Taseko Mines' (TGB) CEO Russell Hallbauer on Q4 2016 Results - Earnings Call Transcript

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Call Start: 11:00 January 1, 0000 11:33 AM ET

Taseko Mines Limited (NYSEMKT:TGB)

Q4 2016 Earnings Conference Call

February 23, 2017 11:00 ET

Executives

Brian Bergot - VP, IR

Russell Hallbauer - President, CEO & Director

Stuart McDonald - CFO

John McManus - COO

Analysts

Brett Levy - Loop Capital

Alex Terentiew - BMO Capital Markets

Tom Bishop - BI Research

John Tumazos - Very Independent Research

CJ Baldoni - Principal Global Investors

Operator

Good day ladies and gentlemen, and thank you for your patience. You've joined Taseko Mines 2016 Q4 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference may be recorded.

I would now like to turn the call over to your host, Vice President, Investor Relations, Mr. Bryant Bergot. Sir, you may begin.

Brian Bergot

Thank you, Latif. Good morning, ladies and gentlemen and welcome to Taseko Mines 2016 fourth quarter and full year financial results conference call. My name is Brian Bergot, and I am the Vice President, Investor Relations for Taseko.

Our financial results were issued yesterday after market closed, and are available on our website at tasekomines.com. Before we begin, I would like to introduce everyone on the call today. We have Russ Hallbauer, President and CEO of Taseko; John McManus, COO of Taseko; and Stuart McDonald, Taseko's Chief Financial Officer.

After opening remarks by management, which will review fourth quarter and full year business and operational results, we will open the phone lines to analysts and investor for question-and-answer session. I would like to remind our listeners that our comments and answers to your questions may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Please refer to the bottom of our latest news release for more information.

I will now turn the call over to Russ for his remarks.

Russell Hallbauer

Thank you, Brian. Good morning everyone, and thank you for joining us today. My comments are going to be relatively brief today, because I think our results speak for themselves. And most of what I will be saying has been said in our press release and MD&A; anything else we can discuss in the Q&A.

With the continued increase in head grief in Q3 along with improved recoveries, copper metal production for the quarter rose an impressive 23% from the £33 million in Q3 to £41 million this quarter or the last quarter. Correspondingly site costs are found net of byproducts spend went down 26% and our C1 costs are down 20% from the year ago. The effect of having molybdenum plant operating at a high level has boosted byproduct credit by $0.08 per pound over the corresponding period a year ago. And as the moly price continues it's recent decline which is now around $8, we expect the byproduct credit to increase as well as in month's ahead.

Off-property costs were $0.03 higher in the quarter as a result of the fact that the larger portion of our concentrate this quarter went to our JV partners. They have a higher EC/RC price than the majority of our other concentrate sales. We believe moly prices as I said will continue the increase and the strength of steel production growth in the world and we expect both our site operating cost and our OPC cost to decline in the quarters ahead.

But looking at this quarter we are extremely pleased with their performance; cash flow from operations rose to $50 million and copper sales price roughly $2.46. We took debt in turn to generate EBITDA of $45. Being completely unhedged in the upside, unlike member of other copper producers, we will participate significantly going forward on rising prices. We expect to continue to generate similar ongoing operational grow sales in the months ahead and with copper prices as I said appearing to be on the verge of approaching $3 soon on the back ongoing production disruptions in other countries, 2017 will be a very good year for the company.

Looking at projects; work on Florence moves forward; we began work on our point of compliance as well as state infrastructure, while we await hearings on the challenges to the issuance of our recent permits. Effectively as it stands now, we could do everything we want in our property except drill several injection wells and as we do not have final board approval for full scale work, we're advancing the project within those combines.

Going to New Prosperity; we acquired the province, we have notice of work on our claims and leases and we expect to receive those shortly. Once those are in place, we'll move to more detailed work of hydrology, and Geo Tech anticipation of applying for mining permits. We have completed, just recently completed in the court our presentation on challenging the water quality finance of natural resources candidate at prosperity panel which led to the panel coming to a wrong decision of significant environmental effects of the project, which in turn affects the final decision. We're in the process of working with the government to amend our PC environmental certificate and we expect that to occur in the near future.

I'd like now to turn the call over to Stuart, to talk about our financials.

Stuart McDonald

Thanks, Russ and good morning everyone. And we're pleased to report strong earnings and cash flows for the fourth quarter yesterday as we benefitted from improvement metal production and higher copper prices. Fourth quarter earnings for mining operations before depreciation were $47 million, adjusted EBITDA was $44 million, and cash flow from operations was $50 million. These results were obviously significant improvements over the prior quarter and reflect the impact of higher copper prices and lower costs.

We generated gross revenues of $106 million from sales of 30 million pounds of copper, 600,000 thousand pounds of molybdenum. Those amounts represent our 75% share of Gibraltar sales volumes for the period. Our realized sales prices in the quarter with $2.47 per pound and that excludes an additional $0.07 a pound of positive provisional pricing adjustments which arose in the quarter because of increasing copper prices.

Total operating costs fell to a $1.48 per pound reduced, mainly due to higher copper production and the increased moly byproduct credit. We also have $6 million of capitalized shipping costs in the quarter after an accounting allocation and that's going to vary from time to time depending on mining ally [ph] but it's important to note that our total site spending was maintained at a low level in recent quarters and will continue to remain stable through 2017.

Other significant items on the fourth quarter P&L include an $8.8 million unrealized foreign exchange loss on our U.S. dollar denominated debt and a $3.4 million unrealized derivative loss due to increasing costs of prices. And as a non-cash items as Russ explained, our production currently unhedged.

GAAP net income for the fourth quarter was $5.1 million or $0.02 per share, and after adjusting for the unrealized FX and derivative losses, we're reporting adjusted net income of $16.4 million or $0.07 per share. We also reported our annual audited financials yesterday, and those included adjusted EBITDA of $42 million for the year and operating cash flow of $34 million. Obviously, the vast majority of 2016 earnings and cash flow were generated in the last three months of the year.

Turning to the cash flow statement now; fourth quarter operating cash flow was at $50 million, was partially offset by $9 million of capital items and $15 million payments for debt service. Fourth quarter CapEx included $6 million of capitalized looking at Gibraltar and also $2 million of capitalized cost at Florence as we continue to take a prudent approach on project spending.

Our year-end cash balance was $89 million which is $29 million higher than at the end of third quarter -- sorry $25 million higher than at the end of the third quarter. The rebound in copper prices and higher grades we expect continued growth in our cash balance in the coming quarters. Stronger cash flows will also improve our credit metrics. For example; annualizing our fourth quarter EBITDA would give us a debt EBITDA ratio of just over two times and not as with lower copper prices than what we're experiencing today.

So we are optimistic about the future and believe that our improving balance sheet and cash flow generation will put us in a strong position to address the 2019 debt maturities.

And with that, I'll turn it back to Russ.

Russell Hallbauer

Thank you, Stuart. Operator, we'd like to open the lines to the questions please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brett Levy of Loop Capital. Your question, please.

Brett Levy

Hi guys, very good quarter, it looks like more than even better than it come in the next several and current copper prices. Has there been an increase in activity from -- I don't know other potential acquirers of developmental properties or -- I don't know, has your phone been ringing war about some of the assets that you have given what's going on in copper and how people are basically looking around for good projects right now?

Russell Hallbauer

Well, we don't discuss those things.

Brett Levy

Okay. It was really just sort of a level of inquiry as opposed to something specific. And then, you know, given kind of where you were or would you consider putting hedges on at current levels just to kind of lock-in the next little bit of -- you know, sort of positive dynamic. And in that context have you gone back to the rating agencies and said what for the bond CAA1-CCC is probably not going to be the right rating given our 2017 likely metrics?

Stuart McDonald

Hi Brett, it is Stuart speaking. First on the hedging; no, we don't have any plan to hedge, we like having that upside open to our shareholders. We do buy put options to protect the downside and look for the right opportunity to continue that program but no plans to hedge away to upside. On the rating agencies, yes, we actually -- I believe Moody's just upgraded us late last week. And so, yes, certainly hope for that the other rating agencies will also look at these results and see a brighter future.

Brett Levy

All right. And then is there going to be any sort of active out to reach to SNP?

Stuart McDonald

Well, yes, I mean we keep a normal ongoing dialogue with both of those rating agencies to follow us, so it's normal for us.

Brett Levy

Got it. Because they're supposed to get your forecast once in a while, I imagine that's been revised a bit?

Russell Hallbauer

Yes, well I think yes, with higher metal prices everybody is looking at forecast carefully.

Brett Levy

And the you know last one is it in the context, it is very nice run but it is still not proving very lofty levels [ph], are you guys contemplating your stock buyback or bond buyback as a part of your strategy or it makes more sense maybe even to continue to invest in some of your projects.

Russell Hallbauer

No, no we're not looking at those things right now, we're happy with the cash balance, so no plan for restocked or debt buy back at this point.

Brett Levy

Alright, thanks very much, guys.

Russell Hallbauer

Thanks.

Operator

Thank you, our next question comes from [indiscernible] of Scotiabank. Your line is open.

Unidentified Analyst

Hi, good morning. A couple questions if I may, where do you see your cost per ton were pretty good in 2016 or $9.50 do you think that's sustainable as we move into 2017.

John McManus

Hi, this is John McManus. That's what we've got laid out continued expenditures about the same and we are going to mill 30 million tons, so should be the same cost for 10 million right through.

Unidentified Analyst

Okay. And then in terms of CapEx for 2017 on the sustaining level alter and for caps tripping are any forecast he could provider there.

Russell Hallbauer

On capital tripping we don't really give a guidance on that, as they explain its really look at it as an accounting allocation, between operating and capital and I think the key point on that is our total spend is stay the same, as John said. In terms of the sustaining CapEx no big items in the horizon.

Stuart McDonald

A few small things but nothing substantial.

Unidentified Analyst

Okay, in terms of -- maybe on way to ask it, what is the strip racial look like this 2017 relative to 2016?

Russell Hallbauer

We continue to move on it, we're looking at strip ratio and we are also considering when copper prices coming up we might start stripping a little bit more with the current upgrades.

Unidentified Analyst

Okay. So sounds like it likely to be higher than the kind of 1.6 in 2016.

Russell Hallbauer

Probably yes. The other thing on that is that a little bit by we've built stockpile in 2016 inventory. And we'll use some of that inventory up in 2017. So strip ratio is based on waste mine over old mine, not new. So mine more ore than we did in 2016. That strip ratio appears lower than it would otherwise.

Stuart McDonald

So after all we are looking at grade tonnage curve, and we all -- couple years ago we changed our mine plan to reflect a lower cut-off. We brought a bunch of lower green into the mine plan, and going forward we will look and see what prospect is based on what the copper price is going into back end of 2017 and 2018, we may very well raised the cut out rate by 0.17 to 0.18 or maybe back to 0.2 and then convert and then obviously that would increase or head rate to the mill and but as the trade-off is now much more stripping, we would have to release that order but we're in the money making business; so the end result is that if you do that you make more cash than what we are doing right now.

Unidentified Analyst

Okay, that's great. And just finally for me how much should we budget for CapEx spending for non-Gibraltar activities IE Florence or any better early stage projects for 2017.

Stuart McDonald

Like we said, we don't have our full ho ahead on what we may or may not do in Florence. I can't remember particularly from the budget what is it about the Florence.

Russell Hallbauer

It is kind of get the money in the bank first and then decide what we did to total for projects, I think $7 million. The goal to get the money in the bank first, especially the money.

Unidentified Analyst

Thank you very much, great.

Operator

Thank you. Your next question comes from Alex Terentiew of BMO Capital Markets. Your question, please.

Alex Terentiew

Hi guys, just couple of question that first grade at that your alter it bounced back quite nicely from the low numbers Q1 2016 on your guiding 23% for 2017 so you got the 0.32 that you had in Q4 was that in line with what you're expecting and I guess my question really that is -- is it 0.3 potentially conservative for 2017, or is it that you may be at the higher end loaded at a higher grade the first part of the year, about lower in the second half; just trying to get a better estimate on grade profile.

Russell Hallbauer

We talked about here, we said for years that would be great if your broker can swing 10% above below what's the reserve average is from quarter-to-quarter just as we work through the ore body. So the 0.32 was on high, we have 0.3 average for 2017 and as we've discussed, I mean we made with the price of copper coming up may make sense to increased strip and increased -- we are looking over these things right now, which 0.3 average based on our current upgrade.

Alex Terentiew

Okay, great. Next question is on Florence. Can you take me through what needed there to start drilling your injection wells?

Russell Hallbauer

We've got our underground injection certificate from the EPA U.S EPA federal. We're allowed to do everything except injection wells, which is five wells, and we are considering whether or not press forward on that. The U.S is an appeal process that we don't at this point in time know how quickly that will go, could be over quickly and then we are free to go up all the way. Or could drag out for six months we don't know.

Alex Terentiew

Okay, but I guess you are hopeful that by the end of this year things will be clear enough that you know if you had the financial capacity in copper prices what it is, and you want to go or you could start something by the end of this year.

Russell Hallbauer

We're very confident that we will have a permit up held but the EPA and the state permit to there doing a good job. And it's up to them to do upholder permit and we think that all cleared up by the end of this year for sure.

Alex Terentiew

Okay great, then that one last question, the BC hydro power deferral rate program, I know that there is a function of not only copper price but the Canadian dollar and I don't have the exact the table in front of me but at current exchange rate and copper prices, is there a default that you can take advantage or is that closed at these levels.

Stuart McDonald

Hi Alex, this is Stuart. There would be no deferral in current levels; in fact there would be a quite small repayment of the previously differed amount. I think even in the month of December I don't think we got the deferral, so that meant protective in the local price. But you know we've got a good recovery so we are not getting a deferral anymore.

Russell Hallbauer

It doesn't affect us anyway, unless we take it across when it occurred.

Stuart McDonald

Absolutely. It is just a cash flow item, not a cost.

Alex Terentiew

Sure, yes. That is good, thank you.

Operator

Thank you. Your next question comes from Tom Bishop of BI Research. Your question, please.

Tom Bishop

Hi Russ, and everybody.

Russell Hallbauer

Nice to hear from you finally.

Tom Bishop

Yes, well you know what, it's like somebody open the window we get a breath of fresh air here. I see the tons mills stays pretty steady at 7.3 million tons, I think you are looking for a 30 million for the year, is that pretty much at practical capacity therefore.

Russell Hallbauer

Yes, that's right Tom.

Tom Bishop

Okay. And that also could you give us an exploration update, I believe some time ago the companies said Taseko was going to drill I think I a dozen more whole wells in new target area.

Russell Hallbauer

Yes, so we finished the drilling, we are now filing the data, and doing a technical analysis, we are also continuing to drill, drilling program -- further drilling program forward for us to review in the coming week and then we will decide the best [indiscernible].

Tom Bishop

Well, will we get some of the results that the shareholders the exploration kicker is always nice.

Russell Hallbauer

Yes, I guess we could, but I don't know at this rate it is hard to say. We had a couple nice holes and we had some other exploratory holes and some of them -- we had to figure out structure, we are just not going to announce holes randomly unless they are meaningful.

Tom Bishop

Are there other historical holes in the area that you have also to go on, or not.

Russell Hallbauer

Yes there are a few. They are shallow holes Tom. We know there is a whole running through the area right now, and we have to decide the structural -- and how we approach the next phase, we are not going to randomly plump $200,000 holes in the U.S not knowing where we are going.

Tom Bishop

You mentioned that you find a high grade area. What that based on.

Russell Hallbauer

Well, it is based on one pretty long hole, a 2,000 foot ahead of like five or six foot intersection.

John McManus

Yes, we went on 2016 just to check and see what was underneath the shallow holes and we can't quite predict [ph] but there is as Russ said structure and geology trendy side where to best place the next hole so we are defining the lower body, but finding nothing.

Tom Bishop

You mentioned -- you talked about the stripping ratio for 2017, but I mean is it going to stay down and 1.1 or go up again.

Russell Hallbauer

Well, the actual stripping ratio will appear to go up because we're going through -- will be using some of the stockpile that we built in 2016; so to look like a 2.5 but the amount of mining is the same.

Stuart McDonald

Yes, I don't think the people should get stung up on the strip rate Tom, like John said before if our total expend remain consistent for the last 24 months, so we going forward our spend month-over-month is going to remain the same in respect to what strip ratio is.

Tom Bishop

And what is this spend been at one level.

Stuart McDonald

Well, it is a dollar whatever cost were; how many pounds we've produced.

Russell Hallbauer

$25 million plus or minus.

Tom Bishop

$25 million plus or minus?

Russell Hallbauer

Yes. $24.1 million on a 100% base.

Tom Bishop

And what period is that?

Russell Hallbauer

A month.

Tom Bishop

Okay. And then couple of you mentioned update to its reserve marble table in 2015, can you remind us what was updated about that and was that due to the decline in copper prices requiring a different strategy from mining the reserves what was behind that.

Russell Hallbauer

That's what it was Tom.

Tom Bishop

Okay. So that might be re visited now the copper prices are rising, is it?

Russell Hallbauer

Well we're always looking at that, it's our job to take it to the maximum out of the positive that we mined through.

Stuart McDonald

But we won't change the reserves.

Russell Hallbauer

Yes, won't change the reserves.

Stuart McDonald

No, the reserve won't change; the stuff below goes into low grade stockpile.

Tom Bishop

Okay. We've got some new prosperity in amending the BC environmental assessment of it. This is my last question by the way. How and why is that being done and two we seen recall the back of my mind that we're going to ancient history here but that new prosperity. I think to be broad for us today, it would be subject only to provincial approval not federal if I recall that correctly, so this would have anything to do with that, or do I not remember it right.

Russell Hallbauer

Well, you remember part of it. We need to have that -- we have a provincial government that certificate which was given to us in 2010. We need to have it amended or it expires 2020. So we're working with the product and we got -- it we have application and without amendment a long time now as we get close to finally getting it done. What happens with the federal government now is they have an equivalency where one environmental assessment is done performed by the province of British Columbia doesn't happen to control the provinces, British Colombia profitability to do that. Then the result of that province assessment decided both provincial and federal, the federal government and if they grant equivalency of submission. I would take a look at the province environmental assessment would be decision to go ahead of it.

Stuart McDonald

Federal still involved. Yes, whenever there's a federal permit required they end up having to make an environmental assessment decision. So the premise that would really be required are under administrative environment and Department of [indiscernible] and transportation. So that triggers for the feds.

Tom Bishop

Alright, thank you.

Operator

Thank you, our next question comes from the line of John Tumazos of Very Independent Research. Your line is open.

John Tumazos

Thank you. As we look forward perhaps beyond the completion of the Florence project. Which of your potential British Columbia expansion projects would you rank first? Or do you think that you'd reopen your process possibly defined do better other project, where do you go next?

Russell Hallbauer

Well, I think that is a good question John, there is -- there is still some massive opportunities for Gibraltar. We did design the facility, the concentrates to add another mill. And well complication and tanks to increase production there. And that could be an option, it all depends on what's going in the business, we will likely be coming up with a new update shortly with new 43-101 that deals with new capital cost understanding we spend a lot of time in tactical work on that; we've actually reduced both of the capital cost and the overall operating cost. So that project as any undertaking the more engineering, the more you risk it, the more you understand the metrics of the economics, so that there. We have been late the next little while, and as you all know, it is pretty competitive out there. Certainly, for company our size going to find development assets that will be coming up in the paper and keep busy for the foreseeable future. And not to have to compete with the other folks for assets that are in another jurisdictions here in Canada.

John Tumazos

Thank you.

Operator

Thank you. Our next question comes from CJ Baldoni of Principal Global Investors. Your line is open.

CJ Baldoni

Hello, could you maybe talk a little bit about how you're thinking about the balance sheet and I understand that you have a pretty good run way, will likely build some cash. Do you see you taking care that the debt the maturity altogether or might you look to do the refinance at the bank debt first, I mean are these 2017 items or if you just talk a bit about that please.

Russell Hallbauer

Sure. I mean I don't know how much we can really talk about it, but I guess the way we look at it that we've got two years on the maturity, we've got time and we are going to wait and see how things unfold and see what our options are as we move forward, at this point we are patient, and we will continue to be patient and wait for the right opportunity that make sense for shareholders, and for bond holders. So you can always do a deal, but if waiting for the right time to get the right deal and that is what we are going to do.

CJ Baldoni

The bank facility pretty punitive so -- so your weight on that as well, is there anything you can do to it to limit the at the back end cost of that.

Stuart McDonald

Well, it is very interesting above 8.5%, so it moves forward I don't think there is any extra cost come in on the back end, so we are monitoring it and again I said we are going to continue to kind of size up our options and other financial, as we report more result we will have more options in the future.

CJ Baldoni

And in terms of -- I have a question and you may have touched on this in your opening remarks about the treatment costs, refining costs, could you talk about that that for 2017, I think that you said that has to do with the charges related to your partner's off take.

Stuart McDonald

Well, 70% of our concentrate goes to trading houses that says different -- that have a different TCRC contract than our partners. So our partners [indiscernible] have benchmarked very -- so when you ship concentrate to them there is a difference between that both TCRC and others that we sell this last quarter I should say we had different predominance of that coming to them, corresponding the TCRC higher.

CJ Baldoni

That persists in 2017?

Stuart McDonald

No. Well, 30% goes to our partner, always, so the average of year, which happens in Q4 we had more rental partners in that quarter than average. So if you look at the average for the year what happens in Q4 was we had more rent into the partners in that quarter at average, so if you look at the average 31% to our copper partners and 70% to traders.

Russell Hallbauer

Yes, and that's been reflected in the previous quarters. So you can see what our average is, it's around -- I don't know, $0.31 or $0.32.

CJ Baldoni

Okay, thank you very much. That's all I have.

Russell Hallbauer

Okay operator, I think that's all the questions we have. So thank you very much for joining us. Looking forward to talking to you next quarter. Cheers.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude Taseko Mines 2016 Q4 Earnings Conference Call. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.

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