Taseko Mines Ltd Q3 FY2022 Earnings Call

Good morning, everyone. My name is Michelle, and I will be your conference operator today. I would like to welcome you to Taseko's Third Quarter Earnings Conference Call. I will now hand it over to Mr. Brian Bergot. Please proceed, sir.

Thank you, operator. Welcome, everyone, and thank you for joining Taseko's third quarter conference call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com and on SEDAR. I am joined today in Vancouver by Taseko's President and CEO, Stuart McDonald, Taseko's Chief Financial Officer, Bryce Hamming; and our Senior VP, Operations, Richard Tremblay. As usual, before we get into opening remarks by management, I would like to remind our listeners that our comments and answers to your questions will 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. For further information on these risks and uncertainties, I encourage you to read the cautionary note that accompanies our third quarter MD&A and the related news release as well as the risk factors particular to our company. I would also like to point out that we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release. Following opening remarks, we will open the phone lines to analysts and investors for a question-and-answer session. I will now turn the call over to Stuart for his remarks.

Thank you, Brian, and good morning, everyone, and thank you for joining the call today to Taseko's third quarter operational and financial results. But before we get into those details, let's start with an update on our Florence Copper Project as there were a number of positive developments this quarter. In mid-August, the U.S. EPA issued the draft Underground Injection Control permit. This is the final key permit required for the commercial production facility. Although the timing was several months later than we would have liked, the permit wording was as expected. No surprises. The public comment period ended in late September and the feedback from local residents, community leaders, and statewide organizations was overwhelmingly positive. 98% of the written comments were supportive, and there was no negative commentary at the public hearing. The positive response we've received through both the state and EPA processes is a direct result of the prudent approach that we've taken in developing the project. The efforts we've made to inform the Florence community and, of course, the low impact nature of the mining operation. Our next steps are back to the EPA now to respond to the public comments received. We've reviewed all the comments and have had initial discussions with the EPA. Based on that, we're confident they'll be able to address all of the comments before issuing the final UIC permit in the coming months. And we'll be ready to begin construction at that time. Switching to Gibraltar now, and the improved copper production in Q3 drove a significant rebound in financial performance. $34 million of adjusted EBITDA and $19 million of earnings from mining operations, both much stronger than the last quarter. Copper production at Gibraltar increased to 28 million pounds, which is nearly a 40% increase over Q2, mainly a result of higher copper grades, but also from an increase in mill throughput. In fact, the two mills averaged over 89,000 tonnes a day for the period. That's 5% above design capacity and our best quarter yet in terms of throughput. We're definitely benefiting from the softer Gibraltar pit ore as we expected. Head grade, on the other hand, while it did improve over Q2, was lower than where we expected it to be, and that also impacted recoveries. We're seeing higher than normal mining dilution in the Gibraltar pit, and we have a number of operational initiatives underway to reduce that going forward. But it's a work in progress, although we do see an improving trend, and we're now into larger, more consistent ore zones. Production in the fourth quarter is forecasted to be roughly 10% higher than Q3, and we'll continue at those higher rates for the next few quarters. Gibraltar pit will be the primary source of ore now through the end of 2023. Waste stripping out of the new connector pit has begun and will continue through next year. In order to get full access to that new ore zone, we need to move an in-pit crusher. That capital project started this summer and is well advanced. We're planning to complete the crusher move in the third quarter next year. Operating costs in the quarter declined quite dramatically, but were still being impacted by the same inflationary pressures that the rest of the industry is facing. Diesel costs were up about 50%, 55% higher than the same period last year, and that added $0.26 per pound of copper to our cost structure. We have some diesel hedging in place now to protect against further price escalation. Capitalized stripping was also unusually low this quarter, which drove up our unit operating costs. In the present environment, we're obviously very focused on cost control and managing copper price risk. We have a long-standing strategy to opportunistically acquire downside copper price protection through both copper puts and collars, and that approach again paid large dividends this quarter. We realized cash proceeds of just under $19 million from copper put options, and we have price protection in place at $3.75 per pound until the middle of next year. On top of that, we have a pricing strategy where we fixed prices around the time of shipment. So it's notable we have very low provisional price adjustments this quarter, whereas many of our peers have larger losses. We're well positioned for when copper prices rebound, which they inevitably will do. And as we see with markets today, when prices move up, it happens quickly. Global inventories are low, and physical demand fundamentals are strong. So we remain optimistic about our copper business long-term. We have a great portfolio of assets here in North America and focused on copper. But in the meantime, with the global economic uncertainty, we are managing CapEx carefully. At Florence this quarter, we spent a further $27 million, mainly related to the procurement of major components for the SX/EW plant and a few other long lead time items. Those items were ordered earlier this year and are now being delivered to site. We won't be making any more significant capital commitments now until we have a clear view on permit timing. We've been successful in locking down pricing on long lead items, but we are seeing inflationary pressures on other project costs, including drilling contractors and construction labor. Arizona, in particular, has been a hot market. But it's also a very volatile market, and we'll wait until we have a firm review of the construction schedule before updating our CapEx estimate. The balance sheet remains in a strong position with available liquidity of $210 million. That includes the undrawn revolver. We have a solid hedge position in place and improving production from Gibraltar. We're also seeing a lot of interest from royalty providers, which is a potential additional source of funds for Florence. And on that note, I'll pass things over to Bryce for a financial update.

Thanks, Stuart. Good morning, everyone. I’ll provide some details on our third quarter financial results. Sales for Gibraltar in the quarter were 27 million pounds of copper at a realized price of $3.48 per pound, comparable to the LME average price. We experienced negative provisional price adjustments of $0.5 million this quarter, attributed to the relatively stable copper price ranging from $3.30 to $3.70, along with our practice of fixing the price of most concentrate shipments at the time of shipment. This strategy minimizes copper price exposure and volatility with our customers. We either set the price directly with the customer or enter into a QP hedge with banks, which helped to stabilize our revenues this quarter compared to some peers. Total site costs, including capitalized stripping, decreased by $5 million from the last quarter but are still up $10 million compared to the same quarter in 2021. The increase in costs is mainly driven by high diesel prices, as well as steel and reagents for milling. We capitalized only $1 million of mining costs this quarter since mining was concentrated in the Gibraltar pit. The C1 operating cost per pound of copper reduced by 22% to $2.72 per pound due to increased production, despite fewer capitalized mining costs. Earnings from mine operations before depreciation were $19 million. We also realized gains of $60 million on our copper put hedges, leading to an adjusted EBITDA of $34 million. We have copper price protection of $3.75 in place until the middle of next year, allowing for potential upside if copper prices recover. The value of this protection is reflected on the balance sheet as $30 million within our financial assets. During the quarter, we acquired diesel call options to guard against further diesel price increases until mid-2023. With expected production rises in the fourth quarter and into next year, we anticipate further reductions in operating costs on a per pound basis. Adjusted net income for the quarter stood at $5 million or $0.02 per share, benefiting from $16 million of realized gains on settled copper put options during the quarter. We reported a GAAP net loss of $24 million or $0.08 per share, mainly due to unrealized foreign exchange losses related to our U.S. dollar-denominated notes. The translation of our U.S. dollar investments in Florence is not reflected in the profit and loss statement, causing a mismatched impact. Our investment in Florence continued this quarter with an additional $27 million spent, and we expect to incur about $15 million for Q4 as we receive the last shipments of our SX/EW equipment by year-end. Our cash balance decreased compared to the previous quarter mainly due to continued expenditures at Florence and other ongoing projects at Gibraltar, including the crusher move for mill 1, which is scheduled for Q3 next year. By the end of this year, Taseko will have spent approximately $18 million on this project to date. We ended the quarter with $142 million in cash and $210 million of available liquidity, putting us in a strong position to handle any future macroeconomic volatility as we prepare for Florence. Regarding Florence financing, as we mentioned previously, we are exploring additional financing options with the recent pullback in copper prices. We have successfully secured financing since acquiring Florence, and there are no encumbrances, allowing us to leverage various financing options to support our cash flow. With that, we are now ready to take questions.

I have some questions about Florence. The previous feasibility study is now five years old, and the estimated capital cost for that project was $230 million. Can you tell us how much of that $230 million has been spent as of the end of Q3? Additionally, given the current high inflationary pressures, I'm trying to understand how much has been incurred versus what remains, and what the risk might be for a significantly higher estimate than that.

Orest, it's Stuart here. You're absolutely right. We're in an inflationary environment, as I mentioned earlier. The original fees from 2017 are definitely outdated now. We updated that in 2019 prior to our London listing, which reflected a similar number. However, since then, we have certainly experienced inflationary pressures. Currently, we've committed approximately $80 million of the project spend, although that amount has not all been spent yet. In my view, it's already committed, it's gone, and the price is fixed. Regarding the remaining expenditures, most of the spending is on equipment, major components for the SX/EW, steel, and similar items, which have been priced and came in line with the original budget. However, we're noticing inflation in construction labor in Arizona. It's a volatile market right now, and we won't provide a new figure at this time. Conditions are changing frequently, making it unnecessary to issue a number now and then update it in a few months alongside a construction schedule. We'll wait for more stability. Looking into next year, we might be heading into a recessionary environment, which could alter the estimates. Overall, in other projects, inflation is around 30% on some capital projects, and that’s a number you might expect for Florence based on the current situation. Nevertheless, we're cautious about committing to any firm numbers at this stage.

Okay. What about the operating cost as well? I mean, we’ve heard a lot about acid pricing being a lot higher over the last couple of years. Any sense on where given current input costs like acid and labor and everything else, like where would the cost profile move to on Florence?

The acid price is currently around $200 a ton in the Arizona market, whereas our initial fees were at $120 a ton. It’s a volatile market, and prices tend to fluctuate. We have observed some potential new supply coming into Arizona, including a new acid plant that a third party may build near Florence, which is positive news. Overall, we maintain a very low-cost operation at Florence, as our 2017 study estimated operating costs to be approximately $1.10. This gives us a good amount of flexibility without compromising the overall economics. We plan to use about 200,000 tons of sulfuric acid per year, so when we reach full production, that can help us evaluate the impact of price changes.

Okay. So is the plan to release a completely updated feasibility technical study that includes revised capital expenditures, operating expenses, and production expectations once the final permits are in place?

Yes. Yes, that will be the plan.

First one, just on some of the additional funding needs. I just wanted to get if you're able to provide your favored source of funding. And then just using kind of the base of the $230 million and I guess the $150 million left you have to spend on that. How much additional funding are you looking for?

Yes, the situation is still somewhat uncertain. We are not completely sure when we will receive the final UIC permit for Florence, which remains a moving target. The price of copper and the cash flow from Gibraltar are also important factors. We ended the quarter with a solid liquidity position, having $210 million available and an undrawn revolving credit facility. In terms of preferences, it's important to note that it's not an encumbered asset, and we currently have no financing at the Florence level, which leaves us with various options. One option we are considering is the royalty and stream market, which has seen growth over the past few years and could provide flexible capital. Additionally, we have some equipment that we acquired that qualifies for equipment financing. We are exploring smaller financing opportunities and will pursue them based on how these other factors develop.

Got it. That's helpful. Regarding Florence, is the timing from the final UIC permit to production still expected to be 18 months as you previously mentioned, or has that timing changed due to market uncertainties? Also, what are your thoughts on current copper prices?

Ed, it's Stuart here. I know it's an 18-month construction schedule. That hasn't changed. In fact, it’s probably been less risky to some extent because of some of the procurement activities we've undertaken. So we're still comfortable with that timeline.

Just a follow-up question. You mentioned the potential for royalties and streams on Florence. Can you give us a sense in terms of what percent of the metal you'd be willing to stream?

Again, we've got a few legacy royalties on the property. And so there's quite a bit aside from that, and that's included in our intercosts that we speak of when we talk about $1.10 per pound from our 2017 report. So I think when we're talking about royalties, I think we're talking about sort of in that 2% plus range of potential encumbrance. It obviously depends on how much we need in that, but that would be something like $0.07 a pound.

And if we do go into weaker markets next year in a potential recessionary situation, is there a price for copper at which you would not hit the kind of green light for Florence just considering, obviously, there'll be pressure on the margins at Gibraltar at that point?

We view Florence as an independent project with a strong internal rate of return. Even at a $3 copper price, it had an internal rate of return around 35% based on the previous feasibility study. There is significant potential for copper price fluctuations with the Florence project. Regarding Gibraltar, we want to ensure we have options to address any downside scenarios, as previously discussed. However, what gives us the most confidence right now is the hedging position that secures us through the middle of next year.

Okay. Maybe one last question for me. You guys have mentioned that the stripping activities will commence at the new connector pit next year Gibraltar. Also, you've got the primary crusher for mill 1 that will need to be moved. Are those fairly capital-intensive projects? Any sense you can give us in terms of overall stripping for next year's costs and the movement of the mill 1? Appreciate it.

We are anticipating a slight increase in our mining rate as we transition from 2022 to 2023. However, when it comes to mining costs, we are looking at the allocation between operating and capital costs, particularly regarding capitalized stripping. Recently, we had a quarter with a very low capitalized strip allocation, but next year we expect a significantly higher portion of our costs to be capitalized. Nonetheless, the overall site costs will not vary much. Richard, could you discuss the timing and costs related to the crusher project?

The crusher work began this past summer, and it is expected to move next August or in the third quarter of next year. The total capital cost for the project is estimated to be between $40 million and $45 million.

A good portion of that's already been spent, right?

That's correct. Yes.

I have many questions about Florence that have already been asked, and I've received some answers. However, one question I have is if you receive the permanent UIC permit in Q1, will you be ready to start immediately? I assume you've conducted much of the internal research on updated capital expenditures, but I understand you're waiting to update the market based on timing. If the permit comes through in the next few months, will you be prepared to begin right away?

I think operationally, we're ready. We have our engineering well advanced. We have our procurement well advanced. As we've noted here, we have a bit of likely financing to complete here in the next few months. But yes, then we'll be ready to go.

Okay. Good. I want to follow up on a comment you made about the crusher spending for next year. You mentioned that the total cost of the project is between $40 million and $45 million, and that a significant portion has already been spent. I'm trying to understand what the spending will look like next year. What kind of figure should we expect?

Yes. I think as Richard said, it's on a 100% basis, the total projects in that sort of $40 million to $45 million range, and we will have incurred about half of that this year. I think at the end of this year, it will be around $25 million completed on a 100% basis.

Good to see the grades up again in the last quarter. Congratulations. I think all of my questions have been answered, except one. Just on the amount of ore that's being milled. So that was obviously up quite a bit in this quarter. How sustainable do you think that is? And what was the key driver of the uptick in that? Is it that the ore is softer that you're going through at the moment? And is the conditions going to go back to what you would call sort of steady state or normal in the coming quarters?

Yes, this is Richard. The ore from the Gibraltar pit is softer, which allows for higher throughput rates. Since 2023 is the source of ore, we expect to see continued high throughput into 2023. As long as we are mining, the Gibraltar pit ore is much softer and it processes well through the grinding circuit.

Okay. And how does the collected look in comparison?

Connected pit will not be as soft as Gibraltar pit, but it will be more typical of our historical granite Pollyanna pit areas.

You've already answered all the questions I had on Florence. Just one left for me on Gibraltar. On the mining dilution you flagged in the quarter, what exactly is that? Is that a rehandling issue, something maybe related to blast pattern design, or just more selectively mining with smaller excavators? Could you give more detail on what you mean when you say initiatives are underway to lower the mining dilution?

Yes. It's really around which is a process we began early in Q3, just reviewing all our controls and procedures and seeking to identify opportunities to reduce the dilution that we're incurring. It is a function of the ore cuts, the ore orientation. We're actually going to bring in a third party to assist us to ensure we're not missing anything or there's not improvements or better tools that we could bring into play and assist us with just dealing with this. And we've already seen some improvements, and I'm hopeful we're going to be able to continue to see further improvements as we go. And we also benefit, as we mine deeper, the ore zones become more consistent and less irregular in terms of what we have to deal with when we make the ore cuts.

At this time, there are no further questions from the telephone lines. I would like to turn the conference back to management for any closing remarks.

Okay. Thanks, everyone, for joining us. So we'll wrap it up there and talk to everyone next quarter. Okay. Thank you. Bye.

Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank you all for participating, and you may now disconnect your lines.