Imperial Metals Corporation (OTCPK:IPMLF) Q4 2015 Earnings Conference Call March 31, 2016 1:00 PM ET
Brian Kynoch - President
Andre Deepwell - Chief Financial Officer
Orest Wowkodaw - Scotiabank
Craig Hutchison - TD Securities
Good afternoon, ladies and gentlemen, and welcome to the Imperial Metals Corporation Fourth Quarter and Year-End 2015 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, March 31, 2016.
I would now like to turn the conference over to your host, Brian Kynoch, President. Please go ahead.
Thank you. Welcome to the Imperial Metals conference call to review our 2015 results. First, I’d like to note that our comments may contain forward-looking statements and they may by their nature they have a risk of uncertainty and the actual results that we have may materially differ from those expressed today. And for further information on the risks and uncertainties, please have a look at the cautionary note that is attached to our news release.
I’ll start the call with brief updates on our major projects, and then I’ll have Andre Deepwell, our CFO, discuss the financial statements. I’ll start with Huckleberry, at the Huckleberry mine, we recovered from the 2014 bull gear failure on the SAG mill. A new bull gear was installed the fourth quarter of 2014 and the mill has been running well since. The tonnage in 2015 was up by 30% compared to 2014, and up by 15% compared to 2013 when there wasn’t a bull mill failure, and the reason it’s up is because we didn’t have a bull mill failure and because the MZO or its softer than the MZX.
In 2015, Huckleberry produced 43.3 million pounds of copper achieving 98% of the targeted production we had for it. At Huckleberry, in spite of the significant cost reductions that Huckleberry has made at the mine site, early in January we suspended open pit mining operations and we are now running the mill on stockpiles, and those stockpiles will take us into the third quarter of 2016, and so we’re going to monitor copper prices and see how the guys do at it continuing to cut the cost at the mine site and decide what to do. But if the prices remain low, it’s likely that we will put it on care and maintenance sometime in the third quarter of 2016.
Sterling underground mining operations were terminated in May 2015 and some residual gold keep still coming out of the heap, and 624 ounces were shipped from site during the fourth quarter for a total in 2015 of 1,740 ounces compared to 5,725 last year. Subsequent to year end, we did receive a Finding of No Significant Impact from the Bureau of Land Management for the environmental assessment we submitted to construct a new open pit mine at Sterling. That Finding has a 30-day public review period, and once that’s complete, we will have completed all the major permitting required to construct and operate a new open pit mine at Sterling. So once we get that permit in place, we’ll update our plan and have a look at implementing it.
Mount Polley restarted operations in August 05, 2015 following the receipt of permit amendments which allowed us to conduct mine operations using the Springer pit to contain our tailings. During the fourth quarter, a total of 1.2 million tonnes were milled producing 5.1 million pounds of copper and about 10,000 ounces gold. The mill operated at about 50% capacity, one week on, one week off until late November, and we started continuous operations of the plant then. For two reasons one is it’s easier to make money when you’re running at 100% capacity or 80% of capacity, and secondly running one week on, one week off is very difficult when its freezing out, so two reasons to go to continuous operations.
The majority of the mill feed in 2015 came from the highly oxidized Cariboo pit which led to reduced copper recoveries. However, if you look at it, you’ll see that the lower copper recovery and lower copper grades were offset by higher gold grades and higher gold recoveries from Cariboo pit ore. And underground operations at Mount Polley are now providing a bigger portion of the mill feed in 2016, and in February, we actually got 26,000 almost 27,000 tonnes of 1.74% copper and over gram a ton gold from the underground delivered to the mill. As a result, March 21, copper head grades have averaged 0.358% copper and copper recoveries 73.6%, both up from the average copper grade of 0.293% and the average copper recovery of 69% that we achieved in 2015. And those underground operations are targeted to continue delivering mill feed until probably the end of the third quarter in 2016.
At Mount Polley, our employees, First Nation members, and local contractors worked through the winter of 2014, 2015 to complete the repair of the breach and restore and rehabilitate the Creeks impacted by the breach. In 2015, the turbidity in Quesnel Lake returned to normal levels, and we are hopeful that in 2016 with the help of our employees, the First Nation’s and local communities we will be able to return to normal operations using the repair and strengthening tailing storage facility.
Turning to Red Chris, production in 2015 was 58.2 million pounds of copper and 25,000 almost 26,000 ounces of gold. We produced that after first – our first copper concentrate was produced on February 17, 2015. We were then able to achieve commercial production by July 01, and we met the strict completion test criteria that are set in our banking facilities by September. Mining activities continued on both the Main and the East zones and metallurgical performance in the mill appears to be better when the mill receives a blend of ore from each of the pits. Adjustments to the flotation circuit including the addition of extra launders to increase the [indiscernible] circuit, and testing of flotation reagents has been undertaken to increase recovery.
Copper recovery was on a general uptrend during 2015. Copper recovery of 76.3% was achieved in December 2015. That uptrend has continued and record recoveries of 82.4% copper and 60.5% gold recovery were achieved in February. The copper recovery, we still need to do some work to achieve the recoveries that are predicted in the feasibility study, which was estimated to average between 85% and 90% over the life of the mine, but the gold recoveries have now achieved the levels that were predicted in the feasibility study.
In the fourth quarter, Mount Polley was impacted by a number of issues. We had some premature wear experienced on the SAG mill discharge trunnion liners and so we had to replace that, there was some downtime. We had a 40 hour outage that was required by BC Hydro to do some work on the transmission line, and we continued to have some water clarity issues that crept up on us in the final week of December, and I think it’s likely due to the buildup of ice consuming the free water and the tailings pond. And those issues continued into January, one with a result by increasing the pumping of well water and adjusting allocation of discharge tailings line.
Mill throughput in the first quarter of 2016 as I said continued to have some issues with water clarity. We had a major shutdown to realign the SAG mill and remove the reclaim barge, and we did have some mechanical issues at the gyratory crusher which have been resolved. With these issues resolved or mitigated, March production at Red Chris is likely to set new production records for both copper and gold. And during the first quarter of 2016 even with those issues, we set a record making six shipments during the quarter out of the port of Stewart. And we actually have another shipment for next week. So if we had any luck, we would have got seven in the first quarter. We continue to minimize expenditures and continue to look, implement cost control measures at all our operations looking to get our costs down as low as we can get them.
With those brief summary, I’ll ask Andre to go through the financials and then we’ll have time for questions. Andre?
Thank you, Brian. Imperial recorded net loss of $97 million in 2015 compared to a net loss of $37 million in 2014. There are various components that affect Imperial’s net income or loss that change from period to period including the income from mine operations, foreign exchange rate movements, rehabilitation and related insurance recoveries, idle mine costs, gains or losses on derivative instruments and share of – income or loss from Huckleberry as well as income and mining tax expense.
On page 5 of our annual report, we have added a table that’s called select items affecting net loss which summarizes the after tax impact of these major items. In 2015, the loss before the selected items was $14.6 million compared to income of $12.3 million in 2014. This is primarily comprised of income from mine operations which due to the various operating times at the Red Chris, Mount Polley and Sterling Mine impacted these results along with the metals prices during these periods.
The single biggest component of the 2015 loss was the foreign exchange movement on debt, net of cross currency swap as the Canadian U.S. dollar exchange rate went from $1.16 at December 31, 2014 to $1.38 at December 31, 2015. On an after tax basis, the net foreign exchange loss was $51 million in 2015 compared to [$15.3] million in 2014. Most of this exchange loss was unrealized as it relates to the company’s US$325 million high yield notes and added the currency swap.
I should note that the foreign exchange movement is likely the largest variable in the company’s net income as the exchange rate has moved again as of today’s date. Based on a projected exchange rate of $1.29 as of today’s date, the company would record a gain of about $20 million after tax in the first quarter of 2016 based on the movement in the exchange rate. As noted, the exchange rate most, the largest part of it is unrealized. The largest lost item in 2014 was the provision for rehabilitation net of insurance recoveries of $29.8 million related to the Mount Polley tailings down failure compared to an insurance recovery of $7.1 million in 2014.
Idle mine costs were $10.7 million in 2015 compared to $4.9 million in 2014. With the commencement of commercial production at the Red Chris mine in July 2015, the company began recording interest on debt through the statement of income. This interest had been previously capitalized to mineral properties during the construction of the mine. The company recorded gains on its remaining gold derivatives in 2015. The company has no derivate instruments for copper or gold at December 31, 2015 or today. The company recorded $3 million as of share Huckleberry’s loss in 2015 compared to equity income of $0.6 million in 2014. Huckleberry had eight shipments in 2015 compared to seven in 2014. The lower net loss reflects lower metals prices and higher cost.
Imperial’s capital expenditures were $125 million in 2015, down from $405 million in 2014 when construction at Red Chris was still in progress. The 2015 additions for Red Chris are primarily for the tailing stand and net pre production revenues and expenses to June 30, 2015. Capital expenditures in 2015 at Mount Polley were primarily related to the tailings dam.
The company reports four non-IFRS measures, adjusted net income, adjusted EBITDA, cash flow and cost per pound of copper produced. The adjusted net loss which removes non-recurring and unrealized items was $49.6 million in 2015 primarily as a result of the interest expense in excess of income from line operations. Adjusted income was $10.8 million in 2014. Adjusted EBITDA was $1 million in 2015 compared to $48 million in 2014 as income from mine operations from Red Chris was affected and Mount Polley was affected by lower metal prices and negative revaluations of $5.9 million in 2015 compared to $2.5 million in 2014.
Cash flow however was a positive $14.8 million in 2015 compared to negative cash flow of $6.8 million in 2014. The 2014 amounted included the provision for rehabilitation of the Mount Polley tailings dam. The cash cost per pound of copper produced is calculated for the company’s three mines. As Red Chris commence commercial production in 2015 and Mount Polley restarted in August as well. Cash cost per pound of copper produced in 2015 were US$58 per pound for the Red Chris mine, US$226 per pound for the Mount Polley mine and U.S. dollar $95 per pound for the Huckleberry mine.
In 2015, the company completed four debt and equity financings that raised the gross proceeds of $130 million. These were comprised of a $50 million second lien credit facility, private placement of shares for $6 million and oversubscribed rights offering that faced $44 million and the $30 million convertible debenture financing. The $30 million of these funds, we pay the short term loan facility the company received in May 2015. At December 31, 2015, Imperial had cash of $9.2 million.
In January 2016, the government of British Columbia announced that it would provide assistance to copper and coal mines during the low commodity price environment. This allows the company to defer payments of up to 75% of its monthly electricity billing based on average copper price and exchange rates for the period preceding the billing. Interest on the deferred payment amounts is charged and added to the deferred payment balance at the Bank Prime Rate plus 5%, except for the Huckleberry mine, which has a fixed interest rate of 12%.
The Payment Plan has a five year term with payment deferrals allowed only during the first two years. Repayments of the deferred amounts are required at up to 75% of the monthly electricity billing when the copper price exceeds CDN$3.40 per pound. At a copper price of CDN$3.40 per pound there is no deferral or repayment. The maximum deferral of 75% is available at a copper price of CDN$3.04 per pound or less and the maximum repayments are required at a copper price of CDN$3.76 per pound or more. Payment of any balance under the Payment Plan is due at the end of the five year term.
Joining the Plan is optional. However, in March 2016 the Red Chris, Mount Polley and Huckleberry mines joined the Payment Plan with the resulting payment deferral being effective for the March 2016 electricity billings which are due for payment in Mid April. At the maximum discount of 75% the estimated monthly payment deferral would be approximately $1.5 million in total related to Red Chris and Mount Polley, plus another $400,000 for the company’s 50% share of Huckleberry. To be noted that, joining the Payment Plan does not change mine operating costs and increases interest expense, however, it does provide the company with increased liquidity when copper prices are below CDN$3.40 per pound.
The company reviews its operating cost inputs on an ongoing basis. While lower commodity prices reduce the company’s revenues, they also reduce the company’s operating costs. These operating costs savings are realized in the form of diesel and other petroleum based products including explosives as well as in grinding media which benefit from lower steel costs. Certain of the company’s employees and directors took pay reductions in late 2015 with further pay reductions currently in process.
Other than principal payments of about $1 million per month on equipment loans, the company has no long debt coming due except for the senior credit facility maturing on October, 01 of this year. The company is currently in discussion with its lenders to extend the credit facility; and therefore does not and expects the lenders to extend the facility and therefore does not expect that the $200 million due on the facility will be required to be repaid during 2016. There is currently about $166 million drawn on the facility in terms of cash advances and another $34 million thereabouts in letters of credit, and that’s how we get to the $200 million total. It should be noted that financial covenants are not applicable on the senior credit facility until the quarter ending March 31, 2016.
And lastly just a comment about quarter four results. The company recorded net loss of $35.9 million in the last quarter of 2015 compared to a net loss of $9.1 million in 2014. The movement in the Canadian dollar, U.S. dollar exchange rate was the main reason for the increase in the loss, and again as I noted earlier that’s primarily unrealized.
Those are my comments.
Okay. So then we’ll take some questions now.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Orest Wowkodaw, Scotiabank. Orest, please go ahead.
Hi, afternoon. I guess good morning at Vancouver. Just a financial related question, your covenants come into effect this quarter based on where metal prices have been. It would seem to me that you’re likely going to trip the covenants as is in the first quarter. Have you already A) can you confirm that, and B) whether have you already had some negotiations or discussions with the lenders to relax the covenants? Just curious where that process might be.
Well, we don’t know what the impact is going to be in terms of are we going to trip the covenants or not because it depends on quite a number of factors including the exchange rate and we’ll have to see where that all ends up here at the end of this quarter including the EBITDA and so on. But it is reasonably close. We have had discussions with the lenders and that’s part of the discussions for extension of the credit facility, and we’ll see where that goes. We’ve basically asked them to relax the covenants effective March.
Okay. And does that covenant only apply to the credit facility that’s due this year or is it also embedded in some of the other debt facilities you have?
The second lien credit facility is basically those covenants near the first, and then there is one other debt agreement equipment loan, a small equipment loan that has a covenant in it as well.
Okay. So can I assume you’re also in discussions to relax those covenants as well?
The second lien for sure, the other one we have – the equipment loan, we haven’t addressed that one yet. We have to wait and see where we end up.
Okay. Thanks very much.
Thank you. [Operator Instructions] Your next question comes from Craig Hutchison, TD Securities. Craig, please go ahead.
Good afternoon guys. Question on the permitting for the Red Chris tailings dam, the South dam I guess that you guys are still waiting for. What’s the timing for that and is there any issues if you don’t get it by a certain time that you could bump up against some issues there in terms of storage?
Yes, we are about to get the permit that we need to start construction on the north dam and we would need to get the permit for the south dam sometime in the middle of the summer, but we expect to get it by then and we’re busy working on those things right now. So we do need to get that south dam permit before I don’t know the middle of the summer July or August. It’s relatively modest amount of work over there that we need to do but we do need to do it this year.
Okay. And I think you might have mentioned in the last call, there is a cost associated for the – I think you had a certain amount for tailings for 2016, was it $20 million to $30 million, is that still?
Yes, around $30 million, that’s right.
$30 million, okay. And then I know it’s still early stages at Red Chris, but do you have a sense of what the costs are per ton, mine, mill or more importantly sort of what your targets are on a unit cost basis for tons mined and milled?
For the cost?
I don’t have them right in front of me. We have them and we’ll get them to you.
Okay. Thank you.
I know that we are – this will be the first full year where we actually have data to be able to prepare a budget and so far in January and February we are really close to our targets to meeting our budgets.
Okay. Thank you.
Thank you. Your next question comes from [Tom Litke], Citadel. Tom, please go ahead.
Yes, real quick with regard to sterling, I assume that if everything goes well that we could be looking at some type of operations by the middle or end of next year?
Yes, that will be about right.
Okay. And then the second question is, just to clarify, how many shipments in the first quarter went out from each of the properties?
We’ve got the, do you know the Mount Polley one?
Yes, just a minute.
We’ll look at that like I say the Red Chris did six.
[indiscernible] one or maybe two and nothing out of Huckleberry.
Huckleberry should have it. I would have expected one or may be two from there as well.
I’ll tell you, I’ll get the data to Gordon and give it to you, but both of them would have had shipments but they certainly weren’t record ones like the Red Chris was. It will be more normal rate of shipment.
Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.
Okay. Thank you for participating.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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