Q3 2019 Earnings Call
Good morning, My name is Jeff and I will be your conference operator today at this time I would like to welcome everyone to the Turquoise Hill resources Q3, 2019 financial results an overview of operations conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. He would like to ask a question. During this time simply press Star then the number one on your telephone keypad. Thank you Mr. When we go head of Investor Relations you May begin your conference.
Thank you Jessica Good morning summary, let me tell head of Investor Relations country indications Wellcome Trust third quarter 2019 financial results Conference call.
Yesterday, we released our third quarter 2019 results press release Mdna financial statements. These items are available on our website consider with me on the call or old Chrome and our CEO Lukas Johnson, our CFO and Joanne Dudley our COO. This call and presentation includes certain forward looking statements information we are for you.
Forward looking statements section of the annual information form dated March 13, 2019, supplemented by our Mdna to the three months and nine months ended September Thirtyth 2019, and now I'd like to turn the call over a 12, Chief Executive officer, both from [noise].
Thank you ROI and good morning to everyone.
Thank you for joining us for our third quarter 2019 financial earnings call.
Today will provide you with both color on our third quarter 2019, operational and financial results, which we released yesterday.
As well as with an update on the commissioning oshaf too and the underground development, well clause or you're told my mind.
This was a significant quarter for the Oyu tolgoi team and our shareholders shops to construction has now been completed.
Beyond the final stages of commissioning.
Charles to will enable us to accelerate the underground development.
Progress one at the top tier one ore bodies on the planet.
[noise] operationally the third quarter 2019 was another strong quarter for the company from both a production and a safety perspective.
Oh, you're told my team has continued to maximize the production from the open pit.
And as a result, once again increased our 2019 gold production.
New targets moving from two out of 230000 to 240000 ounces, while lowering of the same time out 2019, seaborne capa cash cost range to $1.50 Sue and dollar 70 range.
We also continue to build on our excellent safety track record.
You're totally achieved another strong all injury frequency rate of 0.18. The 200000 hours worked during the nine months ended September Thirtyth 2019.
As you know safety is a top priority for us and is at the heart of everything that we do.
Safety mining this deposit is central to who we are.
It's critical to our continued success.
During the third quarter 2019, or you're told her produced 28446 tons.
25607 ounces of gold.
Nine month production totals of 113000 quanta tons of copper and 217 500 ounces of gold.
Kept all your total on track to achieve both its full year 2019 operational costs.
And the now upwardly revised gold production guidance.
Open pit operations are expected to continue mining from the lower grade phase for.
The lower grade phase six material through the remainder of the year.
Mill throughput for 2019.
Back to be approximately 40 million tons, but it includes the processing of some material from minds Klaus.
Turning to the underground development.
Construction of shaft, who is now complete and has entered into the final stages of commissioning.
In addition, we completed a number of final construction activities into third quarter 2019.
It's off to drill crusher system, and the shops to service discharge combat.
It's important to note that the underground development completed to date has not been affected by pending changes to our mine design.
Well infrastructure developed to date remains usable and in the appropriate locations. So all of the mine design options under review.
I'd also like to note that took place hill is heading into the fourth quarter of 2019 on a solid financial footing with a robust balance sheet.
At the end of September 2019.
We're still at 2.7 billion of available liquidity, which is expected to fund our operations and underground development into the first quarter of 2021.
Breaking down our operating performance during the third quarter 2019.
We remain on track to achieve out 2019 guidance of 125 to 155000 tons of copper.
And are now increased gold production guidance of 240000 ounces.
Q3 solid operational performance.
Impacted by a plant shutdown brought forward from October into September .
Combined with higher than planned feed from to harden phase for B or.
Both copper and gold production decreased 27.8% and 66.8% respectively compared to the year ago period.
Mill throughput increased by 4% in the third quarter 2019, compared to the year ago period, as a result of processing software.
Underground development in the third quarter was very encouraging as we achieved a new record for lateral development and moved off to into the final commissioning phase.
During the third quarter rope was completed for both the service cage and the production hoist with this service cage successfully completing low test runs why low testing of the production buckets continued into October .
Instruction of soft who has been completed.
Ended is now in the final stages of commissioning.
Shelf too is a 10 meter diameter, a 10 meter diameter shops, some to approximately 1.3 kilometers below surface.
This is a critical piece of infrastructure that will accelerate the underground development all the way Tolgoi mine.
The sharp uses the world's largest production hoist Moshe that's can lift 60 tons gifts.
When operating at Maxim capacity.
Production always has the ability to lift 35000 tons of material to the surface daily.
With the construction of shop to complete and the service hoist operating time it being granted.
So it was always now allows us to transport 300 people per cage cycle versus a maximum of 60 people pick cage cycles, who shop want.
48 on capacity Cage can now be used to support logistics transporting supplies and components for the development of the line.
Commissioning of the production always continues.
2007 under tons of rock successfully hockey sticks to the surface.
And we continue to work with the regulatory authorities to finalize the permitting.
Look forward to utilizing this major increase in capacity to accelerate.
Underground development.
Turning to the lateral underground development and infrastructure progress. This third quarter has witnessed strong productivity gains.
Extensive focus on the most critical development areas over the past five months.
As weve substantial improvements as the underground development progress 3.6 total equivalent kilometers during the quarter.
With the team achieving a record 1385 equivalent meters over lateral underground development in September .
Since the restart off the underground development 28 equivalent kilometers and 22.1 kilometers of lateral development have to be completed.
In addition to the progress made on shelf too and the accelerated lateral development shop, three pre assembly of headframe modules commenced during third quarter.
For vertical assembly of the sinking stage was completed along with the commencement of stage fits house.
Primary crusher one civil works are ongoing with the team successfully constructing the eight meters of all at the underside of the search been.
And the completion of the mine dry building.
With that let me now turn the call over to join Dudley, Our Chief operating Officer will provide you now with an update of our work to finalize a new mine design.
Joanne.
Thank you. Thank you Hello, everybody placed 10-K slide ice.
Hi, great panels, there I will remind the initial target and a number of refinements are underserved you to determine the phenomenon design.
The first of the decision that has been night is to retain and meet access tried mainly on the apex level a penalty right.
This is an integral step towards completing the final mine design, how it is too early to accurately determine the potential impact on cost all shale.
Decisions on productivity assumptions and on Green underground infrastructure, such as the location of the old passes and options attendant sequencing well need to be completed the for an update on the development capital or shade, Joe can be fine line.
The design modification thing conceded focused around panel the right mining area.
All the other major infrastructure, such as shop, and probably crashes are unchanged from feasibility study plan.
It should be noted that handles the right, which is the highest grade dying all the totally underground remains our priority targets irrespective of the design changes.
The minded on Brexit will form the basis to the definitive estimate mine plan focuses on several give on alternative.
They are aimed at reducing risk to production ramp up in launch of additional geotechnical information we now have.
[noise] productivity right also under it to you as the result of experience today.
The company will focus will continue to focus on minimizing the impact to the production said Jill and calls as it were extremely detailed analysis and testing they each mine design modifications.
And we'll update the market in conjunction with the progression, but independent review.
In addition to working closely with Red Xingtai typically tail has engaged independent third party consultants keep inside the company inside and technical support.
You bet planning an asset prices that is currently underway.
[noise] independent X. Thats also providing insight into the progress of Kate construction work monetized.
We continue to expected it seemed to estimate to be completed in the second half of 2020 .
I'll be available for questions.
In the meantime would you like to continue.
Yes. Thank you very much Joanne, let me turn to slide nine.
In reference to our partnership with the government of Mongolia, We continue to work constructively with the government on multiple fronts.
The Parliament you're working group is in the process of drafting resolution, which will then be reviewed by the economic standing Committee.
And in the meantime, Demagoguing tax authority and all your total LLC continue to negotiate the a 155 million dollar tax assessments.
Well you're talking about is also an advanced stage with a competitive tender process to award a turnkey engineering procurement and construction or EPC contract for construction off that haven't talked about based power plant.
It has shed certain preliminary cost estimates for the project with took quick so and the government often go.
I'd now like to turn the call called over to our Chief Financial Officer, Lou Colton to speak about the Companys financial performance for the third quarter of 2019.
Thanks, all and good morning, everyone.
If I can get used to please turn to slide 10.
Ill give you a summary of our chief financial metrics for the third quarter of 2018.
Starting off with revenue in the third quarter.
Was 209 million, which represents a decrease of 15% compared to 246.5 million in the third quarter of 2018.
And that's primarily due to the these significant expected decreases in gold and copper production.
As we transition to the lower grade phase for B or and start stockpiles.
Cash generated from operating activities in Q3 of 29 team was 6.1 million.
Compared to 76.2 million in the third quarter of 28 team.
Cash used cash used in operating activities before interest and tax was 13.1 million into 320, 19 and that compares to cash generated 52.5 million in the year ago period.
Primarily reflects the impact of lower sales revenue and movements in working capital.
The company recorded income of 45.1 million for Q3 of 2019 and income attributable to owners of Turquoise Hill of 71.7 million or four cents per share.
This is compared to income of 15.2 million an income attributable to owners of turquoise Hill of 53.2 million.
Or three cents per share.
In Q3 of 2018.
The increase in income from Q3 2018 to Q3 2019 was primarily due to the impact of additional deferred tax assets recognized in Q3 2019, when compared to Q3 2018.
And this is partially offset by lower gross margin, resulting from the lower sales revenue.
See one cash costs of $2 in 14 cents per pound of copper produced increased 29.7% from $1.65 in Q3 of 2018, reflecting lower copper production.
Moving on will be discussed in a bit more detail on the next slide.
So you when cash cost guidance for the year has been reviewed down to a range of a buck 50 to a buck 70 per pound for pound of copper produced this is due to the impact of the increase in the gold production guidance combined with the revised reduction in operating cash cost guidance to a proxy.
Currently $800 million.
If you look at Q3 2019 in isolation see when cash costs of $2.14 per pound of copper produced.
Were above the full year ex expected range due to the impact of lower gold sales revenue driven by the lower gold production.
All in sustaining cost so $2 that 84 cents increased 24% from $2.29 in Q3 of 2018.
Similar to the see when cash costs. The increase was primarily due to write a reduction in copper production parts, partially offset by lower royalty costs, resulting from the lower sales revenue in Q3 2019 versus Q3 2018.
Capital expenditure was 329.2 million in the third quarter compared to 328.8 million in Q3, 2018 and includes 297 million underground development spend with the remainder related to open pit activities.
In addition, OTN further capital commitments of point 8 billion as of Thirtyth of September 2019th.
Turning to slide 11.
Where we show the reconciliation Novo Tc one cash cost per pound of copper produced from the third quarter of 2018 to the current quarter.
The principal moving that was driven by the lower copper production and as impact upon direct costs as well as its impact upon tcs Rcs and freight differential costs.
While total gold revenue decreased period on period, there was actually a marginal benefit when considering the amount of gold revenue on a unit basis per pounds of copper produced.
Moving to slide 12.
Turquoise Hill's liquidity balance at the end of quarter 320, 19 was 2.7 billion was 1.6 billion in cash and cash equivalents at 1.1 billion of remaining project finance pros.
We currently expect to have enough liquidity to fund operations and underground developments, including progression of the Calvin told by based power plant into Q1 of 2021.
As a result of the incremental underground capex and further scheduling delay, which we announced in July .
We will require significant incremental financing to sustain underground development and construction of a talent tollway based power plants beyond this timeframe.
As has been previously noted there isn't enough there is an option to raise additional external financing.
Not subject to the required approvals to assist in funding development going forward, including during undergrad commissioning and ramp up.
However, there are important variables that could impact the ultimate amount of additional financing required.
While it's progression of the definitive estimate will continue to clarify the company's funding requirements.
We have put forward a proposal to Rio Tinto as to how best source incremental funding necessary to progress underground development over and above our 2.7 billion of available liquidity.
And with that I will hand, the call back to all.
Thank you Luke.
Turning to slide 13.
The Oyu Tolgoi Hugo North underground deposit is one of the best tier one ore bodies on the planet and the significant progress made during the third quarter.
Has allowed us to accelerate the underground development and drive close to reaching a sustainable production.
During the third quarter, we witnessed record underground lateral development.
An increase to the gold production guidance.
Decreased to US you on cash cost guidance.
And an integral decision for the updated mine design, which is the retention of a mid access drive on the apex level of pound zero.
Shop to construction is complete.
With the service hoist now able to lift 300 work has a cage cycle.
It is in the final stages of commission.
And we entered the fourth quarter of 2019 with sufficient liquidity to fund our operations into the first quarter of 2021.
We continue to work towards the completion of to find the mine design targeting the highest grade panels zero.
And we expect to be able to provide our sample does and the markets with an update in early 2020 and a final definitive estimate in the second half of 2020.
The Oyu Tolgoi team, which is made up of 92% fully nationals has a proven track record of operational excellence and a strong safety record.
As we move closer to the milestones over the definitive estimate and first sustainable production, we drive closer to the monetization our shareholders of a rare high grade.
No cost.
Long life copper and gold deposit.
And in conjunction with our World class partner Rio Tinto.
Took was still remains committed to working with our Mongolian stakeholders to bring the Oyutolgoi underground mine into production.
So with that let me now turn the call over for questions back to the operator, Jessica I think Thats you handing that if I could have a hand the call back over to you. Please.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Three tone prompt acknowledging your request and your questions will be pools in the order. They are received should you wish to decline from the pulling process. Please press the star followed by the Q and if anything is speakerphone. Please lift the handset before pressing.
Alright. Your first question comes from Auris walked out of Scotiabank. Please go ahead.
Yes, good morning, I apologize for the bone quality here I'm just curious on the financing proposals you mentioned that you.
Put a proposal forward to Rio Tinto, and I'm curious whether that proposal.
I would include streaming a potential streaming transaction after the precious metals and or whether there's any potential for a bridge loan from Rio Tinto.
Until some of the other issues or sorted out.
Alright, thanks for the questions, let me just a.
Cost Luc maybe to respond to that as if they were but thanks for the question or.
Yeah Rs. Thank you very much further question and I.
Can certainly improve I can certainly appreciate.
The reason why you're asking ads.
You can appreciate from our perspective, where.
Looking at all of our options at this stage and you can also appreciate that at the moment, we do still have.
2.7 billion and liquidity.
Specifically sort of related to the discussions with Rio.
We'd love to be in a position to give more detail, but you can appreciate at this stage, we're not really in a position to be able to do that those discussions at this point are are are confidential, but rest assured we are certainly engaging with Rio tinto and we have we have the best interests.
Turquoise Hill as it as a company in our minds as we are having those discussions with Rio.
But I mean that being said can you talk broadly about what non dilutive financing options, you're considering them on among the sweet available options.
So.
I again I can appreciate why why you.
I I appreciate the importance of that question and rest assured from a turquoise Hill perspective from from the perspective, our of our company and doing what's right for our shelf shareholders. We.
Have looked at and are looking at you know.
The options that you would expect us to be looking at and Weve casting that very wide, but in terms of you know the actual discussions with Rio Tinto at this stage.
Around the proposal that we've put forth it wouldn't be appropriate at this time to to go into any more detail.
Okay, maybe if I could ask this one more different way.
Is there anything structurally that would prevent.
The radical screaming transaction in the capability.
Not that I'm aware of at this stage, but you can obviously appreciate in relation to and the form of financing that we may want to put forth or we might may want to take take take forward.
For everyone's consideration you can appreciate you know under the agreements that we have got there are definitely sort of approval rights et cetera, all of that has to be taken into consideration.
From a structural perspective at this stage I'm not aware of anything.
Obviously, there is there's more work to do in that space, but but at the moment I'm not aware of anything worse.
Okay. Thank you very much guys.
Your next question comes from Dalton Corrado of Canaccord. Please go ahead.
Hi, Good morning, guys. I was also going to ask a financing question, but it doesn't sound like we're going to get a whole lot teach out today.
Maybe one.
One is that I was surprised to hear you'd say that yeah, I'm actually working group is still drops and the legislation.
Got it hasn't had the economic standing committee, yet can you maybe give us a sense. When you expect the Skandi companies actually review this stuff when you expect them to get back to you in terms of what they're asking.
Yeah, Thanks, Don for the question and.
But we'd love to give you a specific time I think.
The parliamentary working group Pro says as you know has been unfolding for a long period of time going back into the early part of last year.
And as much as we'd love to give your visibility I think dolton, we got to recognize it's not a process that we control. It's really run of course by them. All you know authorities, we've got a respect that.
We.
Do maintained we have maintained.
Together with OATI and Rio as join stakeholders constructive to all look for a period of time.
But we cannot simply because we don't we don't control the process give me a specific time as to when that resolution might be drafted.
And it when it turns to something that we then need to respond to in the meantime, we've engaged very much involved but is really a process that is run and control by by the Mongolian authority and.
We remain engaged but don't control and if I can give you specific date.
Okay, no problem or maybe if I can ask a slightly different question then.
If you've got sufficient funding to last year with Q1.
What is the absolute latest that Youre syndicate.
Needs to have information it requires before it can make a decision.
Right so.
We do at the moment as kind of we said in our earnings call an M. DNA. We do think we have enough liquidity it liquidity at this point to take us into.
Q1 of 2021.
And obviously, there's a lot of work being done at and no two level and other places to try and optimize the spend.
You know push that data out if we can.
In terms of the engagement with Pf lenders there have been engagement with Pf lenders those discussions are ongoing.
We do have a pretty good idea of what.
You know that process would be and sort of the timing associated with that.
You know, it's probably somewhere in the sort of nine month range, maybe a little bit more than that.
But you know you can appreciate that we're looking at other options as well.
Okay, and then maybe just one last one from me I thought I heard you say that.
You've got a general south sets now or some sort of ballpark number I love BBCN contract.
What caused you able to share that with us.
Yes, so we have been provided with a preliminary figure from Rio I understand that's also been shared on a preliminary basis with the government of Mongolia.
But we're not yet in a position and I apologize for the US we're not yet in a position we're ready to make that number Republic, there's still internal review and assessment that we need to do within T., our Q with the help of our independent advisors to make sure that were comfortable with the number and.
But it's a number that we can stand behind and that's something that we're working very hard to do quick currently and we'll do it as quickly as we can.
Okay. Thanks, guys. That's all for me.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Next question comes from Craig Hutchinson of TD Bank. Please go ahead.
Hi, guys a couple of questions for me.
Obviously, you can't say too much in the financing, but have you submitted the proposal that you submitted the real have you also submitted out to the government in Mongolia.
It's been submitted to Rio at this stage.
I didn't share with the government okay.
In terms of the a the power source or your framework agreement you mentioned it in their mdna, there's certain milestones that have passed.
And you're seeking to it gets make adjustments. These milestone table can you talk about what those milestones are and I guess why were there missed.
Yeah sure so if and not pay document it is actually on our website. So you could actually going have to look out this in a bit more detail. If you wanted to.
The end dates so probably the most important milestone is to be in a position, where we have a power plant up and running by I believe it's the Thirtyth of June 2023, and that's obviously still something that everybody is working towards.
There were some interim milestones over the course of 2019.
Some of those had to do with sort of funding principles and that green those funding principles with the government of Mongolia.
There are other sort of milestones that kind of are tied to the sort of EGPC process.
And negotiation of agreements related to the TTP flower power plant.
Some of those agreements the EGPC process itself is still ongoing but we obviously are working quite hard to complete all of that hopefully in the near future certainly as quickly as possible.
And in the meantime, there has been good engagement with the government of Mongolia to keep things understood between the various parties and you know as necessary to discuss whether or not those milestone timelines need to be re looked at and renegotiated.
Okay. Thanks.
As we sort of shift four to 2020 I realize you guys haven't put your guidance and I know it typically you put it out in December or sort of early January but.
Can you just give a sense in terms of what you're thinking in terms of throughput and grades in particular gold grades do you think gold grades will materially pickup from these levels or should we expect the in both gold and sort of copper grades to be similar levels to 2019.
Hi, Craig Thanks, very much the youre.
Question.
Ah Hey, you know as you mentioned you know what that detailed guidance will come out in December on the way that that's running like is down at all you Tokely.
It is ti on maximize Oh castlight.
I've got one delek Honeywell through through the plant and that takes into account.
Hi, some copper and gold value.
So I I you know, we're working on maximizing the value and that drives.
That and where we did see should we are in the in the peace draw I'd say that Dave mentioned levels as we progress until it is a good way to think of it is that Oh, you know we were thinking through sites fob towards down towards the bottom of the pace, which is hiring great.
But you know we're progressing on the margins at that pace.
At the mine and and and that is reflected in our current a current performance. So you know to the detail I think we need to wait until until December but the team at size working really hard to optimize a ready to the business and keeping the current situation and you know they're doing a great job.
Controlling costs and trying to focus on carrying value for the business.
Okay, maybe just setting a broader question do you think the open pit can be free cash flow positive occurred in spot prices.
Uh huh.
At current spot prices listen.
Greg I think the answer to that question is we're looking at it now we're going through our planning and budgeting process.
Obviously, making sure we understand the assumptions that underlie that planning and budgeting process and what the sensitivities to it might be but we will issue guidance as soon as we can we're targeting December at this stage.
Okay, guys. Thanks for taking my questions and thanks to the uptick.
There are no further questions at this time. Please proceed.
Okay. Thanks, Jessica Thanks, everyone on the line look thanks for dialing in this morning.
I appreciate that there was some questions where people were looking for some more specific on says which.
We have to sort of defer to a later point in time that is not obviously because now we're not working on things I think from our perspective, the third quarter highlights were really ones that say.
The operational performance. The team has seen strong you'll find as commented on that what the team in a at all your Tolgoi is driving for is to run the open pit mine as efficiently as safely as productively as to cash generative as positive as possible. Both this year.
And that is true for next year.
And the year thereafter.
And in part that's driven by the fact that the team realize is of course not with yeah time delay we had on the underground we need to do everything we can.
To get the opened in operation to compensate as much as possible not cash flow that we now need. So that's that's an important thing for the team to do and that's what.
I'm onto taller as the CEO of CEO of OTN and his team are doing.
The second piece is I think you've had some really good progress reports on the underground development.
Last time, we spoke in.
Okay.
Some of you have be into a site visit in September as well, we've laid out some of the key milestones or gating items that we think.
We will deliver against us with what's the final mine design and the definitive estimate you've seen and that's a quota.
Some tangible.
Progress and some tangible deliverables, so shock to the construction of shopped who is complete.
We you've seen some tangible progress on productivity.
You've seen a decision on the made access five.
All of which where things we had flagged as key milestones and that's what we've done and we anticipate to do that going forward.
So really I think what you're seeing the team to do is to focus on the Controllables right. We drive hot the controllable cost cash flow performance safety.
I haven't heard us tightened the range on cost or she had drilled so far.
Simply the fact that.
We think that we should demonstrate progress and we should show performance I'm not declare victory too early.
Though you've seen some encouraging signs.
And in the meantime, I think some of the comments that Luke angina provided you with on a financing in power.
Adults and even to your question Parliamentary working group I think these are just discussions that you would expect us to have to move forward on some of the other critical deliverables, whether its power or financing.
But that lead time is a little bit longer than on some of the other item. So really the focus for us than for the team.
And on managed to Controllables, there's a strong operational performance.
And do what we said we would on delivering the underground that's been the focus on the third quarter I think you've seen some evidence and that's what are you should expect to see from us going forward.
So with that leaves, let let me leave it there. Thank you for your participation. Thanks for dialing in this morning thinks we a question and with that Jessica will will close off the call. Thanks very much everyone.
Thank you ladies and gentlemen, this concludes your conference call for today. Thank you for participating.
Thats your line.
[noise].