Turquoise Hill Resources Ltd.
Q1 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good day, ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill Resources Q1 2015 financial results held on May 12, 2015. I would like to turn the call over to Jessica Largent. The call is being recorded and will be available today for replay. Please go ahead.

[Jessica Largent:]

Thank you, Kummel [ph]. I want to welcome you to our financial results conference call. Yesterday, we released our first quarter 2015 results press release, MD&A and financial statements. These items are available on our Web site and SEDAR. With me today is Jeffery Tygesen, CEO; Steeve Thibeault, CFO; and Stewart Beckman, Senior Vice President of Operations and Technical. 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 would now like to turn the call over to Jeff.

[Jeffery Tygesen:]

Thank you, Jess. As we enter Turquoise second full year production operations continue to improved and progress. Over the past several months have made multiple trips to Mongolia and have also met with the number of our large investors. I continue to believe that management and all shareholders have unified goal of delivering value for Turquoise show which hinges on a number of components. One of those components is solid financial and operational performance which we will discuss today. Today, I’ll start things by providing a high level view of our first quarter result, I will then turn the call over to Steve, who will address the financials and then Stewart will cover up operations. So for the first quarter, there are few key takeaways I want to highlight. First, safety is a critical aspect of our business and a major focus throughout Oyu Tolgoi’s operation. During the first quarter, Oyu Tolgoi achieved a strong safety performance with no fatalities and an All Injury Frequency Rate of 0.25 per 200,000 hours worked. I would like to commend the Oyu Tolgoi team. Second, first quarter revenues in concentrate, sales were down compared to the fourth quarter of 2014. This was expected due to lower quarterly production and head grades. First quarter sales were impacted by the Lunar New Year holiday in February. That said concentrate sales exceeded production for the quarter and our cash flow from operations is more than a $100 million. Also during the quarter, Oyu Tolgoi achieved the milestone of shipping their 1 million tonne of concentrate. Third, operational improvements that were initiated during 2014 are starting to take hold. Stewart will discuss this further at a later time. Fourth, we expect to see higher grade ore in the second quarter as we highlighted during our last call. We anticipate the production distribution for 2015 to be similar to last year with level significantly higher in the second half of this year. In the concentrator, Oyu Tolgoi has a planned shutdown expected to take place during July to install the second pebble crusher magnates, this is part of our continuous improvement program. Lastly, I want to speak about the status of the discussions with the government of Mongolia. I’m sure many of you have seen comments in the media by Mongolian officials about the status of Oyu Tolgoi discussions. While significant progress has been made, we have not finalized the comprehensive agreement that would allow underground development to recommence. We continue to believe the unlocking Oyu Tolgoi’s value for all shareholders is through developing the underground. All parties are committed to resolving matters and moving forward with the underground. Well, a final agreement has not been reached, I believe good progress has been made and I am optimistic we can resolve outstanding matters. On project financing, we continue to engage with a consortium of banks and they remain supportive of the transaction. Current indications are a suitable financing package will be available once we have successfully resolved the outstanding matters. Until we are able to resolve matters and ultimately restart underground development, I think it’s important to remember that we have an open pit mine generating positive operating cash flow. At this point I am going to turn the call over to Steve to discuss the financial aspects in more detail.

[Steeve Thibeault:]

Thank you, Jeff. First I’ll take few minutes to discuss the impact of the conversion of U.S. GAAP IFRS then I will discuss Q1 financial results. So beginning January 1, 2015, we began preparing our financial statements in accordance with the international financial reporting standards or IFRS. Now our MD&A and financial statements, we highlighted the impact of the conversion. Here are some examples, first on the U.S. GAAP, the first stripping is treated as a current production cost, while under IFRS, it is capitalized to mineral property to the extent to benefit future ore extraction. This adjustment impact property plan and equipment or PP&E and also flow through the inventory balances on the balance sheet. The impact as of January 1, 2014 was an increase of $9.4 million of PP&E. Second, under the U.S. GAAP, the non-current inventory was carried as a lower of costs and on discounted net realized value. Under IFRS, the company value inventory at the lower of costs and discounted net realized value based on cash flow of when the stockpile are expected to be processed. This resulted in a provision against a non-current inventory and corresponding adjustment to repaying earnings at January 1st, 2014 of $104 million. Third, as a result of the IFRS conversion, we also modify the presentation of certain items on the financial statements. Binding royalty are now included with an operating expenses where previously they were netted against revenues. Accretion expense for decommissioning obligations is included within finance costs it was previously shown separately on the page statement of operations. Deferred income tax liabilities from withholding taxes on intercompany interest payments are now classify as non-current deferred income taxes previously included in accounts payable and accrued liabilities. And lastly other U.S. GAAP, in Q4 2014 financial statement, the investment in SouthGobi was consider an investment in the company subject to significant influence. The investment was recognized at fair value as a long-term investment with the non-current asset held for sale. Under IFRS, the company has determined it has the power to control the activities of SouthGobi and has consolidated SouthGobi and the company consolidated financial statement as held for sale and discontinued operation. Moving to Q1 financial results. During the first quarter of 2015, Oyu Tolgoi generated a net revenue of approximately $426 million on sales of approximately 167,000 tonnes of concentrate. Revenue and sales were down over 2014 fourth quarter as expected. This reflects lower production due to reduced head grades. First quarter income attributable to shareholders was $96.2 million, which included a non-cash impairment reversal credit related to SouthGobi investment of approximately $35 million. The cash balance at the end of March was little more than $950 million with an operating cash flow of $105 million for the period. As previously mentioned, these funds are earmarked for underground development. Cash flow expenditure for the quarter totaled approximately $30 million including 27 million of sustaining cash flow. Our cash operating cost guidance for 2015 has increased from $900 million to a billion, an increase of 100 million to consider the IFRS presentation change related to the 5% royalty payable to the government of Mongolia. Previously, the royalty was deducted from revenue and now reflected as a cash operating expense. Lastly, with first quarter we began reporting unit cost data both C1 cash costs and all in sustaining costs. These metrics are impacted by byproduct credits which were substantial in the first quarter due to the high gold content in the concentrates sold. We have provided a reconciliation to cash operating costs and the MD&A for reference. That conclude my comments, I am going to turn it call to Stewart.

[Stewart Beckman:]

Thank you, Steve. There were no surprises in the quarter, concentrate productions for Q1 was about 30% lower than Q4 primarily the results of mining lower grade ore swhich was at mining schedule. During the quarter, we completed a most successful shutdown to date; the shutdown was conducted successfully on both SAG mills, reline mills and to undertake other advancements and improvement work. The work was completed on time and with no injuries. More integration is on track with material mined in Q1 about 15% higher than the previous quarter. As Jeff indicated, the mined continues improvement program has really started to gain traction. The program is mostly been low costs modification and other operational improvements. For example quick change initiatives, improved mining coverage to shift change and mill breaks and simple modifications to the track trace to allow them to carry more combined with training and monitoring to ensure that every truck loaded full one. As planned, we started to regain access to the high grades zone in Q2. Encouragingly, we also continue to see a slight positive reconciliation in the open-pit. While the concentrated milling rates increased in Q1 as included started to take effect, there are further improvements planned in the summer shutdown. In particular, some modifications so may be to the pebble crushing circuit that partially results recycle issues which restrict segment rates. Extra magnates will be added to the circuit during the full planned shutdown. We expect that this along with other improvements will improve concentrated throughput. Additionally, amount in mill values in project has been underway looking to optimize such things as loss fragmentation, crusher product size and concentrated performance. We’ve made some improvements in this space and will continues. For 2015 our guidance remains at 175,000 to 195,000 tonnes for copper and 600,000 to 700,000 ounces in gold and concentrates. Finally, the Mongolian Minister from mining Mr. Jigjid has appointed in experts group and they have started the process of reviewing the modified feasibility study. [indiscernible] 2015 which was submitted in mid-March. We have a series of making of some presentations over the last few weeks and the experts for on-site over the weekend. That concludes my comments, I’ll turn it back over to you Jeff.

[Jeffery Tygesen:]

Thanks Stewart. In summary, Oyu Tolgoi delivered solid first quarter results, sales exceeded production for the quarter, cash flow from operations with more than $100 million, operational improvements are starting to take hold and in the second quarter we started mining higher grade ore. We continue active engagement with the government to resolve outstanding matters and I am confident that we can reach the successful outcome. That concludes our remarks. Kummel we are ready to take questions.

[Operator:]

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

[Orest Wowkodaw:]

I was wondering, if you can help explain how to understand the movements in the shareholder loan accounts. It looks like -- it was 7.8 billion as of the end of 2014 and now it’s a 6.9. I see from the disclosure that there was a 150 million payment in Q1, but how do we understand the differences in terms of change of these accounts?

[Jeffery Tygesen:]

This is Oster, is that correct?

[Orest Wowkodaw:]

Orest.

[Jeffery Tygesen:]

Orest, sorry about that. This is Jeff, I’m going to turn that over to Steve, he has been working on that very closely.

[Steeve Thibeault:]

Orest the presentation in the last year was we thinking the two numbers together. The Q1 as a right presentation, we’re showing the two numbers separately so we’re showing the shareholder loans and we’re showing the lending certificates separately. It’s something that we’ve picked about and it was not repay in the last quarter. So there is no increase as you say, there was a payment done but the movement for the shareholder loans would go down, it’s just a question of presentation that Q4 was not correct, if I can say this way.

[Orest Wowkodaw:]

Okay. So really you’re saying the Q4 balance should have been something different than the 7.8 to get to the 6.9 today?

[Steeve Thibeault:]

It was including both the shareholder loans and the UT loans as well.

[Orest Wowkodaw:]

Okay.

[Steeve Thibeault:]

They should not have been combined Orest, that’s how we’re, we should have presented that differently.

[Orest Wowkodaw:]

Thank you for the clarification.

[Operator:]

We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Jeff Tygesen. Please go ahead.

[Jeffery Tygesen:]

Kummel, just to double check is there any further questions?

[Operator:]

We have a follow-up, further question from Craig Hutchison from TD Securities. Please go ahead.

[Craig Hutchison:]

Can you give us a sense of what throughput you are actually targeting for this year and how long you anticipate that shutdown to be in July to make the changes to pebble crusher?

[Jeffery Tygesen:]

Craig, this is Jeff. Stewart spending a lot of time on-site in working with the site team, I mean let him respond to that.

[Stewart Beckman:]

So, we haven’t disclosed the rights that we’re ask about the order of 110 tonne a day, through the plant, will be the target before the shutdown. We do see those from time-to-time, I mean it’s through the plant there. And the shutdown duration hasn’t been finalize yet. And the shutdown work has included in the annual plant, so it’s not extra work that we need to do, it will be– it’s been taken into consideration and we issued guidance for the year anyway. But it will be of the order of couple of weeks and we need to do a significant shutdown once a year, we couldn’t do a lot of the work in January, because we made it to the shutdown successfully so that we can keep the mills going, at least one of the lines going so that we didn’t freeze the plant.

[Craig Hutchison:]

The 110 tonnes per day, are you seeing that’s the nominal rate between prior because I think 92% of availability factor to that number?

[Stewart Beckman:]

We are aiming to achieve above 110. But at this stage, that’s above the desired number, but that will be our expectation of that order on a continuous basis.

[Craig Hutchison:]

Is the ore softer than you guys are anticipated or there about some constrains are getting up probably 100,000 tonnes a day given the hardness of the ore?

[Stewart Beckman:]

No, so what the time if they’re doing a number of things. In particular, looking at blast fragmentation. So they’re increasing the cost in the pit of blasting to get a final blast coming into the plant. We’re also running primary crusher at close gap so when we can that’s [indiscernible] 6 inches down to 4 inches. So we’re providing [indiscernible]. And then there has been a whole series of work around optimizing the control of the mills and we do get restricted around the mills because there is the performance of the magnets or what happens is we’ve had a lot of bolts [ph] filing and then the bolt seal comes out and then we end up with – the crusher is going to bypass [indiscernible] .So they have done some initial work by modifying the equipment that we stopped and nice improved and have done a hell lot of work to replace to change the [bore] hardness. So it’s going to be tougher [bore] that weighs a little bit faster, but it is less likely to -- in the mills. And then all the shutdown all do some major modifications to the magnate. So there has been, doing quite a quantum of work, that’s not everything that has happened but that’s a big chunk of the work that’s happened and if you step back and have a look at the amount of the work that the [indiscernible] has been putting in is pretty impressive over the last, really the last 6 to 12 months. And so we would hope to see that coming to fruition in the back half of the year.

[Operator:]

We have the follow-up question from Orest Wowkodaw from Scotiabank. Please go ahead.

[Orest Wowkodaw:]

Just wondering if you could provide any color in terms of negotiations with the Mongolian government in terms of what areas are still left to be resolved. I know you want to get into specifics but if you could maybe just provide any color in terms of what’s left in order for Phase II to move forward?

[Jeffery Tygesen:]

Orest, this is Jeff, I’ll fill that question. As you may or may not know, we’ve been in discussions for a period of time. And what we’re trying to conclude and finalize are some of the more technical questions related to stabilization of the original investment agreement with relation to tax. And that’s where the time is being spent is to make sure and I think the Prime Minister has quoted recently as saying that “his technical team needs to make sure the agreements that we reach are sustainable for a long period of time and then we just don’t reach an agreement and then find a technical issue that might crop up later. So it’s spending their time and that level of detail to ensure that basically all the Ts are crossed eyes dotted but it’s getting into the details of the tax calculation.

[Orest Wowkodaw:]

And is it your view that if once the tax sort of agreement is stabilized that the other issues are relatively minor in terms of that are left to be resolved or?

[Jeffery Tygesen:]

They were no real minor issues but we’ve been able to work through those and reach understandings on those. And I want to point out that it’s a package not just one item that we move on that a collective package. So I think all the items -- when we started the initial discussions were something that we could achieve agreement on and we’re just getting it down to those last few that require a little more time and as everybody knows it takes a lot of time with the tax guys.

[Orest Wowkodaw:]

Is it your expectation that you would be in position to reach a final agreement three months from now when we have your two call?

[Jeffery Tygesen:]

I’ve been hopeful for a while. I would say and characterize that both sides are working very hard and it’s in everybody’s best interest to do at sooner than later. But I wouldn’t want to pick a date and say this is it because, the likelihood of hitting that date I would be wrong it could be earlier or it could be later but that day I know I would be wrong.

[Operator:]

We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Tyegsen. Please go ahead.

[Jeffery Tygesen:]

Well, I’d like to thank you for joining us on today’s call. Operations at Oyu Tolgoi continue to improve and we should begin to see higher grade ore process beginning in the second quarter. I am confident that matters with the Mongolian government will be successfully resolved. Again thank you for joining us and that concludes the call.

[Operator:]

Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.