Company Updates

Q2 2018 Earnings Call: Management’s Discussion

August 14, 2018

Brian Bergot - Taseko Mines Limited - VP of IR

Thank you everyone, for joining us today to review Taseko’s Second Quarter 2018 Financial Results.

My name is Brian Bergot, and I’m the Vice President, Investor Relations for Taseko.

Our financial results were issued yesterday after market closed 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 second quarter of business and operational results, we will open the phone lines to analysts and investors for a 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 to 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 second quarter results news release, as well as the risk factors particular to our company.

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

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

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

As I stated in our previous call, our first quarter head grade was low and recoveries poor as a result of oxidation of the copper mineralization as we developed our next pushback in the Granite pit. However, near the end of the first quarter, we began to see increased head grades and recoveries back in the high 80s as we transferred — transition through those ore zones. And although the higher grades did not affect first quarter performance, we knew things were improving.

This trend has continued in the second quarter with increasing head grades and better recoveries. As I indicated in May, as grade and recoveries improve, we would be returning to good operating earnings and cash flow and that is exactly what has happened. Copper production rose nearly 50% quarter-over-quarter from the 23 million pounds in Q1 to nearly 34 million pounds this quarter.

Earnings from mining operations grew from $14 million to $36 million, so we are back on track with our plan and, in fact, things are progressing quite well into Q3. In July, we produced just over 15 million pounds or 87% recovery, while processing just under 90,000 tons a day through our concentrator. So we reiterate what we have previously said, we expect the rest of 2018 to be good from a production position. And at USD 2.80 to USD 3 per pound price of copper, we should generate very good operating earnings and cash flow.

Certainly, all the noise around the trade disputes has affected mining companies exporting to Asia. But we believe that is totally overblown as copper is effectively trading around a mean copper price of USD 3 per pound, plus or minus, which continues to give us a very healthy margin. As a market update specifically dealing with copper, I’d like to say a few words.

Chinese imported — the Chinese imported approximately 430,000 tons of concentrate from the U.S.A. in 2017, accounting for roughly 2.5% of total concentrate imports. Those concentrates came from Freeport’s Morenci and Chino Mines, Capstone’s Pinto Valley mine, Lundin’s Eagle Mine and KGMH’s Robinson mine. China only imported 3,000 tons of refined copper from the U.S. in 2017, an insignificant portion of the total of over 3 million tons of refined copper imports into the country. China — imported roughly 535,000 tons of scrap from the U.S. in 2017, accounting for about 15% of total scrap imports into China. U.S. scrap imports in China have not been added to the 25% tariff so far. If that 25%, though, is put into U.S. — onto U.S. scrap exports, that could potentially kill off 15% of Chinese scrap imports and refined copper could definitely jump in price.

Additionally, Pan Pacific Copper, one of the largest copper producers in Asia, sees no slowdown in coppers consumption in China, and they expect copper to rebound to near the $3.20 range from now until year-end, as the metal deficit grows that we’ve all been talking about.

Turning to our projects. Our Florence Project is coming along nicely and we expect to be commissioning the plant in the next few weeks. We’ve done a number of tests and these tests are showing our solution moving through the ore body faster than we have predicted, which could have some major economic impacts on annual copper production once we get the commercial plant running. All technical data we see so far is confirming our feasibility study work.

With Florence being one of the few — only few copper projects coming online in the Continental U.S. in the next few years, its capital production will certainly displace foreign refined copper imports, so as — it’s advancing towards production at an opportune time for this company. We’re continuing to work on our Aley Project and we’ve just in the final stages of completing the bulk of sample program, which will allow us to produce niobium metal for marketing purposes. So things are going the way we like to see them.

I would like to now turn the call over to Stuart to talk a little bit about our financial.

Stuart McDonald - Taseko Mines Limited - CFO

Thanks, Russ, and good morning, everyone.

I can provide some further details from our second quarter financials that we released yesterday.

And the improved copper production led to a significant improvement in our financial results over the previous 2 quarters, as Russ described. And we reported earnings from mine operations before depreciation of $36 million and adjusted EBITDA of $32 million for the quarter.

Revenues for the period were $94 million from the sale of 24 million pounds of copper and approximately 300,000 pounds of molybdenum. Our realized copper sales price was USD 3.13 per pound, which was in line with the average LME price for the quarter. Moly prices declined slightly in the quarter to an average of $11.65 per pound and we had some technical issues in the moly plant, which impacted recoveries. As a result, moly production did not increase in line with the increased copper production and byproduct credits per pound decreased to USD 0.12 from USD 0.23

in the previous quarter. The plant is running well again and moly prices are back up above $12 a pound so we should see increased byproduct credits going forward.

Site operating costs increased in the second quarter, primarily because we capitalized a smaller proportion of waste stripping costs this period but also because of the increased mining rate. We capitalized $7.7 million of waste stripping costs in Q2 compared to $14.7 million in the previous quarter.

Our total operating cost per pound or C1 increased to USD 1.98 per pound. That’s 15% lower than the first quarter because of the increased grade and copper production. We also recorded $18 million of depletion and amortization expense in the second quarter, compared to $15 million in the first quarter and $12 million a year ago. These increases relate to amortization of capitalized stripping costs as the majority of ore tons are now being mined from a new section of the Granite pit.

Other significant items on the second quarter P&L include a $7.7 million unrealized foreign exchange loss on our U.S. dollar debt and a $1 million unrealized gain on copper put options. The GAAP net loss for the second quarter was $4.7 million or $0.02 per share. After adjustments for the unrealized foreign exchange and derivative gains, we are reporting adjusted net income of $2.3 million, which is $0.01 per share.

Operating cash flows for the second quarter were $20 million and were negatively impacted by $11 million of noncash working capital adjustments or increased accounts receivable and inventories. Our operating cash flows were offset by $24 million of cash used for investing activities, which included $7 million of capitalized stripping and $4 million of other capital expenditures for Gibraltar. We also made cash payments of just under $10 million for construction of a Production Test Facility in Florence.

In terms of financing activities. We made a semiannual interest payment of $14 million in June and equipment lease payments of just under $3 million. We also supplemented our liquidity with a new $9 million equipment loan, which was completed in June. We ended the second quarter with $52 million of cash on the balance sheet, a reduction during the quarter as was expected.

And looking ahead to the rest of 2018, spending at Florence will decline as construction of the Production Test Facility nears completion.

And we expect to finalize an insurance claim for the Cariboo wildfires last year and expect cash proceeds in the range of $4 million to $10 million for that.

Copper prices have obviously declined over the last month, but with prices as they are today, we should be able to maintain a healthy cash balance going forward. And we also have some downside protection in the form of put options, which protect the minimum price of $2.80 per pound for 30 million pounds of copper over the second half of the year.

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