Turquoise Hill Resources Ltd (TRQ) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thanks for joining us today. Welcome to the Q2 results conference call. I would like to turn the call over to Mr. Tony Shaffer. The call is being recorded and it will be available later today for replay. Please go ahead, sir.

Thank you, Operator. I want to welcome you to our financial results conference call. Yesterday we released our second quarter results press release MD&A and financial statements. These items are available on our website and on SEDAR. With me today is our CEO, Jeff Tygesen, Steeve Thibeault, our CFO, and Brendan Lane, Vice President of Operations and Development. We'll 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 the MD&A. I would now like to turn the call over to Jeff.

Thanks, Tony. Following Notice to Proceed approval in May, underground activities continue to progress. In early June, Oyu Tolgoi appointed Jacobs Engineering, the EPCM contractor. In July, Thiess, Khishig Arvin were appointed the contractors for the development of the decline. I am pleased with how things are moving forward. There's been an increase in mobilization by several contractors and a key first step site specific site training of new and returning personnel. The Turquoise Hill management team is with our Board in Mongolia and yesterday we visited the site and saw firs hand what's taking place.

The team in Oyu Tolgoi are very focused on advancing construction of the underground with each day moving closer to underground production. During the quarter, Oyu Tolgoi drew down approximately $4.3 billion of the project finance facility. As stated previously, net funding was used to pay down shareholder loans to Turquoise Hill. Steeve will talk more about this shortly. We are working on our new technical report which we expect to publish later this year.

There are no material scope changes from the 2014 report. The primary purpose of the update is to align the production schedule to reflect our recent notice to proceed approval. We also plan to include several high level cases including production schedules and economics. We think this will provide a more robust view of Oyu Tolgoi's optionality and allow for greater option visibility.

With the development of Hugo North Lift 1 underway, we are beginning to anticipate the next logical steps in the long-term development of Oyu Tolgoi. Once Hugo North begins production, we expect to undertake additional drilling for Hugo North Lift 2 and plan on converting it from resource to reserve. Because Lift 2 is below Lift 1, we cannot begin large scale production from Lift 2 until Lift 1 is nearly complete which is anticipated around 2038 to 2039.

One of the benefits of the decline used to convey ore from Hugo North Lift 1 is that it passes by design near Hugo South. Once the decline is complete, additional drilling of Hugo South is possible and we hope to be able to also convert it from resource to reserve. One of the production scenario options be reviewed is Hugo South could allow us to consider an increase in concentrated capacity thereby increasing production. Clearly our immediate focus is on the development of Hugo North Lift 1 but we are already starting to think longer term. One of the key aspects of Oyu Tolgoi is the developmnent/production optionality. A parameter of world class assets.

Moving to current operations. Oyu Tolgoi had another outstanding safety performance during the second quarter with year-to-date all injury frequency rate of 0.13 for 200,000 hours work. The Oyu Tolgoi workforce continues to truly impress me with their industry leading safety performance.

During the second quarter we began to see an impact of reduced mining in Phase II of the open pit. We've been flagging this for some time mainly because of the drop in gold production we expect in the second half of this year. Mining will occur in phases three and six in the second half of this year. These phases have copper production consistent with previously mined sections of the open pit but they contain much lower gold grades.

We don't expect to see gold grades increase until we begin mining phase four or, in mid to late 2018. For people who may be new to Turquoise Hill, this gold grade decline was anticipated in our 2014 technical report. Second quarter revenue decreased 22% over the first quarter mainly due to lower gold clients. We reported operating cash flow of more than $160 million for the second quarter, a decrease of approximately 17% over the first quarter. Also reflecting lower gold production and sales.

Both copper and gold production were lower in the second quarter compared to the first quarter as mining in Phase II was reduced. Copper production in the quarter was primarily impacted by lower head grades. In summary, I'm pleased with our progress on underground development. Gold production is pretty much as we expected due to reduced mining in Phase II. OT remains focused on developing an efficient cost structure over the next years as gold grades are low.

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

Thank you, Jeff. I want to start off with an overview of the project finance draw-down that took place during the quarter. As Jeff mentioned, Oyu Tolgoi drew down $4.3 billion during the quarter. We are working with Oyu Tolgoi to finalize draw-down of the remaining amount. Oyu Tolgoi deducted $33 million for bank fees and used approximately $100 million of its own cash to pay additional bank fees. The net proceeds were $4.3 billion which was used to pay down shareholder loans. We paid an additional $118 million in withholding taxes and placed $4.2 billion on deposit with Rio Tinto.

This was in accordance with the previously agreed cash management services agreement. We will redraw these funds as required for Oyu Tolgoi on the ground development. While these balances are in deposit with Rio Tinto, we benefit from their reduction in the guaranteed fee payable on the project finance debt. Project finance borrowing has been recorded as long term debt. The $4.3 billion draw-down was upset on initial recognition by transaction costs of $218 million.

This transaction costs are amortized over the life of the borrowing as a constituent of the interest charges. Amortization of transaction costs in the quarter since draw-down is approximately $2.1 million resulting in balance sheet borrowings of approximately $4.1 billion. The amount of $4.2 billion deposited with Rio Tinto has been recorded as a loan to related parties in the balance sheet.

A summary of the deposit terms together with the impact on the guarantee fee can be found on note 23 to the current quarter consolidated financial statement. Revenue for the quarter was $330 million, a decrease of 22% when compared with the first quarter of 2016. The decrease was mainly due to reduced volume on gold in concentrate sold as a result of lower head rates. Average copper prices in the quarter was $2.14 per pound compared with the first quarter of $2.11.

Copper prices at the end of June were $2.19 per pound compared with $2.20 at the end of March. The average gold prices for the quarter increased by 6.5% from $1,183 per ounce to $1,260 per pound compared with the first quarter. Gross margin was lower than in previous quarter at 28.1% compared to 50.8 in the first quarter. The decrease was a result of lower gold revenue and higher unit costs on production due to lower grade and mill recovery. Income attributable to Turquoise Hill shareholder in the current quarter was $30 million.

Due to continual forecast metal prices, medium grade copper gold stockpile expected to be processed in more than one year are fully provided against. A charge of $3.9 million was recognized in the quarter. The operating cash cost at Oyu Tolgoi were $216 million compared with $197 million in Q1.

The increase was mainly driven by Oyu Tolgoi administrative costs including additional management services fees, or MSP, entered into the execution of the projects financed during the quarter. At June 30, 2016, our cash balance was approximately $1.5 billion. Operating cash flow for the quarter was $162 million, 17% below Q1 reflecting the lower gold sales.

Capital expenditure on a cash basis was $53 million for the quarter including $37 million for under ground development and pre start activities. The C1 costs in the first quarter were $1.12 per pound compared with $0.06 per pound in the first quarter. The increase was mainly due to lower gold credit combined with a higher unit cost of production reflecting the lower copper grades. First quarter all in sustaining costs were $1.55 per pound compare with $0.66 in Q1.

The increase in all in sustaining costs was due to the same drives as those having an impact on Q1 costs. We have abated some aspect of our guidance for 2016. Copper and gold production guidance remain unchanged at $135,000 to $195,000 tons of copper and $225,000 to $285,000 ounces of gold. Sustaining capital expenditure for the open pit has been revised to approximately $200 million from $300 million previously. This is mainly due to reduced deferred stripping due to open pit optimization to reduce waste, bringing forward metal from phase four and changes in strip ratio updated for the most recent reserve estimates.

Operating cost guidance is now increased to approximately $840 million from $800 million. The revision is a result of the net impact from changes in deferred stripping and additional management service fees incurred in relation to project finance partially offset by cost reductions.

So that concludes my comments. And I'm going to turn the call back to Jeff.

Thanks, Steeve. In summary, progress continues on underground development. Due to reduced mining in Phase II, the open pit is pretty much as we expected with lower expected gold production. OT remains focused on developing an efficient cost structure over the next few years as gold grades are low. That concludes our remarks. John, we're ready to take questions.

Thank you, sir. (Operator Instructions). Our first question is from Orest Wowkodaw, from Scotia Bank. Please, go ahead.

Good morning. I was wondering if you could given us an idea how the changes that you just talked about in terms of stripping and so forth impact the mine plant for 2017? Specifically, in terms of what that might mean for copper and gold production?

Thanks for the question. What the team has been working on is a way to pull some copper forward. I guess in reference or comparison to the 2014 tech report. And how they've been able to do that, although we haven't given guidance for 2017, is by splitting phase 4 into two halves and focusing on what the one half that has a shallower or lower ship ratio and that's how we will be able to pull that forward in combination with having the experience of Phases one and Phase two and seeing how the rock is performing. There's some upside as far as the slope angles and being able to defer some of that waste.

The tech report that's going to come out I assume sort of in the next two months or so, will it give us that kind of detail for what's left of the open pit, or will it only look at the underground?

Oh, no. It will be a refresh of where we're at to date. What I wanted to avoid by having the updated tech report is as people try to match up what we said in the production schedule with open pit with the delay so we'll show a new schedule going forward from 2017 combined open pit/underground.

Okay. And what's the expected filing date for the tech report right now?

I'm officially saying second half of this year. We're busy going through the review process. I don't want to commit to a date but it will definitely be in the second half of this year.

Okay. And is it not subject to the sort of 40 day, 43-101 requirements from a filing perspective?

No.

It's not? Okay. Thank you.

Before we move to the next question, Jeff, this is what I'd like to do. I just realized that within my text I gave you a different guidance on the gold. I said 225 to 285. The guidance we had and that we maintain is 255 to 285. So, I just wanted to make sure that I have the record straight here, okay? Sorry about that, guys.

Thank you. The next question is from Sasha Bukacheva, from BMO Capital Markets.

Thank you. Jeff, you mentioned that once you had the chance to upgrade resource at Hugo South, you might be looking at an increase in concentrator capacity. So do you have an idea of what might be an optimal concentrator increase to support that? Would you have to do an assessment? How should we think about that optionality?

Sasha, thanks for your question. There is the option and I've referenced that before. We will have to do a feasibility study because we have to do review the costs of that development. And the time frame for that given the drilling feasibility study, we would be looking at the earliest around 2027 time frame. But it could have the range of the 30,000 to 50,000 tonne range, depending on what the feasibility shows for Hugo South.

30,000 to 50,000 tonnes per day?

Correct.

Okay. Is that something that might make sense to implement sooner and supplement it with the feed from the open pit before you transition into Hugo South?

Did you mean Hugo North 1 transition?

What I mean is make the concentrator bigger earlier before 2027 before the feed from Hugo South becomes relevant and put the open pit material through the concentrator to supplement the feed you're getting from the Hugo North?

We will provide clarity in the upcoming cap report. So there's several combinations looked and I know you have, the 2014, and we're reviewing those right now, so those will be in the (inaudible) papers.

Okay. Sounds good. Thank you.

Thank you. (Operator Instructions). The following question is from Craig Hutchison, from TD Securities.

Hi, good morning. Just a follow-up on the development options you're going to align in your technical report. Can you give us a sense of which options you're looking at? You mentioned Hugo South, and expansion there, Lift 2. Would Heruga factor in as at this point? Or are you just sort of looking at different options in terms of Lift 2 and Hugo South?

Craig, thanks for that question. Looking at Lift 2 and Hugo South in priority over Heruga at this point primarily just because of location with respect to the facilities and more importantly, the grade. So Lift 2 has the higher grade behind Lift 1 followed by Hugo South and then are still standing order Heruga that we've outlined in the 2014 report. So location is one. Use of combined infrastructure and grade are the reasons for going in that particular order.

Okay. Because Hugo South will be developed before Hugo North 2, correct?

From a timing standpoint, I can't start drawing from Lift 2 until Lift 1 is mostly complete just because it shifts vertically below. Versus Hugo South sits off to the side. So if the scenario looks favorable for Hugo South, that could come online before Lift 2.

Okay. In terms of guidance for next year, can we will assume we'll get some kind of a guidance when the technical report comes out? And just in terms of the underground development spending, when can we get a sense of what those numbers and what those budgets will be?

So yes, you'll see items on 2017 going forward for production. And the second part was guidance for capital spend, I'm guessing that's toward the underground?

That is correct, yes.

Currently the group on site is about 1,000 people and as I mentioned, a lot of what's going on is refresher training. That's a key component of Oyu Tolgoi's operating philosophy. And the plan is to end the year somewhere between 2,000 and 2,500, as I say, end of year and also start of next year. So it's a timing of when people are actually on site and we'll have better clarity as that effort progresses. But the 1,000 people on site and the work that we saw occurring now is pretty impressive from my standpoint, given the real short time frame of notice to proceed and activating the contracts. So we have contracts for EPCM, the decline, underground development and the two shafts. And it's getting all of those people mobilized and onsite to do that. And the spending kind of lags a little behind that. So I think in the next quarter, we'll be able to have better clarity on what that profile looks like.

Craig. The team is working very hard at the moment to put these numbers together. I would have wished to give you a number today. (inaudible) number I was comfortable with. When we started to poke different things, I mean we want to go in a cash basis as we do usually because I think it's more useful for you guys and I was not comfortable with the numbers because there was different variances. As soon as I have something I feel more comfortable with that information.

And key point on that Craig to follow up on Steeve's response, if it wasn't yearend, it would be an easier number but because some might fall a little bit in December or January, that's where as opposed to if it was earlier in the year, it would be an easier number to hit. And also at the start of these projects, the ramp-up is pretty steep and picking which month they fall in is difficult towards the end of the year.

Okay. Maybe just one last question from me. Just in terms of the metallurgical recoveries in the quarter, it came down a fair by for copper and gold. I know some of that is grade related but is there something specific about phase six ore? Is it a higher oxidized material that's impacting those recoveries and do you expect them to improve towards the back end of this year?

Well, Craig, as we stated before, phase six does have different metallurgical characteristics than one and two. One and two are really good. So they are relatively lower, Phase III and phase six compared to one and two. But I wouldn't say compared to our plan they're materially different but they are lower. But I think the biggest contributor from a copper standpoint is just lower head grades and pretty much by definition of all of the deposits I worked in the lower head grade you end up with slightly lower recoveries.

Okay. Thanks, guys.

I should maybe as Steeve mentioned we're staying on target for the copper guidance, and the last quarter we updated the gold guidance. So I'm still feeling comfortable with those.

Perfect. Thanks.

Thank you. This are no further questions registered for the moment. I would like to turn the meeting back over to Mr. Jeff Tygesen. Please, go ahead, sir.

Well, thanks for joining us on today's call. As I mentioned earlier, it was an exciting day at site and going through both the current operations and seeing the underground. 80% of Oyu Tolgoi's value resides in our underground reserves. And as I've stated recently and throughout this year, in my opinion it's the best copper opportunity development today. Thank you.

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