Turquoise Hill Resources Ltd (TRQ) 2014 Q4 法說會逐字稿

Welcome to the Turquoise Hill Resources fourth-quarter and full-year 2014 financial results held on March 25, 2015. The call is being recorded and will be available later today for replay. I would like to turn the call over to Jessica Largent. Please go ahead.

Thank you, Donna. I want to welcome you to our financial results conference call. Yesterday, we released our fourth-quarter and full-year 2014 results press release, MD&A, financial statements and other annual documents. These items are available on our website and SEDAR. With me today is Jeff Tygesen, CEO; Steeve Thibeault, CFO; and Stewart Beckman, Senior Vice President of Operations and Technical. We will take your questions after our 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 Jeff.

Thank you, Jess. It is an honor to be leading my first results conference call since being appointed CEO on December 1. While new to the role of CEO, I have been a Turquoise Hill director since 2012 of August and in my previous position, I began working with Oyu Tolgoi in 2010. I've always been impressed with this world-class asset. Since my appointment, I have made a number of trips to Mongolia to review Oyu Tolgoi's operations, to work on planning, develop and maintain strong relationships with key stakeholders. In addition, I have met one on one with many of our large shareholders, as well as presented and participated at several industry events. These opportunities have allowed me to hear a number of perspectives. One thing is clear, we have a common objective to deliver value for Turquoise Hill. I'm going to provide a summary of our 2014 results. I will then turn over the call to Steeve who will address the financial components of both fourth quarter and the year. And then Stewart will cover [off] operations.

So for 2014, there are several key takeaways I want to highlight. First, safety. It's one of the most critical aspects of our business and a major focus throughout Oyu Tolgoi's operations. For 2014, Oyu Tolgoi achieved a good safety performance with no fatalities and an all injury frequency rate of 0.47 per 200,000 hours worked. Second, Oyu Tolgoi achieved a strong financial result in its first full year of production. Turquoise Hill generated its first annual operating cash flow of more than $650 million driven by net revenues in excess of $1.6 billion. We expect another strong year of cash flow generation in 2015.

Third, operations at Oyu Tolgoi performed well during 2014 despite a few challenges. We met our production guidance for the year and we are starting to benefit from the productivity improvements identified during 2014. Production distribution for 2015 is expected to resemble 2014 with significantly higher output in the second half of the year as the production from the high-grade zone of the open pit recommences.

Fourth, I wanted to speak about the status of the discussions with the government of Mongolia. As previously disclosed, we made an offer to the government last year to resolve outstanding matters. The offer remains on the table and we believe it is beneficial to all stakeholders. We continue to engage with the government to resolve matters. Those discussions slowed since late in 2014 with the appointment of the new prime minister and new cabinet. The change in government required a pause in discussion to allow the new parties to get up to speed on the issues being addressed. Engagement is ongoing and I am confident that we can resolve the outstanding matters.

We continue to work with the government to resolve the outstanding tax matters. Oyu Tolgoi has initiated an appeal to a ruling by the Mongolian Tax Authority. It is crucial that the tax situation is clear to support further investment. On project financing, we continue to engage with a consortium of banks and they remain supportive of the transaction. Current indications are a suitable financing package will be available once we have successfully resolved the outstanding matters. Until we are able to resolve those matters, restart underground development, I think it's important to remember that we have the open pit mine generating positive operating cash flow. At this point, I'm going to turn over the call to Steeve to discuss the financial aspects of the year in more detail.

Thank you, Jeff. In 2014, Oyu Tolgoi generated net revenue of $1.6 billion on sales of approximately 734,000 tonnes of concentrate. The fourth-quarter sales increased more than 19% over the third quarter. For three consecutive quarters, sales exceeded production and by year-end, concentrate inventory had been drawn down to more normal levels. Strong sales combined with marketing and logistic improvements throughout the year made this drawdown possible.

Net income for 2014 was $32 million. Net income from continuing operations was $141 million entirely from Oyu Tolgoi. In 2014, our cash increased by $785 million resulting in a cash balance of $863 million at December 31. These funds are currently earmarked for underground development.

As Jeff mentioned, Turquoise Hill delivered its first annual operating cash flow of $658 million, which includes $455 million from operational activities and $251 million from selling down inventories. This allowed Oyu Tolgoi to repay $477 million of share order loans to Turquoise Hill in 2014.

In addition, we received $115 million from the repayment of a Mongolian treasury bill that matured in 2014. Capital expenditures on a cash basis totaled $203 million, which includes 2013 accrued CapEx. Oyu Tolgoi's cash operating costs for 2014 were $905 million, approximately $35 million higher than our October guidance. The increase is mainly due to additional costs related to the December concentrator fire and 2015 planned maintenance brought forward to 2014.

Starting in 2015, our financial statement will be prepared in accordance with the international financial reporting standards, or IFRS. In our first-quarter 2015 financial statements, we will provide the necessary information related to the conversion. That concludes my comments and I'm going to turn the call over to Stewart.

Thank you, Steeve. Operating performance improved through 2014, but was impacted by a series of post-commissioning issues in the concentrator, including failure of the rake blades in the thickener in Q1, a different failure of the rake [ham] in the thickener in Q3 and a fire in one of the four ball mill cyclone packs in Q4.

Recoveries also improved through 2014 driven by operational improvements and the increased ore grades as the mine developed through the high-grade zone in the last half of the year. Lower processing rates in Q4 due to the cyclone fire were partially offset by higher than predicted grades. Recoveries improved with increasing grade and gold recoveries were above expectations for higher grade ores.

Repairs from the concentrator fire were completed in January 2015. Early in 2014, certain post-commissioning improvement projects occurred in order to preserve cash. This deferral and operational issues delayed the open pit mine advance. Further, lower mining rates in Q4 reflect the longer (inaudible) [rates] of waste to the tailing facility to complete construction before winter and equipment availability. Pleasingly, the underlying performance of the mine improved towards the end of the year as a number of the improvement projects took effect.

Marketing and logistics improvements allowed the concentrate inventories to be drawn down to normal levels by the end of 2014. Oyu Tolgoi will continue to work to reduce this working capital. In the high-grade zone, grades and recoveries are both higher and metal production is variable reflecting mining source. The current mining schedule has production from the high-grade zone resuming in mid-2015.

As mentioned previously by Jeff, this means that we are scheduled to see lower production rates in Q1 with rates building through mid-2015 into the latter half of the year. Oyu Tolgoi conducted a planned shutdown in January and February to realign both [tape] mills and undertake modification and improvement work in the concentrator. We were very happy with this shutdown. There's no injuries and all work completed within the schedule. The impact of the improvement work is yet to be fully realized. Oyu Tolgoi is expected to produce 175,000 tonnes to 195,000 tonnes of copper and 600,000 ounces to 700,000 ounces of gold in concentrates in 2015. That concludes my remarks. I'll turn back over to you, Jeff.

Thanks, Stewart. In summary, Oyu Tolgoi delivered strong 2014 results despite a few operational challenges. Those challenges are common in early-stage operations and I've been impressed with the Oyu Tolgoi's team to learn and improve through this process. We continue to engage with the government to resolve outstanding matters and I am confident that we will reach a successful outcome. That concludes our remarks and, Donna, we are ready to take questions.

(Operator Instructions). Craig Hutchison, TD Securities.

I guess my first question is in terms of the guidance. I think in December you guys had previously guided for operating costs of $900 million in 2015 and CapEx I think of $230 million. Is that guidance still valid?

Craig, thank you for that question and I'll turn that over to Steeve.

Yes, definitely that is still in line. I think that you have seen the results from this. We had pretty much that amount. Keep in mind that I don't want to be too technical here, but I am the CFO and I just want to remind you that the $900 million will be based on IFRS and we'll give you all the detail once we go through the year in order to give you the impact and the difference compared to 2014. Okay?

Okay, thanks. Going forward, would you guys be reporting on C1 cash costs and industry reconciliations and costs per tonne mine milled? Will that information start coming through in 2015?

Yes, Craig, I thought that we had done a great job in 2014 to give you more information, but, no, seriously we are going to -- we are looking at providing information in the C1 costs and maybe other unit costs. We are looking at it indefinitely in 2015; that is the goal that we have.

Okay, thanks. Maybe a question for Jeff. Just in terms of resolving the issues with the Mongolian government, have they indicated a timeframe where they are looking to resolve these issues? I know they have been quite public in the past talking about resolving the issues by the end of 2014 and obviously that has got pushed out to 2015. Do you get a sense of when they are looking to have these things resolved? Obviously you guys probably want to resolve this as quickly as possible, but before the summer season, anything to do with parliamentary sessions, etc.?

That's probably been one of the number one questions I've been getting when I've been meeting with shareholders. We have been actively working with the government for over a year and a half and as I mentioned earlier, there was a change in government late last year and that team is now up to speed and there's active discussions going on. The President came out with an economic recovery plan, which the parliament approved and I don't know if you are aware, but parliament is on break until April 1, so we're actively engaged and talking to them. Like I mentioned before, we've had a deal on the table. We think it's a good deal for all stakeholders. So we are actively pursuing that. Another comment that was made in the press by the President and the PM is they hope to have things activated for the Phase 2 portion at the end of 2015.

Okay. So that is just -- when you say activated, it would be approved or actually money being spent or --?

Once everybody approves everything, there is a process to ramp up a project and if you referenced our technical report and kind of that has been pushed out in time because of the change in government, but there's a ramp-up, so immediately will a $1 billion a year be spent? No, once we get through that ramp-up, reengage the team, then we will begin with actual production and construction of the site.

Okay, great. Thanks. That's all for me.

(Operator Instructions). There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Tygesen. Sorry, we do have a question. Oscar Cabrera, Bank of America Merrill Lynch.

The negotiations with the Mongolian government have been ongoing for more than four years now. And the last feasibility study I believe had assumed that you would be able to start construction of the underground on the second half of last year. I am just wondering if you have put in place an alternative plan if these negotiations don't get settled until after the election next year. And if so, what would the production profile for the open pit look like for the next three to five years?

Oscar, thank you for that question. I'm going to turn that over to Stewart to respond. Thank you.

Thanks, Oscar. So Oscar, the open pit production profile at this stage will remain reasonably in line with what is in the feasibility study. So the development schedule for the mine, the open pit, is more or less the same. We are certainly doing a lot of work looking at what we need to do to optimize the open pit. Given that when we did the original schedule and the open mine contemplated the underground coming in much earlier than what it is going to come in now. With that said, it will be generally the similar sorts of (inaudible) coming into the (inaudible) production rates with some scheduling and optimization really to reduce risk and smooth out the production profile.

As far as needing to take a more drastic change in the mine and increase rates, that wouldn't need to occur until about year 2020 if we still see movement forward on the mine. So at this stage, if you are looking to the rule of thumb, if you use what is in the technical report would be our cost.

Okay, that's very helpful, Stewart. Thank you. And the other thing is I understand that you have been engaging companies or subcontractors to get shovel to ground as soon as possible. In the past, we had talked about six months to get folks down to the underground or to get construction going and then a 30-month construction period. Should we be thinking about those time periods as something that is doable at this point or would you be able to shorten this timeframe with the negotiations or engagements that you have had with folks?

So a couple things. First of all, in your leading comments, when we did the 2014 technical report, that contemplated that we started to build resources ready for the restart at the end of last year, so this is starting to employ the [earnings] team, to extend the earnings team to be able to execute the project and then start to do some enabling projects through the beginning half of this year.

You can use as a rule of thumb to every month that we push out without approval or even approval for us to be able to start to build resources passed about September 3 last year is adding a month, so we are roughly 6 months behind and you can push the underground schedule back by about that much. We have been doing work and we have been in the market working in particular the EPCM contracts and we are close to the point (inaudible) ready to award that contract. And that potentially awarding the contract subject to notice to proceed, of course and we're doing the same for some of the other contracts, taking the opportunity to get those completed and negotiated ahead of approval, which will help us to accelerate things.

At the same time, when we closed down over a year and a half ago now, we had a more substantial team. We have reduced that team, so I think there's a little bit of swings and roundabout there. So we are seeing some improvement and also some (inaudible) to restart. So if you just assume that we are pushing out by roughly the time past September.

The one other comment I wanted to make as well is the underlying assumptions for the feasibility study and the technical report were completed at the end of 2013 and the beginning of 2014. So the estimate is starting to get dated and if we don't get some progress soon, we will need to go back and refresh those estimates.

Presumably lower diesel prices or skilled labor should help, shouldn't it?

Yes, yes, we are certainly seeing people more willing to negotiate a bit harder. The markets -- the mining industry is very stressed at the moment, so it's a good time to be in the market to negotiate.

Great. Thanks very much, Stewart.

Thank you. Mr. Tygesen, there are no further questions.

Well, thank you for joining us on today's call. It's an honor to lead the Turquoise Hill team and be associated with the world-class Oyu Tolgoi asset. Operationally and financially 2014 was a good year and I look forward to building on our successes in 2015. Thank you for attending.

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