highlight what occurred during the quarter in our production cycle. Looking back, late in 2013, during our 2014 budgeting process, we knew that we would be undertaking some major shovel rebuilds during 2014, and as we can’t capitalize those costs but have to expense them, even though they only occur once to every six to seven years of operation, we developed a mine plan that would help offset the impact of those costs on copper product cost by mining higher copper head grades. What we have always attempted to do is try and give the most transparent look through our cost structure quarter over quarter so investors at large get an appreciation of what we can really produce a pound of copper for. What we want to avoid is large swings in our cost reporting structure quarter over quarter. We try and manage all our inputs to show that quarter over quarter consistency. Well, our best-laid plans this quarter were thwarted by a high wall movement concern that forced us off our mining sequence into lower head grade ores and as a result, we effectively dropped well below what we had planned for head grades and what we expected copper production would be for the quarter. Instead of producing approximately 42 million pounds of copper, which we predicted based on mill throughput and head grade, we produced roughly 35 million pounds. Obviously, with the 16% less metal production profile, our cost per pound would be affected. The combination of lower head grades, increased mining and contractor costs, and large expenditures for several [rebids] pushed our overall operating costs considerably above the trend we were establishing in Q1 and Q2. And certainly it is disappointing for us this quarter to report that. As a see-through, though, it’s important to understand in a single mining operation that aberrations to quarterly cost of production will occur for many reasons beyond the control of management, and this quarter was a direct result of that, although we attempted to stabilize them as much as we could. If we look further afield, we believe we still can get our cost at or near $2 per pound, as we were trending in Q1 and Q2 on a sustainable go forward basis. We presently are seeing input costs decrease for steel, reagents, diesel, and as we move our truck fleet to more productive and efficient areas, we will move much more muck with less expense. If one looks through our production profile, we moved approximately 2 million tons more in Q3 versus Q2, and if we look at stripping the one-time cost out of the direct operating spend and producing the pounds we anticipated, our cost per pound would have come in at approximately $2 a pound. Going forward, in Q4 our head rates will settle out at about 0.27%, depending on how well we manage the high wall issue and how we manage utilizing our large stockpiles near our crushers and we should be able to maintain an approximately $1 margin at copper price of $3. We can speak to those questions more fully later in the call if requested. I’d now like to ask Stuart to speak a little bit in more detail on the finances, and then I’ll return.

[Stuart McDonald:]

Thanks, Russ, and good morning everyone. As Russ has noted, there were a number of operational challenges in the third quarter, which have translated into disappointing financial results. The pit wall instability led to lower head grades, which resulted in reduced copper production and revenues, and it also led to higher mining costs, which have impacted our margins. Third quarter revenues were $93 million on total sales volumes of 28.6 million pounds of copper and 530,000 pounds of moly, and those amounts are reported on a 75% basis. Sales volumes were slightly higher than production volumes this quarter, as we were able to load a ship right at quarter end and reduce our concentrate inventory levels. However, reported revenues on the P&L exclude the sale of 1.6 million pounds of copper, which was produced from the lower-grade material, and the related revenue from this material has been netted off against capitalized stripping costs on the balance sheet. Revenues were also impacted by the declining copper and molybdenum prices in the third quarter. Our realized copper price was $3.07 per pound for the period compared to $3.16 per pound in the second quarter. Moly revenues were also impacted by declining prices as the spot price fell from over $14 a pound in June to just over $10 a pound at the end of the third quarter. On the cost side, our total operating cost per pound produced was $2.75 in the third quarter, a significant increase from $2.12 in the second quarter and attributable to the increased mining costs resulting from the pit wall instability and also shovel maintenance costs. Exploration and evaluation expenses were $1.7 million in the third quarter, and include $500,000 transaction costs related to the acquisition of Curis, which we expect to close in November, as well as other costs associated with the Aley and New Prosperity projects. Other significant items in the third quarter P&L include an unrealized foreign exchange loss of $9.3 million which relates to the weakening of the Canadian dollar and the impact of that on our U.S. dollar denominated debt. The GAAP net loss for the third quarter was $20.9 million. Adjusting for the unrealized foreign exchange loss, Curis acquisition costs, and other items results in an adjusted net loss of $11.2 million, or $0.06 per share. I’d like to talk about cash flow for a minute. We generated just over $22 million of cash flow from operations in the third quarter. This includes $20 million of working capital adjustments related to the reduction in inventory levels and timing of cash receipts and payments. Cash flows from investing activities included a $13 million refund of a security deposit from BC Hydro, which we replaced with a surety bond. Capital expenditures included $8.4 million of capitalized waste stripping costs and cash flow from financing activities included $7 million of principal and interest payments on capital leases. We ended the third quarter with the strong cash position of $93 million. We’re expecting to receive an $18 million tax refund before the end of the year. We also have the protection of copper put options that are in place through the end of the second quarter next year and will continue to manage our cash resources conservatively. And with that, I’ll turn it back to Russ.

[Russ Hallbauer:]

Thank you, Stuart. This week, we published our 43101 report on our Aley project. In fact, I think it’s today being filed. Also, we expect the Curis shareholders to approve our purchase of their company, as Stuart alluded to, in the next few weeks. And we’re continuing to work with both the provincial and federal governments on moving New Prosperity forward, while we are, at the same time, moving through the course to protect the company’s interests. Generally speaking, as a company, we’re pretty much where we expected we would be in the bottom end of the copper cycle. And we expect that this is the bottom end of the copper cycle. And I think the pundits are indicating that if we’re not at the bottom end, we’re very near the bottom end. And when we invested in GDP2 and GDP3, that was the thesis. Our percentile cost on a world basis have dropped to nearly the 50th percentile, and if we look at copper projects out there now, the 90th percentile of cost is around a lot of $3 per pound. And the 75th percentile is around $2.70 a pound. So even with our low head grades, but with their efficiencies and our productivities, we are in about the middle of the production percentile cost curve. So we’re well-positioned today, and we’re well-positioned heading to what appears to be a deficit position in copper supply later in the latter part of 2015, 2016, or 2017. Certainly nobody actually knows where that will be apparent, but certainly if we look at the turmoil in the copper market presently, with the apparent strength that’s coming at Antamina, the Grasberg issue, and a number of other things, this razor edge surplus could become a deficit very, very quickly. So we believe we’re in very good shape. We won’t, although, be without our challenges, but those can be overcome. Folks have been reading about where the Canadian dollar could be headed. We have a large contingency of American shareholders, so they should understand this. If we look at where the Canadian dollar is vis-à-vis the U.S. dollar, our position is even more enhanced. As of today, the Canadian dollar [unintelligible] selling price is exactly the same as it was a year ago at this time, at roughly $3.41 Canadian. With over 70% of our costs in Canadian dollar terms, every penny decrease in it relative to the U.S. dollar goes mostly to our bottom line. Also, one area of cost that very few people really appreciate is how offsite costs affect overall costs. Five years ago, our TCRC freight port shipping costs were $0.20 a pound lower than they are today. Specifically, we had TCRC costs for the majority of the past 10 years, specifically related to Gibraltar at fifty and five, while others struggled to maintain somewhere between seventy and eighty cost per ton for our TCRCs. We were thought to be crazy by locking in long term frame contracts, but here we are today having one of the finest quality concentrates of any major mine and TCRC is lower than any major producer, and that goes with the long term evergreen contract. The quality deterioration on many new mines with respect to arsenic, mercury, and antimony cannot be overstated, and I don’t think it’s really been reflected in the marketplace yet. But, for example, Toromocho, the new mine that’s just coming on in Peru, has a 4.5% arsenic head grade in its concentrate. So these kinds of products are going to be very hard to place with smelters worldwide. We thought that having a 0.2% arsenic concentrate in our head grade, in our Prosperity concentrate, when we first started that program, was going to be an issue, but it pales in comparison, and in fact New Prosperity concentrate actually looks pretty good compared to everything else that’s coming out of South America. But in reflection, if we look at Gibraltar, Gibraltar has zero deleterious materials, and going forward, Gibraltar concentrate will continue to demand a premium to the TCR benchmark market. Where mine operators will sort out with this year’s contracts remains to be seen. We can see contracts, though, for this year, well over $100 per ton, $0.10 a pound, which will have a major impact on copper cost for many producers, while we’ll have a weighted average base likely below $90 and $0.09 a pound. If we compare our rail, port TCRC costs, we were in the lowest 10% of the world producers. So with that, I’d like to open the line to calls and take any questions.

[Operator:]

[Operator instructions.] And our first question comes from Adam Low from Raymond James.

[Adam Low:]

My first question is with regards to the moly circuit. So it’s taken a bit of a step back over the last couple of quarters, just in terms of recoveries. It’s kind of been a two steps forward one step back kind of process. Just wondering if there are any particular issues that are being phased in that moly circuit and if so, what kind of actions have you guys lined up to address them.

[John McManus:]

It’s a complex circuit. The issue now is not really in the moly plant. We’re getting lower recoveries in [their uppers], because of the lower grades. So you just don’t get as much moly over to the moly plant from the concentrators, but it continues to be a focus of ours to get that plant to perform where it should be. Just right now, we can’t get 50% in there, because of the feed to the plant.

[Adam Low:]

Your grades have been stable, at least for moly, over the last couple of quarters, at 0.011%. Do you really need to have grades higher than that to get closer to your 50% target?

[John McManus:]

Yeah, it’s about the grade that makes it to the moly plant, from the concentrators. So the grade of moly in the concentrate going to the plant right now is not high enough to get a 50% recovery.

[Russ Hallbauer:]

We’ve got some other issues that we’re working on too. That’s not the only thing. But that’s the main one right now that’s hobbling us.

[Adam Low:]

Any expected timeline for what you think you could tackle this issue?

[Russ Hallbauer:]

Yeah, I mean, it’s a work in progress. Has been for quite a while. But with the lower head grades coming from the pit on the copper concentrate, it makes it very difficult to get the concentrate to the moly separation plant, to give you the ability to get that 50%. So we’re actually forecasting more in the 45% range, for the next few quarters.

[Adam Low:]

And one more question from me. Obviously, you guys have had a pretty big focus over the last couple of years on reducing your unit operating cost by increasing your volumes of production. You’ve done pretty good in that regard. The one thing I’m curious about is if there are any cost takeout initiatives to reduce not just on a unit basis, but reduce aggregate costs on an absolute basis, if you have anything in regards to that kind of thing going on.

[Russ Hallbauer:]

Yeah, I mean, that’s one of the things we’re focused on now, especially since we’ve gotten into this situation where we’re running lower grades. One of the things about the lower grade that we’re running is it doesn’t have the same cost structure as the high grade, because you don’t have to attribute a stripping cost to it. It’s already taken to the edge of the pit. So even though our production will be lower, our margin should be the same, because we get our cost down. Most of the overrun in process is in the mine in Q3. So we’ve moved our equipment back up into high productivity areas, higher in the mine, higher benches. Shorter hauls, shorter waste hauls, shorter ore hauls, all of that’s going to help with this. Plus, we’ve shut down the contract mining show, which was also high cost. And we did three shovel rebuilds this year, for a total of $14 million spent. That’s done now. We don’t have that for another four or five years.

[Adam Low:]

Can you give us a sense as to what kind of contract or shovel rebuild costs you had in the third quarter that might not be recurring going forward?

[Russ Hallbauer:]

Yeah, we spent $6 million to rebuild one of the shovels in the third quarter. And the contractor costs were higher than they normal would have been, because again, we were focusing with the high wall movement. We were trying to accelerate ore release lower in the pit, so we had the contractor down in the bottom long hauls, which turned out to be very high cost. So we’ve stopped that. So now, with the ability to run some of the lower grade material, we don’t need to run as much mining equipment, so our expenditures will go way down.

[Adam Low:]

Do you have any sense as to what the magnitude of that might be?

[Russ Hallbauer:]

Yeah, I mean, we should be in that $2.10 to $2.20 Canadian cost per pound, total, for the quarter.

[Operator:]

[Operator instructions.]

[Russ Hallbauer:]

It appears there are no other questions, operator. Thanks very much, everybody, and I’ll speak to you at the end of next quarter. Cheers. Have a nice Christmas.