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Executives

Brian Bergot

Russell Edward Hallbauer - Chief Executive Officer, President, Director, Chairman of Executive Committee and Chairman of Investment Committee

Peter C. Mitchell - Chief Financial Officer

John W. McManus - Senior Vice President of Operations

Analysts

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Steve Parsons - National Bank Financial, Inc., Research Division

Samar Sidhu

Tom Bishop - BI Research

David Olkovetsky - Jefferies & Company, Inc. Fixed Income Research

Aleem Ladak - PI Financial Corp., Research Division

Taseko Mines (TGB) Q4 2012 Earnings Call February 22, 2013 10:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Taseko Mines 2012 Year-End Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Brian Bergot, Director of Investor Relations. Sir, you may begin.

Brian Bergot

Thank you, Kate. Good morning, ladies and gentlemen, and welcome to Taseko Mines 2012 Fourth Quarter and Annual Results Conference Call. My name is Brian Bergot, and I am the Director of Investor Relations for Taseko. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko; John McManus, Senior Vice President, Operations; and Peter Mitchell, Taseko’s Chief Financial Officer.

After opening remarks by management, which will review 2012 business and operational results, we'll open up the phone lines to analysts and investors for a question-and-answer session. Accompanying management’s discussion will be presentation slides for our webcast participants. Alternatively, the presentation can be found in the Investor Relations section of our website.

I would also 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

Thank you, Brian. Good morning, everyone. Thank you for joining us today to discuss our fourth quarter and year-end results and to provide you with an update on Gibraltar and the various activities that have been on the goal for the last quarter.

Gross profit for the year was roughly $52 million from our sale of 66 million pounds of copper and 1 million pounds of molybdenum on our 75% ownership of Gibraltar's 90 million pounds of copper and 1.3 million pounds of molybdenum. Peter will speak more to the financials in his presentation.

In reviewing 2012, concentrate production was affected as a result of lost production in Q1 related to water issues in our granite pit. Water affected ore release and ore fragmentation, which, in turn, hindered throughput through our SAG mill. Resolving the water incursion and getting new operational plan back on track and the operating issues resolved took us well into the second quarter.

In the second half of the year, throughput increased. However, we were affected by lower mill availability and subsequent operating time as a consequence of our GDP3 tie in. These events are behind us now as operations are stable. We've gotten our GDP concentrator producing the hourly rates we expect, and now it's a question of methodically increasing our recovery rates and obtaining the mill availability targets as we're not hindered by GDP3 tie-ins, a much simpler task now than what was presented to us in early 2012.

There's always commentary around concentrator efficiencies and design criteria in terms of throughput. And you see many new mining operations after running for a while moving to add secondary crushing systems between their primary crushers and the SAG mills to increase throughput after they have had trouble hitting projected milling rates. To be clear in this matter, when this type of situation occurs, it indicates that the front-end engineering design and flow sheets design were flawed. Not enough work was undertaken on the feasibility study, metallurgy and grinding. Effectively what you are doing when you're adding a secondary crusher behind a primary crusher to feed a SAG mill is you're turning your SAG mill into a big ball mill.

The costs rise from about $0.15 to $0.20 per ton milled for the primary crusher and secondary crusher system to $1.20 per ton milled. Secondary crushers were what was used in the 1970s before the introduction of SAG mills. They're inefficient and costly, and that's why we replaced ours a number of years ago. This issue has been raised with myself on a number of occasions, and in our instance, we do not need a secondary crusher. We did the proper engineering and analysis before we built our SAG, and we have plenty of horsepower in our GDP SAG mill and more than enough in our GDP3 concentrator to obtain throughput rates.

Like I said before, those who need secondary crushers do not have that horsepower in the correct location, and it's a reflection of the original design criteria and mistaken design that were in the feasibility study.

Looking at our first page, first slide on Slide 4 regarding some important statistics for the company. We mined 66.2 million tons in 2012 versus 57.5 million tons. And tons declined by 1.1 million tons through the concentrator over 2011. However, recoveries, as you can see, dropped from 88% to 85% as we moved to higher hourly throughput rates.

Target hourly rate of 2,450 tons per hour is being achieved. However, we are now balancing throughput with recoveries to produce the most metal possible at the optimum throughput as we work on increasing recoveries to design levels. As I have spoken about in the last conference call, we do have work to do on increasing our recoveries but that will be resolved in the near future.

Slide 5, production recovery versus throughput gives you some indication of that over the last year. This slide thoroughly illustrates that relationship. We know we can achieve 89% recovery, and we are presently in the 84% to 85% range. Right now as we increase throughput rates, our biggest challenge is ensuring we can achieve 89%. So you can see the difference from March of 2012 through December of 2012 when we were roughly at 89% and now we dropped down to 85%.

We've identified 3 main issues that are affecting that, and these are distinct from the various ore domain issues evident in the ore body that I've spoken about in past conference calls that also affect recovery. First, the ball mill distribution systems adjust the distribution to even out the max flow of particle size feed to each ball mill needs to be tweaked, and we've been working on that for the past several weeks. Secondly, the ball mill trommel screens need modification to allow better split in particle size and we're changing those out one by one. Thirdly, we need to increase rougher concentrate pumping to aid in deaeration, and we expect those -- these changes to be complete by the end of the quarter.

These initiatives, which are presently in the works, will be completed in the next months -- next few months, and we expect an increase in our recovery to follow. We now believe we have a clear handle on hourly throughput rate and what affects those. We're nearing the point where we see stability of our cost structure in our GDP mill as we concentrate on optimizing the circuits and focusing on business improvement and cost containment.

Let me explain a little further. On the cost side, Slide 6 illustrates what we feel are onetime costs associated with our present operation as we've set up for running the GDP3 mill. On the labor front, between the mine and the mill, $0.22 per pound can be attributed to increased manpower that we've talked about in the past, tied to GDP3, with no increase in metal production. As you can all appreciate from this slide, all things being equal, unit labor cost per pound of copper produced will decrease as we had additional metal once GDP3 begins producing.

With respect to maintenance costs, we have experienced -- we have expensed costs that are made up of items like undercarriage on the shovels that last 30,000 hours, front-wheel motors, to name but a few, all of which have occurred this year as a timing issue and keyed for their conservative nature with respect to capital allocations whether we expense it or capitalize it. We have taken most of our costs to expense. All of these expenses, particularly the maintenance side, have added -- and the labor side have added nearly $0.30 a pound to our copper produced in 2012.

Moving forward, we have reduced our powder factor after completing the mine-to-mill analysis and what was affecting mill throughput. And while we blanketed an increase in powder factor across all ore types and waste zones in 2012, we now know or understand better where to focus increased powder factors to affect fragmentation. So we expect this cost to reduce dramatically in 2013 and going forward. As you can see, explosive costs were $0.07 per pound incremental cost per pound of copper produced.

With respect to diesel consumption, we now have a new dump in operation that's been permitted, which is going to significantly shorten our waste hauls and correspondingly drop our cost per pound for diesel use. Diesel and powder costs added approximately $0.14 a pound. So we know where we need to go with our costs, and we expect to get there sometime this year.

So once we begin making concentrate from the new plant, we will see all these costs rebalance in terms of cost per pound of production. John and I will be happy to answer specific questions on these matters once we get to the Q&A, if you have such.

Now looking at Prosperity. We have nearly completed our answers to the information request from the federal panel. We will be submitting those by the end of the week -- end of next week, and then the next date will be public hearings, which we are waiting anxiously to begin that process.

With respect to our Aley project, we have made significant progress on getting the metallurgy figured out. We produced concentrate. Next we'll be producing salable ferroniobium metal in the refractory furnace. Our recovery is lower than we think it should be, so we're continuing to investigate that. And as soon as we solve that, we will complete the flow sheet and finalize our feasibility study, which we expect sometime in the second quarter.

I would like to -- oh, okay, we've got some pictures here for you as well. Looking at Slide 7, you can see our new SAG mill. The trommel screens, we actually put material to it earlier this week, and so we're now expecting to start producing concentrate. Next picture is our 20-foot ball mill. As you can appreciate, this is quite a different system than the one we presently have, where we have 6 ball mills. That was a carryover from the old Gibraltar facility. So now we have one 34-foot SAG mill and one 20-foot ball mill. So circuit control is going to be much improved, and we're looking forward to -- certainly the crews are looking forward to firing this baby up and getting to work on it.

Flotation system, as you can see in the next slide, is compact and a very clean, bright-looking facility, and we're pretty happy with what's transpired with our work to this date. And it's a credit to our construction and operations crew that we've got this facility up and operating effectively on time and on budget.

I would like to now turn the call over to Peter so he can comment on the financials. Peter?

Peter C. Mitchell

Thanks, Russ. From a financial perspective for Taseko, the fourth quarter represented a continuation of the building theme in 2012 with the construction of GDP3 along with New Prosperity and Aley development, all impacting operating results and a transition in our balance sheet accounts with cash reductions offset by fixed asset increases.

Revenue for 2012 was $253.6 million, which was comparable to the 2011 revenue of $251.9 million. Revenue in the fourth quarter was $62.9 million and comparable to the $60.5 million the same period last year. A reminder to listeners, revenue recognition is a function of copper shipments and can vary widely quarter-to-quarter depending on schedule.

Copper concentrate inventory was 2.5 million pounds at year end, representing the lowest level for the 2012 recording periods. Copper prices closed the year within 2% of where they began in 2013, however, lower than 2011 on an average basis, which impacted revenues. Cost of sales and gross margin were impacted by increased labor cost, a 27% increase in headcount at Gibraltar from the end of 2011 to 2012 for the reasons that Russ highlighted.

General and admin cost which for 2012 were $19.1 million, down from $21.1 million due to reductions in stock-based compensation. Exploration and evaluation expense of $17.8 million in 2012 as compared to $10.4 million in 2011, representing spending on the Aley project development and our EA for New Prosperity. Our accounting treatment continues to be to expense this work depending on 2012 with less than budgeted because of scheduling certain items, including road construction and metallurgical work.

Other operating loss for 2012 was $30.5 million comprised most significantly of a $24.8 million unrealized loss and a $5 million realized loss on copper derivative instruments. Both are part of our copper price protection program. The unrealized portion of these copper derivatives was mark-to-market at the end of the year and caused the unrealized component, which is noncash.

Finance expense of $14.2 million reflects bond interest and accretion on our PER. We capitalized $7.7 million of interest expense in 2012 related to the GDP3 debt. The capitalization will cease once GDP3 is commissioned.

Income tax recovery for the year was $2.9 million and reflects an effective tax rate of 15.7%. Adjusting after tax earnings for unrealized gains and losses on derivatives, foreign currency translations and other gains and losses yields net earnings of $1.9 million for 2012, and that compares to $17.8 million for 2011 and corresponds to $0.01 per share earnings in 2012 versus $0.09 in 2011.

Cash position was $135 million at the end of 2012. Cash decreased by $142.8 million in 2012, which was more than offset by a property, plant and equipment increase of $191.4 million, with the difference being funded primarily by cash flow from operations.

In conclusion, from a financial perspective, 2012 was the culminating building year for Taseko at Gibraltar. We're progressing into 2013 with a significant portion of our copper production protected against downside price variability, A strong cash position, and an imminent ramp up of GDP3 to generate incremental free cash flow. This positions Taseko extremely well as we pursue our current growth projects in New Prosperity and Aley to create additional shareholder value. Russ?

Russell Edward Hallbauer

Thanks, Peter. Operator, let's now open the lines to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brett Levy with Jefferies & Company.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

It seems like good things are on the way here. Can you talk a little bit about sort of your hedging strategy going forward?

Russell Edward Hallbauer

Certainly. We've been hedging since 2009, and our general philosophy has been to hedge our share of costs at Gibraltar just to cover the downside. So going into 2013, you can see that our hedge position -- our hedge book in the first half of the year is slightly higher than the back half of the year. That's something that we're looking at and also sort of monitoring as we complete the commissioning of GDP3 and ramp up our production. But it's something that we'll continue to hedge our share of operating costs and kind of a proactive part of the way we manage at Gibraltar.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And you go out about a year. In other words, you're not doing anything for '14 additionally...

Russell Edward Hallbauer

We have done nothing for '14 as of yet, in terms of -- specifically, we buy puts, and the puts obviously, the time value of money is a factor. So managing the cost of those puts is very important. The further out the puts are, the more expensive they get.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And as you do your sort of own modeling forward here, where do you see troughs liquidity going to and at what point -- obviously, we can build our own models, but at this point, you feel like you have more than enough, I just want to get a sense sort of what timing and what sort of level you see trough liquidity being?

Russell Edward Hallbauer

Are you talking about cash liquidity?

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Yes.

Russell Edward Hallbauer

Yes, no. We're in good shape. We finished the year with $135 million in cash, and we're virtually at what -- we've completed construction at GDP3. So we're really at a sort of transition point to getting GDP3 commissioned and starting to generate cash and building our cash position back up.

Operator

Our next question comes from the line of Steve Parsons with National Bank Financial.

Steve Parsons - National Bank Financial, Inc., Research Division

A quick question on GDP3, wondering if you could provide a bit more color on the current status of the expansion and maybe detail your ramp up milestones that contributed to the -- that contribute to the previous production guidance for GDP3.

Russell Edward Hallbauer

John?

John W. McManus

Well, the status of the project is, is it's essentially complete. We're doing test runs of ore through all of the systems. The short runs, we run it for 15 or 20 minutes and then stop, check the alignment to the belts and the pumps and make sure that everything was running well. Our internal ramp-up schedule is to have it completely -- to target tonnage by the end of the third quarter. We think that this is probably going to be very achievable. There's nothing in this mill that we haven't already run in the other mill, other than the 20-foot ball mill, which is much simpler to run than 6 small ball mills. The mill itself, the flotation sections, the reagents, everything else is all and well-tested over the last 7 or 8 years at Gibraltar. We've got a trained workforce in place. We're ready to go. So I'm optimistic that we'll get it up quickly, but these things always take some time to work through the bugs. You have things that are installed that need to be checked. All of the operating systems and monitoring systems need to be run and checked. But I'm really proud of what the guys have done up there. It's amazing, actually.

Russell Edward Hallbauer

And I think, Steve, if you look at what we provided you guys in terms of our projections, we said 12 million to 14 million tons would be produced in the first half of the year and 14 million to 15 million in the second half. And if you look at where we are right now, if you assume that we're doing x number of tons through GDP2 concentrator and you project 12 million tons for the first half of the year, that means we have to average right around 20,000 tons a day nominally through the GDP3 concentrator to hit the low end of that. So if John and his crew do 25, then we're going to be -- if they do 30,000 tons, we'll be up to 14 million tons, if we do 25,000 tons we'll be somewhere between 12 million tons -- so that's how we guided, and I think we're pretty comfortable with that. When these things -- when you fire -- when John and his guys start to fire them up, once they work through all these system issues, it's not like you're going to run this thing at 5,000 tons a day for 30 days. When you push the green button, I think, when we fired up GDP2, it went right up to 30,000 tons just like that, didn't it, John?

John W. McManus

Yes. The problem isn't the throughput rate. It's the run time. It's how you get up to -- because these run -- this machine will run at 2,000 tons an hour right off the bat as long as we can run it and then it'll shut -- is the keeping it running. And that's what we're working through right now.

Steve Parsons - National Bank Financial, Inc., Research Division

Fair enough. Can you just -- quick comment on how the mine is ready for feeding the mill out. And so those are fresh points. [ph Are you stocked? Do you have a stockpile ahead of the mill? Where are you at in that respect?

John W. McManus

Well, what we've got is, we've got all the equipment into place. We're still bringing a few trucks in, but the mine itself is ready to go. Much better shape than we were last year, the water issues, we're way ahead of it this time. We've got new gear. We've got a whole new fleet of trucks, new shovel, drills. One more drill to come in. The mine plan, the ores is-- rather than trying to stockpile in front of the mill, we keep it in the pit to run it at the right time. So the mine planning is in very good shape. The other thing is to -- is that -- I call it concentrator #1 and concentrator #2. One is the old one and #2 is the new one. Concentrator #1 is running much better than it was last year. We've actually -- we've really dialed in the throughput on that. We can run it at a rate that we want. So having 2 mills mine where the mine plan is set up, water problem sort of could be an issue. We're ready to go. It's -- far better condition than we were in 2012 at this point in the year.

Operator

Our next question comes from the line of Samar Sidhu with Scotiabank.

Samar Sidhu

I just have a few questions here. The first one is on the Q4 cash cost. In your MD&A, you have a chart that compares Q3 cash cost with Q4, and there is another category in there which has gone up $0.05 this quarter. Can you just provide some more color on to what's in this other category?

Russell Edward Hallbauer

It would be an accumulation of small items, basically all the throw-ins end up in that category. I can get you a specific description of it.

Samar Sidhu

But all the labor cost increase, that's all captured in the labor category, which falls for $0.05?

Russell Edward Hallbauer

Yes.

Samar Sidhu

Okay. And my second question is on the impairment charge of $1.3 million in this quarter, which was for some plant and equipment becoming redundant with GDP3 coming online. Can you give us some more details on what that plant and equipment was? Was that...

Russell Edward Hallbauer

Every year, we go through an analysis of equipment that -- ensuring that it's in use, that it's appropriate to continue to depreciate it. And that $1.3 million again would represent an assortment of mobile equipment and other things that are no longer in use and, yes, relative to the size of the property, plant and equipment asset base that we have, it's extremely immaterial.

Samar Sidhu

Okay. And my last question is on the CapEx spend. What are you guys expecting to spend in Q1 and Q2 this year? And how much remaining capital is left to be spent on GDP3?

John W. McManus

GDP3 is essentially done, but this is Q1, so there will be some expenditure.

Russell Edward Hallbauer

Yes, we generally haven't given guidance on a quarter-by-quarter basis as to what our CapEx is going to be.

Operator

Our next question comes from the line of Tom Bishop with BI Research.

Tom Bishop - BI Research

The net operating cost has gone up steadily lately and up to $2.44 in Q4, and I realized that was due to some unusual items, low throughput and labor, and all that. But for one, how much of that labor, that large labor increase is due to training staff at GDP3? And how much was -- I mean, I would assume the labor agreement wouldn't go into effect maybe until Q1. But, I mean, why is that such a big number?

Peter C. Mitchell

It's not labor agreement, Tom. As Russ describes it, the additional people we've had in Q2 and Q3, sorry, Q3 and Q4. We brought an additional 130 people on staff and -- in order to get ready for GDP3 to come up and that period is about a $0.30 per pound when you roll in wages and benefits plus all of the gear that they need. And every person who's being trained needs a trainer. So it's an expensive thing to have to do, but if you're not ready [indiscernible].

Tom Bishop - BI Research

There's a lot of background noise there, but so all those trainees ended up in the cash cost of production, the operating cash cost of production?

Peter C. Mitchell

Yes, they did.

Tom Bishop - BI Research

Okay. And by the way, what is the difference between the cash cost of production and the operating cash cost of production? I mean, what other things come into that second number that it's larger?

Peter C. Mitchell

Operating cash, I think, we have depreciation in that number as well.

John W. McManus

There might be some operating leases in there, too.

Peter C. Mitchell

Leases as well. That's in there as well.

Tom Bishop - BI Research

If you lease equipment, that's not in the cash cost of production?

Russell Edward Hallbauer

In the -- no, it's not.

Peter C. Mitchell

There is operating leases and capital lease. The capital lease component's in the second one.

Tom Bishop - BI Research

Oh, I see, okay. And is also in there just more general G&A?

Peter C. Mitchell

No.

Tom Bishop - BI Research

No. That's not?

Peter C. Mitchell

No.

Tom Bishop - BI Research

Okay. All right. Now my biggest question is, once the smoke clears, say later in the second half of 2013, what sort of more normal cost of production can we expect now that we don't have all this other extraneous stuff? Going on in a more normal expected level of production, what sort of cost per pound?

Russell Edward Hallbauer

Tom, we kind of figured it'll be somewhere between $1.50 and $1.70 a pound, SAG cost, depending on where the Canadian U.S. dollar sort of sells out at.

Tom Bishop - BI Research

Wow, that would be a breath of fresh air. Also how does the...

Russell Edward Hallbauer

On that SAG cost, Tom, we still have off-property costs.

Tom Bishop - BI Research

Okay. So that's plus the refining...

Russell Edward Hallbauer

Yes, $0.35 to $0.40 cents on off-site costs. So somewhere around the $2 range, give or take.

Tom Bishop - BI Research

Okay, well, that would be good.

Russell Edward Hallbauer

Yes, that's why we spent all this money on GDP3.

Tom Bishop - BI Research

Okay, good, and one of the advantages that I recall from GDP3 is that you'll be able to, if you're getting some different kinds of ore out of the pit, you can send one to one plant, one in a different kind to the other plant. You said one time, you had 2 main kinds of ore, but 7 altogether?

Russell Edward Hallbauer

Yes, that's right.

Tom Bishop - BI Research

That should be an advantage, too.

Russell Edward Hallbauer

Tom, if you look at it sort of holistically, we actually have one mine feeding 2 different concentrators. So that's going to give us a lot flexibility doing all kinds of things for John's and Dave's operating crews. So we're not going to be one mine feeding one concentrator. So it's almost like we've got 2 separate mines here.

Tom Bishop - BI Research

I did have another question about the capitalization of costs for Aley and New Prosperity. You can capitalize them once you have a feasibility study, is that the rule? Or what's the rule on that? Because I was surprised to see that anything related to New -- to Aley was being capitalized.

Peter C. Mitchell

Nothing related to Aley has been capitalized at this point. And under IFRS, there's not -- as they say, a completely bright line. It's a function of -- in our case, we believe that getting permits is critical in terms of determining at the point at which the expenditures are reasonably assured of having an extended value to the company. But given history, et cetera, without a permit, obviously, a feasibility study is critical as well. Those are all the considerations that go into determining when we start capitalizing.

Russell Edward Hallbauer

We're very...

Tom Bishop - BI Research

Okay. So everything related to Aley is getting expensed right now. And with regards to New Prosperity, which has a feasibility study and a lot of design, I assume, in it already -- I mean, I assumed a lot that is getting capitalized, no?

Peter C. Mitchell

None, 0.

Russell Edward Hallbauer

Tom, we're taking a very conservative approach to capitalization. So there's some -- about 60% of mining companies do it a different way. We take a conservative approach.

Peter C. Mitchell

Yes, I mean, obviously, the risk is you go down the path of capitalizing and then some adverse information comes out from a permitting perspective or something, then we have to take a giant charge against our income, which is not something we'd like to do.

Russell Edward Hallbauer

Yes.

Tom Bishop - BI Research

So what was the hit from Aley and New Prosperity in 2012? Do you know?

Russell Edward Hallbauer

Yes, just under $20 million, just under $20 million. I think $18.7 million, Tom.

Peter C. Mitchell

$17.8 million, $17.8 million in 2012, $10.4 million in 2011.

Tom Bishop - BI Research

That's right. I saw that number but I didn't know for sure that, that was all expense. So that's quite a monkey you've had on your back there on the income statement.

Operator

Our next question comes from the line of David Olkovetsky with Jefferies.

David Olkovetsky - Jefferies & Company, Inc. Fixed Income Research

Just one quick question. I think it was already answered but I just want to confirm. You said that once GDP3 is fully operational, I guess, sometime in Q3, that your cash cost will decline to $1.50 to $1.70. I just want to confirm that, that's what you were saying.

Russell Edward Hallbauer

Yes, and that's -- that's dependent on the Canadian U.S. dollar and a few other things. But we think that could be achievable.

David Olkovetsky - Jefferies & Company, Inc. Fixed Income Research

Okay. And as it relates to Aley, can you give me a sense what the cash costs there would be or maybe provide a margin relative to, say, niobium price of $40 per kg?

Russell Edward Hallbauer

Pretty good. We're looking...

Peter C. Mitchell

It's a bit early, perhaps...

Russell Edward Hallbauer

But I think our margin -- we're generally hardwired around $10 per pound margin.

David Olkovetsky - Jefferies & Company, Inc. Fixed Income Research

$10 per pound margin. Okay, got you

Russell Edward Hallbauer

Yes. Don't hold us to that, but that's -- but we think if everything works out the way -- but that's going to have some influence on operating costs. We dictate about -- but we think that's kind of in the ballpark.

David Olkovetsky - Jefferies & Company, Inc. Fixed Income Research

And what's the end capital intensity of that project?

Russell Edward Hallbauer

We haven't finalized that yet.

John W. McManus

Yes. We haven't finished the flow sheet yet, so...

Russell Edward Hallbauer

Just speculation.

John W. McManus

We've got good mineral deposit at the moment, and we're working through the engineering to see what -- -- if it's an ore deposit we think it is. But it's too soon.

Russell Edward Hallbauer

So again, we talked about this earlier like the issue I raised about people not doing the proper front-end engineering work and then screwing up their flow sheet. We won't do that. So we won't be pushed by release of premature information until we have the technical work done to say that we can do certain things. So for us, the big driver now is to make sure that we can get the recoveries like we spoke about earlier, that we produce the concentrate, we're going to produce metal here. We're going to do tests on producing metal. The big deal is to push up the recoveries by doing further investigative work, and then once we have those recoveries we can finalize our flow sheet. We know we have an economic project, and then we can finalize the all-in capital costs.

John W. McManus

One of the things of the project like this, there's no rule of thumb. We can't open the textbook and say well, what does a niobium plant look like. So we've got to develop the whole thing on the bench first, and we've made great progress and great strides.

Peter C. Mitchell

Yes, we're probably 80% there now.

Operator

Our final question comes from the line of Aleem Ladak with PI Financial Corporation.

Aleem Ladak - PI Financial Corp., Research Division

I apologize I joined the call late. So this may have already been answered but when do you guys expect commercial production at GDP3?

John W. McManus

Commercial production will be very soon I think, but because we are running rocks through it right now, I mean, we're checking -- it's the final checks we're on. Full production, we've got scheduled for the end of Q3.

Aleem Ladak - PI Financial Corp., Research Division

Full production at the end of Q3.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back over to management for closing remarks.

Russell Edward Hallbauer

Okay, everyone. Thanks very much. Look forward to talking to you next quarter. Spring is coming. So we should all be happy. Okay, bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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