Turquoise Hill Resources Ltd.
Q3 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Good day, ladies and gentlemen, thank you for joining us today. Welcome to the Turquoise Hill Resources Q3 Results held on November 10, 2014. I would now like to turn the call over to Jessica Largent. The call is being recorded and will be available later today for replay. Please go ahead.

[Jessica Largent:]

Thank you, operator. I want to welcome you to our third quarter 2014 financial results conference call. This morning we released our third quarter press release, MD&A and financial statements. These items are available on our website and SEDAR. With me today is Kay Priestly, 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 Kay.

[Kay Priestly:]

Thank you, Jess. Good morning everyone and thank you for joining us today. I’m going to start the call off with a high-level overview of the quarter. Steve Thibeault will cover the financial aspects of the quarter and Stewart Beckman will discuss operations. I’ll finish with the status of discussions with Mongolian government and then we’ll take your questions. In terms of the high-level overview, there were several key takeaways that are important. First, concentrate sales in the third quarter where the best we’ve seen thus far. With so much discussion focused on the government negotiations, I think it is important that we recognize that we have an operating copper and gold mine generating significant operating cash flow. I am very proud of the team at Oyu Tolgoi for all their achievements this year, particularly the ramp up in sales and the focus on operating as efficiently as possible. Second, we continue to work with the government to resolve the shareholder matters and finalize project finance. Last week’s resignation of the Mongolian Prime Minister, an announcement that a new cabinet would be formed will likely impact the timing of those discussion. We are not in a position to make any predictions or comment on the political environment. We are monitoring the situation and we have to wait and see how the political process unfolds. We stand ready and willing to work with the new leadership when in place and continue our engagement. Third, I want to speak to safety which is a critical part of our operation. Safety remains a major focus for Oyu Tolgoi and mine’s management is committed to reducing risk and injury. Through the end of the third quarter, Oyu Tolgoi’s all-injury frequency rate was 0.50 per 200 hours’ work. At this point, I’d like to turn thing over to Steeve to discuss the financial aspects of the quarter.

[Steeve Thibeault:]

Thanks. As previously mentioned by Kay, sales for the third quarter were the best we’ve seen so far from Oyu Tolgoi. Net revenue was $466 million which is a 9% increase over the second quarter from approximately 220,000 tons of concentrate. Sales for the quarter exceeded production resulting in the client inventory drawdown [ph]. Fourth quarter sales are expected to remain strong and we continue to target between 4 to 8 weeks of concentrate inventory at Oyu Tolgoi by the end of this year. In terms of cash flow, the inventory drawn-down is having a positive impact on working capital. Given Oyu Tolgoi’s strong sales this year and the operation moving to a steady state, where our building a strong cash position was cash on-hand of approximately $345 million at the end of September. Reduced capital and expenditure due to the underground being on care and maintenance also contributed to the increase of cash. Compared with our funding constraints during the recent years, I have to say that this is a nice situation to be in. Cash surplus is currently earmarked for the underground development until we are ready to move ahead with the underground, our investment strategy is designed to preserve cash. Our net income related to continuing operation was $40.8 million for the quarter. Following the sales and purchase agreement of approximately 30% of [indiscernible]; we reclassified [indiscernible] asset and liability on the balance sheet to help for sales and discontinued operations in the income statement and cash flow. During the quarter, we recorded an impairment of $125 million related to the reclassification of [indiscernible]. After non-controlling interest, a $70 million impairment is included in the $79.5 million net loss related to discontinued operations. Other operating expenses for the quarter at $52.5 million is mainly Oyu Tolgoi G&A, including Ulan Bator office in operations for ‘14. We’re [indiscernible] cost for content-freed [ph] locators at the Chinese border and management service payment. This concludes my comments. I’m going to turn the call over to Stewart to discussion operations.

[Stewart Beckman:]

Thanks, Steeve. Third quarter production was impacted by the September failure of the rake arms in one of Oyu Tolgoi’s two thickeners. It’s worth noting that the failure of the rake arms was different to that of the rake blades that was experienced earlier in the year. Middle production remains in line with the second quarter as the higher grades offset the impact of the brake failure. Repair of the rake arms was completed at the end of September in the concentrator was gradually brought back into normal operations. As a result of slower mining rates, we did not access the high grades loan of the open pit as early in the third quarter as we’d originally expected. However, by September, we were consistently mining in the high grade zone. We will continue to mine through the high grade zone in the fourth quarter and early in the third quarter of 2015. Copper grades are expected to reach about 0.6 to 0.7 gram per cent [ph] and gold grades are expected to average about 1 gram per ton. Given the delayed mine advancement rate, Oyu Tolgoi experienced in the third quarter and earlier in the year, as previously reported we slightly revised production guidance for 2014. Oyu Tolgoi has structured programs in place looking to remove as much cost out of the business as possible and concurrently stabilizing production with a view to eventually increasing production. Part of this includes working with marketing and logistics to increase efficiencies and reduce cost in the supply chain. Importantly, with the underground delay, Oyu Tolgoi is looking at how to best reschedule the open-pit mine to maximize value and to reduce the risk. These initiatives has started to produce results and has allowed us to lower our operating cash cost guidance for the year by about $130 million of which about $55 million is due to volume change. The 2014 feasibility study was disclosed to the Oyu Tolgoi board, but it’s not yet been approved by the board for submission to the Mongolian Minerals Council. The new reserve and resource report was submitted to the Minerals Council. This is a requirement ahead of the feasibility study submission which is based on the new resource work. The Minerals Council voted to approve the acceptance of the resource submission, pending some minor changes. We are awaiting written confirmation ahead of final submission. Released the new technical report that evaluates the development of a huge annual Flip 1 [ph] underground mine and the processing of the Oyu Tolgoi reserves. The technical report again demonstrates what an outstanding asset Oyu Tolgoi is. That concludes my comments. Back to you, Kay.

[Kay Priestly:]

Thanks, Stewart. I wanted to now take this opportunity to welcome Jeff Tygesen, the newly named Turquoise Hill CEO to the company. Jeff is a mining engineer and his operational background will be extremely valuable to Turquoise Hill with Oyu Tolgoi being in production and the underground set to move forward, once matters with the government are resolved. He was on the Oyu Tolgoi technical committee from 2010 to 2011 and has been a Turquoise Hill director since 2012. Jeff knows Oyu Tolgoi and Turquoise Hill very well. When the board succession planning process started several months ago, my retirement was planned for the end of the year to allow for a logical transition period. I’ve known Jeff for many years and I’m confident that he is the right leader for Turquoise Hill particularly in this space of Oyu Tolgoi’s development. Jeff and I will work together through the end of the year to ensure a smooth transition. Before we finish, I want to discuss the status of our discussions with the government. We all continue to be committed to resolving the shareholder matters and restarting underground development. We have presented an offer to the government proposing resolution on these matters and we believe this offer is beneficial to all stakeholders. We continue to work with the government to resolve and clarify remaining tax issues including principals associated with the tax stabilization provisions and the investment agreement and their practical application to Oyu Tolgoi’s business operation. It is important that the tax situation is clear to support further investment. We continue to apprise the project finance lending group on the status of our discussions with the government of Mongolia. Some lender group remains supportive of the Oyu Tolgoi project financing and current indication suggest a suitable package will be available in the future. The timing of any extension request on the formal lender commitment which expired on September 30th will be determined when definite progress or resolution of shareholder matters has been achieved. In summary, I could not be more pleased with the sales from Oyu Tolgoi in the third quarter and mine’s cost and productivity improvement are starting to deliver real results. These two achievements are the main drivers of our enhanced financial performance and stronger cash position. The cash that is starting to build up is earmarked for underground development and we have a strategy in place to protect those funds. We have also presented the Mongolian government with an offer to resolve outstanding matters that is beneficial to all stakeholders. And we are ready to continue to engage but we need to wait to see how the political situation unfolds. That concludes our prepared remarks, operator. We are now ready for questions.

[Operator:]

Thank you. We will now take questions from the telephone lines. (Operator instructions) There will be a brief pause while the participants register for questions. Thank you for your patients. (Operator instructions) The first question is from Terence Ortslan from TSO & Associates. Please go ahead.

[Terence Ortslan:]

Good morning, Kay, and thanks for all your assistance for the shareholders and for the company over the period of time. From what we understand, the prime minister has resigned, hasn’t really resigned, it’s been postponed until December and there is more of an issue to us is the coalition possibility with other parties. First, maybe new [indiscernible] will be formed after that, so I expect nothing is going to happen between now and December, am I right?

[Kay Priestly:]

Terence, thank you for your comments. We really are not in a position to speculate or predict the political situation right now. We would be speculating to do that and it would not be very productive. We are, of course, monitoring the situation and we just need to let the political process play out.

[Terence Ortslan:]

No, I was commenting from the point of view what you said. You said the prime minister has resigned and a new cabinet will be formed and so what I’m saying is that, from what we understand, there will be no new cabinet for a while until December with the coalition happening. Our concern is that the new coalition will have more horse trading [ph] to do and compromise to do than the present government cabinet. Does that mean – to us it basically means that there could be more delays in this agreement. So question number one, is that a possibility? And number two is that, with respect to the financing of – project financing there’s may be more delays into next year.

[Kay Priestly:]

Terence, yes, to answer your question, the political situations certainly could result in a possible delay because of all the thing you said and the uncertainty of the process right now. As far as project finance, we’ve been working with the lenders, both the banks, the commercial banks and the IFIs and they have all been very supportive. We continue to engage and keep them informed. And as I mentioned earlier, on confidence that once matters are resolved and once we’re ready to go forward with the underground that we will be able to have a funding solution.

[Terence Ortslan:]

Okay, that doesn’t really shed too much light over what I’m expected to hear from the company as a shareholder and also all the shareholders including Rio Tinto and the government with respect to their shareholding in the industry, in the organization. Can we talk about the TCRC for next? I know you forward sell your – you commit your volumes, what changes we expect for TCRC as an average next year and the rest of this year?

[Steeve Thibeault:]

The TCRCs will be industry standard.

[Kay Priestly:]

Yeah, Terence, we don’t really provide that detail but I can assure you that the sales and marketing team worked very hard on – on getting best industry standards and benchmarking to market churn [ph].

[Operator:]

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

[Craig Hutchison:]

Thanks for taking my call. Can you tell me what level of government the offer was made to? Was this made to the board of OT or any other levels?

[Kay Priestly:]

Craig, this offer was made, clearly, it was discussed with the board of OT but was also discussed with several representatives in government at various levels.

[Craig Hutchison:]

Was this before or after the departure of the PM?

[Kay Priestly:]

It was before.

[Craig Hutchison:]

Okay. All right. Thank you. Those were my questions.

[Operator:]

Thank you. The following question is from Daniel McConvey from Rossport Investments. Please go ahead.

[Daniel McConvey:]

Yes, good morning, Kay, everyone. Just on that, Kay, can you give us a rough timing when was the offer made, in the last three months?

[Kay Priestly:]

It’s difficult to say. We’ve been engaged with the government for some time, quit some time and as you may recall there were many, many issues initially and we narrowed it down considerably. And we’ve been working on a potential agreement and refining it. So it’s hard to ballpoint a specific time, but recently we have presented an offer that we think is very beneficial and that incorporates a lot of the discussions we’ve had over this period.

[Daniel McConvey:]

Okay, thanks. With the open pit, if we do get delayed a lot longer, can you kind of give us the dynamics of what has to go in the pit in terms of the – I think it was during that you needed a blend; you’re hoping to blend the open pit with the underground for arsenic impurities [ph]. What kind of [indiscernible]?

[Steeve Thibeault:]

You’re breaking up quite badly. I believe you were asking, what we will do with the open pit with the delay. Clearly, the original scheduling for the open pit didn’t contemplate a very long delay. And you would have seen in the previous technical reports in this technical report that we have periods of lower production and cash flow as a result of staging over the pit. And really, what we were doing was developing the pit quickly to get to the gold zone quickly, then go in another trench before the underground came on. Given that it’s moving out, the team onsite have been looking at how we best redo their schedule. The issue – you broke up quite badly when you were talking about the arsenic. The area with the high arsenic is an area of the pit called central. And we are, in fact, looking at the possibility of pulling some of that material forward. There are some areas of higher grade in there. But probably and more importantly for us is that the ore and central is substantially softer than the more than the rest of the open pit. And we’re looking at whether we can advance the development of that and increase the production to the volumetric limit of the processing plant and overall increase the production through the concentrator, to the extent that we are actually drilling a couple of metallurgical test holes in their and looking at what it does to reschedule. It is higher in arsenic and you can see that in the technical report. But it’s always been within the blending limits that we’ve got and certainly we’re looking at how we would blend that and bringing it forward will help us both increase production through the volume increase and also blend outs any effect arsenic.

[Daniel McConvey:]

But it’s not a stopper. It’s not something you have to blend. It’s within the limits. You can sell?

[Steeve Thibeault:]

yes.

[Daniel McConvey:]

Okay. Thanks. Final question; the 150 million received from the government, just looking at the statements, I see it’s in long term and I was looking hard, that is now – I’m assuming that’s going to show up in – your cash balance has been benefited by that in the last month. And just when and why it was long term?

[Steeve Thibeault:]

Yes, because that was another asset.

[Daniel McConvey:]

Yeah.

[Steeve Thibeault:]

I mean, it’s just that’s the way it was slashed apart. So, yes, we’re going in this month and that will be an increase of cash that we can have in the fourth quarter.

[Daniel McConvey:]

Okay, but if it was maturing on October 14th whatever day, unless I’m looking at it wrong, I’m just wondering why – I know there’s that reason. I’m just wondering why it was classified as long term.

[Steeve Thibeault:]

Yes, we left it there historically.

[Daniel McConvey:]

Okay, okay. Well enough.

[Steeve Thibeault:]

And it was an investment as available for sales, so that’s where we placed it [ph].

[Daniel McConvey:]

Okay. Thank you very much and all the best care.

[Kay Priestly:]

Thank you.

[Operator:]

Thank you. (Operator instructions) The next question is from Ralph Profiti from Credit Suisse. Please go ahead.

[Ralph Profiti:]

Good morning and thank you for taking my question. Kay, I’m wondering if there’s a risk of the tax dispute resolution getting revisited. Is there a potential for jurisdictional overhang with the government changeover?

[Kay Priestly:]

Well, Ralph, we’ve been working with representatives from the Mongolian tax authority during this period and continue to do so. As you know, we are very pleased with the reduction but there are still some matters that we are looking at for clarification and we’re working through that process with the local – through the local process. So we’ve been very confident and pleased with how that process is going.

[Ralph Profiti:]

Okay, thanks for that. And, there was a previous commentary about the volumetric limits above the concentrator. Should we be still thinking about that as a 100,000 tons per day, given the bottlenecking and maybe if you can talk about sort of more hardness or quality, is there a capacity to operate at or above design going forward? Thanks very much.

[Stewart Beckman:]

Okay, thanks for that. So, just to recap, the 100,000 tons is a nominal. So, in fact, we’re scheduled to do of the order of 95,000 tons on the hard ore that we’re in now. And when we move to the softer ore, either the cobaltite [ph] or in central in the pit area or in the underground and you can see in the schedules that the throughput actually increases to – of the order of 115 tons. Additionally to that, we are looking at what options have we’ve got to creep [ph] the plant. And there are very focused projects on site, mine to mill working with MIPS [ph], so working the broader Rio Tinto group to look at what sort of creep [ph] that we can get out of the plant. So both from a financial and from a cost basis and from a production throughput basis, there is upside relative to what was put into the technical report. In the technical report, we haven’t included either of those creeps [ph] in the base case. Although we believe that they’re a probability. We have not demonstrated those yet. So the there aren’t any cost reductions that we included with the demonstrated one and we haven’t included any potential upside. However, of course it exist and we’re very focused on trying to deliver it.

[Ralph Profiti:]

That’s great, very helpful. Thank you.

[Operator:]

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Ms. Priestly.

[Kay Priestly:]

Thank you, operator. Why don’t we wait a minute more to see if we have any further questions?

[Operator:]

Thank you. (Operator instructions)

[Kay Priestly:]

Okay, well, operator, hearing none, this concludes our call today. I’d like to thank everyone for joining and also just want to remind everyone that Oyu Tolgoi is a world-class asset and clearly a priority right now is operating the open pit as efficiently as possible and we’ve been real pleased with how sales and production and operations have been going. We also though recognize the value in the underground. We’re preserving the option and we are poised and ready to continue to engage once the political situation in Mongolia is resolved. Thank you all.

[Operator:]

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