Turquoise Hill Resources Ltd (TRQ) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Turquoise Hill Resources Fourth Quarter 2020 Results. (Operator Instructions) This call is being recorded on Wednesday, March 9, 2020. I would now like to turn the conference over to Roy McDowall, Head of Investor Relations and Communications. Please go ahead.

Thank you, Joanna. Good morning. I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our fourth quarter and year-end 2020 financial results conference call. On Monday, we released our fourth quarter and year-end 2020 results press release, MD&A and financial statements. These items are available on our website and SEDAR.

With me today on the call are Steeve Thibeault, our Interim CEO; Luke Colton, our CFO; and Jo-Anne Dudley, our COO. This call and presentation includes certain forward-looking statements and information. We refer you to the Forward-looking Statements section of the Annual Information Form dated March 8, 2021, as supplemented by our MD&A for the 12 months ended December 31, 2020.

Before I hand over the call, I would like to formally introduce Steeve Thibeault, who was appointed interim CEO of Turquoise Hill last Thursday. Many of you on the call know Steeve from his tenure as the CFO at Turquoise Hill from 2014 to 2017. In addition to being TRQ's CFO, Steeve was also on the Oyu Tolgoi Board and has been to the site in Mongolia multiple times, and was instrumental in securing the $4.4 billion project finance facility in 2015. You can find our presentation on our website in the Financial and Technical Report section. And now I would like to turn the call over to Steeve.

Thank you, Roy, and good morning, everyone. Before going any further, I would like to take a moment to thank Ulf Quellmann who served as CEO of Turquoise Hill for nearly 3 years. We thank Ulf for its service and wish him well.

As you know, I returned to Turquoise Hill just 5 days ago. And although it will take me a few weeks to fully up -- get up to speed, my serving with TRQ has enabled me to hit the ground running and immerse myself in the key strategic objectives: first, securing funding to complete the underground development; second, to work with the government of Mongolia and Rio Tinto to finalize the long-term power supply for Oyu Tolgoi; and third, to update or replace the existing UDP in a matter that is mutually beneficial to all parties.

I'm sure, as you were aware, all of these discussions are in advanced stages, and I'm joining a strong team that has continued to move these issues forward, while prioritizing the interest of Turquoise Hill shareholders.

I will now walk through the year-end update as efficiently as possible, and then we'll open the call for Q&A. Please note on Slide 2 and 3, they contain our cautionary statements, and I would encourage you to read them. On Slide 4, you will see 2020 was a very busy year that saw the key milestone of the new mine design for Panel 0, an updated Oyu Tolgoi technical report and, finally, the definitive estimate that reconfirm the compelling value proposition that Oyu Tolgoi provides investors.

On Slide 5, you will see Oyu Tolgoi 2020 operating performance, which once again has met or outperformed the original production guidance we set in the beginning of the year. Of note, you saw Q4 was a very strong quarter for gold production. And now looking at our 2021 goal forecast of 500,000 to 550,000 ounces, you can appreciate how this will contribute to our 2021 estimated C1 copper cash cost of negative $0.50 to $0.80 per pound of copper produced. 2021 is set to be a great year for Oyu Tolgoi.

Slide 6 highlights all Oyu Tolgoi's safety records and continue above nameplate capacity performance of the mill. The All Injury Frequency Rate has fallen to a new record of 0.15. And although we encountered more other ore with ore-grade gold in 2020, on average, we continue to operate the mill at above nameplate capacity.

On Slide 7, Slide 7 is extremely important as it demonstrates Oyu Tolgoi commitment to operate in an ESG-compliant matter. Operating in the Gobi Desert provides the additional challenge of water scarcity, and you will see from this slide that our operation used only approximately 1/3 of the global average of cubic meter of water per tonne of ore process. In 2020, Oyu Tolgoi was awarded The Copper Mark. Traded in 2019, the Copper Mark is the first and only program for responsible production in the copper industry. The Copper Mark took the United Nations Sustainable Development Goals as its framework for responsible production and created a set of 32 environmental, social and governance issue area associated with sourcing minerals and metal.

By meeting these criteria, Oyu Tolgoi has again proven its continued commitment to environmental standards. With that, I will now hand the call over to Jo-Anne Dudley, our Chief Operating Officer.

Thank you very much, Steeve. On Slide 8, you can see the Oyut open pit the left-hand side and the Hugo North with one underground development on the right-hand side. Combined, these 2 ore bodies have an estimated 31-year life of mine as the basis of the 2020 reserves update in the Annual Information Form. The definitive estimate completed in December 2020 includes finalized pit locations on the Panel 0 boundary and an optimized drawbell layout to minimize exposure to the lower fault. This resulted in a nonmaterial increase in the Hugo North Mineral reserves of 10 million tonnes of ore, 0.18 million tonnes contained copper, and 0.07 million ounces contained gold.

The underground ore reserve has an average copper grade of 1.52%, which is more than 3x higher in the open pit for reserve and contains 0.31 grams of gold per tonne. The Oyut proven and probable mineral reserves are estimated at 3.3 million tonnes of contained copper and 7.2 million ounces of contained gold. The end of year reserves update incorporates a decrease of 41 million tonnes of ore from 2019, which includes depletion from mining, change due to new metal price assumptions, and change due to new slope design criteria.

The largest positive change in the 2020 Oyut open pit mineral reserve was the inclusion of a new slope design criteria. Although positive, it was not enough to displace depletion from mining. If we turn to Slide 9, Materials Handling System 1 progress continues with civil work complete on Primary Crusher 1 and steel and cable installation continuing. First, sustainable production for Panel 0 in October 2022 is on track but continues to be monitored. Overall, the underground lateral development has now reached 53,000 equivalent meters with development acquired before first drawbell substantially complete. All surface infrastructure required for sustainable first production is also now complete. With the assistance of vendor representatives on site, installation and commissioning of sinking-related equipment continues in Shaft 3.

In Q4 2020, activities at Shaft 4 focused on completing all construction and commissioning activities below testing and verification in preparation for shaft sinking, which commenced in early February 2021. However, progress is being monitored, particularly for Panel 1 and Panel 2 ramp-up, which Shaft 3 and 4 support and we'll communicate any implications at an appropriate time. The commencement of the undercut in 2021 is a key milestone, and it is critical to ensure that once commenced, the undercut and drawpoint construction continues unimpeded. This will require both technical support, such as competence and commissioning dates and materials handling system as well as the achievement of nontechnical criteria.

We're working with Oyu Tolgoi and other stakeholders to ensure that critical supporting aspects for a successful project are in place prior to commencing the undercut. Several mining studies are in progress and are focused on the evaluation of different design and sequencing options to Panel 1 and 2. These studies are underpinned by additional geology and geotechnical data that is being collected from underground and surface drilling. A design update for a subset of Panel 2 is expected in half 2 of 2021.

With that, I'll now hand the call over to Luke Colton, our Chief Financial Officer.

Thanks, Jo-Anne, and good morning, everyone. If I could ask you to please turn to Slide 10, and I'll provide a summary of our key financial metrics for Q4 and full year 2020.

Revenue for Q4 2020 increased 83% from Q4 2019, and that's driven by increases in both copper and gold production and price. For full year 2020, revenue decreased 7.5% versus 2019, reflecting overall lower gold production, partially offset by 27% higher average gold prices and marginal increases in both copper production and average copper prices by 2% and 3%, respectively. The lower gold production was caused from mining lower grade gold areas of the open pit through the majority of 2020. 2020 cash generated from operating activities before interest and tax was 9% higher than in 2019, and that's due to favorable working capital movements, partially offset by the decrease in revenue.

Lower gold credits in 2020 was the main reason for the increases -- for the increase in the unit cost basis for C1 cash cost. The unit cost basis for all-in sustaining costs was also impacted by the lower gold credits. However, this was more than offset by lower open pit sustaining capital expenditure.

If I could ask you to please turn to Slide 11. You'll see that Turquoise Hill had liquidity of $1.1 billion at the 31st of December 2020, which is expected to be sufficient to meet our requirements, including continued underground development into Q3 of 2022. This has improved from our previous estimate of Q2 2022, and that's driven largely by improved commodity price assumptions. The base case incremental funding requirement at the 31st of December 2020 is estimated to be $2.3 billion, and that's down from the $3 billion reported previously. This improvement is driven primarily by improved commodity price assumptions over the peak funding period. The incremental funding requirement includes the current project finance debt service and related costs, as well as principal repayments and, therefore, is estimated before any additional supplemental senior debt or reprofiling of existing debt is considered.

As per the MOU signed between Turquoise Hill and Rio Tinto in September 2020, both parties support the pursuit of reprofiling OT's existing debt as well as securing an additional $500 million of supplemental senior debt. The reprofiling of the existing principal repayments would decrease the company's incremental funding requirement by up to $1.4 billion. Our liquidity outlook and estimated incremental funding requirement will continue to be impacted, either positively or negatively, by various factors, many of which are outside the company's control.

The company continues to advance financing options to minimize its incremental funding requirements, as announced on the 22nd of December 2020, turquoise Hill completed the first phase of its comprehensive funding review process, and we continue discussions with Rio on these options in the context of the company's funding strategy. Any of the options, if implemented, would have the effect of reducing the company's incremental funding requirements. Successful implementation of such options may require us to achieve alignment and agreement with the relevant stakeholders, including Rio, existing lenders, potential new lenders as well as the government of Mongolia.

Finally, in Q1 2021, the company purchased copper and gold put options to establish a synthetic copper and gold price war. This was done to provide increased certainty around the company's liquidity horizon. Thank you very much. I'll now turn the presentation back to Steeve.

Thank you, Luke. I'm going to use the key milestone outline on Slide 12 to provide an overview of what we are working through in 2021 to keep us on track for the first sustainable production in October 2022.

The first milestone I will address is power. As you know, we had the first power milestone, the extension of the IMPIC Supply Agreement due on March 1, 2021, and the second milestone, the signing of a Power Purchase Agreement due March 31. On March 25, the government of Mongolia formerly noticed Oyu Tolgoi that the Tavan Tolgoi Power Station project will be implemented and we have -- and have requested the milestone date under the PSFA agreement be extended. Oyu Tolgoi are currently engaged with the government of Mongolia to agree to a standstill period following the lapse of the March 1 milestone and we'll continue to work with government to ensure a secure, stable and reliable long-term power solution is implemented.

The second milestone we are focused on is the arbitration with Rio Tinto and resolving the forecast funding gap. As we stated on previous calls, the arbitration proceedings have commenced in British Columbia, and we are bound by confidentiality agreements that prohibit us to comment on the arbitration proceedings until a binding decision is reached. At this time, we expect the arbitration proceedings to conclude in May.

On the funding front, as Luke outlined earlier, our base case funding gap as at 31st December 2020 is $2.3 billion. We have evaluated and presented a financing option to Rio Tinto and Erdenes and are currently in discussion to finalize a funding solution that takes into consideration the forecast requirements of the underground project with the objective of maximizing debt and minimizing a rights offering. The Oyu Tolgoi independent review of the cost and scheduled delays continue to advance. And as with the arbitration, we will not be in the position to comment on the findings until after the review is completed.

As most of you on the call are aware, the key milestone of 2021 is the undercut blasting, currently scheduled for June 2021. Once commenced, the undercut and drawpoint construction continues unimpeded. Turquoise Hill is engaged with Rio Tinto and Erdenes to address and agree on the undercut milestone with the joint objective of preserving the time line for the project completion.

I would like to thank you all for taking the time to join our conference call and I would now like to turn the call back to the operator for any questions.

(Operator Instructions) First question comes from Orest Wowkodaw at Scotiabank.

(inaudible) liquidity GAAP estimation, the $2.3 billion, that's down from $3 billion in the third quarter. Can you talk about how much of that $700 million decrease is strictly attributable to higher commodity pricing? And then secondly, what's the assumed minimum cash balance in this assumption?

Okay. Luke, can you handle that question, please?

Yes, of course. Thank you for the question. In terms of our funding gap or remaining funding gap, you're correct. It's reduced from the $3 billion down to $2.3 billion as per our year-end estimate. Your -- I think you probably have also -- you've already answered the question in asking it, but the majority -- the vast majority of the -- of that decrease is actually related to improved commodity price assumptions for both copper and gold. In terms of the way that $2.3 billion works in terms of any minimum buffer amount at the end, that $2.3 million is the full amount until we run out of cash. So that is the full amount of the requirement.

I see. So there's no minimum cash balance assumed in that. Okay. And then, Steeve, I mean, with the change here in terms of Ulf leaving and you entering, is there any change in the way you're approaching the arbitration? Like do you plan to follow that through in terms of getting an arbitration decision?

The arbitration is continuing, okay? That's -- like I mentioned previously, the objective is really to clarify the roles of each that was mentioned previously. And so I think that's important that we are proceeding. And I'm confident -- not confident, I know that, that will help both parties, Rio Tinto can argue to have a better understanding of the roles. And so we're proceeding.

You're proceeding. Okay. And then finally, is -- coming back to the financing again. Is it a nondilutive streaming transaction still an option that's being considered or is that now off the table?

Luke, you want to provide the detail?

Yes. No, of course. So listen, it's a good question. And let me just start by, I guess, reiterating our funding strategy. And it is -- the fact that it is based, obviously, on some basic principles, and that's really finding the best cost of capital, balanced with the need to ensure efficiency and stability in how we fund, careful and thorough consideration by the Board and the special committee of the relevant merits of the various sources of debt and equity and finding alignment with the relevant stakeholders and once the Board and special committee are happy. We have made significant progress on stabilizing and enhancing our financial situation this quarter. And as I've already talked about, that's driven by an extension of our liquidity and our hedging program.

In management, we are obviously working under the supervision of the special committee, and we remain committed to ensuring that the relevant negotiations continue with their view to arriving at a funding plan that is in the best interest of the company. And in terms of the options that have been looked at, there really isn't any change from what we've communicated in prior quarters. So we continue -- we've looked at, obviously, the options that are summarized in the MOU, which include reprofiling, additional supplemental senior debt, a global medium-term note program and, of course, we've done a lot of work around the streaming as well, as you indicated.

The next question comes from Dalton Baretto at Canaccord.

A couple more questions on the funding side of things. So first question. $2.3 billion funding gap, that's based on the $6.75 billion as far as I can see. Are you going to seek incremental liquidity to cover a potential overrun up to your 15% sensitivity?

Okay. Good question. I mean, guys, you will understand that after 5 days, I'm not around all the questions around funding and that detail. So Luke will answer all those ones. And Luke, you want to proceed?

Yes. Thanks, Steeve. Happy to try and answer that question. I'm not 100% sure what 15% is being referred to. But obviously, the focus of management and the special committee is to secure funding that is sufficient to meet the company's reasonable requirements and to make sure that we continue -- we can continue to do that into the future. And for that, that's the reason why we've investigated the various options that we have investigated.

In terms of that $2.3 billion number, and some of this has been stated previously, if we're successful in achieving our reprofiling objectives, that will, of course, reduce that funding gap from the $2.3 billion by $1.4 billion. So it will reduce it down to $900 million. We also, in the MOU that was signed in September, there was alignment that we should be seeking supplemental senior debt of $500 million. If we're able to do that, that reduces the funding gap from the $900 million down to $400 million. And from there, we have -- we've looked at various different options, and I've kind of summarized what those options are already. And those options, if implemented, would put us in a position where we could fill that remaining funding gap of $400 million or potentially more than that $400 million.

And of course, as a final backstop, we cannot -- we can't completely discount the possibility of an equity offering. But from our perspective, the objective continues to be to maximize the sort of low-cost debt financing and minimize the quantum of any equity offering as much as possible.

Okay. Great. So Luke, just to clarify, though. That 15% comes from the sensitivity that Rio put out around their definitive estimate. So maybe another question. The tax payments that you made in February, I think it was just over $200 million, is that coming out of your current liquidity?

Yes. So the tax payments have already been made. So the liquidity forecast that I think I just discussed of into Q3 2022 incorporates the payment of those 2 tax invoices, which the 2 together were about USD 230 million.

Right. But your disclosure -- your liquidity position as of December 31 that these payments were made in February, but you're saying the Q3 number assumed these payments were made?

No. I'm saying that on the 31st of December, we had liquidity of $1.1 billion. I mean, obviously, there's been activity since then. But what I'm saying is in terms of the number that we just put out for year-end in terms of our liquidity forecast, which is that we have liquidity into Q3 of 2022. That forecast incorporates the payments of those few tax invoices.

Right. Okay. And then just maybe switching to the undercut. And again, this is a bit of a funding question here. But the targeted date is in June, the Mongolian election is in June. On the off-chance that you guys don't wrap everything up to a level that is sufficient to initiate the undercut, what are your costs associated with every month delay? Let's say it gets delayed by 3 months. What's that going to cost you?

Luke, you want to -- do you have an answer on that one? I doubt and I'll be honest. Yes, okay. Go ahead.

So I don't -- listen, I don't think that's information -- unfortunately, I don't think that's information that's in the public domain. What I probably can refer you to is some sensitivities that we've done in prior period financial statements that indicated the impact of delay to first sustainable production would have a -- we did a sort of sensitivity around that. And I believe the sensitivity was for every 1 month of delay, that had a -- an impact on value or on NTV of about USD 100 million. So hopefully, that helps to answer your question a bit.

No, that's great. That actually puts some context. And maybe just one last for me.

Dalton, sorry to interrupt. I would say that we are all aware, okay, at the company, at OT and Erdenes, that this is a key milestone. And I can tell you we have a board meeting coming in pretty soon at the OT level. And definitely, this is a hot topic to make sure that we're all aligned to make that decision. And there are different things that are being done at the moment to align ourselves for that for -- to move ahead with that June undercut, okay?

Of course. And then maybe just one last one for me. Are you in a position to tell us what you've purchased in terms of the puts? Just notional amount, strike prices, that sort of thing?

Luke? Do you want to -- yes. Go ahead.

Yes. So again, that's unfortunately not information that we put in the public domain. But obviously, the intent of the sort of plain vanilla put options that we've put in place for a period of about 12 months, the intention of that is obviously to preserve our liquidity position on the downside to effectively protect us from sort of downside pricing, maintain that liquidity position for as long as possible so that we can obviously have the time that we need to continue these other important work streams that are underway.

And what obviously the hedging program doesn't do is cap the upside. So if prices -- if the prices continue to improve for copper or if gold bounces back, then we're not -- that doesn't put -- what we've done doesn't put us in a negative position in terms of being able to capture that upside.

The next question comes from Craig Hutchison at TD Securities.

Steeve, good to hear your voice again. Just -- you guys touched on the financing in quite a lot of detail this morning. But just in terms of the sequence events, can you walk us through how you sort of see the sequence of events unfolding? Do you have to wait until the arbitration is complete before you can work on the debt reprofiling in terms of locking up the supplemental debt with Rio Tinto? Can you maybe kind of give us some ballpark milestones in terms of how you kind of see that playing out?

I will take that one, Craig. I think that definitely, the work has been done to understand the

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in a couple of initial contacts, where definitely, we are working in the next couple of weeks and months, I mean that's -- we're talking short term here. That's when we will really engage pretty heavily or more heavier. And definitely, the arbitration will help us to redefine that we're expecting to be completed in May. We're following that, definitely. The roles will be clearer and will move ahead, okay?

So I would say, in your time frame, you should count, I mean, between now and June to see a lot of activities here.

earnings release.

Okay. And debt-free profile discussions going well?

Like I said, Craig, well there were some discussions and yes, I would say that we -- the estimate we have of $1.4 billion, we're quite confident.

Is your expectation that the new CEO, if it's not yourself, will be independent and that the new Board member will also be independent as well?

I am not going to be able to comment on that one. But I can tell you that the Board has started the process of replacing or having a new CEO and that they're definitely looking external and internal. So all the options are open. But that's a decision for the Board, Craig. I will not put myself in the middle of it. That's for them to decide, but they're looking at all options.

Okay. And maybe just an operations question. You guys, prior to your 2021 guidance, there was some issues around geotechnical concerns and Phase 4b, the open pit that changed the mine design in 2021, 2022. Are there any updates on how that status is going? And I think you guys were anticipating providing 2022 outlook once some of that work was done. So any update will be appreciated.

Okay. Yes. Craig, Jo-Anne will answer that question for you.

Okay. Thanks very much. Thanks, Steeve, and thanks, Craig. Yes. So with respect to that geotechnical event, it was really not anything outside of a business-as-usual situation. These things have happened at the Oyu Tolgoi pit in the past, and it's something that OT has dealt with a number of times. There's a sophisticated monitoring system in place as well as the sound ratio and control. The team is managing the area well with minor alterations to the mine design to deal with the structures of concern that led to that multibench value in a small section of the pit. And the areas will be mined in the next phase.

In terms of what we're seeing in terms of updated guidance beyond 2021, the sequence and design is under review, given the timing of the failure in December. It meant that we needed to rework the '22 plan and also include the usual business improvement kind of opportunities that are being considered, and that work is in process. We'll come back to the market as soon as we can once the work is complete.

The next question comes from Hayden Bairstow at Macquarie.

So a couple of questions from me. Just firstly on maybe just following this tax -- deferred tax asset that keeps sort of boosting the earnings every quarter. I mean how do we think about that going forward? I mean, it's now up to what over $800 million. I mean does that cover you for similar credits this year? Or -- so how do we sort of model that through?

Go ahead, Luke.

Yes. No. Thanks, Hayden. Good question. So listen, deferred tax, deferred tax credits is an area, as you can appreciate of estimation and certainty and judgment, and it's impacted by many variables, such as commodity price estimates, et cetera. Reserves and resource estimates, development capital estimates, mine planning, scheduling, et cetera. Broadly speaking, whilst the underground development continues until the achievement of peak production, we would anticipate additional losses to be incurred by OT and those additional losses would be resulting in further deferred tax credits.

So up until that period of time where OT has delivered the underground and they're no longer running losses, we would expect those deferred -- those additional deferred tax credits to continue to accrue.

Okay. And the same goes to your capitalizing interest, is that right through to sustainable production or peak production?

Yes. So under our accounting policy, and it gets a little bit technical, right? But under our accounting policy, borrowing costs related to construction or development of the underground are capitalized until the point at which substantially all the activities that are necessary to make the asset ready for its intended purpose are complete. So there's a degree of judgment there, obviously. But we estimate that at this point in time, that would be approximately equivalent to sustainable first production.

Okay. Great. And just on the sustainable target. I'm just interested to know, I mean, the commentary in the quarter, it basically implies that everything could be ready to go underground. Just, Jo-Anne, what work has to be done from here to get to first drawbell? Or are you basically ready to go for is drawbell? And as a result, what is the underground team actually doing between now and when you get approval to pick it up?

Jo-Anne, you want to take it?

Thanks, Hayden, for the -- yes, sure. Thank you, Steeve. Thanks, Hayden, for the question. Well, needless to say, people will be very busy working hard underground at the mine. And we're continuing to complete construction on Materials Handling System, which is on track. So there is still work to be done. There is remaining development required to support Panel 0.

So that work is still ongoing. As noted in the documents that we've just released, a lot of the on-footprint development of the levels, the 3 levels extraction undercut matrix level was largely complete. And so that development on footprint is largely complete, the pieces that are required before first drawbell. And so we continue to work on the Materials Handling System, and we'll continue lateral development work to support the ongoing development of the mine essentially.

And obviously, there's other work going on as well that supports us getting beyond the Panel 0 production rate and that includes mining of the conveyor to surface decline, which is progressing well this year and then also Shafts 3 and 4, that work continues as well.

0

Okay. Just a follow-up on that Jo-Anne. Just on the Shaft 3 and 4, I mean, just looking at the diagram in the presentation, the late delivery of those, does that impact the mining rate of Panel 0? Or is it more an impact on how fast you could ramp-up Panel 2 or 1, whichever one comes next?

Yes. So I mean, it's a good question. And Panel 0 production can ramp up without Shafts 3 and 4. And we continue -- as we've noted, we continue to see COVID travel restrictions impact travel, which means it's been challenging to get some specialists to the site. And I acknowledge all of the hard work of the teams in Mongolia or in -- and offshore teams to try to get people back into site, and we're making good headway on resuming regular flights where we can get specialists -- the specialist numbers up further to support that sinking.

So we probably should note that panels -- the panels can be mined independently. So there's not necessarily a technical need for continuous mining from Panel 0 to the other panels. And first sustainable production for Panel 0 is on track. We are continuing to monitor progress, as you would expect. And we will communicate any implications, particularly for Panel 1 and 2 ramp-up, with Shafts 3 and 4 support at an appropriate time as the information materializes.

Okay. Great. Just one final one probably for Luke, I guess, just on the CapEx guidance for this year. I noticed in the quarterly sort of broken out the underground CapEx into sustaining. Just sort of understand what that -- actually the difference between the 2 is? And how should we break up the sort of $1 billion for this year?

Steeve, do you want me to handle that one?

Yes. Yes, go ahead.

Yes. So the sustaining capital guidance that's sort of separately noted in the guidance is for the open pit. The underground guidance that was issued for 2021 includes an amount related to development capital. So this goes back to the work that's needed -- that needs to be done to deliver sustainable first production on the underground for Panel 0. And then there's also some work that's more of a sort of, we call it the underground sustaining capital, which a lot of it relates to the progression of Panels 1 and 2.

Okay. So is it a material part of the $1 billion? Is it similar to the breakout that we got in that quarter? Or how do we think of that?

No. The majority -- the large majority of it -- sorry, Hayden, I don't have the exact number off the top of my head, but the large majority of that number relates to underground development capital, which is the capital that's needed to deliver Panel 0 sustainable first production.

The next question is a follow-up from Orest Wowkodaw with Scotiabank.

I'm just curious again on first drawbell expectations. What is the current expectation there? And it does sound like you're getting fairly close with respect to the actual physical work required to be able to do first drawbell. But are -- it -- like, are we still expected that this could get put on hold waiting essentially for some of these nontechnical aspects to get sorted out before first drawbell will happen here?

Yes, Orest, that's a good question. But I can reassure you that we are all focused to make sure that the nontechnical -- I agree, the technical aspect, that's easier, if I can say it this way. But on the nontechnical aspect, we are definitely working hard, every shareholders or every stakeholders, to make it happen. And I don't see -- I -- we are on target. We're working on all these issues and that I don't see definitely, at the moment, anything that would divide or change that date.

Okay. And that data is what right now, in terms of best estimate?

Jo-Anne, would you remind me that date for the first drawbell?

Yes. No problem. Yes. So we don't -- we haven't disclose the first drawbell date in its current pace of work. But what we do talk about is quite meaningful, which is sustainable first production in October 2022, which is when we really start drawing the cave and undercut blasting is in -- is planned for June 2021.

I see. Okay. And then just on the power. Certainly, there's -- it seems like the power plant is being pushed back a little bit here. But is it your expectations that the cost for power are going to be roughly similar to what they currently are in terms of imported power? And perhaps the cost of purchasing power domestically, is that already included in the definitive study cost estimates released last year?

Yes. What -- unless Luke has a detail on that one, I must say that I -- Orest, I don't have a detail on that one at the moment, okay, what would be the cost between the different alternative. Didn't get time to do it on the last 5 days. But Luke, do you have more detail on that, or?

Yes, listen, I can try to provide a bit more detail.

Okay. Go ahead.

So -- As people on the call would know, we signed an amended -- an amendment to the Power Sector Framework Agreement back in June of 2020. And under the that amended agreement, the agreement was to prioritize a state-owned state-funded power plant. So the estimates that I've just sort of summarized around funding GAAP liquidity, et cetera. They assume a state-owned state-funded power plant.

The amended PSFA also has some fallback options. So in an event that the state-owned state-funded power plant, for whatever reason, if it were to not happen, there are fallback options in that amended PSFA document that include grid supply, include a renewables option and also a coal-based -- an OT-based coal-fired power plant. But those alternative options don't form part of the sort of base case estimates for funding gap in liquidity that I talked about earlier.

There are some milestones in the PSFA. The first of those milestones was related to an extension of the current IMPC contract. And that milestone was actually the 1st of March, so we just passed it. The government of Mongolia did formally notify OT and Rio late February that the Tavan Tolgoi, this state-owned state-funded power station project, will be implemented connected to the central energy system and operated under a unified low dispatch control. So there's still some work to be done, obviously, and the government of Mongolia suggested that all the milestone dates under the PSFA amendment agreement should be reconsidered and extended. OT is engaging with the government of Mongolia in relation to that and hopefully to agree a standstill period following the lapse of that 1st of March milestone.

During the standstill period, OT would -- we would not -- wouldn't exercise its right to select and proceed with an alternative power solution, but would be waiving it -- but also would not be waiving its right to do so in the future. And there, as you can appreciate, there are discussions that are underway in relation to all of that to work out the reasonable pathway forward on power. So that's kind of the update on power that I'm able to provide. I hope that's helpful.

Well, I'm not sure -- I appreciate the color, but I'm not sure you actually answered my question. What is assumed in the definitive estimate that was put out in December? Does it assume imported power? Does it assume the purchase power from Tavan Tolgoi? I guess what is assumed in the cost estimates, operating cost estimates, life of mine?

We may have to go back and double check that actually. I believe that those estimates assume sourcing of power from within Mongolia under the options in the PSFA, but we may have to take that question away. Jo-Anne, unless you happen to remember off the top of your head. That's my recollection at least, but we may have to take that question away.

Yes, I can help, Luke. It's that -- there certainly was a consideration of the current agreement to supply. As -- and as I understand, it's a switch to an in-country solution. So I can't exactly say when that changeover was in the modeling, but I understand -- as I understand it, they are both considered in that estimate, and there was a change over time between the two.

Okay. So I guess on that one, we'll have to get back to you and probably give you a bit more guidance in terms of timing of the current contract, when it expires and what is assumed. We'll do a follow-up on that.

The next question comes from Ralph Profiti at Eight Capital.

Welcome back, Steeve. Luke, maybe this is a question for you on potential tax assessment risk going forward. And basically, when do you file the 2019 taxes? When do you file the 2020 taxes? Are these sort of based on North American corporate standards? And do you have an estimate based on the Mongolian Tax Authority methodology on what tax -- those tax assessments could look like? And is the intention to partially pay those down? And could we see those before the third quarter of 2022?

Luke, do you want to go ahead?

Yes. Yes. So let me try and answer the second part of that question first. I mean, in terms of the timing of our tax -- our tax filings in Canada, that would just as -- that would just be as per the sort of normal course stuff. I mean, it would be similar in Mongolia as well. In terms of the actual tax assessments in Mongolia, they've -- we've received tax assessments for period 2013 through 2015 and period 2016 through 2018. So you could expect the next audit to start in due course over subsequent periods. So '19 and '20. I'm not sure of the exact timing of when that would start, but you would expect, obviously, those periods to be looked at in normal course as well.

So in terms of the actual payment of tax, OT pays in the normal course all of the tax that I believe it owes. And then in -- and then there are obviously the outstanding assessments that are the subject of the current international arbitration. In relation to the 2016 to 2018 tax assessment, we have paid the amounts. So those are the payments that have been recently made, the $230 million that was discussed previously. Those invoices were received by OT and have been paid by OT now.

In terms of the overall international arbitration process, that process still continues. It will continue over the course of 2021 and into 2022. We still are quite confident in the company and OT's position around the outcome of those international arbitration proceedings. And so we do continue to feel quite positive about a favorable outcome in due course.

Fair enough. I got it. Okay.

Yes. So Ralph, I would just summarize that our -- we're paying our tax and we pay the amount that were based on the understanding that we have of the tax law in Mongolia. And like Luke mentioned, I mean the amount are in arbitration at the moment. The law forced us to -- forced us, that's a wrong word. By law, we have to pay these amounts of these right away, okay? So there's no delay because we're in this agreement.

So when they make an assessment, we have to pay right away. And then we go to arbitration or we debate it. And that's why, from my point of view, we're in arbitration. We believe these -- we have paid the right amount of tax and we'll see. So that's why in any calculation, you have to be careful to make assumption that we will have these changes. I mean, from our point of view, we're paying what we're supposed to.

The next question comes from Myles Allsop from UBS.

Just a couple of things to clarify. First of all, the undercut in June, is there any flex to that to get to first sustainable production in October or every month that the undercut is delayed, if it does get delayed, would result in a month delay to first sustainable potion? That's the first question.

Myles, I've got a problem to hear. Jo-Anne, can you handle that question, please?

Yes, sure, sure. Thanks, Steeve, and thanks, Myles. In terms of what will happen between the undercut blasting, the commencement of the undercut and first sustainable production, there is a sequence of events, if you like, that need to happen. So we need to progress the undercuts and create a shadow for drawbells to be constructed underneath. And we need to get then enough drawbells constructed to reach critical hydraulic radius, at which point we say we've got to sustainable first production. And so there is a sequence of events that needs to happen.

There may be some sort of flex between how much is done depending on timing. But in general, it is a sequence of things. So it is important to consider that when we're thinking about what happens in between those 2 dates, if that makes sense.

Okay. That's helpful. And then who makes the decision about the undercut? Is that the OT Board? Or how much interest does Rio have in terms of the timing of that as you see with uncertainty?

Jo-Anne, on that one?

Yes, sure. And so the intent is that the OT Board would approve -- would ultimately approve the start of the undercutting and that TRQ would also follow its own governance processes with its Board prior to that. And so it is a decision taken at the highest levels of the organization.

But ultimately, Myles, this is a decision of OT Board. Okay?

Yes. Yes. Okay. Understood. And then the $2.3 billion funding gap could you give us a sense -- I mean you have -- you mentioned you assumed higher copper and gold prices. How much higher are those copper and gold pricing versus the puts option and support level? Are they meaningfully higher? Close to spot? Or how much risk is around $2.3 billion, very volatile to what is the price environment?

Luke, I think you can and you should -- you can answer that one.

I will do my best. So the prices assumed in our base case, $2.3 billion, are -- they're based on kind of consensus pricing at approximate to the reporting date, so 31st of December. Obviously, the price -- the spot -- current spot price for copper is higher than what consensus price would have been on the 31st of December. So if you assume spot pricing, you -- as a sensitivity, you may have -- that would improve the liquidity position. It would improve from that perspective. The hedging program, we haven't provided a lot of details around what the floor is, and I don't think I can get overly specific. But I -- to answer your question, I -- if I remember correctly, I believe the floor is -- it provides downside price risk protection of basically 10%. I think it's about 10% of the base case.

So from that perspective, we're shielded from any sort of downside pricing reps for copper and gold of more than 10% from the base -- that base case, if that makes any sense at all.

Okay. No, that helps in terms my understanding. One other question because that we had just -- there's been some change in the Mongolian tax law at the beginning of January. And then there's been some talk about thin cap rules and net tax due 3:1. And how -- is that a concern for yourselves or why is that not a concern?

Okay, Myles. I cannot -- I don't -- could not get exactly. Are you talking about a change in the tax -- the tax?

Yes. So the change in Mongolian tax regulations and rules on how (inaudible) moves an issue potentially. I really have no idea, whether there's some tax [issue] over here.

Yes. Luke, you would have a comment on that?

So the 3:1 debt to equity, we've already been operating under that assumption. So I'm not sure specifically what changes to Mongolian tax law you're referring to. We do have a very strong tax team at the OT level that will obviously be all over that, and we'll make sure that we maintain compliance from a tax perspective, and we continue to pay the amount of tax that we owe, as we always strive to do in Mongolia and all of the jurisdictions in which we operate.

Around the thin -- around that thin cap point, I don't believe it's an issue at this stage. And we are always operating under the sort of 3:1 debt-to-equity ratio anyway. So I think, hopefully, that helps answer the question. We can follow it up with more detail if we need to, but no issues have been highlighted to me.

Thank you. Ladies and gentlemen, we have reached the end of our Q&A session. I will now turn the call back over for closing comments.

So Roy, are you making any comments? Sorry, guys, that's my first one. So Roy, do you have any comments, additional, or should I just make one?

No, we're good to end the call, Steeve.

Yes. Okay. But I would say -- can I just make a comment? Thank you very much, guys, for the call, and I'm sure in the next couple of weeks, we'll have time to discuss and have a call -- engage in a call with you guys. Okay. Thank you very much for the call.

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