Turquoise Hill Resources Ltd.
Q1 2020 Earnings Call Transcript

Published: 14 May 2020

[Operator:]

Good morning. My name is Juana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Turquoise Hill Resources First Quarter 2020 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]Thank you. Roy McDowell, you may begin your conference.

[Roy McDowell:]

Thank you, Juana. Good morning. I am Roy McDowell, Head of Investor Relations and Communications. Welcome to our first quarter 2020 financial results conference call. On Wednesday, we released our first quarter 2020 results, press release, MD&A and financial statements. These items are available on our website and SEDAR.With me on the call are Ulf Quellmann, our CEO; Luke Colton, our CFO, and Jo-Anne Dudley, our COO. This call and presentation includes certain forward-looking statements and information, we refer you to the forward-looking statements section of the annual information form dated March 18, 2020 as supplemented by our MD&A for the three months ended March 31, 2020.And now I would like to turn the call over to our Chief Executive Officer, Ulf Quellmann.

[Ulf Quellmann:]

Thank you, Roy, and good morning, to everyone. Thank you for joining us this morning for our first quarter 2020 financial earnings call. It is only a relatively short while ago that we hosted our 2019 year-end conference call and yet the impact of the Coronavirus pandemic has become far greater than probably most of us might have expected at the time.On a personal note, we hope that you and your families are healthy and safe and they are able to adapt to the new realities that all of us are being presented with.Turning to yesterday’s first quarter update and the announcement of the updated Panel 0 mine design, I’d like to begin by providing with an overview of the quarter and then, turn the call over to our Chief Operating Officer, Jo-Anne Dudley to take you through the updated Panel 0 mine design and finally to Luke Colton, our Chief Financial Officer to summarize our first quarter 2020 financials.In Mongolia, the COVID-19 situation escalated in early March when Mongolia recorded its first case of COVID-19. The Oyu Tolgoi team responded quickly and worked with local and federal authorities to ensure the health and safety of our workforce. Their families, the local communities, while the Government of Mongolia acted decisively by halting international rails, flights and intercity travels.Immediate impact of travel and border restrictions slowed supply in Oyu Tolgoi and concentrate deliveries to our customers in China. However the open pit operations continued uninterrupted. As of to-date, we – or they have no recorded any cases of COVID-19 and there is not any employees or contractors in isolation.In addition, Mongolia itself has not reported any recorded locally transmitted cases. The situation at the border has stabilized with shipments of copper concentrates into China and supplies into Oyu Tolgoi returning to normalized levels. The Oyu Tolgoi business resilience came in on a daily basis and continues to work with the Mongolian authorities to monitor improvement or possibility of any COVID-19 cases.From an operations and underground development perspective, the team has done an exceptional job of managing the impact of the COVID-19 pandemic. The open pit operations continued uninterrupted through the first quarter with copper and gold production remaining on track to achieve our 2020 guidanceIn addition, the team is implementing initiatives to bring forward the higher gold-bearing ore into 2020, which is expected to lead to gold production at the upper-end of the guidance range. Important to note, that this excellent level of productivity has occurred with a backdrop of continued excellence plus safety record that remains the Oyu Tolgoi team’s top priority.Although we have experienced slowdown in certain areas, progress on the underground development has continued as per expectations as we’ve been able to cross-train our high skilled local workforce to alleviate impact of the travel restrictions and focus on critical deposit infrastructure.Productivity improvements has resulted in a lateral development grade averaging 1822 equivalent meters in the first quarter versus 1607 equivalent meters in the fourth quarter of last year with March setting a new record of 1939 equivalent meters.As I touched on earlier, the first quarter was another excellent quarter from an open pit productivity perspective. Although we are transitioning through the lower-grade areas of the pit considering the impact of COVID-19, the team has done an excellent job of keeping production in line with our guidance. Low throughput is another metric to note, we processed over 119,000 tons per day, which is well above the main capacity of 100,000 tons per day.Now before I turn the call over to Jo-Anne to discuss the updated Panel 0 mine design, I would like to take moment to than our shareholders for their continued support. As you would recall, in July last year, we announced that stability risks have been identified with the original Panel 0 mine design with an associated estimated increase in the schedule to sustainable first production of 16 to 30 months and an increase in capital development cost of $1.2 million to $1.9 million.We set a timeline to complete an updated mine design by the first half of 2020 and now after extensive geotech modeling and technical assurance program that included independent third-parties, the updated design changes for Panel 0 have been approved by the TRQ Board.And with that, I would now like to turn the call over to Jo-Anne to take you through the underground development and Panel 0 mine design. Jo-Anne, over to you.

[Jo-Anne Dudley:]

Thank you, Ulf. Hello everybody. Please turn guys to Slide 7. Before turning to you guys on the Panel 0 mine design, let me provide you with a snapshot of progress elsewhere that came offline towards the progression of the underground development was the completion of Shaft 2 in October last year.Shaft 2 has been performing well, but payloads and hoisting speed on the production hoist are currently reduced due to routine stretching of the newly commissioned ropes. We are working through this ordinary cause issue with remote support, with no impact on underground lateral development to-date.Shaft 3 and 4 saw very good construction progress during the quarter and nearly ready for sinking works to commence. Due to travel restrictions rising from COVID-19, these shafts have never been put into care and maintenance until specialist personnel can reach the mine site.Thus, I would like to note that the initiation ramp up is tunnel 0 tubes are safe without the shafts commissioned. Primary crusher one civil works are ongoing and the team has successfully ored the 10 kilometer crusher bore.Despite Shaft 3 and 4 being on care and maintenance and the slowing of construction work on the primary crusher system, our team achieved a new record of 1939 equivalent meters of lateral development in March and a record average of 1822 per month for the quarter. Progress continues on the conveyor decline which has a kilometers equivalent made this developed during the quarter.Please turn to Slide 8. You will now recall from our fourth quarter update that we’ve guided the market to expect the new Panel 0 mine design in the first half of 2020. And we’ve made important steps to guide that design over the past few quarters.The Panel 0 mine design decision has now been made by the TRQ Board with its caving method of mining remaining valid and the design and location of all the other mines infrastructure such as shaft and primary crushers are unchanged from the feasibility study. The design changes are focused around the Panel 0 mining area, which is the highest grade at the Oyu Tolgoi underground and remains our priority target.The updated design provides increased resiliency and execution and operation to geotechnical conditions in Panel 0 is now understood. The decision was supported by updated geotechnical modeling and a rigorous technical assurance program involving third-party experts and considered consequential impacts on and risk relating to recovery, geotechnical, constructability, operability, schedule, cost and value.The next slide is mine design studies will include design optimization to Panel 0 and a review of mine design options for Panel 1 and 2 to utilize the learnings in the Panel 0 work. The Panel 1 and Panel 2 studies will be informed by additional data collected from an underground drilling program, which is in progress.Please turn to Slide 9. The approved Panel 0 design remains within the ranges previously described and anticipate a delay to the 2016 technical report key project milestone of sustainable production of 25 months with a range of 21 months to 29 months inclusive of the allowance for schedule contingency. And an increase in development capital cost of $1.5 billion with a range of $1.3 billion to $1.8 billion.This is subject to any additional scheduling delays or increases in capital cost arising from the impacts of the COVID-19 pandemic. As I’ve said earlier many of the fundamentals of the mine remain unchanged from the 2016 Feasibility Study with the changes to Panel 0 work is on addressing the stability was highlighted by updated geotechnical modeling.The updated design vary to the 2016 design, primarily through the incorporation of the structural payloads located immediately north and south of the current Panel 0 boundaries and relocation of ore handling infrastructure to these pillars. This addresses the risk of damage to the ore handling system in the original position as identified by updated geotechnical modeling.A change to initiate via a single undercut face instead of two reduces the complexity of managing two sectors but related work areas and improves the separation of mine construction and production activities.The incorporation of payloads provides the opportunity to initiate Panels 1 and 2 as independent panels or blocks allowing design optimization and these areas to be developed discretely enabled by the required ventilation and ore handling infrastructure as well as lateral development progress.Overall, the changes provide a robust platform to develop and operate the Hugo North with Lift 1 cave and when they’ll undergo a period of further detailed design, engineering and optimization to support the Definitive Estimate during the second half of 2020, again, subject to any delays due to the impact of the COVID-19 pandemic.I will be available for questions, but in the mean time, Ulf, would you like to continue?

[Ulf Quellmann:]

Thank you, Jo-Anne. Before I turn the call over to our CFO, Luke Colton, let me just provide you with a quick update of our multiple discussion the government of Mongolia. First turning to power, as you know, Oyu Tolgoi is obliged under the 2009 investment agreement to secure a long-term domestic source of power for the Oyu Tolgoi mine.In February of this year, Oyu Tolgoi submitted a Feasibility Study for a Tavan Tolgoi Power Plant, TTPP with an estimated cost of $924 million. At the same time, a notice of Contingency under the power source framework agreement was submitted by Oyu Tolgoi to the Government of Mongolia.This notice initiated the first phase, Phase 1 of the contingency process which attempted successfully Tolgoi on a basis for the TTPP, the Tavan Tolgoi Power Plant to proceed.Now, the second phase of the Contingency process has commenced where Oyu Tolgoi and the government said that the alternatives to the TTPP prescribed in the tower source framework agreements. On the 14th of April, the Minister of Energy notified Oyu Tolgoi of the Government's decision to develop and fund a State-Owned Power Plant.Oyu Tolgoi is currently in discussions with the government to allow continued consideration of TTPP as well as the State-Owned Power Plant. Reaching such an agreement remains our objective. However, if such an agreement cannot be reached between Oyu Tolgoi and the government by the 14th of June, then thereafter, Oyu Tolgoi is entitled to select and implement one of these alternative options that are outlined in the power source framework agreement.In reference to the outstanding tax disputes between Oyu Tolgoi and the government on the 20th of February, Oyu Tolgoi proceeded with the initiation of a formal international arbitration proceeding in accordance with the disputes resolution provisions of the investment agreements. We remain of the opinion that Oyu Tolgoi has now paid all taxes and charges required under the investment agreement, the ARSHA, the Underground Development Plan and Mongolian law.As we announced in December last year, the Parliamentary Working Group finalized its report from which a resolution was put forward for the Government of Mongolia to enter into discussions to improve the implementation of the investment agreement and improve the Underground Development Plan.This also included a variety of other measures including, but not limited to exploring options of a product sharing agreement or swap Mongolia’s 34% equity holding for a special royalty. At this stage, representatives from Turquoise Hill and Rio Tinto are engaged with the government to resolving the issues and we will update the market as and when appropriate.So, with that, let me now turn the call over to Colton, our Chief Financial Officer to take you through our financial highlights. Luke, over to you please.

[Luke Colton:]

Thanks, Ulf, and hello to everyone on the call. If I could get you to please turn to Slide 12 and I’ll give you a summary of our key financial metrics for Q1 of 2020. There are some significant variances when comparing the metrics in the first quarter of 2020 to the first quarter of 2019. The primary reason for this is due to the planned transition into mining lower-grade Phase 4B and 6B ore, together with stockpiles.The reductions in head grade and recovery led to a 78% decrease in gold production and a 23% decrease in copper production when compared to Q1 2019. Now this ultimately led to a 63% decrease in revenue from Q1 2019 to Q1 2020, which in turn contributed to lower cash generated from operating activities.The 75% decrease in gold sales revenue was the main reason for the increase in C1 cash costs from $0.77 in Q1 2019 to $2.07 per pound of copper produced in Q1 of 2020.The period-on-period increase in all-in sustaining cost was not as significant as the increase in Q1 cash costs and this was primarily due to the offsetting impact of lower sustaining capital expenditure and lower royalty cost due to the lower sales revenue.If I can ask you to please now turn to Slide 13. Turquoise Hill’s liquidity balance at the end of March 2020 was $1.8 billion with $1.6 billion in cash and cash equivalents and $200 million of remaining project finance proceeds. In addition, we expect to generate free cash flow at our existing open pit operations subject to any impact of COVID-19 and this will also be available to help fund the underground developments.We currently expect to have enough liquidity to fund operations in underground developments including progression of a power solution into Q3 of 2021. This timing has been extended since the March 2020 earnings call, as a result of an estimated slowdown in underground development spend arising from the potential impact of COVID-19, which has restricted our access of the mine for teams from OT, Rio Tinto and our construction partners.This has led to a downward revision of both our underground development guidance range for 2020 to $1 billion to $1.1 billion, as well as the downward revision of the upper-end of our open pit operations guidance range from $120 million to $100 million.As work to complete the definitive estimates, the Panels 1 and 2 mine design study and to secure a long-term domestic power solution progressive, Turquoise Hill will continue to evaluate its cash flows, liquidity and financing projections, while its funding requirements will be clarified by the ongoing work, we are well progressed in discussions with Rio regarding a proposal for sourcing incremental interim funding to ensure Turquoise Hill progress the underground developments over and above its $1.8 billion of available liquidity.Current estimates indicate an incremental funding requirement over and above liquidity currently available of at least $4 billion. This current estimates has improved from the at least $4.5 billion previously disclosed due in part to the selection of the Panel 0 mine design, coupled with lower forecast LIBOR rates.As the slide shows, the at least $4 billion estimate is dependent on many variables, all of which could impact the quantum of incremental funding requires, and of course the company will continue to assess the possible impacts of COVID-19 on its operations, development activities, as well as the incremental funding requirements.And with that, I will hand back over to Ulf.

[Ulf Quellmann:]

Thank you very much, Luke. So, to wrap it up, the first quarter of this year has been over – overshadowed by COVID-19 and the impact it has had on the health and safety of really everyone around the world. And everyone is still trying to assess the full impact on the global economy, as well as the financial markets.In light of an unprecedented event such as this, it is our belief that Mongolia, as well as Oyu Tolgoi have demonstrated an extraordinary capability to manage and mitigate the impacts on its workforce, the broader community, and its business performance in an outstanding fashion.Mongolia has done a tremendous job in containing and minimizing the impact on its people, and Oyu Tolgoi as business has been able to safeguard the well-being of its people and operate and deliver under the most difficult circumstances.This achievement, and of course, we know that the challenges – speaks to the resilience and the ingenuity of the Mongolian people who of course make up more than 94% of Oyo Tolgoi’s workforce.Our safety record remains strong. Our open pit operations have continued thus far uninterrupted. The underground mine development and construction have progressed albeit they are experiencing challenges, primarily as a result of not being able to get specialist and supervisory foreign nationals to sites.But we are exploring creative ways to mitigate these impacts as best we can. Importantly, we have approved the mine design for Panel 0 that we are now taking forward to execution level planning, culminating ultimately in the DE, the Definitive Estimate later this year.So since July of last year, we have done what we said we would do. We’ve laid out a process map that we shared with the markets and we have delivered on those key milestones. And that’s what we intend to continue to do. The caveat in all of this of course is, the precise impact of COVID-19 on our key activities which today remains unquantified.We have more work to do, both on power, as well as financing. Luke just updated you on the latest minimum funding requirements, as well as the work and the discussions we continue to have with finance providers.The discussions are progressing and we are absolutely focused on those. Also recall though that we have available liquidity that sees into the third quarter of next year. So whilst funding is absolutely important, and a priority for us to lay out a funding plan, there is no immediate cash outflow.And on power, we are working with the Government of Mongolia to progress sourcing power from within Mongolia. There are a variety of options available and each one of them has its own advantages and challenges. The PSFA is the Power Source Framework Agreement is the contractual framework within which these discussions are taking place.The government has most recently put forward its preferred concept and we are now in discussions to find a way to embed this concept into the PSFA framework which we hope to be able to do soon. So the priorities remain clear. We are seeing Oyu Tolgoi is progressing on many fronts and delivering against the milestones we set out.The quality of the ore body and the quality of Oyu Tolgoi as a business remains world-class and it is well on its way to being one of the world’s Tier-1 copper mines which can able to demonstrate important progress in the key area of mine design and you are able to see what Oyu Tolgoi’s largely Mongolian workforce is able to do in the phase of adversity as evidenced by COVID-19. So there is a lot to be done, but we are certainly well on our way. So that concludes our prepared remarks.And with that, operator could I please turn the call back to you for any questions please?

[Operator:]

[Operator Instructions] The first question comes from Orest Wowkodaw from Scotiabank. Please go ahead.

[Orest Wowkodaw:]

So, hi, good morning. I’d be curious now that you’ve completed the mine design for Panel 0, can you give us some color on what the ramp up schedule would look like, once you achieve that initial for sustainable production which I take it based on the 25 month delays more like first quarter of 2023. I am curious, specifically, whether the ramp up profile for the copper and the gold has changed materially at all from what we saw in the 2016 tech report?

[Ulf Quellmann:]

Orest, thanks for the question, if I may, I may have to add a little bit of a facilitator on the call this morning, because we are all working from different places. Jo-Anne, I hope you could hear the question. Are you – do you want to address Orest’s questions?

[Jo-Anne Dudley:]

Yes, absolutely. Thank you and I think you asked the question. So, at this stage, the decision that’s being approved really is surfaced on the Panel 0 area and there is some ongoing optimization work that’s being completed to understand the full impact of the changes.We also are continuing to work on design assignments at Panel 1 and 2, which also requires to be part of the ramp up, as you would know from that 2016 technical report. So, as part of that design review work, we will be further reviewing any impact on ramp up. The work is still in progress and has the activating process.This was noticing that with the incorporation of pillars to the North and South of Panel 0, there is some flexibility to start Panel 1 and 2 independently, as – and that will be deterred by infrastructure availability, ventilation and ore handling and development progress. And so, so that works will be going on through 2020.

[Orest Wowkodaw:]

Sure. But I am not sure I understand if – are you saying that it’s too early to know if there is a material change or maybe I can ask, do you anticipate there will be a material change to the ramp up profile?

[Jo-Anne Dudley:]

Yes, so, it’s too early to say, the design gives us flexibility on the starting of – on the initiation of Panel 1 and 2, the design decision for Panel 0. And so, there is some opportunity provided with that. But that work is ongoing and we just hasn’t crystallized yet. It is a good question, but we are just not there yet.

[Orest Wowkodaw:]

And then, if I could, can you just give us an idea of how much contingency is embedded in the new development plan and capital overall number with respect to say, number of months or dollars for the budget?

[Jo-Anne Dudley:]

Yes, so, another good question. So, there is contingency included in the range provided in the estimates and this is calculated on each schedule and the degree of progress that has been made. So in this case, we are not – we haven’t specified the contingency, but there is contingency included as you would expect and as you have seen in the past with the work that we communicated.

[Orest Wowkodaw:]

Okay. But you can’t quantify it?

[Jo-Anne Dudley:]

Not right at this moment.

[Orest Wowkodaw:]

Thank you.

[Ulf Quellmann:]

Orest, can I just add to the two to supplement Jo-Anne’s comments, yes, we are not in a position to publicly provide what the contingency is. I think what I just want to highlight Orest, we are keen and we were keen to update the markets on the progress we made on mine designs, which is what we’ve done. We were also keen to provide the market with an update on ranges, right, for – and for capital costs and that’s what we’ve done.They are ranges, because of course, that’s where we are at the moment from a level of precision, if you like. So that’s why they are ranges, as opposed to precise numbers. But we wanted to do that at this point in time, because we felt it was appropriate for that. That’s why also we have a contingency in the numbers at this stage.The final number, if you like, or the definitive number, both on cost and schedule, you will then receive when we get to the Definitive Estimate, which is later this year.

[Orest Wowkodaw:]

Okay. Thanks, Ulf.

[Operator:]

Thank you. The next question comes from Hayden Bairstow from Macquarie. Please go ahead.

[Hayden Bairstow:]

Hi. Evening from my side of the world. Just a couple of quick questions. Firstly on the new sort of mine plan. Do we need to sort of throw out the old numbers in terms of 65k, the development getting sort of being underway given you to sort of ore handling area as opposed to one at always numbers will come in with Definitive Estimate.So, again, my points are looking at your quarterly development rates and seeing it closer to the finishing of the development work, that’s of course one. And then, the second one just on – I noted in the commentary that completion of the Panel 1 and 2 won’t be done until 2021.So, does the Definitive Estimate won’t be definitive or won’t have of loss of mine CapEx, or that sort of stuff which you while actually you finished all of the Panel 1 and Panel 2 design work. Is that a fair way to think about?

[Ulf Quellmann:]

Yes, two very good questions, Hayden. Again, I think Jo-Anne on this call this morning, I am afraid, you may probably get the bulk of the questions. But are you – could you hear the question from Hayden. Do you want to start answering? I can supplement in the end if needed.

[Jo-Anne Dudley:]

Sure. Thank you, Ulf and thank you, Hayden. So, in terms of the way we should think about things, I mean, we have provided an update of the sustainable production date and that is the key value driver for the mine.And that’s why we are focused on that date. It’s not necessarily meaningful to think about the development made – for example, because there are multiple critical paths on the project and some of them are develop natives and some of them are other aspects of the schedule like infrastructure, ventilation, and material handling, for example.And all low – build to give us the date at which we can start ramping up which is first sustainable production. So, with this to focus on the dates in front of us, so the start of ramp up is that makes then. In terms of the Definitive Estimates, the key eyeing of the Definitive Estimate is to provide an – a very accurate data is on the development capital estimate, which is really about the infrastructure component that is being constructed.And so, that particular portion of the estimate will be called as a good quality, subject to cost changes that we are finding as a result of COVID-19. So, we have some aspects of the construction that is being impacted. So – does that answer your question, Hayden?

[Hayden Bairstow:]

Yes, I am just trying to get an understanding of the Definitive Estimate, all achieve would be a – provide updates for everything that clearly one have lots about this.It’s more focused on the front-end CapEx. But just on the underground development theme, we understand what you were talking about, the previous numbers that were in the studies about, we needed 64k and that’s for development to keep going, it’s probably more than that now? So, that’s my point even thinking about those numbers as relevant will still to open the Definitive Estimate?

[Jo-Anne Dudley:]

But there will be – yes, so, there will be an update about it at some other time and there has been no change of the about – that period. So it is a good way to think of that. I mean, just, sorry, back to the Definitive Estimate question, there is work going on and drilling proceeding on the book and trying to understand any residual uncertainties and we’ll get a significant grade improved picture as it remind you of 2020, perhaps things are going to work out in terms of that loss of mine picture.

[Hayden Bairstow:]

Okay. And Ulf, if I can, still one final one.

[Ulf Quellmann:]

I’ll give Jo-Anne, rest.

[Hayden Bairstow:]

Just on the funding shortfall of $4 billion, I mean, like half of that, from memory just you had the date or time and schedule, I mean, the force as you would be – of debt, is that changed that repayment schedule or it changed for long stop date?And if we strip that out, obviously the funding still pulls by lower list, past development is pretty interesting. I mean, does that potentially remove the power station cost or a large proportion from part of this potential shortfall?

[Ulf Quellmann:]

Thanks, Hayden. I’ll let Luke comment in a second maybe on the fourth measure the loss update. Just on power, the second half of your question, what you are rightly point out Hayden is, as we are still looking at various options and if you were to take the government’s preferred option which is what they call the State Owned and Funded option.If we ended up with that option and that was absolutely executable and met OT’s requirements, then of course, that would have a material impact on the funding requirement, because it would all of sudden remove a big chunk of the funding from OT if the government decided that it was willing to fund the power plant, right.And so, you absolutely rightly pointed out that, if that is where we ended up and of course, that’s not certain at the moment, but it’s that’s way we did end up with have a material impact on the minimum funding requirement.Maybe, Luke, with that, do you want to comment briefly on the first part of Hayden’s questions around – and indications on long stop date? And the size of the debt service really as part of that funding gap?

[Luke Colton:]

Yes, no problem. The question is a good one and the answer is simple. The impact is really on the long stop date, Hayden, this date we are not really expecting that the sort of near-term interest and principal repayments are going to change at all as a result of this. So, that’s the quick answer. Happy to go into more detail if you want, but that’s the quick answer.

[Hayden Bairstow:]

Okay. Great. I’ll take in this context. But terrific answers.

[Operator:]

Thank you. The next question comes from Oscar Cabrera from CIBC. Please go ahead. Oscar, your line is open. Go ahead please. Oscar, if you are on mute, please unmute your phone.

[Oscar Cabrera:]

Apologies. Let me start over. I was just saying, hope you and your families are well in this uncertain times. So, couple of things for me. The first is, could you discuss the critical path items in the underground in order to meet your 25 month delay. It sounds like Shaft 3 and 4 are not part of this critical path.And if they are not, then, how long can you wait to seeing this before it starts affecting future underground development and production?

[Ulf Quellmann:]

Thanks, Oscar. I’ll pass the question in a second to Jo-Anne, but first of all, I acknowledge, thank you for your good wishes and hope you and your family are safe, as well. And Jo-Anne, just before you answer the specific question, you are absolutely right, Oscar, to point out that when we look at the impact to-date of COVID-19 and what might happen going forward, there are differences, right, because, what we try to point out is, to-date, certainly the open pit operations have been really uninterrupted.That continues to be the case and in areas of underground development, it’s also been unaffected, because we continue to deliver strong results. But where there has an impact is, correctly as you pointed out on some infrastructure, whether it’s shafts 3 and 4 and one or two others. And Jo-Anne, maybe you want to take it from there and say, what are the implications of that and are they on the critical path now or if not now, will they become critical path at some stage going forward?

[Jo-Anne Dudley:]

Thank you, Ulf and thank you, Oscar for the question. On this project there are multiple critical paths and a component of that, a critical path is the actual development progress, as well as material handling and supply components to the critical path and at some point all of these aspects may become critical path on the project.We should recall that, Panel 0 is able to be initiated and commenced ramping up using the existing ventilation capacity. And so initially, any delays in shaft 3 and 4 should have a minimal impact. As Ulf mentioned before, there is ongoing work on Panel 0 and also Panel 1 and 2, where design refinement work being carried out and at this point, a complete and full understanding of the critical path is under review.And so, more is mentioned about that we will emerge as the work progresses and there is obviously some uncertainty about what will happen in terms of timing and accessibility to restart that work. So, the work is ongoing. It’s very much – there is a focus for the time. Ulf, do you want to add anything further?

[Ulf Quellmann:]

I would just say in general, Oscar, I think it’s important for us to strike the right balance. I think on the one hand be very, I think proud to look at what the OT team and with the support of the Mongolian government has been able to do so far in terms of really minimizing the impact.At the same time, all of us know about - looking forward, it is quite or the degree of uncertainty remains high, right and many of these things at the moment are outside of our control. And whilst we are – I mentioned that in my prepared remarks, whilst we are looking at some creative solutions to try and mitigate some of these impacts.For example, where we do need specialized expertise from abroad to the in country, are there ways using technology to do it remotely, all of these things are being looked at. But at this stage, we just haven’t got certainty to give you really a good answer and say, right, the impact is x many months and that’s when it was mitigated.So that means all at the moment we can do, Oscar, is kind of point out what we’ve done so far. The work as Jo-Anne is saying, that’s going to look at these things and mitigate them. But it’s really not possible for us to put a lid on or put a cap on what is the impact obviously going to be, because the situation is live and emerges on a daily basis. I know, that’s not a good answer, Oscar, but that’s I am afraid the reality where we are.

[Oscar Cabrera:]

Yes. No, that’s helpful, Ulf. And I think my – the main take away from you is that, that’s pretty forward do not have an impact on the sustainable production or the 24 - 25 month delay. Thanks. Then, turning to power, clearly the Mongolia government is intent to develop and halt the Tavan Tolgoi Coal Fields. Based on previous history, this is not particularly a reliable solution.So, how are you thinking about this process? I noticed that deadline of June 14, based on your agreement with the government and this is ten days ahead of your parliamentary elections. So, could you just provide context around that?

[Ulf Quellmann:]

Absolutely, Oscar. So, you are right. So, the dates and if you like, deadlines, for lack of a better term, that we mentioned, they are the processes that are laid out in the power source framework agreement, that is agreement that was signed in December 2018 that really Tavan’s, the implementation of Oyu Tolgoi’s obligation to deliver power domestically.That was an agreement that was signed with the government in December the year before last. And in that agreement, there are options laid out in terms of power options that are being considered and there are certain steps when they can be considered. So that the contingency mechanisms that we’ve referred to, and there are two of them.The first one has expired and now we are in the second one. And the power options that were included and are considered in the power source framework agreement do not include the option that the government has now put forward as its preferred option, all right?And so the discussions we are having at the moment is, f you want to consider that, which of course, we do, the government has decided that this is its preferred option and so therefore, that’s something we need and want to respect.And investigate that if this indeed can be executed and you have some reservations about the – how we are listing it is, but it’s certainly something that we take seriously and we would like to work with the government to run the ground. In order to be able to do that, and to have that grounded in a proper legal framework, we would really need to amend that agreement, because at the moment, it technically does not allow for this option, if you like.So what we are really saying is, we would like to work the government on this and on other options. But to be able to do so, we would really need to amend that agreement. And the date by which the current agreement says, it would need to be done, happens to be June 14th. That’s how that works and comes together. Does that answer the question, Oscar?

[Oscar Cabrera:]

Yes, no, it does. Hopefully, the government of Mongolia has thought this through and we can deliver the power for the project. Then the last thing if I may, on your estimate for current liquidity, lasting until – still the third quarter 2021, what operating cash flow assumptions or working capital assumptions do you have embedded there? And at what now the price is?

[Ulf Quellmann:]

Thanks, Oscar. I might ask Luke to take that question. Luke, are you okay to address this one?

[Luke Colton:]

Sure, I will do my best. And Oscar, can I just say, I hope you and your family and loved ones are safe and well. Thank you for wishing the same for us. My attempt to answer your question is, I guess, first of all to, I guess, refer you to our production and CapEx guidance for 2020.And that will give you an idea of some of the key assumptions that we are assuming in the – in both the CapEx and the production phase that obviously will contribute to our operating cash flow as well as our free cash flow. You’ll know that the ranges haven’t changed. But we are somewhat hopeful that we’ll be able to get some additional gold and that will end up at the top-end of the range for gold production for 2020.I’d also refer you to the 2021 outlook for copper and gold as well, which we haven’t changed. And it still remains valid. In terms of working capital assumptions, I mean, we are not assuming anything sort of Herculean in an effort really we are assuming kind of normal course stuff.So, we are not assuming any sort of significant build-up or draw down in inventory levels, AP levels sort of appropriate for the level of CapEx expenditure that we are planning to see over that period of time. And then obviously, our assumptions around AR would be consistent with the sort of revenue profile over that period of time, which again, you can kind of – you can kind of see from the guidance that we’ve issued. It’s probably worth noting that on the CapEx guidance for the underground.We have reduced that to a range of $1 billion to $1.1 billion and we’ve also reduced the top-end of the sustaining CapEx guidance down to $100 million, it was previously at a $120 million. So, all of those things are obviously having an impact on liquidity over that period of time.In terms of pricing, over that sort of key period in the remainder of 2020 and 2021, I mean, we are not really in the habit of sharing our pricing assumptions too broadly, but what I can say is that for 2020, we certainly have recognized the potential impact of COVID-19, not just on our levels of spending, but also sort of from a global macro perspective, the impact it’s having on the copper price.So, we do have a very conservative assumption for 2020 that, without giving you the number, it’s in the range of current spots, if not makes any sense at all. And obviously, a more conservative assumption for gold. And then, for 2021, we revert back more to broker consensus really, which is what we would use for both copper and gold.So, I know that’s not a 100% answer to your question. But hopefully, it helps to answer the question and gives you a better flavor.

[Oscar Cabrera:]

No, that’s helpful, Luke. Thanks very much and best wishes everyone.

[Luke Colton:]

Thanks.

[Operator:]

Thank you. Your next question comes from Dalton Baretto from Canaccord Genuity. Please go ahead.

[Dalton Baretto:]

Thank you. And good morning, everybody. Ulf, I’d like to take up on your discussion with Oscar there on the power plant, did this option up in government actually building and it’s funding the power plant and supplying you guys, I mean, clearly, that’s a business critical risk, not just from a reliability perspective, but also from a negotiating perspective. Should this be the way going forward, what type of contingency are you thinking in terms of power supply?

[Ulf Quellmann:]

Dalton, just to clarify, when you say, contingency, you – what are you thinking about?

[Dalton Baretto:]

A backup power supply.

[Ulf Quellmann:]

I would say, look, it’s a good question, Dalton. If you – I’d ask you probably to have a little bit of patience, only because this option was put forward by the government relatively recently in the middle of April. So, less than a month ago and I would say, like you, there is lots of questions that we would have as well to be able to run the ground with the government.The one you are mentioning is one. There is a few others, as well. So, at this stage, Dalton, I think where we are is, to really focus on making sure that we can address all of these options and therefore make an amendment to the agreement to provide us to do the flexibility to do so.As you rightly pointed out, Dalton, at the end of the day, power is an absolutely critical component for OT to be able to run the business and that is why ultimately, Oyu Tolgoi does need to be in a position to decide what the best option is to run the business. But at the same time, we want to make sure we have an option that if the best for Oyu Tolgoi that also has the full support of the government.And to do that, to run that to ground, putting an amendment in place to give us more time and flexibility to explore that would be important. And once we’ve done that, Dalton, then we need to be in a position to answer some of the questions you raised and Oscar raised, because ultimately OT is to make a decision and to do so, certainty, capacity, funding, permits, all that would need to be answered to be able to make a final decision. Up to day, it’s only four weeks after we received the proposal. It’s premature for us to comment on that, Dalton.

[Dalton Baretto:]

Yes, okay. That’s fair. So, maybe I’ll switch gears and I think you were talking about this updated guidance if you will on CapEx and schedule. I mean, I apologize if I missed this in your earlier comments. But does this guidance factor in any of the COVID-19-related delays? That’s number one.And then, number two, I know you said, you said, you can’t comment on the contingency. Can you maybe talk about how much of the contingency has been consumed already, given the delays today?

[Ulf Quellmann:]

Dalton, I did answered to my questions. But just to be clear, when you say guidance, I think you are referring to the guidance on the underground not to 2020, right?

[Dalton Baretto:]

That’s correct. Yes, the schedule and CapEx, yes.

[Ulf Quellmann:]

Yes, yes. I know, that guidance does not include any potential negative impacts on COVID-19, point number, to be clear, does not. And the second point is, we are in a position to provide any update on contingency, how much is in there and therefore where we are, Dalton, I am afraid, that’s the level of – at this, we are not in a position to provide to the market. I know it’s disappointing, but at this stage, we can’t do that.

[Dalton Baretto:]

That’s fine. So then, when you do put out the Definitive Estimate, will that then update these numbers based on the delays you’ve seen so far or do you think it’s just stick with us and see how it all unfolds?

[Ulf Quellmann:]

No, no, absolutely, so, you are exactly right, Dalton. So, the Definitive Estimate is meant to have a very high level – execution level of accuracy, both on schedule, as well as on costs. And so, where we are at the moment, Dalton, is really in the process, right. If you remember, July last year, we started off by saying 16 to 30 months and $1.2 billion to $1.9 billion.Now, we’ve given you a range of 25 month to 29 months and $1.3 billion to $1.8 billion. So, it’s still a range. It’s still fairly broad, but it’s narrower, and importantly, it stayed within the range we’ve given, it hasn’t gone outside of that. You should expect us we get to the Definitive Estimate that those ranges become very, very narrow and might even converge on any number.

[Dalton Baretto:]

Excellent. Okay, that’s all for me guys. Thank you.

[Ulf Quellmann:]

Thanks, Dalton.

[Operator:]

Thank you. The next question comes from Craig Hutchison from TD Securities. Please go ahead.

[Craig Hutchison:]

Good morning. In terms of the updated Panel 0 mine design and the incorporation of the structural pillars to the north and south of the boundaries, do you think that’s going to have any impact on your ultimate reserves?

[Ulf Quellmann:]

Craig, morning to you. Jo-Anne this feels like for you, if you are okay to take this one?

[Jo-Anne Dudley:]

Yes, of course, of course, Ulf, thank you very much. Thanks, Craig. So, the impact on reserves is still being assessed as the pillars and there are recovery options, recoverability options being assessed in this next level of design refinement.And so, we will understand more about this as the next three months progress, what’s progresses in the next few months. So, that’s really the focus at the moment. So, does that answer your question? Is there a second part to it? Sorry, it’s getting a bit lousy.

[Craig Hutchison:]

No, I mean, no, I just – so, I wanted to know if there is any materiality to those - the size, I guess, and the tons and grade that’s in those structural pillars, in terms of the sequence in ramp up?

[Jo-Anne Dudley:]

And really, those pillars are going to be – are being less fair to provide support for the ore handling system, which in this case is to move ore off the footprint to the crushers via trucks and those pillars – the ore handling system will be able to used by Panel 1 and 2 and it provides some redundancies. So, there is no benefits to adding those pillars.In terms of recoverability, we are really working on what options that we have at the moment to look at what the outcomes might be and it’s just too early for us to draw any conclusions, because of where they planning process is at. But it is something that we are looking at closely. Ulf, would you say any more about that?

[Ulf Quellmann:]

No, that’s I, just to say, work is going on too early at the moment and when the work is completed, then we’ll know and move from there accordingly, Craig. We just at the moment, it’s just too early, simply said.

[Craig Hutchison:]

Okay. Thanks for taking my questions.

[Operator:]

Thank you. There are no further questions. I will turn it back over for closing comments.

[Craig Hutchison:]

Thank you very much, operator. Look, thank you everyone for joining us this morning. I will keep it very, very short in terms of my closing remarks. We have talked a lot about COVID-19. I do not want to delay with the point anymore than we need to, but at the same time, it is the biggest event that is impacting all of our lives as well as the business at the moment.I think we’ve been able to draw it on the call today that, up until now, the business has done an outstanding job and the government is being extremely supportive in putting us in a position we are to-date, both as far as the operations are concerned, as well as the underground development, lateral development has not been impacted, but at the same time, we are mindful that going forward, it is likely to have an impact, but how much? We don’t know.And so, the team is working very hard to be as creative as possible to find ways to mitigate those options and again, to work with and get the support of the government to be able to do so. The second point I am going to make is, we have made an important decision, when I say we, that is the TRQ Board, to approve the mine design option for Panel 0.What does it mean? Well, it means we are on track in relation to the timetable we laid out late last year as to what are the steps that allow us to work through, address some of these initial stability concerns that we had identified. The Definitive Estimate is due for this – later this year subject to any delays by COVID depending on how that plays out.We have provided you some ranges, some updated ranges today in terms of CapEx, as well as schedule. So, 21 to 29 months and $1.3 billion to $1.8 billion and that funnel will narrow and converge on a number. By the time we get to the Definitive Estimate. So there is still an inherent degree of uncertainty in these ranges today, because of course, the level of accuracy we have today.But we have now picked an option and we now can take this option and develop it to an executional level – degree of certainty.And finally, on funding and power work is ongoing. We have a plan. We have engagement and on the financing side, as Luke commented, we are working towards putting an interim funding facility in place really to give us time and flexibility to make sure we can explore long-term funding options that address that minimum funding gap that Luke was talking about.And I think on parallel, you’ve hears on the call that there are discussions going on with the government. There is an agreed framework in place that provides the legal framework and within that, we are trying to work the government to put amendments in place to allow us really to investigate the options that are best for the business, but also important that the option that the government would like to pursue and an amendment would allow us to do that.So with that, let me leave it there. Thank you for joining us on our call this morning. Stay safe, and thank you very much and good-bye.

[Operator:]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines. Enjoy the rest of your day.