Turquoise Hill Resources Ltd.
Q3 2013 Earnings Call Transcript

Published: 15 Nov 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill Conference Call on the Third Quarter Financial Results held on November 14, 2013. I would now like to turn the call over to Kay Priestly, Chief Executive Officer. The call is being recorded and will be available later today for replay. Please go ahead.

[Kay G. Priestly:]

I want to welcome you to our Third Quarter 2013 Financial Results Conference Call. Today, we released our third quarter results press release, MD&A and financial statements. In that, we provided an update on Oyu Tolgoi, and we also filed a preliminary prospectus for our rights offering. These items are available on SEDAR and they are also available on our website. Joining me on today's call is Chris Bateman, our Chief Financial Officer; and Stewart Beckman, our Senior Vice President of Operations. We will take questions after providing you an update. This call will include forward-looking statements. Please refer to the forward-looking language included in our press release and MD&A. In light of all of these announcements, there are 3 key points I want to highlight

[Operator:]

[Operator Instructions] The first question is from Terence Ortslan from TSO & Associates.

[Terence Ortslan:]

Just a couple of, I think, sort of summary -- by the way, excellent summary and details here. Just a couple of questions on that about issue of the engagement with the government issues. The first point and the fourth point; first being the economic value distribution and sharing it. And fourth being the timing of the feasibility study and expansion of the underground, aren't they related? Whereby there only one of the other in terms of being able to understand the valuation, implying that those negotiations may continue till the feasibility study of the expansion is completed? And as a result, everybody knows what they're sharing for.

[Kay G. Priestly:]

They are related, but they are 2 distinct issues we're working through with the government. First of all, the sharing of value, the first point, also includes the cost of the first part of the project, Phase 1, and that's the feasibility study. That is still an issue that we are having discussions with the government on. The last part looks at Phase 2 and getting a clear picture or understanding of the cost and the funding needed to get that forward. And yes, it is important, before we go forward and advance funding with the underground, that the government understands and we understand the estimate of those costs and the funding necessary to go forward. So they are related and that it all relates to the total value sharing, which would mean the total economic value that goes to all parties. But there are 2 separate issues that are part of our discussions right now. With respect to timing, as we have said, we expect to complete the 2014 feasibility study in the first half of next year. We have started a process with the government to work with us together as we work through that process. But it will take time, and it does put us into the time frame when we can get a clear picture in place what those costs are, what additional funds will be needed and how we will fund them.

[Terence Ortslan:]

So in that context -- that's great. In that context, I think, that's quite probable that this particular rights issue, timing is one thing, with respect to paying back to Rio Tinto and all. But we do not know in those rights issue when we will see a project financing which will flow by those 4 points that you summarized. And I really see with your -- with the number one and the number four relation here, whereby this may go on for a while, so the rights issue now people will be buying the rights or not buying the rights. The uncertainty is the timing of the project financing. And there's another uncertainty I want to talk about in a second, but is it fair to assume that the number one being -- the number two I guess you summarized as being the initial development and construction costs. Are we close on that, that there will be one uncertainty off the table? And the water issue will be resolved? And then project financing may be delayed whereby and there's no issue with respect to the banks for the project financing they're going to be there, and if its delayed past certain times or early as 2014?

[Christopher Bateman:]

Maybe I can jump in. It's Chris Bateman here. And -- I think to focus on the timing completion, around the underground feasibility study prior to restarting the underground, all parties need to be clear on the cost and approve that cost. I don't think it's a prerequisite that, that has to be done before we can close project financing. There has been a significant amount of work done on studies for the underground. And we've clearly shared our views with the lenders in terms of the -- a look at those forward costs. So I wouldn't say that they're directly linked and we would certainly be looking to close an agreed financing as soon as practical, and certainly not quite everything to be sold before we get to a point of agreeing project financing.

[Terence Ortslan:]

And -- okay. Okay. I just -- one other question, Kay, you summarized that the shipments -- or the productions will be about 77,000 tonnes? Or was that shipment number you're talking about?

[Kay G. Priestly:]

Copper in concentrate.

[Terence Ortslan:]

That's the shipment or the production?

[Kay G. Priestly:]

Production.

[Terence Ortslan:]

And do we know what the shipments maybe this year?

[Christopher Bateman:]

We disclosed our shipments year-to-date around 5,000 tonnes of concentrate, not [ph] copper in concentrate. We just started to see customer pickups starts at the border. And that's when we recognize the actual sales. We'll see that picking up towards the end of the year, but there will be, as a result of the delays at the border, a significant build of inventory this year.

[Terence Ortslan:]

Okay. Just reflecting, one more thing from the shareholders today that -- about the rights issue. The 2013, '14, I think they're somewhat summarized, yet what will be the grades of copper and gold for the best then another year some correlation of the geological model that the production 2014 and '15 to go ahead here in the absence of the underground? So we know what we -- how are we going to value the company and the rights issue. Do we have the grade numbers, please?

[Christopher Bateman:]

The best thing to refer back to is to the technical report. As we said earlier in the call, there has been a delay in terms of accessing the higher grade core, gold core, as a result of the curtailment of the open pit. But in terms of overall mining plan, we are tracking to that mining plan.

[Terence Ortslan:]

Yet, the grades are much higher than the mining plan?

[Christopher Bateman:]

Well, the grade...

[Terence Ortslan:]

On the gold side.

[Christopher Bateman:]

Basically, we were expecting higher levels of gold this year in 2013. We haven't had those production levels of gold because we haven't got into the high-grade gold-bearing ore. What we're saying is that is now shifting back in time due to mining being behind the original schedule.

[Operator:]

The next question is from Tony Robson from BMO Capital Markets.

[Anthony Robson:]

Two questions, if I may please. Obviously, with the $2.4 billion of equity about to come into your balance sheet, you wouldn't need the full $4 billion of project financing straight away. Would you envisage taking that down in several tranches? Or having several smaller project financing issues over the years? Firstly, any thoughts on how that would pan out, please?

[Christopher Bateman:]

Tony, in terms of the project financing, at this point in time, we're still working with the same term sheet that we developed and signed up to the original commitment letters. There's been no changes to that term sheet. Obviously, as we discussed, project financing with the Government of Mongolia and the directors of OT, it may be that changes are made in response to their questions. But at this point in time, we're looking for circa $4 billion in project financing with the existing banks indicated.

[Anthony Robson:]

Okay, great. Second question, Kay, I understand your comments before -- but it's very early days, but analysts love information. How -- your cash cost per tonne, have you done reconciliations as yet to what was the public available from the technical reports? Or it's just too early days for you -- even to do that assessment internally?

[Kay G. Priestly:]

It really is still early days, Tony, for us to do that. As we indicated, things are -- we're very encouraged on what we're seeing. We're in line with the technical report, and it's just too early for us to comment or give an estimate on that at this point.

[Operator:]

The next question is from Oscar Cabrera from Vancouver (sic) [Bank of] America.

[Oscar Cabrera:]

It's actually Bank of America Merrill Lynch. Just wondering if you could characterize for us the current state of, not negotiation, but the relationship with the banks that were -- that will allow a delay in the financing? Are you -- are these banks still interested? Could you just put some context around that, please?

[Christopher Bateman:]

Oscar, we've been in constant touch with the banks, and we're in regular communications. So they're up to date on the progress of the project financing. At the current time, the commitments extend into December, but I think if the banks continue to see good progress being made -- and I want to see good progress being made -- many of these banks have been involved in this process for an extremely long time. It's fair to say that everybody would like to see it come to a swift conclusion, but we've had very good support from the IFX [ph] IFIs and the banks.

[Oscar Cabrera:]

Okay, now, that's helpful. And also interested in your comments with regards to access to water, concerns to -- with access to water. Like you mentioned, the government had been involved in the different facets of the pre-feasibility, feasibility and revision to the feasibility work on the underground, so what are they concerned with -- can you be more specific?

[Kay G. Priestly:]

There was a local, Oscar, there was a local rule that was trying to be put in place to limit water to mining in general. But we believe that we're making good progress in working with the government on that issue, but it's still not completely unresolved. And we're -- however, we are making good progress with the government in working through that issue.

[Oscar Cabrera:]

Okay, great. And then lastly, can you please remind me -- you gave us last quarter, I believe, it was or the quarter before the amount of time that you would require to get people back into the project and then into construction. Was this 6 to 12 months? And assuming that everything is signed off by the government, how long would it take for you to start construction and then getting to the actual ore in the underground?

[Christopher Bateman:]

Oscar, the team is working through those and it will very much depend on how we come to conclusion and when we come to conclusion. But it will be several months from a sudden decision that everything goes ahead to being back up at full production -- at full development rates. Now if things are moving along and we're making progress, then there's certainly an opportunity to parallel some of those processes. So we would hope it won't be a sequential process, but we'll get indications and be able to ramp up for preparedness in concert to closing out some of the outstanding issues.

[Stewart Beckman:]

Oscar, it's Stewart. I just like to add to that -- we've maintained key leadership and technical teams that -- to speed that process up when we finally get the go-ahead.

[Operator:]

The next question is from Daniel McConvey from Rossport Investments.

[Daniel McConvey:]

A few questions. The CapEx cost for -- which came out today was not provided to the government, would that be a public document?

[Christopher Bateman:]

The public document will be the Turquoise Hill's technical report, which we'll file if there's an update and material change to the CapEx.

[Daniel McConvey:]

Okay. But the study that the government's requested in terms of the -- of why it costs $6 billion for the work up till now, would that be something we'll have access to?

[Christopher Bateman:]

No.

[Daniel McConvey:]

Okay. The debt cost is result of not getting it done by the end of 2013, will that -- will the interest rate -- I guess we don't know -- but my sense is we could have an increase in the interest rate as a result of the delay? Is that fair thinking?

[Christopher Bateman:]

I've no reason to believe there'll be an increase in the interest rate as result of the delay. But obviously, when we talk to the banks about extensions, we will have to understand their position. But there's no reason in my mind why the interest rates should go up.

[Daniel McConvey:]

Okay. The open pit delay, just refresh my memory, I know we have delays with the underground, but I guess when we -- when you slowed down the underground, that impacted the open pit, I just wanted to -- trying to remember why the open pit is behind schedule by 8 months?

[Christopher Bateman:]

That's a separate issue and not related to the underground development. The underground development that was curtailed when we got the letter letting us know that it required parliamentary approval. The open pit, we were approving budgets on a very short-term basis throughout the first 2.5 quarters of 2012. And with the delays in first shipments, we moved aggressively to curtail costs. So the open pit, in the second quarter, was ramped down and we used all from stockpiles to see the concentrator through the commissioning process. We thought it during that process, very important to keep the concentrator commissioning on track with all of the experts from all of the vendors on site. And we wanted to get the concentrator up and running, and did so successfully. At that point, the concentrator is able to generate cash through sales. So it made sense to continue with the concentrator while we look to secure project financing.

[Daniel McConvey:]

Last question. Do you have the rights offering, you repay all of the debt, you should have a net -- a no net debt situation, you got a buildup of inventory, of concentrate inventory, and so next year, you're going to have a good year. Production-wise, you also have the catch up in terms of filling the concentrate. So you would expect, going as planned, prices being where they are, you have a strong free cash flow year. So you're -- I guess what I'm seeing is, 2014, we could see a strong net cash position by the end of the year, if you don't go ahead with the underground?

[Christopher Bateman:]

That's absolutely correct. And depending on when the decision is made to ramp back up the underground. Obviously, then the capital cost will start kicking in. But absent the investing activities, we would expect, and you can see this through the technical report, a very strong cash flow year.

[Operator:]

[Operator Instructions] The next question is from Terence Ortslan from TSO & Associates.

[Terence Ortslan:]

Oscar brought it up, I think Chris or Stewart, you give the answer. Underground is such a big component of the net asset value of this -- of the company and also the project. So I think I asked the question last time, the time involved here whereby there are delays, how much reengineering is being done to, I think, last time you said it's being done, but I didn't get an answer for that, whereby you can shorten the time period from benchmark 0 to production time, and what is the time? And two is still the -- also on the cost side, and the capital side of the underground, whereby the -- some reengineering is being done.

[Kay G. Priestly:]

Stewart, why don't you -- I'll turn it over to Stewart, Terence, to take that first part of the question.

[Stewart Beckman:]

So the value engineering and work had started last year, and that work is quite advanced. And they're making quite good progress on that. The slowdown in -- or the postponement of the underground work has allowed the team to go back and have a little -- have a look a bit more broadly at what changes may be made as to the mine design that may not have been able to be made when we were under such a tight time line, but that work is still not complete. We are seeing good progress and we are seeing improvements coming out in the work that they're doing. But I think if we were to share those, it might mislead people now. And as we talked about it previously, it will be complete in the middle of next year. The scale for reducing time line is somewhat limited by the time for accessing underground. So while the team is looking at those opportunities, it's unlikely that they will be able to significantly pull the schedule back.

[Terence Ortslan:]

Okay. So if you assume the worst-case circumstance whereby things are a bit delayed and so on, the 2015 becomes an important time in the -- no matter what in the absence of underground. Are we going to revert back to the technical report? Or are we going to get an update on 2015 head grades for both copper and gold?

[Christopher Bateman:]

If there's a material change to the plan, we will have an update. And if there isn't a material plan, then there's not a requirement under 43-101 to provide an update, but we'll continue to provide guidance. I think once we've got more operating experience under our belt, it will be much easier to provide more guidance. But as Kay said earlier, we are very much in the early days of development. We've released today guidance for 2014, but we'll continue to look at this and we understand the market is looking for longer-term guidance.

[Stewart Beckman:]

I would also like to assure you that the team is looking at what the opportunities are to fill that gap in 2015, which I think is you're referring to and which was the step-down in production that was previously predicted between the open pit and the underground and from other opportunities we have to reschedule in the open pit. But that work is still very early and it's not complete, but we're certainly looking at all of those opportunities.

[Terence Ortslan:]

Kay, one more question to you, please. Given that holidays are coming up and Tsagaan Sar in Mongolia, what are the times -- time elements that may be missed here between now and, let's say, February? Or March, for that matter, given the holiday period?

[Kay G. Priestly:]

Well, Terence, as you know that there's the new team, a working group in Mongolia that's been working with us through these issues. They're very much engaged and we're all committed to moving these issues along pretty quickly. We've had meetings with them on weekends, virtual meetings, so I think there's a real commitment even given those holidays to move forward with the issues.

[Terence Ortslan:]

But no deadlines?

[Kay G. Priestly:]

We're working on a timeline right now, trying to get a timeline agreed with the governments on all of these -- all the elements of these issues and so we have a clear path forward.

[Operator:]

The next question is from Tony Robson from BMO Capital Markets.

[Anthony Robson:]

You noted in the MD&A today that a Chinese smelter that was going to take 30% of your copper concentrate had canceled when the mine wasn't able to deliver in time. Sounds a little bit surprising, I would have thought all the anecdotal evidence is information that Chinese smelters are still happy to take any concentrates as long as it's clean. Were there some sort of reason why the smelter did not sort of cut you some slack and extend the contract?

[Christopher Bateman:]

Tony, this is also reported in the second quarter MD&A because it was post the end of the half. The contracts are written in such a way that if you didn't reach on this particular contract, if you didn't reach commercial production by June 30, then they did have an option. I think we, our current view is that it was a negotiation tactic, and we have replaced or we placed that volume elsewhere this year.

[Anthony Robson:]

Sorry I missed it in the second quarter MD&A. What's generally the duration of those contracts typically with your Chinese customers? Are they 1-year renewals or longer periods, please?

[Christopher Bateman:]

They're longer periods. What we've sought to do is layer the contracts so that we don't have exposure to large numbers of contracts expiring in any 1 year. Obviously, when you start up, that means that you have different length contracts. So they go from 3 years on out and with options to renew up to 10 years.

[Operator:]

The next question is from Matthew Fifth [ph] from Macquarie.

[Unknown Analyst:]

I just wanted to pick up on the point about positive cash flow in 2014. I know I note it wasn't a technical report, that the gold grade in 2014 should be around about 0.96 grams per tonne, which is actually 71% above the 10-year average for the mine. Do you think that the mine will be cash flow positive post this gold grade?

[Christopher Bateman:]

The mine will be positive -- cash flow positive, once the gold grade drops off. Was that the question?

[Unknown Analyst:]

Yes, that's correct.

[Christopher Bateman:]

Okay, I think, again, you can look into the technical reports for the outer years. Stewart alluded to the drop-off in '15, '16 in grades. And the cash flows is becoming much tighter at that point in time. Now with the delays in mining this year, some of that cash flow will be time shifted out. And obviously, in the near term, we have a large backlog of inventory at the year end that we'll be wanting to clear. The cash flows, I think, will still be positive on an operating basis out there, but it will be getting extremely tight and we are looking at ways to bring grade forward and fill that period up. But you're now looking out into the 2016 period.

[Stewart Beckman:]

[indiscernible] Yes, the cash costs are highly variable in the first few years depending on the -- speaking on the gold credits as you point out. And the gold -- as it's known on site -- the gold core which will reach will be even 2014 and '15 now, and that gap won't occur until -- out in 2016 on the assumption that we won't do anything to change the mine plan. But no decisions have been made on that. They are still a work in progress.

[Unknown Analyst:]

Okay. Sure. And just one more question, if I may, just picking up on the comment that you haven't quite yet reach the targeted recovery rates due to the nature of the ore. Now obviously the low head grades are affected here, but could you please provide just a little more color, if it's possible, just in terms of what you think maybe impacting the non-realizations of those recovery rates?

[Stewart Beckman:]

Okay. So we're running -- well particularly in gold and we're really at the top of the ore body. We're seeing off-site mineralization coming through. And as you're aware, the concentrator is not designed to recover that material, so we expect that, that will this disappear with it [ph]. And we have very recently been seeing some high grades coming into the plant from the pit and the recoveries are in line with where we need to be. And I would also say that -- there's been quite a lot of variability coming to the plant and the normals through ups and downs that you have with commissioning and something we're really learning to operate. So we've got work ongoing to reduce that variability. We expect to see improvement with the oxidized ore disappearing and we also have a number of people from Rio Tinto and others providing support, making sure that we're looking forward that both if -- are there any risks of this persisting, which we don't believe that there are, and are there any opportunities for the upside.

[Operator:]

This concludes today's question-and-answer session. I would like to turn the meeting back over to Ms. Priestly.

[Kay G. Priestly:]

Thank you, operator. In summary, Oyu Tolgoi continues to ramp up and we expect the mine to be running at full capacity by the end of the year. We are focused on resolving all the outstanding issues with the Mongolian Government, completing project financing and developing the underground. I am confident that we can successfully resolve everything, but it will take some time. Thank you, everyone, for joining us today.

[Operator:]

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