Company Updates

Q1 2018 Earnings Call: Management’s Discussion

May 03, 2018

Brian Bergot - Taseko Mines Limited - VP of IR

Good morning, everyone, and thank you for joining us today to review Taseko’s First Quarter 2018 Financial Results.

Our financial results were issued yesterday after market close and are available on our website at

Before we begin, I would like to introduce everyone on the call today. We have Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and Stuart McDonald,

Taseko’s Chief Financial Officer.

After opening remarks by management, which will review the first quarter business and operational results, we will open the phone lines to analysts and investors for question-and-answer session.

As usual before we proceed, I would like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information by its nature is subject risks and

uncertainties that may cause the stated outcome to differ materially from the actual outcome.

I encourage you to read the cautionary note that accompanies our first quarter financials in MD&A and the related results, news release as well as the risk factors particular to our company.

I will now turn the call over to Russ for his remarks.

Russell Edward Hallbauer - Taseko Mines Limited - President, CEO & Director

Thank you, Brian. Good morning, everyone, and thank you for joining us today.

As we indicated in our year-end conference call, we expected production in Q1 to be roughly comparable to that of Q4 of last year, with metal production being affected by the drop in head grade as we developed our new major pushback as lower grade ore is on the top of the Gibraltar ore body.

Mine production can best be described as being somewhat lumpy over the past few months, as our operating team experienced those pushback lower grade ores as well as inconsistent metallurgy. The ore feed has also had more oxidation than we normally experience when develop these new pushbacks.

And as we are still pulling from supplemental ore from the stockpile along with the pit ore, our recoveries went down significantly because of those mineralogical changes. The copper — and we’ve experienced in the past, the copper mineralization is a little bit different than we’ve experienced in the past and it’s taken us some time to work through that.

Historically, recovery has been around 86%, 87%. As you all well know, in this quarter, we were 76% as a result of both grade and recovery. As I said at year-end, it would take a number of months to get through this period of lower head grade ore. However, we did not recognize the degree of oxidation we have encountered. We are now though seeing higher grades from the pit and our recoveries are slowly coming back to normal levels.

On the positive side, throughput has been excellent as our concentrators are continuing to perform very well. And we rate – ran right around design at 85,000 tons per day and our cost per ton mills has remained relatively constant as it has in the past. And that’s considering our head grade was 0.2% copper. We still manage to generate roughly $12 million of cash flow from operations.

We expect Q2 and Q3 and into Q4 to be much improved, as we move back up the grade curve to reserve grade. And as grade improves, recovery will improve and the outcome will be returning to good cash flow and operating earnings through the remainder of the year. For example, yesterday, head grade was 0.25% and we produced over 400,000 pounds of copper for the day.

Unfortunately, aberrations are normal course of the business in the mining process. And we’re trying to get through these times the best we can when presented with them but as we’ve seen the events of last summer, have continued to linger on operations.

Generally, I’ve always spent a lot of time discussing Gibraltar. Obviously, it is our most important asset, presently. However, with our growth strategy coming to fruition with both Florence and Aley in the not too distant future, Gibraltar could be our least important asset, as our group plans unfold.

For a number of years, I’ve spoken about the quality of Florence. Generally speaking, I’m not sure if the general investment community give it the respect it deserves in terms of intrinsic value.

I guess, I can somewhat understand that considering the length of time it’s taken us to permit the project, the nature of the extraction process in general unfamiliarity of the technical process we will be using. Well, Florence is getting closer to reality than I think most appreciate.

As I’ve said before, the overall process is an innovative copper extraction process. However, it’s very common in the uranium business, and our engineering test continues to support those similarities.

I urge you to go to our website and see the work that has been completed on the drilling and our plant, and you will see the effort going into this project.

We are on-time and on-budget, and we expect to be injecting solution later in the summer and expect to see pregnant copper solution being presented to the plant in Q4 of this year, a few short 6 to 7 months from now.

There is obviously a lot of discussion around greening up the mining business as all businesses, and it’s important topic at this time. To give you an idea about Florence in this regard here a few facts. Energy consumption at Florence will be 2 kilowatts per pound of copper produced versus a conventional open pit mine of the same versus 7 for the conventional open pit mine of the same metal production. Fresh water use will be 3 gallons per pound of copper produced versus 41 gallons for a big similar size open pit mine. An important consideration will be the kilograms of CO2 per pound of copper produced and that will be 1 kilogram at Florence versus 6 for a conventional open pit mine. We will have no tailing ponds, no changes to the land and the land can be used after operation and with no environmental concerns.

It all adds up to the attractiveness in this asset and other aspects beyond just financial, and the value to Taseko as carbon and water becoming increasingly bigger issues in the future of mining operations. Not only will our overall weighted cost of production drop, so will our overall carbon footprint in other green footprint initiatives.

We have invoiced, Stuart will speak about it briefly later, roughly $15 million of the $25 million budget. We’re more than half done. In fact, probably on the GAAP curve, we’re significantly done more than the dollars indicate.

Important aspect is the recent changes to the U.S. corporate tax rate have boosted the NPV of this project by USD 80 million to roughly CAD 760 million or $700 million or nearly CAD 1 billion.

The question over the next few months may be raised with Stuart in terms of how we finance the permanent SX/EW plant and extraction of wellfield. But with the compelling economics of Florence, we expect that we’ll be able to complete normal debt project financing. Stuart plans to kick that work off in the fall with the commercial banks.

With respect to Aley, we have continued our engineering work aggressively. The more you engineer a project, the better project one will have. As a result of this work, we have enhanced economics at a lower niobium price and this — and have increased the NPV and the IRR from those in our 2014 technical report.

Also, we have engineered in the stage development process dependent on market conditions. The full details of which will be in our technical report update that we will be publishing shortly.

We can continue to speak the steel mills around the world on offtake agreements, and we are extremely pleased with the progress we are making in that area.

We believe Florence can be operational by late 2021 or early ‘22, and Aley shortly thereafter, if all pans out.

I would now like to turn the call over to Stuart for his remarks.

Stuart McDonald - Taseko Mines Limited - CFO

Thanks, Russ, and good morning, everyone.

I’m happy to provide some further details in our first quarter financials that we released yesterday. And as we described in the release, our copper production and grades this quarter were well below normal levels.

Credit score has a knock-on effect on earnings, although we still generated $13.5 million of earnings from mine operations before depreciation and adjusted EBITDA of $7.5 million for the quarter.

Gibraltar’s copper sales volumes were just under 23 million pounds, which was the same number as our quarterly production as we are able to maintain a low inventory level at quarter end.

The average LME price in the period was USD 3.16, which is higher than recent quarters, but we didn’t get the full benefit of that as the copper price dipped at the end of the March. And for accounting, we revalued our receivables at the quarter end price of $3.04 per pound.

Total provisional price adjustments on copper were negative $4 million over the quarter, resulting in a realized copper sales price of USD 2.98 per pound.

Moly prices strengthened significantly in the first quarter, rising from about $10 a pound at the beginning of the year to well over $12 by quarter end.

Our byproduct credit in the first quarter increased to $0.23 per pound of copper.

Based on our 75% share of Gibraltar volumes, our total revenues for the quarter were $64 million, which is obviously a lower amount than recent quarters and is the main reason why earnings are below normal levels.

On the cost side, our total site spending continues to be fairly consistent from quarter-to-quarter, but our operating cost per pound increased this quarter to USD 2.33 because of the lower copper production and lower capitalized stripping.

We also drew down our lower grade ore stockpile in the quarter by processing approximately 2.5 million tons of the stockpile. When we do this, we take the accounting book value of the stockpile ore to earnings and this resulted in a noncash inventory expense of $3.9 million and additional depreciation expense of $1.3 million in the quarter.

We’re continuing to pursue an insurance claim related to Cariboo wildfires from last July, and we advanced work on the claim in the first quarter, but the amount hasn’t been annualized.

We estimate that our 75% share of the claim will be in the range of $4 million to $10 million, and we recorded a $4 million insurance recovery in the quarter, which is at the low end of the range.

Other significant items on the first quarter P&L include an $8.3 million unrealized foreign exchange loss on our U.S. dollar denominated debt and a $1.2 million unrealized gain on copper put options.

The GAAP net loss for the first quarter was $18.5 million or $0.08 per share. After adjustments for the unrealized foreign exchange loss and derivative gain, we’re recording an adjusted net loss of $11 million, which is $0.05 per share.

Operating cash flows for the first quarter were $12 million and were offset by cash outflows for investing activities of $24 million. As a result, our cash balance reduced to $64 million at quarter end.

CapEx in the first quarter included $15 million of capitalized stripping cost in the new section of the Granite pit.

We also spent CAD 14 million or USD 11 million on construction of the Production Test Facility of Florence. That project is on budget, and we have about USD 10 million of remaining CapEx to spend this year.

Looking ahead, as we expect to return to normal reserve grades, will lead to significant improvements in quarterly earnings and operating cash flows.

As I noted on the year-end call, we may see a small decline in the cash balance in the next few months as the majority of the Florence project spend is weighted towards the first half of the year, and we also have a bond interest payment in June. And then we expect to begin growing the cash balance again in the remainder of the year.

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