Turquoise Hill Resources Ltd.
Q4 2014 Earnings Call Transcript

Published: 25 Mar 2015

[Operator:]

Good day, ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill Resources fourth quarter and full year 2014 financial results held on March 25, 2015. The call is being recorded and will be available later today for replay. I would like to turn the call over to Jessica Largent. Please go ahead.

[Jessica Largent:]

Thank you, Donna. I want to welcome you to our financial results conference call. Yesterday we released our fourth quarter and full year 2014 results press release, MD&A, financial statements and other annual documents. 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. It's an honor to be leading my first results conference call since being appointed CEO on December 1. While new to the role of CEO, I have been with Turquoise Hill as a Director since 2012 of August and in my previous position I began working with Oyu Tolgoi in 2010. I have always been impressed with this world class asset. Since my appointment I have made a number of trips to Mongolia to review Oyu Tolgoi's operations, work on planning, develop and maintain strong relationships with key stakeholders. In addition, I have met one on one with many of our large shareholders as well as presented and participated in several industry events. These opportunities have allowed me to hear a number of perspectives. One thing is clear. We have a common objective to deliver value for Turquoise Hill. I am going to provide a summary of our 2014 results. I will then turn over the call to Steve who will address the financial components of both fourth quarter and the year. And then Stewart will cover off operations. So for 2014, there are several key takeaways I want to highlight. First, safety. It is one of the most critical aspects of our business and a major focus throughout Oyu Tolgoi's operation. For 2014, Oyu Tolgoi achieved a good safety performance with no fatalities and an All Injury Frequency Rate of 0.47 per 200,000 hours worked. Second, Oyu Tolgoi achieved strong financial results in its first full year of production. Turquoise Hill generated its first annual operating cash flow of more than $650 million driven by net revenues in excess of $1.6 billion. We expect another strong year of cash flow generation in 2015. Third, operations at Oyu Tolgoi performed well during 2014 despite a few challenges. We met our production guidance for the year and we are starting to benefit from the productivity improvements identified during 2014. Production distribution for 2015 is expected to resemble 2014 with significantly higher output in the second half of the year as the production from the high grade zone of the open pit recommences. Fourth, I wanted to speak about the status of the discussions with the Government of Mongolia. As previously disclosed, we made an offer to the government last year to resolve outstanding matters. The offer remains on the table and we believe it is beneficial to all stakeholders. We continue to engage with the government to resolve matters. Those discussions slowed since late in 2014 with the appointment of the new prime minister and new cabinet. The change in government required a pause in discussion to allow the new parties to get up to speed on the issues being addressed. Engagement is ongoing and I am confident that we can resolve the outstanding matters. We continue to work with the government to resolve the outstanding tax matters. Oyu Tolgoi has initiated an appeal to a ruling by the Mongolian tax authority. It is crucial that the tax situation is clear to support further investment. 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 those matters and restart underground development, I think it's important to remember that we have the open pit mine generating positive operating cash flow. At this point I am going to turn over the call to Steve to discuss the financial aspects of the year in more detail.

[Steeve Thibeault:]

Thank you, Jeff. In 2014, Oyu Tolgoi generated net revenue of $1.6 billion on sales of approximately 734,000 tons of concentrate. The fourth quarter sales increased more than 19% over the third quarter. For three consecutive quarters, sales exceeded production and by year end concentrate inventory had been drawn down to more normal levels. Strong sales combined with marketing and logistic improvements throughout the year made this draw down possible. Net income for 2014 was $32 million. Net income from continuing operations was $141 million entirely from Oyu Tolgoi. In 2014 our cash increased by $785 million resulting in a cash balance of $863 million at December 31. These funds are currently earmarked for underground development. As Jeff mentioned, Turquoise Hill delivered its first annual operating cash flow of $658 million which includes $455 million from operational activities and $251 million from selling down inventories. This allowed Oyu Tolgoi to repay $477 million of shareholder loans to Turquoise Hill in 2014. In addition, we received $115 million from the repayment of a Mongolian treasury bill that matured in 2014. Capital expenditures on a cash basis totaled $203 million which include 2013 accrued CapEx. Oyu Tolgoi's cash operating costs for 2014 were 905 million, approximately $35 million higher than our October guidance. The increase is mainly due to an additional cost related to the December concentrator fire and 2015 planned maintenance brought forward to 2014. Starting in 2015, our financial statement will be prepared in accordance with the International Financial Reporting Standards or IFRS. In our first quarter 2015 financial statements, we will provide the necessary information related to the conversion. That concludes my comments and I am going to turn the call over to Stewart.

[Stewart Beckman:]

Thank you, Steeve. Operating performance improved through 2014 but was impacted by a series of post- commissioning issues in the concentrator including failure of the rake blades in the thickener in Q1. A different failure of a rake arm in the thickener in Q3 and a fire in one of the four ball mill cyclone packs in Q4. Recovery has also improved through 2014 driven by operational improvements and increased ore grades as the mine developed through the high grade zone in the last half of the year. Lower processing rates in Q4 due to cyclone fire were approximately offset by higher than predicted grades. Recoveries improved with increasing grade and gold recoveries were above expectation for high grade ores. Repairs on the concentrator fire were completed in January 2015. Early in 2014, certain post-commissioning improvement projects were deferred in order to preserve the cash. This deferral and operational issues delayed the open pit mine advance. Further lower mining rates in Q4 reflect the longer haul rates of waste to the tailings facility to complete construction for winter and equipment availability. Pleasingly, the underlying performance of the mine improved towards the end of the year as a number of the improvement projects took effect. Marketing and logistics improvements allowed the concentrate inventories to be drawn down to normal levels by the end of 2014. And Oyu Tolgoi will continue to work through [just this] [ph] working capital. In the high grade zone, grades and recoveries are both higher and metal production is variable reflecting mining [source] [ph]. The current mining schedule has production from the high-grade zone resuming in mid-2015. As mentioned previously by Jeff, this means that we are scheduled to see lower production rates in Q1 with rates building through mid-2015 and to the latter half of the year. Oyu Tolgoi conducted a planned shutdown in January and February to reline both SAG mills and undertake modification and improvement work in the concentrator. We were very happy with this shutdown as no injuries and overhead completed in the schedule. The impact of the improvement work is yet to be fully realized. Oyu Tolgoi is expected to product 175,000 to 195,000 tons of copper and 6-700,000 ounces of gold in concentrates in 2015. That concludes my remarks. I will turn it back. Over to you, Jeff.

[Jeffery Tygesen:]

Thanks, Stewart. In summary, Oyu Tolgoi delivered strong 2014 results despite a few operational challenges. Those challenges are common in early stage operations and I have been impressed with the Oyu Tolgoi's team to learn and improve through this process. We continue to engage with the government to resolve outstanding matters and I am confident that we will reach a successful outcome. That concludes our remarks and Donna, we are ready to take questions.

[Operator:]

[Operator Instructions] And the first question is from Craig Hutchison from TD Securities. Please go ahead.

[Craig Hutchison:]

I guess my first question is in terms of the guidance. I think in December you guys have previously guided for operating costs of, I think $900 million in 2015 and CapEx of $230 million. Is that guidance still valid?

[Jeffery Tygesen:]

Craig, thank you for that question and I will turn that over to Steve.

[Steeve Thibeault:]

Hi, Craig. Yes, definitely that’s still in line. Okay. I think that you have seen the results from this. We had pretty much that amount. Keep in mind that, I don’t want to be too technical here but I am the CFO, and I just wanted to remind you that the $900 million will be based on IFRS, okay. And we will give you all the details once we go through the year in order to give you the impact and the difference compared to 2014. Okay.

[Craig Hutchison:]

Okay. Thanks. Going forward, would you guys be reporting [C1] [ph] cash costs and just the reconciliations in terms of cost per ton mine milled. Will that information start coming through in 2015?

[Steeve Thibeault:]

Yes, Craig. I thought that we have done a great job in 2014 to give you more information but no, seriously we are going to -- we are looking at providing information in the [C1] [ph] cost and maybe other unit cost. We are looking at it definitely in 2015. That’s the goal that we have.

[Craig Hutchison:]

Okay. Thanks. Maybe a question for Jeff. Just in terms of resolving issues with the Mongolian government. Have they indicated a timeframe or were they are looking to resolve these issues? I know they have been quite public in the past talking about resolving issues by the end of 2014 and obviously that’s got pushed out to 2015. Do you get a sense of when they are looking to have these things resolved? Obviously you guys probably want to resolve as quickly as possible but before the summer season anything to do with parliamentary sessions etcetera.

[Jeffery Tygesen:]

That’s probably been one of the number one questions I have been getting when I have been meeting with shareholders. We have been actively working with the government for over a year and half and as I mentioned earlier, there was a change in government late last year. And that team has now upped the speed and there is active discussions going on. The President came out with an economic recovery plan which the parliament approved. And I don’t know if you are aware, but parliament's on break until April 1. So we are actively engaged in talking to them. Like I mentioned before, we have had a deal on the table. We think it's a good deal for all stakeholders. So we are actively pursuing that. Another comment that was made in the press by the President and the PM is they hope to have things activated for the phase 2 portion at the end of 2015.

[Craig Hutchison:]

Okay. So that’s just -- when you say activated, it would be approved or actually money being spent or...?

[Jeffery Tygesen:]

Well, there is a -- once everybody approves everything there is a process to ramp up the project. And if you referenced our technical report and kind of that’s been pushed out in time because of the change in government. But there is a ramp up so immediately well a $1 billion a year will be spent. Now once we get through that ramp up, reengage the teams, then we will began with actual production and construction of the site.

[Operator:]

Thank you. [Operator Instructions] There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Tygesen. Sorry, we do have a question from Oscar Cabrera from Bank of America Merrill Lynch. Please go ahead.

[Oscar Cabrera:]

The negotiations with the Mongolian government have been ongoing for more than four years now and the last feasibility study I believe had assumed that you would be able to start construction of the underground on the second half of last year. I was just wondering if you have put in place an alternative plan if these negotiations don’t get settled until after the election next year. And if so, what would the profile or the production profile for the open pit would look like for the next three to five years?

[Jeffery Tygesen:]

Oscar, thank you for that question. I am going to turn that over to Stewart to respond. Thank you.

[Stewart Beckman:]

Thanks, Oscar. So Oscar, the open pit production profile at this stage will remain reasonably in line with what's in the feasibility study. So the development schedule for the mine, the open pit, is more or less the same. We are certainly doing a lot of work looking at what we need to do to optimize the open pit. Given that when we did the original scheduling at the mine, it contemplated the underground coming in much earlier than what was going to come in now. That said, it will be generally the similar source of tonnages coming into the production rate with some scheduling and optimization, really, you can say, at reduced risk and smooth out the production platform. As far as needing to take a more drastic change in the mine at increased rates, that wouldn’t make to a third to about be a 20

[Oscar Cabrera:]

Okay. That’s really helpful, Stewart. Thank you. And the other thing is, on the stand that you have been engaging companies or subcontractors to get shovel to ground as soon as possible. In the past we had talked about six months to get folks down to the underground to get construction going and then a 30-month construction period. Should we be thinking about those time periods of something that is doable at this point or would you be able to shorten these time frames with the negotiations or engagements that you have had with folks.

[Stewart Beckman:]

So a couple of things. First of all, in your leading comments. When we did the 2014 technical call, that contemplated that we started to build resources ready for the restart at the end of last year. So this is starting to employ the [indiscernible] team. The will expand the [indiscernible] to be able to execute the project and then starting to do some enabling projects for the beginning half of this year. But you can use as a rule of thumb, so every month that we push out without approval or even approval for us to be able to start to build resources past about September last year, is adding a month so we know we are roughly six month behind and you can push the underground schedule back by about 10 months. We have been doing work and we have been in the market working, in particular, the APCN contract and when it's close to the point I think ready to award that contract and essentially awarding the contract subject to [indiscernible] or course and we are doing the same for some of the other contracts and the opportunity to get those completed and negotiated ahead of approval which will help us to accelerate things. At the same time when we close down over a year and a half to getting out, we had a more substantial thing with -- reduce that [team size] [ph]. I think it's a little bit of [indiscernible] about that. So we are seeing some improvement and also some things will make a little bit more difficult for us to lease that. So if you just use, assume that we are pushing out by roughly the time past September. The one other comment that I wanted to make as well is the underlying assumptions for the feasibility study and the technical report work completed at the end of 2013 and the beginning of 2014. So the estimate is starting to get dated. And if we don’t get some progress soon, we will need to go back and refresh those estimates.

[Oscar Cabrera:]

Presumably that lower diesel prices or skilled labor should help in then?

[Stewart Beckman:]

Yes. So we are certainly seeing people more willing to negotiate since the [indiscernible] the mining industry is now. Very stressed at the moment. So it's a good time to be in the market to negotiate.

[Operator:]

Thank you. Mr. Tygesen, there are no further questions.

[Jeffery Tygesen:]

Well, thank you for joining us on today's call. It's an honor to lead the Turquoise Hill team and be associated with the world class Oyu Tolgoi asset. Operationally and financially 2014 was a good year and I look forward to building on our success in 2015. Thank you for attending.

[Operator:]

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