Turquoise Hill Resources Ltd (TRQ) 2013 Q3 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 third-quarter financial results held on November 14, 2013. I would now like to take the turn the call over to Kay Priestly, Chief Executive Officer. The call is being recorded and will be available later today for replay. Please go ahead.

Thank you, operator. I want to welcome you to our third-quarter 2013 financial results conference call. Today we released our third-quarter results press release, MD&A, and financial statement. In that we provided an update on Oyu Tolgoi, and we also filed a preliminary prospectus for a rights offering. These items are available on Sedar, and they are also available on our website. Joining me on today's call is Chris Bateman, our Chief Financial Officer; and Stewart Beckman, our Senior Vice President of Operations. We will take questions after providing you an update.

This call will include forward-looking statements. Please refer to the forward-looking language included in our press release and in MD&A. In light of all these announcements, there three key points I want to highlight. First, I am pleased with the ramp-up of the operations that Oyu Tolgoi, from mining through processing to shipping. Although we have had some teething difficulties, we have worked through logistical issues and the now have customers picking up product. Second, we continue to progress discussions with the government of Mongolia related to the continued development of Oyu Tolgoi, and we remain committed to obtaining project finance to fund the development of the underground.

Lastly, the company has filed a preliminary prospectus for a rights offering. The funds raised will be used to be pay be facilities owed to Rio Tinto.

Let's talk first about Oyu Tolgoi operations. I'd like to start by noting that Oyu Tolgoi is still in the early stages of operations and mine development. To date, we have limited operating data and are therefore cautious about drawing too many conclusions about future performance. We are encouraged by the performance of the mine and the concentrator. Like all large-scale commissioning projects, there have been some hiccups; however, we are confident that we will overcome them. Based on our experience to date we believe that the 2013 technical report is representative of what the project can and will deliver. With Rio Tinto as manager, we have access to the best tactical and operating skills in the industry and we will continue to ramp up and optimize the operations.

The open pit mines successfully began ramping up in early 2013, but in the second quarter, a decision was made to idle the mine in order to preserve cash. Some previously stockpiled ore was processed during this period. The open pit encountered some delays when ramping back up, and the mine is expected to reach full production rates by the end of this year. As result of the decision to curtail the mine, development is now behind the original schedule, and that has resulted in higher variability in ore types as well as lower concentrator feed grades.

In 2014, we expect to produce 150,000 to 175,000 tonnes of copper in concentrate and 700,000 to 750,000 ounces of gold in concentrate. We want to highlight that the gold rich area of open pit will be reached later as a result of the mines flowing in 2013. The impact of that gold production in 2014 will be significantly higher than scheduled in our 2013 technical report. The production of over 700,000 ounces in 2014 makes the Oyu Tolgoi a very significant gold producer. It is to be too early to draw conclusions from the reconciliation between mine material to the geological model, given the limited mine development. Encouragingly, early indications are that the grade and tonnages of ore recovered are slightly higher than anticipated by the geological model.

The concentrator has a nominal nameplate capacity of 100,000 tonnes per day. However, the throughput rate is a function of ore hardness. Based on the current mine plan and the expected ore hardness, we were anticipating throughput rates in the low 90s. Given this, it is pleasing to have achieved extended periods operating at run rates above 100,000 tonnes per day. Recovery rates continue to improve as the plant stabilizes, but we have not yet attained our targeted recoveries for sustained periods of time, particularly for gold. The recovery rates have been affected by the variability of the ore and the type of mineralization as well as the lower feed grades. We expect to produce 72,000 to 77,000 tonnes of copper and concentrate in 2013. Recently, we have seen higher grade ore coming from deeper in the pit and recoveries more in line with expectations. Operations continue to ramp up and we expect the mine to be running at full capacity by the end of the year.

Sales of concentrate were delayed as customers navigated through the customs clearance process at the bilateral trade border between Mongolia and China. These issues have now been resolved and customs applications are being accepted allowing customers to collect their concentrate. It appears that customers have been cautious about initiating the customs clearance process until they were confident of being able to pick up product. We now expect that customers will ramp up their significant logistics chain in the coming weeks and months to collect their concentrate.

Now, I'd like to provide an update on the engagement with the government of Mongolia and project financing. The Company, Rio Tinto, and representatives from the government of Mongolia are continuing discussions on the issues associated with the development and operation of Oyu Tolgoi. There is good engagement and progress is being made. The four major issues being discussed are -- number one, the sharing of economic value from Oyu Tolgoi. The principles of value sharing are outlined in the investment agreement and the amended and restated shareholders agreement and are the foundation for our investment in Oyu Tolgoi. Number two, clarification of the initial development and construction costs. We have been working with the government and are committed to ongoing transparency. Number three, access to water. Local legislation resulted in some concerns about long-term access. And number four, timing completion and Oyu Tolgoi LLC shareholder approval of the feasibility study for the expansion of operations. We expect the feasibility study will be completed in the first half of 2014, and we are working with the government to ensure that we clear the various approval processes efficiently.

With regard to the approval of project financing, the government has indicated this can be accomplished by the Oyu Tolgoi board, and it would not need to go to the Mongolian Parliament. However, a degree of uncertainty still exists around the approval process and timing to resolve the outstanding issues, complete the project financing, finalize the expansion feasibility study, and receive final signoff from the government and Oyu Tolgoi shareholders. I am confident that we can successfully resolve everything, and we are working for the government to agree on a timetable. However, these issues are complex, and resolving all that is necessary to progress the underground will take time. We are committed to completing project financing as well as developing Oyu Tolgoi. Constructing the underground will require more funding, and it is important that the government of Mongolia has a clear understanding of the estimated costs of the expansion. Completing the feasibility study is important to understanding those costs and the amount of funding that will be needed.

As outlined in the 2013 technical report, we expect the operations of the open pit to generate positive cash flow beginning next year, but it will not be enough to fund the underground development. It is necessary to sort out all the issues, agree the estimated costs and the total funded needed with the government. As result of not being able to complete project financing this year, we are moving forward with a rights offering. The proceeds of the planned rights offering will be used to repay Rio Tinto the outstanding amounts on the $600 million bridge facility and the $1.8 billion interim funding facility. We expect to close the rights offering early in the new year and Rio Tinto has agreed to extend the existing facilities until mid-January.

In summary, we are about to complete our first year of operations at Oyu Tolgoi. We have had a few hiccups but have made solid progress. We are excited about further improvement at Oyu Tolgoi and the ramp-up of the sales volume. Strong operational results are expected in 2014. We have had positive engagement with the government of Mongolia, and all parties are committed to the further construction of the underground and the overall development of the Oyu Tolgoi project. With that, I'd like to open the call up to questions.

Thank you. We will now take questions from the telephone lines. (Operator Instructions) Terence Ortslan, TSO & Associates.

Thank you, operator. Good day, everybody. Thanks for the summary, by the way. Excellent summary and details here. Just a couple of questions on that issue of the engagement with the government issues. The first point and the fourth point, first being the economic value distribution and sharing it, and fourth, being the timing of the feasibility study and expansion of the underground, are they related whereby there are only one or the other, in terms of being able to understand the valuation -- implying that these negotiations may continue until the feasibility study of the expansion is completed and as a result everybody knows what they are sharing for?

They are related but they are two distinct issues we are working through with the government. First of all, the sharing of value, the first point, also includes the cost of the first part of the project, phase 1 and that feasibility study. That is still an issue that we are having discussions with the government on. The last part looks at phase 2 and getting a clear picture or understanding of the costs and the funding needed to get that forward. And, yes, it is important before we go forward and advance funding with the underground that the government understands and we understand estimate of those costs and the funding necessary to go forward. So they are related in that it all relates to the total value sharing, which be the total economic value that goes all parties. But there are two separate issues that are part of our discussions right now. With respect to timing, as we have said, we expect to complete the 2014 feasibility study in the first half of next year. We have started a process with the government to work with us together as we work through that process, but it will take time. And it does put us into the timeframe when we can get a clear picture in place what those costs are, what additional funds will be needed, and how we will fund them.

That's great. In that context, I think that's quite probable that this particular rights issue timing is [one sync goes back] to paying back to Rio Tinto and all, but we do not know in this rights issue when we will see project financing which will flow by those four points that you've summarized. And I really see with your number one and number four relation here whereby this may go on for a while. So, the rights issue now, people will be buying the rights or not buying the rights. The uncertainty is the timing of the project financing, and there's another issue I want to talk about with you in a second, but is it fair to assume that the number one -- number two I guess you summarized it is being the initial development and construction costs -- are we close on that? That would be one uncertainty off of the table, and then the water issue will be resolved. And then project financing may be delayed whereby -- and there's no issue with respect to the banks for the project financing. They are going to be there even if it's delayed past the certain time of early 2014?

Maybe I can jump in -- it's Chris Bateman here. I think to focus on the timing completion around the underground feasibility study -- prior to restarting the underground all parties need to be clear on the cost and approve that cost. I don't think it's a prerequisite that that has to be done before we can close project financing. There has been a significant amount of work done on studies for the underground, and we've clearly shared our views with the lenders in terms of a look at those forward costs. So I wouldn't say that they are directly linked, and we would certainly be looking to close and agree project financing as soon as practical and certainly not wait for everything to be solved before we get to a point of agreeing project financing.

Okay. Just one other question. Kay, you summarized that the shipments, or the productions will be about 77,000 tonnes. Or was that the shipping shipment number that you were talking about?

Copper and concentrate.

That's the shipment or the production?

Production.

And we know about the shipments maybe this year?

We disclosed the shipments year to date around 5000 tonnes of concentrate, of copper and concentrate. We just started to see customer pickups start at the border, and that's when we recognized the actual sales. We will see that picking up towards the end of the year, but there will be as a result of the delays at the border a significant build of inventory this year.

Okay. Just reflecting one more thing from the shareholders today that is about the rights issue. In 2013, 2014 I think they are somewhat summarized, yet what would be the grades of copper and gold, (inaudible) some correlation of the geological model with the production 2014 and 2015 to go ahead here in the absence of the underground so we know what we -- how we're going to a value of the company and the rights issue. Do we have the grade numbers, please?

The best thing to refer back to is to the technical report. As we said earlier in the call, there has been a delay in terms of accessing the higher grade core -- gold core as a result of the curtailment of the open pit. But in terms of overall mining plan we are tracking to that mining plan.

Yet the grades are much higher than the mining plan? On the gold side?

Basically we were expecting high levels of gold this year in 2013. We haven't had those production levels of gold because we haven't gotten into the high-grade gold bearing ore. What we are saying is that is now shifting back in time due to mining being behind the original schedule.

Thank you. I will let someone somebody else ask you a few questions. Thank you very much.

Tony Robson, BMO Capital Markets.

Kay, and Chris, thank you for your time taking our questions. The two questions, if I may, please. Obviously with the $2.4 billion of equity that comes into your balance sheet you wouldn't need the full $4 billion of project financing straightaway. Would you envision taking that down in several tranches or having several smaller project financing issues over the years? Any thoughts on how that would pan out, please.

Tony, in terms of the project financing at this point in time we are still working with the same term sheet that we developed and signed up to the original commitment letters. There's been no changes to that term sheet. Obviously, as we discussed, project financing with the government of Mongolia and the directors of OT, it may be that changes are made in response to their questions, but at this point in time we are looking for circa $4 billion in project financing with the existing bank syndicate.

Okay, guys. Thank you. Second question, Kay, I understand your comments before about its very early date, but analysts love information. Your cash costs, per tonne, have you done any reconciliations as yet to what was publicly available from the technical reports? Or just too early days for you even to do that assessment internally?

It really is still early days, Tony, for us to do that. As we indicated, we are very encouraged on what we are seeing. We are line with the technical report, and it's just too early for us to comment or give an estimate on that at this point.

Okay. Great. Thank you.

Oscar Cabrera, Vancouver America.

Thank you, operator. Good afternoon or morning, everyone. It's actually Bank of America Merrill Lynch. Just wondering if you could characterize for us the current state of, not negotiation but the relationship with the banks that allow a delay in the financing. Are these banks still interested? Could you just put some context around that?

Oscar, we've been in constant touch with the banks, and we are in regular communication. So they are up to date on the progress of the project financing. At the current time, the commitments extend into December, but I think if the banks continue to see good progress being made -- they will want to see good progress being made -- many of these banks have been involved in this process for an extremely long time. It's fair to say that everybody would like to see it come to a swift conclusion, but we have had very good support from the [IFFs], IFIs, and the banks.

Okay. That's helpful. Thank you. And just also interested in your comments with regards to access to water. Like you mentioned, the government has been involved in the different facets of the pre-feasibility, feasibility, and then revision to the feasibility work on the underground. So, what are they concerned with? Can you be more specific?

There was a local, Oscar, there was a local rule that was trying to be put in place to limit water to mining, in general. But we believe that we are making good progress in working with the government on that issue. But it's still not completely unresolved and -- however, we are making good progress with the government in working through that issue.

Great. Thank you. And then, lastly, could you please remind me -- you gave us last quarter I believe it was or the quarter before the amount of time that you would require to get people back into the project and into construction -- was this 6 to 12 months? And assuming that everything is signed off by the government, how long would it take for you to start construction and getting to the actual ore in the underground?

Oscar, the team is working through those, and it will very much depend on how we come to conclusion and when we come to conclusion. But it will be several months from a sudden decision that everything goes ahead to being back up at full development rates. Now, if things are moving along and we are making progress, then there's certainly an opportunity to parallel some of those processes. So we would hope that it wouldn't be a sequential process, but we will get indications and be able to ramp up for preparedness in concert to closing out some of the outstanding issues.

Oscar, and Chris, it's Stewart. I would just like to add too that we have maintained a key leadership and technical time to speed that process up when we finally get the go-ahead.

Okay. Very helpful. Thank you.

Daniel McConvey, Rossport Investments.

Yes, good day, and thanks for doing the conference call. A few questions, the CapEx costs for [which comes out today], when that is provided to the government, would that be a public document?

The public document will be the Turquoise Hill technical report, which we will file if there's an update and material change to the CapEx.

Okay. But the study that the government has requested in terms of the -- of why it cost CAD6 billion for the work up until now, is that something we will have access to?

No.

Okay. The debt cost as a result of not getting it done by the end of 2013, will the interest rate -- I guess we don't know -- but my sense we could have an increase in the interest rate as a result of the delay. Is that fair thinking?

I have no reason to believe there will be in an increase in the interest rate as a result of the delay, but obviously, when we talk to the banks about extensions we will have to understand their position. But there is no reason in my mind why the interest rate should go up.

Okay. The open pit delay -- refresh my memory, I know we had a delay with the underground, but I guess been you slowed down the underground, that impacted the open pit? I just want to -- just trying remember why the open pit is behind schedule by eight months.

That's a separate issue and not related to the underground development. The underground development that was curtailed when we cut the letter [I think it's now] that it required parliamentary approval. The open pit, we were approving budgets on a very short-term basis throughout the first 2 1/2 quarters of 2012. And with the delays in first shipments, we moved aggressively to curtail costs. So the open pit in the second quarter was ramped down and we used ore from stockpiles to feed the concentrator through the commissioning process. We thought that during the that process very important to keep the concentrator commissioning on track with all of the experts from all of the vendors on-site and we wanted to get the concentrator up and running and did so successfully. At that point, the concentrator is able to generate cash through sales so it made sense to continue with the concentrator while we looked to secure project financing.

Okay. Thank you. Last question, you do the rights sale offering; you repay all the debt; you should have a no net debt situation. You've got a buildup of inventory, of concentrate inventory. And so, next year you're going to have a good year. Production wise and you also have a catch up in terms of selling the concentrate. So you would expect -- going as planned prices being what they are -- to have a strong free cash flow year. I guess what I'm seeing is in 2014 we could see a strong net cash position by the end of the year if you don't go ahead with the underground.

That's absolutely correct. And depending on when the decision is made to ramp back up the underground, obviously then the capital cost will start kicking in. But absent the investing activities, we would expect and you can see this through the technical report a very strong cash flow year.

Okay. Thanks, Chris.

Terence Ortslan, TSO & Associates.

Thank you. Oscar brought it up; I think Chris, or Stewart you gave the answer. Underground is such a big component of the net asset value of the Company and also the project. So I think I asked the question last time, the time involved here whereby the delays, how much be reengineering is being done to -- I think last time you said is being done but I didn't get an answer for that, whereby you can shorten the time period from benchmark zero to production time, as well as the time? And two is still the also on the cost side on the capital side of the underground whereby the -- some of the engineering is being done? Thank you.

Stewart, why don't you talk -- I'll turn it over to Stuart, Terrance, to take that first part of the question.

Thanks, Kay.

Okay. So the value engineering had started last year, and that work is quite advanced. And they are making quite good progress on that. The slowdown or the postponement of the underground work has allowed the team to go back and have a little bit more broadly at what changes may be made to the mine that may not have been able to be made when we were under such a tight timeline. That work is still not complete. We are seeing good progress, and we are seeing improvements coming out in the work that they are doing. But I think if we were to share those, it may [mislead people now]. And as we have talked about previously, it will be complete in the middle of next year. The scope for reducing timeline is somewhat limited by the time for accessing underground. So while the team is looking at those opportunities, it's unlikely that they will be able to significantly pull the schedule back.

Okay. So if you assume the worst case circumstance whereby teams get delayed and so on, 2015 becomes an important time in the -- no matter what in the absence of underground -- are you going to revert back to the technical report? Or are we going to have an update on 2015 head grades for both copper and gold?

If there is a material change to the plan, we will have an update. If there isn't a material plan, there is not a requirement of the 43-101 to provide an update but we will continue to provide guidance. I think once we've got more operating experience under our belt, it will be much easier to provide more guidance. But as Kay why said earlier, we are very much in the early days of development. We released today guidance for 2014, but we will continue to look at this and we understand the market is looking for longer-term guidance.

I would also like to assure you that the team is looking at what the opportunities are to fill that gap in 2015, which I think is you are referring to which would be step-down in production that was previously predicted between the open pit and the underground and some other opportunities we have to reschedule in the open pit. But that work is still very early, and it's not complete. But we're certainly looking at all of those opportunities.

Thanks, Stewart. Kay, one more question to you, please. Given that the holidays coming up and Tsagaan Sar in Mongolia, what are the time elements that may be missed here between now and let's say February, or March, for that matter, given the holiday period?

Well, Terence, as you know, there is a new team and working group in Mongolia that's been working with us through these issues. They are very much engaged, and we are all committed to moving these issues along pretty quickly. We've had meetings with them on weekends, virtual meetings, so I think there's a real commitment even given those holidays to move forward with the issues.

But no deadlines?

We are working on a timeline right now, trying to get a timeline agreed with the government on all the elements of these issues so we have a clear path forward.

Thank you very much for your answers.

Tony Robson, BMO Capital Markets.

Thanks, guys, for taking my questions again. You've noted in the MD&A today that a Chinese smelter that was going to take 30% of your copper concentrate had canceled when the mine was unable to deliver it at the time. Sounds a little bit surprising; I would've thought all of the anecdotal evidence is information that Chinese smelters are still happy to take any concentrate as long as it's clean. Was there some further the reason why smelter did not cut you some slack and extend the contract? Thank you.

Tony, this is also reported in the second quarter in MD&A because it was post the end of the half. The contracts are written in such a way that if you didn't -- on this particular contract if you didn't reach commercial production by June 30, then they did have an option. I think we -- our firm view is it was a negotiation tactic, and we have replaced that volume elsewhere this year.

So, sorry I missed it. In the second quarter in MD&A, what's generally the duration of those contracts, typically with your Chinese customers? Are they one-year renewals or longer periods, please?

There are longer periods. What we have sought to do is layer the contract so we don't have exposure to large numbers of contracts expiring in any one year. Obviously, when you start up, that means that you have different length contracts. So they go from three years on out with options to renew up to 10 years.

Okay. Great. Thank you very much.

Matthew Fisk, Macquarie.

Thanks for taking the call. I just wanted to pick up on the point about positive cash flow in 2014. I know from looking at the technical report that the gold grade in 2014 should be around about 0.96 grams per tonne, which is actually 71% above the 10-year average for the mine. Do you think the mine will be cash flow positive post this gold grade?

The mine will be positive cash flow positive once the gold grade drops off, was that the question?

Yes, that's correct.

Again, I think you can look into the technical reports for the outer years. Stewart alluded to the drop off in 2015, 2016 in grades, and the cash flow is becoming much tighter at that point in time. Now with the delays and mining this year, some of that cash flow will be time shifted out, and, obviously, in the near term we have a large backlog of inventory at the year that we will be wanting to clear. The cash flows, I think, will still be positive on an operating basis out there, but it will be getting extremely tight. And we are looking at ways to bring grades forward and fill that period up. You are now looking into the 2016 period.

The costs are variable in the first few years depending on the, particularly on the gold credits, as you point out. And the gold core, which we will reach will be in 2014 and 2015 now and that gap won't appear until out in 2016 on the assumption that we don't do anything to change the mine plan, but no decisions have been made on that. It's still a work in progress.

Okay. Sure. And just one more question if I may. Just picking up on the comment that you haven't quite yet reached the targeted recovery rate due to the nature of the ore. Now, obviously, the low head grades are affected here, but could you please provide just a little more color if it's possible in terms of what you think may be impacting the non-realization of those recovery rates?

Okay. So regarding, particularly in gold, and we are really at top of the ore body. We are seeing oxide mineralization coming through. And as you are aware, the concentrate is not designed to recover that material, so we expect that that will disappear with it. We have very recently maintain some high grades coming into the plants from [their kind of bid]. And the recoveries are in line with where we need to be. And although, as I said, there has been quite a lot of variability coming into the plant and the normal sort of ups and downs that you have with commissioning and it's something we are really learning to operate. But we've got work ongoing to reduce that variability. We expect to see improvement with the oxidized ore disappearing, and we also have a number of people [from red detailing], others providing support and making sure that we are looking forward both at if -- are any other risks of this persisting, which we don't believe that there are. And are there any other opportunities for something upside?

Okay. Thank you very much.

Thank you. This concludes today's question-and-answer session. I would like to turn the meeting back over to Ms. Priestly.

Thank you, operator. In summary, Oyu Tolgoi continues to ramp up, and we expect the mine to be running at full capacity by the end of the year. We are focused on resolving all of the outstanding issues with the Mongolian government, completing project financing, and developing the underground. I am confident that we can successfully resolve everything, but it will take some time. Thank you, everyone, for joining us today.

Thank you. The conference has now ended. Please disconnect your lines at this time. And thank you for your participation.