Taseko Mines Ltd (TGB) 2023 Q2 法說會逐字稿

Good morning. My name is Joell, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko's Second Quarter Earnings Conference Call. (Operator Instructions)

Thank you. Mr. Bergot, you may begin your conference.

Thank you, Joell. Welcome, everyone, and thank you for joining Taseko's second quarter 2023 conference call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com and on SEDAR.

I am joined today in Vancouver by Taseko's President and CEO, Stuart McDonald; Taseko's Chief Financial Officer, Bryce Hamming; and our Senior VP, Operations, Richard Tremblay.

As usual, before we get into opening remarks by management, I would like to remind our listeners that our comments and answers to your questions will 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. For further information on these risks and uncertainties, I encourage you to read the cautionary note that accompanies our second quarter MD&A, and the related news release as well as the risk factors particular to our company.

I would also like to point out that we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release. And finally, all dollar amounts we will discuss today are in Canadian dollars unless otherwise specified. Following opening remarks, we will open the phone lines to analysts and investors for questions.

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

Okay. Thank you, Brian, and good morning, everyone. Thank you for taking the time to join our call this morning.

Operationally, it was a decent quarter at Gibraltar. We had copper production of 28 million pounds, which is up 12% from Q1, and unit costs also declined. As we've spoken about previously, the lower benches of the Gibraltar pit are producing higher grade, more continuous ore zones, and the pit is set up very well for ore release over the balance of this year. Head grade in the quarter averaged 0.24%, and we should see similar levels for the rest of the year.

Mill availability was the main operational challenge that we faced in the quarter. We had several maintenance downs in April and May. As a result, mill throughput for the quarter was just below 80,000 tons per day, which is below target. However, since early July -- or since early June, the situation has much improved. And we've been operating at closer to 90,000 tons a day. And the softer ore in the Gibraltar pit is being processed very well.

Improved mill performance allowed us to produce 11 million pounds in June and again in July. We're expecting second half copper production to be roughly 15% higher than the first half of this year, and we remain confident in our original production guidance of 115 million pounds of copper.

Turning to our financial results now. Sales volumes in Q2 were lower than production as we had a small inventory build. And the average realized price also dipped to $3.78 per pound from $4.02 in the prior quarter. It also averaged about $4 last year. These changes have a meaningful impact on Gibraltar earnings and cash flow, and we have a lot of leverage to the copper price.

The price trend in recent weeks has been positive, and it's currently hanging in the $3.90 per pound range. That's up about $0.20 per pound since quarter end. It's also notable this quarter that copper and moly price changes led to an $8 million write-down of our ore stockpile inventory. That's $0.03 per share impact on GAAP earnings, adjusted earnings and EBITDA. With that, we still reported $22 million of adjusted EBITDA and earnings from mine operations of $28 million.

Our unit operating costs declined quarter-over-quarter down to $2.66 per pound. That's a 10% reduction over Q1, partly due to lower diesel prices and cost reductions in a few other areas, but the higher production level was the biggest factor. An offset was the lower moly byproduct credit, as average molybdenum prices dropped from $33 per pound in Q1 to $21 per pound in the second quarter. Overall, we expect our C1 unit cost to continue to decline in the second half of this year as copper production increases.

Capital spending remained at elevated levels again in the second quarter, both at Gibraltar and Florence. Work continued on construction of the new site for the in-pit crusher at Gibraltar. And as we noted in the past, the actual crusher move has been deferred until Q2 next year. But this has been a significant capital project for us, about CAD 50 million in total on a 100% basis. But most of that spending has already been done, with about $10 million left to go next year for the physical move. After that move, we'll be able to continue advancing into new ore zones in the Connector pit.

And of course, spending has continued at Florence as well as we continue to receive long-lead items on-site in preparation for construction. Bryce can add some more details on CapEx in a minute, but certainly, the capital projects this year have impacted our cash flow, especially in light of a lower copper price in the second quarter. But with Gibraltar CapEx mostly behind us, we expect solid free cash flow generation from the mine over the remainder of this year.

As far as permitting process at Florence, the message remains the same. We're in regular contact with the EPA, and we continue to see them taking the final steps towards issuance of the final UIC permit, and we don't see any significant issues or concerns emerging. And in fact, in June, the EPA circulated the final Programmatic Agreement for signature, which we see as another positive sign that they're readying to issue the UIC permit. It's been a lengthy and tedious process, and we need to keep patient and allow the agency to finish the final steps of their work. But we do remain confident it will be a positive result very soon.

We're using the additional time to deliver the right financing package for the project. The remaining CapEx that we disclosed a few months ago was about USD 230 million. And with our existing liquidity and the funding commitments received from Mitsui and Bank of America, we already have a large portion of that financing in place. We continue to advance discussions on project-level financings, which could include a copper royalty or a small project loan. Progress is being made on both fronts and tracking with the expected permitting time line.

Two last topics to touch on, and both have been in the news recently in BC. Firstly, the port strike, that occurred in the first half of July, and it delayed copper concentrate shipments to be in our third quarter. It was a 2-week strike or a 2-week labor disruption at least and created quite a backlog of cargo for Taseko and all the other shippers that operate on the West Coast ports. We're now supplementing our regular rail service with trucking to try to reduce the site inventory levels in the coming months.

Secondly, the wildfire situation. It's been a very active fire season here in BC and in other parts of Canada as well. To date, there's been no impact to Gibraltar operations, although in July, we did have a fire break out just a few miles from the mine site. But it was contained and no longer present any risks to the site. We're grateful for the work of the BC Wildfire Service and the many others that are working hard to keep communities around our province safe.

And with that, I'll turn the call over to Bryce for some more details on the second quarter financials and an outlook. Over to you, Bryce.

Thank you, Stuart, and welcome, everyone. As Stuart mentioned, it was a fairly straightforward quarter, but I'll provide some additional details.

Sales in the quarter were 26 million pounds of copper, generating $120 million -- sorry, $112 million of revenue, both of which are in line with the first quarter. Taseko realized a price drop from $4 to -- in Q1 to $3.78 per pound in the second quarter. Despite the drop in copper price, revenue remains strong as we now consolidate the 12.5% of Gibraltar that we acquired from Sojitz, and this was the first full quarter of that additional ownership interest in our financial results.

In the second quarter, total site costs were $105 million. This is $7 million lower than the first quarter. We saw lower diesel costs as well as lower purchase of electricity, natural gas, explosives and contractor services in the quarter. Another significant impact on our C1 costs in the second quarter was the moly byproduct credit. Stuart has already mentioned, the steep drop in moly price from the low $30 range in Q1, not only affected our revenue but also resulted in negative price adjustments in the quarter for prior sales. So our byproduct credit dropped from $0.37 a pound to $0.13 a pound in the second quarter. Going forward, we should see this increase.

The lower site costs combined with higher production in the quarter drove our C1 costs from $2.94 per pound in Q1 down to $2.66. In spite of the lower byproduct, we expect this to decrease further in the second half as production increases.

For the quarter, we had $22 million of adjusted EBITDA. Earnings were negatively impacted by a notable write-down of our lower-grade ore stockpiles due to the decline in copper, moly prices and foreign exchange. This resulted in the charge to the P&L of $8 million, which has also reduced adjusted earnings by $0.03 per share as we don't normalize for this noncash charge.

GAAP earnings in Q2 was $10 million or $0.03 per share, and an adjusted net loss of $4 million or $0.02 per share loss. The most significant difference between GAAP earnings and adjusted net loss was the unrealized foreign exchange gain related to the weakening U.S. dollar, which reduces the value of our debt in Canadian dollar terms.

Based on our average realized price of $3.78 per pound in Q2, we continue to have a healthy operating margin of $1 per pound with ongoing volatility. It's worth highlighting, too, that we still have our price protection in place for the next 5 months, which secures a minimum copper price of $3.75 per pound for 35 million pounds or 7 million pounds a month. Copper price is showing signs of recovering, we could look to add to this hedge position to cover 2024 in the coming months ahead if the markets allow and as we prepare for Florence construction.

Capital spending in the second quarter was notably higher. We spent $31 million at Gibraltar in sustaining and capital project expenditures, with notable spend on the in-pit crusher relocation project as well as major maintenance on one of our large mining shovels, which was a $10 million program in our sustaining capital cost.

Most of that spending for the crusher is now complete until the equipment is physically moved next year in Q2. We also purchased new equipment for the mill and did component replacements in our fleet in the quarter. So sustaining capital and spend on capital projects at Gibraltar will be much lower in the second half of this year.

At Florence, we capitalized $13 million in the second quarter for the total year-to-date spend of CAD 27 million. We will see the Florence burn rate reduce in Q3 until the final permit is received, and we begin construction. We ended the second quarter with approximately $180 million of available liquidity, with CAD 86 million in cash.

Just to wrap up, I'll touch on some of our financing transactions that we announced and closed in the quarter. The first was the increase to our corporate credit facility from USD 50 million to USD 80 million. We had announced in February of this year that this facility has been extended, but also increased subject to credit approval. In June, ING Capital was officially added to the syndicate, and the amendment to $80 million was fully credit approved. We continue to see commercial banks supporting us in our copper business and our growth ambitions.

The other significant transaction was an amendment to our Gibraltar silver stream with Osisko Gold Royalties, a longstanding partner of the company. We increased the payable silver from 75% to 87.5% to coincide with our purchase of our 12.5% interest in Gibraltar from Sojitz in Q1. We received just shy of CAD 14 million for that increase in silver deliveries.

And finally, we also put in place an ATM during the quarter as a standby option to support our Florence construction needs, if needed, over the coming years. We see this as just another tool in the toolbox that the company preparing for construction should have. We did not issue any shares under the ATM in the quarter.

With that, we're ready to take questions now, operator.

(Operator Instructions) Your first question comes from Ed Brucker with Barclays.

My first one just is on Florence. There's a lot of -- some of the prebuys that you've been doing in machinery there. Do you think the production time line for Florence has shortened at all? Or do you think kind of start to finish still 18 months?

Yes, Ed, it's Stuart. It's still in our view, an 18-month project. I think that some of the spending that we've done has certainly derisked that time line, and it's allowed us to start promptly on receipt of the permit, but it's still an 18-month project.

Got it. And the timing between receiving the permit and construction is relatively short?

Relatively short. I mean we certainly need to -- a little bit of time to mobilize the team. We have cut our spending in the last 6 months here in terms of contractor readiness and things like that. So it takes -- it will take a month or 6 weeks to get people mobilized, and then we'll be into it. And the schedule will -- or the spending will ramp up from there.

Got it. And just my last question, given that it's August now, hope to get the EPA decision there 18 months from now, kind of puts you close to the -- when the 2026s are going to go current. So just wanted to get your thoughts on that maturity and if you would do anything proactive with it?

Well, yes, I mean, certainly keeping -- it's not really top of mind for us right now. I think we want to get Florence permitted and financed and going into construction. But certainly, as we get into the second half next year, we'll be keeping a close eye on markets and looking for an opportunity to refinance that.

I think we have a good story to tell, obviously, with Florence coming online. It's going to be a very meaningful growth story for the equity and for bondholders as well in terms of its cash flow generation and its impact on our credit. So -- but no specific plans on the refinancing at this stage.

Your next question comes from Craig Hutchison with TD Securities.

My question is on molybdenum. If I look at your tech report last year, you were kind of targeting an annual run rate of close to around 2.5 million pounds a year. It looks like you're trending closer to 1 million pounds this year. Now that you're deeper in the benches at Gibraltar, can we expect a fairly significant uptick in moly production over the next, say, couple of quarters and into next year?

Craig, Richard here. So molybdenum at the start of Gibraltar pit, we saw grades being well below kind of life of mine averages. And we do expect the grade as we keep going deeper to kind of get back closer to the life of mine average. So that, combined with the higher throughput in the mill, we'll see improved moly production for the remainder of the year.

Okay. Great. And then just encouraged by your comments that you expect Gibraltar to generate free cash flow here in the second half. But can you give us kind of a sense of what the total capital spend is for Gibraltar? And what I mean by that is capitalized stripping, sustaining anything kind of development-related?

For the second half, you're focusing on -- I mean...

Yes, please. Yes.

It's really going to drop off on the capital projects. The crusher work, as we noted there is essentially done for the year. And we'll -- the final piece there will pick up in Q2 next year.

And then the other piece that hit us in this quarter was major maintenance, $10 million toward the shovel, and that's a one-off as well. It doesn't -- we don't expect any of those items to hit us in the second half.

So we should be really kind of normal run rates for CapEx here in the second half. I don't know what that -- something in the range of -- I don't know, $10 million to $15 million perhaps over the next 6 months, something more typical maybe closer to $10 million.

Yes. And then capital strip. Capital strip is coming from our -- we're deep into ore in the Gibraltar pit. The capital strip in the first half of the year came from the stripping we're doing on the Connector ore zone. And that's -- not much happening there in the third quarter. It will pick up a little bit again at the end of the year in the last few months. But generally, capital strip should be pretty low here for the second half. You might see another $10 million in Q4, perhaps. That's a very rough number.

Your next question comes from Alex Terentiew with Stifel.

Just 2 questions for me. First, on Florence. I'm curious with -- have you guys secured -- I mean, obviously, you haven't secured yet since you don't have the final EPA permit, but asset sources for the mine when it gets up and going. I'm wondering with asset prices in various regions coming down now, is there an opportunity to secure supply? I believe the prices now in the spot market are probably less than what you used in your -- in the tech report a few months ago? So that's the first question.

And the second one, at Gibraltar, it's good to see costs coming down. You guys are guiding to a better cost in the second half of the year as well. What's driving that? The strip ratio in the last 2 quarters has been a little bit lower than I expected. So that's good. But I'm just curious, what sort of strip ratio? Are haul distances a little bit shorter? Or what else is in there that's driving the lower cost?

Do you want to speak to the asset supply there?

Yes, yes. No problem. Yes. Alex, this is Richard. So for the asset supply, we've been in ongoing discussions with suppliers in the market, and there's a lot of interest in supplying the Florence site. So certainly you staying in close contact with what the market is doing. And we've gotten really positive and strong indications from the asset suppliers about what we can expect going forward. And those conversations are ongoing. And really, we won't finalize anything until we get the UIC permit in hand and see the timing. There's some pretty interesting developments with supply or storage being put in place close to the project site, which greatly helps on the asset price.

Yes. Okay. That's what I was hoping to hear because I think otherwise, if you bring it in from California, it's quite a bit more expensive just the transport cost?

Yes.

Yes, Alex, your question on the cost at Gibraltar, I think the big item there is just production increasing, right? It's always the denominator as you know whether you're billing $0.22 or $0.25, or your costs are the same. And so it's getting the pound out, which is the biggest driver of reducing our costs.

I think we noted our site spending was a little bit lower in Q2 versus Q1. Diesel costs have come off and a few savings here and there on the site. But it's -- as I said, it's a fixed-cost operation. We have our fleet running 24/7, and we really have to get the pounds up to get our unit costs down. I think if you look at the second half with our production guidance, if we can achieve that, we should see a meaningful reduction in C1 below Q2 levels.

Your next question comes from Alex Bedwany with Canaccord Genuity.

Just 2 questions for me. First one is, are you concerned at all with mill availability given the rates over the last 3 quarters? So I obviously acknowledge that the fourth quarter was affected by severe weather.

And the second one is along the lines of financing. So obviously, you've expanded the headroom on the revolver, and you've got the ATM facility there. You're also considering a royalty. How do you sort of think that these things will move once you get the permit? Will you be drawing down on all of the revolver? And will that happen in tandem with the ATM facility? Or are they independent of each other?

Alex, for the mill availability question, the downtime that we've incurred here in the first half of the year has really been focused in the grinding circuit and dealing with some maintenance and alignment issues that we had going on in the grinding circuit. We have those resolved now, and we're continuing to monitor closely as we go forward.

But all indications from our performance in June and July is we should be back to a normal kind of downtime incurred -- downtime events in the mill, which mill availability then is going to be in line with kind of our expectations. So don't expect that to continue, the long answer, but don't expect that to continue.

Maybe just -- maybe I can just speak briefly on the financing, the way we're thinking about it right now. Alex, it's Stuart speaking here. We've got $75 million committed from Mitsui and Bank of America. And it's USD 230 million of remaining spend. We're looking to raise something in the range of USD 100 million of project-level financings, give or take, and that's -- as I noted, that's -- as we've been talking about for a while, it's going to be a combination of royalties and project debt. I think we're making progress on those discussions, and we're optimistic. We'll have some announcements soon on that.

So that's $175 million. I think, out of the $230 million, I think the last would be -- for success. The last piece is going to come down from the corporate level from Taseko for the last $50 million or $60 million. And as you noted, we have the revolving credit facility. We have CAD 180 million of available liquidity right now and cash flow from Gibraltar. And then we do have the ATM there as a backstop as well. It's not in our -- it's not our intention to be using that as a primary funding source at this time, and we haven't drawn it yet. So yes, that's kind of how we're thinking about the total package.

In terms of the order of how we spend money, I think that will come down to how the final financing negotiations play out at Florence in terms of whose capital is going in first, but we're -- yes, we're confident that the money will be there and that we're in a strong financial position for us.

There are no further questions at this time. Please proceed.

Okay. Thank you. Thanks, operator. Thanks, everyone, again for joining, and enjoy the rest of your summer, and we'll talk to you in the fall. Thanks.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.