Turquoise Hill Resources Ltd.
Q1 2017 Earnings Call Transcript

Published: 16 May 2017

[Operator:]

Good day, ladies and gentlemen and thank you for joining us today. Welcome to the First Quarter 2017 Conference Call. This call is being recorded and also will be available for later today on replay. I would now like to turn the meeting over to Mr. Tony Shaffer. Please go ahead, Mr. Shaffer.

[Tony Shaffer:]

Thank you, Operator. I want to welcome you to our results conference call. Yesterday, we released our First Quarter 2017 Results Press Release, MD&A and financial statements. These items are available on our website and SEDAR. With me today is our CEO, Jeffrey Tygesen; Steeve Thibeault, CFO; and Brendan Lane, Vice President of Operations and Development. We'll take your questions after our prepared remarks. This call will include forward-looking statements. Please refer to the forward-looking language included in our press release and MD&A. I'd now like to turn the call over to Jeff.

[Jeffery Tygesen:]

Thanks, Tony. Over the past few weeks, we have seen our stock price and valuation come under pressure. We have had inbound calls from shareholders and analyst asking if they're missing anything. I'm not aware of anything significant that is causing this downward pressure. In the first quarter, underground development continue to move forward and open-pit operations performed well, despite known great challenges resulting from the mining sequence. Our guidance for the year for metal production and our expectation for the start of underground has not changed, Oyu Tolgoi is still expected to be the third largest copper mine in approximately eight years, when the underground reaches peak production. Oyu Tolgoi has one of the top - if not the top - growth profiles in copper space. Copper production is expected to grow by more than 320% between 2017 and 2025 - the vast majority of this sector, I'd like to be able to say that. I don't believe the current valuation sufficiently reflects Oyu Tolgoi growth profile. I'm thrilled to be a part of Oyu Tolgoi and believe it is hands-down the best copper project in development. I am convinced that at some point, hopefully soon, the market will realize the amazing quality of Oyu Tolgoi and our valuation will appropriately reflect its value. Specific to the first quarter, I'm going to kick off with safety. Oyu Tolgoi all-injury frequency rate was 0.42 for 200,000 hours worked. This was an increase over the rate at the end of 2016 which can be explained given the increase in the underground work force. A number of the underground work force of over 3,500 are new to Oyu Tolgoi and are being trained on Oyu Tolgoi's safety culture. During the first quarter, Oyu Tolgoi continued to advance the various components of the underground. Lateral development remains on schedule. Work on Shaft 2 is focused on mass excavation off the 1,202 level. Shaft 5 progressed during the quarter, although it is slower rate than planned. We now expect Shaft 5 to be completed in early 2018. Brendan will cover more underground development in detail later in the call. We continue to expect production from the first draw bell mid-2020 and first sustainable production early 2021. Cash basis underground CapEx was approximately $140 million during the quarter and there were further commitments of approximately $875 million. During Q1, Oyu Tolgoi signed several large contracts. The largest contract was for the decline material handling system. Moving to operations, Q1 production was the first time we saw full quarter of low-grade impact we have been flagging for the past year. For those new to Turquoise Hill, this is a function of the current open-pit mining sequence and production was as expected. Despite the low grades particularly for gold, I was impressed with the performance of the concentrator and the various production elements Oyu Tolgoi had to balance. Revenue in the first quarter increased almost 6% over the fourth quarter due to higher average selling copper price and increased volumes of copper and concentrate sold. Operating cash flow for the quarter was almost $90 million. Last Friday, we announced that Oyu Tolgoi found a new power purchase agreement for up to six years. This was a great achievement and allows time for Oyu Tolgoi to continue working with the Mongolian government to establish a domestic power source. Overall, I was pleased with the quarter. Underground development is moving forward, open-pit metal production was as expected and the concentrator had record-performance. That concludes my opening comments. Before I turn the call over to Steeve, I want to acknowledge that Steeve will be retiring from Turquoise Hill next week and this will be his last call. I want to thank him for his contributions and we wish him well in the future. With that, over to you, Steeve, to discuss financial aspects of the quarter.

[Steeve Thibeault:]

Thank you, Jeff. The revenue for the quarter was $237 million, an increase of approximately 6% over the fourth quarter of 2016. Average copper prices in the quarter increased by about 10% from the fourth quarter from $2.40 to $2.65 per pound. Average equal prices for the quarter remained consistent with the previous quarter averaging $1,219 per ounce. Concentrate sold increased approximately 5% over the fourth quarter. Gross margin for the quarter was approximately 18%, consistent with the fourth quarter. Cost of sales includes an adjustment of $5 million for reversal of the provision against concentric inventory, reflecting improved spot prices at the end of the quarter. Income attributable to Turquoise Hill shareholders in the first quarter was $41 million. The net realizable value of copper gold stockpile at the end of the quarter was $81 million, an increase of $20 million for the fourth quarter due to the improved short-to-medium term price outlook that positively impacted the value of the medium-grade stockpile. A net reversal to the income statement of $6 million was included with an operating expenses for the quarter after accounting for partial reversal of the medium-grade stockpile provision together with the provision against the recurring value of material in supplies and other inventory adjustments. In the quarter, we increased the total deferred total tax assets recognized from $296 million to $339 million. The increase reflect additional Mongolian operating losses in interest charges incurred by Oyu Tolgoi in the first quarter of 2017 and taxable income projection driven by improved long term commodity price forecast. Total operating cash cost at Oyu Tolgoi were $168 million in the quarter compared to $175 million in the fourth quarter, reflecting a reduction in administration expenses. At March 31, Turquoise Hill's cash balance was $1.4 billion. Capital expenditure on the cash basis was $148 million in the quarter, compared to $143 million in the fourth quarter and includes $136 million for the underground development. Q1 cost in the quarter were $1.85 per pound compared to $1.57 in the fourth quarter, due to lower grade in recovery partially offset by a reduction in administration expenses. That concludes my comments and I'm going to turn the call over to Brendan.

[Brendan Lane:]

Thanks, Steeve. During the quarter, the concentrator processed ore from Phase 6, Phase 4A and stockpile. Given the expected low grade this year, Oyu Tolgoi's objective is to maximize copper production and copper revenue. We plan to do this by using the highest copper grade available, which comes from Phase 6. This ore has nearly 50% higher copper grade than the next best available ore. However, Phase 6 is a complex ore body and blending is required to make shipping specifications, which in turn leads to several offsetting factors that need to be managed. First, given the very low levels of gold in Phase 6, 0.08 grams per ton or less; the Phase 6 ore sits right at the bottom end of the grade recovery curve, with inherently low gold recovery levels. And additionally, it can be subject to further variability to the downside at both levels. The Phase 6 material also has high arsenic grade; and in order to limit the final level in the concentrate, it requires blending with other lower arsenic ores from Phase 4A and stockpile, these have lower copper grades. Lastly, Phase 6 is also high in pyrite and in order to produce concentrate at the correct grade, the pyrite must be suppressed in the concentrator. This however can also impact the gold recovery of the blending ores from Phase 4 and stockpiles that contain some gold. Oyu Tolgoi is managing rather successfully, I think, a fairly complex blending process in order to maximize revenue from copper. With the soft ore from Phase 6 and improvements implemented in 2014 and 2015, the concentrators set a record for the first quarter ore treated had average daily throughput. This good performance is expected to continue through 2017 with the softer ores from Phase 6 central zone, and eventually the Hugo North Lift 1 block cave. We expect the concentrated process approximately 40 million tons for 2017. However, there is a plant maintenance outage during the second quarter, so we will likely see a dip throughout the next quarter. Moving to the underground project, overall development continues to advance and the work force has grown to more than 3,500 people. Since the project restart in mid-2016, we have completed 2.6 equivalent kilometers of lateral development, including 1 equivalent kilometer in the first quarter. Shaft 2 mass excavation continued at the 1,202 level - that's the production level - during this last quarter and at this level is finished, sinking will move on to the 1,256 middle level, the main access level. And then finally, Shaft bottom will be reached with 1,284 mid-level a dewatering level, and this is expected to occur and be completed in 2017. Shaft 2 pit out is then plan to occur either 2018. Sinking of Shaft 5 has progressed slower than we expected due to a combination of an initial slower ramp up and lower than expected average sinking rates to the end of Q1. Average sinking rates over the last month, however, have improved significantly, which we expect to continue going forward. We now expect Shaft 5 to reach its final depth in early 2018. We additionally expect that the lateral development rate we are seeing will provide a buffer to the longer than expected sinking of Shaft 5 and as such, we don't expect this to materially impact the development. In the coming quarters, we expect to complete construction and commissioning of a higher capacity development pressure and a new underground dewatering system. This infrastructure expected around mid-year will enable the ramp up of additional development crews. A third crew is already training underground and is also expected to be deployed around mid-year with the fourth and fifth crew expected to follow later in the second half of this year. We plan on providing more on update on these milestones when we report the second quarter results at the end of July. Finally, we remain on-target for production from the first drilled well in mid-2020 and sustainable first production in 2021. That concludes my comments and I'll now turn it back to Jeff.

[Jeffery Tygesen:]

Thanks, Brendan. In summary, underground development continues to advance and our first production targets remain the same. The concentrator continues to set records and open-pit operations are performing as expected given the 2017 grade challenges. We expect to be back in the high grade golds on of the open-pit around middle of 2018, which should benefit both metal production and revenue. As you think about Oyu Tolgoi's future, there are two key numbers to remember

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Matt Murphy from Macquarie. Your line is now open.

[Matt Murphy:]

Good morning. Just a question on lateral development in Q4. What was the equivalent kilometers of lateral development of prior quarter?

[Brendan Lane:]

In Q4? For Q4 or Q3?

[Matt Murphy:]

Yes. For Q4. Because did you say it's 2.6 in total?

[Brendan Lane:]

2.6 in total, yes.

[Matt Murphy:]

And you did 1 this quarter? I'm just wondering, like trying to see if there's a ramp up, or if it's steady or what.

[Brendan Lane:]

Our best consistent lateral development has occurred in the last quarter.

[Matt Murphy:]

Yes, okay. So picking up. Okay. And then just had a question on the OT admin expense. Good to see it down to $25 million. Just wondering how sustainable that is?

[Steeve Thibeault:]

Matt, Steeve here. Matt, the first quarter is always a bit tricky because the level of expenses, I would say, that there are probably going to be a catch up a little bit, but you should see expenses slow than last year. In other words, what I'm saying is that there's always a question on the timing of the first quarter. I would not book all the savings that you've seen, but I would not definitely put it at the same level last year.

[Matt Murphy:]

Okay. Thanks a lot. Congrats on the retirement, Steeve.

[Steeve Thibeault:]

Okay, thanks.

[Operator:]

Thank you. [Operator Instructions] I'm not showing any further questions at this moment. I would like to turn the call back to Jeffrey Tygesen for any further remarks.

[Jeffery Tygesen:]

Is there a question, operator?

[Operator:]

I do see a question from Craig Hutchison from TD Securities. Your line is now open.

[Craig Hutchison:]

Good morning, gentlemen.

[Jeffery Tygesen:]

Good morning.

[Craig Hutchison:]

Just sort of question on the IMF loans. Have you guys noticed any changes in country? Any potential changes to your investment agreement? Or any served clauses potentially in their budget that may impact the Oyu Tolgoi project?

[Jeffery Tygesen:]

Craig, thanks for your question. Recently, people might have seen some reference in the press to budget resolution 29 in Mongolia. That was issued in March and then approved or voted on approval in April. There was a clause added at the last minute that had undergone review in comparison to existing laws and also the investment agreement. I think it was on April 24, the IMF was having a board meeting to review the funding package and recognize that that clause was in conflict and subsequent to that, that resolution 30 that clause has been revoked.

[Craig Hutchison:]

Okay.

[Jeffery Tygesen:]

So there is nothing that impacts Oyu Tolgoi's investment agreement or subsequent ARSHA or UDP.

[Craig Hutchison:]

Okay. Perfect, guys. Thanks.

[Operator:]

Thank you. And I'm not showing any further questions at this moment. I would like to turn the call back to Jeffrey Tygesen for further remarks.

[Jeffery Tygesen:]

Thank you for joining us today. I'll leave you with we are continuing some advanced underground productions and Oyu Tolgoi realizing its full potential.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.