Turquoise Hill Resources Ltd (TRQ) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen. Thank you for joining us today. Welcome to the Turquoise Hill Resources Q1 2015 financial results held on May 12, 2015.

I would now like to turn the call over to Jessica Largent. The call is being recorded and will be available today for replay. Please go ahead.

Thank you Camille. I want to welcome you to our financial results conference call.

Yesterday we released our first-quarter 2015 results press release, MD&A and financial statement. 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. As we enter Oyu Tolgoi's second full year of production operations continue to improve and progress.

Over the past several months I have made multiple trips to Mongolia and have also met with a number of our large investors. I continue to believe that management and all shareholders have a unified goal of delivering value for Turquoise Hill which hinges on a number of components.

One of those components is solid financial and operational performance which we will discuss today. Today I'll start things off by providing a high level view of our first-quarter results. I will then turn the call over to Steeve who will address the financials and then Stewart will cover off operations.

So for the first quarter there are a few key takeaways I want to highlight. First, safety is a critical aspect of our business and a major focus throughout Oyu Tolgoi's operations.

During the first quarter Oyu Tolgoi achieved a strong safety performance with no fatalities and an all-injury frequency rate of 0.25 for 200,000 hours worked. I would like to commend the Oyu Tolgoi team.

Second, first-quarter revenues in concentrate sales were down compared to fourth quarter of 2014. This was expected due to lower quarterly production and head grades.

First-quarter sales were impacted by the lunar new year holiday in February. That said, concentrate sales exceeded production for the quarter and our cash flow from operations is more than $100 million. Also during the quarter Oyu Tolgoi achieved a milestone of shipping their 1 millionth tonne of concentrate.

Third, operational improvements that were initiated during 2014 are starting to take hold. Stewart will discuss this further at a later time.

Fourth, we expect to see higher grade ore in the second quarter as we highlighted during our last call. We anticipate the production distribution for 2015 to be similar to last year with levels significantly higher in the second half of this year.

In the concentrator Oyu Tolgoi has a planned shutdown expected to take place during July to install a second pebble crusher magnet. This is part of our continuous improvement program.

Lastly I want to speak about the status of discussions with the government of Mongolia. I'm sure many of you have seen comments in the media by Mongolian officials about the status of Oyu Tolgoi discussions. While significant progress has been made, we have not finalized the comprehensive agreement that would allow underground development to recommence.

We continue to believe that unlocking Oyu Tolgoi's value for all shareholders is through developing the underground. All parties are committed to resolving matters and moving forward with the underground. While a final agreement has not been reached, I believe good progress has been made and I am optimistic we can resolve outstanding matters.

On project financing we continue to engage with the 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 matters and ultimately restart underground development, I think it's important to remember that we have an open pit mine generating positive operating cash flow.

At this point I'm going to turn the call over to Steeve to discuss the financial aspects in more detail.

Thank you, Jeff. First I'll take a few minutes to discuss the impact of the conversion from US GAAP to IFRS then I will discuss Q1 financial results.

So beginning January 1, 2015 we began preparing our financial statements in accordance with the international financial reporting standards or IFRS. In our MD&A and financial statements we highlighted the impact of the conversion.

Here are some examples. First, under US GAAP the first stripping is treated as a current production cost while under IFRS it is capitalized to mineral property to the extent it benefits future ore extraction.

This adjustment impacts property, plant and equipment or PP&E and also flow through the inventory balances on the balance sheet. The impact as of January 1, 2014 was an increase of $9.4 million of PP&E.

Second, under the US GAAP the non-current inventory was carried at a lower of cost and undiscounted net realized value. Under IFRS the Company value inventory at the lower of cost and discounted net realized value based on cash flow of when the stockpile are expected to be processed. This resulted in a provision against a non-current inventory and corresponding adjustment to retain earnings on January 1, 2014 of $104 million.

Third, as a result of the IFRS conversion we also modified the presentation of certain items on the financial statements. Mining royalty are now included within operating expenses where previously they were netted against revenues.

Accretion expense from decommissioning obligations is included within finance costs. It was previously shown separately on the face of the financials of the statement of operations. Deferred income tax liabilities from withholding taxes on intercompany interest payments are now classified as non-current deferred income taxes previously included in accounts payable and accrued liabilities.

And lastly, under US GAAP in Q4 2014 financial statement the investment in SouthGobi was considered an investment in a company subject to significant influence. The investment was recognized at fair value as a long-term investment with a non-current asset held for sale. Under IFRS the Company has determined it had the power to control the activities of SouthGobi and has consolidated SouthGobi in the Company's consolidated financial statement as held for sale and discontinued operations.

Moving to Q1 financial results, during the first quarter of 2015, Oyu Tolgoi generated a net revenue of approximately $426 million on sales of approximately 167,000 tonnes of concentrate. Revenue and sales were down over 2014 fourth quarter as expected. This reflects lower production due to reduced head grades.

First-quarter income attributable to shareholders was $96.2 million which included a non-cash impairment reversal credit related to SouthGobi investment of approximately $35 million. The cash balance at the end of March was a little more than $950 million with an operating cash flow of $105 million for the period. As previously mentioned, these funds are earmarked for underground development.

Capital expenditure for the quarter totaled approximately $30 million including $27 million of sustaining capital. Our cash operating cost guidance for 2015 has increased from $900 million to $1 billion, an increase of $100 million, to consider the IFRS presentation change related to the 5% royalty payable to the government of Mongolia. Previously the royalty was deducted from revenue and now are reflected as a cash operating expense.

Lastly, for first quarter we began reporting unit cost data, both C1 cash cost and all-in sustaining cost. These metrics are impacted by byproduct credit which were substantial in the first quarter due to the high gold content in the concentrate sold. We have provided a reconciliation to cash operating cost in the MD&A for reference.

That concludes my comments. I'm going to turn the call to Stewart.

Thank you, Steeve. There were no surprises in the quarter. Concentrate production for Q1 was about 30% lower than Q4, primarily the result of mining lower grade ores which was in line with our mining schedule.

During the quarter we completed our most successful shutdown to date. The shutdown was conducted successively on both SAG mills, reline the mills and to undertake other maintenance and improvement work. The work was completed on time and with no injuries.

Mine progression is on target with material mined in Q1 about 15% higher than the previous quarter. As Jeff indicated the mine continuous improvement program has really started to get traction.

The program has mostly been in low-cost modification and other operational improvements. For example, quick change initiatives, improved manning coverage for shift change and mill breaks and simple modifications to the track trays to allow them to carry more combined with training and monitoring to ensure that every truckload is a full one.

As planned we started to regain access to the high grade zone in Q2. Encouragingly we also continued to see a slight positive reconciliation in the open pit.

While the concentrated milling rates increased in Q1 as improvement started to take effect, there are further improvements planned in the summer shutdown. In particular some modifications were made to the pebble crushing circuit that partially resolved recycle issues which restricts SAG mill rates.

Extra magnets will be added to the circuit during the full plant shutdown. We expect that this along with other improvements will improve the concentrator throughput.

Additionally, a mine to mill value steam project has been underway looking to optimize such things as blast fragmentation, crusher product size and concentrator performance. We've made some improvements in the space and work continues. For 2015 our guidance remains at 175,000 to 195,000 tonnes of copper and 600,000 to 700,000 ounces of gold and concentrates.

Finally, the Mongolian minister for mining, Mr. Jigjid, has appointed an experts group and they've started the process of reviewing the modified feasibility study, EOT assets 2015 which were submitted in mid-March. We had a series of meetings and presentations over the last few weeks and the experts were on-site over the weekend.

That concludes my comments. I'll turn it back over to you Jeff.

Thanks, Stewart. In summary Oyu Tolgoi delivered solid first-quarter results.

Sales exceeded production for the quarter. Cash flow from operations is more than $100 million. Operational improvements are starting to take hold and in the second quarter we started mining higher grade ore.

We continue active engagement with the government to resolve outstanding matters. And I am confident that we can reach a successful outcome.

That concludes our remarks. Camille, we are ready to take questions.

(Operator Instructions) Orest Wowkodaw, Scotiabank.

Hi, good morning. I was wondering if you could help explain how to understand the movements in the shareholder loan accounts?

It looks like it was $7.8 billion as of the end of 2014 and now it's at $6.9 billion. I see from the disclosure that there is a $150 million payment in Q1. But how do we understand the differences in terms of change of these accounts?

This is Oscar, is that correct?

Orest.

Sorry about that. This is Jeff, I'm going to turn that over to Steeve. He's been working on that very closely.

The presentation in the last year was reflecting the two numbers together. The Q1 has the right presentation where we're showing the two numbers separately, so we're showing the shareholder loans and we're showing the landing certificate separately. It's something that we picked up after and it was not very clear in the last quarter.

So there is no increase, as you say. There was a payment done but the movement for the shareholder loan would go down. It's just a question of presentation that in Q4 was not correct if I can say it this way.

I see. So really you're saying the Q4 balance should have been something different than the $7.8 billion to get to the $6.9 billion today?

It was including both the shareholder loans and the EOT loans as well. (multiple speakers)

Okay, thank you for that clarification.

They should have not been combined. That's how -- we should have presented that differently.

Okay, thank you for the clarification.

We have no further questions registered at the time. I would now like to turn the meeting back over to Mr. Jeff Tygesen. Please go ahead.

Camille, just to double check, is there any further questions?

Craig Hutchison, TD Securities.

Hi, good morning guys. Can you give us a sense of what throughput you're actually targeting for this year and how long you anticipate that shutdown to be in July to make the changes to the pebble crusher?

Craig, this is Jeff. With Stewart spending a lot of time on site and working with the site team I'm going to let him respond to that.

Hi Craig, it's Stewart, how are you?

Good, how are you?

Okay, so we haven't disclosed the rates that we're after but they're of the order of 110 tonne a day through the plant will be the target post the shutdown. We do see those from time to time coming through the plant now and the shutdown duration hasn't been finalized yet and the shutdown work is included in the annual plan so it's not extra work that we need to do. It will be -- it's been taken into consideration when we issued guidance for the year anyway.

But it will be of the order of a couple of weeks and we need to do a significant shutdown once a year. We couldn't do a lot of the work in January because we needed to do the shutdown successively so that we could keep the mills going, at least one of the lines going so that we didn't freeze the plant.

The 110 tonnes per day, I assume that's a nominal rate can we apply I guess like a 92% availability factor to that number?

We're aiming for -- we're aiming to achieve above 110. But at this stage that's above the design number but that will be our expectation of that order on a continuous basis.

Is the ore softer than you guys had anticipated? Because I thought there were some constraints to getting up above 100,000 tonnes a day given the hardness of the ore?

No, what the team has been doing, they've been doing a number of things, in particular looking at blast fragmentation. So they're increasing the costs in the pit of blasting to get a finer blast coming into the plant.

We're also running the primary crusher at a close gap. So when we can that's moved from six inches down to four inches, so we're providing finer feed.

And then there's been a whole series of work around optimizing the control mills. And we do get restricted around the mills because of the performance of the magnet. So what happens is we've had a lot of balls failing and then the ball seal comes out and then we end up with the magnet, the crushers going to bypass we end up with a larger circulating load.

So we've done some initial work by modifying the equipment that we've got that's improved it. We have done a whole lot of work to replace to change the ball hardness, so we've got a tougher ball that wears a little bit faster but is less likely to break in the mills. And then on the shutdown I'll do some major modifications to the screens, to the magnet, sorry.

So there's been quite a quantum of work. That's not everything that's happened but that's a big chunk of the work that's happened.

And if you step back and have a look at the amount of the work that the team has put in it's pretty impressive over the last really the last 6 to 12 months. And so we would hope to see that coming to fruition in the back half of the year.

Okay, thanks.

Orest Wowkodaw, Scotiabank.

Hi, thanks for taking my follow-up. I was wondering if you could provide any color in terms of the negotiations with the Mongolian government in terms of what areas are still left to be resolved? I know you don't want to get into specifics but if you could maybe just provide any color in terms of what's left in order for Phase 2 to move forward.

This is Jeff. I will field that question.

As you may or may not, we've been in discussions for a period of time. And what we're trying to conclude and finalize are some of the more technical questions related to stabilization of the original investment agreement with relation to tax.

And that's where the time is being spent is to make sure and I think the Prime Minister was quoted recently as saying that his technical team needs to make sure the agreements that we reach are sustainable for a long period of time and that we just don't reach an agreement and then find a technical issue that might crop up later. So it's spending that time and that level of detail to ensure that basically all the Ts are crossed and Is are dotted but it's getting into the detail of the tax calculations.

And is it your view that once the tax agreement is stabilized that the other issues are relatively minor in terms of that are left to be resolved?

Well there were no real minor issues but we've been able to work through those and reach understandings on those. And I want to point out that it's a package, not just one item that we move on but a collective package.

So I think all items when we started the initial discussions were something that we could achieve agreement on and we're just getting it down to those last few that require a little more time. And as everybody knows it takes a lot of time with the tax guys.

Is it your expectation that you would be in a position to reach a final agreement three months from now when we have your two call?

I've been helpful for a while. I would say and characterize that both sides are working very hard and it's in everybody's best interest to do it sooner than later.

But I wouldn't want to pick a date and say this is it because the likelihood of hitting that date I'd be wrong. It could be earlier or it could be later but that date I know I'd be wrong.

Okay, fair enough. Thank you very much.

We have no further questions registered at this time. I would now like to turn the meeting back over to Mr. Tygesen. Please go ahead.

Well I'd like to thank you for joining us on today's call. Operations at Oyu Tolgoi continue to improve and we should begin to see higher grade ore process beginning in the second quarter. I am confident that matters with the Mongolian government will be successfully resolved.

Again, thank you for joining us. That concludes the call.

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