Turquoise Hill Resources Ltd.
Q3 2015 Earnings Call Transcript

Published: 6 Nov 2015

[Operator:]

Good day, ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill Resources Q3 2015 Financial Results held on November 6th, 2015. I would now like to turn the meeting 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 third quarter 2015 results press release, MD&A and financial statements. These items are available on our website and on SEDAR. With me today is Jeff Tygesen, CEO; Steeve Thibeault, CFO. 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.

[Jeff Tygesen:]

Thank you, Tony. Overall we had a solid third quarter. Open pit operations at Oyu Tolgoi continue to progress and we are advancing the restart of underground development. Our current focus is on completing the remaining steps for full commencement of underground construction. I want to start this morning with a review of the quarter as well as the status of underground preparation. Steeve will discuss the financial aspects and then we'll take your questions. First Oyu Tolgoi continues to perform well from a safety perspective. The performance is especially impressive in the context of such a new operation. The year-to-date annual for all injury frequency rate was 0.31 per 200,000 hours of work. During the quarter they had 85 injury free days. Second, revenues for the quarter increased 2.5% over the second quarter and concentrate sold increased 19% over the previous quarter. This reflected stronger volumes sold partially offset by lower copper prices. Operating cash flow for the quarter is just above a $170 million. Third open pit operations continue to progress during the quarter. In July there was a planned shutdown to fleet improvement project. One of the main components of the work was to address issues with the [indiscernible] crusher which were successfully finished. Post shutdown throughput has been consistent with concentrator averaging 2-3% above nameplate capacity. The concentrator team continues to focus on ways of improving performance. During the third quarter work began on Phase 6 of the open pit. This phase has good copper grades but relatively low gold. Work on this phase begins to set Oyu Tolgoi to similar copper production in 2016. The 2016 plan also utilizes stock piled ore to augment low grades from Phase 6. As a result of mining in Phase 3, gold production in Q3 was lower than anticipated though we expect improved gold production in the fourth quarter as the mine access is higher grade ore in the lower benches of Phase 2. Copper production for the quarter hit a record high. We are maintaining our production guidance for the year and expect the coming at the end of copper and mid-range for gold. Looking forward we have known for some time as outlined in the technical report that metal production over the next several years will be challenging due to lower grades in the mining sequence. This is particularly true for gold however one of the positives to the underground delay as Oyu Tolgoi focused on being a more efficient operation. They have been optimizing the mine plan and implementing and appropriate cost structure. We've planned to provide future guidance in early December. Fifth underground construction preparation. In August early works spending was approved to put the underground construction in the best position for project advancement when project financing is complete. Steeve will discuss project financing details but we continue to expect PS signing by the end of the year. In August Oyu Tolgoi filed updated development schedule to the feasibility study with the Mongolian Minerals Council. The last piece of the feasibility study is updating capital estimate which is expected to be complete in the last first quarter or early second quarter of 2016. We are not expecting any material change from the current estimate. Following completion of the capital estimate the Turquoise Hill, Rio Tinto, Oyu Tolgoi boards are expected to provide their decision on notice to proceed early in the second quarter with commencement of underground construction following shortly thereafter. As mentioned earlier works are already underway paving the way for an orderly restarting. In connection with early works Oyu Tolgoi just held an underground development suppliers forum on Wednesday. Nearly 600 companies from 29 countries including 369 Mongolian businesses participated to better understand the process of becoming an underground supplier. The forum is an important milestone in the lead up to restarting construction. Lastly I am asked about the impact of current prices are moving forward with the underground. We are a long believer in copper and we don’t expect prices to remain at these levels forever. As most of you know from our technical report and market updates it's expected to take approximately five years to bring the underground online, another five years to ramp up full production. It's unreasonable today our restart decision on current prices. Based on market reports Oyu Tolgoi is expected to be the third largest copper mine in the world when the underground portion of the operation is up in running. An asset like this performs across a wide range of economic cycle. We are long term focused and our development plans follows suite. In summary open pit operations are progressing well. And we are anticipating underground restart Q2 2016. Open pit periods will be challenging for the next few years but the primary focus of Oyu Tolgoi has always been about the underground for 80% of the mines diver sides. At this point, I am 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 third quarter was $431.7 million an increase of 2.5% over the second quarter. The increase resulted from higher sales volume partially offset by lower copper prices. [Contemplated] sales increased 19% over the second quarter. In the third quarter income attributable to Turquoise Hill shareholders was $21.2 million. Income from continuing operations, which relates to Oyu Tolgoi was $44 million. The loss from discontinued operations for SouthGobi, was $22.8 million. During the quarter a $76 million noncash charge was recorded in operating expenses for a provision against lower grade stock buy expected to be processed in more than one year. The charge is mainly due to lower expected markets prices combined with a change in the mining plan. At September 30th, Turquoise Hill balance was approximately $1.3 billion. The cash from operating activities before interest and tax for the third quarter was $172 million. We have updated our capital expenditure guidance for 2015 to $120 million of which a $115 million is related to sustaining capital. Our original guidance was $230 million. The reduction is due to lower outstanding on the tailing storage facility, lower differed stripping due to a change in the mining plan and the allocation to extent versus capital of the underground pre stock expenditure and capitalization of the underground pre stock expenditure was charge with the completion of the project financing in accordance towards the company policies. We have also updated our operating cash cost guidance to approximately $900 million from our previous guidance of $1 billion. The reduction reflects the benefit from the Oyu Tolgoi cost savings initiatives it exclude the non-recurring expenses relate to the underground agreement of May 18 of this year mainly the payment of the tax and the royalty adjustments and the underground pre site costs. This item will total approximately $80 million. Turning to unit cost, C1 cost for the third quarter were $0.40 per pound compared to $0.73 per pound in the second quarter. The second quarter included a $22 million charge for the settlement following the underground agreement. All in sustaining costs were a $1.52 per pound compared to a $1.26 in the second quarter. The current quarter all in sustaining cost included the non-cash inventory charge of $76 million related to low grade stock pile. As Jeff mentioned the project financing is progressing as expected with signing plan by the end of this year. We still continue to have a strong support from the banking [indiscernible]. That concludes my comments and I'm turning the call back to Jeff.

[Jeff Tygesen:]

Thanks Steeve. In conclusion Oyu Tolgoi delivered solid third quarter results. Revenue in concentrate sales increased. Cash flow from operations is more than a $170 million and we end the quarter with approximately $1.3 million in cash. Concentrating is averaging above name plate capacity, following the July shutdown. We are maintaining our annual production guidance and expect to be at the high end for copper and mid-range for gold. We expect signing a project finance by the end of the year and update capital estimates for the feasibility study in first quarter 2016. Decisions by the three boards are noted to proceed early in the second quarter of 2016 and restarting the underground shortly thereafter. That concludes our remarks Melanie and we are ready to take questions.

[Operator:]

Certainly. We will now take questions from the telephone lines. [Operator Instructions] The first question is from Oscar Cabrera of Bank of America.

[Oscar Cabrera:]

Thank you operator, good morning everyone. I was just wondering if you could provide us with the breakdown of the CapEx that was pushed forward or stayed. I think in your comments you mentioned [something to do with the tailings] so in other words out of the $120 odd million dollars that you're saving, is that this year, is that going to be spent later on or only part of it?

[Steeve Thibeault:]

Couple of items we're going to have net save, or having net savings and like you say some will be transferred next year. On the tailings facility we had $20 million there and that's definitely a net savings okay. What we maybe a couple of years, or two years ago or a year ago we had issue around the [attaining] facility and now we've been able to get it right and the cost savings are, the new costs now are along around $20 million savings that we had compared to budget. The [first stripping] that's related to different mining plans so that depends, it will have an impact for the following year, so that would be, that's another $20 million Oscar that you would have for the following year. There's net savings about $35 million in the overall plan and operation that these ones will not necessarily are real savings. And the last one I would like to maybe to mention is the underground. The underground expenses, we had a certain amount to, about $25 million in our capital and the accounting policy is just to make sure, this amount has been transferred to expenses because it will be capitalized. We will start get capitalization of the pre costs, of the pre start cost Oscar only when we're going to have the project signing which we expect by the end of this year. So next year when we'll do in 2016 when we'll have the pre start cost, these will be capitalized but this year they were in our expenses. And I mentioned that when I was talking about the guidance.

[Oscar Cabrera:]

That's helpful, thank you and so, will the $150 million in sustaining capital be a good number to use over the next couple of years before you start doing -- I guess you said the underground doesn't start for another five years, so for the next five years.

[Steeve Thibeault:]

Oscar, I would say that early next year we're going to provide the guidance for 2016 and it's different elements because the sustaining includes pre stripping and that could vary significantly by year depending on the phases that we take. So that's something that we will give you early next year.

[Oscar Cabrera:]

Okay, great thanks. The other thing I was wondering is if you could provide the terms that you get in your TCRC, in the second quarter that they've come lower then we were expecting. I think in the past you have mentioned that you are doing everything in international terms but the numbers that we are getting out lower than those international term.

[Steeve Thibeault:]

Ashar I'm sorry I am not understood I understood your question, probably on the terms that were getting on the?

[Oscar Cabrera:]

On the treatment charges?

[Steeve Thibeault:]

No, what we said we are always getting the market we don’t provide detail on these ones. I think that if your question is we look at the market and for September and we are not getting your exact your revenue is because keep in mind that we are having the provisional pricing and in reality when you are trying to mend to reconsolidate revenue Oscar, instead of taking the quarter in which we are making our sales its more the following quarter that you have to take because of this provisional pricing. So in other words when people try to reconcile our revenue they take the quarter market prices and when you have a market that's where a prices are reducing or have a significant decrease you don’t have the matches because of the 90 days provisional pricing that we are having. So a proxy is better to take the following quarter then the current quarter.

[Oscar Cabrera:]

Okay. So, for example for this quarter you are saying you are lagging by 90 days or you are looking at the price of the last day of the quarter to price everything.

[Steeve Thibeault:]

Exactly the way would be the price for the third quarter would be mainly based on September forward prices for October and November that's what the average price that you would have. And that what's will give you a better proxy and that's because of that provisional pricing.

[Oscar Cabrera:]

Great. Thank you very much.

[Operator:]

Thank you. [Operator Instructions] The following question is from Ralph Profiti from Credit Suisse. Please go ahead.

[Ralph Profiti:]

Good morning. Thank you for taking my question. Where do you anticipate or estimate the stockpile could be at the end of the year is my first question. And if you can sort of split that between which you will characterize as medium grade material and high grade material?

[Jeff Tygesen:]

Hi, Ralph. This is Jeff. Thanks for your question. The stockpile will be similar at the end of where it is today because we are not moving a lot of material in or out. The high grade is very low tonnage, it's more intermediate as a -- make efficient use of the crusher so the crusher is down for a short period of truck end up the pricing material there than its picked up in a very short period of time. The medium grade stockpile as I referenced will be going down in 2016 where we try to balance some of the gold that's not going to be there out of phase six. So we see that decreasing through the year, percentage wise it will probably be a decrease of somewhere between 30% and 40%, it will be much higher we estimate at this point.

[Ralph Profiti:]

Right. And can I characterize Jeff with your comments when you speak about balancing because these grades that you are sort of following a mine plan meeting into the project financing that will make OT at these metals price as free cash flow break evenish, is that kind of a fair way to characterize how you are going to use this stockpile over the next two years?

[Jeff Tygesen:]

Well we've had -- as any good miner we start with the highest grade in Phase 1 and Phase 2 had the highest grades because the part of it I'm talking a total net smaller return because of the gold grades. As we start developing Phase 4 which is below Phase 2 there is a period about two years of stripping to get to the higher grade material and as from the tech report Phase 6 and Phase 3 don’t have the same level of gold grades but we did stockpile lower grade material that has higher gold byproduct than the material is coming out of Phase 6. So yes it's all about maintaining our positive cash flow.

[Steeve Thibeault:]

Ralph if I can add on that one if you take the technical report just for more prices okay we do the same and what we have seen and we were continuing we are definitely focused on the year where we have low gold and making sure that those year we maintain operating cash flow at least neutral and even a little bit more, okay and that's being done through what you've seen this year the initiative around the mail and the operation and second around the cost initiatives.

[Operator:]

Thank you, there are no further questions registered at this time, I would now like to turn the meeting back over to Mr. Tygesen.

[Jeff Tygesen:]

Thank you for joining us on today's call. Next steps we're absolutely focused on the signing of project financing, completing the feasibility study and planning for an underground restart Q2 in 2016. As I said several times before 80% of Oyu Tolgoi's value resides in our underground reserves. And in my opinion it's the best copper opportunity in development today, thank you.

[Operator:]

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