Earnings Call Transcript - TGB Q2 2020

Operator, Operator

Good morning. My name is Pam, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines Q2 Earnings and Production Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Mr. Brian Bergot, please begin your conference.

Brian Bergot, Conference Caller

Thank you, Pam. Welcome, everyone, and thank you for joining Taseko’s second quarter 2020 conference call. The news release announcing our financial results was issued yesterday after market close and is available on our website at tasekomines.com. With me today in Vancouver is our CEO, Russ Hallbauer; our President, Stuart McDonald; John McManus, our COO; Taseko’s Chief Financial Officer, Bryce Hamming; and Richard Tremblay, our Vice President of Operations. 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 second 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. After opening remarks by management, we will open the phone lines to analysts and investors for a question-and-answer session. I would now like to turn the call over to Russ for his remarks.

Russ Hallbauer, CEO

Thank you, Brian. Good morning, everyone. Since the last time we spoke three months ago, there has been a lot of turmoil, as you all know. I’d like to just take a moment to quickly speak about the resiliency of our employees and their determination to excel across all our operations from British Columbia to Arizona during these very difficult times that COVID-19 has presented to everyone. It’s particularly encouraging that our Arizona operations have functioned so well in light of the grave issues with the pandemic in Arizona. Over the past 15 years, myself running this company, our employees have always risen to the challenges before them—from the ongoing challenges of expanding Gibraltar seven or eight years ago, the impact of the great financial crisis in 2008, 2009, and 2010, to the meltdown of copper prices in 2016, and to the forest fires in Central British Columbia of 2017 and 2018, and now to the present challenges of COVID-19 and its effect on the commodity markets earlier this year. As a group, we’ve endured and have actually strengthened our business over this time. That’s one of the primary reasons to have long life reserves, because calamities arise and metal markets are affected. If your ore bodies don’t have sufficient life, you can’t regroup and regain your financial footing that has been affected by the ebbs and flows of the business. The last four to five months have really given us opportunities to implement new plans and improve our mining sequencing at Gibraltar. While this is always an ongoing iterative process to extract maximum value from ore bodies, particularly at Gibraltar, we certainly became more focused because we weren’t certain of how long ore or corporate prices would be upon us this time. This detailed work has resulted in very positive aspects for the path forward, which will improve our cost structure—our cost of production, which we’re already seeing and is evident in these quarterly results, reduce our capital expenditures in terms of infrastructure development, and ultimately improve our financial performance going forward. Certainly, we’ve done all of this, but first and foremost, we are protecting the health and safety of all our employees. Gibraltar’s Q2 results speak for themselves. The site operating cost of US$1.4 per pound and C1 cost of US$1.34 per pound. With low costs per ton milled, one would be hard-pressed to find any mine in the world with those kinds of costs processing a copper ore with a 0.28% head grade. This quarter's US$1.34 per pound shows what can be achieved when the copper price takes a drastic hit like it did this year. We’re very pleased with where we’re heading in the transition from the Granite pit to the Gibraltar pit, and how we’ll be set up heading through the back part of 2020 and into 2021. For insight into our financial performance, please visit our Taseko website and look at our July 2020 Corporate Presentation. On Page 8, there’s a chart illustrating the impact of C1 costs on our margins at various copper prices. With our year-to-date operating costs averaging roughly US$1.58 per pound and copper nearly US$3 today, on a year-over-year basis our operating margin will be roughly $184 million. Our leverage to copper, as we know, pricing in the Canadian dollar is very dramatic; a US$0.25 increase in U.S. copper price equates to over $30 million in operating profit for Taseko. Thus, we are very excited about the operating margin we can generate over the course of this year and into 2021, especially in our transition to the Gibraltar pit. Gibraltar’s performance will enable us to continue providing financial support for all our growth projects. As we informed everyone a few days ago, we have received our draft APP permit for Florence this morning and await the final UIC permit from the EPA, which will come in due course. Obviously, COVID-19 has slowed the regulatory work and timelines, but that isn’t a concern for us as it gives us time to work on the best financing package for Florence. We look forward to the startup construction of the commercial facility in 2021 and the next step in the growth of this organization. Looking forward, many folks appear to be focused on this company only through how Gibraltar is performing, while superficially thinking about our other assets. I find it strange that investors and analysts do not really contemplate the large gold reserve base we have, especially in the world today where gold seems to be the focus. I think everyone has forgotten that Taseko has proven gold reserves of over 10 million ounces and total resources of roughly 18 million ounces. It seems odd to me that small junior companies with a few drill holes can have market caps of $200 million, $300 million, or $400 million based on hype, yet Taseko receives no credit for ounces in the ground of proven reserves. The question is why won’t they? Projects all over the world run into obstacles—some social, some technical, and some a combination of both. While these factors may delay and sometimes halt advancement, most times those projects move ahead. Look at the projects in Ecuador, Guatemala, and even Chile, which have advanced despite previous challenges. Our projects are different; Canada and British Columbia are among those countries. In fact, we have an EA certificate from the province of British Columbia for New Prosperity, and our recent standstill agreement with local First Nations government should signal that nothing remains the same forever. Please take note that Canada is no different, and sound projects ultimately advance when all conditions are met. At some point, those 10 million recoverable gold ounces in our projects will be mined. And now I’d like to turn the call over to Stuart.

Stuart McDonald, President

Okay. Thanks, Russ, and good morning, everyone. I can provide some more color on our second quarter results, and also talk a bit about the outlook for Gibraltar and Florence. It’s certainly been a volatile year for copper prices, with prices falling dramatically in March and recovering in recent months. It's now at an even higher level than at the start of the year. But all things considered, I think we’ve managed the business very well through this challenging period and have demonstrated the flexibility that we have at Gibraltar and the quality of that asset. When the COVID crisis struck in March, we took decisive action to protect the health and safety of our workforce, ensure the continuity of operations, and adjust our business to the changing copper price environment. In our first quarter earnings release, we announced that a new operating plan and identified cost reductions that would amount to over US$0.40 a pound of savings. That’s what we’ve delivered in our second quarter, as our C1 operating costs dropped by US$0.48 to US$1.34 per pound. Gibraltar’s CapEx also dropped by an additional US$0.27 a pound. At the same time, we’ve seen a relatively quick recovery in copper prices, which, combined with the lower costs, has led to strong earnings and cash flow generation in the second quarter. For Q2, we’re reporting revenues of $106 million, operating cash flow before working capital adjustments of $55 million, and adjusted EBITDA of $51 million. Gibraltar produced just under 37 million pounds of copper for the quarter, on head grades of 0.28% copper, recoveries of 85%, with an average throughput of 84,000 tons a day. The strip ratio was 1.9:1, which is a bit lower than recent quarters, but it’s in line with the average life-of-mine ratio. So, we certainly haven’t done anything that would jeopardize the longer-term mine plan. Our 2020 production guidance remains unchanged at 130 million pounds of copper, plus or minus 5%. We actually expect to be at the higher end of that range based on the strong performance in the first half. In terms of costs, we expect the lower site spending to continue in the coming months and expect overall spending in the remainder of 2020 to be generally in line with the first half of the year. Over the last six months, as I said, we’ve seen some major swings in the copper price and changes in market conditions on both the demand and supply sides. The current price of just over $2.90 a pound is about US$0.50 higher than the average LME price in Q2. This bodes well for Q3 earnings, and we expect to continue growing our cash balance again in this quarter. That being said, it’s an uncertain environment, and we will continue to keep a close eye on prices and adjust accordingly. We recently acquired copper put options with a $2.60 strike price for the fourth quarter. We will continue to protect the downside and keep the upside open for shareholders. As Russ just discussed, we have a lot of leverage to that upside in the copper price. You can see that in our stock price performance, as our equity value is up over three times since March. With that, the stock price still doesn’t reflect the value of our Florence project, which we continue to advance and de-risk. The production test facility has operated continuously for over 18 months now, and in June and July produced copper at a rate of over 1 million pounds a year. That production comes mainly from one well—the center recovery well in the test well field. The data gathered over the last 18 months has validated many of the model assumptions in our feasibility study and has been used to refine operating plans for the commercial phase. The experience our team has gained will greatly assist in the production ramp-up when we expand to commercial scale. The PTF has also demonstrated that we can run the in-situ leach operation safely and in compliance with the current permits. The process for the commercial facility permitting continues to advance steadily. The ADEQ is publishing the draft APP Permit today, which is another significant milestone for the project. The next step is a 30-day public comment period, which ends with a virtual call hearing in September. We are nearing completion of the technical review for the UIC permit, which is another major permit required. No significant technical issues have been identified to date, although the process has been slightly delayed by the COVID situation in Arizona. We believe this has extended the EPA's timeline by a few months, but we still expect the project to be fully permitted in early 2021, which will lead to first production in 2022. Florence will provide Taseko with an 80% growth in our production capacity at a significantly lower cost. The in-situ mining method also has environmental benefits, including low energy and water consumption, minimal surface disturbance, and a carbon footprint that’s 90% lower than a conventional mine. So it’s green copper from a secure U.S.-based source, and we’re seeing good interest from off-takers and financing partners in that green aspect. Negotiations with potential JV partners are progressing well. I think the COVID situation and the permitting timeline are allowing us some extra time to secure the best deal for Taseko shareholders and that’s what we’re working towards. We still expect to have a full financing package in place prior to permits. With that, I’d like to now hand the call over to Bryce to discuss the Q2 financials.

Bryce Hamming, CFO

Thanks, Stuart. Good morning, everyone. For the second quarter, we reported earnings from mine operations before depletion and amortization of $50.3 million and adjusted EBITDA of $50.9 million. Earnings in this quarter clearly benefited from both the recovery in copper price and higher production and sales volumes in the quarter, coupled with our planned management cost reductions. We also had $10.1 million in provisional price adjustments, of which $5.9 million was unrealized and we will price after the quarter. As copper continues to recover after the quarter end and as we had 13 million payable pounds for Taseko’s 75% share at the end of June that will be priced in subsequent quarters, we could expect additional cash flow from Q2 production—$10 million at these current copper prices. We were also successful in reducing our concentrated inventory at the end of June, with a focus on our shipping schedule. Ending inventory was 3.8 million pounds of copper in concentrate, compared to 6.4 million pounds at the end of Q1, which led to sales of $39.3 million compared to production of 36.8 million pounds. Site operating costs came in at US$1.34 per pound and were significantly reduced from the prior quarter due to higher copper production, lower mining rates arising from the lower strip ratio, as we mined more ore tons than waste tons from the Granite pit, lower diesel costs, which were 31% lower than budgeted, a weaker average Canadian dollar at $1.39 versus $1.34 in Q1, and other site cost savings. This number of $1.34 is also before any consideration of payment deferrals like the BC Hydro tariff program. We continued purchasing fuel call options to provide a ceiling price on fuel at Gibraltar for the rest of the year and into Q1 2021. This will lock-in approximately $0.20 per liter savings as oil prices recover. This remains significant, given we consume about 30 million liters of diesel a year at Gibraltar, but we also fully participate in the low-spot diesel prices we are currently experiencing. This is an example of how we will continue to deliver on reducing unit costs in this COVID environment for the remainder of the year and into 2021. Depreciation at $26 million was generally consistent with the prior quarter and should be at a similar level for Q3, before we transition into mining and processing of ore from Pollyanna in Q4. GAAP net income was $18.7 million, and EPS was $0.08 per share due to the higher sales volume and operating cost savings. GAAP net income did not include the net proceeds from our sale of marketable securities of $7 million, which was recognized in other comprehensive income. We had an unrealized gain of $13 million due to the strengthening dollar at the end of the quarter on our U.S. dollar-denominated bond. After adjustment for this unrealized gain, adjusted net income was $8 million or $0.03 per share. Our cash flow statement illustrates the full story; we generated cash flows from operations of $37 million and free cash flow of $25 million. In June, we made the semi-annual interest payment on our bonds, and we were still able to increase our cash position by $14 million to $64 million at the end of June. With improving free cash flow into the third quarter from higher copper prices and continued lower costs, we forecast cash balances to grow further, reducing our net debt position and increasing our overall balance sheet strength as we prepare to finance Florence. I will now turn it back to the operator for any questions. Thank you.

Operator, Operator

Thank you. Your first question comes from Max Kaye with Liberum. Please go ahead.

Max Kaye, Analyst

Hi there, guys. Just three for me. Firstly, on the cost-cutting. Do you expect to keep mine costs at this level for the rest of the year? How do you expect that to rebound back in 2021 and beyond? Secondly, do you intend to continue hedging your copper exposure, and if so, at what level? And lastly, how do you view the timeline on refinancing the 2022 debt?

John McManus, COO

I’ll take the first one. It’s John here. Good morning; or it might not be morning where you are from your accent.

Max Kaye, Analyst

Yes.

John McManus, COO

I’ll answer the question on the cost forecast. We had an opportunity to adjust our mine sequence when the COVID pandemic hit and the copper prices came down to readjust our sequence and reduce our costs. I think Stuart framed it correctly that the second half of 2020 will be about the same as the first half of 2020 overall. Going into 2021, we expect to return to a more normal cost structure. There’s nothing that we’ve done during this quarter that needs to be suddenly caught up. There won’t be a spike in costs. We’ll gradually return to more normal costs.

Stuart McDonald, President

Yes. Max, it’s Stuart here. I can take your other question; I think it was about our hedging plans. We continuously hedge, and our strategy has been to buy out-of-the-money put options. We try to keep three, four, or five months of protection on the downside in front of us, and that strategy has served us well over the years. We have put options in place at a strike price of US$2.60 for Q4. As we move later in the fall, we will look for opportunities to extend that out into 2021. No change in the plan there.

Max Kaye, Analyst

Got it.

John McManus, COO

So based on our resequencing, we go into a different pit where the ore is considerably softer. Although our cost per ton mined will stay the same, our throughput in the mill should increase significantly, which will reduce our cost per ton milled and increase our copper production.

Max Kaye, Analyst

Excellent. Thank you very much.

Operator, Operator

Your next question comes from Nick Jarmoszuk with Stifel. Please go ahead.

Nick Jarmoszuk, Analyst

Hi, Nick Jarmoszuk from Stifel. I was hoping you could talk about the outlook for grade over the next couple of quarters.

Richard Tremblay, VP of Operations

Hi, it’s Richard. The grade for the next couple of quarters will be similar to the grades here in Q3. We will see a slight reduction in grade in Q4 and Q1 and then return back up later in 2021.

Nick Jarmoszuk, Analyst

Yes. And then I’m sorry, go ahead.

Russ Hallbauer, CEO

That’s normal for Gibraltar; it would vary up and down 10% off the deposit average.

Nick Jarmoszuk, Analyst

Okay. And then returning to the high-yield notes. If I understood you correctly, you won’t look to pursue refinancing until you have a JV in place. Is that right?

Bryce Hamming, CFO

Yes, that would be our current thinking.

Nick Jarmoszuk, Analyst

Okay. And in terms of the financing coming from Taseko, would the high-yield market be the preferred funding source for Taseko’s share?

Russ Hallbauer, CEO

Sorry. Are you talking about Taseko’s share of the Florence financing?

Nick Jarmoszuk, Analyst

Yes.

Russ Hallbauer, CEO

Yes. We have several options we’re looking at. We have project-level debt, which we’re exploring and advancing discussions with banks. We also have royalties and streaming options on copper. Lastly, there’s the high-yield market which is always available as well, but there are other forms of equity from Taseko. Gibraltar is generating good cash flow at these levels, so we could generate a bit of cash from Gibraltar. We’re considering all options and trying to come up with a funding package that we think is the best. We don’t need to decide on that now.

Nick Jarmoszuk, Analyst

Okay. And regarding the JV discussions, can you give us a sense of whether they are still preliminary or quite advanced?

Russ Hallbauer, CEO

Yes, we’re in negotiations. We have several parties at the table, and we’re trying to push forward and advance them to secure the best deal possible. I remain optimistic that we can have a deal to announce in the next few months, but we’ll see—time will tell. We won’t rush something just for the sake of an announcement; we want to get the best deal for our shareholders.

Nick Jarmoszuk, Analyst

Okay. That’s all I have. Thank you.

Operator, Operator

There are no further questions at this time. Please proceed.

Russ Hallbauer, CEO

Okay. Thanks, folks. See you in the next quarter. Have a good and pleasant summer. Bye.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and you may disconnect your lines. Have a great day.