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Executives

Kevin Loughrey - Chairman and Chief Executive Officer

Pamela L. Saxton - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Pamela Solly - Director of Investor Relations

Analysts

Tom Meyer - Scotiabank Global Banking and Market, Research Division

David Katz - JP Morgan Chase & Co, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Ralph M. Profiti - Crédit Suisse AG, Research Division

Craig Miller - TD Securities Equity Research

George Caffrey - GMP Securities, LLC

Garrett S. Nelson - BB&T Capital Markets, Research Division

Ian T. Parkinson - CIBC World Markets Inc., Research Division

Oscar Cabrera - BofA Merrill Lynch, Research Division

Joseph Von Meister

Gary Lampard - Canaccord Genuity, Research Division

Dan Kecskes

Thompson Creek Metals (TC) Q2 2012 Earnings Call August 14, 2012 8:30 AM ET

Operator

Good morning. My name is Denise, and I will be your conference operator today. At this time, I would like to welcome everyone to the Thompson Creek Metals Company Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] Mr. Kevin Loughrey, Chairman and Chief Executive Officer, you may begin your conference.

Kevin Loughrey

Thank you very much, operator, and good morning, everyone, and welcome to the Thompson Creek Second Quarter Financial Results Conference Call. We are speaking to you today from Denver, Colorado, and I'm joined by Pam Saxton, our Executive Vice President and Chief Financial Officer; and Pam Solly, our Director of Investor Relations.

The information about which we speak today is available in SEDAR and on our website, and in addition, we have slides that accompany this discussion, and they are available also on the webcast and the website. As always, we refer you to the cautionary statement, which is provided info with our disclosure documents in which reminds everyone that certain statements we make are about the future and are therefore subject to being incorrect, and everyone should bear that in mind as we proceed.

Before we begin discussing our second quarter results -- so therefore, before we start looking at the slides, I want to make a statement with respect to our recent performance. Clearly, we've had a difficult first half of the year, and while it's true that there have been some factors beyond our control, such as moly price, which has had a negative impact upon us, we have also, in some cases, not performed as well as we would have hoped. I hasten to add, however, that despite some operational difficulties, the most important thing we do is to send everyone who visits our properties home safely each day. In this effort, we are performing very well, and our safety performance continues a several-year pattern of improvement. In difficult times, companies are often accused of cutting back on safety, but for us, it remains our #1 priority.

At the Thompson Creek Mine, we had an unanticipated problem with a pit wall that caused us to curtail production for a time and then to revise our mine plan to ensure safe operation. These actions had a negative impact on our first half production from the mine. We have since moved into higher grade portion of the ore body, and we expect that we will make up much of that lost production and we expect to produce, for the full year at Thompson Creek, within the guidance we have previously provided.

At Endako, we encountered 2 issues that reduced our moly production. As we came to the final months of mining from the Denak West pit, one of the 3 distinct pits in the Endako complex, the ore grade we encountered was below what we had expected. While overall, the Denak West pit has performed better than our model predicted, this last portion of the pit underperformed. In addition and partially as a result of this low-grade ore, the new Denak mill did not generate the recoveries we assumed it would. High grade typically generates higher recoveries, and the reverse is also normally true, so lower-grade ore exacerbated our problem with the mill. However, in retrospect, it is fair to say that we were not as efficient in managing the transition to the new mill as well as we would have hoped. Although we are getting both the throughput and the quality of moly concentrate that we have planned, recovery, that being the percentage of available moly that the mill successfully extracts from the ore, is not yet at design standards. Although recovery problems at new mills are by no means unexpected, we had hoped to do better and to do so faster. We have looked at this problem very closely, employing experts from outside the company and from within. We have made significant process changes, and we've also made personnel adjustments, and we remain confident we will do better in the future in bringing the mill up to design standards. This problem with the ore grade at Denak West, when coupled with the falling price for molybdenum, has caused us to rethink our mine plan at Endako. We have decided to feed the mill from a stockpile of material on the property. This will temporarily obviate the need from mining from the pits and should reduce our costs from what they otherwise would be. With this plan, we can achieve production in the second half of the year which is in line with what we had anticipated for the entire year. Unlike the Thompson Creek Mine, however, we cannot recover the shortfall from the first 6 months, and so we have reduced full year guidance at Endako.

The saying that good things end bad come in 3s has proven true for us this year. Problems of both mines have occurred at the same time as a pronounced weakness in the moly market. In a year in which most analysts expected a strong moly market, the prices fall into the $11 range. Weakness in the European markets and reduced growth rates in China, when coupled with a sense of uncertainty worldwide, have slowed market activity in moly to a crawl. We continue to believe that underlying market fundamentals are sound, but there is not much short-term optimism at the moment.

Our operational problems, coupled with low moly prices, had a ripple effect that caused an impact on our financing. Unexpectedly low cash flow created a situation that left us unable to obtain access to the lending facility that we have recently arranged to fund the Mt. Milligan construction. In order to overcome this problem, we sought relief from the banks in order to gain access to these funds. Understandably cautious, the banks insisted that we obtain additional liquidity before they would grant such relief. Consequently, we initiated discussions with Royal Gold, the company to whom we have already sold 40% of the gold from Mt. Milligan. Royal Gold management and board agreed to purchase an additional 12.5% of the gold for $200 million plus $435 an ounce. This is a strong third-party affirmation of the Mt. Milligan project, and we thank everyone involved at Royal Gold for their continued support. The money generated by this sale was sufficient for the banks, and they then renegotiated the covenants, making it far more likely that we can obtain access to those funds if and when we need them. We now believe that we will be able to fund the Mt. Milligan project through to completion in 2013. Endako is just beginning its stockpile run, and we are encouraged by recent results. Thompson Creek is back into much better ore, and we'll have a good second half of 2012. Langeloth is just completing its traditional scheduled maintenance shutdown and will be back to full capability for the balance of the year and beyond. The construction at Mt. Milligan is progressing well, and we remain on schedule to obtain first ore in the third quarter of 2013 and have the mill running in the final quarter of that year.

While there are pressures on the budget for the project, we still expect to complete Mt. Milligan within the guidance number given. Throughout our history as a public company, we have been careful to report our numbers accurately and to be prudent when providing guidance about future performance. Until recently, that approach has created a record of which we are proud, when we, much more often than not, performed as well as we predicted or better. Unfortunately, over the past 6 months, we have not managed to continue that trend. One of the analyst reports I read last week mentioned, and I paraphrase, that management's credibility was in question. For us, this is the unkindest cut of all because we have worked very hard in good times and in bad to be as accurate and as transparent as we could possibly be. I would like to say that at no time have we presented numbers that we ourselves did not believe. In that sense, we all stand resolutely behind every number or comment we have ever generated. However, there can be no question that recently, we have not performed as well as we thought we would, and in that sense, it is fair enough to question our performance. The late Stephen Covey, author and management and efficiency expert, said something that has always stayed with me. He stated you can't talk your way out of a situation that you behaved yourself into. Meaning, of course, that words are cheap, but action is persuasive. Our intent is to perform as best as we can and to demonstrate what we know to be the case that we have good people, good assets and that we can manage them efficiently.

I will conclude this portion by saying that we have redoubled our efforts to get back on a positive track, and I have confidence in the people here, knowing that together, we can accomplish this in a manner that is consistent with our long history of positive performance. We also continue to believe we are on a positive track and that the development of Mt. Milligan, together with strong operations at both mines in Langeloth in a manner consistent with their long histories, will bring us success. I can also assure you that each of us is working hard to achieve that objective.

Now let me take just a few minutes to review our financial performance. Again, I refer you to the cautionary statements with respect to statements that we make, which are about the future. I'll reference the slides that are on the webcast, and the first slide that we'll look at is Slide 3, which is our safety record. As I mentioned in my prior comment, safety is the #1 priority for us, and you can see here that we have continued a long-term trend of improving our safety performance of all of our operations. This is something we consider and work on every day, and we hope to see further improvement.

In the second quarter of 2012, as demonstrated on Slide 4, our revenue was $113 million, significantly down from prior quarter, or $227 million year-to-date. We experienced an operating loss of $18 million and a net loss of $14 million. Our operating cash used was also negative $20 million. This is a reflection both of lower volumes and lower prices for moly.

Molybdenum production was 4.1 million pounds in the quarter at a cost of $14 and year-to-date, 8.5 million pounds of production at a cost of $13.73. As we have talked before, the costs at the mines are directly related to volumes, and when the volumes go down, our costs go up. We anticipate, as our guidance shows, that we'll do better in the second half of the year.

If you look at Slide 5, which details that molybdenum production and cash costs, you can see that we had lower production at both mines in the second quarter of 2.5 million pounds at Thompson Creek and 1.6 million pounds at Endako. We are anticipating in the second half of the year significantly better performance at both. And while these numbers may look optimistic given the first half performance, I think if you look back on our record over the years, that they really are much closer -- the second half is much closer to our historic levels both in terms of production and costs. As a result of this increased production, we believe that the second half cost guidance is $6.75 to $8 a pound, and you can see below that the components Thompson Creek back into the high-grade ore is a much lower cost of $6 to $7.

Slide 6 details our capital expenditures. We have expended so far -- our estimate for 2012 is between $860 million and $940 million. The vast majority of that, of course, is going to the Mt. Milligan project. The numbers for Endako are almost completely spent as the Endako expansion is done and cost just under the $650 million guidance that we most recently gave. And you can see for 2013 that our capital expenditures go down significantly as we complete the Endako project in the third and fourth quarter of that year. So our capital expenditures are going to be, for the next 12 months, quite high and then dropping off dramatically after that. And you can see on the right hand of that slide the money we've expended to date on the projects, and most notably, Mt. Milligan, we've spent about $757 million through June 30 of this year.

Moving on to Slide 7. This details the capital expenditures that we predict for ourselves and details the sources of funding for those capital expenditures. We have $410 million on hand in cash, this is all as of June 30, estimated equipment financing of just under $100 million, Royal Gold proceeds of $127 million and a new Royal Gold proceeds of $200 million, for a total of $836 million. That compares to $822 million projection, which is sufficient but close. And then if we exceed that number, we have available to us net revolver availability of $176 million and estimated cash flow of $22 million. So we believe that we have sufficient funds under even difficult circumstances to completely fund the Mt. Milligan project and the other capital expenditures we have planned until we get to the revenue-generating portion of the Mt. Milligan project.

Slide 8 shows Mt. Milligan's opportunity for us. We have recalculated our cash costs at Mt. Milligan. If you recall, the numbers we gave last were slightly lower than this. They were based generally on a 2008 study that Terrane Metals did. While we have not engineered a complete new study to detail in specifics our operational costs, we know that they will be higher as a result of several factors, labor and then the major single factor is the construction of a operations camp. We had initially planned to run that operation as a drive-in/drive-out camp, but because of the remote location and the difficulty of obtaining personnel, we have deemed it necessary to build a camp which will house the regular workers at the camp, and that's added about $15 million to the annual operating costs. But you can still see that at today's prices or even prices significantly lower than that, Mt. Milligan generates significant revenue once it gets underway.

We have -- on Slide 9, we are complete at about the 80% level of the CapEx spending at Mt. Milligan. We have purchase commitments for $347 million and then lump-sum contracts for $116 million, with the non-fixed costs remaining at $239 million and a contingency of $59 million. We spent a fair amount of the contingency in the past 2 quarters as a result of doing earthworks on a tailings storage facility. That was the biggest unknown for us as we had to dig to levels that we could not predict, but that work is done, and so we feel a large portion of the unknowable piece of the expenditures at Mt. Milligan have been -- are behind us.

On Slide 10, when we look at the Mt. Milligan development update, we show a number of milestones that we have achieved through July of 2012. I won't go through all of those, but I just will highlight a few. Our construction camp is now at its capacity of 1,070 beds, which we believe will be adequate for throughout the construction period. The contract -- the concrete work is complete for most of the major buildings. We have a roof on 2 sides on the building, which is something that's important for us to get done before the winter sets in, and we can do that. We leave that open intentionally for easier access and delivery of parts and equipment, and we can close that quickly before the weather turns. The assembly of the semi-autogenous grinding and ball mills is underway, and we've begun mechanical and electrical installation. Also very importantly, we, just last month, got power to the site and power to the shovel, and so we're in very good shape in terms of the schedule at Mt. Milligan. And we have 4 brand-new 793 haul trucks and a loader on site, and the shovel should be commissioned very shortly.

Again, on the project update, we have the engineering 99% complete, a critical factor to get done as early as possible. The procurement is 97% complete. That's not to say that all that material is on site, but it's been ordered, priced and is scheduled for delivery with no complications expected. Construction is 54% complete. And so our overall progress is 72%, and we're well on our way for the startup expected in Q3 of 2013.

We put some pictures on Slide 12. Picture says a thousand words, and you can see more readily than we can describe the progress we've made. On the top, on the left and right, is before-and-after pictures, if you will, since the last time we spoke to you. And today, that is the concentrator building. It's got a roof on it. You can see it's mainly enclosed. There is an open portion there. As I said, we can do that anytime we choose. We leave it open for a variety of reasons. But before the winter comes, we'll be able to enclose that sufficiently to begin work at the building. It will hold heat, and we'll be able to make progress during the sometimes difficult British Columbian winter. On the bottom 2 slides, you can see the progress of the SAG mill. Between April and August of 2012, the SAG mill was fully installed, and we're working on making it operational right now. So all of these things are very good signs as we are just where we want to be in terms of progress at Mt. Milligan.

Slide 13 details some of the derisking actions we've taken, meaning things we've done to keep on budget or on schedule. The important piece of having the engineering almost complete is critical for us as it enables us to predict, procure and plan very effectively. Likewise, we have procurement. The construction of the critical areas to tailings storage facility is well on its way to being complete, and the plant development is actually slightly ahead of schedule, so we're in very good shape there. We're having good luck now retaining our labor force at a little better rate than we were. We still have some turnover, but we've been able to maintain most of the skilled positions that we need. As for the schedule, the schedule was originally proposed in February of 2011. We have not had to make any changes on that, which is a very good sign in terms of predictability going forward. And as I say, Q3 2013 still looks very doable for us. And we continue to be fully permitted for the construction. We have all the permits we need for the construction. One additional permit, we need to obtain in order to actually deposit tailings in the tailings storage facility. To my knowledge, the British Columbian government has never failed to grant the second half of the permit allowing us to deposit the tailings once they've granted the first half allowing us to construct the tailings storage facility. And we have a tailings storage facility down the road at Endako. It is much larger than we successfully maintained since 1965, so we don't expect any problems in getting that last permit probably in the second half of this year.

Finally, looking at Slide 14, it shows the future Mt. Milligan milestones, and the real purpose of this schedule is to show that we are very much on schedule, in some cases, a little bit ahead of schedule. The next 2 developments for us are the mine development for the tailings storage facility construction and the concentrator building fully enclosed, except for the access to the SAG, which should happen in the next quarter or early in the fourth quarter of 2013, so -- I'm sorry, 2012.

So Mt. Milligan remains very much on schedule for us. As I said in my earlier statements, we had a difficult first half of the year. I think things are turning up in terms of our operational performance. We still have to deal with what we think is a lower moly price than we had anticipated. And with that, I'll open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Tom Meyer with Scotiabank.

Tom Meyer - Scotiabank Global Banking and Market, Research Division

Thanks, Kevin, for the description and color around some of the Endako issues, but I'm wondering if you could expand a bit further as it relates to the recovery issues. You mentioned some process changes. Is this a flotation issue with resident timing reagents, or is this a grinding issue? Or do you guys know at this point?

Kevin Loughrey

Yes, we have looked at both of those things and more. We're looking at the length of time for the reagents, the blend of the reagents, our grinding circuit, all of those things. The mill is entirely new, and it's a series of complex interactions as you work through the process. So we have also included much more instrumentation than we had on the prior mill there, and the process of the learning curve, learning how to operate that instrumentation, how to interpret and how to adjust as you go forward is all something we're learning. So I'd say all the things you asked about are things we have looked at. And I think we're seeing incremental improvements in all of them, which, together, should make significant improvements in the overall performance of the mill.

Tom Meyer - Scotiabank Global Banking and Market, Research Division

And, like, this is a mine that's been operating, really, on and off since 1965, so is there anything that your guys have seen to date that will give you maybe a bit more caution on reaching that design recovery of 79%?

Kevin Loughrey

No. No, we feel quite confident about that, actually. As I mentioned, we were impacted by a couple of things coming together. One was just the startup of the new mill, which is always something that takes a little while to get to the levels that you expect. And as I said, looking back, we probably didn't manage that quite as efficiently as we would have, I'm sorry to say. But then that had been unfortunately juxtaposed with the occurrence of this low-grade ore at the very periphery of the Denak West pit. And if you come in -- experience problems in the mill, and we experienced problems in the old mill, when we got to these peripheral areas that had exceedingly low grade, the low grade is just harder to get the higher efficiencies. So the combination of the learning curve on the mill coupled with the problematic low grade at the far end of the pit, I think, has really been what's been difficult for us. And stockpile material is somewhat higher-grade, very predictable material that we've milled before. We can feed the mill on a very steady-state basis, and so we think we'll see that recovery come back up. There's nothing we've seen in the metallurgy or in the operation of the mill that would lead us to believe that we can't do what we've done in the past and what the mill is designed to do. And we've actually -- when we've gotten it right, we have had the kinds of recoveries that the mill is designed to produce. We haven't yet done them as consistently as we'd like, but we know that it will do it. And as I said also in my remarks, we've had very good success. And in fact, the good success we had early with the throughput might have led us to believe it was an easier task than it's proven to be. We've had very good success putting through the amount of material the mill wants to run at these very high throughput levels. Our concentrate grade has been good. We just need to hone that final recovery piece, and we'll be there. But I understand your question, and it's really just the contrary. There's nothing that we've seen there that leads us to believe we can't do this. The materials, especially the stockpile material, very good for grinding and crushing, so we think we'll get those recoveries.

Operator

Your next question comes from the line of David Katz, JPMorgan.

David Katz - JP Morgan Chase & Co, Research Division

A couple of questions. So it seems that the contingency, as you noted, went down from $137 million to $59 million. That was a little bit of a surprise to us given that procurement and the construction percentage didn't increase that much. What gives you comfort that the contingency amount isn't going to decrease further?

Kevin Loughrey

We had, as I mentioned earlier, we had some significant issues as we were coming out of the ground in building the tailings storage facility. So we had to conduct that -- construct that facility down to the glacial tilt to the level at which we need to get the earth down so that we can build the facility on top of a substantially solid material. That took considerably more time and effort and therefore, money than we had originally intended, and it was essentially unknowable. The only way we could have discovered what that was was to do an extensive drilling program, and the only thing the drilling program would do was tell us in advance where we had to go. And no matter what it told us, we had to go there. So there was no sense in doing the drilling even though it would have given us greater predictability. It would have just been a cost that we could and did avoid. Having done that, we have gotten past what I think is the major imponderable of the process so that everything we see now in front of us is much more easily predicted and the costs more easily controlled. So I'm not saying there isn't pressure on those costs. There is. But we think that the major uncertainties are behind us and that what we can see in front of us is something that doesn't have those kinds of unknowable facts associated with it.

David Katz - JP Morgan Chase & Co, Research Division

Okay. And that's unlikely to be affected by the [indiscernible] turn on unknowable nature of winter?

Kevin Loughrey

No, you bring up actually a good point. The one thing that could make a difference that we can't predict is winter. We have allocated a -- we have constructed a schedule which takes into account the normal issues that we face during a British Columbian winter. So we're not anticipating the kind of construction project throughout the year that we're seeing right now. This is the perfect time, and that's why we have over 1,000 people up there right now as we attempt to take advantage of the more benign weather conditions. But a serious winter is one of the issues. There is some contingency, and I can't tell you exactly how much that we've looked at for winter. And as I say, the schedule takes into account the rate of progress we think we'll make during a normal winter. But that -- there are always unknowables, and that's certainly one of them.

David Katz - JP Morgan Chase & Co, Research Division

Okay. And then with regard to Endako, what timeline to your return to design specifications does the guidance, specifically the 2013 guidance, inherently suppose?

Kevin Loughrey

The 2013 guidance, in the sense of conservatism, anticipates production recoveries still slightly under the specifications that we've given. We think we'll get there, but in order to not promise something that we aren't absolutely sure we can deliver, we've taken a slight haircut on the recoveries in 2013.

David Katz - JP Morgan Chase & Co, Research Division

And to use your words, kind of absolutely certain within the realm of possibility that the guidance that's provided is achievable?

Kevin Loughrey

I'm sorry. I didn't understand your question.

David Katz - JP Morgan Chase & Co, Research Division

The guidance that you've provided, which you've noted as conservative, you feel very confident for 2013 that that's achievable?

Kevin Loughrey

Yes. I mean, that gets back to the question of guidance generally. You could -- generally speaking, when you give guidance, you can easily imagine a scenario where you can do better, and you can easily imagine a scenario where you could do worse. It's a variable world, and so what you try to do is give guidance which you think is achievable, is the most likely scenario and what you are confident you can achieve.

Operator

Your next question comes from the line of Michael Gambardella with JPMorgan.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I just have a question on -- a little bit away from Mt. Milligan and to the market. What are you -- how do you think the market is going to transpire in terms of the moly pricing with Freeport's new client or the restart of the Climax Mine coming in?

Kevin Loughrey

Yes, I'm always cautious about predicting what's going to happen with the moly market and moly prices. Freeport has indicated that they're going to manage their moly production, if I understand their guidance and the narrative that they've given, that they're going to manage the production of their moly in accordance with market demands. And their guidance is, I believe, for 2012 and '13 is not significantly different than their prior year's even though they do have the Climax Mine, which I presumed to mean they're going to reduce at least Henderson. So the moly market, to me, for the next while doesn't appear to be oversupplied. The demand appears to be weak. There's not a huge amount of surplus that we're aware of anywhere, surplus in inventory either at the producers or at the customers. But the demand is weak, and the emotion, if you will, around the market is cautious at best and, perhaps, negative. And so until something happens on the demand side, I don't see a whole lot of change. Now as we come up to the end of the summer and the beginning of the fall, we typically see something of a rebound in moly prices as demand increases and people get back from vacations. That's especially a European phenomenon, and who knows what's going to happen in Europe if that traditional fall bounce will come in moly demand. But the issue we're looking at in moly right now, to me, is much more demand than supply-related, and it's also much more about the sentiment in the market. When the sentiment changes, the moly price usually changes, and the sentiment is not particularly positive right now.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And from a product, end market product standpoint, is stainless the weakest end market right now for moly?

Kevin Loughrey

Yes. I don't know. It's one of the weakest, certainly. Aerospace is strong. The automobile industry remains pretty strong. The chemical market is okay, but the constructional steels and certainly, the stainless are not where we'd like them to be.

Operator

Your next question comes from the line of Ralph Profiti with Credit Suisse.

Ralph M. Profiti - Crédit Suisse AG, Research Division

Kevin, with what you're seeing in molybdenum prices and the operational performance, have you found yourself in the position of having to turn back bids for material, essentially choosing not to sell as you -- as Thompson Creek enters this sort of cash conservation mode? Have you guys encountered that in the most recent future?

Kevin Loughrey

We have not. Frankly, the spot market is very quiet right now. So we are selling most of our material under our existing contracts and haven't been too active in the spot market. And I think that probably, we'll obtain for the near future. In fact, it's possible that we'll build some inventory over the second half of the year as Thompson Creek starts producing a tremendous amount of material.

Ralph M. Profiti - Crédit Suisse AG, Research Division

And just going back to your last commentary, should we infer that when you're thinking about sales in the second half of the year, that you can actually see more of a Q3 weighting, or would you still expect that guidance to be more evenly split in the back half?

Kevin Loughrey

I think it'll be relatively even. I think we'll probably see a little bit of fourth quarter overweighting because Thompson Creek is, as we speak, ramping up. And so that would indicate that that continues to happen. July won't have been strong. August will be stronger. So actually, the more I think about it, I haven't looked at those numbers in that respect before, I do think we'll see some weighting in the -- the fourth quarter will be better than the third in terms of overall production numbers.

Operator

Your next question comes from the line of Craig Miller with TD Securities.

Craig Miller - TD Securities Equity Research

Kevin, I'd like to go back to the Endako pit for a moment. Reserves are supposed to be at the highest level of confidence. Were you mining at the fringe of, I guess, the confidence level from your drilling? What grades were you expecting there? What grades were you getting, and how do those grades compare to what you've now switched to in stockpile? And as I recall, from a recent trip there, there was expectation for a new reserve estimate for Endako this quarter. Is that still coming out?

Kevin Loughrey

Yes, I'm going to avoid the specific question of grade just because I'm concerned that if I give you specific numbers, they won't be quite on eye. I don't have those in front of me. But I can speak to sort of order of magnitude, if you will. We design a pit design based upon our reserves, and we do have confidence in those reserves. And as I said, if you look at the entire Denak West pit from when we began mining there several years ago to today, we have really gotten more material out of that pit than we initially indicated in our reserve study. The issue comes that no design, no drilling program allows you to predict with specificity on a week-by-week or month-by-month or quarter-by-quarter basis exactly what you'll get. It fluctuates. And what you hope to achieve and what we did achieve is predictability that enables us to estimate the overall amount of moly that was recoverable in the Denak West pit, and we achieved that. What happened, and really, this is kind of standard practice, you mine according to the design specifications, and if everything goes exactly as predicted when you get to the limit of your pit shell, you'll be done. In this case, as we got close to that pit shell limit, we experienced lower grade, and it was -- and I'm in a guessing mode here, but it was like 0.03, 0.35 moly, which is lower than we had anticipated. The stockpile material will get various, but it's significantly better than that. So what we're going to do is mine from the stockpile material. We will then, as circumstances in the market warrants, move back into the Endako Pit. We'll certainly do this for several months. And then we'll move back into the Endako Pit at the right moment. We don't have a date for that. We have sufficient material to mine from the stockpile material for some time. In terms of the reserve study, given what we're doing right now, I think we've slowed that down a bit. We will put out a new reserve study when we can. All indications look that the change that we're experiencing now shouldn't change the reserves at all because, as I said, we really mine more material from Denak West than that reserve study indicated.

Operator

Your next question comes from the line of George Caffrey with GMP Securities.

George Caffrey - GMP Securities, LLC

I've got a couple of questions regarding your new or revised facility. It appears, based on your presentation, that there's no intention to, at the moment, to need to draw on the facility to complete Mt. Milligan, but it's there more as a contingency. My questions are, one, you talked about some conditions precedent before you can draw on the line. Could you talk a little bit about that? And also, could you give us the actual levels in terms of EBITDA for 2013?

Pamela L. Saxton

Sure. This is Pam Saxton. So in the presentation that was on our webcast, if you look at Page 18, we've outlined with a little more specificity what is really there. There's really a couple of things. Each time that we would ask for a draw, we will give, really, a representation together with a cash flow forecast at that point, indicating what our future cash situation is and that we could fully fund Mt. Milligan. So that's really a rep, that condition precedent that we would have to give at the time of funding.

George Caffrey - GMP Securities, LLC

Okay. And that's the only significant rep?

Pamela L. Saxton

That's correct. So if you look at Page 18, you can kind of go through the different pieces. I kind of put it in categories of covenants, conditions to draw and then reporting requirements.

George Caffrey - GMP Securities, LLC

Sure. And then looking at this, though, on 18, unless I missed it, it would appear that there's no minimum EBITDA for the third quarter of this year, that it's 0 for the end of the year, and then it doesn't specify for 2013. Could you give us the 2013 numbers?

Pamela L. Saxton

We'll be filing the amendment. I don't have that right in front of me, but...

Pamela Solly

We have filed it.

Pamela L. Saxton

Oh, it is filed, so you could look it up there. I would tell you they're in the teens and the 20s. So you can look on there, quarter by quarter, of meeting those minimum EBITDA. I apologize. I don't have them right at my fingertips.

George Caffrey - GMP Securities, LLC

That's fine. And the other question, and I guess I could find this up from the filing as well, but is the adjusted EBITDA, as you reported, identical to the EBITDA that's referred to on the covenant package?

Pamela L. Saxton

Correct. We didn't report any EBITDA going forward. These are all forward-looking EBITDAs. They aren't backward-looking as the have been in the past.

George Caffrey - GMP Securities, LLC

I meant, is the calculation the same?

Pamela L. Saxton

Yes, correct.

Operator

Your next question comes from the line of Garrett Nelson with the BB&T Capital Markets.

Garrett S. Nelson - BB&T Capital Markets, Research Division

Kevin, as Chairman, I was wondering if you could walk through the decision to sell forward additional gold output at Mt. Milligan versus, perhaps, procuring a bridge loan or exploring other strategic alternatives? Was a bridge loan an option that any banks were willing to step up and commit to?

Kevin Loughrey

We looked, I think, at every available option that we could think of and concluded that from an overall perspective, the Royal Gold solution was the best. I'm not sure that we would have, given what we needed to do with the covenants, that we could have gotten a bridge loan or that we could have gotten the covenants amended with a bridge loan. As I mentioned in my earlier comments, one of the things that the banks demanded in order to relook the covenants was the addition of liquidity, which a bridge loan wouldn't have provided. So amending the covenants and taking on more debt, I think, would not be something that we could have achieved.

Operator

Your next question comes from the line of Ian Parkinson with CIBC.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

Just a quick question on Endako. I'm thinking back a couple of years ago. At the Thompson Creek Mine, you were operating off of a stockpile for a period of time, but at that time, it was a lower-grade stockpile, I think, than pure grades, and it's been around for a while. With the Endako stockpile, have you run any sort of any batch process and lasted a while, where you've got a really good handle on how it's going to recover, seeing it is so oxidized?

Kevin Loughrey

It isn't really heavily oxidized, actually. If you go out and look at it, it's kind of surprising. It's extremely dry environment. The materials laid there a long time. It doesn't have much clay. So some oxidation on the surface of the material, but on the majority of the stockpile, it's not heavily oxidized. We have run stockpile material from Endako before, and it handled very well. And so we think there shouldn't be many problems there. We've had a few weeks doing it right now. And so far, we haven't experienced problems with the material. We had a major stockpile run there several years ago, and that went without problem. So we don't anticipate that. We've looked at that in depth. And as I say, we've run the stockpile material for the past several weeks without significant milling problems.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

If you run flat, how long will the stockpile material last?

Kevin Loughrey

I think there's probably something like 45 million pounds of moly contained there, so it's very rough, but you could go 3 years.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

One more quick question on the covenants. The previous covenants of consolidated secured debt, 3:1 versus EBITDA, has that covenant been completely removed from the covenant package now?

Pamela L. Saxton

Yes, that's been completely waived.

Ian T. Parkinson - CIBC World Markets Inc., Research Division

And it doesn't come back in future years or anything like that?

Pamela L. Saxton

No, it does not.

Operator

Your next question comes from the line of Oscar Cabrera with Bank of America Merrill Lynch.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Kevin, just I would like to get back to Mt. Milligan for a second. On Slide 8, you have some indication of increasing costs, I believe, $245 million. I was wondering if you can put this into context of life of mine, what you had expected before and what you're expecting now.

Kevin Loughrey

The original estimate from Terrane Metals was that the operating costs at Mt. Milligan would be about $160 million to $170 million. That did not include treatments and refining charges for the copper and gold concentrate, and we estimated those to be about $40 million, which got us to $210 million. We amended that a few months ago because of exchange rate issues, and so we made an estimate of $220 million. That is all based upon -- I shouldn't say all. The $160 million to $170 million portion of that is based upon a Terrane Metals study that was done in 2008. So as we approach late 2012 and look forward, we looked at all the components of that. And as I mentioned, we have not done a full engineering effort to estimate the costs of that. That is in the process of being done but isn't yet complete. But our indications today are that, not surprisingly, $160 million to $170 million calculated almost 5 years ago is not what's going to hold today. So with that in mind, we've taken it to $220 million to $245 million. We've said that's plus or minus 10% to indicate the sort of level of precision of the numbers. And that's what we're saying it will cost to operate Mt. Milligan going forward. We hope to have, well before we operate, a firm number that we can give you that will be more precise than this. But we felt it was appropriate since we have this sense of increase in costs due to the passage of time and inflation and the addition of the camp. And I do want to repeat that $15 million of that difference comes from what we would traditionally call a scope change as opposed to inflation or increased costs. We're doing something differently than was originally planned. The original plan was to have people drive in and out to the operation. Well, if you've been there and if you've driven there, you know that driving there, working 10 or 12 hours and then driving back was probably never a realistic plan. And so we have included a $15 million operating cost for a site camp that will operate full time all the time and which will house the workforce there.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay, great. That's helpful. And then on your schedule here you have at the back of the presentation, you are at 54% construction. How do you see this evolving over the next 12 months? Do you expect to be at, like, 75% by the end of this year or first quarter next year? Do you have estimates for us?

Kevin Loughrey

I don't have that. I don't have the construction piece broken down in front of me. But if you go there now and you can kind of -- the pictures, unfortunately, don't do justice to what's going on. We're at a period of kind of maximum visible improvement. As steel goes up and concrete gets poured, the building gets clad. The roof gets placed on. The major parts get delivered. That should all take place -- the majority of that should take place by the end of this construction season. Then you go through a period during the winter when you go up time after time, you don't see much improvement at all because what you're doing then is putting in the mechanical, the electrical, the plumbing, the things that aren't as visible but are crucially important to get the thing done. So I don't have the percentages relative to time, but we're making very good progress. We should have all that outside work or the vast majority of it complete by the end of this construction season, which is sometime September, early October. It will be done in a fashion that allows us to comfortably proceed with all that other work through the winter season. And then come the spring, we'll do the finishing pieces of the outside work now that all the interiors have been completed, and that should put us comfortably on schedule to start in the third quarter of 2013. So the schedule, I would say, is going very, very well. And as I mentioned, it's adhered very closely. In fact, we've shown a little progress to the schedule we've put in place in February of 2011. Typically, if you see schedule problems, they come on pretty early and they exacerbate over time. In this case, we've had a little schedule gain, no schedule loss. So we feel quite comfortable where we are in terms of construction and completion progress.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Great. And last question on Endako, if I may. You've talked about the mill, and I think one of the last questions had to do with the actual grades and the deposits. Do you have an estimate of how much more you would have to spend in exploration to make sure that the reserves that you have for the throughputs are, in fact, what you plan for in your mine plan?

Kevin Loughrey

No, that cost is not usually significant, and we will put out another 43-101 when the conditions warrant. But to tell you the truth, at this moment, we see no indication of any reserve problems or issues whatsoever. As someone else mentioned, the mine has been in operation since 1965. The grade has not been an issue. The reserves haven't been an issue. The only changes made in the reserves over the past several years have actually been to increase them as we do additional work. So we don't see any indication of grade problem. I'd like to actually talk just for a minute about that because in the midst of a day-to-day issue, sometimes, things seem critically important when, in fact, in the longer-term view, they're not. If you look -- we had a few months at Denak West where the grade wasn't what we expected. But you put that in context of operating the mine since 1965, it's a very small blip. And in fact, as I mentioned earlier, if you look at the Denak West pit as a whole, we got more production out of there than we had anticipated. So admittedly, this small blip came at an unfortunate time, given what we were doing up there and our need for cash and EBITDA. But in terms of evaluating the reserve position of the mine as a whole, I don't believe it's significant and we don't have any reason to believe that there are grade issues. And so far, in the few weeks that we've been doing the stockpile, we're seeing just what we thought in the stockpile. We have very good records of the grade at the stockpile when it was laid down, so we can anticipate that pretty well, too.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Okay. Then if I may, are you suggesting then that it's a mill problem then? And have you seen any variances or any issues with the stockpile as you put it through the mill?

Kevin Loughrey

No, everything is -- you're right, actually, in saying that it's a mill problem. What we're really seeing is more of a mill problem. And I would say that it's really a problem with us learning how to operate the new mill to its -- and being able to operate it to its maximum efficiency. And we have not seen problems with material. We've had our own metallurgists. We've had metallurgists from the Thompson Creek Mine. We've had metallurgists from the outside come and look and mill experts. We don't see any problems there. No one has any opinions at this moment that I'm aware of that lead us to believe that we can't achieve those numbers. We just have to do it. So we don't see a problem with the mine or the reserves. We don't see a problem structurally or functionally with the mill. It's simply a question of bringing that mill up to its maximum efficiency. And I've admitted several times, we haven't done our best job here, perhaps, but I will also say that we're well under a year of operating this mill. And that is not unusual in terms of the time it takes to bring a big, modern mill of this significance, which is a drastic change than what we've had before, up to full capacity.

Operator

Your next question comes of the line of Joseph von Meister with Bennett Management.

Joseph Von Meister

I'm relatively new to the names, so forgive me if this question is a little bit off the mark, but from what I understand, at the Endako Mine, you're having grade quality problems, and the game plan is to mine the stockpile. That doesn't seem like a game plan that has any real longevity to it, so could you explain to me and us what the longer-term plan is for the Endako property?

Kevin Loughrey

Sure. And if you're new to the story, welcome, and your question isn't off the mark. I think it's a very reasonable question. The mining of stockpile material has more longevity than one might expect because we've been mining the thing for quite some time, and so there is a significant amount of stockpile material there. And it's always been in the mine plan that at some point, we would mine that stockpile material. So you have a combination of factors, really. The surprise at the end of the Denak Pit that the grade wasn't what we had hoped, the low moly price and the difficulty we're having putting the mill together that makes this at this moment a good transitional plan. And we will, when the conditions are right, we'll move back into the Endako Pit, which is what our mine plan was when we got through with the Denak West pit anyway. And so really, all we're doing is bridging that gap in what we think will be a low-cost manner during a period of low moly pricing. And so it's nothing more than, I would say, standard management of a mine plan that is cognizant of the economic circumstances under which we operate. And we could go for several months, we could go for a year mining the stockpile material. It's a function of all those factors I just mentioned and then making a judgment as to what is the most efficacious path forward.

Operator

Your next question comes from the line of Christian Christensen [ph] from Rossport.

Unknown Analyst

I was wondering what you're assuming for your working capital build at Mt. Milligan, and I just wanted to ask if this has changed any in the last year or so.

Pamela L. Saxton

And you'll notice on the slide, we have assumed in the capital number in our guidance about $30 million, and that represents first fills, spare parts and commissioning parts.

Unknown Analyst

Okay. And has that number changed much going back?

Pamela L. Saxton

No.

Operator

Your next question comes from the line of Gary Lampard with Canaccord Genuity.

Gary Lampard - Canaccord Genuity, Research Division

My questions have been answered already.

Operator

Your next question comes from Randy Stewart [ph] from Merit.

Unknown Analyst

Just a question on the Endako Mine. Is the strategy to mine a different area of the Denak West pit kind of, I guess, to an area where you think there's more ore, or is it going to continue to kind of go on the mine plan, where you're mining ore that's kind of on the periphery?

Kevin Loughrey

Let me step back for a minute just to tell you what the plan had been, and that was to mine to the end of the Denak West pit and then move into the Endako Pit. And if my memory serves, somewhere near the end of this year or the beginning of 2013, we would have moved into the Endako Pit in any event. So we were very close to the end of Denak West. We're moving a few months early. Our sense of what's happening there, we've done some drilling. We'll probably do a little more confirmatory drilling. But our sense of what's happened is that the heart of the -- the floor of the Denak West pit is exhausted, that there's no additional economic reserves there, which, as I said, is a few months different in a 60-year mine plan, a few months difference in one of the pits. But I do think there's some material in the walls that's recoverable, and so when the circumstances warrant and when it's efficient from the standpoint of the movement of equipment and the other alternatives available, we'll go back and recover that from the walls of the Denak West pit, and then we'll be done. And again, when we conclude, when the moment is right to stop doing the stockpile and move into Endako, then we'll do that. And I expect that sometime in 2013, but I don't want to be any more precise than that at the moment because we have a number of mining decisions to make before we make that change. But there's some more material in the Denak pit. It's not huge and it's not really in the floor of the pit. It's more recovering in the benches and walls on the outskirts.

Unknown Analyst

And just a question on the stockpile. As you're mining from that -- or not mining from that, but as you're utilizing that stockpile, can we assume that the cost per pound should be under that, which could be expected from traditional mining, where you're drilling and blasting at your shovels, getting the ore out of the pit, so the cost of the...

Kevin Loughrey

Part of the reason that you do it and do it now when the moly price is low is because the lack of drilling and blasting and presumably shorter hauls and a number of things make it easier and less costly to do. So therefore, accessing the stockpile material should result in lower cost than mining untouched ore.

Unknown Analyst

Right. And generally speaking, is the milling and processing part like 2/3 of the cost, or how do we think of that?

Kevin Loughrey

You mean 2/3 of the overall cost?

Unknown Analyst

Yes. Like, I mean, I guess my question is, how much of your cost per pound would you notionally be saving by not having to drill and blast?

Kevin Loughrey

I think it's roughly half-and-half milling and mining. You're not saving all of the mining costs. You still have to collect the material and move it. So I'd say you're probably 20%, 25%, somewhere in that range that you're saving. That's very rough.

Operator

Your next question comes from the line of Ken Anjersy [ph], a personal investor.

Unknown Shareholder

A question concerning moly contracting and pricing. What percentage of your projected moly '13 sales volume is under contract and how are those prices adjusted? And I guess you'd mentioned in previous calls that you guys lagged spot prices up and down, but maybe you can just elaborate a little bit more on contracting and pricing for moly in '13.

Kevin Loughrey

Sure. But just let me clarify. Your question was to 2013 volumes?

Unknown Shareholder

Yes.

Kevin Loughrey

Okay. Again, let me step back a little bit. The typical moly contract is for a calendar year, and that calendar year contract is generally negotiated in October, November, early December of the prior year. And so at this moment, we don't have any material contracted for 2013, and -- I take that back. There might be one contract we have which has some material, but it's going to be on the same format, and that format is that the price isn't set in the contract. The contract specifies the volume, and then the price is -- generally, the price of the month of delivery or the month before delivery varies from contract to contract. But suppose -- if you buy a pound of moly from us today under a contract which we negotiated last year, you'll pay either the August price or the July price, depending upon what that contract specifies. So we are -- we will, in about 2 months, go into what they call in the business the mating season, where all the buyers and sellers get together. They will negotiate the contracts for 2013, and if the past 40 or 50 years of history holds, they will be just like I mentioned, yearly contacts, specifying the volume not the price. And the reason it lags is because of what I said that you're selling the material in one month and you price it the month before, so as the price goes up, your price goes up along with it, and the price falls along with it. So the price, over time, is in the graph almost exactly like the graph of the moly price generally, just slightly removed in time. Does that answer your question?

Unknown Shareholder

Yes, it does.

Operator

[Operator Instructions] Your next question of some Dan Kecskes from Global Credit Advisers.

Dan Kecskes

The new amendment that you guys put out added delivery of a weekly historical report for sources and uses. Given that everybody in the investor group is looking to make sure you can complete this project on time and within budget, is this something you'd be willing to release to the wider investment group?

Kevin Loughrey

No. This is done under different standards than what's disclosure information would be released. We have very precise requirements with respect to what we can release to investors and when, and the information that we give has to be at a certain specificity. The material that we give to the banks will be not to say inaccurate, but it will be less precise numbers, quickly calculated. And the banks understand that and take it on those conditions, whereas the investment community, we can't release information like that to the investment community. So we'll continue to release the numbers that we've released now. They'll be audited numbers and complete, and these are more imprecise -- I don't want to say imprecise, but numbers that are done quickly in order to satisfy the banks' requirements. And the banks very clearly take them with the recognition that they are not audited, not precise and not disclosable. We don't mean to be unforthcoming there, but it is very clear what kind of standards you have to have for the numbers that you release to the investment public, and these are not to those standards.

Operator

There are no further questions. At this time, I'd like to turn the call back over to Mr. Loughrey.

Kevin Loughrey

Well, thank you very much for your interest and your questions. We always appreciate it, and we look forward to talking to you at our next quarterly call. So long.

Operator

This concludes today's conference call. You may now disconnect.

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