Turquoise Hill Resources Ltd (TRQ) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill conference call on the second quarter financial results held on August 13, 2013. I would now like to turn the call over to Mr. Jason Combes, Director of Investor Relations. Please go ahead.

Thank you. I want to welcome you to our second quarter 2013 financial results conference call. Yesterday we released our second quarter results press release, MD&A, and financial statements. These items are available on SEDAR, and we have also posted them on our website. The call is being recorded and will be available later today for replay. On the call are Kay Priestly, our CEO, and Chris Bateman, our CFO. We will take questions after their prepared remarks.

This call will include forward-looking statements. Please refer to the forward-looking language included in our press release and MD&A. I would now like to turn the call over to Kay.

Thank you Jason. Good morning everyone. I am speaking to you today from Ulan Bator. Over the past six to eight weeks, there has been quite a bit of activity for Turquoise Hill related to funding, project financing, and discussions with the Mongolian government. I wanted to start today's call by giving you my perspective on the latest lay of the land, and then turn to operational progress at Oyu Tolgoi. Chris will discuss our cash utilization plans for the balance of 2013, as well as covering more detailed financial information.

Last week we announced that we had received proceeds from our Altynalmas transaction, and this these funds had been used to repay our short-term bridge facility with Rio Tinto, which was fully drawn. We also announced that we have signed a binding sheet with Rio Tinto for a new funding plan. The funding plan is designed to meet our cash needs for the balance of the year, and allow for the continued operational ramp-up of Oyu Tolgoi. As part of that agreement, the short-term bridge facility has been extended, and is available to us until we finalize the new funding plan, which should occur by the end of this month.

The new funding plan includes a new $600 million bridge facility that matures on December 31, 2013. Importantly, Rio Tinto has waived the conversion feature of the short-term bridge facility, and the new bridge facility does not include any conversion provisions. We are in ongoing discussions with the Mongolian government, and are working very hard to have project financing in place and able to draw down funds by the end of 2013. The proposed package supports repayment of the new bridge facility and the $1.8 billion interim funding facility, both of which are due at the end of 2013. The interim funding facility was agreed with Rio Tinto in December of 2010. If project financing funds are not available by the end of 2013, Turquoise Hill will launch and complete a rights offering with a stand-by commitment from Rio Tinto before the end of the year.

In discussions with many of our institutional investors over the last few weeks, you have said clearly you prefer us to use debt versus equity for funding until project financing can be completed. Our first priority for funding Oyu Tolgoi is using debt with the completion of project financing. In the event equity is needed before the end of 2013 because project financing isn't available, all investors will be given the opportunity to participate in the rights offering. That said, we are working hard in having project financing in place by the end of the year.

On the subject of project financing, I want to provide some more clarity on events that have unfolded over the past couple of weeks. Following a receipt of a letter from the CEO of [Urdanez] Oyu Tolgoi, the company that holds the Mongolian government's 34% stake in Oyu Tolgoi, and the appointed leader of the government of Mongolia Working Group, we worked with Rio Tinto to confirm that the contents of that letter were the formal position of the government, and to properly understand its implications. Once we had that confirmation we promptly disclosed the new requirements for project financing. I recognize the recent comments by the Prime Minister and the Minister of Mining.

This is a long-term development, and we are working constructively with the government on how we move forward for the benefit of Mongolia and all stakeholders. This process will address both project finance progress, and resolution of other outstanding matters that have been raised. Given the likely time needed to gain the consent for project financing, funding for further underground construction has been deferred. As a result, the underground development will transition into care and maintenance until the substantive issues associated with the investment agreement can be concluded with the government.

We continue to engage with the government on a range of issues. Progress has been made on a number of issues including receipt of all permits and support for concentrate shipments, resolving marketing and sales agreement concerns, use of international bank accounts, and increasing Mongolian representation in the Oyu Tolgoi management team. This progress allowed concentrate shipments to commence, and supports ongoing cash generation from the mine. As noted, engagement with the government on the matters associated with the investment agreement and project financing will continue, with the aim to resolve uncertainty and support further development. With respect to project finance, we are inclose contact with the international financial institutions and commercial banks. All of the commercial banks have extended their commitment letters to December 12, 2013.

Moving to Oyu Tolgoi operations, I am pleased to say that Oyu Tolgoi continues to ramp up production. The concentrator is consistently producing at over 80% of capacity, and has completed all commercial production tests. We expect to reach full production in the second half of 2013, and are focused on maximizing production.

I am now going to turn it over to Chris.

Thanks Kay. Oyu Tolgoi began shipping concentrate in early July, and the mine is currently delivering products on the long term sales contracts and the spot markets sales. We have been shipping for about five weeks now, and will continue to ramp up logistics. Oyu Tolgoi is working with its shipping vendors, and fine tuning the process on both sides of the Mongolian Chinese border to ramp up concentrate shipments. We expect shipments to continue to grow for the remainder of the year, and anticipate sales will align with production by the end of 2013.

On a weekly basis, we expect up to 36 truck convoys to leave the mine. A convoy includes 16 trucks together carrying about 575 tons of concentrate. We expect Oyu Tolgoi to produce between 75,000 and 85,000 tons of copper in concentrates for 2013. At the end of the second quarter there was slightly more than 50,000 tons of concentrate in inventory, containing 13,100 tons of copper, and 21,000 ounces of gold. By the end of the year we expect to build a concentrate inventory equivalent to four to eight weeks of production.

From a cash flow perspective, concentrate will be sold on a provisional basis with the majority of the sales proceeds being received by Oyu Tolgoi about two weeks after shipment. The balance of the transaction is settled roughly two to three months after the shipment, and takes into account prices at that time.

Moving now to our funding requirements for the remainder of the year. With regard to the use of funds, as Kay mentioned we entered into a new funding agreement with Rio Tinto that is designed to meet our cash needs through the remainder of 2013. There are some remaining costs related to the new road to the border, which is expected to be completed in January of 2014. The Undai River diversion and final payments to suppliers and contractors. With the decision to put the underground on care and maintenance, demobilization will occur over the next couple of months, which will result in cash outflows through November.

From a cash flow perspective, it should be December when the impact of the delay in underground development will be noticeable in the cash flows. I mentioned earlier sales are ramping up to align with production, and we expect Oyu Tolgoi to be operating cash flow positive by the end of the year. Kay, back to you.

Thanks Chris. I wanted to briefly mention SouthGobi and Inova. During the second quarter SouthGobi produced about 170,000 tons of coal, and their operations have been negatively impacted by the continued softness in the Chinese coking coal market. SouthGobi has responded by continuing to focus on cost and cash management. Production at Inova's Starra 276 mine continues ramp up during the second quarter. In June they produced over 59,000 tons of ore, which is the expected monthly mining rate.

In summary, the production ramp up at Oyu Tolgoi continues, and we are expecting the mine to reach full production by the end of 2013. We are engaged with the Mongolian government to clarify the situation with project financing, and we are working very hard at having project financing in place by the end of this year. In addition to project financing, we are discussing a range of other matters with the government. We have agreed to a funding plan with Rio Tinto that is designed to cover our cash needs for the remainder of 2013.

With that, I would like to now open the call up to questions.

(Operator Instructions). The first question is from Ralph Profiti from Credit Suisse. Pleases go ahead.

Good morning and thank you for taking my question. Kay, in previous presentations it was a TR2 condition that a declaration of commercial production was subject to resolution of the government talks. I am just wondering is this still the case, or is the case simply by definition that we could still see commercial production announced on September 1 even without a resolution?

Thanks Ralph. Commercial production is defined in the current investment agreement, and that is defined to be met when the concentrator has produced at 70% capacity for 30 straight days. That has occurred, and the first day of the month following when that occurs is September 1. So we will absolutely meet the definition of commercial production as defined in the investment agreement on September 1.

Great. Thank you for that clarity. I do have a follow-up with respect to grades. Both the copper and gold grades in the second quarter production report were below sort of the first five-year plan according to 2013 technical report. Would you consider these lower grades normal during the commissioning phase, and could we still expect to see these grades trend upwards, to what I guess is 0.57% copper and about 0.6 grams per ton of gold, as we move forward into the latter part of 2013 and early 2014?Thank you.

The grades are lower in the startup. This was expected. It has been a combination of early lower grade quality feed, and also the fact that the team has been stabilizing, and learning how to tune the plant. We expect the recoveries to improve over the coming months, and we see no reason at this stage to think that we won't achieve design, and that we expect to be there this year.

Thank you for taking my question. Thank you.

Thank you. The next question is from Oscar Cabrera from Bank of America. Please go ahead.

Thank you. Good evening Kay, and good morning everyone. Just wanted to if you could clarify your statement with regards to the letter sent to you by banks, do you need Parliamentary approval from the government of Mongolia to proceed with the project financing?

Thank you Oscar. As I mentioned earlier, we did receive that letter officially from a representative from the government of Mongolia, and prior to our disclosure we did in fact confirm that it was the formal position, and it was an understanding that based on the current terms of the project finance package and all of the issues related to that, there would be many levels of levels of approval needed in the government, and the key thing we need to focus on right now is what happens next, and we are working with the government to address those issues and move the project forward. The government and we are completely aligned to keep these discussions going, and to continue to progress the project. It is in everyone's best interest to have certainty and stability, and the issues surrounding the investment agreement and the [Arsha], which are the fundamental cornerstone to our investment are very important, and we need to get those issues resolved as part of the current project financing package.

Thank you very much for that, Kay, that makes it very clear. Now if I may, in Jason's comments with regards to putting the underground in care and maintenance, can you let us know, or give us a little bit more color in terms of what capital do you expect on a yearly basis, assuming that this goes on or on a quarterly basis, I don't know what the best way to put into context is, but what kind of capital are we talking about for that care and maintenance exercise, and when should we see this CapEx start, I believe he mentioned December?

Yes, Oscar, we are not putting out right now any detailed guidance on CapEx. We are working right now through the implementation plan for the care and maintenance. As Chris mentioned earlier from a cash flow perspective we won't see any significant changes in cash flows until the end of the year, as a result of continuing to pay amounts that are currently due there is a 30 to 60-day lag after amount as are incurred and when they are due. There were be some demobilization costs, but by the end of the year we will be as Chris mentioned seeing the results in our cash flows from these adjustments.

I apologize. I believe I changed your CFO's name. Apologies, Chris. Could you then tell us what CapEx you expect, what is the CapEx for the second half of this year, please?

As I mentioned, Oscar, we really haven't firmed up those numbers yet.

Okay.

And aren't in a position to disclose those at this point.

Okay. Understood. Thank you very much.

Maybe I will jump in on that. But the general --

Thanks Chris.

The general issue, Oscar as we demob, we are still looking through the treatment and demobilization costs. We can't switch off the lights immediately. We want to put it into a safe situation, also there will be some ongoing costs just to continue with the ventilation and keep the asset ready to be restarted.

From a book perspective we will see charges coming through in October and September related to the underground. Come November, December, those costs will have been reduced dramatically, and just reflect the care and maintenance. What we wanted to draw people's attention to is from a cash flow perspective you are looking at a 45 to 60-day lag between the work being done the following month the invoice coming in, and then typically a 30-day payment term beyond the invoice coming in. There is a two-month lag to the cash flow impact. Hence the real cash impact will be in December, as opposed to any time earlier in the year.

Okay. I appreciate the color, Chris, thank you very much.

Thank you. The next question is from Terence Ortslan from TSO & Associates. Please go ahead.

Thank you again for hosting the conference call. Very informative. If I may, I have two questions. One is operational, and goes back to the government issue. The operational question is from what you have seen in the case of the mill, mill availability as per your feasibility study how would you rank it in that sense? And then also the B part of that is, underground suspension of the further development, can we assume the exact meter image, whereby if you decide to go back into it again and the circumstances permit, will it be another two or three months of incurred costs before you see and a lead time before you see underground development starting? That is the first question. Thank you very much.

I think the first question was a question on the operational and the performance of the mill is that right?

Mill availability, correct.

Yes. We are very pleased with the performance of the mill. As I mentioned earlier we are over 80%, and we expect to be at full capacity in the second half of this year with respect to the mill availability and performance.

Any bottlenecks anywhere, Kay, in the mill?

We are right now focused on shipping, and we had as we said in our report we had 50,000 tons of concentrate at the end of June, and right now we are focused on the logistics, but from a bottleneck perspective we envision moving that forward and again ramping up and being in a positive cash flow, operating cash flow position by the end of the year.

And the underground?

The underground as Chris was mentioning, as part of our planning we are preparing for care and maintenance, but also preparing for ramp-up at the same time and startup. So we are very carefully going through this process. It is not a complete shutdown of everything immediately. We will be demobilizing and reducing and stopping the expenditures on the lateral development and the sinking of shafts. We will continue to have ventilation there. It is going to be a very careful, thoughtful way of putting the underground into care and maintenance, and we also will have a team ready to remobilize. As I mentioned, the government and us are very much aligned and committed to progressing this, and we want to work through these issues so we can go forward.

I think in the Rio Tinto conference call you had said that a decision was made because that management should be more focused with what is happening with the operational sense and not the development sense, and that was the reason. And I think that is a clear message that focus has shifted from underground into ongoing operating parameters, as well as the financial parameters of concluding this issue. Now the tip on that front, if you were to mobilize would the extra two to three months before you get going, or you would have lost all together like assume six months, if you start to mobilize in January of underground development? Can we assume that, or the passage is shorter?

They are still working on those plans with respect to how much time to remobilize, and those detailed plans are still underway at this point. But it will take some months to remobilize, yes.

I want to come back to the issues with the government. Obviously this has become a very major political issue that is ongoing, and too many people are making comments that is really confusing, from news releases all of the way to press meetings, and so on and so forth. Let's summarize and say, what is on the table which they really require from you, and you expect to be able to negotiate in the short-term and the medium term? And two, are they going to be able to get any tax revenues this year with the plans that you have and expectation of commercial production in September, and also cash flow positive towards the end of the year, are there income taxes coming through?

I will answer that second question first, and then go back to your first question. Clearly the government will get the 5% royalty on revenues this year. They will continue to get that on any expenditures we have. And other taxes, so the government will receive revenues from us for the balance of the year. By the way, we have already is spent over $1 billion in taxes and other revenues to the government since the project started.

With respect to what issues are on the table, I am sure you can recall back in earlier in the year the government had publicly stated some issues, and we have also disclosed some of the issues we have been discussing with the government. These issues are critical and important, and they were an important component of getting project financing as currently planned, and that is why we had this delay at this current time. However, the government is very much interested in progressing it.

We have agreed with the government that these discussions are very sensitive, and we have agreed to keep the detail of these discussions confidential as both parties progress, with the aligned interest to resolve the matters as soon as we can. What is important now in my perspective is how we move forward, and how we work together going forward, and again the government understands our position, and we have agreed to keep the details confidential, but you can go back and see the issues that have been raised. They have been in the press, and we will continue to work through those issues.

In that context, Kay, I think there was the auditor report, I can't remember if it was Ernst & Young or Deloitte, I can't remember. Has that report been completed with respect to assessing the capital expenditures, and number two, are the banks and the financial organizations extended to December 31, 2013 as you mentioned, are there any conditions for the extension or the circumstances they will actually check it or exit?

Well, to answer your first question, the work is still in progress with respect to the audit. This is the audit that is underway on the capital costs for Phase I, and that is still in progress with the government. And once we have received the official findings from the government and worked with that working group. we will discuss any outstanding issues and concerns. It is important to note that all of the financial statements have been audited, and we have no reason to believe based on where we are so far in this process, that there are any concerns with respect to those numbers.

And the bank?

Chris, I will let you, yes please.

We have extended the commitment letters under the same terms and conditions, so it is just an extension of the commitment letters. No new terms, conditions, et cetera. But as we have said previously, there has always been a condition, precedent that we need approval at the OT LLC Board ultimately, and once we get to that position that we believe is the look through that everything else has been sorted out at the higher levels.

Okay. Thank you very much for the answers.

Thank you. The next question from Tom Scarborough from GLS Capital. Please go ahead. Mr. Scarborough, your line is open. If you are using a speaker phone, could you pick up the handset?

Right. Thank you for taking the call, Kay and Chris. And congratulations on the recent package, it is appreciated and well done. The questions I had were two questions really. One was what in your opinion is the Mongolian objection to project financing at this stage? And secondly, is what options have you explored, or are available in respect to just refinancing Rio's loans of about $2.4 billion at the end of the year from perhaps some alternative providers? Those are the two questions I have got. Thanks.

Okay. On your first question, the concern with project financing was really related to all the issues not just the project financing, but all of the issues that we have been discussing with the government over the last several months. And the resolution of those issues. As I mentioned earlier, it is important that we resolve those issues. It was important to the banks and the lenders that those issues be resolved, and those issues will take time and as mentioned earlier engagement with the government at many levels as we go through that process. That was the concern with the project financing timing. The commitment letters with the banks originally expired on August 12, and therefore there was no way that we were going to get this done in time. Fortunately, we have extended those commitment letters, but we do need more time and we are just not sure right now what the time table will be to conclude on all of these issues, so that is the main issue with respect to the timing of the project finance.

With respect to your next question on refinancing the loan at the end of the year, our number one priority and Rio Tinto is 100% aligned with Turquoise Hill, is working with the government to progress project financing between now and the end of the year. So our intent is that is our first objective and primary objective is to progress that. And that would then be available to support repayment of the ISF $1.8 billion, and the bridge amounts that we draw between now and then. However, we have agreed with Rio that by then if we are not able to repay those debts that we will undertake a rights offering, and all shareholders will be able to participate in that, and Rio will backstop that rights offering.

Just to be clear, I think the corporate financing is for more are than just the amount of the Rio debt, because it includes sort of future CapEx, et cetera, and the ongoing project. What about refi just the Rio liens, so just roll them over for a year. Let's say the situation is negotiations with Mongolian government taking a little bit longer than you would have hoped. Maybe they are looking to get completed in February, maybe in the second half of next year, and they are getting dragged out, what about just refi-ing the existing Rio debt, rolling it over, keeping the project on course, that sort of thing, and then the project finance can perhaps be organized in the second half of next year, should that be an issue? And then that would just certainly avoid a rights issue at the end of the year.

Well, we --

Maybe, Kay, I will .

Go on, yes.

As part of the short-term bridge facility that we put in place we looked at a number of other options and various contractual commitments between Turquoise Hill and Rio Tinto including the provision of third-party debt, and with respect to the December 31st, Rio has made it clear that they put this package together some time ago, and they are expecting us to repay it at the end of the year. Obviously anything is possible depending on the circumstances that exist at the time. What we have at this point in time is a guaranteed way to repay that and not default on the ISF, with as Kay mentioned the standby commitment from Rio Tinto. We will continue to talk about all of the options, but we are very, very focused on the project financing number two, and we have a backup plan should that not come to fruition in the time frame that we are looking at, and we can continue to talk about options, but that is the sort of central case plan currently.

And then as well suggested there isn't sort of a plan B other than what you stated, and so the next sort of, when will we get the next sort of update on how things are going? I guess that will be when the Mongolian government does reconvene, that sort of thing, when is a good time frame for the next update?

I think any material changes in the situation we would obviously disclose immediately. And the discussions are ongoing, and will continue, and are intense. We will just have to wait as those discussions go on, and disclose appropriately. What we have said is that the day-to-day negotiations and discussions with the government, in order to move them ahead proactively, we don't want to be discussing each and every conversation that we are having with the government, as we feel that would be counter-productive. So in the coming weeks and months, as things change as the situation changes we will come back and update everybody.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the meeting back over to Ms. Priestly.

Thank you Patrick. And to everyone for joining us today. To sum things up, I am very excited about Oyu Tolgoi, and the way they are continuing to ramp-up production and the operation of the concentrator, and we are continuing to sell concentrate. We are also very much engaged with the Mongolian government to clarify the situation with project financing, and we are working very hard at having project financing in place by the end of this year. Thank you again for joining us today.

Thank you, the conference has now ended, please disconnect your lines at this time. Thank you for your participation.