Turquoise Hill Resources Ltd.
Q4 2020 Earnings Call Transcript

Published: 9 Mar 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Turquoise Hill Resources Fourth Quarter 2020 Results. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. . This call is being recorded on Wednesday (sic) , March 9, 2020 (sic) . I would now like to turn the conference over to Roy McDowall, Head of Investor Relations and Communications. Please go ahead.

[Roy McDowall:]

Thank you, Joanna. Good morning. I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our fourth quarter and year-end 2020 financial results conference call. On Monday, we released our fourth quarter and year-end 2020 results press release, MD&A and financial statements. These items are available on our website and SEDAR. With me today on the call are Steve Thibeault, our interim 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 statement section of the annual information form dated March 8, 2021 and supplemented by our MD&A for the 12 months ended December 31, 2020. Before I hand over the call, I would like to formally introduce Steve Thibeault, who was appointed interim CEO of Turquoise Hill last Thursday. Many of you on the call know Steve from his tenure as a CFO at Turquoise Hill from 2014 to 2017. In addition to being to TRQ's CFO, Steve was also on the Oyu Tolgoi board and has been to the site in Mongolia multiple times and was instrumental in securing the $4.4 billion project finance facility in 2015. You can find our presentation on our website in the Financial & Technical Reports section. And now, I'd like to turn the call over to Steve.

[Steve Thibeault:]

Thank you, Roy. And good morning, everyone. Before going any further, I would like to take a moment to thank Ulf Quellmann, who served as CEO of Turquoise Hill for nearly three years. We thank Ulf for his service and wish him well. As you know, I returned to Turquoise Hill just five days ago. And although it will take me a few weeks to fully get up to speed. My story with TRQ has enabled me to hit the ground running and immerse myself in the key strategic objectives. First, securing funding to complete the underground development. Second, to work with the government of Mongolia and Rio Tinto to finalize a long-term power supply for Oyu Tolgoi. And third, to update or replace the existing UDP in a manner that is mutually beneficial to all parties. I'm sure, as you were aware, all of these discussions are in advanced stages and I'm joining a strong team that has continued to move these issues forward, while prioritizing the interest of Turquoise Hill shareholders. I will now walk through the year-end update as efficiently as possible and then we'll open the call for Q&A. Please note, on slide 2 and 3, they contain our cautionary statements and I would encourage you to read to read them. On slide 4, you will see 2020 was a very busy year that saw the key milestone of a new mind design for panel zero and updated Oyu Tolgoi technical report and, finally, the definitive estimate that reconfirm the compelling value proposition that Oyu Tolgoi provides investors.

[Jo-Anne Dudley:]

Thank you very much, Steve, On slide 8, you can see the Oyut open pit on the left hand side and the Hugo North with one underground development on the right hand side. Combined, these two ore bodies have an estimated 31 year life of mine and as the basis of the 2020 reserves update in the annual information form. The definitive estimate completed in December 2020 includes finalized pillar locations on the Panel 0 boundary and an optimized drawpoint layout to minimize exposure to the lower fault. This resulted in a non-material increase in the Hugo North mineral reserves. Of 10 million tonnes of ore, 0.18 million tonnes contained copper and 0.07 million ounces contained gold. The underground ore reserve has an average copper grade of 1.52%, which is more than three times higher than the open pit or reserve and contains 0.31 grams of gold per tonne.

[Luke Colton:]

Thanks, Jo-Anne. And good morning, everyone. If I could ask you to please turn to slide 10 and I'll provide a summary of our key financial metrics for Q4 and full-year 2020. Revenue for Q4 2020 increased 83% from Q4 2019, and that's driven by increases in both copper and gold production and price. For full-year 2020, revenue decreased 7.5% versus 2019, reflecting overall lower gold production, partially offset by 27% higher average gold prices and marginal increases in both copper production and our average copper prices by 2% and 3% respectively. The lower gold production was caused from mining lower grade gold areas of the open pit through the majority of 2020. 2020 cash generated from operating activities before interest and tax was 9% higher than in 2019, and that's due to favorable working capital movements, partially offset by the decrease in revenue. Lower gold credits in 2020 was the main reason for the increase in the unit cost basis for C1 cash costs. The unit cost basis for all-in sustaining cost was also impacted by the lower gold credits. However, this was more than offset by lower open pit sustaining capital expenditure. If I could ask you to please turn to slide 11, you'll see that Turquoise Hill had liquidity of $1.1 billion as of 31st of December, 2020, which is expected to be sufficient to meet our requirements, including continued underground development into Q3 of 2022. This is improved from our previous estimate of Q2 2022, and that's driven largely by improved commodity price assumptions. The base case incremental funding requirement at the 31st of December, 2020 is estimated to be $2.3 billion, and that's down from the $3 billion reported previously. This improvement is driven primarily by improved commodity price assumptions over the peak funding period. The incremental funding requirement includes the current project finance, debt service and related costs, as well as principal repayments and, therefore, is estimated before any additional supplemental senior debt or reprofiling of existing debt is considered. As for the MOU signed between Turquoise Hill and Rio Tinto in September 2020, both parties support the pursuit of reprofiling OT's existing debt, as well as securing an additional $500 million of supplemental senior debt. Reprofiling of the existing principal repayments would decrease the company's incremental funding requirement by up to $1.4 billion. Our liquidity outlook and estimated incremental funding requirement will continue to be impacted, either positively or negatively by various factors, many of which are outside the company's control.

[Steve Thibeault:]

Thank you, Luke. I'm going to use the key milestone outline on slide 12 to provide an overview of what we are working through in 2021 to keep us on track for the first sustainable production in October 2022. The first milestone I will address is power. As you know, we had the first power milestone, the extension of the IMPIC supply agreement due on March 1, 2021. And the second milestone, the signing of a power purchase agreement due March 31. On March 25, the government of Mongolia formally noticed Oyu Tolgoi that the Tavan Tolgoi power station project will be implemented and have requested the milestone date under the PSFA agreement be extended. Oyu Tolgoi are currently engaged with the government of Mongolia to agree to a standstill period following the lapse of the March 1 milestone, and we'll continue to work with GoM to ensure a secure, stable and reliable long-term power solution is implemented. The second milestone we are focused on is the arbitration with Rio Tinto and resolving the forecast funding gap. As we stated on previous calls, the arbitration proceedings have commenced in British Columbia, and we are bound by confidentiality agreements that prohibit us to comment on the arbitration proceedings until a binding decision is reached. At this time, we expect the arbitration proceedings to conclude in May. On the funding front, as Luke outlined earlier, our base case funding gap as at 31st December, 2020 is $2.3 billion. We have evaluated and presented financing option to Rio Tinto and Erdenes and are currently in discussion to finalize a funding solution that takes into consideration the forecast requirements of the underground project, with the objective of maximizing depth and minimizing a rights offering.

[Operator:]

. First question comes from Orest Wowkodaw at Scotiabank.

[Orest Wowkodaw:]

liquidity gap estimation, that $2.3 billion, that's down from $3 billion in the third quarter. Can you talk about how much of that $700 million decrease is strictly attributable to higher commodity pricing? And then secondly, what's the assumed minimum cash balance in this assumption?

[Steve Thibeault:]

Luke, can you handle that question, please?

[Luke Colton:]

In terms of our funding gap, our remaining funding gap, you're correct. It's reduced from the $3 billion, down to $2.3 billion as per our year-end estimates. You've already answered the question in asking it, but the vast majority of the of that decrease is actually related to improved commodity price assumptions for both copper and gold. In terms of the way that $2.3 billion works in terms of any minimum buffer amount at the end, that $2.3 billion is the full amount until we run out of cash. So, that is the full amount of the requirement.

[Orest Wowkodaw:]

I see. So, there's no minimum cash balance assumed in that. Okay. And then, Steve, with the change here in terms of Ulf leaving and you entering, is there any change in the way you're approaching the arbitration? Like, do you plan to follow that through in terms of getting an arbitration decision?

[Steve Thibeault:]

The arbitration is continuing. Like I mentioned previously, the objective is really to clarify the rules of each. That was mentioned previously. And so, I think that's important that we are proceeding. And I'm confident – not confident, I know that that will help both parties, Rio Tinto and TRQ, to have a better understanding of the rules. And so, we're proceeding.

[Orest Wowkodaw:]

You're proceeding, okay. Finally, coming back to the financing again, is a non-dilutive streaming transaction still an option that's being considered? Or is that now off the table?

[Steve Thibeault:]

Luke, you want to provide the detail?

[Luke Colton:]

Of course. Listen, it's a good question. And let me just start by, I guess, reiterating our funding strategy. The fact that it is based, obviously, on some basic principles, and that's really finding the best cost of capital balanced with the need to ensure efficiency and stability and how we fund, careful and thorough consideration by the Board and the special committee of the relevant merits of the various sources of debt and equity, and finding alignment with the relevant stakeholders once the board and special committee are happy. We have made significant progress on stabilizing and enhancing our financial situation this quarter. And as I've already talked about, that's driven by an extension of our liquidity and our hedging program. And management, we are obviously working under the supervision of the special committee and we remain committed to ensuring that the relevant negotiations continue with a view to arriving at a funding plan that is in the best interest of the company. And in terms of the options that have been looked at, there really isn't any change from what we've communicated in prior quarters. So, we've looked at, obviously, the options that are summarized in the MOU, which include reprofiling, additional supplemental senior debt, a global medium term note program, and of course, we've done a lot of work around the streaming as well, as you indicated.

[Operator:]

The next question comes from Dalton Baretto at Canaccord.

[Dalton Baretto:]

Couple more questions on the funding side of things. First question, $2.3 billion funding gap, that's based on the $6.75 billion as far as I can see. Are you going to seek incremental liquidity to cover a potential overrun up to your 15% sensitivity?

[Steve Thibeault:]

Guys, you will understand, after five days, I'm not around all the questions around funding and that detail. So, Luke will answer all those one. And Luke, you want to proceed?

[Luke Colton:]

I'm not 100% sure what 15% is being referred to. But obviously, the focus of management and the special committee is to secure funding that is sufficient to meet the company's reasonable requirements and to make sure that we can continue to do that into the future. And for that, that's the reason why we we've investigated the various options that that investigated. In terms of that $2.3 billion number and some of this has been stated previously, if we're successful in achieving our reprofiling objectives, that will, of course, reduce that funding gap from the $2.3 billion by $1.4 billion. So, it'll reduce it down to $900 million. In the MOU that was signed in September, there was alignment that we should be taking supplemental senior debt of $500 million. If we're able to do that, that reduces the funding gap from the $900 million down to $400 million. And from there, we've looked at various different options, and I've kind of summarized what those options are already. And those options, if implemented, would put us in a position where we could fill that that remaining funding gap of $400 million or potentially more than that $400 million. And, of course, as a final backstop, we can't completely discount the possibility of an equity offering, but from our perspective, the objective continues to be to maximize the sort of low cost debt financing and minimize the quantum of any equity offering as much as possible.

[Dalton Baretto:]

Just to clarify, though, that 15% comes from the sensitivity that Rio put out around their tentative estimate? So, maybe another question, the tax payments that you made in February, I think was just over $200 million, is that coming out of your current liquidity?

[Luke Colton:]

The tax payments have already been made. So, the liquidity forecasts that I think I just discussed into Q3 2022 incorporates the payment of those two tax invoices, which the two together were about $230 million.

[Dalton Baretto:]

But your liquidity positions as of December 31 – and these payments were made in February, but you're saying the Q3 numbers assume these payments?

[Luke Colton:]

No, I'm saying that, on the 31st of December, we had liquidity of $1.1 billion. Obviously, there's been activity since then. But what I'm saying is, in terms of the number that we just put out for year-end, in terms of our liquidity forecast, which is that we have liquidity into Q3 of 2022, that forecast incorporates the payments of those two tax invoices.

[Dalton Baretto:]

Just maybe switching to the undercut, and again, this is a bit of a funding question here. But the targeted date is in June. The Mongolian election is in June. On the off chance that you guys don't wrap everything up to a level that is sufficient to initiate the undercut, what are your costs associated with every month delay? Let's say it gets delayed by three months. What's that going to cost you?

[Luke Colton:]

Listen, I don't think that's information – unfortunately, I don't think that's information that's in the public domain. What I probably can refer you to is some sensitivities that we've done in prior period financial statements that indicated the impact of delay to first sustainable production would have a – we did a sort of sensitivity around that, and I believe the sensitivity was, for every one month of delay, that had an impact on value or on NPV of about $100 million. So, hopefully, that helps to answer your question a bit.

[Dalton Baretto:]

No, that's great. That actually puts some context.

[Steve Thibeault:]

I would say that we are all aware at the company, at OT and Erdenes that this is a key milestone. And I can tell you, we have a board meeting coming in pretty soon at the OT level. And definitely, this is a hot topic to make sure that we're all aligned to make that decision. And there are different things that are being done at the moment to align our result to move ahead with that June undercut.

[Dalton Baretto:]

Maybe just one last one for me. Are you in a position to tell us what you've purchased in terms of the puts, this notional amount strike prices, that sort of thing?

[Luke Colton:]

Again, that's unfortunately not information that we've put in the public domain. But obviously, the intent of these sort of plain vanilla put options that we've put in place for a period of about 12 months, the intention of that is obviously to preserve our liquidity position on the downside. So, effectively, protect us from sort of downside pricing, maintain that liquidity position for as long as possible, so that we can obviously have the time that we need to continue these other important work streams that are underway. And what, obviously, the hedging program doesn't do is cap the upside. So, if prices continue to improve for copper or if gold bounces back, then what we've done doesn't put us in a negative position in terms of being able to capture that upside.

[Operator:]

The next question comes from Craig Hutchison at TD Securities.

[Craig Hutchison:]

Just so you guys touch on the financing, quite a lot of detail this morning. But just in terms of the sequence of events, can you walk us through how you sort of see the sequence of events unfolding? Do you have to wait until the arbitration is complete before you can work on the debt reprofiling in terms of locking up the supplemental debt with Rio Tinto? Can you maybe kind of give us some ballpark milestones into how you kind of see that playing out?

[Steve Thibeault:]

I think that definitely the work has been done to understand in a couple of initial contacts, where definitely we are working the next couple of weeks and months, that's we're talking shorter here, that's when we will engage pretty heavily or more heavier. And definitely, the arbitration will help us to redefine that we're expecting to be completed in May. We're following that. Definitely, the rules will be clearer and we'll move ahead. Okay? So, I would say, in your timeframe, you should count, between now and June see a lot of activities here.

[Craig Hutchison:]

And debt reprofiling discussions going well?

[Steve Thibeault:]

Like I said, Craig, there was some discussion. And, yeah, I would say that the estimate we have of $1.4 billion, we're quite confident.

[Craig Hutchison:]

Is your expectation that the new CEO, if it's not yourself, will be independent and the new four member will also be independent as well?

[Steve Thibeault:]

I'm not going to be able to comment on that one. But I can tell you that the board has started the process of replacing or having a new CEO, and that they're definitely looking external and internal. So, all the options are open. But that's a decision for the board, Craig. I will not put myself in the middle of it. That's for them to decide, but they're looking at all options.

[Craig Hutchison:]

And then just an operations question, you guys, when you provided your 2021 guidance, there was some issues around your technical concerns in phase 4B, the open pit, that changed the mine design in 2021, 2022. Are there any updates on how that status is going? And I think you guys were anticipating providing 2022 outlook once some of that work was done. Any update there would be appreciated.

[Jo-Anne Dudley:]

With respect to that geotechnical event, it was really not anything outside of business as usual situation. Those things have happened at the Oyut open pit in the past. And it's something that OT has dealt with a number of times. There's a sophisticated monitoring system in place as well as the sound ratings control. The team is managing the area well, with minor alterations to the mine design to deal with the structures of concern that led to that multi-bench failure in a small section of the piece. And the areas will be mined in the next phase. In terms of what we're seeing in terms of updated guidance beyond 2021, the sequence and design is under review. Given the timing of the failure in December, it means that we needed to rework the 2022 plan and also include the usual business improvement kind of opportunities that are being considered. And that work is in process. We'll come back to the market as soon as we can once the work is complete.

[Operator:]

The next question comes from Hayden Bairstow at Macquarie.

[Hayden Bairstow:]

A couple of questions from me. Just firstly on – maybe just follow-on on this deferred tax asset that keeps sort of boosting the earnings every quarter. How do we think about that going forward? It's now up to what over $800 million? Does that cover you for similar credits this year? Or how do we sort of model that through?

[Luke Colton:]

Deferred tax credits is an area, as you can appreciate, of estimation judgment. And it's impacted by many variables, such as commodity price estimates, et cetera, reserves and resource estimates, development capital estimates, mine planning, scheduling, et cetera. Broadly speaking, whilst the underground development continues until the achievement of peak production, we would anticipate additional losses to be incurred by OT, and those additional losses would be resulting in further deferred tax credits. Up until that period of time where OT has delivered the underground and they're no longer running losses, we would expect those additional deferred tax credits to continue to accrue.

[Hayden Bairstow:]

And the same goes to your capitalizing interest, is that right, through to sustainable production or peak production?

[Luke Colton:]

It gets a little bit technical, right? But under our accounting policy, borrowing costs related to construction or development of the underground are capitalized until the point at which substantially all the activities that are necessary to make the asset ready for its intended purpose are complete. So, there's a degree of judgment there, obviously, but we estimate that, at this point in time, that would be approximately equivalent to sustainable first production.

[Hayden Bairstow:]

And just on the sustainable target, I'm just interested to know, the commentary in the quarterly basically implies that everything could be ready to go underground. Jo-Anne, what work has to be done from here to get to first drawbell? Or are you basically ready to do first drawbell? And as a result, what is the underground team actually doing between now and when you get approved to kick it off?

[Jo-Anne Dudley:]

Needless to say, people have been very busy working hard underground at the mine. And we're continuing to complete construction of the Materials Handling System, which is on track. So, there's still work to be done. There is remaining development required to support Panel 0. So, that work is still ongoing. As you know, as noted in the documents that we've just released, a lot of the on-footprint development of the three levels – extraction, undercut largely complete. And that development on footprint is largely complete. The pieces that are required for first drawbell. And so, we continue to work on the materials handling system and we will continue the actual development work to support the ongoing development of the mine, essentially. And obviously, there's other work going on as well that supports us getting beyond the Panel 0 production rate, and that includes mining of the conveyor to surface decline, which is progressing well this year. And then also, Shaft 3 and 4, that work continues as well.

[Hayden Bairstow:]

Just want to follow-up on that, Jo-Anne, just on the Shaft 3 and 4, just looking at the diagram in the presentation, the late delivery of those, does that impact the mining rate of Panel 0? Or is it more an impact on how fast you could ramp-up Panel 2 or 1, whichever one comes next?

[Jo-Anne Dudley:]

It's a good question. Panel 0 production can ramp up without Shaft 3 and 4. As we've noted, we continue to see COVID travel restrictions impact travel, which means it's been challenging to get some specialists to site. And I acknowledge all of the hard work of the teams in Mongolia and offshore teams to try to get people back into site. And we're making good headway on resuming regular flights where we can get the specialist numbers up further to support that thinking. So, we probably should note that the panels can be mined independently. So, there's not necessarily a technical need, the continuous mining from Panel 0 to the other panel. And the sustainable production at Panel 0 is on track. We are continuing to monitor progress, as you would expect. And we will communicate any implications, particularly to Panel 1 and 2 ramp up which shafts are in full support at an appropriate time as the information materializes.

[Hayden Bairstow:]

Just one final one. Probably for Luke, I guess. Just on the CapEx guidance for this year, I noticed in the quarterly sort of broken out the underground CapEx into sustaining. Just sort of understand what that actually – the difference between the two is and how should we break up the sort of $1 billion for this year?

[Luke Colton:]

The sustaining capital guidance that's sort of separately noted in the guidance is for the open pit. The underground guidance that was issued for 2021 includes an amount related to development capital. So, this goes back to the work that's needed, that needs to be done to deliver the safe sustainable first production on the underground for Panel 0. And then, there's also some work, and it's more of a sort of, we call it, underground sustaining capital, which a lot of it relates to the progression of Panels 1 and 2.

[Hayden Bairstow:]

Is it a material part of the $1 billion, given the breakout that we've got in that quarter? Or how do we think of that?

[Luke Colton:]

The large majority of it – sorry, Hayden, I don't have the exact number off the top of my head, but the large majority of that number relates to underground development capital, which is the capital that's needed to deliver Panel 0 sustainable first production.

[Operator:]

The next question is a follow-up from Orest Wowkodaw with Scotiabank.

[Orest Wowkodaw:]

Just curious again on first drawbell expectations. What is the current expectation there? It does sound like you're getting fairly close with respect to the actual physical work required to be able to do first drawbell. But are we still expected that this could get put on hold waiting, essentially, for some of the non-technical aspects to get sorted out before first drawbell will happen here?

[Steve Thibeault:]

I can reassure you that we are all focused to make sure that the non-technical – I agree, the technical aspect, that's easier, if I can say this way. But on the non-technical aspect, we are definitely working hard every shareholders or every stakeholders to make it happen. And I don't see – we are on target. We're working on these issues and I don't see, definitely, at the moment, anything that would divide or change that date.

[Orest Wowkodaw:]

And that date is what right now in terms of best estimate?

[Jo-Anne Dudley:]

Joe-Anne, would you remind me that date for the first drawbell?

[Jo-Anne Dudley:]

We haven't disclosed the first drawbell date in the current piece of work. But what we do talk about is quite meaningful, which is sustainable first production in October 2022, which is when we really start drawing the cave and undercut blasting is planned for June 2021.

[Orest Wowkodaw:]

Just on the power, certainly, it seems like the power plant is being pushed back a little bit here. But is it your expectations that the costs for power are going to be roughly similar to what they currently are in terms of imported power? And have the costs of purchasing power domestically, is that already included in the definitive study cost estimates released last year?

[Steve Thibeault:]

On this, Luke, has a detail on that one. I must say that, Orest, I don't have the detail on that one at the moment, what would be the cost between the different alternatives. Didn't get time to do it on the last five days. But, Luke, do you have more detail on that?

[Luke Colton:]

I can try to provide a bit more detail. As people on the call would know, we signed an amendment to the power sector framework agreement back in June of 2020. And under that amended agreement, the agreement was to prioritize a state-owned, state-funded power plant. So, the estimate that – I've just sorted summarized around funding gap, liquidity et cetera, they assume a state-owned, state-funded power plant. The amended PSFA also has some fallback options. So, in an event that the state-owned, state-funded power plant, for whatever reason, if it weren't to not happen, there are fallback options in that amended PSFA documents that include grid supply, include a renewables option, and also a coal-based – an OT-based cold-fired power plant. But those alternative options don't form part of the sort of base case estimates for funding gap and liquidity that I talked about earlier. There are some milestones in the PSFA. The first of those milestones was related to an extension of the current IMPIC contract. And that milestone was actually the March 1. So, we just passed it. The Government of Mongolia did formally notify OT and Rio late February that the Tavan Tolgoi, this state-owned, state-funded power station project will be implemented, connected to the central energy system and operated under a unified low dispatch control. So, there's still some work to be done, obviously, and the Government of Mongolia suggested that all the milestone dates under the PSFA amendment agreement should be reconsidered and extended. OT is engaging with the Government of Mongolia in relation to that, and hopefully, to agree at a standstill period following the lapse of that March 1 milestone. During the standstill period, OT would – we wouldn't exercise its right to select and proceed with an alternative power solution, but also would not be waiving its right to do so in the future. And as you can appreciate, there are discussions that are underway in relation to all of that to work out the reasonable pathway forward on power. So, that's kind of the update on power that I'm able to provide. I hope that's helpful.

[Orest Wowkodaw:]

I appreciate the color, but I'm not sure you actually answered my question. What is assumed in the definitive estimate that was put out December? Does it assume imported power? Does it assume the purchase power from Tavan Tolgoi? What is assumed in the cost estimates, operating cost estimates, life of mine?

[Luke Colton:]

We may have to go back and double check that actually. I believe that those estimates assume sourcing of power from within Mongolia under the options and the PSFA. But we may have to take that question away. Jo-Anne, unless you happen to remember off the top of your head. That's my recollection, at least. But we may have to take that question away.

[Jo-Anne Dudley:]

Yes, I can help, Luke. There certainly was a consideration of the current agreements to supply. And as I understand it, a switch to an in-country solution. So, I can't exactly say when that changeover was in the modeling, but as I understand it, they're both considered in that estimate and there was a change over time between the two.

[Steve Thibeault:]

I guess on that one, we'll have to get back to you and probably give you a bit more guidance in terms of timing of the current contract, when it expires and what is assumed. We'll do a follow up on that.

[Operator:]

The next question comes from Ralph Profiti at Eight Capital.

[Ralph Profiti:]

Luke, maybe this is a question for you on potential tax assessment risk going forward. And basically, when do you file the 2019 taxes? When do you file the 2020 taxes? Are these sort of based on North American corporate standards? And do you have an estimate based on the Mongolian tax authority methodology on what those tax assessments could look like? And is the intention to partially pay those down? And could we see those before the third quarter of 2022?

[Luke Colton:]

Let me try and answer the second part of that question first. In terms of the timing of our tax filings in Canada, that would just be as per the sort of normal course stuff. It would be similar in Mongolia as well. In terms of the actual tax assessments in Mongolia, we've received tax assessments for period 2013 through 2015 and period 2016 through 2018. So, you could expect the next audit to start in due course over subsequent periods, so 2019 and 2020. I'm not sure of the exact timing of when that would start. But you would expect, obviously, those periods to be looked at in normal course as well. In terms of the actual payment of tax, OT pays in the normal course all of the tax that it believes it owes. And then, there are obviously the outstanding assessments that are the subject of the current international arbitration. In relation to the 2016 to 2018 tax assessment, we have paid the amounts. So, those are the payments that have been recently made, the $230 million that was discussed previously. Those invoices were received by OT and have been paid by OT now. In terms of the overall international arbitration process, that process still continues. It will continue over the course of 2021 and into 2022. We still are quite confident in the company and OT's position around the outcome of those international arbitration proceedings. And so, we do continue to feel quite positive about a favorable outcome in due course.

[Steve Thibeault:]

Ralph, I would just summarize that we're paying our tax, as we pay the amount based on the understanding that we have of this tax law in Mongolia. And like Luke mentioned, the amounts are in arbitration at the moment. The law forces us to – force us, that's the wrong word. By law, we have to pay these amounts right away. So, there's no delay because we're in disagreement. So, when they make an assessment, we have to pay right away and then we go to arbitration or we debate it. And that's why, from my point of view, we're in arbitration, we believe we have paid the right amount of tax, and we'll see. So, that's why in any calculation, you have to be careful to make assumption that we will have these changes. From our point of view, we're paying what we're supposed to.

[Operator:]

The next question comes from Myles Allsop from UBS.

[Ralph Profiti:]

A couple of things I wanted to clarify. First of all, with the undercut in June, is there any flex to that to get to first sustainable production in October ? Or now every month the undercut is delayed, if it does get delayed, would result in month's delay to first sustainable production, is the first question.

[Jo-Anne Dudley:]

In terms of what will happen between the undercut blasting, the commencement of the undercut and first sustainable production, there's a sequence of events, if you like, that need to happen. So, we need to progress the undercut and create a shadow for drawbells to be constructed underneath and we need to get then enough drawbells constructed to reach critical hydraulic radius, at which point we say we've got to sustainable first production. And so, there is a sequence of events that needs to happen. There may be some sort of flex between how much is done depending on the timing, but in general, it is a sequence of things. So, it is important to consider that when we're thinking about what happens in between those two dates, if that makes sense.

[Ralph Profiti:]

Who makes the decision about the undercard? Is that the OT board or how much influence does Rio have in terms of the timing of that ?

[Jo-Anne Dudley:]

The intent is that the OT board would ultimately approve the start of undercutting and that TRQ would also follow its own governance processes we've explored prior to that. And so, it is a decision taken at the highest levels of the organization.

[Steve Thibeault:]

Ultimately, Myles, this is a decision of OT board.

[Ralph Profiti:]

And then, with the $2.3 billion funding gap, could you give us a sense – you mentioned you've assumed higher copper and gold prices. How much higher are those copper and gold prices versus the put option and support level? Are they meaningfully higher close to spot or how much risk is there around $2.3 billion with a very volatile commodity price environment?

[Luke Colton:]

I will do my best. So, the prices assumed in our base case $2.3 billion, they're based on kind of consensus pricing approximate to the reporting date. So, 31st of December. Obviously, the current spot price for copper is higher than what consensus price would have been on the 31st of December. So, if you assume spot pricing, as a sensitivity, that would improve the liquidity position, it would improve from that perspective. The hedging program, we haven't provided a lot of details around what the floor is. And I don't think I can get overly specific, but to answer your question, if I remember correctly, I believe the floor is – it provides downside price risk protection of basically 10%. I think it's about 10% of the base case. So, from that perspective, we're shielded from any sort of downside pricing for copper and gold, more than 10% from that base case, if that makes any sense at all.

[Ralph Profiti:]

Then one other question, changing the Mongolian tax law at the beginning of January and then there's been some talk about thin cap rules and debt to equity 3 to 1. Is that a concern for yourselves? concern?

[Steve Thibeault:]

Ralph, I cannot get exactly. Are you talking about changing the tax?

[Ralph Profiti:]

Yeah. So, the change in Mongolian tax regulations. Are thin cap rules are an issue potentially? I really have no idea. But obviously, .

[Luke Colton:]

So, 3

[Operator:]

Thank you, ladies and gentlemen. We have reached the end of our Q&A session. I will now turn the call back over for closing comments.

[Steve Thibeault:]

Roy, do you have any comments additional or should I just make one?

[Roy McDowall:]

No, we're good to end the call, Steve.

[Steve Thibeault:]

Can I just make a comment? Thank you very much, guys, for the call. And I'm sure, in the next couple of weeks, we'll have time to discuss and have a call – into a call with you guys. Okay, thank you very much for the call.

[Operator:]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.