Turquoise Hill Resources Ltd.
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, ladies and gentlemen. Thank you for joining us today. Welcome to the Q1 Results Call. I would now like to turn the call over to Mr. Tony Shaffer. This call is being recorded and will be available later today for replay. Please go ahead,

[Tony Shaffer:]

Thank you, operator. I want to welcome you to our financial results conference call. Yesterday, we released our first quarter results press release, MD&A, financial statements as well as our notice to proceed announcement. These items are available on our website and SEDAR. With me today is our CEO Jeff Tygesen, Steeve Thibeault, our Chief Financial Officer and Brendan Lane, Vice President of Operations and Development. We will 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.

[Jeff Tygesen:]

Thank you Tony. We’re calling from Mongolia. Your last night, we announced a receipt of notice to proceed for the OluTolgoi underground by the various boards. I am thrilled that we have reached this wonderful milestone and then underground development will move forward. We are in Mongolia to mark this occasion, a side event with members of the government and OluTolgoi’s hardworking team. I know this is an achievement our shareholders have been looking forward to for some time. I personally want to say thank you for your patience and standing by for us over the last several years. This is an exciting step on the journey toward OluTolgoi realizing its full potential. Now that we have noticed to proceed, I know many of you are eager to understand the next steps. We will move to complete the conditions precedence for the project finance facility and expect a full draw down to be complete in June. We expect to restart underground construction around mid-year. In August 2015 early works funding of approximately $100 million was approved. This allows the underground team to hit the ground running when construction begins, advancing the project by approximately nine months. We currently have approximately 200 people on the underground team and I would expect that number to quickly start to increase. In March, OyuTolgoi named MarcoPerez as the Chief Development Officer for underground development which was a key appointment. In the coming weeks OyuTolgoi remobilization will start to escalate rapidly. I think we are well positioned for a smooth transition to begin construction. I know there has been some anticipation about the updated capital estimate from the 2016 feasibility study. The 2016 nominal estimate is $5.3 billion, for reference that estimate on a real 2016 cost basis is $5 billion which is broadly in line with the 2014 technical report estimate of 4.9 billion. Going forward we have updated long-term prices of $2.86 per pound of copper and $1,200 per ounce of gold for the 2016 feasibility study. Those prices compare to $3.08 a pound of copper and $1,304 amounts for gold in the 2014 technical report, which is a reduction of approximately 7.5% for both. The vast majority of the reduced value is due to these lower prices. We are frequently asked why the capital estimate wouldn’t go down relative to 2014 estimates given the current industry environment. The majority of the underground work involves digging tunnels, which is heavily dependent on labor. While mining cost have decreased in the current environment, labor has not. If we are building a new concentrator I would agree that the cost would likely decreased because we would have benefitted from lower input prices, however that's not the case with the underground project. We expect to file the updated technical report in the second half of this year, this will allow all shareholders to have the most up-to-date information on OyuTolgoi’s planned production and development. Other than depletion from ongoing operations we don’t expect any material changes to reserves and resources estimate that were included in the 2014 technical report. Again I'm very happy that they notice to proceed has been approved and we are able to move forward with underground development. This is a historic achievement for OyuTolgoi. Moving to current operations, OyuTolgoi’ excellent state to performance continued in the first quarter with an all injury frequency rate of 0.21 per 200,000 hours worked. The OyuTolgoi workforce again delivered an industry leading safety performance. First quarter revenue increased almost 19% over the fourth quarter reflecting higher gold prices partially offset by lower volumes of concentric sales. We recorded operating cash flow of approximately $195 million for the first quarter, an increase of approximately 45% over the fourth quarter. This reflects continued production and delivery cost improvements. First quarter production was strong since 2014, we've been working on productivity improvements at the concentrator and we continued to see progress. For the first quarter average throughputs were approximately 106,000 tonnes per day, copper production reached a quarterly and gold production was stronger than anticipated. The open pit team has been accessing more over the final high grade debentures in Phase 2, because of that we increased our 2016 gold production guidance to 255,000 to 285,000 ounces. Our copper production guidance remain the same at a 175,000 to 195,000 ounces. Mining of Phase 2 gold core is expected to be complete near midyear. In summary, 2016 is starting off quite well. All the necessary approvals are in place to restart underground development and open pit operations are progressing well, while gold rates would be a challenge in the second half of 2016, the mine team is doing all they can to maximize gold production in the first half of this year. Copper and gold prices appears to as stabilized providing OyuTolgoi a bit of financial buffer given the open pit cash flow. The OT team remains focused on developing our efficient cost structure over the next few years as gold grades decrease. At this point, I’m going to turn the call over to Steeve to discuss the financial aspects of the quarter in more detail.

[Steeve Thibeault:]

Thank you, Jeff. Revenue for the quarter was $423 billion, an increase of 19% over the fourth quarter of 2015. The increase was mostly due to higher gold prices, partially offset by lower concentrated sales volume and lower copper prices. Average copper prices in the quarter decreased by 5% compared with the fourth quarter of 2015 from $2.20 per pound to $2.11. Copper prices at the end of March improved approximately by 4% from December to end the quarter at 2.20 compared to 2.11 at the end of December. The average gold prices for the quarter increased by 7% from the $1,106 per ounce to $1,183 per ounce when compared with the fourth quarter. Concentric sales volume decreased approximately 11% over the first quarter. Gross margin was higher than previous quarter at 50.8% compared with 32.7%. In the fourth quarter of 2015 the increase was mostly attributable to operating cost improvement and in the concentrator efficiencies. Income attributable to Torquoise Hill shareholders in the first quarter was $119 million, an income, old income now related to continuing operations. Due to continued low forecast prices, medium grade copper, gold sub-files expected to be processed in more than 1 year are now fully provided against the charge of $7.9 million was recognized in the quarter. Total cash operating cost at OyuTolgoi was $192 million reflecting production and operating improvement efficiency in cost reductions. At March 31, 2016 Torquoise Hill cash balance was approximately $1.5 billion. Operating cash flow for the quarter was $195 million almost double the same period in 2015 and 41% above Q4 2015. Capital expenditure on the cash basis was $56 million for the quarter including $23 million for the underground pre-start activities. C1 cost in the first quarter were only $0.02 per pound compared with $0.88 per pound in the fourth quarter. C1 cost in the quarter was favorably impacted by production volume increases and cost optimization together with a large gold credit per pound of copper produced due to stronger sales volume and prices. First quarter all All-in-sustaining cost were $0.62 per pound compared to $1.56 in Q4 2015. All-in-sustaining cost were favorable for the same reason as the C1 cost. That concludes my comment and I’m returning the call to Jeff.

[Jeff Tygesen:]

Thanks Steve. With a notice to proceed approval, I wanted to take this opportunity to talk about the longer term optionality that existed at OyuTolgoi. But the challenges the open pit faces over the next several years with gold grade, it’s easier to get caught up on current commodity prices and how it impacts open pit operations. The true value of OyuTolgoi and the real prize is the underground. We are a long-term believers in copper based on forward looking supply demand it’s unclear where supply is coming from starting around 2019. For example, Chile provides approximately 30% of the world’s copper and it’s a known factor that rates are declining. And they haven’t been able to replace the lower grade line with newer supply. If one were to assume the current demand remains flat, you still have a significant supply gap. We think that OyuTolgoi’s first underground production around ’20-’21 fits very well with the expected supply deficit. If you were to look at the startup mines like [indiscernible] where they were in the third year of production, they looked nothing like they do today. [Indiscernible] started with the concentrate of approximately 20,000 tonnes per day and today they are at 300,000 tonnes per day. We don’t expect OyuTolgoi to stay at current productions for the long-term. We are planning to evaluate our options to expand the concentrator given the grade of the underground, we only need to reach about 30,000 tonnes per day from the underground before its equivalent to about 100,000 tonnes per day from the open pit. Once production begins from Hugo North life 1, additional drilling can be done for Hugo North lift 2 and convert it from resource to reserve. The decline for Hugo North lift 1 goes very close to Hugo South. Once the decline is complete, we will have closer access to Hugo South of the gold converting resource to reserve there as well. With ore bodies like OyuTolgoi it’s quite common that other potential ore bodies exist nearby. We expect to do additional exploration in the area in the coming years. Cleary our near-term focus is to construct Hugo North lift 1 and ramp it up to full production. As that process unfolds, there will be points where we can shift to consider the additional development options we have. One other thing I think many people forget is that once the underground is ramped up to full production the mine is expected to produce sufficient cash flow to self-finance future expansion options. OyuTolgoi is a truly amazing assets. Mines like this perform across a wide range of economic cycles. Based on current reserves and resources it’s expected to be a multi-generational asset that is hands down the best copper mining development today. In conclusion, OyuTolgoi delivered strong first quarter results. The underground is expected to restart around the middle of the year. Open pit operations are performing well. Concentrated productions continue to expand beyond nameplate capacity. Our balance sheet is strong and we ended the quarter with approximately $1.5 billion of cash. The journey towards realizing OyuTolgoi’s full potential is truly underway. That concludes our remarks. Mary we are ready to take questions.

[Operator:]

Thank you. We will now take questions from telephone line. [Operator Instructions] The first question is from Ralph Profiti from Credit Suisse. Please go ahead.

[Ralph Profiti:]

Jeff are you able to help me with the mining cost for the block cave on the dollars per tonne basis in the feasibility study? You may still be working on finalization of these numbers, but as you know the 2014 technical report blended these figures for both the open pit and the underground.

[Jeff Tygesen:]

Thanks for your question Ralph. The mining cost [indiscernible] on a unit basis I can give you a rough ballpark on a dollar per pound and it just happens to be, we’ll be at roughly at $1 per pound from the underground.

[Ralph Profiti:]

Okay that's great, thank you. Second question Jeff, a 110,000 tonnes per day at the concentrated post the expansion this 200 million, seem like an awfully conservative number. I don’t want to hold you to something bigger, but is something like a 120,000 to 125,000 tonnes per day with what you’re seeing on the debottlenecking and the process control and this is possible over say the next five years?

[Jeff Tygesen:]

The majority of the capital cost that we've just reported is for the backend of the concentrator where we’ll be putting in additional float cells to handover the additional cooper concentrate. There is some frontend and extra ball mill as we move to the underground the grind size is a bit finer, so a little bit more work on the frontend but the majority of the costs are going to be at the backend of the concentrator in the flotation.

[Ralph Profiti:]

I see understood. Thank you very much.

[Operator:]

Thank you. The following question is from Craig Hutchison from TD Securities. Please go ahead.

[Craig Hutchison:]

Great to hear the news. A question on the startup, you guys said 2021, Rio Tinto said 2020 in the press release, can you just clarify which one it is and is there is possibility to accelerate it to 2020 based on development rates?

[Jeff Tygesen:]

Craig this is Jeff. Thanks for the question. They are both correct, if you look at the first draw bell of that currently targeted towards the end of 2020 and what I referenced for 2021 is where we’ll have sustainable production at a rate more than 1 draw bell. So it's kind of blend and -- so they are both correct. But the answer to the second part of your question, is there a potential for upside. I think so, and the reason I say that is the current assumptions as far as development rate are somewhat conservative and depending on the rock characteristics that we run into there is a chance that those will actually do better than our current assumptions.

[Craig Hutchison:]

Okay. And then if you look at the 2014 study plus the reserve MPV was with 7.4 billion today is releases is 4.6 billion. I understand in 2015 and in parts of 2014 you probably captured about a billion dollars of MPV from the open pit. Is the rest largely explained by the drop in metal prices as 7.5% that’s quoted in today's release versus 2014?

[Jeff Tygesen:]

Yes it's roughly about 80%, is due to change in price and yes we have captured, we now have a billion dollars in cash or 1.5 billion. This has come from the operation. So, if you look at the difference in price and what we have made over the past two years that gets us close to the earlier estimate.

[Craig Hutchison:]

And then maybe just a question again on the expansion, you mentioned some additional drilling in Hugo South and some work on life 2, what’s sort of really the trigger for you guys to go for an expansion to say 140 or 150, what are you still --.

[Jeff Tygesen:]

So there are sort of two parts to that, currently we’re doing, I think Q1 was a 106,000 tonnes a day. Our target for this year is 38 million tonnes which is about a 104 -- little over a 104,000 tonnes a day, so we’re a little bit above that. Every day the site team is trying to figure out ways to add incrementally to the throughputs. So there is the creek that we've talked about trying to do without much capital but there will be a little bit of capital to as we discovered new bottlenecks in the system, but as far as drilling Hugo South and Hugo North lift 2, that's initially planned just to convert resource to reserve so that we have -- we can start developing production plans for those few resources. If there is going to be any upside from the underground for the mill and it is just a guest mate on my part at this point in time because we haven’t done all the work yet, but Hugo South would be additive and Hugo North lift 1 & 2, but because of lift 2 is underground, lift 1 we can’t necessarily do both of those at the same time. But Hugo South offers optionality to increase mill throughput.

[Craig Hutchison:]

Okay. And there is one last question from me on the quarterly results. The revenue you guys reported seemed high versus the sales volume. Was there any positive provisional pricing adjustments or was it related to timing of the gold sales and you captured some of the best prices for the quarter?

[Steeve Thibeault:]

Yes. You got it right.

[Jeff Tygesen:]

So when the prices go down, provisional doesn’t help you, when prices go up they do. So we did benefits from that and it was probably the biggest piece.

[Steeve Thibeault:]

Greg, you’ll see that in note 23 and in our financial statement, you can find more information around that. So have a look to the numbers and in that note you’ll see the number that probably has created that.

[Craig Hutchison:]

Okay. I appreciate. Thanks guys.

[Operator:]

Thank you. The next question is from Sasha Bukacheva from BMO Capital Markets. Please go ahead.

[Sasha Bukacheva:]

I wanted to how sustainable the costs cuts are that was seen in the quarter and when we might see updated cost guidance for ’16 and then what would you be projecting for 2017 compared to the 2016 levels?

[Jeff Tygesen:]

You said that sustaining -- sorry I missed the first one, so you were --?

[Sasha Bukacheva:]

The operating cost were definitely lower than what we expected and I think they were also tracking lower compared to your guidance, because I think they guided to 800 million if I am not mistake and the cost came into the low dots, like below 200 on annualized basis. So how sustainable are those lower cost spend?

[Jeff Tygesen:]

The main difference at the moment, Sasha, comes from the difference rating, okay. What’s happening is that we have maybe in the first quarter we had a bench measure, okay. And that slowed down a little bit the different stripping and honestly overall the year I think that can be probably a favorable area in term of CapEx. Now you’ll understand that very often with different stripping is just a swing between cash flow and operating expense. So, I would say that, I wouldn’t be surprised if we’re going to be lower, but we’re still finalizing our estimate for the year before giving any guidance.

[Sasha Bukacheva:]

Fair enough. Do you have a target in mind that you’re trying to reach or how do you think about trying to lower your stripping costs?

[Jeff Tygesen:]

It’s a change in the mining plan that we have Sasha and I would not be able to give you a number or a target today, it wouldn’t be approximately. Like I said, we are compiling and hopefully around the mid-year we should be able to look at that and probably give you something maybe a new guidance. I am not promising, but probably we will have the information at that time to revise that.

[Sasha Bukacheva:]

Okay. That’s good to know and second question I had was on the VAT numbers, Mongolian VAT of about 1 billion over the life of project that was included in the capital estimate. Is that refundable?

[Steeve Thibeault:]

No.

[Sasha Bukacheva:]

Okay. That’s it from me.

[Jeff Tygesen:]

Sasha just to clarify when you talk about that, that’s over the life of the reserve, right?

[Sasha Bukacheva:]

Yes, the 300 million for the extension and then 700 million during the life of mine post expansion.

[Jeff Tygesen:]

I think we only gave capital estimates for the reserve case and not the resource. So that would go and tell 2054. Right?

[Sasha Bukacheva:]

Yes.

[Jeff Tygesen:]

Just difference in terms, life of mine Sasha would include resource and the reserve case is just open pit and left 1.

[Sasha Bukacheva:]

No, I am just referring to bill and that was noted that the capital estimates provided that’s between 2016 and 2054 for the reserve sheet.

[Jeff Tygesen:]

Thank you.

[Sasha Bukacheva:]

So, that’s not refundable?

[Jeff Tygesen:]

Nope.

[Operator:]

Thank you. This will conclude today’s question-and-answer session. I will now turn the meeting back over to Mr. Tygesen for closing remarks.

[Jeff Tygesen:]

Thank you for joining us today for the call. Underground development is expected to restart mid-2016. 80% of OyuTolgoi’s value resides in our underground reserves and I said this before and I’ll continue to say it, in my opinion is the best copper opportunity for development today. Thank you. Operator Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.