Turquoise Hill Resources Ltd (TRQ) 2019 Q1 法說會逐字稿

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Turquoise Hill Resources Q1 2019 Financial Results and Review of Operations Conference Call. (Operator Instructions) Thank you. Mr. Roy McDowall, Investor Relations, you may begin your conference.

Thank you, Joanna. Welcome to our first quarter 2019 financial results conference call. Yesterday, we released our first quarter 2019 results press release MDA (sic) [MD&A] and financial statements. These items are available on our website and SEDAR. With me today is our CEO, Ulf Quellmann; and our CFO, Luke Colton. I'd now like to turn the call over to Ulf.

Thank you, Roy, and good morning to everyone. Thank you for joining Turquoise Hill's First Quarter 2019 Results Conference Call. Firstly, I'd like to welcome Roy to the Turquoise Hill team as our new Head of Investor Relations and Communications, welcome Roy. This presentation includes forward-looking information. I'd like to remind you to please read the disclaimer on Slide 2.

Today, I'll provide an update on what we've achieved over the first quarter of 2019. Luke will provide an overview of the financial performance of the company, and I'll finish by providing an overview of our priorities for the balance of the year.

Yesterday, we announced a strong set of results for the first 3 months of the year. As you know, the health and safety of our people is our top priority and we're pleased to report a new record of safety performance for the quarter. Our All Injury Frequency rate fell to 0.09 for 200,000 hours of work exposure down from 0.21 from the first quarter of 2018 and our lowest since commencement of commercial operations in 2014. This is an outstanding achievement and something we commend the Oyu Tolgoi team for. As an organization, we must continue to strive to do the best in the area of health, safety and environment and to aspire to be seen as raising the standard in this area.

We achieved copper production of 45,800 tonnes, gold production of 120,000 ounces, our C1 cash costs for the quarter for $0.77 per pound and income came in at $105 million. We've also made significant progress on a number of key infrastructure projects with the completion of the 6,000-tonne per day jaw crusher, the Surface Discharge Conveyor and the expansion of the Central Heating Plant.

Each of these projects have now moved into the commissioning phase. Sinking of shafts 3 and 4 have also commenced and we progressed 3.2 total equivalent kilometers in underground development over the quarter and 2.3 kilometers of lateral development.

Moving on to Slide 5. Oyu Tolgoi delivered a very strong quarter at our open pit operations, concentrator operated above nameplate capacity and we delivered production of 45,800 tonnes of copper and 120,000 ounces of gold. This is an increase over the same corresponding quarter of last year of approximately 18% and 188%, respectively. Our C1 cash costs reduced by 56% over the first quarter 2018 as we benefited from a higher gold byproduct contribution. The strong gold production over the first quarter was in line with expectations as we continue to process higher gold grade Phase 4 ore during the first quarter of 2019. We're now transitioning into the lower gold grade Phase 6 ore. We continue to remain on track to achieve our 2019 production guidance of 125,000 to 155,000 tonnes of copper and 180,000 to 220,000 ounces of gold.

Moving on to Slide 6. Consistent with our project schedule, we've made significant progress in completing a number of surface infrastructure projects over the first quarter of this year, including a new 6,000-tonne per day jaw crusher, which is mechanically completed, already been commissioned, Central Heating Plant expansion, which has now moved into the commissioning phase. Construction of the Surface Discharge Conveyor was also completed in March and tied into the existing Overland Conveyor. And Shafts 3 and 4 works are progressing well too, and as of 31st of March, were 10 meters and 50 meters below the shaft collar, respectively. Finally, we achieved 2.3 kilometers of underground lateral development in the first 3 months of 2019.

Going forward into the remainder of the year, we are focused on completing the fit out and commissioning work on Shaft 2, which is expected to be completed by the end of October this year. Once commissioned, Shaft 2, which is our primary service and personnel shaft, will enable Oyu Tolgoi to accelerate underground lateral development and achieve increased productivity rates more in line with expectations.

Additionally, work continues on the definitive estimate work. This may include some potentially significant changes to the design of some future elements of the mine design and the development schedule. While we still expect to commence the cave initiation within Panel 0, the highest grade area of the underground, [key] priorities for the team are confirming the location of the ore passes to ensure stability over the long life of mine an ore body the size of Oyu Tolgoi supports. Finally, work also continues on making any necessary adjustments to the initiation sequence of the [block cave] to preserve the attractive economics of the mine. We expect to provide an update along with our half-year results followed by the definitive estimate review, which is expected to be completed by year-end.

Moving to Slide 7. We are currently working with a number of local key stakeholders including the Government of Mongolia in a number of activities, most notably, power. We're also increasing our local sourcing in Mongolia, community development et cetera. Furthermore, there are other items and aspects that require dialogue and cooperation between Oyu Tolgoi, its shareholders as well as the government of Mongolia. This includes discussion about the appropriate funding structure for Oyu Tolgoi, finalizing some outstanding tax matters as well as cooperating on various reviews and working groups.

Starting with power. Late last year, we entered into an agreement, Power Source Framework Agreement, that sets out a pathway, a roadmap really to securing domestically sourced power for the mine. Having access to reliable and competitively-priced power is critical for the success of Oyu Tolgoi. It also ensures that Oyu Tolgoi delivers on its commitment as set out in the 2009 investment agreement.

Work continues on finalizing the technical configuration of the power plant and we've received licenses and permits, including the construction permits for the Tavan Tolgoi power plant and electricity lines being renewed by the regulator. We've appointed an external technical adviser to assist us with various aspects of managing this very complex project, and we expect to approach EPC contractors in the short term.

In relation to some of the other matters that require cooperation, most recently, and as you will be aware, Oyu Tolgoi has been provided with a summary of the Parliamentary Working Group Report. Oyu Tolgoi has submitted a written response with some preliminary comments to the Economic Standing Committee of Parliament. Our understanding is that the timeline to review the Parliamentary Working Group Report by the Economics Standard Committee of Parliament has not been fully established yet. In the meantime, Oyu Tolgoi and its shareholders continue to engage with the respective stakeholders in Mongolia.

Moving on to Slide 8. Here you can see several photos of the newly completed discharge conveyor to surface, which has also been tied to the existing Overland Conveyor. This will connect ore transported from Shaft 2 to the existing infrastructure to deliver then to the concentrator. It will be load commissioned when Shaft 2 is available.

Turning to Slide 9. Here you can see several shots of the Shaft 2 jaw crusher. This is mechanically complete and is currently being commissioned. The system has capacity of 6,000 tonnes per day and it will help accelerate underground development once Shaft 2 is complete.

And turning to Slide 10. In the top left photo, you can see the completed Central Heating Plant, which is now in the commissioning phase. This will of course ensure adequate ventilation to support the ramp-up of the underground operations. The top right photo, you can see the initial progress at Shaft 3. Concrete collar has been installed and sinking has commenced. In the bottom left, you can see the hoist for Shaft 2. In the lower right, you can see tunneling for the conveyor to surface.

And now I'll hand over to Luke to walk you through the financial highlights.

Thanks, Ulf, and hello to all of you listening in today. If I can get you to please turn to Slide 12 for a summary of our key financial metrics for the first quarter of 2019.

Revenue in Q1 2019 was $352.7 million, which is an increase of $43.6 million (sic) [43.6%] compared to $245.6 million in Q1 of 2018. The increase is primarily due to increased gold revenue, and not straight -- driven by the significant increase in gold production, as OT benefited from the processing of Phase 4 ore that contained higher gold content.

This is partially offset by a decrease in average copper price Q1 2019 versus Q1 2018. The higher revenue was also the primary driver behind the increase for other financial metrics such as income per share, which increased from $0.04 per share in Q1 2018 to $0.06 per share in Q1 2019.

Also the increase in cash generated from operating activities before interest and tax, which was $49.8 million in Q1 2019 compared to $14.7 million in Q1 2018, with the higher sales revenue partially offset by higher cash operating costs. This was more than enough to fund sustaining CapEx for the open pit. And actually, it helped to fund a portion of the underground development as well. The increase in operating cash cost was primarily due to higher freight and royalty costs and that's associated with the higher sales revenues, but also higher power study costs and increased community development costs.

Capital expenditure was $325.3 million in Q1 of 2019 and that compares to $285.7 million in Q1 of 2018, and that includes $296.4 million in underground development spend. Since the beginning of 2016, the total amount spent on underground development is now approximately $2.6 billion. In addition, OT had further capital commitments of $1.1 billion, as of the 31st of March, 2019. Turquoise Hill's liquidity balance at the end of Q1 2019 was approximately $3.2 billion.

If you could turn to Slide 13 now. OT's C1 cash costs in Q1 of 2019 were $0.77 per pound of copper produced. That's a decrease of 56% from the $1.76 per pound in Q1 of 2018. The primary reason for the significant decrease in the C1 cash costs was due to the benefit incurred from the additional gold credits arising from the $85.4 million increase in gold revenue Q1 2018 versus Q1 2019. This is further supported by reduced unit cost of production benefiting from increased copper grades and recovery rates and lower negotiated TC/RCs and freight differential.

Slide 14 comments on TRQ's strong liquidity position as we ensure the continued funding of OT. Total underground spend since January 2016, as I previously mentioned, is now at just about $2.6 billion. At the end of March 2019, Turquoise Hill has approximately $3.2 billion of available liquidity and that's split between finance proceeds, the remaining finance proceeds of $1.6 billion and approximately $1.5 billion of cash.

In addition, we expect to generate free cash flow at our existing open pit operations, which will also be available to help fund the underground development. For example, in 2018 approximately $360 million was generated from our open pit operations.

By the end of this year, key milestones related to the underground project will be significantly more advanced than today, including the completion of Shaft 2 and the completion of the definitive estimate review. This will include final estimates for completion, schedule, costs, both CapEx and OpEx, grades and the production schedule.

I'll leave it with that for now, and I will hand back to Ulf to finish.

Thank you, Luke. As stated earlier, the health and safety of our people is our top priority and we've continued to improve over 2018, achieving our best quarterly safety performance since commencement of commercial operations. However, we can certainly not be complacent and this remains a key priority for us. The recent performance at our open pit is on track to deliver our 2019 production on plan and we continue to remain extremely focused on operating cost discipline. As we continue to progress the underground over the remainder of 2019, our primary focus will be on completing Shaft 2, which will facilitate an acceleration in underground development. We'll also complete the excavation of key underground infrastructure and continue to progress Shafts 3 and 4.

In addition to the underground, development work continues on the Tavan Tolgoi base power plant. We've already secured some of the required permits. We expect to approach EPC contractors shortly. We are focused on working towards the milestones as set out in the Power Source Framework agreement. We will continue to engage with the government of Mongolia as we work through some of the remaining outstanding items. And lastly, work is ongoing with Rio Tinto, our project manager, to complete the mine modification work. This work will form the basis of this investment, which we'll provide the final update on cost and schedule.

Turning to Slide 17. Here we highlight Turquoise Hill's leading copper growth profile. As you can see, Turquoise Hill's copper production growth is expected to be well above peers due to the substantial increase in copper production that the underground mine will bring. This will be driven by a significant increase in copper grade. On average, copper grade within Panel 0, which our underground operations will start, is approximately 2.5%, approximately 5x the average copper grade achieved at our open pit operations.

Turning to Slide 18. And to summarize, Oyu Tolgoi is one of the few world-class copper and gold deposits capable of producing significant tonnage of low-cost copper over a multi-decade mine life. It is a low-cost, long-life asset. Turquoise Hill presents a unique opportunity to invest directly in this Tier 1 copper and gold asset. On completion of the underground project, Oyu Tolgoi will be a top 3 copper mine by production with first quartile cash cost and the potential to support a 100-year life of mine. These unique characteristics are expected to result in the generation of significant and long dated free cash flow throughout the cycle. The project is well advanced with almost half of the Capex already having been spent. Compared to some other copper projects of similar scope, Oyu Tolgoi has some key advantages that set it aside. To name just a few, Oyu Tolgoi has a significant part of its infrastructure already in place; it has a world-class operator in Rio Tinto; our customers in the biggest markets of the world in China are just on our doorstep; we have an agreed framework in place to secure a long-term power solution from within Mongolia; and we operate in a jurisdiction that benefits directly and indirectly from Oyu Tolgoi success. We're well on our way of transforming Oyu Tolgoi into a truly Tier 1 operating mine. And with that, I'd like to conclude our prepared remarks. Operator, we'd now like to turn to take questions.

(Operator Instructions) And your first question is from Orest Wowkodaw from Scotiabank.

Ulf, I was wondering if you could provide any details on the report produced by the Parliamentary Working Group? Specifically I'm curious what they may be recommending or what their conclusion may be, and obviously, you've responded to that, but when do you think we could get some details on that?

Orest, thanks very much for the question. I think this is one and I touched upon it briefly in the remarks I just made, we're really in the process at the moment. We aren't really in a position, Orest, at this stage to really say anything above and beyond what we've said publicly in the press release last week and that's really to say that Oyu Tolgoi received a copy of the summary report. It provided some written responses back to the Economic Standing Committee of Parliament. It is now really with the Economic Standing Committee of Parliament to decide what the next steps in the process are. And all we can say at this stage, Orest, really is that we continue to be engaged the with relevant stakeholders in country, seeking to working towards a good outcome for all participants. I'm afraid we can't really share any detail of the reports; they are not public.

Okay. But would it be fair to say that they're proposing changing the current investment agreement?

As I said, Orest, we can't really comment on the content in the report. It's been provided to us. We provided our responses. We want to work with the relevant authorities in a trusted, cooperative fashion. And I hope you understand that we would only refrain from really sort of spilling out the comments of the report on a public conference call like this.

Okay, okay. And then just finally for me. You stated in your release that you expect to provide an update on the underground with your mid-year results. Just curious kind of what we can anticipate there? Would that be kind of an updated CapEx and schedule? Or is that just more -- I'm just curious how that might differ versus sort of this definitive report at the end of the year?

Thanks, Orest. I think what we are attempting to do is really to recognize that, obviously, a lot of work is going on to complete the definitive estimate. We talked on our last call a little bit about the work that's required around the review of the mine plan as a result of some of the difference in [rock mass stability], and as a result of that, the definitive estimate is now only available towards the end of the year. That's a long way away from now, but that's really the time when final costs and schedule will be known. And I think we just recognize that we ought to be in a position to give the market an interim update before year-end; the next logical point for us to do that is the half year. What format and what extent exactly that takes, Orest, we still have to work out. We want to be as helpful as possible to the markets, but at the same time, we need to see where we are at that point in time to see what we can meaningfully provide you with. But it's really a reflection of the fact that we want to be in a position to provide the market with visibility as opposed to having you wait until the full year before we can tell you anything really.

Okay. So is it possible we could see a preliminary new schedule and CapEx at that point or is that unlikely?

Look, we'll have to see where we are. I don't want to raise your expectations more than we can deliver, Orest. I think we just -- we recognize that we need to provide you with some visibility. The form extent, we will have to work through.

Your next question is from Ralph Profiti with Eight Capital.

Ulf, when we think about modification of this initiation sequence within Panel 0, right, how much better are you experiencing the ground conditions as you sort of think of these alternatives? Are those quantifiable possibly in terms of, say, MRMRs? Or even a qualitative review of the relative stability would be helpful. I'm just trying to figure out how much better you're off in the alternative scenarios? And then maybe just a touch on that, how would you describe the ground conditions in Panel 1 and Panel 2 relative to Panel 0?

Ralph, these are really good questions, and far from trying to dodge the questions, but we are really in the process of working through that. So at this point in time, the specifics that you're asking for, we're not in a position to give you. What we can say to you is that obviously the project team is working through it, we're working with the team together to make sure we understand it. And we'll have to see what position we can be in, as I said, at the half year to give you an update. But we need to make sure we do the work first so that we -- when we are in a position to give you an update, we've done the work, we've done the homework and we don't come back to you continuously with changes. But really these are all good questions, they're just a little bit early for us to give you definitive answers to at this point in time.

Okay, okay, no, I understand. Is it possible that you've held -- this is a different topic -- any preliminary discussions with the project financing syndicate on mentioning your previous commentary but potentially looking at the schedule change in that as an option? Or will you most likely wait until the definitive review estimate until you kind of tackle those issues if they need to be addressed at all?

Sure, Ralph. I might just look at Luke to see, given that it's a finance question, to see if Luke wants to take that one.

Sure, no, I'm happy to do my best to answer that question. We are in the process of looking at a variety of different funding options and that certainly does involve preliminary discussion with various parties. And there's certainly have been some interactions at very high levels with different parties including with existing banks, et cetera. But I don't think -- we're talking very, very high level at this stage, I don't think that there's -- I don't want you to get too far ahead of yourself, I guess, if that makes any sense at all. We're certainly -- we certainly feel like we're at a stage in terms of us assessing our various options which is appropriate for the point in time where we now find ourselves, and you know we'll continue to execute against our anticipated timelines.

Your next question is from Terence Ortslan from TSO.

Just 2 quick questions. One, your mill operating rate above the nameplate capacity. Is that because of the softer ore or is it because of the better availability of the mill?

Yes, so if you look at our Q1 2019 operating results versus prior quarters, specifically Q1 of 2018, you'll see we had good head grade, we had good recovery. We did have slightly lower mill throughput. And you're correct in saying that's really the result of processing the harder Phase 4 ore and a larger proportion of that in Q1 of 2019 versus Q1 of 2018.

Okay. But Q2 last year, you had a quite substantial operating rate compared to the nameplate capacity. 112,000 tonnes versus the 100,000 tonnes or thereabouts of nameplate.

Yes, no, and we do, I think, continue to operate our mill above nameplate capacity. But we do get the benefit of softer ore in terms of being able to maximize that throughput. So it was -- it would've been a little bit lower in the first quarter of this year but you would expect as we move into Phase 6 ore, which is softer, over the course of 2019, you would expect that to have a positive impact, all other things being equal.

I must congratulate you on your frequency -- injury frequency rate. Is there a Mongolian standard developed as to how many times? I mean the limited mining operations they have, do they have an industry-wide rate in Mongolia nowadays?

Yes, we obviously benchmark our safety performance in country, but we certainly also have the benefit of benchmarking it vis-a-vis the other reoperations and of course industry-wide. You will know that this is one of the key standard metrics in the area of safety that people quote. There are obviously others, it's not the only one we measure, but this is probably one of the most commonly used ones. And we just think safety is one of those things, it's not only our #1 priority, it speaks to our core values, that's who we are, that's how we think about our responsibility vis-à-vis our employees. They really need to be in a position where they come to work every day and they feel they can go home safe and sound at the end of each day to their families. So that's why it's our #1 value. And second of all, we also think safety tends to be a good proxy for good operatorship. People at operations who tend to have good safety metrics, safety processes, systems, culture, there tends to be a correlation to operating efficiency and effectiveness as well. So that's why we do -- that's why we report on it and that's why we benchmark our performance against various best-in-class and industry standards.

Just following up Orest's question at the beginning. The previous commissions or approaches to negotiate, renegotiate, discuss the investment agreement was somewhat retroactive. I appreciate you don't want to discuss or negotiate this thing in public, but is it a retroactive issue or issues in this particular submission that they have? Because all going forward is the way they get looking into the -- into discussing with you the possibilities?

Well, I would say, I can try and attempt to answer your question. Look, it's -- there are obviously multiple discussions dealing with multiple topics that we have, whether it is power, whether it is community development, whether it's how can we support the local economy through sourcing more in country. This discussion around the Parliamentary Working Group Report is one of many others. And we just take the approach that ultimately, we are long-term partners and we're in country, we will be in country for a long time, and the government through various holdings is a direct and indirect beneficiary of OT's success, if you like, either as a shareholder or just as a tax collector through employment and so forth. So we're engaging with the government and the various stakeholders really on multiple levels, multiple aspects, and we do so in a what we believe, cooperative, collaborative, respectful fashion. And ultimately, we are clear from a Turquoise Hill perspective, we need to make sure we deliver what's in the best interest of our shareholders. What form that ultimately takes, we'll have to see. But I think the engagement, the nature of the engagement is important, and we're certainly very clear about our priorities, still with the government of course. Luckily, we think in many, many cases the interest of us are aligned and that both of us are benefiting from OT being successful. The more OT is successful, the better for Mongolia as a country as well.

Your next question is from Oscar Cabrera from CIBC.

Ulf, I think you partly answered the question I had for you with respect to the Parliamentary Working Group Report and the new mine plan that you're working on. It sounds like the discussions are far beyond what the letter that was submitted to you, and I just want to wish you good luck. The question I had is with respect to the power agreement you have. You have been pretty specific about the dates where you need power or to have power source from the power plant. Tavan Tolgoi, is that part of the discussion as well of i.e., I'm assuming that you're sourcing your gold from the mine, but are you thinking or is part of the process that will have you involved in the mining of it -- of the Tavan Tolgoi deposit or is that going to be done by a third party or by the Mongolian Government?

Yes, I think, Oscar, I wasn't necessarily stretching that far. When I mentioned power, it was -- and the linkage to Mongolian stakeholders, it was in the context of, number one, the ability to source power domestically from within Mongolia is one of the key obligations that Oyu Tolgoi as per the investment agreement; number two, the Power Source Framework Agreement envisages that Oyu Tolgoi is a majority shareholder of that new entity that owns the power plant, and of course, Erdenes Oyu Tolgoi is a shareholder to Oyu Tolgoi. So indirectly, there is a government ownership. Then we're talking about what other partners might we want to have in the Tavan Tolgoi power project. And of course, we need the support and collaboration by the government in providing licenses and permits, if you like. So I mentioned it, Oscar, more in the context of really the multitude of discussions that we're having with the government that go far beyond things like the Parliamentary Working Group Report, right? There are many of these discussions, and power is a good example I think where power is a critical, and I would say, strategic enabler and value driver for Oyu Tolgoi. And again, it's an area where we are working to whether -- together with various, various Mongolian stakeholders. So that's the point I was trying to make, so I hope that partially addressed your question, Oscar.

No, it does, Ulf, thanks very much. We've all seen the -- your stock come under pressure. I think this uncertainty surrounding the Parliamentary Work Group Report is not helping. Do you think that once you present a new mine plan and that the power plant plan, as it were, by the end of this year, beginning of next year, do you think that all things can be settled with the government? Or should -- or do you expect these conversations to continue beyond that?

It's a very good question, Oscar, and I think, look, I mean we obviously can't predict how things unfold. But clearly what we can say and what we would like to see is where we have outstanding issues, we are -- we believe we are all incentivized to resolve these. So if we specifically refer to the Parliamentary Working Group Report, it's now been commissioned more than a year ago. And we believe that ultimately in a partnership that we have in country, as we said, in various aspects, issues come up every now and again, that's normal. The key is how do we resolve them and how can we work cooperatively, collaboratively together to work through some of these issues so that they don't become a major obstacle for the development of the mine, right? As you well know, with the underground, with power, these are critical components that we need to progress with. They're critical to unlock the value potential that Oyu Tolgoi has, and therefore we, as well as believe, we believe the Mongolian government, we're all incentivized to resolve any issues that could present some sort of impediment from delivering on the value potential. So we're keen to resolve them, work with the government, and the sooner we can do so, I think the better we're all served.

Thank you, we have no further questions. You may proceed.

Thank you, operator, and thank you for everyone joining us on the call this morning. If I could just quickly wrap it up and maybe summarize. Oyu Tolgoi is a long-life, low-cost Tier 1 asset. We have delivered what we believe a very strong quarterly operational performance in the first quarter of this year. We are progressing with both the underground as well as with power; both of those are key strategic value drivers for us. You all know that Oyu Tolgoi is a large and complex project, so we will encounter challenges along the way. But the key thing is that we recognize when we have challenges and that we are putting really the best people and the best resources against it to make sure that we resolve them. Rio Tinto is, as an operator, as a manager, is recognized as one of the world's best mining companies. We also have, we didn't touch on it very much on the call today, the support of a large syndicate of international financial institutions. And of course, we'll continue as we just said to work cooperatively with our Mongolian stakeholders to maximize value for our shareholders. That's what our commitment is and that's what we will do. So with that, I'd like to thank you for joining us on today's call. We will end the call here. Thank you and goodbye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.