Turquoise Hill Resources Ltd (TRQ) 2022 Q1 法說會逐字稿

Hello, and welcome to the Turquoise Hill First Quarter 2020 Financial Results Call. My name is Harry, and I'll be the operator for today's call. (Operator Instructions) I'd now like to hand you over to your host, Roy McDowall, Head of Investor Relations, to begin. Roy, the floor is yours.

Thank you, Harry. Good morning. I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our first quarter 2022 financial results conference Call. On Tuesday, we released our first quarter results press release, MD&A and financial statements. These items are available on our website and SEDAR.

With me today on the call are Steve 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 2, 2022, as supplemented by our MD&A for the 12 months ended December 31, 2021. And now I'd like to turn the call over to our Chief Executive Officer, Steve Thibeault.

Thank you, Roy, and good morning to everyone. Thank you all for joining us for our first quarter 2022 financial earnings call. The first quarter of 2022 was a monumental inflection point for Turquoise Hill shareholders as we come in the blasting of the undercut of the Oyu Tolgoi underground line.

The share revenue to celebrate this moment was held on January 25 and was attended by many dignitaries from the Government of Mongolia. We look forward now to ramping up production from the underground and becoming one of the largest copper producers in the world. Other highlights of the first quarter include an All Injury Frequency Rate of 0.09. Our gold production guidance being increased from a range of 115 to 165, to 135 to 165 ounces and trending towards the end -- the higher end of the range. Cross-border concentrate shipments to China have improved and have resulted in an outside content inventory decrease of 30%.

An amended HOA with Rio Tinto that provides a pathway to address the company estimated funding requirements, a preliminary underground project CapEx forecast, up $7.06 billion. The base case incremental funding requirement remaining unchanged at $3.4 billion, and Turquoise Hill received an offer from Rio Tinto to purchase the shares held by our minority shareholders for CAD 34 through a plan of arrangement.

On Slide 7, the first quarter recorded another low All Injury Frequency Rate of 0.09 per 200,000 hours work, one of the lowest recorded quarter in recent years. This is an excellent outcome and reflects the continued excellence of our Oyu Tolgoi, as they operate the open pit, ramp up the underground mine and continue with further underground development. Production in the quarter was 30,900 tonnes of copper and 59,200 ounces of gold. This is in line with our expectation and includes production from the underground mine. The mill throughput remained above nameplate capacity even though we had scheduled downtime for maintenance. C1 cash costs were $1.66 per pound. The open pit optimization continued with final results expected in Q3 of this year.

We continue to actively manage COVID-19 and have seen workforce level return to almost full capacity. The increased concentrate shipments into China resulted in our on-site concentrate inventories falling by 30% in Q1. We are maintaining the fourth measure until there are sufficient volumes of convoys to ensure Oyu Tolgoi ability to meet its ongoing commitments to customers and return on-site concentrate inventory to target levels. Since the first blasting of January 25, the underground team has been able to keep on schedule despite the initial delays to undercut. We maintained our expectation to achieve sustainable production in H1 2023.

The preliminary 2022 cost and schedule update for the underground project, up $7.06 billion, provides greater confidence in our capital expenditure for the remainder of the underground project. The cost and schedule update is still under review with the final outcome expected in Q2. With that, I will now hand the call over to Luke Colton, our Chief Financial Officer.

Thanks, Steve, and good morning to everyone. If you could please turn to Slide 8, I'll provide a summary of our key finance metrics for the quarter.

Revenues of $403 million for Q1 2022 were 23.5% lower than for the same quarter of 2021. And that's due to the planned transition of mining in the open pit to the next phase of operations, partially offset by the impact of higher prices. Copper and gold volumes decreased by 33% and 60%, respectively, as Phase 4B was completed in March of this year, and mining actively started to ramp up in Phase 5. Average prices were 17.9% higher for copper and 4.3% higher for gold.

Cash generated from operating activities before interest and tax of $123 million in Q1 2022 was 51% lower than the first quarter of 2021 and that's due to the planned transition to Phase 5 in the open pit and higher operating expenses due to inflationary pressures on prices for critical supplies. Income attributable to owners of Turquoise Hill increased from $1.18 per share in the first quarter of 2021 to $1.37 per share in the same period of 2022.

This increase mainly reflects higher recognition of deferred tax assets and higher operating expenses, but partially offset by lower revenue. $257 million deferred tax assets were recognized in Q1 2022 compared to $52 million in Q1 2021. The recognition in Q1 2022 was due to an increase in temporary differences related primarily to tax depreciation on property funds and equipment and an increase in utilization of 2016 losses against higher projected 2022 taxable income driven by higher metal pricing.

In Q1 2022, C1 cash costs and all-in sustaining costs were also impacted by lower copper volumes and lower gold credits due to the planned transition of mining to Phase 5 as well as higher operating expenses. All-in sustaining costs were further impacted by an $18 million increase in open pit sustaining capital expenditure, and that's due mainly to higher deferred stripping from Phase 5 waste removal and commencement of the JFK road construction.

Expenditures on property fund and equipment of $230 million for Q1 2022 were made up of $204 million relating to the underground, and that includes $85 million in underground sustaining capital as well as open pit capital expenditure of $26 million. 2021 capital expenditure for the same period was $250 million.

Liquidity decreased from $0.7 billion at the end of the year to $0.6 billion at 31st of March 2022, as cash flows generated from OT's open pit operations were not sufficient to meet the additional investment required to fund the underground project. The base case incremental funding requirement at the end of March 2022, as Steve mentioned, remained at $3.4 billion.

If you could please move to Slide 9. And again, noting that Turquoise Hill had liquidity of $0.6 billion at the 31st of March 2022, decreasing from the $0.7 billion at year-end and that the funding gap at 31st of March 2022 remained at $3.4 billion as commodity price improvements largely offset the draft impacts of the 2022 cost and schedule update. Specifically, TR/RC base case incremental funding requirement incorporates metal price assumptions for copper and gold over the incremental funding period, and we have noted those in our MD&A. The draft outcomes of the 2022 cost and schedule update, reflecting an increase in development capital from $6.75 billion to $7.06 billion, and that number is inclusive of the known incremental COVID-19 cost impacts.

The current forecast of sustainable production for Panel 0, which remains the first half of 2023, the current forecast of delays to Shafts 3 and 4, $1.8 billion of scheduled principal repayments, which the company is attempting to reprofile. And in the updates or changes to mine plans of either the open pit or underground mine including from the optimization efforts currently underway, which, as Steve mentioned, would be ready in Q3 of this year.

The details of these and other items are discussed more fully in our MD&A, which is available on the company's website, SEDAR and EDGAR. The company continues to focus on the implementation of its amended HOA with Rio Tinto, which we entered into on January 24 and real effort to implement remain underway.

As provided for in our year-end 2021 presentation we presented the notable elements of the amended HOA on this slide for convenience. The Rio Tinto proposal to take the company private is currently under consideration by a special committee of the TRQ Board and its advisers and related considerations could influence the order, nature, size and timing of the various elements of the amended HOA. Under the current base case assumptions, additional equity in excess of the initial $650 million would not be required if the reprofiling SSD and co-lending are fully successful.

The amended HOA provides that, if necessary, Turquoise Hill could be required to raise up to a total of $1.5 billion less the amount raise and an initial equity offering via further equity offering in the form of its choosing. Should they occur any significant further delays to the underground project or nonfulfillment of any of the conditions precedent identified in the amended HOA, would also adversely affect the ability of the company in OT LLC to obtain additional funding or to reprofile existing debt as contemplated by or within the time frame set out in the amended HOA.

Additionally, the company continues to monitor, among other things, commodity markets, the ongoing impacts of COVID-19, undercut progression and progression of the other key underground development milestones. Our liquidity outlook and estimated incremental funding requirement will continue to be impacted both positively and negatively by various factors in addition to the aforementioned and not all of those are within the company's control. And with that, I'll hand the call over to Jo-Anne, our COO.

Thank you, Luke. If we now turn to Slide 10. In Q1 2022, Materials Handling System 1 and first on-footprint truck chute commissioning activities were successfully completed. These are key infrastructure required to support Panel 0 sustainable reductions. All mass excavation was completed in the conveyor-to-surface in Q1 2022, and we saw the recommencement of sinking activities in Shaft 3 and 4, which are a critical source of ventilation for continuing development of the Hugo North Lift 1 footprint in Panels 1 and 2.

All undercut readiness criteria were achieved on the 24th of January 2022, and the first undercut blasting was tried on January 25. There's been good progress made towards first drawbell blast since undercut initiation, including excavation and construction of drawpoints. Studies in Tunnel 1 and 2 continue with preliminary results expected before the end of half 1, 2022.

Ongoing ore body knowledge acquisition continues with 25 kilometers of drilling planned over 2022 and 2023. Most of these are made into potential future mining areas, which were on the Hugo North Lift 1 horizon and are currently excluded from the mineral reserves.

In terms of exploration, Turquoise Hill through its wholly owned subsidiary, Asia Gold Mongolia LLC, Heruga Exploration LLC and SGLS LLC, operates an exploration program in Mongolia on three licenses that are not part of Oyu Tolgoi. Planning is underway ahead of the 2022 exploration program, which includes further work on areas of interest identified in 2021. The infill program will be completed midyear during warmer month.

If we turn to Slide 11, we can see the key near-term milestones for Panel 0 as well as critical activities to enable the ramp-up of production to 95,000 tonnes per day. Important milestones for 2022 include the first drawbell [mining] in Panel 0, which is anticipated in Q3 and sustainable production for Panel 0 is still expected in the first half of 2023.

The preliminary outcome for the cost and schedule reforecast see the expected commissioning dates for Shaft 3 and 4 moved to the first half of 2024. Following undercut commencement in January 2022, Panels 1 and 2 are expected to be delayed due to changes in mining scope as well as COVID-19 related work restrictions impacting both Shafts 3 and 4 and underground development progress as previously disclosed. When Shaft 3 and 4 -- the Shaft 3 and 4 schedule is finalized in Q2 '22, an assessment of any impact on Panel 1 and 2 will be completed.

Delays to Shaft 3 and 4 are not expected to result in equivalent delays to Panel 1 and 2 given the current underground development approach and further mitigation opportunities are under investigation. The Panel 0 first drawbell remains on track for Q3 '22, as the timing of sustainable production in half 1 '23 and neither expected to be impacted by the update of the schedule for Shaft 3 and 4. With that, I'll hand the call back to Steve.

Thank you very much, Jo-Anne. To wrap up, the first quarter was transitional for Turquoise Hill stakeholders with many accomplishments, including a renewed partnership with the government of Mongolia, an amended funding agreement with Rio Tinto, the initiation of the undercut blasting of the Hugo North Lift 1 ore body, which has started the production process of the underground mine. And although the undercut was delayed, we are still on track for our forecast H1 2023 sustainable production.

Preliminary cost estimate of the underground development CapEx, including known COVID cost assumptions, is $7.06 billion below analyst consensus. Workforce numbers on site has recovered to over 90%. On-site concentrate inventory level have decreased by 30% in Q1. We are well on the path of transforming Oyu Tolgoi underground into a truly Tier 1 operating mine and becoming one of the largest copper producer in the world for the benefit of all stakeholders. And with that, I would like to turn the call back to the operator for questions.

(Operator Instructions) Our first question is from the line of Orest Wowkodaw.

Your release speaks to the fact that -- the release speaks to the fact that the updated CapEx estimate for Phase 2 of $7.06 billion is preliminary and there's some areas under review. Can you please elaborate in terms of what areas specifically and whether you see incremental risk to the CapEx associated with those areas?

Yes, do you want to take that one?

Yes, sure. Thanks. Yes. So from our perspective, the review that we're conducting include both the cost and schedule, and we're not seeing any significant differences at this clip up, we're still in the process. And so we need to just have some caution there. But predominantly, our focus has been around schedule at this stage.

All right. Sorry. Sorry, Jo-Anne. Just want to understand, you're saying you potentially see risk to the schedule, not necessarily the capital items themselves?

Yes. So that's still under review, and we haven't finalized the view yet, but -- and the schedule, obviously, is not about first drawbell in Panel 0 that remains on track at the sustainable production. It's a later schedule that we're reviewing at the moment.

Okay. And there's about $2 billion left to spend on the Phase 2 based on the updated number. Can you give us any guidance on what the cadence would be over the next couple of years in terms of the breakdown? I mean, obviously, you've given us already '22 guidance, but I'm wondering how much of that $2 billion remaining is, say, planned to be spent in '23, '24 and beyond?

Orest, we haven't actually provided guidance beyond 2022 and maybe that's something we can take away and see what we can provide once the cost and schedule update is complete. It's worth noting that the sort of key funding period is kind of 2022 to 2024. So you would expect the -- you would expect that approximately $2 billion, as you've noted, to be spent over that period of time.

Does the sum of it though extend beyond that period? I'm just wondering as we work on your funding gap of $3.4 billion, sort of, how to profile the remaining CapEx?

There may be a very small tail that extends into 2025, but the majority -- the vast majority of the remaining spend will occur -- is scheduled to occur in 2022 through 2024.

Our next question is from the line of Ralph Profiti Eight Capital.

I have two questions. Firstly, maybe another way of asking the sort of the CapEx or the remaining CapEx. Luke, could you help me understand of the remaining CapEx, maybe what -- where is that money being spent specifically? And maybe a little bit of help on what component of the remaining CapEx is related to labor as opposed to plant equipment infrastructure?

Sure. I'll do with that, and I'll probably let Jo-Anne correct anything that I get wrong here. If you look at the sort of key remaining pieces of development that need to be completed between now and early 2025, you've got the materials -- Shaft 3 and 4 need to be completed. You've got Materials Handling System 2 and the related Primary Crusher 2. You also have the conveyor-to-surface that needs to be completed. So there's the sort of conveyor that needs to be constructed within the current chambers. And you've got the concentrator upgrade. So those are the major pieces of work that need to be completed -- to complete the $7.06 billion.

And a good portion of that been committed, although there is still a good portion still to be committed as well. And there would be a comment of that that's labor. I don't know the exact percentage off the top of my head but it wouldn't be an insignificant portion. Jo-Anne, I don't know if you can add any further color there?

No, not on the component of the cost when it comes to labor. But we have reviewed and updated labor costs as part of the cost update, and that has been considered as part of that work.

Yes. Got it. Okay. Very helpful. And Jo-Anne, when we read in the MD&A about Shaft sinking delays, particularly in #3 and #4, preliminarily, would you consider these sort of execution and performance related? Or are these more technical-related geotechnics rock mechanics, et cetera. Could you help us set for that, please?

No problem. And we need to remember that these pieces of the infrastructure were significantly impacted over the last year by COVID-related delays. And so that is part of where we find ourselves now. And the work that we're doing at the moment is assessing productivity in the shaft. And so it's not necessarily about the geotechnical conditions at this stage, it's more around our ability to attract the right skilled workforce as well as to iron out productivity concerns, and there is a significant program of work that's underway to improve our productivity, and we have seen this kind of work be quite successful, Oyu Tolgoi in the past to improve performance. But we continue to monitor the situation, and we're providing the information that we can at the moment.

(Operator Instructions) And our next question is from the line of Craig Hutchison of TD Securities.

I was wondering if you could provide an update with respect to how the debt refinancing process is going on the reprofiling?

Sure. Happy to do that, Craig. So it's going well, long story short. We've got regular meetings scheduled with the lenders and Turquoise Hill, Rio Tinto, the lenders are all talking on a regular basis. They're asking good questions. We're providing good information, the technical review -- the related technical reviews are underway. It's going very well. I would say, overall, we're still on track. And I'm optimistic that we can get the reprofiling across the line before that December principal repayment.

Okay. Great. And maybe a couple of follow-up questions. Just with regard to the timing of valuation process that's been done by the special committee and their advisers, any sense on when that might wrap up?

Now what we -- no, not really. I mean it's -- the team is working on that, Craig, okay? The special committee is working with the valuator in the bank and also the financial adviser, they're in the process right now. I don't have a specific date of when that process will be finished. But it should be -- I mean, if you consider the guidance we gave before, okay, it should be within this one, but I cannot confirm specifically. It's up to the special committee. And at the moment, they are at work.

And maybe a similar question, might be a similar answer, but just the timing with regard to special committee decision on making a decision on financing whether to pursue maybe a pitch financing at Rio or consider the original option of an equity financing, any timing around that?

What I can tell you is we're working on that, Craig, okay? And hopefully, we can finalize that in a short horizon. So -- but we're still in discussion with Rio Tinto.

And maybe just one last question for me. With regards to the CapEx this year for the underground, you provided a $1.2 billion to $1.4 billion. Can you break that down between development and sustaining CapEx?

I don't -- I'm trying to remember if that's something that we've put out into the public domain. I don't think it is at this stage. So Craig, let us take that away. It is possible to break it out, but let us take that away and see if that's information that we can provide in a subsequent release.

And our next question is from Dalton Baretto, Canaccord.

Most of my questions have been answered, but I do have one question on the Rio bid. Does the bid involve any form of a nonsolicitation clause? Or is the special committee free to go out there and find another bid for the 49%?

I will not go through the detail of -- I mean, Dalton, the only thing I can tell you is that the committee is doing the work of valuation and working with the financial advisers, and they will -- they are definitely looking at the different options. We all know that the asset is a complicated asset to estimate and working with the valuator and the financial adviser, their role is, as I said before, to determine what's the value and then start the negotiation with Rio. All the detail on how they're going to do it, I cannot comment.

Okay. But are you saying that this is purely a valuation exercise ahead of a negotiation with Rio? Or is there a broader scope there in terms of looking at potential suitors?

I haven't said that it was just a valuation.

It might -- I don't know if this is helpful at all, but I think it's important to remember that the Rio's proposal itself is nonbinding. So I don't think there's anything in the proposal that binds us to do anything and maybe that's the answer to the first question that you asked. Obviously, the parties have expressed certain preferences, but I don't think there's anything in the proposal itself that is binding.

And of course, the scope is a bit broader, but that's something that's being overseen by our special committee, and they've appointed the right advisers. They've appointed BMO from a strategic perspective and they have appointed TV from a valuation perspective. So to think, all of this is being very carefully considered by the special committee, and we're confident that they'll progress this to an appropriate outcome.

And seek all the information needed in order to have the discussion with Rio Tinto.

Got it. Okay. That's helpful. And then my follow-up is -- and I think I know the answer to this, but I just want to confirm. The outcome of this process in no way impacts the amended heads of agreement you have with Rio, correct?

That's correct. I mean there's nothing in the proposal that changes the binding nature of the amended HOA. Rio has requested that we refrain from doing equity over the period of time that we're considering the proposal, but again, that's a sort of an unbinding request. And we are in discussions with them around whether or not they are able to provide sort of interim financing on acceptable terms that would then give us the runway we sort of need to consider that proposal. And as Steve noted a minute ago, those discussions are underway, and we're hopeful that we can get them to a good landing point in the near future.

And we have no further questions for today. So this concludes the Turquoise Hill first quarter 2022 Financial Results Call. Thank you for everyone who has joined us. You may now disconnect your lines.