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Thompson Creek Metals (NYSE:TC)

Q3 2012 Earnings Call

November 09, 2012 8:30 am ET

Executives

Kevin Loughrey - Chairman and Chief Executive Officer

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

S. Scott Shellhaas - President and Chief Operating Officer

Analysts

Brett Levy - Jefferies & Company, Inc., Research Division

David Adam Katz - JP Morgan Chase & Co, Research Division

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

Oscar Cabrera - BofA Merrill Lynch, Research Division

Steve Bristo - RBC Capital Markets, LLC, Research Division

Gary Lampard - Canaccord Genuity, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Emmanuel Bello

Brian MacArthur - UBS Investment Bank, Research Division

Operator

Good morning. My name is Steve, and I'll be your conference operator today. At this time, I would like to welcome everyone to Thompson Creek's Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Kevin Loughrey, Chairman and CEO. Please go ahead.

Kevin Loughrey

Thank you, operator, and good morning, everyone and welcome to the Thompson Creek Metals Company Third Quarter Conference Call. I'm joined here in our headquarters in Denver, Colorado by our Chief Financial Officer and Senior Vice President, Pam Saxton; Scott Shellhaas, our President, who's in charge of our operations; and our Director of Investor Relations, Pam Solly. We are speaking to you about documents which have been -- the presentation document we're using is on our website, and can also be -- you can see it on the link to the webcast if you want to follow along with the slides that we'll be speaking from. Our press release has been filed and is available. The 10-Q has been filed, but I understand, is not yet available, but should be within the hour.

As always, we begin these calls with our cautionary statement, which indicates that we have to caution you that we expect to make forward-looking statements, and please be aware that the actual results may differ materially from these forward-looking statements due to risks and uncertainties, and we refer you to our SEC filings for a discussion of factors that could cause our actual results to differ materially from those in our forward-looking statements.

I also need to begin, as one does not wish to begin with such presentations with an apology, for the fact that, first of all, we had to postpone the conference call, which was scheduled for this time yesterday, and then filed the Q in such a time that it's not at this moment available to you, and we're sorry for that. We actually had our financials ready and approved by our Board of Directors on Wednesday of this week, and have planned the call for Thursday. That schedule proved to be a little bit optimistic because after the numbers were improved, our outside auditors and our inside financials people ended up with a question about accuracy that they needed to resolve before we could file, and of course, in such cases, when timeliness and accuracy do battle, accuracy wins out, and we had to postpone the call and the release until such time as both sides were comfortable with the final numbers. That did happen earlier this morning, as everybody put in 2 nights, really, of no sleep to get these numbers right, and we appreciate that effort, but as a result, we were not able to get them filed at the time we expected. As you can imagine, we really focused our efforts on trying to get those numbers right. When we're done with our efforts here today, we will make sure that we work hard to figure out why that happened, and that does not happen again. We appreciate your patience with that and hope that we will not be in this situation again.

So with that mea culpa behind us, let's move forward to the presentation itself. And as we always do here and as we always do on the conference call, we begin with a report on safety because it's our objective always to make sure that everyone that comes onto our property, employees, contractors and visitors go home safely at the end of the day. And as you can see from the chart on Page 3 of the presentation that our safety performance has really improved materially over the years, 75% or 80% improvement from 2007 to 2012, and a significant improvement year-over-year to a rate that at this moment is well behind the U.S. metals mining average for all incidence recordable rate, which is the primary measure by which safety is evaluated. We use other measures as well to make sure that we're not using solely this scale to make sure that we're performing as well as we can in safety. And we're very pleased with those results, but we continue our efforts to try to improve our safety performance every day.

Slide 4 gives a rough overview of our third quarter and year-to-date 2012 financials, and the financial results continue to be impacted by a relatively weak moly market and the extended ramp-up of operations of both the Endako Mine and mill. We had a net operating loss for the quarter of $34.7 million and a net loss -- on the income basis of $48.2 million. And then you can see the non-GAAP numbers for those issues and they are impacted, of course, by a $47 million write down we had for goodwill impairment. This was the result of the change in the mine plan at Thompson Creek, where we ceased stripping in the lower moly prices that has resulted in that. So we've given non-GAAP numbers to indicate what the number would be, had we not taken that goodwill impairment. That resulted in a net loss per share on a GAAP basis of $0.29, but $0.01 on a non-GAAP basis when we take out the goodwill impairment again.

This financial result came as the result of production of 6.1 million pounds of molybdenum in the quarter at a production cash cost of $9.46 a pound. We also had the realized price of $12.85 a pound. That price is somewhat higher than the market price as it typically is because the mix of our products includes upgraded products which raised the price, and it's also higher than the price that exists today, which is in the $11 range, as the moly market continues to be relatively weak as a result of weak performance at some of the subsets of the economy to whom we sell.

At the Endako Mine, we continue to work on improving performance there as a result of the introduction of the new mill and then the change from mining ore and putting that ore into the mill to mining stockpiled material and putting that into the mill. We are having some difficulty with getting the realizations from that stockpile material greater than what we thought we would have, which results in somewhat of a lower recovery. That lower recovery then translates into lower production, and the comments in result from that is the cost -- the unit cost go higher because the fixed costs are spread over a lower production base. So we had in -- we mined approximately 1/3 of that existing stockpile, and we will mine that. By the time we get through mid-2013, we will be done with the stockpile work.

In 2013, we expect to mine material from the Denak West pit. We have some material left in the bottom and in the walls there. That's where we were mining when we ceased mining operations and went to the stockpile earlier this year. And then we'll work into the Endako pit at the end of 2013, where we should get higher grade ore and get much better production and lower unit cost. Meanwhile, we are taking a number of measures to try to improve the recoveries that we're getting from the stockpile material, and we believe that we'll see continued improvement through the course of the year, and then significant improvement as we get to the Denak, and then the Endako material in 2013.

At the Thompson Creek Mine, we have pretty much concluded the effort we indicated we would take last time to cease mining -- to cease stripping activity for Phase 8 and concentrate only on mining Phase 7. We are also, as planned, into a higher-grade portion of the mine, and we're seeing production rise and cash costs go down, and this results, as you can see, in a production and cash cost forecast for 2013 of 20 million to 22 million pounds at a cash cost of $4.75 to $5.75 per pound. So despite the production issue we had earlier in the year at Thompson Creek, we anticipate that for the full year, we'll be back onto the guidance that we gave. And as we said earlier, the efforts we've taken at Thompson Creek should result in savings of approximately $100 million over the course of the next 2 years. Our plan is to watch the moly price and to look at our mining plan at Thompson Creek and to commence -- recommence stripping at such time as that market price warrants. It's difficult to say an exact price there because not only does it depend on the price, but it depends upon your expectation of whether that price will continue to remain stronger over time. Our view of the moly market continues to be that it will strengthen in 2013, in the past few years has weakened towards the end of the year and then strengthened in the first part of the year. And as I say, we will evaluate that on an ongoing basis and recommence stripping when the market conditions warrant. If we haven't done that by the end of 2014 or the beginning of 2015 when we complete Phase 7 mining activity, then we'll have the choice of either recommencing stripping at that point or putting the maintenance of the mine on a care and maintenance basis until the market conditions warrant again.

If you go to Page 7 on our presentation, we give our outlook for moly production and cash costs over the next couple of years. I'm not going to give you all those numbers. You can see them for yourselves. But as you can see, in 2013, our total cash cost go down considerably. That's primarily as a result of very low cost at Thompson Creek, and also our expectation that we will get better production and better recoveries from Endako.

Page 8. We move over and talk about our capital expenditures. Obviously, this has been an issue for our company for some time when we first had the $650 million capital project in Endako, which is now complete, and now we're in the midst of the approximately $1.5 billion capital program for Mt. Milligan. And so this slide gives a sense of where we stand on capital, and we'll spend the next couple of slides talking about this. But as you can see, we have a relatively small amount for operations this year of $35 million to $40 million. The Endako expansion cost of $78 million dollars are fully expended, and there's no more additional cash to be spent there. We are projecting to spend $725 million to $760 million to complete and to get to close to completion in Mt. Milligan this year for a total cash capital expenditure of $838 million to $878 million. And you can see that number as well down into 2013, where we reduced our sustaining capital even lower to $15 million to $20 million, and we have about $280 million to $315 million left to spend on Mt. Milligan.

If you look at the next slide, you can compare the capital expenditures that we have planned to the funding we have available to us for those capital expenditures. And as fortune would have it, both numbers equal $612 million. We do not reverse engineer this. This is how it actually came out, and it's comprised -- on the left-hand side of the money, we have available to spend $360 million in cash, $45 million estimated financing from equipment, additional Royal Gold proceeds of $207 million, and then we take the -- and that equals $612 million. We take the high estimate of our capital expenditures for Mt. Milligan and the rest through quarter 4 of 2013. We come coincidentally to the same $612 million, and that indicates that we have enough money on the financing to do this without drawing on the revolver with the exception of that would leave us with 0 cash, which is obviously not a prudent position. So we would need to withdraw the revolver to the extent that it would be necessary to maintain a significant reasonable cash balance.

So we are becoming more and more comfortable with the capital expenditure number at Mt. Milligan. Obviously, things can happen in terms of operating expenses and the moly price, but we feel good about our financing as it stands to date. We have significant revolver financing still available to us, and so we feel that our financing position at the moment is quite good. Nonetheless, we are constantly looking into the market to assess what the financing opportunities are, and seeing if there is an improvement on our financing condition we can make as we move forward to the end of the year and into 2014.

Mt. Milligan continues to be a very substantially profitable asset for us, and we're making good progress there. As we've mentioned in the past, all the reserve calculations at Mt. Milligan were done with very conservative pricing, much lower than today's. The current resource is open. There are exploration targets nearby. There are other targets within that land position that we have there, and so we think we have the potential to expand revenue there as we do additional work on drilling. We have also finally completed what I think is the most specific cash cost forecast that we have done today. Recall, the last time we spoke a cash cost of $245 million, plus or minus 10%, the number that we have arrived at is at slightly above the top end of that range of $280 million. We've gone back and looked at the original forecast we did when we purchased Terrane in 2010, and their work was done, of course, based on 2008 number. And the primary differences in those operating cost arise from the simple straightforward inflation, which has been significant in the mining business from 2008 to 2013 when this mine will begin operating. The effect of foreign exchange, which at the time, was done at $0.85, the Canadian dollars to the dollar, and is now done at parity, we've had to add, as we've discussed before, a permanent camp, which was not in the original numbers at all. We needed that in order to be able to secure our workforce. We were having trouble recruiting people to a camp where they had such a long daily commute, and so we have added a permanent camp, and that has helped in our recruiting efforts. And then we have also included a significant amount for road maintenance as we have fairly long stretch of road going in both directions to Mackenzie and Fort St. James, the 2 communities closest to the mine and those are mines that -- are roads we had to maintain, and the cost of maintaining those roads was not in the original forecast. As you can see at today's prices, even with a somewhat higher operational cost, Mt. Milligan is going to be quite attractive for us as we move into operation.

And obviously, the largest issue about Mt. Milligan is what is going to cost. As time goes on, we're able to narrow down our forecast more precisely. We started out saying that it was $1.265 million -- $1.265 billion, I should say, plus or minus -- I mean, plus in -- from 10% to 20% above that number, sorry for that confusion, and we have now narrowed that to 15% to 20% above that. And you can see here the component parts we've spent to date, $935 million. We have a retention of $27 million, which is money we've technically spent, but was held back from the contractor until the work is done. We have purchased commitments of $219 million. The important piece of that is that those are fixed prices, so those prices will not rise. We also have lump sum contracts of $106 million, and those are mainly fixed. There is some possibility for slight movement in those, but generally speaking, those prices are fixed, and that leaves us with $177 million for non-fixed cost remaining to be spent at Mt. Milligan, and there is some contingency built into that number. This $54 million that you see is a pure contingency. It is really reverse mathematics. We took the totals of all the money we think we'll spend and subtracted that from the highest capital expenditure number of $1.518 billion, which is $1.265 billion plus 20%. You will subtract the one from the other, and you get $54 million. That's not money we intend to spend. It's money that's there as a pure contingency, and our goal would be to not spend that money as we complete the project.

Now Milligan development is going very well. We have listed last time on the left-hand side of Slide 12 a number of items that were complete. We've continued to list those, so you can see it. But on the bottom left-hand portion of that slide, the highlight in the yellow, are the things that have changed since our last conference call and you can see that we've gotten much more equipment in-line and those have been assembled. The crusher embankment wall is complete, and that allows the primary pressure assembly to begin, and the primary mechanical construction is on schedule as well.

If you look at the -- before and after pictures on Page 13, you can see the improvement that we've made since the last conference call. That's the large mill building that you see in the top 2 pictures, and an interior shot of the re-grind area. In the bottom, you can see great progress. One of the things we've talked about is the enclosure of the mill building in the top 2 slides. It's difficult to see on the left-hand portion of the after slide, if you will, the current slide, but that is the concentrate storage area so that does not need to be enclosed. And in fact, it is all sheeted, and you can sort of see inside the steel girding that there's a sheet covering what's inside that building so we can put heat into the building there and continue to work. Likewise, on the far right-hand side, we've intentionally left some material open so that we can insert larger motors with ease, but that is actually a sheet greater than you see in the picture as of today, and we can also put heat in the building. We have the critical areas covered inside with material. So we can have heat in the building, and there shouldn't be any disruption of our progress on the construction of the material inside the concentrator building as a result of cold weather.

We've taken a number of de-risking actions. I think most of these we've talked about. I won't spend too much time on them, but we have succeeded in narrowing down the range of flexibility in the costs. The biggest risk to us at this point remains what is always the biggest risk in a project in Canada, and that is winter weather. We have allowed for an average or somewhat worse than average winter. If gets worse than that, it could have an impact on schedule and cost, but that's becoming less and less the risk as we move on. And we are seeing very good results now. As I said before, the schedule that we're adhering to has been in place since February of 2011, and we're still on schedule for a third quarter start-up and fourth quarter production of commercial production. We have not, at this moment, because of the uncertainty, given guidance about what we expect from revenue, if any, in 2014, but -- in 2013, but we should see some. We'll watch that very closely, and when we feel comfortable being able to give somewhat precise numbers, we'll do that, but for now, we're not showing in our forecast any revenue for 2013, but we are very much on schedule for doing that at that time.

Slide 13, -- 15 is a slide we've shown for a couple of times, and it gives a timeline and the list of events that we hope to conclude as that timeline moves along, and I think there are 2 important facts to this slide. The first is that all of the events, which should be complete at this moment, are in fact complete, and we've achieved those. All of the others are on schedule, so we are very much on schedule as far as that goes. Secondly, and I think of equally importance, if you look at the nature of material, most of the things which have delayed possibilities as a result of uncertainty or earthwork, they're working outside in cold conditions, are behind us. And so the opportunity to have the schedule slide or to encounter unexpected additional costs are lessening with the passage of time, which gives us even greater confidence that we'll complete Mt. Milligan on time and on schedule.

So that concludes the presentation. We are doing very well at Thompson Creek. We're improving. We'd like to see faster improvement at Endako. The moly market is not helping us at the moment very much. We still think that mid to long term, the moly market is quite strong, but we need improvements in the underlying economy in order to achieve that. And Mt. Milligan, which is a very important part of our future, is making great progress. And we will continue to give you updates on that, but we think staying on schedule and staying on budget is becoming more likely with the passage of time.

So with that, I would just like to again apologize for the tardiness of our filing. This time, we'll certainly do our best not to have that reoccur. And I also want to conclude with one personal note, and that is that I put out an -- that we put out an announcement today that I had a discussion with the Board of Directors at our meeting on Wednesday, and indicated to them that I have an intention to retire, and would like to do so in the next 12 to 18 months. In response to that, the board has formed a committee to start looking for a replacement candidate. We'll interview both internal and external candidates. My understanding is it takes some time. I plan to stay on at least through the completion of Mt. Milligan, and will probably stay in some capacity after that happens, and so I'm -- I will be sad to be leaving, but I'm not leaving anytime soon. But since that was a fact that we have discussed, we wanted to make sure that we disclosed that properly once that has decision has been made.

So with that, I would like to open the call up to questions.

Question-and-Answer Session

Operator

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

Brett Levy - Jefferies & Company, Inc., Research Division

You guys said that you're going to high grade through 4Q '12. It's interesting, your cash costs are going down significantly in '13 the way you've forecasted. Are you going to continue sort of the same sort of strategies at Endako and Thompson Creek into 2013 as well?

Kevin Loughrey

Well, I'm not sure I understand the premise of your question. So let me restate what we're doing at both properties. At Thompson Creek, we're not high-grading. We have ceased stripping. We're mining Phase 7 exactly as we have planned to mine Phase 7. But because we ceased stripping, we removed all those costs from our calculations, and thus, the unit costs go down because the production remains the same, but the overall fixed costs go down as a result of ceasing of stripping. Our plan there is to continue on that basis until the end of 2014 with the exception of the fact that we are constantly evaluating the moly market and market conditions warrant. We would recommence stripping at the time that was the case. In the case of Endako, we're not really high-grading either. What we have done there is ceased mining, and gone to a stockpile process, whereby we extract material, which has already been mined and place that in the mill. We're going to do that through the middle of 2013, at which point, we work our way back and finish out the mining at the Denak West pit, which will be somewhat higher grade, and then move to the Endako Pit, which will be significantly higher grade. So those -- that's the plan in each of the mines.

Brett Levy - Jefferies & Company, Inc., Research Division

All right. And then you also mentioned that you are looking at what you described as improving financing options, as you get closer to the finish line at Mt. Milligan. My sense is that it would be difficult for you to add any additional debt under the current covenants, but check me on that. Would the possibilities include a metal stream financing, a potential equity financing, a larger availability on the revolver? I just -- I wanted to know sort of what's on the list of improved financing options potentially as you look towards 2013?

Kevin Loughrey

Well, we're looking at all possible financing alternatives to either add on or to replace existing financing opportunities, so prefer not to go in any more detail on that, except to say we are always looking to maximizing our financing situation.

Operator

Your next question comes from the line of Dave Katz with JP Morgan.

David Adam Katz - JP Morgan Chase & Co, Research Division

I believe it's on the last conference call, Kevin, you said that one of the possible things that haven't been accounted for in the contingency was the effects of a harsher-than-expected winter. I was just hoping for an update on that.

Kevin Loughrey

Yes, well, that's the case. We have -- when you make these plans, you have to make certain assumptions about the conditions, which you'll encounter that you can't control. One of them is the severity of the winter. So if we experienced an extremely severe winter, there's a temperature below which is very difficult, if not, impossible to move dirt to build the tailing storage facility. We think we're okay on the concentrator building inside, but with some of the ancillary buildings, you could experience some issues. So the possibility exists that a very harsh winter could slow us down and/or increase cost. But a typical winter and even a slightly more difficult than typical winter, we think we can weather perfectly well and make the kind of progress we've indicated. So as I mentioned earlier, most of the things, which we think could cause us delay or additional costs are behind us. But that one remains out there, and it's just a fact of life with all major outside construction projects in cold-weather climes.

David Adam Katz - JP Morgan Chase & Co, Research Division

Okay. And given that now we're now less than a year away from theoretically when commercial production should have been achieved, what is the ramp-up going to look like in terms of how quickly production is achieved and moving towards the longer-term cash costs that are expected for the asset?

Kevin Loughrey

The ramp-up should be relatively quick, especially for the copper piece. The kinds of mills, which we built at Endako and are now building at Mt. Milligan, are really designed expressly for the sort of ore we have at Mt. Milligan for copper gold circuits. So the experience there is greater. The machinery is designed to do that. The recovery rate should be higher, and the ramp-up should be much, much quicker, so much more conventional. If you look at other ramp-ups, it's a matter of a few months typically to ramp-up to commercial production. So we think we've left ourselves enough time within this existing schedule to do that, but gold is a little more complex and could take a little bit longer, but again, these mills are designed specifically for this kind of ore. We think the ramp-up is going to be much different than what we have had. We've also have -- we've come to think of as an advantage of a workforce that will be hired with the experience of and trained on this exact mill rather than transferring a workforce, which have been working for decades on a much different mill, and expecting them to perform on a new one. So we think in all areas, we'll do better, and we've learned from our experience at Endako, and are really undergoing a very rigorous and long-standing training program to make sure that everyone's ready, operationally ready, when the mine commences. So we think this ramp-up and experience has shown that this ramp-up should be quite quick.

Operator

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

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

Kevin, first of all, congratulations on your upcoming retirement, and then for positioning the company well for growth in the future years through the diversification strategy. You provided some of the recent operational issues at the 2 moly mines, increasing production and driving down cash costs materially at both mines on a sequential basis. I was just hoping you could talk about the new mill at Endako, how is that running? Any color would be appreciated.

Kevin Loughrey

Yes, we're not where we hope to be candidly on the new mill at Endako, and I think we are, frankly, in all respects, but one and that is the recovery rates. And we have gotten throughput to a level that we think is meeting the specifications and may exceed that. The quality of the concentrates we're getting is high, and the reliability factor is getting better over time, but the recovery has lagged and the recovery is -- any one of those issues hurts you, and the recovery hurts you because you get fewer pounds up than you anticipate, but your fixed cost remain exactly the same, and so your cash cost are higher than you would like them to be. Part of that is, I would say, a shake down in the design as you kind of encounter in a mill that is -- this is a little unusual using these mills on the moly. It's not exactly what the mills were designed for so you have to learn how to operate it. As I mentioned or I implied in my earlier answer, looking back, we probably didn't do the best most thorough job of training our workforce that had to really unlearn what they had done before and relearn something brand new. So we're working very hard on that, and we have new operating personnel and new mill personnel, which we are already seeing making a large difference there. We're working on many factors within the mill itself, the reagent mix, the way the pumps operate and the amount of surge that the pumps create, the time in which we leave the material in the mill, and a variety of other technical factors, to be candid, were many of which I don't understand myself, that we worked on to get to improve the recovery in the mill, and we are seeing progress. And then the other issue there that's causing us some concern is the amenability of the stockpiled material to the milling process. We're seeing a little more oxidation than we had anticipated, and that has an impact on recovery. We milled stockpiled material previously on a mill that wasn't as efficient as this mill, and we got better recovery. And the reason we're getting worse recovering now is because that was many years ago, and we've experienced greater oxidation than I, or more importantly, the technical people there thought we would see. So we're working to improve that. We are improving it, and we hope to continue that improvement. We will certainly see improvement as we move into the Denak West Pit, and then back into the Endako Pit, and get to the levels of production recovery we thought we'd get. And all we can say now is we made what we hope to be conservative forecast with respect to what we'll encounter over the next several months. And we're constantly evaluating our mine plan to see -- to maximize the mix of the ore we use and the recovery we get to get the best possible operation and financial result.

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

That's great color. Switching over to Mt. Milligan. I was wondering if you could talk about the turnover rates among the construction workers there. I know that's been an issue in the past, but judging by your progress, have things stabilized, come down?

Kevin Loughrey

Yes, the turnover rates have been stabilized, and we've actually seen as projects have been delayed, a little improvement in the employment picture up there. The one problem we are having and it's not our employees here, it's contractors' employees, but we have over 1,000 people up there now so -- there are a couple of contractors with very large work forces, and they continue to struggle a little bit to get all the operating personnel they need. So that remains the employment issue that's left. It's less severe than it was earlier. It still exists. But as you said, while it might have minor impact on the schedule, the rate of progress, which we're experiencing, indicates that while it's an issue, it's a manageable one, and one that we think we'll be able to deal with adequately and still stay on the schedule that we have given guidance toward.

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

Okay. And then finally, I just wanted to ask about the credit facility amendment filed in August. I know you have a quarterly EBITDA covenant. I think the Q4 is -- 0 is the minimum, and then that number increases for the various 2013 quarters. I just want to understand how EBITDA is defined in that credit facility. I know it's a non-GAAP metric, but on an apples-to-apples basis, what was your third quarter EBITDA as defined by that credit facility?

Kevin Loughrey

There is a reason that I asked Pam Saxton to join in these calls with me, and that you've just asked a question that illustrates that reason. So Pam?

Pamela L. Saxton

Yes, so on the EBITDA with the revolver, you can certainly look up our revolver and look at the definitions. But in general, it excludes any noncash item. So for example, in the third quarter here, the unrealized FX gain that you see on the income statement would be excluded from EBITDA so -- and I don't have the exact figure in front of me, but I would tell you that we had an EBITDA loss for the third quarter again because we exclude that FX, unrealized FX gain for the quarter.

Operator

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

Oscar Cabrera - BofA Merrill Lynch, Research Division

Kevin, happy retirement when it comes too. Just wanted to ask you with regards to the Mt. Milligan. You talked about completion on the project of 75%. How much of this stripping has been done in the project?

Kevin Loughrey

Scott, would you like to take that, please?

S. Scott Shellhaas

Sure. Oscar, the stripping, we commenced, really, mine development in July. We have our operating team, our mine operating team, about 80% in place now so -- and we have the 7 - 495 shovel operational. We have 4 - 793 trucks operational and 1 - 994 loader operational lift, an additional shovel and several additional trucks coming online, either at the end of this year or the first part of next year. We have started pre-stripping operations. Actually, the mine group has taken over the construction of the TSF dam. So as you know, the mine plan at Mt. Milligan contemplates -- every ton of material moved has a place to go. It isn't stockpiled. It isn't taken to a waste dump. It either will go to the mill or it will go to the construction of the tailings dam. So that is ongoing now. We do have in the mine itself, the first area we're mining, we do have the first phase developed and the shovel is working there. So we are progressing in that regard pretty much on schedule.

Oscar Cabrera - BofA Merrill Lynch, Research Division

When would you expect to complete the stripping for the mine?

S. Scott Shellhaas

As I said, the stripping is really an ongoing process. We -- on an annual basis, going forward, we expect strip ratios of about 1. So really, the stripping doesn't get complete at a specific date. It's ongoing through the life of the mine.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Understood. But just to get you to commercial production?

S. Scott Shellhaas

I guess, the answer to that is the stripping that we're doing now is on plan for the commercial production date in the fourth quarter of 2013. There's nothing unusual in the stripping that needs to be done to accomplish that end date.

Kevin Loughrey

And Oscar, the way to think about this is, I mean, there are a variety of ways that you operate these mines. In some of them, you strip in one area and then you're done, and you move and then everything you move at that point is ore or you strip ore at one point and -- I mean, you work ore at one point and the next time you're moving, you're stripping from somewhere else. What really happens at the Mt. Milligan property is that you are all the time doing both. You're stripping and uncovering ore, and one truck is going to take material that is waste to the Tailings Storage Facility, and the next truck will take ore to the mill. And so I think the best answer to your question is as the schedule works now, sometimes, in the -- toward the end of the third quarter, beginning of the fourth quarter, we'll start encountering ore, which we'll take to the mill, which we've recently have started, and we'll start commercial production, but we will also be continuing stripping all that time.

Oscar Cabrera - BofA Merrill Lynch, Research Division

That clarifies that. And could you remind me of your definition of cash cost, is it T1 cost? What is in that $280 million that you talked about?

Pamela L. Saxton

For Mt. Milligan, that includes all of the mining, milling, administration cost and of course, that does include the stripping cost as well, and then we have the camp cost also that are in there.

Kevin Loughrey

And the treatment charges and refining charges. So we try to get it, if you will, similar to what it is at Thompson Creek, to get Thompson Creek material to moly oxide or Endako material to moly oxide. This is the cost on-site and in the off-site transportation treatment and refining charges to get the material into a sellable form.

Oscar Cabrera - BofA Merrill Lynch, Research Division

Great. And just finally on Endako, for -- in order for you to get to the recoveries that you would feel more comfortable with, do you need to spend more capital to do a retrofit? Or you think that you just have to basically work through to understand the ore better?

Kevin Loughrey

There might be a small amount of capital we need to spend to adjust pumps or to do some work on the tanks and try to get the flow of material going a little differently, but I don't think at this moment we're looking at large capital.

Operator

Your next question of the line of Steve Bristo from RBC Capital Markets.

Steve Bristo - RBC Capital Markets, LLC, Research Division

In Q2, you said you've ceased mining and milling, and started milling from stockpiles because the mine ore grade was low, and I heard you said today you say you're going to restart mining in the Denak West Pit next year, which is where you were mining before you ceased, and then that should be higher-grade now. I'm just wondering if you could clarify that?

Kevin Loughrey

Yes, there is a little bit of material at the bottom of Denak and that the -- on the pit walls at Denak, which we think will be economic to mine. What we were doing there was a more thorough mine program. And in order to conserve cash and save costs, as we got into this very tight financial period for us, we thought, overall, it would make more sense for us to reduce the mining activity and have all our activity focused on stockpile material. So we're doing this right now to lower cost by removing, by eliminating the mining activity. And then in the nature of orderly mine development, we'll go back, get that last little bit of material, then move our way into the Endako Pit. So you're right, there is a seeming logical inconsistency, but we did it really to reduce costs as much as we could in the interim, and then we'll move -- we'll work our way back into higher-grade ore.

Steve Bristo - RBC Capital Markets, LLC, Research Division

Okay. And then just regarding the EBITDA covenants, Pam said that you guys provided an EBITDA loss for the quarter. What do you really see improving that's going to help you meet those covenants in 2013 when they're like $29 million?

Pamela L. Saxton

Well, certainly, if you look at our guidance there, it's really the production from the Thompson Creek Mine with no stripping cost, and so you have very low cash cost, and that certainly adds to your margins and your profitability for next year.

Kevin Loughrey

We're also hoping to see slightly improved production and reduced cost at Endako as well.

Operator

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

Gary Lampard - Canaccord Genuity, Research Division

I guess, just a couple of incremental bits of questions that have already been asked. That $280 million operating cost estimate at -- for Mt. Milligan, would the 2% NSR royalty be additional to that?

Kevin Loughrey

It's in there.

Pamela L. Saxton

That NSR should be in there. It's in there, sorry.

Gary Lampard - Canaccord Genuity, Research Division

And the other one, just on those EBITDA covenants, I'm assuming that any product inventory write-downs would be -- they would be excluded from of that EBITDA calculation? Or at least you would adjust back for those write-downs?

Pamela L. Saxton

No, actually, those -- when we have a product inventory write-downs, those are -- I just think about it as any type cash cost, and we have spent the money for things at our inventory, and when we write it down. That goes through so that does impact your EBITDA.

Operator

Your next question comes from the line of John Hughes from Desjardins Securities.

John Hughes - Desjardins Securities Inc., Research Division

Congratulations, Kevin, many of us are envious in terms of your decision. Just 2 quick questions, 1 Endako, can you give us an idea on the tonnage and the grade of the inventory that you have on the ground?

S. Scott Shellhaas

John, it's Scott. We have in our reserve base about 45 million pounds of contained metal in those stockpiles, and the grades -- I mean, the grades that we're seeing are about 0.04 to 0.045, and those grades are really what we expected to see. And as Kevin indicated earlier, the recoveries that we're seeing from that -- the material and grades coming from the stockpile is a little bit lower than what we expected.

John Hughes - Desjardins Securities Inc., Research Division

So the recovery were -- I know I haven't seen the full Q3 postings yet, but I remember, if I recall, the Q2, you were somewhere around sort of the mid-60s, 66%, 67%?

S. Scott Shellhaas

A little bit lower than that, John, but the recoveries we're seeing now even with the stockpile material, a little over 60%.

John Hughes - Desjardins Securities Inc., Research Division

Okay, that helps. And just on Mt. Milligan, on looking at your sort of future milestones, as we go forward through next year, are you waiting on any pieces of equipment at all? I don't think there was anything major when we were on-site a while ago, but I'm just trying to figure out a risk to this timeline for construction through next year? Is there -- anything happening there that we can -- like one item, whether it be a crusher, whether it be some ball mill part or whatever that may hold you up?

S. Scott Shellhaas

No, John, all the procurement has been done, and the material is either actually on site or in warehouses in Prince George or in nearby areas. All the big motor pieces for the SAG mill and the ball mills are there and are being -- actually being moved into the building as we speak. All the steel is on site. So there's no major procurement items that we're still waiting for that would cause any change to our critical past scheduling to complete construction.

Kevin Loughrey

We spend a lot of time fixating, some might say obsessing, on this subject, and I think the 2 issues that concern me that I think are realistic issues out there in terms of potential delay are the one we've mentioned before, the winter weather that just gets so cold that you struggle to move earth, and you can't get something the crews to work safely outside. We, as I mentioned, inside, we're protected, but outside -- and that can be an issue. We've accounted for some of that, but not if it's an extraordinarily cold winter. And then secondarily and I also alluded to this, you got 1,000 people you need to have come to work everyday for a while or some number near that. And if availability of crews becomes difficult, as one of our contractors has had some issues with, then that could slow you down a little bit. Again, we don't foresee that. We've been very successful so far. We've stayed on this schedule through a couple of winters. So we think we can do it. But if you're looking at risks, those were the 2 that I would say are the most significant, and I think the way to test that is our list of milestones, which we list on one of those slides at the end. We've made -- we've stayed on course for every one of those to date. We're on course as we see it for the ones we haven't completed, and we continually report on those with each quarterly to let you know what kind of progress we're making. So I think that's probably the best way to tell how it's going. But as far as we can see and I think you were there, as you said, we're making real nice progress, and it's coming along very nicely.

John Hughes - Desjardins Securities Inc., Research Division

Last one, just to follow-up, to ask this question on the mine side, it seems that like everyone's sort of confused as pre-strip and strip and -- but I would just want to confirm that on an overall basis, the mine development, is that where you want to be? I know you have a 1 face that you're developed to, is...

S. Scott Shellhaas

John, it is. It's right on pace, and I think one of the critical things for us was getting our own mine operators hired and trained and capable of moving material and, that is taking place and is taking place on a daily shift rate that as is in line with our plan, and actually kind of mine operations ramp up. So we're pleased in that regard.

Operator

Your next question comes from the line of Emmanuel Bello with Goldman Sachs.

Emmanuel Bello

Just one quick question. Just wondering why was sort of mine production so much higher than what you actually sold in the quarter? I think it was almost 2x as much?

Kevin Loughrey

Yes, a couple of issues there, really, well, several. We had intentionally planned for lower sales in the first half of the year because we knew we would have lower production. That was always part of our plan, and then we intended to ramp those sales up in the second half, and we've always been able to do that in the past. Over the moly market being weaker right now, that's been a little more difficult to do so we're having a somewhat more difficult time adjusting our sales level to our production level that comes up somewhat. So that has been an issue. We also stopped the Langeloth, the roaster for almost 5 weeks for a scheduled maintenance repair, and built inventory during that time, and weren't able to produce concentrate. So those 2 reasons really explain that. We're going to build -- we're going to do more of the same actually in the fourth quarter as we continue to produce quite high numbers at Thompson Creek, higher than our annual rate of sales, and I'll step back just for a minute. As you know, I think most of our sales are done through annual contracts, and those annual contracts have a volume associated with them. It's not a price, and so we have to schedule those annual contracts based upon a rate of production, which we can be sure of maintaining on an equitable basis throughout the year. So we're a little lower on those this year because of lower production in the first half. Now we're going to get increased production in the second half into a weak market. So we'll build some inventory as we go forward here, and we think we'll be able to -- since we can calculate for that, as we do the annual contracting, as we approach the mating season right now, and we think we'll be able to bleed that inventory all throughout the year.

Emmanuel Bello

Just on -- I'm just curious, is there a discrepancy between realized prices you'd get on the spot market, which I know is sort of down right now or in terms of volume that's actually been trading spot in the moly market? Is there a difference on price that you would get there versus what you sell according to your contracts?

Kevin Loughrey

Yes, the way that it usually works is if the moly market is falling, then our average realized price is usually above the falling moly market price because it's typically based on the month prior. Conversely, if the moly market is rising, then the price we get for our contractual material is a little bit lower than the current spot price. That usually, over time, that works itself out. So generally speaking, especially in a market like we've seen over the last several months, which is not moving too much, not a whole lot of difference between the spot price sales we make and the price that we get for the material, which is already contracted and sold according to those most recent quotes. But the mechanism is that our contracts typically use the price in the month prior to the month of delivery, and so we'll see what difference will be, whatever movements you have in the price in that subsequent month.

Operator

[Operator Instructions] And your next question comes from the line of Brian MacArthur from UBS.

Brian MacArthur - UBS Investment Bank, Research Division

I have a couple of questions. Just, first, on your guidance for overall cash cost for 2012. Endako has gone up. Thompson Creek stayed the same, but our overall, still the same. So I assume this is all Thompson Creek doing better. My question really is, obviously, production's up a lot in fourth quarter, which will drive cash cost down, but if you actually stop, is a lot of the improvement in Q4 because you've stopped stripping right away? Like how -- what I'm trying to get at is how much of this is actually just for sure avoided cash costs because we've stopped stripping versus grade for the improvement in the fourth quarter? Because, obviously, Thompson Creek is going to generate a lot of cash at this work or won't if something goes wrong?

Kevin Loughrey

It's essentially all the avoided cost, Brian. The mine plan performs the way mine plan performs, and as you know, we've had a great predictability there, and given very accurate guidance to Thompson Creek over the years. And so there's always risks, but we're highly confident that the mine plan will perform the way the mine plan performs, and we'll see these realized costs. We're already seeing the realized cost. They typically -- they frankly involve personnel, and we've reduced by something over 100 people at Thompson Creek, and that happened almost immediately when we made the announcement, and then avoided cost for the equipment, and that also has happened because we stopped the stripping immediately. So the realization happens quickly, and it happens with certainty. So those -- we're quite confident in those numbers. They're dramatic, but they will occur.

Brian MacArthur - UBS Investment Bank, Research Division

Right. So even if you, for some reason, the grade was off a little bit, if it still comes down a fair bit just because [indiscernible]

Kevin Loughrey

Yes, you have the natural fluctuation the changing grade gives you, but we'd still be considerably lower than we would have been because all those fixed costs will be gone.

Brian MacArthur - UBS Investment Bank, Research Division

And Endako for bringing it down and starting Q4, is that just your assuming better recoveries, better feeds? Or exactly why are we dropping from 16 to 11? Some of its production, but it's probably not as much?

Kevin Loughrey

Yes, it's a combination of all those things. We are seeing better recoveries, and expect to continue to see slightly better recoveries. And then we have in sort of the natural ramp up, we've gotten better reliability and consistency and throughput through the mill. So we'll get better production.

Brian MacArthur - UBS Investment Bank, Research Division

And my last question, I don't know much you can comment on this. But your statement at the beginning that there was -- I think you said an inaccuracy between the auditors, that's just like a number, somehow something went wrong? Or was it actually a philosophical discussion of it, the write down or was it a philosophical discussion about something else? I don't know what you can say, but any color would be useful.

Kevin Loughrey

Yes, you're right, I can't say too much. But we just are at a point where we were -- we wanted to be certain that the numbers that we presented were correct. And a question arose and we worked our way through it and as I mentioned, the numbers we presented to the board initially were the numbers we ended up with. So really, it was much ado about nothing, nothing changed, and we were able to put the numbers out as we had originally planned. We just needed to be certain.

Operator

I'm showing there are no further questions at this time. I'll turn it back over to Mr. Loughrey for any closing comments.

Kevin Loughrey

Well, thank you very much and I just wanted to say one last time, we very much appreciate the interest that the people on this call show in the company, and the fact that they take the time to read our materials and attend the meetings, and we very much respect your schedule and your time, and so that is why we feel badly about the delay this time, the postponement is -- as the great Scot, Robert Burns said, the best-laid plans of mice and men often go awry, and our plans went to awry. And as I assure you, we'll take the time and effort to look through what happened, and make sure we don't do it again. So again, thank you very much, and we look forward to talking to you at our next conference call at the end of the fourth quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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