Q3 2017 Earnings Call: Managementâ€™s DiscussionOctober 26, 2017
Brian Bergot - Taseko Mines Limited - VP of IR
Thank you, Latoya, and thank you, everyone, for joining us today to review Taseko’s third quarter 2017 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 tasekomines.com.
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 third quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session. 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. Please refer to the bottom of our latest news release for more information.
I will now turn the call over to Russ for his remarks.
Russell Edward Hallbauer - Taseko Mines Limited - CEO, President and Director
Thank you, Brian. This quarter was another very good quarter for Taseko in spite of the hardships encountered by over 6 weeks of uncontrolled wildfires in the Central Cariboo, British Columbia.
We generated earnings from mining operations of a little over CAD 45 million, while producing 35 million pounds of copper and 445,000 pounds of molybdenum. Net income of $20.1 million or $0.09 per share was $15 million above that achieved in Q2 2017. Total operating costs were USD 1.18 per pound produced, down from the $1.31 pounds achieved in Q2.
Over the last 12 months, the company has generated approximately $230 million of operating cash flow and $192 million of earnings from operations, which points to the cash-generating ability of Gibraltar when costs and metal prices align.
We anticipate our financial performance to continue as the copper price continues to increase, as it has over the past month. While the market appears balanced at this time, the deficit so long talked about is beginning to present itself.
At the end of Q2, in my quarterly remarks, I commented on the wildfire situation and the effect it was having not only
on Gibraltar, but on the Central Cariboo. We estimated at that time we’d be able to produce roughly 36 million to 37 million pounds of copper based on how we saw the situation at the time and how we managed through it. We did manage to boost — produce 35 million pounds, which was an impressive feat considering the calamity caused by that wildfire situation. We expect to get back on track with both sales and production by the end of the year. And we estimate, if all goes well, selling approximately 40 million pounds in Q4, bringing the yearly total to roughly 150 million pounds.
We are still working through our 2018 budget and what impact the stripping shortfall in specific pit mining areas have had on both head grade and strip ratio, and how it will affect the early part of 2018 as we work through to determine the residual effects of the nearly 7 weeks of impacts from the fires. We anticipate spending less over the next few quarters, and with copper price higher, it should give similar or better financial results in the quarters ahead. The Canadian FOB selling price yesterday was nearly $4.10 a pound. And as we — and as said earlier, we expect sales to rise in Q4 as we reduce inventory and maneuver our mining plans to get back on sequence, while we take advantage of the copper price which is present — which at present is about 12% greater than that which we received in Q2.
The copper business is fast approaching some watershed events. The ever-expanding EV market and the surge by auto companies to lock in supplies of strategic metals to help facilitate that growth in EV production is unprecedented. And we believe it will spill over into the copper business, and it is. Cobalt, lithium and copper are the key ingredients for increased EV production. And over the past months, we’ve seen how emerging cobalt and lithium producers have been affected by that outlook. Copper will be next.
Our Florence asset could not be better positioned. The United States has a 600,000 ton per year copper deficit. They import roughly 1.2 billion pounds of copper metal a year. Florence is going to be one of the first new copper producers in the U.S. in a long, long time. So made-in-America copper from Florence will be going into made-in-America EVs. Florence will not only be the lowest cost per ton of copper capacity to build anywhere in the world, but it will also have the lowest carbon footprint as well. In a world where increasing focus is on environmental aspects of any project, Florence has some important aspects that no other project possesses. Our energy consumption compared to a conventional open pit will be 71% lower. Florence will use 2 kilowatt per hour per pound of copper produced versus a conventional mine mill operation of 7 kilowatts per hour per pound. Florence will also use 3 gallons per pound of copper produced versus conventional mine of 41 gallons per pound, or 93% lower. And kilograms of CO2 per pound of copper will be 1 versus 6 for a conventional mine, 83% lower. And best of all, our C1 cost will be under a $1.10 and a $1.15 per pound, making this project one of the most exciting low-cost copper stories out there today. At present copper prices, Florence will generate roughly USD $160 million in operating profit for Taseko a year and will play an important role in not only our corporate financial profile, but our profile in terms of low-carbon-intensity carbon reduction. So we’re excited about starting the production. We’re starting the construction
of the PTF, and we look forward to having it completed in the second half of next year.
I’d now like to turn the call over to Stuart to talk about the financials.
Stuart McDonald - Taseko Mines Limited - CFO
Thanks, Russ, and good morning, everyone.
Earnings from mine operations before depreciation were $45 million in the third quarter and adjusted EBITDA was $42 million. These quarterly earnings are generally in line with the previous quarters this year, but I can provide a few further details about what’s going on within these headline numbers.
Copper production at Gibraltar was 35 million pounds. The copper sales were only 30 million pounds.
The wildfire situation impacted our rail service, and as a result, we missed a ship at quarter end and it went in early October instead of September. This meant less revenues and cash flow in the third quarter, and copper inventory increased to 9 million pounds. As Russ mentioned, we expect to reduce that inventory level and have higher sales volumes in the fourth quarter.
Third quarter revenues were $79 million based on a realized copper price of USD 3 per pound. That includes provisional price adjustments of $0.04 per pound as copper prices trended upwards through the quarter.
Copper prices have continued to strengthen in October, although they’re a bit off today, but generally we have higher copper prices. The Canadian dollar has weakened recently as well, which helps our margins and we have higher expected sales volumes. All of that bodes well for the fourth quarter.
Total operating costs were $1.18 per pound in the quarter. That’s 38% lower than the third quarter of 2016, mainly due to a higher allocation of capitalized stripping. We capitalized $23 million of mining costs in the quarter related to waste stripping activity in the new section of the Granite pit.
Significant items on the P&L for the quarter include a $10.3 million unrealized foreign exchange gain on our U.S. dollar denominated debt and a $3.6 million write-down in carrying value of mine equipment that we’re intending to sell. GAAP net income for the third quarter was $20.1 million or $0.09 a share. Adjusted net income was $13.4 million or $0.06 per share, and excludes the unrealized foreign exchange gain, the write-down of mine equipment and unrealized derivative loss and the related tax adjustments. These same adjustments were made to EBITDA resulting in adjusted EBITDA of $42 million for the quarter.
Turning to the cash flow statement now. We had operating cash flows of $37 million, and this was offset by $32 million of capital items and 4 million of lease payments. CapEx included $23 million of capitalized stripping, $3 million of sustaining CapEx at Gibraltar and $2 million for project costs at Florence and Aley. We continue to maintain a strong cash balance with $96 million in the bank at the end of September. And while we were cash flow neutral for the quarter, we do expect to generate cash in the fourth quarter as we sell off the excess inventory and take advantage of the stronger copper prices.
Looking back at the first 9 months of the year, it’s been a successful period for the company. We’ve generated over $100 million of free cash flow, including $44 million from the sale of the silver stream in Q1. And we used some of that cash to reduce debt as part of our refinancing in June and also extended the maturity date of our long-term debt from 2019 to 2022. We’re now in a strong financial position to move forward with the development of the project test facility at Florence.