Earnings Call Transcript - TGB Q1 2022

Operator, Operator

Good morning. My name is Miranda and I will be your conference operator today. At this time, I would like to welcome everyone to Taseko 2022 Q1 Earnings and Production 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. Bergot, you may now begin your conference.

Brian Bergot, President

Thank you, Miranda. Welcome everyone. And thank you for joining Taseko’s first quarter 2022 conference call. The news release announcing our financial and operational results was issued yesterday after market close and is available on our website, tasekomines.com. On the call with me today is Taseko’s President and CEO, Stuart McDonald; Taseko’s Chief Financial Officer, Bryce Hamming; and our Senior VP of 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 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. After opening remarks, we will open phone lines to analysts and investors for a question-and-answer session. I’ll now turn the call over to Stuart for his remarks.

Stuart McDonald, CEO

Okay. Thank you, Brian. Good morning, everyone. Thanks for joining us today to review our first quarter 2022 financial and operating results. It continues to be a great environment for copper miners, and even with the pullback in copper prices over the last week or so, we remain very optimistic about the year ahead. So in the first quarter, we actually had our highest ever realized selling price of $4.59 per pound of copper, and that strong pricing combined with our 75% share of Gibraltar sales volumes resulted in $38 million of adjusted EBITDA and $52 million of cash flow from operations. Sales volumes exceeded production by 6 million pounds as we were able to move the excess inventory that was carried over from last year. So it was a lower production quarter, which we anticipated and signaled on the last call, and that was mainly due to lower copper grades. We've recently transitioned mining operations to the Gibraltar pit, which will be the primary source of ore for the remainder of this year. As is always the case at Gibraltar, the upper zones of the deposit are lower grade with smaller, disjointed zones of ore and that's where we were in the first quarter. As mining advances to deeper benches, the grade and ore quality will gradually improve. We expect to see much stronger production in the second half of the year. Mill throughput was a real focus for the site operating team in the first quarter. The carryover of weather impacts from Q4 meant that we had a slow start to the year in January and February. For the first quarter, mill throughput averaged 78,000 tons a day, which is below the design capacity of 85,000. But with the weather issues behind us and a higher percentage of ore coming from the Gibraltar pit, we saw significant improvement over the last two months. In March, we averaged over 87,000 tons a day, and then 90,000 for the month of April. So we're now realizing the benefit of softer ore in the Gibraltar pit, which is what we expected based on historical performance. We are very pleased with that. Recoveries are still on the lower side of where we'd like them as the mill operations team works to optimize performance with the new ore from the new Gibraltar pit. We also have a number of improvement initiatives underway in the mill, including a data analytics project, which is showing some positive results so far. Overall, we expect improved recoveries over the course of this year as grade and ore quality improves. However, I would like to be clear that our original production guidance of 150 million pounds of copper plus or minus 5% is still our guidance and hasn't changed. On the cost side, we're seeing inflationary pressure like everyone else in the industry. The most significant impact is on diesel prices, which historically represented about 10% of our total operating costs. We use over 35 million liters a year at the mine. So when the cost increases from roughly $0.80 a liter, as it was a year ago, to around $1.60 a liter today, that has a big impact on us. That translates to about US$0.20 per pound of copper for additional fuel costs. Grinding media is the other factor affecting costs, although the dollar impact on that is much smaller. There were several other factors that drove higher C1 cost this quarter, including production, sales volumes, and capital strip allocation. Bryce will talk more about those in a minute. What's important to note is that our operating costs per pound will revert to more normal levels as grades and copper production increases in the coming quarters. For the past two years, Gibraltar C1 cost on average has been around $1.90 a pound. Adjusting for fuel prices and other input costs as they are today, we can expect something in the range of $2.20 to $2.30 a pound for the remainder of this year, assuming there are no further changes in input costs. In the first quarter, we also announced a new mineral reserve for Gibraltar, extending the mine life from 16 to 23 years. This was mainly a result of running new pit designs using a $3.05 copper price, up from $2.75, which our previous reserves were based on. The new plan has the same average copper grade and a slightly higher strip ratio in the back half of the mine life. At a consensus copper price of $3.50 per pound, our share of the mine NPV is now C$1.1 billion. At today's copper price, the NPV jumps to nearly $2 billion. We've now been operating Gibraltar for 17 years since the restart, and it has a longer mine life today than we've ever had. It's a great asset for us, and we'll continue to generate good cash flows for many years to come. Switching to Florence now, and unfortunately, we're in a similar position as we were last quarter, and that is waiting for the EPA to issue the draft underground injection control permit. I wish I could offer more or provide some new details, but the regular updates we're getting from the EPA haven't changed. They are making progress, but at a slower pace than they expected. They continue to assure us that there are no issues with the permit and that the process is moving towards the start of the public comment period. We continue to expect the draft UIC permit to be issued shortly so that we can get into the public comment period. In the meantime, we continue to advance other aspects of the project to prepare for construction. In the first quarter, we incurred CapEx of $25 million, which included further payments for major processing equipment and other pre-construction activities, plus the ongoing site operating costs. The expenditures to date are reducing execution risk on the construction project and mitigating the risk of shipping delays out of China and other ports around the world that we see right now. The upfront procurement of long-lead items is also reducing the risk of CapEx inflation. Florence is a relatively small construction project without the large equipment and infrastructure requirements of a conventional copper mine. We've now locked in about US$60 million of project costs, including the major plant components and other items. However, we do still expect some inflation on the other aspects of the construction budget, including contractor labor and well drilling costs. It's a volatile market and we're monitoring it closely. As we get closer to the construction start date, we will be updating the original $230 million CapEx estimate. But we believe any increases will be manageable and offset by higher copper prices. We continue to expect to fund the construction from our existing liquidity and Gibraltar cash flows. As a final note on the first quarter, I also wanted to mention that I attended a signing ceremony with the Williams Lake, First Nations in February. That was for the renewal of the Gibraltar mines participation and cooperation agreement. The original agreement was actually signed in 2013 and provides a framework for how the mine and Williams Lake, First Nations work together to achieve environmentally responsible and economically beneficial mine development. We're happy to get that done and look forward to further strengthening our relationship. We also continued our community engagement work at our Yellowhead project as we prepare for the environmental assessment project. For our Yellowhead project and the new prosperity project, we continue to advance our facilitated dialogue with the Tsilhqot'in national government and the BC provincial government. Our senior management team spends a lot of time on community and indigenous relations for all of our projects, as it's an essential element to move our business forward and create long-term value for all stakeholders. We're in the process of finalizing our third annual ESG report, which will provide a lot more detail on our approach to the environment, communities, our employees, and other sustainability topics. So look for that report to be released later this month. I’ll now turn the call over to Bryce for a review of the first quarter financials, and then we can open up the call for questions.

Bryce Hamming, CFO

Thanks, Stuart and good morning, everyone. I will discuss in further detail the financial results for the first quarter earnings released yesterday. We realized sales of 27 million pounds at Gibraltar at a record copper price of $4.59 per pound, and with an average FX rate of 1.27x, this resulted in total revenue of $118 million. This is the second highest quarterly revenue we have achieved at Gibraltar since its restart 18 years ago. This contributed to adjusted EBITDA of $38 million and earnings from mine operations of $43 million. Our operating margins relative to our other recent quarters in 2021 were impacted by increased site costs. As Stuart mentioned, we did see the total site costs increase by approximately $7 million relative to Q4 and Q1 2021, which was substantially related to diesel costs for the mining fleet and the rising oil price. To a lesser extent, some other site costs like grinding media, which is driven by steel prices. A similar increase of $6 million in the cost of sales was simply IFRS accounting related as we had significantly less mining costs allocated to capitalized stripping and deferred on the balance sheet this quarter compared to Q1 last year, as we finished mining in the current phase of Pollyanna. That difference in capitalized stripping quarter-over-quarter was a difference of $0.30 a pound. It’s probably worth noting that we’ve included a new table in our MD&A to show total site costs, including capitalized stripping to compare our total site operating spend more easily quarter-over-quarter. We expect total quarterly site operating costs, including capitalized stripping of approximately $75 million per quarter for our 75% share to be consistent for the remainder of the year, assuming that diesel prices remain at these current elevated levels. We also have higher costs on a per pound basis that naturally arise as our sales volume exceeded production by almost 30% in Q1. You’ll recall that our inventories were higher at the end of last year, due to the extreme flooding events in Southern BC last fall. We sold an additional 6 million pounds of finished inventory in the quarter and brought our concentrated inventory back to more normal levels. Our offsite charges, which are tied to sales volumes and not production volumes comprised half of the $0.23 C1 cost variance attributed to the lower copper production. As costs for this excess inventory were incurred last quarter, this explains where our cash flow from operations of $52 million was higher than our EBITDA of $38 million. Earnings also benefited from lower depreciation in the quarter, given the new Gibraltar reserve update that we published at the end of March, which decreased by $2 million quarter-over-quarter due to the extended mine life and additional units of quarterly production. We expect depreciation of $14 million per quarter at these new lower rates for the balance of the year. Lower moly revenue is also impacting our earnings as we produced only 236,000 pounds of moly this quarter due to lower grades in the Gibraltar pit ore. However, this was partially offset by the strong moly price, which still hovered around $19 per pound for most of the quarter. We had an unrealized loss on derivatives of $7.5 million at the end of the quarter. This was timing related and due to the copper price closing at a high level on March 31. With a decrease in the copper price since then, this unrealized loss has been mostly eliminated or reversed. Derivatives relate to the copper collar contracts that we have entered into that secure a minimum $4 per pound copper price with a ceiling between $5.40 and $5.60, covering 90% of copper production for Taseko share for the remainder of the year. GAAP and adjusted earnings in the quarter were $0.02 a pound, and would’ve been a penny higher but for the cost of the copper collar contracts that expired out of the money in the quarter. Our cash flow statement highlights that our operating cash flow from Gibraltar continues to fund CapEx at Gibraltar and debt service, which included $14 million for our February bond interest payment. Our cash position decreased overall this quarter due to the continued investment at Florence Copper, which included $25 million in total development expenditures this quarter, primarily related to the long lead equipment purchases that are continuing for the commercial SX facility. We are also beginning to receive shipments of the SX/EW equipment in April to the Florence site, which is exciting to see. We finished the quarter with $273 million in liquidity and our cash balance was $213 million. At current copper prices and with our strong balance sheet, we continue to be in a position to fully fund Florence within our own means. That said, we are still considering ancillary financing options where the cost of capital and synergies with the financing party are supportive of our strategic plans. I’ll now turn it back to the operator for any questions. Thank you.

Operator, Operator

Thank you. The first question will be from Ed Brooker with Barclays. Please go ahead.

Ed Brooker, Analyst

Hey everybody. Thanks for taking the questions this morning. So I know you may not be able to give us this, but I just wanted to ask what is the reason that the EPA is giving you for taking longer than I guess I expected to get the UIC draft? Previously it was COVID kind of holding them up and there was a backlog for them. But I imagine that would’ve been worked through and we would’ve been able to get that draft and go into the comment period. So just wanted to get your thoughts on that and then kind of your best case scenario timeline?

Richard Tremblay, Senior VP of Operations

Yes. Good morning, Ed, it’s Richard Tremblay. Really the message from the EPA continues to be the same. There’s nothing specific that’s causing them to not get into the public comment period. It’s just going through their administrative processes and getting the final arrangements to be able to launch into the public comment period. So, unfortunately, yes, there’s no nothing specific that they’re providing or pointing to. Everything from manpower levels and stuff like that is a bit of a challenge for them. Those are the kind of normal things that occur. Just the process is going quite slow, but is advancing. I would continue to expect very soon, any moment now, to get notification on exactly when the public comment period will start, which they’ve committed to giving us.

Ed Brooker, Analyst

Got it. That’s helpful. And then excited to see your ESG report come out too. I saw some news reports that Florence received some nominations for some environmental awards in Arizona. I just want to get your thoughts on the disconnect between that getting nominations for environmental awards versus some of the doubters that have issues with the mining practices being hazardous.

Stuart McDonald, CEO

It’s Stuart McDonald here. I can take that one. Really in our view there aren’t many doubters left. If you look back at the history going back 10 years, perhaps there were questions about the project and some opposition from the town council. Over the last 10 or 12 years, we’ve worked through that. The test facility that we operated for two years has been a big contributor to that. If you look back in 2020, when we went through our state APP permitting process, we had a public hearing and a public comment period, and it was overwhelmingly positive. I think there was only one negative comment at the whole hearing. We’re very happy with the support we have for the project, and the environmental award is reflective of the good work we’re doing at the site. Yes, we just look forward to getting the permit and commencing with the project.

Ed Brooker, Analyst

Thanks. One more for me and congrats on the extension of Gibraltar. With the improved mine life, and the increased NPV, does that affect your plans at all, probably not for Florence in the short term, but maybe longer-term thoughts on Yellowhead and your confidence in or maybe the funding of that project?

Stuart McDonald, CEO

Sorry, Ed. I didn’t quite understand the question there; you were referring to the Gibraltar reserve or the funding at the Yellowhead?

Ed Brooker, Analyst

Just Gibraltar reserve and the improvement of the mine life, increasing the NPV over time and just thoughts on how you’re looking at funding on over or on Yellowhead in that context?

Stuart McDonald, CEO

Yes. I mean, what we have at Gibraltar and what we’ve shown over time is just the value of a long life asset, right? If you look back at the history when we restarted it, we had a four or five-year reserve in 2005; when we did the GDP extension about 10 years ago, I think we had to close a 15 or a 20-year mine life. Today, we still have a 23-year mine life, which demonstrates the value of long-life assets. That NPV does not depreciate; it’s still there. Actually, with copper prices as you see, it’s growing in value over time and not depreciating. Gibraltar is a great asset, and we think Yellowhead has that potential as well. We’ve got some work to do on permitting. It’s a valuable asset and these are unique assets that can be built. We think Yellowhead is the type of project that needs to get built and financed to fill the supply gap in copper in the coming years. When we get Gibraltar and Florence running, I believe the company will be in a very different place financially, and we will be in a good position to take on a project like Yellowhead potentially.

Ed Brooker, Analyst

Got it. Thank you.

Operator, Operator

Your next question will be coming from Alex Terentiew with Stifel. Please go ahead.

Alex Terentiew, Analyst

Hey, good morning guys. A couple of questions just on Florence first. I appreciate that you’re going to give us an update on CapEx when you move forward with that project. But now that you’re spending some money on it, can you, to the extent you can – how are costs looking relative to the prior expectations? And the second question on the spending there is, I think I can take the spending as your confidence that you will get the UIC draft and the whole process moving forward. But I guess, the question is, should there be material delays of any sort, is there any sort of recourse or refund effectively that you can use to kind of recoup some of the capital that you’ve been spending?

Stuart McDonald, CEO

Sure. Yes, Alex, it’s Stuart here. Thanks for the question. Most of the spending that we’ve done and most of the commitments we’ve made relate to major components for our SX/EW plant. We’ve committed about US$60 million in total, which is the vast bulk of it. That’s equipment that is on route now to our site in Arizona. It’s going to be ready when we get into construction. It’s specialized equipment, and while it may have some sale value, it has been designed specifically for our plants based on the detailed engineering work we’ve done. Yes, it’s a sign of, I believe, we wouldn’t be spending that money unless we were very confident that we’re going to get the permit and move forward. So yes, we’re ready to get going.

Alex Terentiew, Analyst

Okay. And then just on cost, I mean, how are they tracking so far?

Stuart McDonald, CEO

Yes. The cost piece, of the money that we have committed, we’re essentially on budget. It’s in line with the numbers from the 2017 feasibility study, so we haven’t seen any inflation on those pieces. As I mentioned in my comments, we are expecting some inflation on the pieces that we haven’t committed to yet; this relates to some of the labor market in Arizona, which is pretty hot, and contractor and well drilling costs, where we expect to see higher numbers. But as we get closer, we can give some more specifics on that.

Alex Terentiew, Analyst

Okay, great. And then maybe just one question for Gibraltar. I understand moly – or sorry, copper grades are low, but did that impact moly grades as well? Can we expect to get back to the 500,000 pounds or so of moly per quarter that you saw in the past? Is that a reasonable number to expect going forward?

Richard Tremblay, Senior VP of Operations

Yes, the moly grade in the Gibraltar pit is a little bit lower. Essentially, as we move to the West side of the property, the moly grade decreases a bit compared to the East side of the property. We’ll see similar grades to those we saw in the past quarter, with maybe some slight improvements as we mine deeper into the Gibraltar pit.

Alex Terentiew, Analyst

Okay. That’s it for me. Thank you.

Operator, Operator

Your next question will come from Craig Hutchison from TD Securities. Please go ahead.

Craig Hutchison, Analyst

Hey, good morning guys. Actually, questions on moly as well. If we kind of model the same grades as Q1, are we assuming production is sort of in the order of 1 million pounds this year, or is that a fair estimate?

Richard Tremblay, Senior VP of Operations

No, we’ll see production less than 2021, but probably more in the mid-range of 1.5 million to 2 million pounds.

Craig Hutchison, Analyst

Okay. And then just a follow-up question on grades themselves; copper grades at Gibraltar, can we expect you guys to shift back towards reserve grades in Q2, or is that more likely going to happen in Q3 or Q4?

Richard Tremblay, Senior VP of Operations

Yes, it’s going to be more in the second half of the year. We’ll see grades return more towards the reserve levels in Q3 and Q4. In Q2, we’ll see some improvements, but not back to reserve grade levels.

Craig Hutchison, Analyst

And you guys are fairly confident, given the fact your milling softer, that you can be operating at design rate for the balance of the year?

Richard Tremblay, Senior VP of Operations

Yes, as Stuart mentioned in his comments, we’re quite pleased with the throughputs we’ve been able to run and still maintain the optimum mill performance, and don’t see any reason that’s going to change.

Craig Hutchison, Analyst

Okay, perfect. Thanks, guys.

Operator, Operator

There are no further questions at this time. Please go ahead.

Stuart McDonald, CEO

Okay. Thanks everyone for dialing in and for your questions. We will talk to you next quarter in early August. So thanks again. Bye now.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.