Turquoise Hill Resources Ltd (TRQ) 2020 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 First Quarter 2020 Results Conference call. (Operator Instructions) Thank you. Roy McDowall, you may begin your conference.

Thank you, Joanna. Good morning. I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our First Quarter 2020 Financial Results Conference Call. On Wednesday, we released our first quarter 2020 results press release, MD&A and financial statements. These items are available on our website and SEDAR.

With me on the call are Ulf Quellmann, our 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 18, 2020, as supplemented by our MD&A for the 3 months ended March 31, 2020.

And now I'd like to turn the call over to our Chief Executive Officer, Ulf Quellmann.

Thank you, Roy. And good morning to everyone. Thank you for joining us this morning for our First Quarter 2020 Financial Earnings Call. It was only a relatively short while ago that we hosted our 2019 year-end conference call and yet the impact of the coronavirus pandemic has become far greater than probably most of us might have expected at the time. On a personal note, we hope that you and your families are healthy and safe, and you're able to adapt to the new realities that all of us are being presented with.

Turning to yesterday's first quarter update and the announcement of the updated Panel 0 mine design. I'd like to begin by providing with an overview of the quarter, and then turn the call over to our Chief Operating Officer, Jo-Anne Dudley, to take you through the updated Panel 0 mine design and finally to Luke Colton, our Chief Financial Officer, to summarize our first quarter 2020 financials.

In Mongolia, the COVID-19 situation escalated in early March when Mongolia recorded its first case of COVID-19. Oyu Tolgo team responded quickly and worked with local and federal authorities to ensure the health and safety of our workforce, their families, the local communities, while the Government of Mongolia acted decisively by halting international rail, flights and intercity travels. The immediate impact of travel and border restrictions slowed supplies into Oyu Tolgoi and concentrate deliveries to our customers in China. However, the open pit operations continued uninterrupted. As of today, Oyu Tolgoi has not recorded any cases of COVID-19 and does not have any employees or contractors in isolation.

In addition, Mongolia itself has not reported any recorded locally transmitted cases. The situation of the border has stabilized, with shipments of copper concentrates into China and supplies into Oyu Tolgoi returning to normalized levels. The Oyu Tolgoi's Business Resilience Team meets on a daily basis and continues to work with the Mongolian authorities to monitor and prevent the possibility of any COVID-19 cases.

From an operations and underground development perspective, the team has done an exceptional job of managing the impact of the COVID-19 pandemic. The open pit operations continued uninterrupted through the first quarter, with copper and gold production remaining on track to achieve our 2020 guidance. In addition, the team was implementing initiatives to bring forward the higher gold-bearing ore into 2020, which is expected to o lead to gold production at the upper end of the guidance range. Important to note is that excellent level of productivity has occurred with a backdrop of continued best-in-class safety record. That remains the Oyu Tolgoi's team's top priority. And although we have experienced slowdown in certain areas, progress on the underground development has continued as per expectations as we've been able to cross-train our highly skilled local workforce to alleviate the impact of the travel restrictions and focus on critical part of infrastructure. Productivity improvements have resulted in a lateral development grade averaging 1,822 equivalent meters in the first quarter versus 1,607 equivalent meters in the fourth quarter of last year, with March setting a new record of 1,939 equivalent meters.

As I touched on earlier, the first quarter was another excellent quarter from an open pit productivity perspective. Although we are transitioning through the lower grade areas of the pit, considering the impact of COVID-19, the team has done an excellent job of keeping production in line with our guidance.

Mill throughput is another metric to note. We processed over 119,000 tonnes per day, which is well above the nameplate capacity of 100,000 tonnes per day.

Now before I turn the call over to Jo-Anne to discuss the updated Panel 0 mine design, I'd like to take a moment to thank our shareholders for their continued support. As you'll recall, in July last year, we announced that stability risks have been identified with the original Panel 0 mine design with an associated estimated increase in the schedule to sustainable first production of 16 to 30 months, and an increase in capital development cost of $1.20 billion to $1.9 billion. We set a time line to complete an updated mine design by the first half of 2020. And now, after extensive geotech modeling and a thorough technical assurance program that included independent third parties, the updated design changes for Panel 0 have been approved by the TRQ Board.

And with that, I'd now like to turn the call over to Jo-Anne to take you through the underground development and the Panel 0 mine design. Jo-Anne, over to you.

Thank you, Ulf. Hello, everybody. Please go to Slide 7. Before turning to the update on the Panel 0 mine design, let me provide you with a snapshot of progress elsewhere. A key milestone towards the progression of the underground development was the completion of Shaft 2 in October last year. Shaft 2 has been performing well, but payloads and hoisting speeds on the production hoists are currently reduced due to routine stretching of the newly commissioned ropes. We're working through this ordinary course issue with remote support with no impact on underground lateral development to date. Shaft 3 and 4 saw very good construction progress during the quarter and are nearly ready for sinking works to commence. Due to travel restrictions arising from COVID-19, these shafts have now been put into care and maintenance until specialist personnel can reach the mine site.

But I'd like to note that the initiation and ramp-up of Panel 0 can proceed without these shafts commissioned. Primary Crusher 1 civil works are ongoing, and the team has successfully poured the tenth level of crusher pour. Despite Shaft 3 and 4 being on care and maintenance and the slowing of construction work on the primary crusher system, our team achieved a new record of 1,939 equivalent meters of lateral development in March and a record average of 1,822 per month for the quarter. Progress continues on the conveyor decline with over a kilometer of equivalent meters developed during the quarter.

Please turn to Slide 8. You'll now recall from our fourth quarter update that we've guided the market to expect the new Panel 0 mine design in the first half of 2020. And we've made some important steps to guide that design over the past few quarters. The Panel 0 mine design decision has now been made by the TRQ Board with this caving method of mining remaining valid. And the design and location of all the other major infrastructures, such as shaft and primary crushers, are unchanged from the feasibility study. The design changes are focused around the Panel 0 mining area, which is the highest grade of the Oyu Tolgoi underground and remains our priority target.

The updated design provides increased resilience in execution and operations to geotechnical conditions in Panel 0 as now understood. The decision was supported by updated geotechnical modeling and a rigorous technical assurance program involving third-party experts and considered consequential impacts on and risks relating to recovery, geotechnical constructability, operability, schedule, cost and value.

Since the phase of mine design studies will include design optimization for Panel 0. And the review of mine design options of Panel 1 and 2 to utilize the learnings from the Panel 0 work. The Panel 1 and Panel 2 studies will be informed by additional data collected from an underground drilling program, which is in progress.

Please turn to Slide 9. The approved Panel 0 design remains within the ranges previously disclosed and anticipate a delay to the 2016 technical report, key project milestone of sustainable production of 25 months, with a range of 21 to 29 months, inclusive of an allowance for scheduled contingency and an increase in development capital costs of $1.5 billion with a range of $1.30 to $1.8 billion. This is subject to any additional scheduling delays or increases in capital costs arising from the impacts of the COVID-19 pandemic.

As I've said earlier, many of the fundamentals for the mine design remain unchanged from the 2016 feasibility study, with the changes to Panel 0 focused on addressing the stability that was highlighted by updated geotechnical modeling.

The updated design varies from the 2016 design primarily through the incorporation of structural pillars located immediately north and south of the current Panel 0 boundaries and relocation of all handling infrastructure to these pillars. This addresses the risks of damage to the ore handling system in the original position as identified by updated geotechnical modeling. A change to initiate via a single undercut face instead of 2 reduces the complexity of managing 2 separate but related work areas, and improves the separation of mine construction and production activities.

Incorporation of pillars provides the opportunity to initiate Panels 1 and 2 independent panels or blocks, allowing design optimization, and for these areas to be developed discretely, enabled by the required ventilation and ore handling infrastructure as well as lateral development progress.

Overall, the changes provide a robust platform to develop and operate the Hugo North Lift 1 (inaudible) and will now undergo a period of further detailed design, engineering and optimization to support the definitive estimate during the second half of 2020, again, subject to any delays due to the impact of the COVID-19 pandemic.

I'll be available for questions. But in the meantime, Ulf, would you like to continue?

Thank you, Jo-Anne. Before I turn the call over to our CFO, Luke Colton, let me just provide you with a quick update of our multiple discussions with the Government of Mongolia.

First, turning to power. As you know, Oyu Tolgoi is obliged under the 2009 investment agreement to secure a long-term domestic source of power for the Oyu Tolgoi mine. In February of this year, Oyu Tolgoi submitted a feasibility study for a Tavan Tolgoi Power Plant, TTPP, with an estimated cost of $924 million. At the same time, a notice of contingency under the Power Source Framework Agreement was submitted by Oyu Tolgoi to the Government of Mongolia. This note has initiated the first phase, Phase 1 of the contingency process, which attempted successfully to agree on a basis for the TTPP, the Tavan Tolgoi Power Plant to proceed.

Now the second phase of the contingency process has commenced, where Oyu Tolgoi and the government consider the alternatives to the TTPP prescribed in the Power Source Framework Agreement. On the 14th of April, the Ministry of Energy notified Oyu Tolgoi of the government's decision to develop and fund a state-owned power plant. Oyu Tolgoi is currently in discussions with the government to allow continued consideration of TTPP as well as the state-owned power plant. Reaching such an agreement remains our objective. However, if such an agreement cannot be reached between Oyu Tolgoi and the government by the 14th of June, then thereafter, Oyu Tolgoi is entitled to select and implement one of the alternative options that are outlined in the Power Source Framework Agreement.

In reference to the outstanding tax dispute between Oyu Tolgoi and the government, on the 20th of February, Oyu Tolgoi proceeded with the initiation of a formal international arbitration proceeding in accordance with the dispute resolution provisions of the investment agreement. We remain of the opinion that Oyu Tolgoi has now paid all taxes and charges required under the investment agreement, ARSHA, the underground development plan and Mongolian law.

As we announced in December last year, the Parliamentary Working Group finalized its report from which a resolution was put forward for the Government of Mongolia to enter into discussions to improve the implementation of the investment agreement and improve the underground development plan. This also included a variety of other measures, including, but not limited to, exploring options of a product-sharing agreement or swap Mongolia's 34% equity holding for a special royalty. At this stage, representatives from Turquoise Hill and Rio Tinto are engaged with the government to resolve these issues and we will update the market as and when appropriate.

So with that, let me now turn the call over to Luke Colton, our Chief Financial Officer, to take you through our financial highlights. Luke, over to you, please.

Thanks, Ulf. And hello to everyone on the call. If I can get you to please turn to Slide 12, and I'll give you a summary of our key financial metrics for Q1 of 2020. There are some significant variances when comparing the metrics in the first quarter of 2020 to the first quarter of 2019. The primary reason for this is due to the planned transition into mining lower grade Phase 4B and Phase 6B ore together with stockpiles. The reductions in head grade and recovery led to a 78% decrease in gold production and a 23% decrease in copper production when compared to Q1 2019. Now this ultimately led to a 63% decrease in revenue from Q1 2019 to Q1 2020, which in turn contributed to lower cash generated from operating activities. The 75% decrease in gold sale revenue was the main reason for the increase in C1 cash costs from $0.77 in Q1 2019 to $2.07 per pound of copper produced in Q1 of 2020.

The period-on-period increase in all-in sustaining costs was not as significant as the increase in C1 cash costs, and this was primarily due to the offsetting impact of lower sustaining capital expenditure and lower royalty costs due to the lower sales revenue.

If I can ask you to please now turn to Slide 13. Turquoise Hill's liquidity balance at the end of March 2020 was $1.8 billion, with $1.6 billion in cash and cash equivalents and $200 million of remaining project finance proceeds. In addition, we expect to generate free cash flow at our existing open pit operations, subject to any impact of COVID-19, and this will also be available to help fund the underground development.

We currently expect to have enough liquidity to fund operations and underground development, including progression of a power solution into Q3 of 2021. This timing has been extended since the March 2020 earnings call as a result of an estimated slowdown in underground development spend, arising from the potential impact of COVID-19, which has restricted access of the mine for teams from OT, Rio Tinto and our construction partners. This has also led to a downward revision of both our underground development guidance range for 2020 to $1 billion to $1.1 billion as well as the downward revision of the upper end of our open pit operations guidance range from $120 million to $100 million. As work to complete the definitive estimate, the Panels 1 and 2 mine design study and to secure a long-term domestic power solution progresses, Turquoise Hill will continue to evaluate its cash flows, liquidity and financing projections. While funding requirements will be clarified by the ongoing, work, we are well progressed in discussions with Rio regarding a proposal for sourcing incremental interim funding to ensure Turquoise Hill can progress the underground developments over and above its $1.8 billion of available liquidity.

Current estimates indicate an incremental funding requirement over and above liquidity currently available of at least $4 billion. This current estimate has improved from the at least $4.5 billion previously disclosed due in part to the selection of the Panel 0 mine design, coupled with lower forecast LIBOR rates. As the slide shows, the at least $4 billion estimate is dependent on many variables, all of which could impact the quantum of incremental funding required. And of course, the company will continue to assess the possible impacts of COVID-19 on its operations, development activities as well as its incremental funding requirements.

And with that, I'll hand back over to Ulf.

Thank you very much, Luke. So to wrap it up, the first quarter of this year has been all but overshadowed by COVID-19 and the impact it has had on the health and safety of really everyone around the world. And everyone is still trying to assess the full impact on the global economy as well as the financial markets.

In light of an unprecedented event such as this, it is our belief that Mongolia as well as Oyu Tolgoi have demonstrated an extraordinary capability to manage and mitigate the impacts on its workforce, the broader community and its business performance in an outstanding fashion. Mongolia has done a tremendous job in containing and minimizing the impact on its people. And Oyu Tolgoi, as a business, has been able to safeguard the well-being of its people, and to operate and deliver under the most difficult circumstances. This achievement, and of course, we know that the challenge is far from over, speaks to the resilience and the ingenuity of the Mongolian people who, of course, make up more than 94% of Oyu Tolgoi's workforce.

Our safety record remains strong. Our open pit operations have continued thus far uninterrupted. The underground mine development and construction have progressed, albeit they are experiencing challenges, primarily as a result of not being able to get specialists and supervisory foreign national society. But we are exploring creative ways to mitigate these impacts as best we can. Importantly, we have improved the mine design for Panel 0 that we are now taking forward to execution level planning, culminating, ultimately, in the DE, the definitive estimate, later this year.

So since July of last year, we have done what we said we would do. We've laid out a process map that we shared with the markets, and we have delivered on those key milestones, and that's what we intend to continue to do. The caveat in all of this, of course, is the precise impact of COVID-19 on our key activities, which today remains unquantified.

We have more work to do, both on power as well as financing. Luke just updated you on the latest minimum funding requirements as well as the work and the discussions we continue to have with finance providers. The discussions are progressing, and we are absolutely focused on those.

Also recall, though, that we have available liquidity that sees us into the third quarter of next year. So whilst funding is absolutely important and a priority for us to lay out a funding plan, there is no immediate cash shortfall.

And on power, we are working with the Government of Mongolia to progress sourcing power from within Mongolia. There are a variety of options available, and each one of them has its own advantages and challenges. The PSFA, the Power Source Framework Agreement, is a contractual framework within which these discussions are taking place. The government has most recently put forward its preferred concept, and we are now in discussions to find a way to embed this concept into the PFSA framework, which we hope to be able to do soon.

So the priorities remain clear. We are seeing Oyu Tolgoi progressing on many fronts and delivering against the milestones we've set out. The quality of the ore body and the quality of Oyu Tolgoi as a business remains world-class, and it is well on its way to being one of the world's Tier 1 copper mines.

We've been able to demonstrate important progress in the key area of mine design, and you're able to see what Oyu Tolgoi's largely Mongolian workforce is able to do in the face of adversity as evidenced by COVID-19. So there's a lot to be done, but we're certainly well on our way.

So that concludes our prepared remarks. And with that, operator, could I please turn the call back to you for any questions, please.

Thank you. (Operator Instructions) The first question comes from Orest Wowkodaw from Scotiabank.

I'm curious now that you've completed the mine design for Panel 0, can you give us some color on what the ramp-up schedule would look like once you achieve that initial for sustainable production, which I take it, based on the 25-month delay, it's more like first quarter 2023? And I'm curious specifically whether the ramp-up profile for the copper and the gold has changed materially at all from what we saw in the 2016 tech report?

Orest, thanks for the question. If I may, I may have to add a little bit of a facilitator on the call this morning because we're all working from different places. Jo-Anne is -- I hope you could hear the question. Are you -- do you want to address Orest's questions?

Yes, absolutely. Thank you, Ulf, and thank you, Orest, for your question. So at this stage, the decision that's been approved, really, is focused on the Panel 0 area. And there is some ongoing optimization work that's being completed to understand the full impact of the changes. We also are continuing to work on design refinements of Panel 1 and 2, which also required to be part of the ramp-up, as you would know, from that 2016 technical report. So as part of that design review work, we'll be further reviewing any impact on ramp up, as the work is still in progress, and has yet to be completed. However, it is worth noting that with incorporation of pillars to the north and south of Panel 0, there is some flexibility to start Panel 1 and 2 independently, as -- and that will be dictated by infrastructure availability, like ventilation and ore handling and development progress. And so that work will be going on through 2020.

Sorry, but I'm not sure I understand. Are you saying that it's too early to know if there's a material change? Or maybe I can ask, do you anticipate there will be a material change for the ramp-up profile?

Yes. So it's too early to say. The design gives us flexibility on the starting of -- on the initiation of Panel 1 and 2, the design decision for the Panel 0. And so there is some opportunity provided with that, but that work is ongoing, and it just hasn't crystallized yet. It is a good question, but we're just not there yet.

And then if I could, can you just give us an idea of how much contingency is embedded in the new development plan and capital overrun number with respect to, say, number of months or dollars for the budget?

Yes. So another good question, Orest. So there is contingency included in the range provided and the estimates. And these things are calculated on each schedule and the degree of progress that has been made. So in this case, we're not -- we haven't specified the contingency, but there is contingency included, as you would expect and as you have seen in the past with the work that we've communicated.

Okay. But you can't quantify it?

Not right at this moment.

Can I just add to supplement Jo-Anne's comments? Yes, we're not in a position to publicly provide what the contingency is. I think what I just want to highlight, Orest, we are keen and we're working to update the markets on the progress we made on mine design, which is what we've done. We were also keen to provide the market with an update on ranges, right, for schedule and for capital costs, and that's what we've done. There are ranges because, of course, that's where we are at the moment from a level of precision, if you like. So that's why there are ranges as opposed to precise numbers. But we wanted to do that at this point in time because we felt it was appropriate for that. That's why, also, we have a contingency in the numbers at this stage. The final number, if you like, or the definitive number, both on cost and schedule, you will then receive when we get to the definitive estimate, which is later this year.

The next question comes from Hayden Bairstow from Macquarie.

Just a couple of quick questions. Firstly, on the new sort of mine plan. Do we need to sort of almost throw out the old numbers in terms of 65,000 of development pre-getting sort of the thing underway, given you're now that to sort of ore handling areas as opposed to 1? And all these numbers will come out in definitive estimates. So we'll get -- so there's no points of looking at your quarterly development rates to say getting closer to the finishing of the predevelopment work? That's the first one. And then the second one, just on -- I noted in the commentary about the completion of the Panel 1 and 2 work won't be done until '21. So the definitive estimate won't be definitive? It won't have life of mine CapEx and all that sort of stuff because you won't actually have finished all of the Panel 1 and Panel 2 design work, is that a fair way to think about it?

Yes, 2 very good questions, Hayden. Again, I think, Jo-Anne, on this call this morning, I'm afraid you may probably get the bulk of the questions. But are you -- could you hear the question from Hayden? Jo-Anne, do you want to start answering? I can supplement in the end if needed.

Sure. Thank you, Ulf, and thank you, Hayden. So in terms of the way we should think about things, I mean, we have provided an update of the sustainable production date, and that is a key value driver for the mine, and that's why we're focused on that base. It's not necessarily meaningful to think about the development meters, for example, because there are multiple critical paths on the project, and some of them are developed meters and some of them are other aspects of the schedule, like infrastructure, ventilation and material handling, for example, and all of these pieces build to give us the date at which we can start ramping up, which is first sustainable production. So we're best to focus on the dates in front of us for the start of ramp-up, if that makes sense.

In terms of the definitive estimate, a key aim of the definitive estimate is to provide an update -- a very accurate update on the development capital estimates, which is really about the infrastructure component that is being constructed. And so -- but that particular portion of the estimate will be quite of good quality, subject, of course, to the current changes that we're finding as a result of COVID-19. So we have some aspects of the construction that is being impacted. So does that answer your question, Hayden?

Yes. I guess just trying to get an understanding the definitive estimate, I assume would be a -- provide updates for everything, but clearly we won't have life of virus. It's more a focus on the front-end CapEx. But just on the underground development thing, I understand what you were talking about, but the previous numbers that were in the study is about, we needed 65,000 of lateral development to get going. There's probably more than that now. So there's no point in thinking about those numbers as relevant. We'll see all those in the definitive estimates.

There will be -- yes, so there will be an update provided at some other time and there has been scope change over that period. So it is a good way to think of that. I think -- I mean, just -- sorry, back to the definitive estimate question. There is work going on, and drilling proceeding on the footprint to try and understand any residual uncertainties. And we'll get a significantly improved picture over the remainder of 2020 of how things are going to work out in terms of that life of mine picture.

Okay. And, Ulf, if I could steal one final one, just to give Jo-Anne a rest. Just on the funding shortfall of $4 billion. I mean, almost half of that from memory was the debt repayment schedule. I mean, the force majeure declaration on the debt, does that change that repayment schedule? Or has it just changed the longstop? And if we strip that out, obviously, the funding shortfall is way lower. This power station development is pretty interesting. I mean, does that potentially remove the power station cost or a large proportion of it from part of this potential shortfall?

Thanks, Hayden. I'll let Luke comment in a second, maybe on the force majeure, the longstop date. Just on power, the second half of your question. What you are right to point out, Hayden, is as we are still looking at various options. And if you were to take the government's preferred option, which is what they call the state-owned and funded option. If we ended up with that option, and that was absolutely executable in OT's requirement, then, of course, that would have a material impact on the funding requirement because it would all of a sudden, remove a big chunk of the funding from OT if the government decided that it was willing to fund the power plant, right? And so you're absolutely right to point out that if that is where we ended up, and of course, that's not certain at the moment, but if that's where we do end up, then that would have a big material impact on the minimum funding requirement. Maybe, Luke, with that, do you want to comment briefly on the first part of Hayden's questions around force majeure and implications on longstop date and the size of the debt service, really, as part of the funding gap?

Yes. No problem. The question is a good one, and the answer is simple. The impact is really on the longstop date, Hayden. So at this stage, we're not really expecting the sort of near-term interest and principal repayments are going to change at all as a result of this. So that's the quick answer. Happy to go into more detail if you want, but that's the quick answer.

The next question comes from Oscar Cabrera from CIBC.

Just saying, I hope you and your families are well in this uncertain times. So a couple of things from me. The first is can you disclose the critical path items in the underground in order to meet your 25-month delay? It sounds like Shaft 3 and 4 are not part of this critical path. And if they're not, then how long can you wait to think this before it starts affecting future underground development in production?

Thanks, Oscar. I'll pass the question in a second to Jo-Anne. But first of all, I acknowledge, thank you for your good wishes and hope that you and your family are safe as well. And Jo-Anne, just before you answer the specific question, you're absolutely right, Oscar, to point out that I think when we look at the impact, to date, of COVID-19 and what might happen going forward, there are differences, right? Because what we try to point out is to date, certainly, the open pit operations have been really uninterrupted. That continues to be the case. And in areas of underground development, it's also been unaffected because we continue to deliver strong results. But where there has been impact, is exactly as you point out, on some infrastructure, whether it's Shafts 3 and 4 and 1 or 2 others. And Jo-Anne, maybe you want to take it from there and say, what are the implications of that? And are they on the critical path now? Or if not now, will they become critical path at some stage going forward?

Thank you, Ulf, and thank you, Oscar, for the question. On this project, there are multiple critical paths. And a component of that critical path is the lateral development progress as well as materials handling and ventilation supply components of the critical path. And at some point, all of these aspects may become critical path on the project. We should recall that the Panel 0 is able to be initiated and commenced ramping up using the existing ventilation capacity. And so initially, any delays in Shaft 3 and 4 should have a minimal impact. As I've mentioned before, there is ongoing work on Panel 0 and also Panel 1 and 2. We've got design refinement work being carried out. And at this point, a complete and full understanding of the critical path is under review. And so more information about that will emerge as the work progresses. And there's obviously some uncertainty about what will happen in terms of timing and accessibility to restart that work. So the work is ongoing. It's very much something that is a focus for the team. Ulf, would you like to add anything further?

I would just say, in general, Oscar, I think it's important for us to strike the right balance, I think, on the one hand, being very I think, proud to look at what the OT team and with the support of the Mongolian Government has been able to do so far in terms of really minimizing the impact. At the same time, all of us know that, looking forward, it is quite -- the degree of uncertainty remains high, right? And many of these things, at the moment, are outside of our control. And whilst we are -- I mentioned that in my prepared remarks, whilst we are looking at some creative solutions to try and mitigate some of these impacts, for example, where we do need specialized expertise from abroad to be in country, are there ways using technology to do it remotely? All of these things are being looked at. But at this stage, we just haven't got the certainty to give you really a good answer and say, right, the impact is x many months, and that's when it will be mitigated. So that means all, at the moment, we can do, Oscar, is kind of point out what we've done so far to work, as Jo-Anne is saying, that's going on to look at these things and mitigate them. But it's really not possible for us to put a lid on or put a cap on what is the impact of it is going to be because the situation is live and emerges on a daily basis. I know that's not a good answer, Oscar, but that's, I'm afraid the reality where we are.

Yes. No, that's helpful, Ulf. And I think the main takeaway for me is that Shaft 3 and 4 do not have an impact on the sustainable production of the 25-month delay. Then turning to power, clear, the, Mongolian Government is intent to develop and fund the Tavan Tolgoi coal fields. Based on previous history, this does not appear to be a reliable solution. So how are you thinking about this process? I know there's a deadline of June 14 based on your agreement with the government, and this is 10 days ahead of the parliamentary elections. So could you just provide context around that?

Absolutely, Oscar. So -- you're right. So the dates and, if you like, deadlines, for lack of a better term, that you mentioned, they are the processes that are laid out in the Power Source Framework Agreement. That is the agreement that was signed in December 2018 that really governs the implementation of for Oyu Tolgoi's obligation to deliver power domestically, right? That was an agreement that was signed with the government in December, the year before last. And in that agreement, there are options laid out in terms of power options that are being considered, and there are certain steps when they can be considered. Those are the contingency mechanisms that we refer to. And there are 2 of them. The first one has expired, and now we're in the second one. And the power options that were included and are considered in the Power Source Framework Agreement do not include the option that the government has now put forward as its preferred option, right? And the discussions we are having at the moment is if we want to consider that, which, of course, we do, the government has decided that this is its preferred option, and so therefore, that's something we need and want to respect and investigate that if this indeed can be executed. And you have some reservations about the -- how realistic it is, but it's certainly something that we take seriously, and we would like to work with the government to run to ground. In order to be able to do that, and to have that rounded in a proper legal framework, we would really need to amend that agreement because at the moment, it technically does not allow for this option, if you like. So what we're really saying is we would like to work with the government on this and on other options. But to be able to do so, we would really need to amend that agreement. And the date by which the current agreement says it would need to be done, happens to be June 14. That's how that works and comes together. Does that answer the question, Oscar?

Yes. No, it does. Hopefully, the Government of Mongolia has thought this through and you can deliver the power for the project. Then the last thing, if I may, on your estimate for current liquidity lasting until -- through the third quarter 2021. What operating cash flow assumptions or working capital assumptions do you have embedded there and at what metal prices?

Thanks, Oscar. I might ask Luke to take that question. Luke, are you okay to address this one?

Sure. I will do my best. And Oscar, can I just say, I hope you and your family and loved ones are safe and well. Thank you for wishing the same for us. My attempt to answer your question is, I guess, first of all, to, I guess, refer you to our production and CapEx guidance for 2020. That will give you an idea of some of the key assumptions that we're assuming in the -- in both the CapEx and the production base that, obviously, will contribute to our operating cash flow as well as our free cash flow. You'll note that the ranges haven't changed, but we are somewhat hopeful that we'll be able to get some additional goals, and that will end up at the top end of the range for gold production for 2020. And I'd also refer you to the 2021 outlook for copper and gold as well, which we haven't changed. And it still remains valid. In terms of working capital assumptions, I mean, we're not assuming anything sort of herculean in effort, really, where we're assuming kind of normal course stuff. So we're not assuming any sort of significant buildup or drawdown in inventory levels, AP level sort of appropriate for the level of CapEx expenditure that we're planning to see over that period of time. And then obviously, our assumptions around AR would be consistent with the sort of revenue profile over that period of time, which again, you can kind of see from the guidance that we've issued. It's probably worth noting that on the CapEx guidance for the underground, we have reduced that to a range of $1 billion to $1.1 billion. And we've also reduced the top end of the sustaining CapEx guidance down to $100 million. It was previously at $120 million. So all of those things are obviously having an impact on liquidity over that period of time.

And in terms of pricing over that sort of key period in the remainder of 2020 and 2021, I mean, we're not really in the habit of sharing our pricing assumptions too broadly. But what I can say is that for 2020, we certainly have recognized the potential impact of COVID-19, not just on our levels of spending, but also sort of from a global macro perspective, the impact is having on the copper price. So we do have a very conservative assumption for 2020 that, without giving you the number, it's in the range of current spot, if that makes any sense at all. And obviously, a more conservative assumption for gold. And then for 2021, we revert back more to broker consensus, really, which is what we would use for both copper and gold. So I know that's not 100% answer to your question, but hopefully, it helps to answer the question and gives you a bit of flavor.

Your next question comes from Dalton Baretto from Canaccord Genuity.

I'd like to pick up on your discussion with Oscar there on the power plant. This option of the government actually building and funding the power plant and supplying you guys, I mean, clearly, that's a business-critical risk, not just from a reliability perspective, but also from a negotiating perspective. Should this be the way going forward? What type of contingency are you thinking in terms of power supply?

Dalton, just to clarify, when you say contingency, you...

On the back of power supply source.

I would say -- look, it's a good question, Dalton. If you -- I'd ask you probably for a little bit of patience here only because this option was put forward by the government relatively recently, in the middle of April, so less than a month ago. And I would say, like you, there's lots of questions that we would have as well to be able to run to ground with the government. The one you are mentioning is one, there is a few others as well. So at this stage, Dalton, I think where we are is to really focus on making sure that we can address all of these options, and therefore, make an amendment to the agreement to provide us to do -- the flexibility to do so. As you rightly pointed out, though, at the end of the day, power is an absolutely critical component for OT to be able to run the business. And that is why ultimately, Oyu Tolgoi does need to be in a position to decide what the best option is to run the business. But at the same time, we want to make sure we have an option that is the best for Oyu Tolgoi that also has the full support of the government. And to do that, to run that to ground, putting an amendment in place to give us more time and flexibility to explore that would be important. And once we've done that, Dalton, then we need to be in a position to answer some of the questions you raised, Oscar raised because ultimately OT needs to make a decision. And to do so certainty, capacity, funding, permits, all that would need to be answered to be able to make a final decision. But today, it's only 4 weeks after we received the proposal. It's premature for us to comment on that, Dalton.

Okay. That's fair. So then maybe I'll switch gears and talk about this updated guidance, if you will, on CapEx and schedule. And I apologize if I missed this in your earlier commentary. But does this guidance factor in any of the COVID-19-related delays? That's number one. And number two, I know you said you can't comment on the contingency. But can you maybe talk about how much of the contingency has been consumed already given the delays to date?

Dalton, I can answer. It's a great question. But just to be clear, when you say guidance, I think you're referring to the guidance on the underground, not to 2020 guidance.

Yes, that's correct. Yes. The schedule and CapEx, yes.

Yes, that guidance does not include any potential negative impact from COVID-19, for number one, to be clear, does not. And the second point is, we aren't in a position to provide any update on contingency, how much is in there and therefore, where we are. Dalton, I'm afraid, that's the level of -- at this stage, we're not in a position to provide to the market. I know it's disappointing, but at this stage, we can't do that.

No, that's fine. So then when you do put out the definitive estimate, will that then update these numbers based on the delays you've seen so far? Or do you think you'll just stick with this and see how it all unfolds?

No, no, absolutely. So you're exactly right, Dalton. So the definitive estimate is meant to have a very high level, execution level of accuracy, both on schedule as well as on costs. And so where we are, at the moment, Dalton, is really in the process, right? If you remember, in July last year, we started off by saying, 16 to 30 months and $1.20 billion to $1.9 billion. Now we've given you a range of 21 to 29 months and $1.3 billion to $1.8 billion. So it's still a range. It's still fairly broad, but it's narrower. And importantly, it stayed within the range we've given. It hasn't gone outside of that. You should expect us to get to the definitive estimate that those ranges become very, very narrow and might converge on any number.

The next question comes from Craig Hutchison from TD Securities.

In terms of the updated Panel 0 mine design and the incorporation of structural pillars to the north and south of the boundaries, do you think that's going to have any impact on your ultimate reserves?

Jo-Anne, this feels like one for you, if you're okay to take this one.

Yes, of course. Of course, Ulf. Thank you very much. Thanks, Craig. So the impact on reserves is still being assessed of the pillars, and there are recovery options -- or recoverability options being assessed in this next level of design refinement. And so we will understand more about this as the next few months progress, the work progresses in the next few months. So that's really the focus at the moment. Sorry, does that answer your question? Is there a second part to it? Sorry, it's getting a bit light here.

No. I mean, I just -- I wanted to know, I guess, if there's any materiality to those, the size, I guess, and the tonnes and grade that's in those structural pillars in terms of the sequence and ramp up.

Right. And really, those pillars are going -- are being less fair to provide support for the ore handling system, which in this case is to move ore off the footprint to the crushers by trucks. And those pillars -- the ore handling system will be able to be used by Panel 1 and 2, and it provides some redundancies. So there's some real benefits to adding those pillars. In terms of recoverability, we're really working on what options that we have at the moment to look at what the outcome might be. And it's just too early for us to draw any conclusion because of where the planning processes are, but it is something that we are looking at closely. Ulf, would you say any more about that?

No. Just to say, work is going on too early at the moment. And when the work is completed, then we'll know and move from there accordingly, Craig, which is, at the moment, just too early, simple as that.

There are no further questions. I will turn it back over for closing comments.

Thank you very much, operator. Look, thank you, everyone, for joining us this morning. I will keep it very, very short in terms of my closing remarks. We have talked a lot about COVID-19. I do not want to belabor the point any more than we need to. But at the same time, it is the biggest event that's impacting all of our lives as well as the business at the moment. I think we've been able to draw on the call today that up until now, the business has done an outstanding job, and the government has been extremely supportive in putting us in a position where, to date, both as far as the operations are concerned as well as the underground development, lateral development has not been impacted. But at the same time, we are mindful that going forward, it is likely to have an impact, but how much, we don't know. And so the team is working very hard to be as creative as possible to find ways to mitigate those options and, again, to work with and get the support of the government to be able to do so.

The second point I'm going to make is we have made an important decision, when I say we that is the TRQ Board, to approve the mine design option for Panel 0. What does it mean? Well, it means we are on track in relation to the timetable we laid out late last year as to what are the steps that allow us to work through, address some of these initial stability concerns that we had identified. The definitive estimate is due for later this year, subject to any delays by COVID, depending on how that plays out. We have provided you some ranges, some updated ranges today in terms of CapEx as well as schedule. So 21 to 29 months and $1.3 billion to $1.8 billion, and that funnel will narrow and converge on a number by the time we get to the definitive estimate. So there's still an inherent degree of uncertainty in these ranges today because, of course, the level of accuracy we have today. But we have now picked an option, and we now can take this option and develop it through an execution level degree of certainty.

And finally, on funding, the power work is ongoing. We have a plan. We have engagements. And on the financing side, as Luke commented, we're working towards putting an interim funding facility in place, really, to give us time and flexibility to make sure we can explore long-term funding options that address that minimum funding gap that Luke was talking about. And I think on power, you've heard on the call that there are discussions going on with the government. There is an agreed framework in place that provides the legal framework. And within that, we are trying to work with the government to put amendments in place to allow us really to investigate the options that are best for the business, but also importantly, the option that the government would like to pursue. And an amendment would allow us to do that.

So with that, let me leave it there. Thank you for joining us on our call this morning. Stay safe. And thank you very much, and goodbye.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines. Enjoy the rest of your day.