Imperial Metals (IPMLF) on Q1 2016 Results - Earnings Call Transcript

| About: Imperial Metals (IPMLF)

Imperial Metals Corp. (OTCPK:IPMLF) Q1 2016 Earnings Conference Call May 13, 2016 1:00 PM ET

Executives

Brian Kynoch – President

Andre Deepwell – Chief Financial Officer

Analysts

Orest – Scotiabank

Todd Litke – Citadel

Peter Castellanos – Glacier Partners

Derick Ma – TD Securities

Paul Davis – NTB Inc

Bill Rogers – Canaccord Genuity

Operator

Good afternoon, ladies and gentlemen, and welcome to the Imperial Metals Corporation Earnings Announcement for Q1 2016 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 Friday, May 13, 2016.

I would now like to turn the conference over to Mr. Brian Kynoch, President. Please go ahead.

Brian Kynoch

Thank you very much. Welcome to the Imperial Metals conference call to review our first quarter 2016 results. First, I’d like to note that our comments may contain forward-looking statements which by their nature are subject to risk of uncertainty and actual results may differ materially from those expressed today. For further information 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, go through the highlights of the financial statements. I’ll start with Huckleberry, where efforts to increase production, save cost and optimize the mine span continues, the staff there strive to find a plan, which will enable the mine to meet the challenge of the low copper prices.

Huckleberry is now continuing to mill stockpiles and work on the tailing storage facility, however it still expects that all milling operations maybe suspended, and the mine might be put on care and maintenance this fall if copper prices do not increase. The mill at Huckleberry has been running well with throughput averaging over 19,000 tons a day up about 12% from the same quarter last year and copper production £8.2 million was down about 22% with the high throughput rate partially offsetting the 30% drop in copper grade as we milled the low grade stockpiles. We’ll continue to work closely with the other shareholders and staff of Huckleberry and monitor the copper prices to find a plan whereby Huckleberry can remain viable and work through this period of low copper prices.

At Sterling, we've now basically obtained all the permitting we need to start an open pit operation and so we're going to be re-looking revisiting our mine plan and updating our cost estimates and decide how to proceed once that is complete.

At Mount Polley, since we restarted operations on August 5, 2015 following receipt of a permit that allowed us to use the Springer pit to contain our tailings. We've been going on that basis and on April 29, we received a permit amendment that would allow us to store another million ton of tailing from the Springer pit. And that amendment should allow us to operate it until well into June by which time we expect to receive permits that we were required to return to normal operations using the repaired and buttressed tailing storage facility.

In the first quarter we produced we treated a total of 1.7 million tons from 1.2 million tons in the fourth quarter of 2015, and metal production was up £8.2 million pounds versus £5.1 million. Gold production was up twelve almost 13,000 ounces of gold compared to 10.5. So the mill operated at near capacity throughout the period averaging of almost 19,000 tons a day for the quarter.

The Milling operations at the Mount Polley are benefiting from the supply of higher grade tons from underground mining. And in the first quarter a total of 90,000 almost 96,000 tons grading 1.73% copper and just over a gram per ton gold were extracted from underground and delivered to the mill. And underground we’re targeting to continue deliver mill feed from there until the third quarter of 2016.

At Red Chris, metal production for the quarter was £23.5 million and 14,500 ounces of gold both records for quarterly production at that Red Chris and this compared to £20 million and 10,000 ounces of gold produced in the December quarter. During the March quarter several production primary records were set and I think there's eight of them I won’t go through them all. But crusher throughput, as we said before product monthly production of copper and gold during the quarter we also achieved the highest monthly copper recovery 82% in February. So we're making good progress in the mill there.

Copper recovery continues to be lower than we estimated but we’re making progress. We believe one of the keys will be increasing the mass pull on rougher cells to 15%. With the adjustments, we’ve made over I think we started last October, which included installing radial launders on the rougher cells and increasing the pump sizes and cleaning circuit. We’ve gone to put an average mass pull of about 10% to a average mass pullof about 12.5%.

So we’re going to continue to make adjustments to the material handling systems in the clearing circuit until we can handle what we believe will be a required 15% rougher mass pull to achieve our targeted recovery. We’re almost certain that lower recoveries in the need for high mass pull is related the clay content and we do expect that to reduce overtime so we may be able to get our recoveries with less mass pull in the future.

And we have been doing some lab tests with different reagents that have helped us achieve better rougher recovery at lower mass pulls and probably early in June will be able to start plant trails with both. Milling throughput was impacted in the first quarter by for a couple of unplanned issues, one of those included the water clarity, which started in December and continued in to mid-January. We resolved that by increasing the pumping of well water and by moving the reclaim barge and by adjusting the locations of tailings discharge.

The second issue was we did have some mechanical issues at the gyratory crusher during the quarter, which we’ve now resolved. And just as an example so I think we’re through that so far in May we’ve averaged just over 30,000 tons per day throughput at Red Chris. So overall, we continue to minimize expenditure on all our other projects and control our cost as much as we can at the operations and as I said, looking forward to well, we’ve made big progress at Red Chris and continue to look forward to making progress on the copper recovery issue.

With those brief summaries, I’ll pass it over to Andre, he will go through the financials and then afterwards we’ll be available for questions.

Andre Deepwell

Thank you, Brian. Imperial recorded a net income of $17.7 million in the March 2016 quarter compared to a net loss of $33.4 million in the compared of 2015 quarter. Largest component of the $51.1 million improvement in net income on an after-tax basis is a change in foreign exchange gains and losses on debt, net of gains and losses on currency swaps of which totals $49 million.

The Canadian dollar, U.S. dollar exchange rate went from $1.384 at December 31, 2015 to $1.297 at March 31, 2016, reversing the trend that started prior to 2015. Income from mine operations also improved dramatically with both Red Chris and Mount Polley mines making significant contributions to net income. Neither of these mines were in commercial production in the March 2015 quarter.

Mine operating income was offset by interest expense, which was capitalized to construction in to progress from the March 2015 quarter. Refer to the table on Page 10 of the MD&A labeled select items affecting net income loss for further details.

The company recorded gains on its cross currency swap derivatives in 2016 including $5.7 million realized on the sale of a US$20 million of its US$110 million swap position related to the high yield notes. The company has no derivative instruments for copper or gold at March 31, 2016 or today. The company recorded a $4 million of its share at Huckleberry’s loss in the March 2016 quarter compared to a loss of $0.6 million in the comparative March 2015 quarter.

The net increase – the increase in net loss was primarily attributable to a combination of lower metals prices and a provision to reduce stockpile inventory to net realizable value. Imperial’s capital expenditures were $10.5 million in the March 2016 quarter down from the $44.7 million in the comparative 2015 quarter, which included capitalized interest and preproduction costs at Red Chris.

The Company reports four non-IFRS measures: Adjusted net income, Adjusted EBITDA, Cash flow and cost per pound of copper produced. The adjusted net income, which removes non-recurring and unrealized items was $1.2 million in the March 2016 quarter compared to an adjusted net loss of $8 million in the comparative 2015 quarter. Adjusted EBITDA was $45.9 million in the current quarter, a dramatic improvement over the $6.1 million loss in the comparative 2015 quarter.

The current quarter includes $5.2 million in positive revenue evaluations compared to a negative $0.1 million revenue revaluations in the comparative 2015 quarter. Cash flow was $49.4 million in the March 2016 quarter compared to negative cash flow of $6.1 million in the March 2015 comparative quarter.

The cash cost per pound of copper produced as calculated for the Company’s three mines in the March 2016 quarter these were US$0.99 per pound for the Red Chris mine. US$1.07 per pound for the Mount Polley mine and US$1.77 per pound for the Huckleberry mine. These cash costs are all significantly lower than those recorded in the December 2015 quarter.

To improve liquidity the company sold a portion of its U.S. dollar cost currency swap in the March 2016 quarter as already noted. Also in the March 2016 quarter the company refinanced some of its mobile equipment for proceeds of $7.5 million. In the March quarter the company’s mines also joined the BC Hydro payment deferral plan to assist with improving the company’s liquidity during the current low copper price environment. At March 31, 2016 Imperial had cash of $11.4 million.

Has announced yesterday, the company extended the maturity date of the senior secured revolving credit facility to March 15, 2018 and amended certain terms and conditions including financial covenants. The amount of the facility has not changed and remains at $200 million. Effective January 1, 2016 modifications have been made to amend the financial covenants to reflect the reduced commodity price environment. The interest rate charged under the amended facility will fluctuate with the financial leverage of the company. The interest rate under the prior agreement was not linked to the company’s financial leverage.

The company also extended the maturity date of the second lien secured revolving credit facility to August 15, 2018 and mended certain terms and conditions including financial covenants. The amount of the facility has not changed, remains at $50 million. The changes to this facility are the same as those in the senior secured revolving credit facility except there is no change in the interest rate from the prior agreement.

In current with the changes to the second lien secured revolving credit facility, the fee paid to related party for guaranteeing this facility has been amended to reflect – sorry to fluctuate with the financial leverage of the company on the same basis as the interest rate will fluctuate under the amended senior secured revolving credit facility.

I’ll turn it back over to Brian.

Brian Kynoch

Then we’ll take some questions now.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from are Orest from Scotiabank. Orest, please go ahead.

Orest

Hi, good morning. Couple of questions, first of all, I mean, congratulations on extending out your credit facilities. I was hoping you could give us some more color on what the revised terms are specifically, you mentioned there’s a floating interest rate depending on financial leverage. So what would that be today?

Brian Kynoch

Today…

Orest

As per your current leverage, yes.

Brian Kynoch

Well, it’s at the leverage of between three and four times. And currently that would – it depends on if you a borrow Prime Rates or if you borrow under BA’s and so on. But in terms where it was under the old facility, we’re 87.5 basis points higher than we were under the existing facility.

Orest

87.5 basis points higher. And can you tell us sort of what is that rate then that for you’re paying?

Brian Kynoch

Well, under Bankers Acceptances, would be the BA rate plus 350 basis points.

Orest

Okay.

Brian Kynoch

So BA is currently about 80 basis points or there above.

Orest

Okay. And in terms of the covenant, what are the new debt to or net debt to EBITDA covenants on the facility?

Brian Kynoch

As noted it. We were actually posting the agreement on SEDAR. It's probably there already as we speak, so you can take a look and see all the details there.

Orest

Okay. And then just one final question, depreciation seemed really high this quarter especially at Mount Polley, I think that the rate was higher than we've ever seen before. Is that just a one-off thing or is that kind of a new run rate?

Brian Kynoch

It’s – that is impacted by the amount of amortization of the deferred stripping for the – or that was put through the mill in the quarter related to where it was taken from. So that's going to be higher for a while that the base amortization and depreciation costs for the reserves overall or the plant overall that's pretty steady. So really that changes more as a result of amortizing the differed stripping cost.

Orest

Okay. So that'll be higher for couple years then?

Brian Kynoch

It will depend on how long it takes to get through – how long we’re milling that ore. So it will be longer for a while – for the next couple of years.

Orest

Okay. Thank you.

Operator

Thank you [Operator Instructions] There are no further – we do have a question. Our next question comes from Todd Litke from Citadel. Please go ahead.

Todd Litke

Hello. A real quick, I want to get an idea of what I can model in for cash taxes maybe this year and next year. And then the second question is, with CapEx being a little bit high in the first quarter I assume that had to do with Red Chris. And if you want to look at the yearly CapEx including the South dam and whatever you might do with Sterling. What might be the total obligation this year?

Andre Deepwell

Right. So in terms of cash taxes, we would be obligated to pay the 2% BC mineral tax, the advance tax portion of that. So that’s essentially on the operating margin of the mine excluding any – or mines excluding any depreciation charges or capital, so it’s pretty much the revenue left the operating cost, is a good rough measure of that, that’s at 2% of that margin. Other cash income taxes for income in terms of earnings there won’t be any because we’ve got plenty of losses or capital reductions to offset that against.

Todd Litke

Okay.

Andre Deepwell

So cash tax is not going to be a big number this year.

Todd Litke

Right.

Andre Deepwell

The question was related to CapEx. Yes, the tailings dam build at Red Chris has not really commenced. We did spend some money on it in the first quarter, but the big part of it still to come in the second and third quarters. So I’m not certain why you certainly feel the capital was lower in the first quarter.

Todd Litke

High.

Andre Deepwell

High, it’s sort of high.

Brian Kynoch

[Indiscernible] it can be prior to our report.

Andre Deepwell

A little bit of extra cost that do that they modifications, but that we would see a lower number for if you will the maintenance CapEx through the second, third and fourth quarter, but then we have the South dam to pay for and then obviously you got some of work to do at Sterling.

Brian Kynoch

Right. The big capital cost for us this year will be billing, tailings dam at Red Chris is about $35 million, and the vast majority of that will be spent in from now, until October. So the big capital here it should be the second and third quarter.

Todd Litke

And then how much at Sterling.

Brian Kynoch

Well, Sterling we got – that one is a – we’re going to go back and look at all our stuffs and see what the cost is start up, but that Sterling should – the plants already there, Sterling should basically be – if we contract mine at then, all we need to do is build leech path. So it should be relatively small capital cost.

Todd Litke

Okay, thank you.

Operator

Thank you. Your next question comes from Peter Castellanos from Glacier Partners. Peter, please go ahead.

Peter Castellanos

Yes, yes, yes. On the release yesterday, you made a reference to a deeper target at Red Chris. I’m just wondering if you could comment on any of the exploration activities that might be going on up there.

Brian Kynoch

We’re not currently doing any exploration up there, but we have started the engineering studies of what a block cave for the deeper material beneath the open pit would look like. So we’ve started engineering work and we may – the engineering work will probably lead to some drilling that will – is both exploration and just geotechnical. So we’ll need some answers for some of the parameters of the rock and the water and stuff down at the depths. And this would happen from probably 500 meters down to a kilometer down. So we’ll probably need – we are going to do some engineering work and then we’re probably going to need to get some data to finish the engineering work, so I call it more a related engineering than exploration.

Peter Castellanos

Thank you.

Operator

Thank you. Your next question comes from Derick Ma from TD Securities. Derick, please go ahead.

Derick Ma

Thank you. Just a quick question on Mount Polley. When you guys do get the necessary permits you wanted to you would do envision in terms of throughputs and production there. And then in terms Sterling, you mentioned an updated mines plan, any timelines that when you do expect that? Thank you.

Brian Kynoch

Mount Polley, if we get the permits we’ll continue to operate at 18,000 to 22,000 tons a day depending exact. Some of the earth is a bit softer, some of it’s a bit harder, but within that range probably average 20,000 tons a day. And the current – we kind of have – we’ve broken our mine plan down into two pieces. One that will take us four years and one that will take us ten years. Of course the four-year one is I would say a more robust and would work at lower prices. And then ten-year one that is we need probably a little bit better prices than we have now to make that one work. At Mount Polley we are doing a small amount of exploration work there. And that work – what we’re trying to do there is design a pit in the Cariboo area that can last us another year than we currently have planned.

So that will give us more time to move the tailings we’ve deposited in the Springer pit, out of there so we can continue. A lot of our remaining reserve is down at the bottom of the Springer pit, so to give us more time to get that removed, so we can get back down there. So once that drilling is done, we’ll probably have a revised mine plans for Mount Polley. And for Sterling, I would say in the three or four months from now, we should be able to have a plan of what we want to do down there with our permit.

Derick Ma

Okay, thank you.

Operator

Thank you. Your next question is a follow-up question from Orest from Scotiabank. Orest, please go ahead.

Orest

Hi, thanks for taking the follow-up. Just I wanted to revisit Red Chris and the South dam tailings. Can you obviously you’re getting ready to start the work there, but the permits for me outstanding. What happens – I mean how much leeway do you have on the timing with these permits before it would impact the operation if the permits were delayed? Thank you.

Brian Kynoch

We actually are working on the dam on the North dam right now. The North dam has to be raised as well. And we do have the permits are required to do – we’ve done some of the preparatory work like logging and organizing borrow pits in the South area.

But we do need more permits before we can actually build the dam in the bottom of the valley and we do need to build it this year and I would say, I don’t know the exact date, but we need it sometime in July the permits. Because right now, we’ll get the crews there, we’re focus, we’ll get the North dam finished. And it will probably take us into July and then we’ll have those crews and stuff shift over to the South dam. So I can’t give you an exact date, but we’ll need that permit sometime in July.

Orest

Okay. And if – so if you don’t get the permit by July, there could be some potential impact to the operation next year?

Brian Kynoch

Yet, there could be.

Orest

Okay. And then just with Mount Polley as well. When exactly do you need the new permit in order for operations you sort of continue without having to shut down again?

Brian Kynoch

Well. We can probably go to late June with this extension to put another million tons of tailings in the Springer pit.

Orest

And then it would – it’s basically a hard stop if the permits on hand?

Brian Kynoch

Or we ask for another bridging permit to give us a little bit more time. We preferred as soon as we can, quick put in part of the thing as I was just mentioning about trying to readjust the Cariboo permit to give us more time to get tailings out of the Springer, because the more we put in there, the more we have to take out. So I’d rather it be as short as possible but, there is still more room in the Springer pit.

Orest

Okay. Thanks very much.

Operator

Thank you. Your next question comes from Paul Davis from NTB Inc. Paul, please go ahead.

Brian Kynoch

He is not there.

Operator

Paul, your line is open.

Paul Davies

Good morning or afternoon whatever the case might be there I just want to thank you for taking my question and say what a great job you and the team and the entire Imperial Metals team has done in the last few years and overcoming great adversities, one of those probably the biggest one is the breach. In the breach, we learn that you were under insured and I apologize, if I missed it in your filings. Can you assure us that you are not under insured at this time on your various mining properties?

Brian Kynoch

We – you're right, we weren’t insured enough to cover all of our losses there. You're right. But it is actually relatively difficult to get insurance as a magnitude of what you can possibly lose. So I would say we try to make sure, we're insured similar to our peers and what we can get in a cost effective way. So getting a 100% insurance for what could happen and the kind of the worst event at a tailings facility I think is almost impossible.

Paul Davies

So would say that you are insured process will be in the same manner that were at that time or there is your coverage littler better at this point.

Brian Kynoch

I would say well, at Red Chris, I’d say it’s a little bit better.

Paul Davies

Right.

Brian Kynoch

But as I said, I don't think you can get insurance for the worst case, or really it’s not cost effectively get insurance.

Paul Davies

I see. Okay, well, thank you and again congratulations on a great quarter.

Brian Kynoch

Okay, thank you.

Operator

Thank you. There are no further questions at this time please proceed. We do have someone in the queue. The question comes from Bill Rogers from Canaccord Genuity. Bill, please go ahead.

Bill Rogers

My question is relating to the last caller and that is with regards to what is the current status of a lawsuit against the engineering firms to do with Breach at Mount Polley.

Brian Kynoch

We're still looking at that so. There is still some time before we have to file anything and we're still considering the correct steps Bill.

Bill Rogers

Thank you.

Brian Kynoch

Okay.

Operator

Thank you. Please proceed there is no further the questions.

Brian Kynoch

Okay. Thanks so much. Thanks for attending our conference call.

Operator

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

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