Turquoise Hill Resources Ltd.
Q4 2017 Earnings Call Transcript

Published: 16 Mar 2018

[Operator:]

Good day ladies and gentlemen and welcome to the Turquoise Hill Resources, Q4 and Full Year 2017 Financial Results Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would like to introduce your host for today's conference, Mr. Tony Shaffer. You may begin sir.

[Tony Shaffer:]

Thank you, operator. Welcome to our financial results conference call. Yesterday we released our fourth quarter and full year results press release, MD&A and financial statements. These items are available on our website and on SEDAR. With me today is our CEO, Jeff Tygesen; Luke Colton, CFO; and Brendan Lane, Vice President of Operations and Development. We'll take your questions at the conclusion of our prepared remarks. 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.

[Jeff Tygesen:]

Thanks Tony. 2017, a year characterized by underground development progress and record setting open-pit performance. The year was a major step forward in advancing value for our shareholders. I was quite pleased with where we entered 2017 and I think have entered 2018 in a good position. We continue to expect first draw bell mid 2020 and first sustainable production in early 2021. Another highlight for Turquoise during 2017 was their safety performance, which has been gratifying to see as the workforce matures entering our sixth full year of operations, leading the industry in safety performance. Safety is the cornerstone of Oyu Tolgoi’s culture and it shows. During 2017 the major component for the underground project were lateral development and work on Shaft 2 and 5. For the year we completed just over six equivalent kilometers of lateral development, which was in line with expectations in the technical report. Since project restart in 2016 we have completed a total of 7.7 equivalent kilometers of lateral development. In the MD&A we have provided a breakdown of lateral development and mass excavation which we will include going forward. The sinking of Shaft 2 is completed in January and 2018 will be devoted to fit out of the shaft. This includes installation of steel guides given the shaft is more than 4,200 feet deep. This is a significant amount of work to place guides approximately every three meters. The completion of Shaft 2 is critical to increases in lateral development, which is expected to begin in 2019. Shaft 5 had approximately 100 meters remaining at the end of 2017 and sinking is expected to be complete in late March. The team has already commenced installation of exhaust fans, which is expected to be compete in early second quarter, which will allow an increase in development meters. Development momentum is good and I am confident we will continue to make good advancement in 2018. For 2017 cash basis underground expansion spend was about $835 million, which was at the lower end of our guidance. Since notice to proceed, the cumulative project expansion spend has been approximately $1.1 billion, which is about $0.4 billion under Tech Report projections. In addition Oyu Tolgoi had further capital commitments of $1.2 billion at the end of 2017. For 2018 we are expecting approximately 10 kilometers of lateral development and underground spend of $1.1 billion to $1.2 billion. Brendan will cover underground development in more detail later in the call. During the fourth quarter Rio Tinto undertook their schedule and cost review, concluding there are no material changes to project scope, schedule or cost. Moving to open pit operations, 2017 was also a strong year for open pit operations. Despite the great challenges that we have been talking about for some time, material mind and concentrator throughputs set records for the year. The concentrator benefited from softer Phase 6 ore and it was a second year in a row the concentrator achieved a nameplate capacity. We met production guidance and Oyu Tolgoi generated more than $325 million in operating cash flow. For reference, we went into 2017 anticipating neutral operating cash flow and benefited from stronger copper prices. Regardless the outcome is a real testament to the Oyu Tolgoi workforce. Since 2014 the mine has generated more than $2 billion of operating cash flow. Oyu Tolgoi has been working for quite a while to optimize the open pit mine plan in order to bring cash flow forward. We have been talking for some time about splitting Phase 4, which contains higher gold rates. With our 2018 guidance release, we said we are bringing approximately 100,000 ounces of gold into 2018. To be clear, it’s not additional goal, but taking production from future years. The result is advanced gold production and related cash flow by about six months sooner than the original mine plan. Because of processing harder Phase 4 ore in 2018, we expect throughput to be about 37 million tons. In February we announced the government of Mongolia had canceled the Power Sector Cooperation Agreement, which results in the restart of the four year time frame for Oyu Tolgoi to source power domestically. There has been a lot of market discussion about the announcement, but we are of the view it is a net positive for Oyu Tolgoi, because it puts the issue of power within Oyu Tolgoi’s control. For reference in 2013, Oyu Tolgoi is headed down the path of building its own in-country power source, but those plans were put on hold to work with the government to look at other options in the South Gobi region. From a cash flow perspective, the technical report model assumes approximately $0.12 per kilowatt hour, which includes a capital component. By building our own power plant the costs are expected to be about $0.05 per kilowatt hour, but we will have to invest the upfront capital. Oyu Tolgoi is busily evaluating the various options and I would expect the final decision in the latter part of this year. All told, 2017 was a good year, open pit operations performed well and the underground development is advancing towards first draw bell in mid 2020. From an evaluation standpoint, I don’t think the market prices are expansion progress, proximity expected to first draw bell or Oyu Tolgoi cash flow generation potential. Our $3 copper and $1,300 gold by no means aggressive assumptions, Oyu Tolgoi is expected to generate approximately $9.5 billion in free cash flow from 2022 to 2026. Expected first draw bell is just a little over two years away. As some point the market has to start pricing this in and our current valuation should be a thing of the past. Oyu Tolgoi is a true world class asset, and we are full steam ahead towards underground production. With that, I’m going to turn the call over to Luke to discuss the financial highlights.

[Luke Colton:]

Thanks Jeff and hello to everyone on the call. Moving right into our financial results, revenue year-on-year was down approximately 22%; that’s primarily due to lower gold sales volumes driven by decreased gold grades compared to 2016. Copper revenue was slightly higher due to an increase in copper pricing, which is partially offset by decreased sales volume as a result of lower copper grades compared with 2016. During 2017 average copper prices increased by about 27%. From $2.20 per pound to $2.80 per pound compared with 2016, with a strong finish at the end of the year at $3.27 per pound. Higher gold prices averaging $1,257 per ounce compared with $1,219 per ounce, also partially offset the impact from lower sales volumes. Concentrates solid in copper and concentrate decreased 13% and 21% respectively compared with 2016, impacted by the lower grades. Gold and concentrate produced over 1,140 ounces were down 62% year-on-year, but is expected to more than double in 2018 with guidance at between 240,000 and 280,000 ounces as a result of mine find optimization, allowing production to be brought forward from future years as Jeff explained. Gross margin for the year was 19% compared with 28% in 2016. The decrease was the result of the lower sales revenue. Cost of sales included an adjustment of $9 million in 2017 for a reversal of provision against concentrate inventory, reflecting improved spot prices at the end of 2017. Finance cost of $153 million or net of amounts capitalized on the underground construction of about $200 million. Income attributable to Turquoise shareholders in 2017 was $181 million. Cash flow from operating activities in 2017 was $326 million compared to $399 million in 2016, primarily reflecting lower sales volumes for copper and gold. Capital expenditure on a cash basis was $918 million for the year compared with $326 million in 2016 and this of course includes $836 million for the underground project, in line with the guidance. Since the first of January 2016 the total amount of underground development is $1.1 billion and we’ve got capital commitments of $1.2 billion at December 31, 2017. 2018 guidance for underground capital expenditure is between $1.1 billion and $1.2 billion. The net realizable value of copper gold stock piles at the end of the year was $99 million, which is an increase of $38 million compared to the end of 2016. The increase in the stockpiles net realizable value compared to the prior year was primarily driven by the addition of higher copper grade stock piled or from basics during the final quarter of 2017, combined with an improved short to medium term price outlook that positively impacted the value of the remaining medium grade stock pile. A net reversal to the income statement of seven million were consequently included within operating expenses for the year, and this includes the $2 million charge related to the materials and supplies provision. During 2017 Turquoise Hill increased the total differed tax asset recognized from $296 million to $474 million, which contributed to a net income statement credit of $154 million for taxes in 2017. The movement in the differed tax assets primarily reflect additional Mongolian operating losses and interest charges incurred by Oyu Tolgoi during 2017, improve long term commodity price projections and updated technical and operating assumptions during the year. At December 31, 2017 Turquoise Hill’s cash balance remained at about $1.4 billion, which is consistent with 2016. Total 2017 operating cash cost at OT were $712 million, meeting our guidance of $720 million. The lower operating cash cost in 2017 compared to the $775 million in 2016 reflect mining and production efficiency improvements, benefits from cost reduction programs and reduce royalty expense due to the lower revenue. This is partially offset by higher open pit material mined and concentrated throughput in 2017 compared to 2016. For 2018 we expect operating cash cost of approximately $700 million. C1 cost for the year were $1.92 per pound compared to $1.02 per pound in 2016. C1 cost in 2017 were impacted primarily by the lower gold sales. All-in sustaining cost for 2017 were $2.39 per pound, compared to $1.48 per pound 2016, again, because of the lower gold revenues. This concludes my comments and I’ll turn the call over to Brendan.

[Brendan Lane:]

Thanks Luke. The operational and development success we saw with Oyu Tolgoi is 2017 was particularly pleasing. Notably, Oyu Tolgoi received the Rio Tinto CEO award for excellence in safety, set production records in mill throughput and material mined, while simultaneous continuing the ramp-up of underground project and adding over 6,500 new workers to the operation. These are clear indicators of an engaged and dedicated workforce with the right culture and it provides a strong sign for the delivery of the future underground operation as planned. Safe operations are quite often a sign of productive and efficient operations, with safety and productivity working hand in hand. This is the case for Oyu Tolgoi as the safety performance has been developed along with productivity achievements. 2017 was Oyu Tolgoi’s best year yet in terms of operational performance. The mine achieved the highest truck utilization to-date and set mine records including over 41 million tons milled and 106 million tons of total material mine from the open pit. The mining rate was delivered by ongoing higher equipment availability and utilization. With these improvements in equipment productivity, we’re supported by further improvements in mine planning. Ultimately copper and gold production was aligned with guidance, despite a significant grade of metallurgical challenges throughout the year. As we have previously discussed, in 2018 we will see a return to significantly higher grades of gold in the second half of the year and less challenging metallurgy. However, this will come with an increase in all hardness and lower expected mill throughput. Additionally during the first quarter of 2018, the mill undertook planned maintenance and the second outage is planned for later of this year. We will continue to mine some Phase 6 ore during 2018 before we move towards the majority of the harder higher gold at southwest ore from Phase 4A. The operations team will continue to look for ways to optimize mill throughput, importantly by maintaining improvements already made to-date, but will also look for future improvements in mill throughput by continued debottlenecking projects such as in the crushing and conveying systems, reliability and capacity. Additionally, in the mine projects such as Controlled High Intensity Blasting are being trialed in an effort to maximize throughput and we hope to see benefits from all these initiatives over 2018. Moving to the underground, overall development continues to advance and the workforces continue to grow with over 6,500 people currently working on the project. Since underground restarted in 2016, the project has excavated over $30,000 cubic meters and constructed over 6.3 millimeters of additional tunnels for non-planned total of approximately 7.7 equivalent development kilometers. December 2017 saw a record 850 equivalent meters developed underground, which was exceeded again in January this year. In the second half of 2017, crushing and hoisting exceeded expectations with the Shaft 1 jaw crusher consistently operating above the 3,500 tons per day nameplate capacity. Shaft fit out and equipment work progressed during the last year. In particular Shaft 2 hoist equipment positioning achieved significant progress during the last part of 2017, and the installation of Shaft 5’s ventilation fans commenced before year end. In the second half of 2017 the project team also undertook the first annual cost and schedule review based on approximately 12 months of project execution data. The Oyu Tolgoi’s Project team based on the service side review found no material change in cost expectations overall schedule or scope of activity. The highlight for 2018, some key activities that will be taking place will include an increased focused on underground risks to achieve the next level in safety performance, completion of Shaft 5 sinking and ventilation system. Shaft 2 stripping, fit out, equipping, as well as construction of associated infrastructure, completion of approximately 10 kilometers of lateral development and additional mass escalation, continued implantation of mining optimization systems to drive performance and productivity improvements, expansion of the Central Heating Plant, fans and mine dry and preparation by the project team will being for business integration and hand over to operations. Of the key activity, work around Shaft 2 and 5 are important enablers of increased underground development activity, in terms of both equipment and people and support the next step ops in mining development. The commissioning of Shaft 5 ventilation is expected early in the second quarter following sinking completion this year. This will enable more equipment and personnel to operate undergrad with increased air flow. Shaft 2 and associated infrastructure will increase crushing, hoisting and logistics capacity and the fit out will be the largest combined activity in 2018. It will require coordinated delivery of a number of integrated packages and eventually a complex machining process. Some of those interrelated packages are the surface facilities including structural, mechanical and piping construction, electrical and instrumentation installation, continued head frame fit out; service and production hoist installation, underground structural, mechanical and piping construction, the underground ore bin installation, and a new material handling system with an additional 6,000 tons per day development pressure. Finally, we remain on target for the first drill point blast in mid-2020 and sustainable production in early 2021. That concludes my comments, and I’ll now turn it back over to Jeff.

[Jeff Tygesen:]

Thanks Brendan. To summarize 2017, open put operations set a number of recorders and generated more than $325 million of operating cash flow. Underground development continues to advance, lateral development is progressing well and sinking of Shaft 2 is completely in January 2018 and sinking of Shaft 5 should be finished in the first quarter. We maintain our expectation for first draw bell in mid-2020 and first sustainable production in early 2021. That concludes our remarks, and Kevin, we are ready to take questions.

[Operator:]

[Operator Instructions]. Our first question comes from Orest Wowkodaw with Scotiabank.

[Orest Wowkodaw:]

Hi, good morning. I was hoping to get some more color on the study that Rio Tinto with respect to the project. You stated that there was no material change to the scope schedule and cost of the project, but can you please define what they mean by material? Is it material to Rio Tinto or what is the threshold of materiality that's been used to characterize the study review?

[Jeff Tygesen:]

Orest, thanks for your question, this is Jeff. The basis of that review has Brendan mentioned was through the first 12 or 13 months of the project, which would have been approximately 10% and through that period the plan as far as schedule and cost and scope were considered equivalent to the feasibility study. This year there will be another review and followed by another review next year as well. But all indications from everything that I’ve seen and where we are at to-date would still say the feasibility study is on track.

[Orest Wowkodaw:]

And can you give us any more detail on that. Like with respect to the capital, are we talking it’s within 5% or 10% of the plan or what’s the threshold of the materiality?

[Jeff Tygesen:]

The original project had a contingency of about 13%, 15% overall, in that range. There is also a contingency for schedule as well and we’re within those. So my target is 5.3%. Now there is still remaining project to finish, but I think its well within the range of our order estimate.

[Orest Wowkodaw:]

Okay, and is it fair to say that Turquoise Hill was not involved in the completion of that study?

[Jeff Tygesen:]

It was the study undertaken by Rio Tinto, which we are provided information on the results. But were we directly involved in the review? No.

[Orest Wowkodaw:]

Okay, is that something that will change moving forward with respect to direct involvement in the review moving forward?

[Jeff Tygesen:]

I am requesting to have Turquoise Hill participation in the next round for this year. All expectations that I have is we will participate in that review.

[Orest Wowkodaw:]

Okay and so, is it reasonable to expect that this will now be an annual process?

[Jeff Tygesen:]

Well Rio, on major projects internally does an annual review. So yes, this will continue through – at least through 2021. I’m not saying through 2022, but through 2021. Now the scope will get a lot less because a big portion of the CapEx spend is more in the upfront. Later on it will part of the concentrator, and the installation of the decline conveyor. So the range will get less as we finish Shaft 5, Shaft 2, we finish the decline, a lot of the surface facilities down excluding the concentrator. So the scope will just smaller, but this year it will be a big year for that review.

[Orest Wowkodaw:]

Great. Thank you very much guys.

[Operator:]

Our next question comes from Matt Murphy with Macquarie.

[Matt Murphy:]

Hi Jeff. I had a question about the outcome of your meeting with SailingStone that the Broad responded to with a letter on Wednesday. That letter says TRQ will consider sensible enhancements to governance. I’m just wondering what is meant by that and is there a formal process underway to address that?

[Jeff Tygesen:]

Matt, thanks for your question. The meeting was held this past week with SailingStone and it was the minority shareholder or minatory – the independent Board members met with them. Management was not part of that, and all indications are, there is follow-up planned is what information I have.

[Matt Murphy:]

And do you think we’ll get more disclosure on that going forward?

[Jeff Tygesen:]

That’s my understanding that there is further discussions planned and they are working towards meeting some of those requests.

[Matt Murphy:]

Okay, thank you.

[Operator:]

Our next question comes from Craig Hutchison with TD Securities.

[Craig Hutchison:]

Hi guys, just on the Q1 shipments for the concentrates. There was the blockade and then we started a force majeure, etcetera. Can you give us a sense of how much material you will actually ship in Q1?

[Jeff Tygesen:]

Craig, what I can say, I don’t have a firm number on the shipments, but the mine was not impacted by – it was, just to go back it was a coal blockade of coal trucks on the Chinese side that had an issue with a new Mongolian tax for social insurance. Once that was socialized and explained, those guys freed the blockade and we are back to regular shipments and that’s why we lifted the force majeure, but all expectations are we are going to hit our production guidance, because like I said, the operation was not impacted.

[Craig Hutchison:]

Okay, so now you can give a sense whether it’s like 50% of shipments actually made it through during the quarter.

[Jeff Tygesen:]

I don’t have that number in front of me, but everything has indication as we are going to meet our production guidance.

[Craig Hutchison:]

And in terms of the power plant, I know you guys are going to come up with a study by year end. But can you give us a sense of over the capital you are looking for that and whether you guys feel like you can finance that internally based on your existing liquidity, cash position, etcetera, whether you need to go and sort of tap that remaining, I think it’s a $1.5 billion for OT.

[Jeff Tygesen:]

So in February we received a notice on the PSCA that the government wanted to cancel that portion of that agreement, which included a power plant by a third party at Tavan Tolgoi. As I mentioned in my remarks, OT had started engineering and planning in 2012, 2013 to build an onsite power plant. We have a space located, we have water and land, two key components to construct it. They were going down the permitting process. The estimate that we still have based on the earlier information, and the engineering is going on right now is about that $1 billion mark. With respect to financing, what I’ve said over the last several years is we have the $4.4 billion of project finance. We are planning to get the other $1.6 in supplemental debt. Currently as Luke mentioned we have $1.4 billion in cash and the open pit is generating – or has been and if you project that $250 million to 300 million, you could if everything holds together by 2022, we have sufficient money with all of those combined.

[Craig Hutchison:]

And when do you think you’d break ground on the power plant, like 2020?

[Jeff Tygesen:]

Oh no! We have to have it up and running by February 2022. So the target is, there is going to be a very quick review at all the options. I think one of them is going to rise to the top very quickly, only because we’ve done the most amount of work, which is on site. They are looking at configurations, because there has been improved efficiencies in plant designs as far as boiler efficiencies. So the build on site is probably leading by I can’t say that firmly. They will start engineering on permitting later this year and the goal will be to build through ’19, ’20 and ’21.

[Craig Hutchison:]

Okay. Thanks guys.

[Operator:]

[Operator Instructions]. Our next question comes from Oscar Cabrera with CIBC.

[Oscar Cabrera:]

Hi, good morning, evening or whatever time that you are at everyone.

[Jeff Tygesen:]

Hey Oscar, it’s coming through very low. Is there a possibility for turning it up. It was not coming through well, let’s try it again.

[Oscar Cabrera:]

Yeah, can you hear me now?

[Jeff Tygesen:]

Yes, the Verizon commercial is working.

[Oscar Cabrera:]

Perfect, well in Canada we don’t have that luxury. Just I know its early, but getting back into the power plant question, in your tradeoff studies have you estimated how much you could save a year in power, starting after the plant runs out?

[Jeff Tygesen:]

Meaning power costs?

[Oscar Cabrera:]

Well, you know you are spending 25% of the total cost in a given year, and that costs were $150 million. Would you be saving 40%, 50%?

[Jeff Tygesen:]

Our early estimates is in the Tech Report we’ve assumed about $0.12 a kilowatt hour, which a component of that if you look at it where we are buying power from China includes a capital component. Our estimates with our own power plant, including fuel is about $0.05 a kilowatt. So we’ll put in the capital and operating cost will then be lowered from roughly $0.12 to around $0.05. Currently, with the current agreement we have with Inner Mongolia Power, it’s about $0.11. So it’s still in that $0.11 or $0.12. So it’s just a trading off in time of – put the capital in, then we have a lower operating cost to pay back that capital. Early indication, very high level, that might generate somewhere around a 10% return, but not fixed depending on fuel component.

[Oscar Cabrera:]

Right. Now this is helpful Jeff. Now the other thing too is like you talked about options. So you know I was under the impression that the plant would be built right next to the project. Are you thinking about still an option where you could build a higher capacity plant so that you can sell power to other…

[Jeff Tygesen:]

No, no what I meant by is, the normal course is, because earlier engineering that had been done looked at one configuration. Since 2012 the study team has found that there is more efficient boilers and as far as – and turbine, and so they are looking at those, the features inside, not necessarily – we are not going to be in the power business to export power. We are just looking to cover the OT requirements.

[Oscar Cabrera:]

Right and – okay, well that’s helpful Jeff. Just in terms of the gold production, I know that you are bringing production forward from the open pit, but what sort of levels should we expect the project to be producing at for 2019 and 2020?

[Jeff Tygesen:]

We haven’t finalized that yet. There is the production profile in the tech report, and on average, not to the ounce, but we are moving about 50,000 ounces forward each year from ’19 and ’20. So you could go through and lower those bars in ’19 and ’20, but we will come out with that later this year.

[Oscar Cabrera:]

That’s helpful Jeff.

[Jeff Tygesen:]

And I’ll tell you the reason why I don’t have an exact answer. It’s a function of how fast is the stripping going to be in the B part and that hitting the ore zone and that’s the part that they are working on to see how the performance is on that waste stripping in 4B.

[Oscar Cabrera:]

Right, thank you sir.

[Operator:]

Our next question comes from Dalton Baretto with Canaccord Genuity.

[Dalton Baretto:]

Hey, good morning guys. There seems to be a little bit of a shift in the dynamics of the relationships between Oyu Tolgoi and the Mongolian government just given recent new flow. Can you talk a little bit about, you know whether that stands right now? And then just you guys as a Turquoise Hill management team, how much involvement do you have in these discussions?

[Jeff Tygesen:]

Thanks for your question Dolton. I don’t know if I can speak for the Mongolian side. But what I would want to first quality is this government that we are currently talking to has been in power since September of last year, so fairly new. And on average Prime Minister and his Ministers and Cabinet is about two years. So every time there is a new group managing or governing Mongolia, there is an intense period of ramping up the understanding of Oyu Tolgoi, and it takes a long time because it's a fairly big project. I think we are making lots of progress. Recently it was mentioned in the press that JS went to Mongolia earlier this year, met with the Prime Minister, had some discussions. They are establishing a working group to make sure both sides understand what the project is about, which I think is a good thing, just having the open dialog. I think from – and this I’m only speaking for myself. I think when statements are made its more based on a lack of understanding and that’s the gaps that we try to fill when those are identified. So I wouldn’t say its straying by means, I would say that there are political statements made, which I think are different than a government policy or approach. I think as we have stated multiple times, Mongolia is a big beneficiary of having OT. Some of the stats are 90% of the work force are Mongolian. Since 2010 we paid $1.7 billion in taxes, number one corporate tax payers in 2015, 2016. $7.2 billion spent in salaries and local supplies, $2.2 billion of procurement in the national businesses. In the South SouthGobi we’ve spent and invested more than $25 million in sustainable project. So from my standpoint, we are committed to Mongolia and the local area. So I think it’s like any other relationship, there is – you need to get to know each other and I think that’s the path we are headed down.

[Dalton Baretto:]

Okay, and I guess it’s fair to say that, it’s Rio that’s managing that conversation.

[Jeff Tygesen:]

No, well there’s parts from the government. There’s representatives from Rio and there will be representatives from Turquoise Hill.

[Dalton Baretto:]

Okay and then maybe just switching gears a little bit. You mentioned that you guys weren’t involved in the actual project review. Can you comment at all in terms of what the current thinking is around any sort of expansion scenario?

[Jeff Tygesen:]

You mean up, expansion beyond the base plan.

[Dalton Baretto:]

Correct.

[Jeff Tygesen:]

That is being considered at this point by the project team. The project team has been given a specific scope to build. There are – I can say there are other groups looking at the options beyond getting Lift 1 completed. But the focus and everybody’s attention is pretty much for the most part of getting Lift 1, because that’s what generates the biggest value at this point.

[Dalton Baretto:]

Okay, so a decision on even a small expansion isn’t eminent?

[Jeff Tygesen:]

Like I said, there is thinking that’s going on, but if we don’t get the first step, we can’t get to the second step. But as we meet the milestones on this phase of the project, then resources could be looked at as far as what are the other options. But it will take five to seven years to go from zero tons in the underground to full production. So there is a fair amount of time in that ramp-up.

[Dalton Baretto:]

Okay, I was thinking more in terms of a mill expansion. But okay, thank you.

[Jeff Tygesen:]

There is a mill component of this phase which is adding a fifth ball mill for a finer grind to get the recovery of the higher grade material and then the back end of the plant for the flotation cells to recovery all that metal. On average it’s going to be 4.5 times to 5 times in the initial part of what we are getting now, so that’s part of this phase of the project.

[Dalton Baretto:]

Okay, great. That’s all the questions from me guys. Thank you.

[Jeff Tygesen:]

Okay, thanks.

[Operator:]

Ladies and gentlemen, this does conclude the Q&A portion of today’s conference. I’d like to turn the call back over to our host.

[Jeff Tygesen:]

Thanks Kevin. For all those who joined in the call today, thank you for joining us. Just a final comment I’d like to make is we advanced the underground production and Oyu Tolgoi is realizing its full potential.

[Operator:]

Ladies and gentlemen, this does conclude today’s participation. You may now disconnect and have a wonderful day.