Taseko Mines Ltd (TGB) 2006 Q3 法說會逐字稿

Thank you for your patience, ladies and gentlemen, and welcome to the Q3 2006 Taseko Mines earnings conference call. My name is Candice and I'll be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Mr. Brian Bergot, Investor Relations. Please proceed, sir.

Thank you, Candice. Good morning, ladies and gentlemen, and welcome to Taseko Mines third quarter 2006 results conference call. My name is Brian Bergot and I am the Investor Relations contact for Taseko. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko, Jeffrey Mason, Secretary, CFO, and Director for Taseko, and John McManus, our Vice President of Operations.

After opening remarks by management, which will review the business and operational results for the quarter, we will open the phone line to analysts and investors for a question-and-answer session. I would also 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 risk and uncertainties that may cause this dated outcome to differ materially from actual outcome. Please refer to the bottom of our latest news release and to our 2005 management discussion and analysis for more information.

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

Thank you, Brian. Good morning, everyone. Thank you for joining us today to discuss the closed third quarter and year-to-date 2006 financial operating results. I'm pleased to report that the company continues to produce strong operating profits as illustrated by the $18.3 million generated over the quarter and the $33.8 million generated for the first nine months of this year. This is allowing the company to advance some [inaudible] initiatives that will result in increased value of the company.

As a completely un-hedged company, we were able to realize $3.08 per pound for our copper sales during the quarter, and just under $25 per pound for molybdenum, and our position with respect to hedging stems us in good stead as we continue to see both the copper concentrate market and copper metal market tighten. The last quarter for Taseko management has been a very busy time. We've essentially rebuilt the senior management group at the mine site over the last few months as part of the transition from Ledcor to Taseko Management, adding significant operational and technical support with through these personnel placements. At the mine site, we essentially have one remaining department head from six months ago.

We've completed our drill program and the results are very encouraging. As a consequence of this, we will be continuing the program into the fall, spending a further $1 million in the next few months. When we entered the drill program, we were looking to expand our reserves by 100 million tunnels. We are near that target, but new, geological interpretation has, we believe, identified some significant additional tonnage that we plan to drill out which will allow us to re-optimize our mine plan. John McManus can speak specifically to this later in the fall in the call if it needs to be clarified.

We have terminated our joint venture agreement with Ledcor and will be taking a more proactive role in the operation of the mine and the pending issues surrounding its management, as I illustrated in my comments a few minutes ago. We have had broad-based community discussion with the many communities of interest in regards to Prosperity and environmental assessment review, we're interacting with local towns, native communities, provincial and federal authorities in this respect which is allowing us to move ahead on the environmental assessment.

We've completed the overview of the previous Prosperity feasibility study and our scoping changes have ascertained that we can drop approximately 25% of the capital input costs on the Prosperity development plan, and we've essentially brought the capital cost back to 1999 levels. We have more work to do and if you would like any clarification on that, you can speak to the -- John can clarify some of that, later in the call. We are on budget, on schedule for our new construction and mill upgrade, the mine upgrade site at the mine site, and re-path of our SX-EW plans.

As we all know, we have been in a [inaudible] dispute with Glencore over arbitration. Last week, Glencore approached us about a potential settlement with respect to this contract dispute. We spent the weekend trying to come to an amicable resolution. However, their terms are too aggressive in terms of what we felt our position was with respect to the evidence put forward to the arbitrator. We broke off discussions, late last night, and have requested the arbitrator to give us his ruling which we are ready to receive. I just announced convertible bond issue will allow us to increase cash reserves and allow management to pursue, invest in our producing assets, as well as undertaking accretive initiatives.

At this time, I'd like to turn the call over to our CFE, Jeffrey Mason, to more fully discuss financial results, then open the floor to questions.

Thank you, Russell, for touching on the operations and some of the financial aspects. This morning, I'm going to address some of the key highlights in actually greater explanation that's covered in the statement -- the MDNA, the news release all contained in the public filing

So, I'll start with the balance sheet if you don't mind referencing that. Importantly, cash is up 24% from $36.6 million to $45.3 million from last quarter. Cash is made up of $37 million that is on hand, as well as $10.5 million is currently classified as restricted. That's restricted only in the case of lead port continuing and since termination notice has been served, $5 million of the $7.5 million comes back to the treasury.

In addition, we have $18.9 million in cash held for future reclamation - a long time in the future, particularly given the new resource view plans. Concentrated inventory in the quarter - all of it was available in the [inaudible] of the ship was shipped. We have normal course inventory remaining. In part, the cash from some of these shipments was not yet received, approximately $8.8 million, and consequently was held at quarter end in amounts receivable and that explains somewhat the higher balance of amounts receivable of $16.3 million. The offshoot of that, of course, is to concentrate shipments is that we had reduced deferred revenue which is typically a liability on the balance sheet.

Plant and equipment increased in the quarter by $21 million, reflecting the payout of the leases of five trucks and one shovel, thus producing the lease debt of about $14 million to 0 on the balance sheet. In addition, there were moneys expanded on plant expansion to secure long, lead-time items, as well as initial work in the plant and engineering. Certainly, this reduction of debt, the payment on the equipment has enhanced the company's position to a no-debt position. Reduced interest charges that were rising because of this U.S.-denominated debt of 7%, as well as standby guarantee fees, overall saving the company about $2 million a year.

Moving down to share capital. It rose in the quarter by $12.9 million, reflecting issuances of shares pursuant to warrants and options exercised in the period. The overall fully diluted share capital position of the company remains relatively unchanged at about $135 million with $121 million currently outstanding as of July 31, 2006. The largest single outstanding potential share issuance relates to the non-interest bearing convertible debenture, totaling $17 million, would be convertible into 3.5 million shares at a conversion rate of CAN$4.89 as at July 21, 2006. And it rises by $0.25 [inaudible] into a maturity date of July 21, 2009.

I'm going to move, now, to the statement of operations. Operating profit increased dramatically during the quarter, quarter on quarter, by 145% from $7.4 million to $18.3 million. In part, this reflects the sales price achieved in the quarter on average at US$3.08 per pound as it compared to the average, last quarter, of $2.06.

In both cases -- in both quarters, as well as year-to-date statements, the company has taken the most conservative approach in addressing the arbitration or excluded amount with Glencore. In this quarter, an expense amounting to $3.8 million was included in the expenses offsetting operating profit, previous quarter was $1.8 million, and the year-to-date is $10 million. I just want to be absolutely clear. In those statements we have booked the most conservative massive amount -- total amount of $10 million that has been deducted from operating profit to reflect the dispute despite the fact that we believe that we're in a very strong position. The arbitration went very well, but we are yet to see that ruling which we expect to receive next week from the arbitrator.

Now, to move on to the expenses and the earnings category in the statement of operation, and I want to explain both the accounting results or the aspect, and most importantly, the business aspect which really drives the value. The expenses rose in the quarter from $2 million to $8.6 million for a net increase of $6.6 million. On first blush, very alarming. But one has to look at the details to try to understand what's precisely there and it is made up of cash, non-cash, and non-recurring items.

First, let's address the non-cash reasons for the change in the quarter. There's a foreign exchange loss. This is a change from quarter to quarter of $770,000. That is unrealized. We have not suffered a loss in foreign exchange. It is simply booking against the monetary assets and liabilities, the change in exchange rate from quarter to quarter. We do not hedge foreign exchange but we do set targets and we're able to achieve due to fluctuations in the market, and we are in the 24-hour market, achieve the conversions of U.S. dollars where our revenue comes from, and achieve better results than that.

Number two in the non-cash category - stock-based compensation. Typically, the company sets options, more or less, annually unless there's new management. Otherwise, it's put on to the company. It is a non-cash item, it's non-recurring, and we wouldn't expect to see from quarter to quarter. Those two combined amount to $1.9 million.

Now, let's move to some of the cash items in the quarter but non-recurring, unusual items. In the quarter, we spent on arbitration and SOX, which is the upgrade of the accounting systems and it is contained in general and administration, of $1 million. The company took very seriously this arbitration, employed experts, concentrated handlers, lawyers, accountants, people that are involved in the actual contract and negotiation. It was undertaken in London. There was some travel cost related, and this is a one-time unusual case, non-recurring. You simply cannot extract that number forward.

In addition, there was interest expense booked in the period, and I call this phantom interest because it's on the future income taxes. It's a non-recurring item, it is based on the prescribed rate on the taxes booked on an accounting basis - and I will address the taxes, in a few moments, but just keep that concept in mind - it is the future income taxes that sit on the balance sheet of approximately $24 million, the prescribed rate applied to those.

The next item is expiration. Truly, there's real value being derived by the enterprise in these expenditures. It was $2.5 million change, quarter over quarter. It is peaking. We will spend an additional upwards of $1 million in the next quarter, but it is peaking. It is seasonal in its nature, and we wouldn't expect it from quarter to quarter. Those totals amount to $4.8 million for a total of $6.6 million. So, the increase is either non-cash, non-recurring, and must be fully considered in trying to extrapolate into yearly results.

Now, to the taxes. In the current quarter, you will see a future income tax booking of $5.6 million. I want to hit the basic facts before I explain it. Number one, and most important, it's non-cash, strictly an accounting provision, and it adjusts year-to-date effective tax rate to 36%. If you didn't have tax pulls, if you don't have shield or otherwise, you effectively pay an overall tax rate in Canada of 36%. The company, at the quarter end if we filed tax returns based on where we stand at this point, would be liable for only $2.5 million for the nine months ended June 30, 2006. And that is without any cash planning. The company has undertaken tax planning with Ernst & Young, one of the big four accounting firms, and there are numerous conventional methods to reduce the tax exposure of the company before yearend.

Moving to the liability on the balance sheet, there is a liability amounting to $24 million. That amount is not the tax filing position of the company. Taseko has not and will not file tax returns based on that liability, and certainly not of that magnitude. It is an accounting pull based on the most conservative approach possible that certain filed tax pulls that we otherwise put on our tax returns are potentially, although there's not proof of that, not available to shield taxable income in the future. Just be absolute clear, we're not filing as though we owe $24 million. It is simply the most conservative position under strict interpretation, even though there's arguments both ways, that this would be a potential liability in the future.

In summary, the taxes are provisional, they're non-cash, they're accounting entries, and not our filing position. We are only, if we filed today, liable for $2.5 million. So, in summary, Taseko is in an extremely strong position, balance-sheet wise. $64 million cash on hand, $19 million reserved for reclamation. No debt. All debt is removed from the balance sheet. We have the potential for a five-year convertible bond of US$30 million, a favorable rates for additional accretive activities.

A resolution is expected next week in the arbitration case. And we have provided for all the worst-case scenarios in the financial statements to date, not knowing for sure what the case will result in, but we do have reviews and they are very positive with respect to them. The plant expansion is underway, on time, expected by late 2007. The company is un-hedged in joining copper prices rising, and our resources and reserves through expiration, mine design, and the like are likely leading towards expansion.

Thank you, very much. Russ?

Thanks, Jeffrey. Operator, I guess we're ready to open the floor to questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Tom Meyer of Raymond James. Please proceed.

Good afternoon, gentlemen. Just a quick one on the rationale for expensing that exploration work, which I see is more towards development, an item that can be capitalized. What was the idea behind expensing those exploration expenses?

Well, repeating the considered approach, we don't know what the results are going to be until we otherwise get them. We are still awaiting numerous assay results there, too. Our anticipations are that we will achieve our goals with respect to resource and reserve enhancement. But, at this time, we take the conservative approach that we're not sure yet what the added value is, so we expanse the item.

It is also a non-recurring, not normal line production basis, so we tend to take the more conservative approach and expense it. It is part of the mine design process. If we were to start to look at satellite locations or otherwise and it was a larger drill program, we would consider capitalizing that, but at this time, we're taking a more conserve - what I'm more concerned about is that people extrapolate and say $2.5 million additional exploration in the quarter where we spent actually close to $3 million. $500,000 was last quarter. We would do that every quarter. That's not the intention of the company.

Okay. When does the contract or termination fee get charged, if it gets charged at all?

Is this regard to Ledcor?

Ledcor, yes.

That would be November 5. It'll amount to $3.4 million. In part, that will be funded wholly by the release of what we call restricted cash of $5 million held by them. We had it in an escrow account to handle payroll and the like. As part of the transition, employees were otherwise employed by them to the extent we want to take them on - and there are numerous of them and they're well skilled - are coming across to Gibraltar payroll. As part of that whole process, the fee will be paid, the $5 million will be released, which previously guaranteed the payment of salaries, wages, expenses, and the like.

And then with respect to the mine plan over the next few quarters, as we saw the copper grade fall off, this quarter, which partially explains some of the lower [inaudible] how does it look over the next few quarters? Are we going to see the grades pick back up or are we at the 0.265?

Yes, Tom. No, that grade drop was in the plan all along, even if you look back [inaudible] report, a year ago. This year, 2006, our average is 0.285 and the forecast was 0.29. What happens is as we move into the lower part of [inaudible], the pit we're in now, and then over into Granite Lake in 2008, we take up over 0.3 so it will come back up.

Okay. And then, finally, on Prosperity, what will be the timing of the release of the feasibility?

Well, it's going to be more into the end of 2007 on the full feasibility because right now, what we've done is, as Russ said, we've knocked about $100 million worth of capital out of the initial, but what we've gotten into is the mill design itself and the facilities around the mill site. Now, we're drilling down deeper and going after things like the construction methods of the [inaudible] staff, how much material is identified as potentially asset-generating [inaudible] being dealt with, mining equipment, more detail to get -- to really understand where we've gotten on the feasibility study. Loose, not turn it loose, but we [inaudible] with the consultant in September.

Okay. Will we get a - then a pre-feasibility or a scoping study before the end of this year on Prosperity?

I think, Tom, we can give some pretty clear indications of where we're at, a broad bush, you know?

Okay, I'll pass it on for the next question.

Thanks, Tom.

Ladies and gentlemen, please be reminded to ask one question at a time. Our next question comes from the line of [Tom Bishop]. Please proceed.

Hi, guys. The $10 million of deduction -- I'm sorry, 10 million pounds of deduction - that's kind of coming off $13 million less in the first quarter and $12.8, last quarter, and none of it quite what we were hoping already. Now, it's 10 million. I know the grade is down, but that's maybe 10%. What's going on up there at the mill? If you had a mill report, maybe I slept through it.

In this quarter, what happens is there was really one specific event and that was - there's numerous things that happened in the quarter, of course - but we had a primary crusher, we had failure in the bearing and the eccentric drive system. Working our way through the whole problem and to get a final and good fix on it took three weeks so we ran out of oil for the mill. That event alone, at least will cost us 2.5 million pounds to 3 million pounds of production in this quarter. If that had not occurred, we would have had - we would have been back in our normal running [inaudible] at our current rate.

Well, for the rest of the quarter, was there still - were you still plagued with repair problems or that was the minor nature?

Yes, we're still plagued with repair problems. That's normal business. A lot of the things that happened in the previous quarter where we had liability problems, we focused on that. We've got better reliability overall but we had this one real big issue that hit us at the end of May and on into June and that just knocked the production down.

Okay. So, that was a May/June thing. That's spilling into July?

No, it's up and running. That crusher ran for 30 years without having this problem. We went in. It sticks, now. It's essentially - well not essentially - just completely rebuilt and it's been running fine since I think it was the fourth week of June. So, that is not going to recur.

Okay. And you bought back the trucks and the shovel. Correct?

That is correct.

$21 million or $14 million? Or what was the number?

It cost $14 million. The trucks, overall, and the shovel are about $19 million in value. The liability existing at the time of purchase, our payout was about $14 million. We had both paid down through our initial deposit plus payments made to date down to the $14 million.

So, $19 was the original value, you're saying.

No. Yes, $19 million is the cost coming across that goes onto the balance sheet. That was the un-depreciated amount coming across. That's right. Yes, going back to the original cost. You're right. We spent about just over $19 million on the five trucks and one shovel, and we spent just under $2 million on plant modifications, the expansion program. We're also looking at other avenues around the plant site, but we've actually had those equipment valued as part of as looking at debt and otherwise, and they have valued that equipment above the prices we ever paid for it due to escalation in steel, rubber, availability, all those types of things. So, we're very confident. It was a very good purchase. Interest rates rise in the United States. They continue to rise. There is a good use of cash.

Okay. Thanks. Well, I'll get back in the queue, I guess.

Thank you for your questions.

Our next question comes from the line of [Chris Wusan] of [Great Eastern]. Please proceed.

Yes, with the expansion of the mill project on Gibraltar mine, what type of benefit should I expect in the long run? And how long to recoup the costs?

What happens with the expansion on the mill is we get about a 30% increase in our - it's 25% expansion, 30% increase in metal production because we improved recoveries by having a more efficient mill, also. The return on that, of course, is somewhat dependent on metals prices. We are about 15, 16 months from having the production increase. When that does kick into 2007, at the metals forecast that we've got that we're using, I believe the payback was at 2.5, 3 years.

Yes, and we've used somewhat conservative copper prices were a lot less than what analysts are forecasting. We're using everything from 250 decreasing down to 125 per pound in that model. That's not necessarily our budget's but in the evaluation as to proceed or not.

That mill expansion, the capital being spent on that is about half what you'd have to put in to get the same sort of production out of the new project because we've already got channeling spawns and channeling systems that are set up. We've got infrastructures there, so I think we're looking at about $6,000 per ton of installed capacity where you're looking at about double that if you try to build a new mill. It's well underway. We already have let most of the major contracts for the bigger parts of the expansion - the mill shell, itself, the gears, and pinions, and the motors. We've let those and those prices are fixed, so we're going to come in, on time and on budget with this thing, and we'll get the advantage of it very quickly once it's up and running.

And the feature - one of the important features from a cash flow perspective - there's little or no interruptions to ongoing operations. We're able to shift this over to the new run without having significant downtime. There will be from a day-to-day [inaudible] shutdown, but there's no shutdown for a core or duration, no interruption to production.

Thank you. I appreciate those comments.

Our next question comes from the line of [Michael Van Crock] of [Polygon].

Hi. My question's already been answered. Thank you.

We have a follow-up question from the line of Tom Bishop. Please proceed.

Yes, hi. The last I looked, the stock's off about 20% today, so I wanted to give you a chance to say what you think investors are missing. But I think, probably, for a quarter where you had $16 million pounds of copper sold and the copper price went up a dollar a pound since the last quarter, to score $0.04 of earnings per share probably, I'm guessing, disappointed more than a few investors. But I'm interested in your thoughts and what we're missing or what we should focus on.

Well, from my personal perspective, Tom - This is Russ. I always look at the cash flow generating ability of the assets and the operating profits. Jeffrey illustrated where some of those non-cash items went to that affected earnings or where it applied to. I just think that as we're generating a lot of cash and that cash is going to allow us to do lots of other things, both pay off the concentrator upgrade, pay off the SX-EW plant, and in combination with the convertible bond that we've just entered into, those issues, we're going to have lots of cash and be able to look at other accretive initiatives for the company.

If you look across a broad spectrum, right now, the company is just trading basically on a cash flow multiple and you see it with some of the organizations. You look at [inaudible], [inaudible], [inaudible] - I don't know what some of the other companies that are in the merger acquisition stage, but it seems to a multiple on cash flow perspective without looking at the impaired assets of the company. I continue to reiterate there's nothing in our evaluation for Prosperity and here we have - we're continuing on the path of streamlining that to change in the scoping study, taking this route and making a mine out of it that's going to generate significant cash flow, going forward.

Okay. What are the metrics by which the industry might value something like Prosperity? It is sort of a low-grade, low-tonnage deposit, but how are such depositors -

Well, Tom, right now, if you look at just straight resources in the ground and you went out and tried to acquire an asset with a resource in the ground - I believe there's 9.8 million ounces of resource. People are buying at [inaudible] resources at $40 to $50 an ounce. So, if you say that that's US$50 an ounce times 9.8 million while you have $450 million worth of assets value there that is not being recognized in this company. Then you have the copper on the other side of it and if you're buying copper assets for $0.02 a pound, $0.03 a pound, that's another $60 million, $70 million. So, that's how I do it. You got anything to add, Jeffrey?

Yes, in addition, it's always tough from quarter to quarter. There's certain cutoff issues. It may not be indicative of where we're going. What I see in this company as not being recognized is we are in a path to getting enhanced earnings, cash flow production. All of it's moving along the track. We're not risking a venture where someone is yet building it, someone's financing, you have to figure if there's resources or reserves.

We have a lot of [gnomes] and the ones that are yet to be resolved are very imminently resolvable. The risky elements, so to speak of it, are the plant we have or rehabilitation, which is well underway, it's within scope, it's minor in nature, no interruption, the mine resources we've addressed through exploration. So, I really think these people that are taking multiples of cash like Russ was saying - they're applying it to people that have different risk profiles. I see our risk profile as exceedingly lower. We have permits, we have an excellent [inaudible] facility that we don't have to rebuild it, we have power available, we have an expansion underway. I'm very excited about the resource/reserve enhancements that potentially exist there.

And so, we're not getting for that premium that should exist for a company that has less risk in the profile, and people are using a wide brush and going across anybody who's got a little bit of copper revenue and swapping it with the same brush. So, I think the operations people shifting from Ledcore, internalizing the production, and then the command over the control. It's all going to pay off. Your one quarter - it's either going to be next quarter or the quarter after - I'm not sure what quarter it is - everybody's going to turn the corner, it's going to be a big surprise, and everybody's going to turn to me. We're going to say that's what we've been planning, that's what we've been trying to communicate to everybody, we're on track, it's happening, but they just need to see that quarter. Look, in the interim, we've gone ahead and paid off all our debt. We have zero debt. Compare that to other companies. And we have a nice cash treasury. That enables us to make decisions that we want to make, not somebody who carries the debt. So, it's frustrating that we can't quite lock that quarter down, but it's going to lock down here and then it's, quarter after quarter, going to come at the investor and they're going to see it. So, people need to understand - look out six months, nine months, even a year, and this company is there. And it's already there and it's positioned. It's financially strong positioned.

Okay. Let me just say a couple things here. The 9.8 million ounces that you mentioned, Russ - I think it's 6.8 unless you were talking equivalent. But then you added the copper number onto that, so -

I was talking about the resource, Tom. The mine-able reserve is less than that. It's just under right around $5 million, isn't it, Jeff?

Yes, at least.

Are potential - are these getting value based on unrecoverable resources is what you're saying? Aren't they going to [inaudible] value the mine-able part only?

They buy resources.

Okay. So, that's $40 to $50 an ounce for that.

Somewhere in that neighborhood.

Okay. Now, I wanted to make a comment, also, that this expansion is going to take you up to 100 million pounds of copper but basically, it's going to take you up not from $70 million, which you have never come close to, but it's going to take you up from about $50 million which is where you've been.

Right. Really, you're really almost going to double your actual capacity when this thing comes online. It's very important because it's going to increase the design [inaudible]. But, more importantly, because we will have higher utilization letdown time, we are going to have more consistent, reliable production streams. And consequently, you're exactly right, and we've had these discussions with our concentrate handler, is essentially we are going to lift up to a double with a higher probability or predictability that we will deliver.

Now, you almost gave me gray hair there with this $2 a pound cost of production for the past quarter. That's not the direction I was hoping to see you go. I know there's a lot of reasons, but what is the cost per pound we're looking to get to soon? Soon, and when the production with the old mill and then when the new mill is done because I think that might give people a carrot.

Go ahead, John. [inaudible]

Well, Tom, In this particular quarter, [inaudible] was about $0.40.

Of the total on the $2. The issue with Glencore, if that's resolved, that's another $0.25. If you take those two out right there, that's $0.65 less. That brings it down $1.35. As we move forward, if you take a look at all the reports, everything that's published, our grade goes up in the next four, five, six months, up about 20% even if -

When? When did you say? In the next five or six months?

That's right.

Will it gradually go up? You're saying it's coming but it would be helpful for us to know kind of pretty close to exactly when it's coming.

I know. We've got to work through the system. Right now, we're redoing the 2007 - we're doing the 2007 mine plan, we're focusing on all of the things we need to do to make sure that we've got an efficient operation so that we not only release the best copper, but we also keep our operating cost at the lowest possible level and balance the two off. So, I don't have an exact number for you right now but it's in sight, and that is a natural effect of the core deposit. When the mine was shut down, it was shut down in good order, but the deposit was taken and the better part of the higher grade were mined at that time before the shutdown. This has always been predicted that the period we're in right now is a lower grade. It comes up at 15% to 20% here over the next two quarters.

In two quarters. Alright.

With that, you talk about the doubling. The 30% increase in metal production is the 30% on top of the capacity, which includes that 20%. That's how you get the double.

I'm sorry. I didn't follow that.

Okay. We get about a 20% increase in production because of grade. Naturally, because of the ore deposit, we've reached the higher grade part of the deposit. Okay? So, that takes us up to the $70 million for 2007. Then, the 30% on the mill expansion is what takes us up to $100 million in 2008.

Okay. Now - that's a good question. Can you reach the $70 million with the way this plant is operating? Or is this $70 million theoretical like $65 million was, originally, for this year?

Well, we're - I believe to see the initiatives we're taking in this mill are going to pay off. We are going to see the performance improve, both in reliability, availability, true put, and recovery from this mill from what we're doing.

Now, is that even independent of the expansion and upgrade that you're doing or is it all wrapped up in that, that we're going to see progress on that all through the coming year?

We are working on that, now. We're not going to sit around and wait 14 months until the mill expansion comes up. We've got to run this things as efficiently as we can. We've got our auto [inaudible] with that. We've got a 160 cubic meter [inaudible] with the Scavenger circuit. That's just come online in the last week or two. That should give a couple points recovery. We've got, as Russ mentioned, we've got some - we've got a new senior management team at the site, we've got the experience, I believe, that we need in order to see the improvements that we need out of that mill. So, we're going to see better true put, better availability, better recovery out of the current mill. And with the mill expansion, that's just - it's going to take away some of the issues that we've got to fight with over the next year and a half.

The other part of that increase in 2007 is our SX-EW plant, which we're bringing up in November. Into November, we should be making capital. That's going to be a ramp up. We start in the middle of winter but that will add to the copper production in 2007 on top of what the mill does.

That's all in the [inaudible] you're hoping to do in 2007, right?

That's right. Yes, I'm explaining how we get to 50 to 70 in 2007. It's grade, throughput, recovery, plus SX-EW on top of it and that'll take us there.

Maybe this is for Jeff, but if you capitalize the strip this year that you had to expense and I think you're planning to get that working better from an accounting standpoint, next year, what would that have done to help share in the recent quarter? Is that anything you kind of know, roughly?

It's more important on a prospective basis rather than a retroactive, going back, and it more applies to the Granite Lake pit. If the pit design is longer term, let's say, five, six years design, we will take the pre-strip amount and amortize it over the planned duration of the pit. This current pit was roughly at 40-month duration, so even if we capitalized, it would be expensed over a relatively short period. Given that we had teething pains to start up and the like, I think we took the most conservative route and expensed it and cleaned our books.

Moving forward, predictability is much higher. That Granite Lake design should be finished by the fall, in time for the 2007 campaign. We will be able to determine exactly where the cutoff is once we've done the pre-strip, capitalize that amount, and then amortization is simply what we believe to be the reserves and the duration to exploit those reserves and get them through to the mill.

I am anticipating quite a long pit design but we're going to have to see. It will no doubt be phased and there may be phased stripping of that and capitalization of that, but I think it's going to have a very positive impact unlike what we just went through with the 40-month because you have to remember we started that 40-month when copper prices were $1.25, $1.40. So, it was very difficult to justify capitalizing. We now know what we can do when we're running right and we are getting towards that and we can more comfortably capitalize those amounts. So, it's all good. It just adds.

[OPERATOR INSTRUCTIONS]

Our next question comes from the line of Tom Meyer. Please proceed.

I see that Jeff is working on a feasibility study on the Highland Valley Copper Refinery, which will be done some time in the third quarter and they're planning on making a decision on whether to go ahead with this in early 2007. Has there been any discussion about possibly treating Gibraltar concentrates with the excess capacity if they do go ahead with this refinery?

Only in general terms, Tom. There's been nothing specific so I haven't had an opportunity to have further discussions with them.

And then, with this convertible debenture, can you give us an idea for the use of proceeds? And if the terms are available, what are the terms for conversion? Like how many shares are we looking at for this convert?

Okay, with respect to uses, we want to be in a position where we can get an accretive acquisition, either another company, another asset, or added expansion based on the reserves or resources or if like potentials come along, we want to be able to access this, right away. Basically, turn the light green and go. We don't want to then have to go to financing and obtain finance subject to complete a transaction. So, that's why we're putting it in place and it's a five-year term so that puts us a lot of known aspects to it, definable.

As to the terms, I'm not really, at this point, able to release them because we just signed the agreement, last night, prior to the release of the quarterlies, and we are now finalizing the formal agreement, which the bankers and lawyers and everybody else [inaudible]. But they're very competitive rates and it is a long ways down on our balance sheet which adds the additional feature that if we should look to an acquisition or otherwise that is larger than our facility is available or we do to a build out of Prosperity or otherwise and any one of these features. We have the ability to stick additional secured debt in front of it and they're very aware of that. That could be a potential. So, it's got a lot of flexibility features that we like.

And then, finally, on the covenant side, we've been able to come to what I think is a very reasonable covenant, much different than North American banks as to earnings, cash flow, EBIT protection, and all those types of things. The features are reasonable and certainly don't constrain our operations for expansion or an acquisition where you would be susceptible to slight changes from quarter to quarter. So, we're yet to finalize that. You're going to hear more about it, shortly, but we've had very good levels of interest from several institutions, very well-named institutions in Europe.

Okay. Thanks very much. That's it for me.

Thanks, Tom.

Our next question comes from the line of [Kershad Bend]. Please proceed.

Good afternoon, gentlemen. I just heard that Prosperity has approximate value of $500 million, estimated, obviously. I just want to say that this is an apples and oranges. Gibraltar is a producing mine as compared to Prosperity, which is an exploration mine. And it's an exploration stage. The discipline and skills which are required to run a production mine versus an exploration are somewhat different. And also being said that the value has not been placed, added to the shareholders value by keeping Prosperity under the sequel. Any consideration being given to the fact that if somehow this structure differently that these two Gibraltar mine and Prosperity, Prosperity with maybe Harmony, is separated to add value for the shareholders?

That's a very good question and we have discussed that, internally, at some length in terms of a go-forward strategy. But right now, there's been no definitive conclusion with respect to how we may pursue that. Now, in the context of saying that this is an exploration property, that is not quite true. We're far more advanced than an exploration property because we know we have a known resource. Right now, we're probably - we're extensively in the development state and what we have in terms of the management team, both at [HDI] and Taseko is a mining operation and development team. So, we're very comfortable that should we choose to develop it, we can develop it. The $70 million that have been spent on the exploration side has been spent and now we're in a position where we have to define the feasibility study and decide whether we take it through to economic development. I hope that answers your question.

Our next question comes from the line of --

Hello?

Your line is open.

Hello?

Mr. or [Miss Chen], your line is open.

Hello?

Hello.

Hi. I was very surprised at the timing of your private placement given that you have the $37 million cash and also expecting future quarters generating positive cash flow until you come to a decision on Prosperity. So, the timing of the financing is - I find it quite surprising. I would like you to maybe comment a little bit further on that unless you have some acquisition that you're working on that might have to access that cash immediately.

The second thing that I wanted to ask is basically looking at the expense column on the statement - on the income statement, on the stock-based compensation, I just want to have an idea that like on an ongoing basis, the million 68 number that we see, this quarter, are we going to expect sort of a more constant number, going forward? Or is it going to sort of go up, going forward? Can you give me some sort of idea as to what we can expect in the forthcoming quarter?

Absolutely. Thank you for your question. On the financing, there's a couple thoughts - trains of thoughts on financing - and that's as follows - when times are good and money is available and copper prices are high, investors are very keen to make investments. In times where operations are a little lower, times are a little tough, and people need money, it's difficult to access money. So, we're taking these times as good times. We expect them to continue but we consider them to be good times. We've had dialogue with lots of institutions, we feel that we're in a very good position to bargain because we don't need the money. That's the second thing. To get good terms from a lender or a person that can convert to equity, you have to actually prove to them, surprisingly, that you don't necessarily need the money, and then you can negotiate the best terms.

So, we have been able to obtain basically like a line of credit, it's characterized as a convertible bond, whereby we access $30 million and have the right for that money for five years. Now, so as long as we can find accretive equities, ways we can earn more on that money, it's better for the company overall.

As for the conversion feature, the stock has gone up and down, granted, and it has been at fairly high levels. We are looking to set the conversion of this bond at a premium to existing market and that is one of the final negotiation points that we realize that we do not want to issue stock that does not represent the true entity value of Taseko. So, we're not doing it at market. We're doing it in excess of market.

Finally, on a conversion feature on a net-net to the company, if you do an equity financing, you have to pay broker fees, lawyer fees, closing fees, and potentially, broker warrants. And on top of that what they call a sweetener, such as a warrant. We are looking here towards a straight conversion to share with no additional costs, no warrants, no sweeteners, so the net-net vested back to the shareholder is higher. And I think we can only do these in times that get like this when everybody is exuberant and excited with what's going on in the market, and this is a prime opportunity for us.

As for acquisition targets, we are constantly reviewing cases. We have some very nice cases. I call them a little bit laying ducts because they're good ducts but they need to get financing, they've got some project hurdles, they don't have the right ownership, they may have some flaw they otherwise can't get over but there's a substantial asset there. We have looked at several opportunities. We haven't hit on one, yet, but we've got lots that are under the microscope and they could be very synergistic to the company, and we want to be able to go green light and pull the trigger. And the only way to do that is to be set up and this provides that facility to do that.

Moving to your second question on stock-based compensation - number one, it's a non-cash item. Number two, it's driven by a forma called [inaudible]. And because of the volatility index, the copper and gold and public companies currently in the middle sector is very high as the data or the change of the stock. It drives the calculations exceedingly high because it's very pedadogical in nature and it drives it to a very high number. It's not realistic [inaudible] believe that they are going to realize on that expense or the gains to the employee.

Finally, our goal, we have an independent Compensation Committee set up who reviews options in the marketplace to make sure we're comparable. We want to attract top management. They are completely independent of the - of HDI and of Taseko. They don't work for us. They sit on the Board and determine those options, and the goal is once a year to set options. But because we've been rebuilding management team and the like as we shift over to Ledcor, we've issued some options. It's not a recurring event and it's non-cash, and it's been magnified, unfortunately, for the [inaudible] theory. So, I hope I've explained your questions. Thank you.

Our next question comes from the line of [Ken McAndress] of Benning & Scattergood. Please proceed.

Good afternoon, gentlemen. The last few quarters, there have been some non-recurring events that have muted production, somewhat. And my question is two-fold. One, we're halfway through this quarter. Are there any events that have happened, this quarter, that are going to disappoint us for production that we're going to see this time, three months from now? And secondly, with all the cash that we do have, are we being proactive in maintaining and updating this equipment so we don't continually get these disappointments on production?

Yes, Ken. So far, this quarter, we're on track. Actually, in July, we beat our internal copper production and we're moving along per plan. We, as an earlier question - I think it was from Tom Bishop about what are we doing about making sure that this is going to - we're not going to have recurring issues. The crusher issue that we had, that's done, that's fixed. That's behind us. We do have an elderly facility, which is an old design, but we've got a team in place which knows, I think, how to get the best performance out of that.

So, moving forward, to answer your question, yes. We've spent - we've been investing in that. In that mill, we replaced all of the [inaudible] liners, we have expensed repair. The crusher was over a million dollars during the past quarter. We continue to work on our mining equipment and our mill equipment. We're investing in the whole operation. I hope that answers your question.

Okay. Thank you.

Our next question comes from the line of Tom Bishop. Please proceed.

Yes, hi. I was glad to that cost per pound issue that we were talking about and you had given me a figure getting down to $1.35, which you can get rid of Glencore and what the crusher did to crush in the Q3 results. And I was noticing that in the press release, though, you kind of - I'm not sure what the basis of that number is but I assume it was just the production cost and didn't include the $0.50 for smelting. But in the Q4 column of the press release where it's sort of forecasting what's going to happen in Q4, it shows the $1 to $1.15, so I wanted somebody to reconcile that for my mind.

And then, also, what I really wanted then was to see what cost per pound production and transportation at that point is going to be out when you have $100 million coming to production - 100 million pounds.

Your first question, $1.35 versus $1 to $1.15 in the press release, yes. The calculation on the $0.37, which is what's in the press release, that's just what it calculated out. We estimate that we lost production 2.5 million to 3 million pounds during the quarter of copper, and 40,000 to 50,000 pounds of molybdenum because we couldn't run the mill for three weeks. So, you simply take - we had to spend the money, essentially, to continue to produce waste and mine and do the things we need to do, plus repair the mill. But we didn't get the advantage of having that money or those pounds of metal to reduce the offer at unit cost. So, that $0.37 is the number that came out. If you take that out of the $1.50 in the Q3 -

Oh, out of Q3?

Yes.

I thought you were taking it out of the $2 in Q3.

In Q3, yes. But I'm looking at the production costs, right now, comparing that.

Okay, I got it, I got it. $1.50. Then you take $0.40 out of that -

Then you're at $1.10.

Then you're at $1.10.

And that doesn't include the repair costs, which is $1 million, and there's another $0.10. There's a lot of things that happened in the quarter and I'm confident that on our plan, everything that we've anticipated, going forward, that $1 to $1.15 is solid for our site costs.

Okay. So then when we get out to having a plant with 100 million pounds of capacity, what sort of cost per pound can we expect by then? And are we going to continue to decline between now and then as different things come online and [inaudible] get made?

Our operating costs are going to continue to decline. That's right. The rate goes up and as we get a handle on the operation of this mill and the rest of the deposit, plus we've got the ability to manage our people in our company better without the Ledcore joint venture in place. And there's costs involved in that. The whole issue brings our operating cost down, moving forward.

So, the combination of reduced operating costs and higher throughput and more pounds of metal will decrease our cash costs.

That's an important thing. I just don't want people to lose track of that. We have not lost any metal, no pounds of copper or pounds of moly have been lost. They're still sitting in tons that need to be processed through the mill. Because the denominator, the number of tons through the mill, didn't reach our expectations - it's still available either in the pit or beside the mill - when they go through the mill, as we're moving towards because the management changing facilities, we will achieve those numbers and nothing has been lost. They will be sold in quarters yet to come and will be processed in those quarters.

Okay, I guess what I'm trying to get at, though, is one you get up to 100 - once you get up to 31 - what's the word? You're at 26.5, right now. Once you get up to 31, say, in two quarters, what roughly will that do to the cost of production? And then once you get to 100 million pounds a year, what will that do to the cost of production?

Each one is going to pull about probably 10% or our site operating costs. Okay. Transportation and treatment costs are more fixed costs than variable but we've got - you end up - you spend the same amount of money in a lot of ways on your fixed costs at the site to produce more metal so that's what brings down your operating costs. So, we get the two together and we should be down in the $0.90.

But then to that, we've got to add still on the transportation of $0.50. And what is that likely to be like, next year, and the year beyond?

That remains to be seen, Tom. We know what we have with respect to our ongoing net contract with Ledcore. But as far as ocean freight goes and those other attendant costs, that presently is unknown but we think that it'll be no worse than this year.

When you show that $0.50 there, how does that relate to the $0.25? You feel like you're getting overcharged. You show $0.50 for all property costs, for transport, treatment, smelting. Is that going to drop to $0.25? Are you saying that the $0.25, right now, that you're being overcharged by Glencore, you hope is not in the $0.50?

It is in the $0.50.

I'm sorry?

It is in the $0.50.

It is?

Yes.

So does that mean that transportation costs in theory, next month, could drop to $0.25?

Actually, on a pure accounting basis, if we bought in the recovery if we won the case, it actually would go to zero. An unusual case would happen. On an ongoing regular basis, we see both within the Glencore contract and the market letting it concentrate for handling, is going to be very comparable to the types of numbers we established before we had this escalation in copper which negatively impacted a price participation interpretation. It'd be much closer to the $0.33, $0.35 per pound of offsite.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn it back to Mr. Bergot for any closing remarks. Please proceed, sir.

Thank you very much, everyone, for participating today. If you have any follow-up questions, don't hesitate to call us here in the office. Thank you.