Taseko Mines Ltd Q1 FY2024 Earnings Call

Good morning. My name is Ina, and I will be your conference operator today. I would like to welcome everyone to Taseko's First Quarter Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. Mr. Bergot, you may begin your conference.

Thank you, Ina. Welcome, everyone, and thank you for joining Taseko's first quarter 2024 results conference call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market closed and is available on our website at tasekomines.com and on SEDAR+. I'm joined today in Vancouver by Taseko's President and CEO, Stuart McDonald; Taseko's Chief Financial Officer, Bryce Hamming; and our COO, 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 first 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. And finally, all dollar amounts we will discuss today are in Canadian dollars unless otherwise specified. Following opening remarks, we will open the phone lines to analysts and investors for questions. I will now turn the call over to Stuart for his remarks.

Thank you, everyone, for joining us today for our quarterly conference call. I will start with a brief overview of the quarter before handing it over to Bryce for more detailed commentary on our financials. It has been a busy few months with increased construction activity at Florence, the buyout of our partners at Gibraltar, and our recent bond refinancing. First, let’s discuss Gibraltar operations. The mine has been running smoothly, and our initial production results are generally on track. Gibraltar produced 30 million pounds of copper and 250,000 pounds of molybdenum during the first quarter, with a grade of 0.24%, consistent with our expectations for the year. One of our two concentrators underwent planned major maintenance in January, resulting in a shutdown of about 12 days. Since resuming operations, our total mill throughput has been robust, averaging just over 90,000 tons a day, exceeding nameplate capacity by 6%. Copper recoveries averaged 79%, slightly lower than anticipated due to higher throughput and milling of partially oxidized material. Our total site costs remained consistent with the previous quarter; however, lower production and reduced capital strip allocation affected our unit costs. Our C1 operating cost was USD 2.46 per pound this quarter, and with a realized sales price of $3.89 per pound, we generated $50 million in adjusted EBITDA and $60 million in operating cash flow, indicating strong financial results. Bryce will provide further details shortly. Looking ahead, we have a pit transition underway. The Gibraltar pit was the main ore source in the first quarter, with the connector pit providing about 25% of the mill feed. By midyear, the connector pit will become the primary pit, and we are preparing to move the in-pit crusher this quarter. Our contractor has begun mobilizing their equipment, and while mill number one will be down for a few weeks, we will take this opportunity to complete proactive maintenance. Mill number two and mining activities will continue as normal. We remain on track to meet our annual production guidance of 115 million pounds of copper. We recently finalized the acquisition of the remaining 12.5% interest in Gibraltar, marking our first full period of complete ownership in the second quarter. This transaction is beneficial for us as it ensures immediate cash flow while maintaining liquidity for Florence development over the next two years. Additionally, we reclaimed the 30% life-of-mine offtake contract previously held by our partners, which comes at a time when smelter treatment and refining costs are at record lows. This allows us to maximize revenue by selling additional spot shipments at negative treatment charges, a rare situation that highlights the value of clean concentrate in the current market. Compared to our previous contracts, we expect cost savings of approximately $10 million in the second half of 2024. We have also secured significant additional tons for 2025 and 2026, which have also been sold at negative treatment charges, indicating traders anticipate ongoing copper concentrate shortages. The refined copper market is strong, with prices rising to around $4.50 per pound, about $0.60 higher than our realized price in the first quarter. This is an opportune time for us to boost production, which we are actively advancing at Florence over the next 18 months. Initial construction and well field development activities at Florence are progressing smoothly. We have three drills operating, with a fourth to be mobilized in May. To date, we have drilled 10 new wells as planned, with earthworks and site preparation for plant infrastructure well underway. Last week, we completed the first concrete pour in the plant area. We spent USD 18 million on constructing the commercial production facility, from an estimated total of $232 million based on our technical report last year. Expenditures will increase in the coming months as we ramp up construction of the SX/EW plant. As indicated in our MD&A, we also incurred USD 15 million in additional CapEx at Florence, which includes final deliveries of long lead equipment ordered in 2022 and costs for constructing another evaporation pond, which we decided to advance for greater water management flexibility. Overall, we are pleased with the progress at Florence. Recruitment is proceeding well, and our site team is preparing for initial well field operations and copper production scheduled for late next year. We have completed several key financings recently, fully funding the Florence project with available liquidity from Mitsui and cash flow from Gibraltar. We have also extended our hedging program to secure a minimum copper price of $4 per pound for 2025, providing added protection during the Florence construction period. Finally, I want to comment on our recent bond refinancing, which we are very pleased with. It has significantly reduced risk for the company and was timely given the favorable bond market conditions following our Gibraltar transaction. Increasing the senior notes from $400 million to $500 million provides additional resources to replace more expensive bank debt at Florence, and extending the maturity date to 2030 gives us ample time to generate cash flow from both Florence and Gibraltar, allowing us to focus on reducing our debt in the future.

Thank you, Stuart. Yes, it has been quite a busy start to the year between the various financing, operating, and construction initiatives. Just to add a little more information about the bond refinancing to start. We're very happy with the outcome of this process, and we moved very quickly into refinancing mode after the closing of the second Careview transaction in March. Being able to refinance and upsize the new notes to $500 million with an 8.25% coupon is quite attractive, seeing bank debt is more than 9.5% at the moment. Originally, we expected that we would be refinancing later this year with the expectation that interest rates may have started to decline by now. As the expectation of lower rates diminished in recent months and weeks, we made the decision to move forward sooner, as the high-yield market was open and constructive. Even though we are in a much higher interest rate environment today compared to our last bond financing in 2021, the credit spread within the high yield rate is historically low and notably better for us by more than 2% than it was for Taseko in 2021. An important factor that investors looked at was our increased ownership in Gibraltar since our last issue and our flexible payment terms we achieved with those acquisitions. Today, our production and financial metrics are 33% higher than in early 2021, with copper prices more than $1.5 higher per pound. The fact that our deal was roughly 4x oversubscribed shows that bond investors can now see the credit rerating that will come with Florence cash flow in the not-too-distant future. Having two copper-producing cash-flowing assets will make a significant difference to our credit profile and our objective of deleveraging in the years ahead. The recent Gibraltar acquisition with Dowa and Furukawa is a great deal for us in several ways. First, we agreed to pay them back their invested capital into Gibraltar of CAD117 million, but that was on the agreement we would essentially only pay them from cash flow from Cariboo, the 25% owner of Gibraltar that we acquired. We agreed to a term of 10 years to pay this back, with any amounts not paid over that time to be made up in the final balloon payment in 2034. We also agreed on a payment framework that was based on copper prices so that if copper prices are higher, they get a higher annual payment, but we obtained downside protection in lower copper price environments. For example, at $4 copper, we would pay them only $6 million per year. And at a $5 copper price, we would pay them no more than $15 million a year. We also achieved, most importantly, a two-year holiday for any payments to ensure we have the runway in the near term to build Florence. The obvious question is why did they sell it to us on such favorable terms? The answer is simple. Last year, both Dowa and Furukawa exited the Onahama smelter in Japan and sold their interest to Mitsubishi. They no longer needed the concentrates from Gibraltar to feed that smelter. And with the acquisition of Sojitz in the prior year, Taseko was the only natural buyer. Dowa and Furukawa agreed to work with us so we could achieve our mutual objectives. We think this will be a very valuable deal to Taseko in the short term and, of course, in the long term. All this said, this Cariboo transaction did create some different accounting in our Q1 financials. When we move from 87.5% to 100% ownership, we are required under IFRS to move from joint control, proportionate consolidation accounting to full consolidation. Under IFRS, we need to revalue our existing 87.5% interest on this deemed acquisition date. This required us to write up the book value of our inventory at March 25 to its fair value or net realizable value, which resulted in a $15 million gain in the income statement. It's noted as a gain on acquisition. But $13.3 million of that accounting gain was actually realized by the end of March, as we had a concentrate shipment in that last week. So $13 million of that was really a realized gain, which otherwise would have been operating margin. We have illustrated this in our adjusted earnings reconciliation, so it's clear to the reader what happened there; that this gain on acquisition was substantially just operating margin in the quarter, just reclassified to this other category called gain on acquisition. Sales volumes in the first quarter were 32 million pounds at an average realized price of $3.89 per pound. Our share of these sales generated $147 million of revenue in the quarter. Sales exceeded production as we brought down our copper inventories again to a more typical level of less than 5 million pounds. While the copper price year-over-year was very similar, the 25% higher revenue was driven by increased production and sales and the increased ownership of Gibraltar. Total site gains at Gibraltar were $110 million in the quarter, in line with the prior quarter and the first quarter last year. Overall site spend at Gibraltar is quite consistent quarter-over-quarter, and we expect this level of spend over the next quarters and for the rest of this year. On a cost per pound basis, our C1 costs in Q1 were $2.46 per pound. Adjusted EBITDA for the quarter was $50 million, including that $13 million of margin from inventory on hand at March 25 and sold before the end of the quarter. Our cash flow from operations was $60 million, significantly higher than the first quarter of 2023. This was driven by increased production and higher sales, including that 2 million pounds of inventory that we drew down over our production as well as the increased ownership of Gibraltar. Adjusted net income was $8 million or $0.03 per share, which was also higher than we reported last year. GAAP earnings for the quarter was $19 million or $0.07 per share, and it included that $47 million gain on the Gibraltar acquisition from Dowa and Furukawa. That's also known as a bargain purchase gain, similar to what we had with Sojitz. Capital spending at Gibraltar in the quarter was $22 million, including $14 million for capitalized strip, $6 million in general sustaining, and $2.5 million for capital projects, mainly that crusher relocation project, which is progressing this quarter. That will wrap things up for me, and we expect about another $8 million to go on it for spending. With mill two downtime in January to replace a major component, we are now in the process of finalizing our insurance claim for that. We have received $3.5 million on that in U.S. dollars to date, and we expect to receive a total claim of at least $20 million or more still to come in the coming months.

Your first question comes from the line of Craig Hutchison from TD Bank.

Just a question on the TCRC. It's obviously very positive to see you guys are going to recognize negative TCRCs. But can you give us a sense in terms of what percent of your concentrate that you expect to produce, say, this year, next year in 2026 is actually under contract?

Sure. Craig, it's Stuart speaking here. Essentially, we have previously sold all of our material for the current year for 2024. But what happened with the Cariboo deal was that we got about 50,000 tons of concentrate back for the shipments that were scheduled for the second half. So those have been remarketed at negative TCs. So that's 50,000 this year in the second half. That's roughly 40% to 50% of our shipments in the second half. And then for 2025 and 2026, we've now sold 220,000 tons of concentrate; 160,000 tons of that in both years were what we've just marketed. The remaining 60,000 tons were sold previously under a long-term deal. So that gives you an idea of what we've been able to achieve. It's pretty significant; it's 75% to 80% of our production in '25 and '26 that we've just sold in the current market.

Great. And just a question on transportation costs; just kind of looking year-over-year, it looks like they're up 100%. I know some of that is just you're recognizing you have a larger interest in Gibraltar, but can you give us a sense of why they're up so much? And is that something we should be modeling going forward?

Craig, Richard here. Really, the story in transportation costs is we've had to utilize trucking to move concentrate from Gibraltar down to the coast for over the last few years, and it's become a regular part of our business. We're working hard to get back to being able to rail it all. That's really the objective on a go-forward basis. We'll continue to utilize trucking as a backstop to inefficiencies and being able to rail the concentrate.

Okay. But what's the sort of limitation on the rail side of things? Is it more cars, or give us a sense of what that issue is?

Yes. It's quite complex, but to simplify it, it really comes down to how fast the cars are cycling on the route back. Just over two years ago, there was a route change where the cars now started traveling north instead of going south out of Williams Lake, and that added cycle time to the cars returning. That has been one of the challenges. The other obvious one is when you get FM events like the flooding or the port strike last year, which impacted our ability to concentrate up at site, forcing us to resort to trucking to be able to move.

Okay. And just another question for Gibraltar. The decision or the consideration to restart the oxide SX/EW plant, what are some of the factors that you're thinking about there? Is it just sulfuric acid prices? And can you give us some kind of sense in terms of what the production would look like if it were to restart?

Yes, Craig, Richard again. Really, the driving factor there is having sufficient oxide ore placed on the dumps to justify the capital investment and the operating cost to be able to restart that plan and then run it sustainably. I think as we've indicated previously, 2026 is the timeframe we're looking at. However, we're also looking at potentially trying to accelerate that with some of the additional tons that have been placed on the dump at the end of last year and through the beginning of this year. Work is underway in that regard.

Okay. Great. Maybe one last question for me. Just on Florence spending. Can you talk to the cadence of the spending here throughout the year? Should we expect a significant uplift in Q2, or is it more starting big spend starting Q3, Q4?

No, I think you're going to see a step up in Q2, probably another step up in Q3, and then kind of steady for a couple of quarters from there and then ramp back down a little bit as we get later on in 2025. It's going to pick up here definitely in Q2.

I think we're good, operator. So we're going to probably stop it there and look forward to chatting with everyone again next quarter. That concludes our conference for today. Thank you all for participating. You may all disconnect.