Taseko Mines Ltd (TGB) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2011 Taseko Mines 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 follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Taseko Mines.

Good morning, ladies and gentlemen, and welcome to Taseko Mines 2011 second quarter results conference call. With me today in Vancouver is Russ Hallbauer, President and CEO of Taseko, and Peter Mitchell, Taseko's Chief Financial Officer. After opening remarks by management in which we will review business and operational results for 2011 Q2, 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 material from actual outcome. Please refer to the bottom of our latest news release for more information. I'll now turn the call over to Russ for his remark.

Good morning, everyone. Thank you for joining us today to discuss our second-quarter results and the ongoing status of Company initiatives. Operating profit for the quarter was CAD11.8 million. This was affected by the large inventory buildup of 9 million pounds in concentrate sitting in our warehouse at Vancouver Wards at quarter end.

Adjusted net earnings for the quarter were CAD7.3 million, and as I alluded to above, we're obviously affected by inventory buildup as well as by circumstances relating to operations and costs that I'll speak about in a few minutes. Sales of 10.7 million pounds were affected by shipping schedules as spoken about.

We would like to have as little inventory as possible at quarter end to allow operating profit performance in terms of production and sales, but up until this point in time many circumstances have affected that even pipeline flow of concentrate through from the mine to our end users.

We haven't quite determined how to solve that problem on a go-forward basis, but we are working on it. In April, we closed our $200 million senior note issuance, so we are all cashed up with plenty of money to advance our projects and in particular GDP3.

In May, we announced a reserve update at Gibraltar, expanding our recoverable metal reserves to 4.3 million pounds, making Gibraltar the largest copper-moly reserve in Canada with a mine life, once we complete our next expansion to 85,000 tonnes per day, of 27 years. All in all we're pretty happy with those 2 events.

In June, we purchased put options on the majority of our 2012 copper production, ensuring a minimum selling price of $3.50 a pound. This matches our ongoing hedges strategy whereby we attempt to eliminate as much of the downside risk to our business, while still being in position to benefit from the upside, therefore ensuring our profitability in uncertain times.

For example, last year when we hedged with our put strategy for the third quarter of this year, we struck puts at $4 per pound floor price. At the time there were skeptics on this initiative, but I expect today those skeptics may not be thinking it was such a bad idea.

As for this quarter we will receive a minimum of $4 a pound. And going forward after that for the fourth quarter and all of 2012 we will receive a minimum $3.50 a pound and still participate in upside copper price if it does go up. So we sleep pretty easily knowing that our cash flows are secure.

In our MD&A you will see a very simple graphic comparison of 2011 first-half cost comparisons versus 2010 on non-controllable factors affecting our cost structure. I urge everyone to look at those charts so you can appreciate where we believe we'll be going once we optimize our concentrator feed and through-put.

The majority influence of cost per pound of production is obviously metal production and exchange rates. Specifically looking at this quarter, once we fired up our SAG pit feed system in mid-May, we discovered that a bank of our floatation cells that we installed in 2007 had defective liners installed back then. Normally these liners last over 15 years. Ours, unfortunately, lasted a little over 3.

So we had the replacement at the same time we had one of our ball mills go offline for a serious trending issue. These 2 unforeseen events affected our ability to actually commission the SAG mill the way it was supposed to be commissioned. So, effectively, we've had the new system online for 90 days. We've only been working on full plant capacity for less than 60 of those days.

Looking back and then looking forward in terms of where we expect to be, for the first 6 months of this year we averaged about 42,000 tonnes per day and that was primarily 50% of the old SAG feed system and 50% of the new SAG feed system. In July, we moved that through-put tonnage to nearly 48,000 tonnes per day and for the past 10 days we've averaged a little over 51,000 tonnes per day.

Now that we are operating at total capacity we are in the process of determining if the internal screens, lifters and other mechanical issues in the SAG mill are affecting through-put rates with this new product feed. In that respect we've ascertained that we are carrying too much pulp, as the lifters are blinding off and our distort port sizes and screens are not big enough.

Each one of these factors take considerable engineering and physical changes to ascertain the answer and each must be done methodically. We are making headway on them all. For the last 10 days, for example, we've averaged a little over 51,000 tonnes per day through the SAG with peaks of over 60,000 tonnes per day. So we know that the milling capacity is definitely there.

We anticipate by year-end we will be at or near or above the 55,000 tonnes per day run rate that we predicted in our engineering studies in advancement of GDP2. So we're happy with that progress. Everyone should remember that SAG mills are complex engineering machines that ours is run by a 13,000-horsepower electric motors and a 6- month ramp-up to deal with all the issues holding back production is a pretty progressive timeline.

I will answer specific questions in the Q&A on this matter if anyone wishes to discuss it more fully. We did spend more money in the quarter to get the pits in shape, which affected our costs and this will hold us in good stead in Q3 and Q4 and heading into [2005]. Effectively we spent nearly CAD6 million more in this quarter than normal on all of these issues.

Looking at Gibraltar on a go-forward basis, GDP3 is progressing well. 30% of the projected spend has been committed so far or roughly CAD70 million. We've begun site prep and are moving ahead expeditiously on construction activities.

We foresee little or no capital creep, and I can speak about that because there has been capital creep in many of the projects that are out there now and if we want to talk about that, I'll be happy to answer any questions on that.

With respect to Prosperity, we expect to have answered the official federal environmental assessment review process very shortly and when that occurs, we'll let everyone know.

We expect to be in the formal EA process by October. After that it will be a, we believe, a 365 day process to finalize the environmental assessment review for both the Federal Government and our amendments to our provincial environmental certificate.

Aley drilling is going well. We have a 60-man camp in place presently. We're three-quarters of the way through with a 55,000-foot drilling program that we started 6 weeks ago and samples are now up for assay.

We expect to have an inferred resource by mid-September and will advance a feasibility study going into 2012. Preliminary indications that we'll have an inferred resource north of 75 million tonnes of NB205 at roughly 0.6% grade. I'd like to now turn the call over to Peter to discuss our financial results.

Getting into specifics, revenue for Q2 2011 was CAD48.3 million, down from CAD56.5 million in Q2 last year because of reduced shipping volume. A shipment scheduled at quarter-end completed on the first of July and will be included in Taseko's Q3 revenue.

The inventory increased to CAD38 million at the end of June of this year compares to CAD21.3 million at year-end and is primarily attributable to this concentrated accumulation.

Cost of sales was affected by lower production rates, consumable cost increases, and the strength in Canadian dollar. The second quarter 34% gross profit compares favorably with the 2010 level of 29% as a result of improved copper price realizations.

General and admin costs were CAD4.9 million for the second quarter, up from CAD3.3 million in 2010 quarter due to increased professional personnel supporting the Company's growth initiatives, as well as consulting expenses. Other operating expense was CAD11 million in the second quarter of 2011 and included CAD10.8 million of unrealized losses on copper derivatives and compares to CAD5 million of gains in Q2 2010.

CAD3.8million loss on contribution to the joint venture is the result of a cap on a capital commitment that was established under a sale arrangement last year. This expense was a return of funds to our partner for money advanced beyond this agreed amount.

Finance expense was CAD7.2 million for the quarter and reflects bond interest for the quarter and the primary reason for the increase over the CAD1.2 million recorded in the same quarter last year. Finance income in the second quarter of 2011 includes interest income on our cash position and gains associated with Continental Minerals transaction.

The income tax recovery for the second quarter of CAD0.9 million stems from the pre-tax loss position of CAD2 million. The effective tax rate in the first half of 2011 is 59% and includes the effect of permanent differences, including share-based compensation and deferred tax adjustments related to BC mineral tax.

Adjusting after-tax earnings for unrealized gains/losses on derivatives, the JV transaction, foreign currency translations and other gains/losses provides adjusted net earnings of CAD7.3 million for Q2 2011 as compared to CAD0.8 million for Q2 2010.

The year-to-date adjusted net earnings to June 30, 2011 are CAD18.1 million compared to CAD9.3 million last year. This corresponds to adjusted earnings per share in the second quarter of CAD0.04 and CAD0.09 year-to-date versus breakeven for last year's second quarter and CAD0.05 year-to-date at June 30, 2010.

Cash and working capital were CAD259 million and CAD402 million respectively at the end of Q2 2011. In addition to this cash, our money market investments beyond 3 months maturity were CAD120.6 million and included in marketable securities at June 30, 2011. Cash provided by operating activities was CAD13 million in the second quarter.

On the hedging front, we have extended our copper puts through 2012 and that's at revenue protection at $3.50 per pound or better from now until the end of 2012 for 90% of Gibraltar's share of Gibraltar production. The recent moves in copper prices affirm the logic of this, considering the capital required for GDP3 during this period. We intend to extend this hedge position into the future subject to market conditions.

In conclusion, Taseko is in a strong financial position from a capital structure and earnings perspective for the second half of 2012 with ample margin protection to both operate and grow our business in these volatile times.

Thanks very much, Peter. Operator, we're -- want to open the phone lines for questions, please?

(Operator Instructions) Orest Wowkodaw of Canaccord.

Just wanted to get a little bit more color on your 2012 production guidance. It looks like in your MD&A you've, at least the first I've noticed of it, you've put out a number of 101 million pounds for 2012 as your target 100% basis. I have to say that's a little bit lower than I was looking for and I'm just wondering what have you assumed in that number in regards to through-put and grade?

That 101 million was really around the hedging position that we took, Orest, and we're actually in the process of finalizing 2012 production. So that really just -- it was intended to provide sort of a general guideline around the hedging levels that we chose for 2012.

So you're saying we shouldn't take that 101 million pounds as actual production guidance?

It's general guidance at this point. There's certainly going to be more detail as we finish going through our budgeting process.

Okay. Thank you.

(Operator Instructions) Craig Miller of TD Securities.

Can you break down the -- where you spent your CapEx in the quarter and then give us some insight into CapEx for Q4 and where that will be spent? And also with gold prices where they are, any plans for Harmony?

Yes. CapEx, first of all, CAD10 million was spent on GDP3. That's actually a number cutting off at the end of July. So slightly less than that for the quarter and other than that, pretty much maintenance CapEx-type items for Gibraltar. Spending between now and the end of the year on GDP3 on a 100% basis we expect is going to be in the CAD60 million range. And Harmony is --

We had had some discussions about six weeks ago with some representatives of the Haida nation up in Haida Gwaii. We laid out some conceptual ideas with respect to a path forward. Because of the summer situation and people being in and out of the office we haven't advanced those discussions too much, but we expect to be moving forward with some kind of engagements in the next little while. Yes, certainly, Harmony becomes a pretty attractive asset at these kind of gold prices, especially with the defined reserve that we have up there, resource, I should say. So, yes, it will be exciting for us, but right now we'll move those initiatives -- we'll advance them slowly because we've got our hands pretty much full with both GDP3, the work we're doing on Aley and moving into the federal environmental review process again.

Very good. Thanks.

Thanks.

(Operator Instructions) Dave Cotterell with BMO Capital Markets.

Just a couple of questions for you. The first one, on the timing of the shipment, was that really just a port congestion thing in Vancouver?

Unfortunately, it was and that's the situation, obviously, that we've been up against historically as well. Yes, as I mentioned in my commentary, Dave, that shipment actually completed on July 1, but revenue recognition for us is when the concentrate crosses the ship's rail and after midnight on June 30 it's not Q2 revenue anymore.

We get usually into this problem in the end of this quarter into the fourth quarter when a lot of the Red Dog concentrate comes in, coming out of Red Dog because they get -- I guess they get first dibs at offloading and onloading. So we got Highland Valley copper, Red Dog. It can get congested up pretty easily, Dave.

Just on that data, do you intend on the costs, are the costs high because basically you're still booking costs with that revenue you're getting from that copper you're not going to get until next quarter? Is that the way -- ?

No. Costs are really matched to -- we're recognizing costs in our income statement in conjunction with the revenue that is associated with the concentrate that's actually sold. So our cost of sales per pound are very close to our costs of production of that copper. There's some minor differences based on timing and things, but very close.

So, Dave, we spent a lot of money in the pit. We had a big shovel rebuild that cost over CAD1 million. You can't capitalize that. We -- this lining issue was a real issue for us, both the lining -- relining those float cells was a big [tedious] job, was really unforeseen and it was pretty disappointing for us. That affected our recoveries, obviously. We had to take a whole bank of those big 160 cubic meter cells offline and it cost a considerable amount of money and then we had some other initiatives in the pit that were initiated prior to the fact that we were going to have these big expenditures. So we don't like to see our, obviously, our costs fluctuate like that like they were. I think in the second quarter we knew that our costs were at over CAD2.00 were too high. We were trying to work on pushing those back below CAD2.00 and then we had these unforeseen circumstances. So, lots of times things beyond your control drive your up costs, but those are one-time dollars that are spent and we think now that with increasing through-put certainly we'll get back to some stability in terms of managing the business.

This happened to us, gee, this very similar thing. If you go back a couple years when you look at the -- when we were expanding and we ramped up all those people before the financial crisis, you'll see our costs, I think it was back in 2008, they spiked in a couple quarters to over, well over CAD2.00 a pound and that's when we had to make those moves to reduce it when the financial cuts, because we were ramping up for people in terms of equipment operators and all that kind of stuff to begin the pre-strip before in advance of doing the first expansion, first GDP3 expansion before the financial crisis. So we are sort of in the same boat now that our manpower is really not optimized for this type of production, but we have to start spending money in anticipation of six months, eight months or a year down the road.

Thanks for that detail. I'm wondering second half for you guys perhaps do you think -- I mean, on my calculations I think you're going to have to do 50 million pounds or a bit more than 50 million pounds in the -- .

Yes. I saw that in your commentary this morning, Dave. Well, we've done July already, so we know what that production number is. So it's not as high as you anticipate, but we think we'll be somewhere in the 90 million pound range and certainly if the results that were seen in the last 10 days, 15 days with concentrator through-put -- you got to remember our head grade is a little lower, too. We're only running about a 0.29 head grade right now. So moving into getting deeper in the pit where the head grade comes up and a bunch of these other things, if we get to the 55,000 tonnes a day by say the middle of October and start to improve those kind of dynamics, then yes.

I mean I don't want to come out with a number that's not -- that we don't believe is realistic, but we put in front of our staff what do you think you're going to be able to produce and that's what they tell us and we have to look at it and evaluate it, decide the risk to it. But, of course, if something happens and let's say we lose our crusher system or we lose something else, who knows what the heck we'll produce, okay? But we think those are relatively reasonable numbers because we run our forecast and we have to look at our predictability of our cash flows, too, because we have these expenditures that are ongoing at Aley and Harmony and for Prosperity, as well as the stuff at Gibraltar.

And last thing for you, Russ, just on Aley, I think last time we spoke you were talking about spending CAD11 million this year. You've upped that to CAD18 million. That's what we see something you guys are really working hard to in case Prosperity gets, who knows what happened to Prosperity.

Well, we originally thought we were going to build a road this year and because the archeological team and our engineering team, we've done a lot of work. We've got a preliminary plant layout site. We know where the tailings pond is going to be. We're in there right now doing geotechnical work in terms of stabilities for -- and we're doing some preliminary engineering on the size of the concentrator, but we firmly believe we have an economic ore body there. So we were anticipating -- so we went to the board and wanted to fast track as much as possible on this. We got approval. Whether we spend all that money is another thing. We've got approval to do it. If it make sense to advance the project, we will do it. So it could be CAD10 million, CAD11 million, CAD12 million or it could be CAD18 million or anything in between there. It's unlikely that we will build the road this year. We may go in, grub the line, cut the trees and get the outline of it and then come back next spring when the snow's gone and rough in a road then.

Okay. Excellent.

But, yes -- but we're doing a lot of work on it, Dave. We're really excited about it.

Okay. Thanks, Russ. Thanks for the detail.

Okay. Thank you.

Mark Turner of Scotia Capital.

Just two quick questions. And then -- I guess first one follow-up on Craig's question about the CapEx. So here you mentioned about CAD60 million for GDP3 for the rest of the year on a 100% basis and 45 attributable to you. Just wondering where does the proposal that you had put forth to your JV partner stand right now? Are you still likely to have to up front most of the CapEx like on a 100% basis-type thing?

Pretty unlikely. Our partner is well advanced. They have done their own diligence process, retained consulting engineers to do that as well and that's being done in conjunction with the bank entity in Japan that they work with as well and all signs are very positive and the indications that they have given to us is that their approval will be forthcoming in all likelihood next month.

And then my other question. In the MD&A there's a comment about some consultants that you've engaged to look at the operational performance over the next, I think, 23 week period, [CAD8.25 million]?

Yes.

Can you elaborate a little bit on that cost and what you expect to get out of the CAD8.25 million that you expect to spend there?

Well, as you can imagine, and certainly some of the issues we face, Mark, is that over the last three or four years is we've been in continual expansion mode. A lot of people have been actively trying to do the best they can in the circumstances with all the chaos that happens while you're trying to modify your facilities plus produce copper and do all the other associated stuff. Now that we've brought some stability into the primary concentrator in that facility and that's not going to be interfered with in the GDP initiative -- GDP3 initiative, we felt that let's help all our employees, right from the shovel operators right through to senior management really understand what we need to do to really take advantage of the CAD300 million plus that we've invested in this plant property. We engaged these fellows to have a review. I've worked with these folks before in the past and I've known them quite well and we've had some very successful implementation.

When we engaged these folks, they came and said okay, we think there's somewhere between this amount of savings and this amount of savings. Low end, if you get your people all coordinated, because they do these things all over the world, mining operations from Australia to the Arctic to South America. They looked at our operations. They saw the processes. They saw the type of technology and the quality of the outfits we have and they said okay, we can -- we looked like on the low side you can have savings of CAD25 million a year and the high side CAD50 million a year, say for example, and we said okay, we think that's worth an investment for the next six months with these fellows to help us attempt to do that. So right now there are somewhere between 15 and 20 folks from this organization on site helping us with those initiatives and we are starting to see some very good results.

I guess I wasn't sure whether they were going to be taking a holistic approach and then looking at everything or whether there was a specific section of the plant or something that you were looking at.

No. It's a holistic approach right from the mine right through -- we call it mine to mill and the acronym is it's the drive to 55. And so everybody, their focus is to make this place operate the way we think it should and we've got a heck of a bunch of good employees up there and they are committed in the teams and we're really starting to see things right from communications to productivity to reduced costs. So we're starting to see the result of those things as we speak and we anticipate by the end of the year that we will have in place the fundamental management structure that's going to allow our employees to perform to the highest levels.

Perfect. Great. Thank you.

Thank you. Thanks for the question.

[Matt Grosio], Barclays Capital.

Just a quick question. If you guys are able to achieve the 90 million pounds of production this year, based on what you're seeing at the port and some of the shipment issues, is there a best estimate as to what you think you'll actually ship out? I mean should we be discounting that 90 million-pounds as far as sales go, any color you can provide there?

Gee, well, we'd like to end the quarter probably with about 2 million, 2.5 million pounds. So if you say we're going to produce 90, it could be 88, 89. We'd like to see it right close tight and that's our endeavor, Matt. Like I said, that 90 million pounds, maybe it's 92 million in actual production if the head grades come up in terms of where we're mining. So then it's actually 90 -- I mean --.

Matt, I would not handicap it either. I mean certainly, as I mentioned in my commentary that shipment commentary completed July first. So knock wood Q3 is a stronger shipment month and very possibly could actually have shipping greater than production when that type of situation presents hypothetically. So, yes. It's a situation that we're up against complicated by things like Red Dog, as Russ talked about.

And apologize if I missed it in the MD&A, but as far as a bit more color on the cost side understanding there are some one-time items in the second quarter, the pit projects that you had, the relining of the floatation cells, et cetera. I mean, what is your ability to get back down around CAD2.00 a pound for Q3 and Q4? Certainly exchange rates are a big factor there and the Canadian dollar has been strong, but what's the likelihood of being back around CAD2.00 a pound for the second half of the year?

Well, we think that's pretty good and that's some of the issue that we were dealing with our efficiency experts that we brought in, plus how we see running the mine in terms of stripping, ore release, what we have to do to prepare for GDP3 coming online next year. So, I get in trouble every time I talk about it too much, so I just think if we can produce close to 55,000 tonnes a day and control that our spend and do things smart, that shouldn't be a problem. I've said that we, depending on what the Canadian and US exchange is and how we perform, that we should be somewhere between CAD1.40 or CAD1.50 and CAD1.70 a pound and I still don't want to vary off of those estimations. Consumables have come up, but look at what's happened with the price of oil. Last quarter we were looking at over CAD100 a barrel. Now it's down in the low CAD80s and that chases everything down. You're seeing softening in the steel business, so that will flow through to our grinding media. As soon as that happens, then you start to see the reagents and power and other things come down. So, yes, I think certainly CAD2.00 is achievable for the second half.

And does some of the work you did in the pits here in the second quarter that showed up in costs per pound, does that actually help your costs in the second half? Is that alleviating some of the waste material you'd have to move around?

Yes.

And then a last question, you mentioned the head grade. Just a little bit of what's your expectation here? It looks like it's dipped a bit below 0.3%. What's the quality of the ore body going forward? Do you expect that to come back up above 0.3%?

We haven't -- we're right in the process of doing the year plan. We knew that this year was going to drop down to below 0.3%. Now we have to see where we deviated from the mine plan, Matt, and how we incorporate that into 2012 and what we may or may not want to do in terms of managing the strip versus head grade and trying to maintain the margins that we think are appropriate. So we will look at how all that fits in. If you look out in terms of our projections in terms of GDP3, the head grade does ramp up over the next -- as you get deeper in the pit, the ore body get better. We're cycling through this pushback and we're going down into higher grade ore. Higher grade, relatively higher grade. But there's a big difference if you're mining at 0.29 and mining at 0.32. I mean that's a huge amount of pounds of production that you're going to achieve. So, yes.

Does mining at a lower head grade result in -- does it directly result in higher costs or is it just -- ?

Yes, yes, higher costs. You're producing less metal. The recovery likely -- recovery is directly related as well to head grade. So you're not putting the tonnes -- you're maybe putting the same tonnes through. You're producing less metal and the less metal is a result of lower head grade plus lower recovery.

Yes, okay. Very helpful, guys, thanks.

Thanks.

(Operator Instructions) Peter Campbell.

One quick question, if I could. I'd like to quickly circle back to management consultant. I'm not really clear on whether or not their expertise is on the management and personnel side of things or if their expertise is technical in terms of making mill tweaks and mining tweaks, mining sequence tweaks, that kind of a thing.

No, no. It's mostly just the management and the coordination of -- they come in and do an audit and they're very objective. So, I guess you could say, Peter, it's a little bit technical because they've seen a lot of these types of situations around the world, but they won't get into -- we think we're pretty good at mining. We think we're pretty good at processing. We might not be as good in terms of management communications between the different departments and the alignments of those interests into the central purpose. So that's what they bring into -- that's what the largest thing that they bring to play in. Okay, guys, step back, have a look at the 30,000-foot level and come up with solutions to the problems we present or that are in front of you as opposed to just continuing to fight problems.

Peter, at market vertical these guys focus on pretty significantly is the mining sector.

That was my second question was I wasn't clear on whether or not they were in any way mining specialists or not, but clearly they've got a fair amount of expertise in the mining industry, then.

Oh, yes, yes. They've done it at Escondida and [Cotahuasi] and [Battaheju] and Cero Verde and they've done a lot of work around the world.

Thank you very much. That's all that I have.

Thank you.

I'm show no further questions in the queue at this time.

Okay, everybody. Well, like to thank you for attending today and look forward to chatting with you at the end of next quarter. Have a nice rest of the summer. Thanks very much, operator.

Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.