Taseko Mines Ltd (TGB) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Taseko Mines Earnings Conference call. My name is Nicole and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Brian Bergot, Investor Relations. Please proceed.

Thank you, Nicole. Good morning, ladies and gentlemen, and welcome to Taseko Mines' third quarter 2007 results conference call. My name is Brian Bergot and I am the Investor Relations Manager for Taseko.

With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko, Jeffrey Mason, Secretary, CFO and Director of Taseko, and John McManus, Taseko's Vice President of Operations. After opening remarks by management, which will review third quarter business and operational results, we will open the phone lines 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 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.

Thank you, Brian. Good morning, everyone. Thank you for joining us today to discuss Taseko's third quarter 2007 financial and operating results. Taseko generated $55.9 million in revenue for the quarter from sales of 13 million pounds of copper and concentrate, 556,000 pounds of capital copper and 138,000 pounds of molybdenum and concentrate.

After tax earnings were $12.4 million, an increase of $8.3 million over the comparable period last year. Of particular note, operating profit for the nine-month period is up $40.9 million and net earnings up $21.9 million in comparison to the same period in 2006. Copper costs, net of byproducts, during the quarter were impacted by exchange rate fluctuations between the Canadian and U.S. dollar and additional operating expenses. We'll speak about that later in the call.

Copper metal production has been steadily increasing over the past three quarters. In Q1, we produced 10.6 million pounds. In Q2, we produced 11.7 million pounds. And even though we experienced a fire in our crusher MCC room which shut down our crushing facilities for nine days and our transition to the new location cells which affected recoveries, we produced 12.7 million pounds in Q3.

Had we not experienced these two issues, copper production would have exceeded 14.5 million pounds of the production rates we'd achieved for the previous six weeks. In terms of operations, tons crushed in the third quarter was 12% over the second quarter. Tons milled in the third quarter was up 15% over the second quarter. And mill operating time was up 10% in the quarter compared to the year-to-date numbers.

Capital production is continuing to increase from an average of 6,000 pounds per day in the winter-spring months, to 14,000 pounds per day in June and July. Operational staff are continuing to work on the issues that have affected operational performance over the past eight to ten months. The Granite Pit has been stripped to the point that ore release will be available in a few weeks.

As the Granite ore has not been processed by this present operating group of the mine, a large bulk tonnage test was run to ascertain operating parameters. The test run proved very successful, with high crushing tonnages, along with steady state metallurgical performance.

This test reconfirms our expected performance when our Granite Lake ore is presented to the new sag mill later in the year. The new mining faces available in the Granite Pit will allow mining flexibility between the Pollyanna and Granite Pits and will help alleviate a number of the operational issues faced over the past months when we counted the wet Pollyanna ore.

As a result, we are very happy with the progress of operations and our construction at site. We continue to be on time and on budget with our concentrator expansion and upgrade. Ten new flotation cells are fully operational and we should see benefits from those in the coming months. The sag mill building is complete and machinery is being installed. The sag mill gear is in Montreal being prepared for shipment to site as we speak and the sag mill shell has left Spain and is in transit.

Our reserve drilling is complete for the time being, as we step back and evaluate the impact our new reserve will have on our life of mine model in terms of optimizing Gibraltar's profitability going forward. A new reserve update will be coming out in the next month which will add to our reserves and obviously add value to the Company.

Although we will complete reserve drilling, we will continue to do exploration drilling on identified mineral occurrences in close proximity to our operating pits. We have recently begun drilling in the [Gun Zone] and the most recent hole returned [at phase] of 0.36% cooper and 0.005 moly over 150 feet, varying year service. We're excited about this initial hole. Prosperity is moving along nicely and we are doing some additional technical evaluation to enhance the feasibility study. We are anticipating completing this work over the next few months.

I'd like to now turn things over to Jeffrey to discuss the financials.

Thank you, Russell, for summarizing operations and covering some of the financial aspects, as well. First off, before I get into the financial specifics, I want to mention that we are extremely proud of the operational personnel. Often, we are focused on the financial capital, but in these times, it is even more critical to assemble a strong production team, which primarily commenced in the fall of '04, where after commercial operations started in January '05.

Along with the human capital that has been built up since September '04, total assets have increased from 131 million to 340 million, and shareholders' equity has increased from negative five million to 150 million by June '07. I'm excited about the near term, as we can see operations and people develop, along with some recent additions of personnel.

And very soon, substantially higher levels of production and sales, and importantly, a long-term platform of modern facilities, combined with long life mine reserves, it is all in place to happen. Realizing that we continue to build on our current base, let's start by reviewing the balance sheet, to which I will talk in millions of Canadian dollars.

The essence of the balance sheet and Taseko's direction is best summarized by, one, investment in the future by way of property, plant and equipment purchases of 37.1 million in Q3, following 34.9 million in Q2; two, all capital additions financed at an operating cash flow and existing cash on hand, which remains strong at 48.7 million at quarter end, including 4.4 million of restricted cash to secure increased electrical power.

Three, Taseko generated from operations cash inflow of 14.6 million in Q3, following 12.3 million in Q2. And four, after funding capital additions in the quarter and various normal course account balance changes, the overall working capital stands at 62.7 million -- that's earned assets, less current liabilities, which decreased by only 15.7 million in the quarter.

Overall, in summary, Taseko is essentially converting working capital and cash inflows into long-term investments in property, plant and equipment, which will benefit operations for years to come. Since September 30, '06, property, plant and equipment, net of amortization, has risen by 93.4 million in only nine months, from 43 million to 137 million.

As mentioned, Taseko's 100% owned mineral properties, plant and equipment increased by 37 million in Q3. The details are as follows. One, mill expansion, 14.4 million in Q3. Last quarter, it was 12.4 million. This is comprised of year-to-date 37.6 million, project to date 43 million. Expected remaining expenditures to December 31, '07, 31 million. And important to note, on time and on budget, as Russell mentioned, at about 74 million in total costs.

The mill expansion in the quarter relates to equipment and contractors for primary, secondary grinding, flotation, surface facilities and buildings. As planned, the 34-foot sag mill is being shipped during August as part of the Phase I expansion, as noted by Russell.

Phase two expansion, which commenced in Q2, is scheduled to complete in late 2008, at a cost of 40 million. It is well underway, focused on engineering and procurement, which will take mill production from 46,000 tons per day under Phase I to 55,000 tons in 2008, or an additional 20% increase.

Importantly, the construction team is ongoing. Again, securing the right human capital with some positive economics, including the construction crew is fully trained on the Gibraltar site activities, in-house Gibraltar supervisory staff, which will be retained expertise for future projects, optimization of scheduling, because as Phase I activities are decreasing, we're refocusing on installation.

Phase two activities are ramping up and focusing in on engineering and procurement, and Phase II and Phase I plans are integrated, thus avoiding duplication and increasing efficiency and effectiveness. On to mine site equipment. Mine site equipment purchased of 2.1 in the quarter, last quarter, 12.9 million. Year-to-date, Taseko has expended 18.2 million. In the quarter, it was mainly comprised of a primary crusher payment of 1 million, tailings line 0.5 million, and some other minor balances.

Also, to note, a $1 million deposit classified as prepaid on the balance sheet was made on a P&H 4100 shovel, expected in August 2008. Both the shovel and the crusher are expected to be operational in the fall of 2008.

Other equipment planned expenditures are new production drills, 4.5 million, and tailings dam raised of 2.3 million. Mine operations in the period included capitalized pre-stripping of the Granite Pit. That has an expected mine life of 11-plus years, extendable, potentially, under the 2007 current exploration program.

Pre-stripping amounted to 9.6 million in the quarter, followed by last quarter at 6.8 million. Project to date, 21.6 million. Balance to expend, and this is a somewhat rough estimate, as the extent of the pit is not fully defined, about 18 million. But this will be sequenced over various quarters as the east and west Granite Pit ore is exposed and depending on the actual ore release to the mill.

This pre-stripping is capitalized and it represents a future non-cash amortization cost of about 3.6 million per year or about US$0.037 per pound of copper over the life of the Granite Pit, which hosts approximately a billion-plus pounds of copper. This pre-stripping cost has been financed out of current operating cash flow. It will become a sunk cost, but will result in a long-term cash inflow, hence the capitalization and the future amortization.

Property went up in the quarter by 10.5 million, comprised of a property purchase of 8.4 million and exploration that we capitalized of 2.1 million, for a total of 10.5 million. In June '07, Taseko completed the acquisition of all the issued and outstanding shares in the capital private company with a project in northeastern British Columbia, Canada. In summary, the purchase was recorded as cash out the door of 1.8 million, common shares and warrants 3.8 million, future income tax provision 2.8 million, accounts payable-minor 0.01 million, for a total of 8.5 million.

On the exploration front, to expand existing reserves in the quarter, we expended on 64,000 feet of drilling, 2.3 million last quarter, 2.1 million. Year-to-date, 5.2 million. To finish the 2007 existing program is approximately 1.8 million. The other balance sheet fluctuations compared to March 31, '07 and September 30, '06 are essentially due to normal course operating timing differences, such as accounts receivable, payable, inventory and deferred revenue.

These other balances are essentially unchanged, except for taxes, which I'll address later. Moving to the statement of operations. Operating profit is up 56% to 28.4 million, compared to Q3 '06 from unhedged sales totaling 55.9 million, from sales of 13 million pounds of copper at US$3.53 per pound, for revenues of 47.8 million. Also, we sold 138,000 pounds of moly at US$31.95 per pound, for revenues of 5.6 million, and capital copper and silver contributed 2.5 million.

Total cash cost of production stood at US$1.46 per pound in Q3. On a Canadian dollar basis, production costs per quarter have been quite constant. However, when you convert these Canadian dollars at average U.S. exchange rate of 1.0984 in Q3 versus 1.1716 in Q2, it accounts for about an absolute $0.07 increase in U.S. dollars per pound of copper.

Therefore, this quarter's cash costs, before adjusting for the foreign exchange, are closer to US$1.39 per pound, when compared to last quarter's $1.33 per pound. The balance of the increase is the result of some isolated nonrecurring events, such as Russell alluded to earlier. As to the update on the copper capital of business, Taseko signed an agreement with a buyer in Q2, covering 5,800 metric tons of copper for approximately the next two years.

Production in Q3 was 0.9 million pounds or about 10,000 pounds per day last quarter. In Q4, capital copper sales are already strong at 1.1 million pounds to date. Total other non-expenses in Q3 '07 of 9.3 million, compared to 8.6 million in Q3 '06 are, for the large part, comprised of exploration 2.2 million, consisting of engineering, permitting, et cetera, on the Prosperity project.

Unrealized foreign exchange loss of 1.5 million due to the increasing strength of the Canadian dollar as compared to the U.S. dollar, as applied to our U.S. dollars on hand, net of U.S. liabilities, general and administration 1.3 million for normal course activities. Interest expense and accretion on the convertible debt totaling 2.2 million, and unrealized change in the fair value of financial instruments due to market decrease and investments held of 2.3 million, and non-cash stock-based compensation of 1.9 million.

This is all offset by interest income due to our cash on hand of $2.4 million, all of this resulting in earnings after taxes in the quarter of 12.4 million, a continued improvement compared to 11.5 million in Q2 '07 and 4.1 million in Q3 '06. Year-to-date nine months net earnings stand at 35.6 million, versus 13.9 million for the same nine-month period in '06. This is up 156% over the comparative period.

Just before I move to income taxes, it is important to note that Taseko has doubled nine-month year-to-date earnings per share over last year from $0.13 to $0.28, of which Taseko has earned $0.09 per share in each of Q1 and Q2, plus $0.10 in Q3. Next, a short review of income tax on earnings. First, in fiscal '06, Taseko utilized most of its tax pools and did not pay any income taxes in fiscal '06.

In Q3, Taseko provided for current income taxes of 5 million and future income taxes of 1.7 million, totaling 6.7 million for an effective accounting tax rate of about 35% in Q3. The cash cost of taxes for the year-to-date amount to 13.1 million, as presented as a current liability on the balance sheet. This amount is determined based on tax yield that we're currently creating based on pre-stripping, exploration, mill and mine expansion, and some other activities.

Taseko is continuing to target methods to minimize taxes actually payable both through tax shield created by expansion activities and some other tax planning strategies. On M&A activity, Taseko continues to actively investigate and monitor several potential strategic alliances with mining companies that will be accretive to Taseko's enterprise value and fundamentally sound MPB and NAB transactions.

The Taseko Group meets regularly to assess these targets, also ensuring to benchmark against organic growth opportunities, including the Prosperity project and additional expansion at Gibraltar, such as Gibraltar-2 and maybe even a Gibraltar-3. To date, organic growth shows the greatest potential for long-term shareholder wealth creation.

But as expansion expenditures decrease over the next little while and higher production levels are accomplished of over 100 million pounds of copper per year, Taseko's goal is to be fully ready in advance to leverage off higher net cash inflows into accretive acquisitions and mining property development opportunities.

In conclusion, Taseko continues to invest in property, plant and equipment, with the near-term goal of producing over 100 million pounds of copper per year from a modern updated mill over a long mine life and Taseko remains financially strong, with 63 million in working capital, of which 49 million is in cash and reclamation liabilities are funded with an additional cash of $33 million on deposit.

Thank you very much, Russ.

Thank you very much, Jeffrey. I'd like to now open the phone lines for questions. Operator?

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of Tom Bishop with BI Research. Please proceed.

Hi, everybody.

Morning, Tom.

How are you doing?

Good.

Let me just get through a couple questions here. What can we expect are the costs of production once Phase I is in place? And, also, I know that capacity is heading to, I believe, 100 million pounds, but we have so far not been doing too well at hitting that capacity level. What level of production can we actually expect for a mill with 100 million pounds of capacity, 46,000 tons of material?

Hi, Tom. This is John here.

The first question there that you had was what's the effect on our cost of production of the mill expansion. Well, with the increased throughput and the improved recoveries by expanding the grinding amount and the flotation capacity, we expect to bring our operating costs down by 10% on the property just through the mill costs, and that's over our target cost, not over our current cost.

What is that target cost?

We're at about $1.05 site costs and to bring it down to about $0.95 of site costs, U.S., compared to what --

The $1.05 compares to the $1.14.

Yes.

So you're hoping to bring it down to $0.95, roughly.

That's right, yes, site cost. That's with the first stage of the expansion and the second stage of the expansion won't be quite as big a step down, but it'll take us more than $0.05, 5% lower.

And on the 100 million pounds of copper production, we get through some of these issues that we've had with ore handling and just the ability to get the throughput through the mill. That 100 million pounds is fully achievable, 46,000 to 55,000.

That would be like a 100% increase.

Yes.

Prospectively.

Yes.

And then what can we expect to happen to the TC/RC, the cost of refining and the cost of transportation? I know that's up for a renewal at some point here.

It's Jeffrey. Currently, our contract will run well into '08, probably about the same time of '08. It's based on a tons -- wet metric tons shipped to Glencore and other smelter groups. And our current costs that you see in our reported of $0.32 is fixed, because we are capped at $57 on the TC and 5.75 on RC.

We've been enjoying costs less than that because benchmark has been forced down. The current market conditions in smelting concentrate is that there's an over-capacity of smelters in the marketplace, and benchmarks have continued to be lower. And we know this because we've had continued non-solicited offers from both smelter groups and traders to handle the concentrate off-take off the Gibraltar site.

And, importantly, what is getting everybody's interest is the greater throughput and the greater production, we become more significant to the various smelters and we have it very sweet with low other metals and the like within our concentrate. So there's a higher desirability, even more so than what we were shipping last year.

So do you expect them to stay even on renegotiation or go up slightly or down slightly?

The topic becomes is -- we have got in front of us at least an 11-year mine plan. So the topic is more that -- how long should we fix, how long should we cap, should we float with current very favorable rates in the marketplace, and that is more the management strategy going forward of where it wants to either fix at slightly higher or shall it continue to enjoy lower prices.

Or, we've even examined a potential mix whereby half of the production floats as to market benchmark pricing, and that's usually established by Escondida and the like, and some of it fixed, so that we ensure that we meet all our costs and goals, and yet we have the potential to speculate and make a little bit more money on (inaudible).

Nothing has been concluded. We have over a year in which to do that, but we would like to do it in a shorter term rather than a longer term, because then we'll be locked in what we consider to be, again, more favorable rates, which, by the way, we enjoyed when we started the production up in '04. We signed our contract with Glencore, enjoyed the same sort of circumstances. So it's arisen again.

Okay. And, finally, you said that float cells will improve copper recoveries. From what to what? They were 79.6% in Q2, but they dropped to 76.4% in Q3.

I'm just wondering how much of an improvement recovery is. Somehow I remember figures much higher than that that were anticipated, and I'm wondering what we can get to in that regard and whether that will impact earnings as soon as those cells are working properly.

Well, part of what you saw in Q3 was we had a lower capacity in the mill because we were in the transition to the new float cells. Once we get the float cells up and -- well, they're up now. So we are already seeing a recovery increase because of that.

But we also get a better grind with the new grinding system. So as the two combine and we've got the full expansion one on board, it should get us into the mid to high 80s in our recovery. It's also going to help in the moly recovery.

But we need to get the sag mill in first.

Yes, because right now, it's the same grind going into the flotation, and actually, if you increase its capacity, you've got to be careful. You've got to get your balance right, but you've got to get the grind and the flotation capacity up and then we get the throughput and recovery increase. In Phase II expansion, it's a pure throughput increase.

And part of the 100 million pounds, Tom, incorporates that increase in recovery.

Great. All right. Well, keep up the good work.

Okay. Thanks very much, Tom.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of [Michael Tomasek], a private investor. Please proceed.

Good afternoon, gentlemen, or good morning, I guess, up there. I've followed your company now for the past year, and I have been very impressed with the results that have been obtained to date and I've, frankly, made little money doing so.

I'm trying to get a handle on, and if you could, please, elaborate on your M&A activity and goals and investments and other mine or mining companies, and specifically discuss your interest in Continental Minerals and its activities in Tibet.

On the M&A group that we meet, we run various schedules on both our peer groups and potential emerging companies, and what we're always trying to do is look at our enterprise cost of capital and try to ensure that whatever we invest in will exceed the internal enterprise cost of capital.

And what is that rate? Well, at the very basic, it's the interest rate you earn at a bank, but, more so, it's if we expand the mill, what rate of return can we generate for that, and that becomes our hurdle rate. We have looked at various enterprises half our size, our size and even one or two bigger than our size for an acquisition. And why is that?

Well, it's just that the cash flow -- eventually, you're going to stop buying property, plant and equipment and it will be free cash flow on which to leverage off and make money, and we don't want to simply put that money in the bank.

So what we've done is we have targeted some emerging companies and we've taken interest in them. We've got two on tap right now, which are companies that are in the pre-feasibility to feasibility level and they have similar operating parameters as we do. And we believe two things, one, they have some management in place and we can leverage off our current experience.

And in that context, on the Continental Minerals situation, what, if anything, do you know about the contract that was supposed to have occurred with the Chinese mining operation or mining company?

With respect to Continental, it falls into that class of a strategic investment. We own, I believe, just slightly less than 8% of that company.

About 8 million shares, I believe.

That's right. And they are in the feasibility level and, also, going to permitting. It's about a 200 million ton ore reserve and they are yet to finalize the results and publish them. We've been very encouraged by the work that they've been doing in that project. We're unaware of any holdups to speak with the government or otherwise. We do not have a lot of the Chinese experience, but what we really like is the ore body.

When we looked at the cost per pound and the potential for production, it made a lot of fundamental sense on an investment to get involved with them. The secondary decision, which has not been made is, is there a future as to going along with their other major partner, which is Jinchuan, the largest nickel producer in China, which also owns about 8.2% of Continental, in which case there would be a tri-party take the project forward.

We can't make that decision until they complete their feasibility study and they have their permits in hand. We want to acquire investments that we can build or be involved in the build to add to our production and with a goal of eventually doubling our production through acquisition or otherwise, and whether that's in one acquisition or two or three, that's our goal.

We don't want to necessarily risk the Company, but we want to incrementally grow the Company. We're taking it to the current levels, which is 100 million pounds, and we'd like to see that double and we're just not sure yet where that's going to occur. And we'd like to get an in-fill project between now and Prosperity so that we have an even, a more even distributed growth profile for Taseko.

So not to prolong this, but on the situation with Continental, this is not merely an investment. This is a potential for something in the future for actual participation on some level in terms of the production.

Yes. It is still an investment, in the truest sense, because we're below 10%. We don't affect management, other than we get reports and updates periodically from management.

So we haven't made that decision. What we consider to be strategic is in that it is greater than a $1 million investment, and consequently, we track it very carefully. But we have yet to make the decision whether we are -- purely an investment, held for trade, or we're going to strategically get involved in it.

Okay. So there is some synergism beyond merely the investment.

Exactly.

Okay. Well, thank you very much. I appreciate that.

Your next question comes from the line of Richard Stoneman with Dundee Securities. Please proceed.

Morning, Russ. Can you tell me want the production profile looks like over the next two quarters, given things appear to be working a lot better now?

Well, I wouldn't like to do that, because unforeseen circumstances could set us back. We have said that we have the capacity to produce 60 million pounds a year off what we're doing right now.

I think my comment said that if we had not had the fire, the problem in the MCC room, that we probably would have exceeded 14.5 million pounds. I think that's the kind of number you've got to look at going forward, Richard.

Thanks, Russ. The second quick question, is there any insurance recovery possible off of the business interruption?

I think our minimum is 15 days.

No. We've got a 15-day business interruption. We're looking at the damage. We've got a claim in on the damage, but we've also got a deductible on that that I'm not sure the actual damage will reach the deductible.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Is that it, Operator?

(OPERATOR INSTRUCTIONS)

Okay, Operator. It appears that we have no further questions. I'd like to thank everyone for joining us today, look forward to a great quarter next quarter and look forward to chatting to you then. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may disconnect. Good day.