Taseko Mines' (TGB) CEO Russ Hallbauer on Q2 2014 Results - Earnings Call Transcript

Aug. 3.14 | About: Taseko Mines (TGB)

Taseko Mines Limited (NYSEMKT:TGB)

Q2 2014 Earnings Conference Call

July 31, 2014 11:00 ET

Executives

Brian Bergot - IR

Russ Hallbauer - President & CEO

John McManus - COO

Stuart McDonald - CFO

Analysts

Adam Low - Raymond James

Chris Chang - Laurentian Bank Securities

Brett Levy - Jefferies

Tom Bishop - BI Research

Operator

Welcome to the Taseko Mines’ Second Quarter 2014 Earnings Conference Call. (Operator Instructions). I would like to introduce your host for today’s conference call, Brian Bergot. You may begin, sir.

Brian Bergot

Thank you Kevin. Good morning ladies and gentlemen, and welcome to Taseko Mines Second Quarter 2014 Results Conference Call. My name is Brian Bergot, and I'm the Vice President, Investor Relations for Taseko. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and Stuart McDonald, Taseko's Chief Financial Officer. After opening remarks by management, which will review second quarter business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session.

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.

Russ Hallbauer

Thank you Brian. Good morning everyone. Thank you for joining us today to discuss our second quarter results. Our revenue of $107 million for the quarter was up $3 million over Q1 even though our Canadian denominated revenue was affected by a 3% stronger Canadian dollar quarter-over-quarter. Our operating profit from mining operations increased from 19.4 million in Q1 to 26.7 million this quarter. A 37% increase and a 107% year-over-year increase when compared to the second quarter of 2013. We expect earnings per operations and cash flow to continue to increase in the back half of 2014 as we move back towards average grades in the granite pit and as we achieve steady state throughput on the concentrator of 85,000 tons per day.

Our shovel performance was much better in this quarter as the work we have undertaken with our equipment supplier is beginning to pay off and as a result productivity is improved which will lower mining cost going forward. Our concentrator as we have seen has performed very well as we averaged 85,000 tons per day per calendar day roughly 93,000 tons per operating day. And with grade increasing we should see some increased metal production, we should see increased metal production going forward in the second half of the year.

Looking back when we started off in this path to modernize Gibraltar, I believe the first year John and I worked for the company we produced roughly 48 million pounds of copper for the full year and here we’re close to producing that in three months. Certainly things have changed.

We continue to work on both the copper and molybdenum circuits. Recovery on both of these continues to move up. For example if looking back in Q3, 2013 we have produced 284,000 pounds of molybdenum, this quarter 667,000 pounds which is combination of throughput and recovery going hand in hand. Anyways we don’t have much to say on operations, life is much easier and controlled than it has been in the past and this is reflected as our state operating cost continue to decline from nearly $2 in Q1 of 2014 to the $1.76 that we achieved this quarter.

We expect cost for an unforeseen issues to continue to climb and we expect operating profit to grow as well as cash flow. Specific questions on operational matters can be addressed by John and myself in the Q&A following this presentation. Last quarter I spoke briefly about our Aley Project. Our team has worked in more detailed process flow site investigation and metallurgical test work and as a result we have achieved repeatable recoveries of over 60%. This will be very important in terms of capital and operating cost as we go into detailed engineering level of design.

We’re in a process of recosting our flow sheet for our 43-101 report. Concurrently with these advancements we have also filed with both the federal and provincial government our project description and we expect that the Feds will move it over to the province’s EA process. At the same time we’re continuing to gather background environmental assessment data.

We know at this juncture we will be entering the Niobium market in the not too distant future and with Niobium trading at roughly $50/kg and with only 20% of worldwide steel productions [ph] using Niobium manufacturing process we see basically an unlimited market with only three significant players and at present and barriers to entry are very high.

Aley reserves frankly huge, we have a 20 year detailed mine development plan but the ore body has a potential to easily produce, grow over 75 years. The robust reserve grade, low strip ratio and a small mine and relative stems [ph] for an open pit. We’re excited about what Aley means for the future of this company. As well as new Prosperity continues to wind it's way through the court process. However the most recent ruling by the Supreme Court of Canada has confirmed new prosperities outside the First Nations title area and now that that element in the room has been removed. We believe we have a clear path forward for ourselves of both levels of government, federal and provincial to see a way to an agreement that moves new Prosperity forward.

I know many folks remains skeptical that new Prosperity will ever be developed but quite frankly the overarching issues with the title issue now being clarified will have a huge impact on the path forward.

I would like to turn the call over to Stuart to talk about financial results. Stuart?

Stuart McDonald

Thanks Russ. Good morning everyone. As Russ has already highlighted we have had strong earnings growth this quarter with both higher revenues and lower production cost from first quarter. Revenues have increased to 107 million in the quarter from sales of 28 million pounds of copper and 548,000 pounds of molybdenum and those amounts are reported on the 75% basis.

Sales volumes were generally in-line with production volumes and as a result there were no big changes in inventory in the period. Copper prices have recovered over the course of the second quarter and our realized copper price was $3.16 U.S. per pound compared to $3.10 per pound in the previous quarter.

We have also benefited from the increasing molybdenum price which has strengthened to over $14 per pound in June and we generated over $10 million of moly byproduct revenue in the second quarter.

Turning to cost now, our total operating cost per pound produced was $2.12 U.S. in the second quarter significantly lower than $2.48 in the first quarter. Mechanical issues from the first quarter were resolved and the Gibraltar mines returned to normal operating utilization. Also strong molybdenum sales volumes combined with the increasing price has resulted in increased byproduct credits which drove down our unit cost.

Off-property cost per pound produce returned to a more typical level this quarter as sales volumes were generally in-line with production volumes. Exploration and evaluation expenses were 2.4 million in the second quarter which include cost for metallurgical studies and refining of the flow sheet at the Aley Niobium project. And also legal costs related to the judicial reviews for the new Prosperity project. Other significant items on the second quarter P&L included an unrealized foreign exchange of 7 million primarily due to the strength in Canadian dollar during the quarter and impact of this on our U.S. dollar debt. We also recognized an unrealized loss of 2.7 million on our copper put options which was expected given the increase in comp price.

And we also reported non-cash written down of marketable securities about 400,000 due to the decline in value of one of our investments. GAAP net earnings for the second quarter were 2.6 million adjusting for the unrealized foreign exchange and unrealized derivative loss result in adjusted net loss for the quarter of 2.1 million or $0.01 per share. The company also generated adjusted EBITDA of 90 million in the second quarter and 34 million year-to-date.

Turning to cash flow now, cash flow from operations was 13.5 million in the second quarter and it's important to note that this was achieved despite a negative working capital adjustment of 6.8 million which was mainly due to accounts receivable and the timing of cash receipts from customers.

So excluding working capital adjustments we had operating cash flows of over 20 million in the period. This was offset by cash payments of 17 million for debt service costs which included a semi-annual interest payment on our senior notes. In April, we also spent 6 million on capital expenditures including capitalized waste stripping and other sustaining items.

We ended the second quarter with 77 million of cash on hand and we expect this balance to grow in second half with increased copper production and lower costs. We’re also now working with BC Hydro to arrange a refund of $13 million prepaid deposit in exchange for surety bond and we expect to receive a $19 million tax refund in the coming months as well.

In the longer term looking at our pipeline of projects and specifically Aley which Russ talked about, we have got a number of potential financing options including joint venture partners, offtake [ph] financing and export development financing.

So these are the types of things we will be looking at more closely going forward and of course with our free cash flow from Gibraltar and strong fundamentals in the copper market which provides us with a solid foundation as well and with that I will turn it back to Russ.

Russ Hallbauer

Thank you Stuart. Operator we like to open the lines to any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Adam Low with Raymond James.

Adam Low - Raymond James

First of all just want to say congrats on the good operating performance at Gibraltar and the progress on Aley. For Aley one of the things I’m curious about is that you guys are obviously having great success at starting to get the recoveries into the concentrate. Just wondering with the next step in the process we’re trying to convert the power core cost into the ferroniobium product. How difficult do you see that stage of the process relative to the one you have just gone through?

John McManus

What we have got is -- the processes have all been worked out now including the conversion from concentrate to ferroniobium. We’re doing some final confirmatory lab work but all of the research and development section is complete now. We are doing -- we are within a few weeks of being able to say that we have got this with the cost firmed up and the engineering well in way, in another words other flow sheet including the converted.

Adam Low - Raymond James

What’s the next stage after you get to that part of the process for you guys? I mean do you guys need to take us to a pilot plant or something like that?

John McManus

We’re considering a pilot plant for next year. I’m not sure if we needed or not, we’re looking at that but next stage is going to be over disturbing [ph] for financing and you permitting. We have got the basic science done which took longer than we had hoped it would but it's pretty good result.

Russ Hallbauer

And for the pilot plant, Adam, it's not going to likely build a specific facility it will be we were able to likely do it in various components in different labs across the country that come out with the final result.

John McManus

This just a larger scale in confirmation of what we have already gone.

Adam Low - Raymond James

So it's not something that would require a whole lot of upfront capital.

John McManus

No.

Adam Low - Raymond James

Okay switching gears to Gibraltar. You started up the SX/EW, it looks like you got pretty good production on of it the startup here. How sustainable is it to do 0.9 million pounds in the quarter and also I’m just curious as to what kind of copper inventory is in the dumps?

Russ Hallbauer

It's sustainable for about six months of the year Adam. We shut it down in the winter months because the power draw, we’re trying to keep the solutions one but we will run it essentially Q2 and Q3 shut down Q4 and Q1. And once it's (indiscernible) it should grow up to those levels that we have seen in this quarter.

Adam Low - Raymond James

And in terms of the inventory, I mean your last resource reserve statement on the dumps is it still fairly accurate?

Russ Hallbauer

Yes, no change there. We have got -- we took a year out I guess and it didn’t run it last year. I think it's only one year and then we have got enough reserves to run it like say six months a year for foreseeable future.

Adam Low - Raymond James

One another question on Gibraltar here I am just curious as to what your mill availability was in the second quarter and where it currently stands right now?

Russ Hallbauer

The number two mill, the new one? The new concentrator was on target and number one mill was below number two but we have reduced the targets for number one. So our overall 92.2 for the two first -- we are on target.

Adam Low - Raymond James

You’re -- target?

Russ Hallbauer

It is on target, yes.

Operator

Our next question comes from Chris Chang with Laurentian Bank.

Chris Chang - Laurentian Bank Securities

Just a quick question, I just called a little bit late and I’m not sure if you mentioned this but at the end of last quarter you highlighted that there was a potential for the expansion at Gibraltar. I was wondering if you had any more visibility on what that could look like and secondly if -- would you require more analysis there before you made a decision on Aley?

Russ Hallbauer

Yes our engineering team has been pretty busy, we haven't put a lot of time and effort into that, Chris. So we will have all these the various -- that was on the project identified in terms of where we think we will deploy our expertise and our capital going forward and that is something that will evolve as we head into the budgetary process for 2015 over the next few months. So yes we don’t have a lot of insight into that at this juncture.

Operator

Our next question comes from Brett Levy with Jefferies.

Brett Levy - Jefferies

Call date coming up in 2015 and are in a mode where you could potentially be delevering here and it kind of where do you see yourself going in terms of target capital structure and have you any thoughts about that first call date or subsequent call dates with respect to the note?

Stuart McDonald

I think generally speaking right now we’re comfortable with the leverage we have got on Gibraltar, we’re not looking at that call date at this stage. As you know we have got a couple of good projects in the pipeline too and we need to spend a bit of time and move those forward and look at how we might finance those but at this point in time there is no big change is expected on that, on the notes or on the balance sheet for the near future anyway.

Brett Levy - Jefferies

And then in terms of I mean you obviously you do have these projects, are you continuing to be exquisite or you are focusing on what you got in front of you right now?

Russ Hallbauer

We look at everything. So, we are going to be exquisite of one thing a day and looking at what we have in front of us at the other day. So it depends on what presents itself.

Operator

(Operator Instructions). Our next question comes from Tom Bishop with BI Research.

Tom Bishop - BI Research

Just to remind us all, what is average grade, is it 0.30 for copper or 0.31 or 0.305?

Stuart McDonald

The deposit average is 0.31 Tom.

Tom Bishop - BI Research

Is that a reasonable number for the near term as well? I mean or we have --

Stuart McDonald

Yes, it is. I mean it varies but the average is 0.31, will vary 10% either way.

Tom Bishop - BI Research

You have been hitting lately as, hasn’t really gotten too much above 0.85, 0.86 maybe. What’s the target there on the copper?

Stuart McDonald

It's 0.89%.

Tom Bishop - BI Research

You got ways to go there but you think you can hit that anytime soon?

Stuart McDonald

Yes there is a number of things going on there. The guys are focused on it. There is things we believe that we can do to move the (indiscernible), it is getting better. We’re improving our upward trend but the goal is 89%, we will get there tomorrow but we will get there.

Tom Bishop - BI Research

And the same for moly, as I recall the life of mine grade on those is 0.611 is it--

Stuart McDonald

Yes they are about it, I can’t remember exactly.

Tom Bishop - BI Research

And you’re targeting 50% recovery so. On the off-property cost it was commented that the average Q2 was more normal but you also said that there was some credits in Q2 that didn’t sound ordinary. What are property cost expected to average per pound?

Stuart McDonald

Yes I think, you’re right there was a small credit that went to this quarter which probably helped us buy a couple cents per pound but I think going forward something in that $0.40 a pound range is difficult, that’s where we have been and now we don’t see any changes to that kind of going forward.

Russ Hallbauer

But it will vary on a quarter-by-quarter basis but depending on who we’re shipping to. We have a lower TCRC cost going into China versus going into Japan, so the blended, if we shift more to Japan in the quarter than we do to China then that cost will be up and therefore our property cost will be up. So it's almost like grade, it will vary and that will depend on the shipping schedules that are before us.

Tom Bishop - BI Research

Okay can you identify how much the company spent on Prosperity and I know that they are not really representative of what it cost to do business at Gibraltar but you’ve any figures on those two?

Russ Hallbauer

I mean in the period, in the quarter we spent just over $2 million on those projects. Was that were you asking?

Tom Bishop - BI Research

Yes and what is the next date for Prosperity. I mean you have got this court case and you said you’re more optimistic on approval because of the land title issue but it seems like the bigger issue is the tailings and a liner and all that which amazes me still that there is an issue there, it was in the proposal or it wasn’t but what’s going on there, what’s to happen next and why you’re so more optimistic about it?

Russ Hallbauer

Well certainly if you step back Tom, and look at what the Prime Minister there when this thing came forward when they made their decision they said there was two overarching issues. One was -- it was in an area of unresolved land claim issues that has been resolved by the Supreme Court of Canada and the other was the scientific process with respect to environmental issues and we’re proving in court right now that a rigorous scientific process was not followed and that the federal government aired both at the panel level and at the decision level before the Minister of Environment and what are the next thresholds time will tell us before the courts.

Tom Bishop - BI Research

Are you saying you presented briefs? Something like that to explain your side?

Russ Hallbauer

Well in these judicial reviews yes it's very intense, we have been at it for months, with affidavits and the government has to counter those affidavits, our affidavits from our technical people and they go before the courts and the court has to decide who is correct and who isn't.

Tom Bishop - BI Research

But we don’t have any timeline at this point.

Russ Hallbauer

Well like it's in the courts, we expect that sometime in the fall we will be the first court appearance sometime in October but there is lots of things you know that can happen between now and the fall in terms of someone coming to their senses. I mean litigation and going to the courts is the last thing you want to do but somehow we have to follow through in a process that ensures that the government has ultimately has reviewed this process that we were in objectively and fairly taking into account everything that and it appears that has not gone on.

Tom Bishop - BI Research

And they will sit back in their chairs and go you know what they are right, let’s just short circuit this process.

Russ Hallbauer

Well that is what happens when you go to court and there is lot of times it makes people pause and look and -- the last process through the panel and going into the Ministry of Environment for review -- it’s a very at arm’s length, you can’t talk to anybody so therefore there is lots of areas in that process that can be by passed and not followed correctly and that’s what ultimately has happened in our opinion.

Tom Bishop - BI Research

Russ, just one last question if Prosperity and Aley were approved tomorrow is it real clear which way you would go?

Russ Hallbauer

At this juncture not yet, no it's absolutely not.

Tom Bishop - BI Research

It sounds like a pretty juicy bomb that you’re holding on to there.

Russ Hallbauer

Yes we think -- like I said and it hasn’t been reflected in any of the discussions in this company yet but we worked it for 2.5 years on the metallurgical side. John and his team and the technical team and all the consultants have put a lot of work into this stuff. These are the barriers to entry on these opportunities are very, very high because not all (indiscernible) types are created equal and each one is different. Ours is different from CBMM and (indiscernible) is ours and so there is going to be a lot of broken pits on these things but ours is not broken and we have got it to a point now where this truly is a very good asset and I know a lot of people haven't accepted that yet but time will show it all. So we have two very good assets there with New Prosperity and Aley and we will just have to decide which has the best economic return for the shareholders.

Tom Bishop - BI Research

Not to mention Gibraltar four, so -- okay thanks.

Operator

And I’m not showing any further questions at this time. I would like to turn the conference back over to Russ for closing remark.

Russ Hallbauer

Okay thank you very much everybody. I hope you have a good rest of the summer and we look forward to talking to you in the third quarter. Bye.

Operator

Ladies and gentlemen this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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