Q1 2020 Earnings Call
Good morning, My name's colon and I'll be your conference operator today at this time I would like to welcome everyone to see coal mines Q1 earnings and production results Conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session.
If you like that question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press Star then the number two thank you see go you may begin your conference.
Thank you, calling my name is Brian Bergot and industry, the Vice President Investor Relations worked to CECO welcome everyone and thank you for joining us today to review to see goes financial and operational results for the first quarter, two 2000 and twice.
News release announcing our financial results were issued yesterday after market close and are available on our website at <unk> Dot com.
With me today in Vancouver, as Russ Hallbauer Chico's CEO.
Stuart Mcdonald, our president, John Mcmanus, or Seattle, and to Seacoast, Chief Financial Officer brace humming.
After opening remarks by management, which will review first quarter and business and operational results. We will open the phone lines to analysts and investors Burke question answer session.
Before we proceed I would like to remind our listeners that are comments and answers to your questions will contain forward looking information. This information by its nature is subject to risks and uncertainties. The me caused the student outcomes to differ materially from the actual outcome for further information on these risks and uncertainties I encourage you to read the cost.
No that accompanies our and Newpark first quarter Mdna and the related news release.
As well as the risk factors, particularly to our company I will now turn the call over to rest for his remarks.
[laughter] I'd like to wish everyone on the call good health for yourselves and your families and then we get back to some form of normality in our lives not too distant future.
Talking about business on these kotick time seems to be misplaced businesses of all sorts will be very important.
Aspect of a return to normalcy.
To seek wasn't very fortunate in many ways in the past few months.
First our tem older buying as a community based mine our employees all sweep in their own beds every night.
Combined with cafeteria entered and or account.
This allowed us early on and the onset of the cold, but pandemic to be able to immediately begin to help protocols to protect our employees and to continue to run or operations.
Secondly, we have a battled hardened workforce.
We've been through this before.
We survived the great financial crisis of 2008 2009.
[laughter] survived the copper price drop in 2016.
And we survived the central BC wildfires three years ago.
Oh, we were on or help protocols at the end of February well before.
The government protocols came out.
And we've got to this point at this juncture in very sound shape with respect to all that.
As we go forward and we got to this point I think the balance sheet and cost structure. We now have in place and going forward illustrates a illustrates all of that and a basin Stuart will speak about that in a few minutes.
Well there site cost now anticipated dropped by 40 to 50 cents U.S. going forward. We're in very good shape to weather whatever's going out of.
The great thing about Gibraltar.
Like many people don't I read you understand that is a could collection of ore body surface. Unlike.
Unlike so many others that are just one big ore body, they're all connected at depth, but the pits. We are developing all come to surface. So we have the Brad Pitt pollyanna pit the connector that the Jeff West pad that you have extension pet so it's much much different than many other big open pit mine so.
Why do we get into these types of situations where into right now go back to basics, what is where in the context of the day, what can we do they access and develop quickly a newer releases and can we provide continuity and consistency of operations year over year.
Going forward.
This time, we really focused on the rest of 2020 and out into 21, 22, and 23 Armine concerns was we generate operating profit.
So for <unk>.
2020, we'll get our cost to the dollar 40 U.S. per pound range, well, we were out new or at least push backs in some of these pits that I spoke about.
This exercise that we've undertaken is proven very insightful and further gives us confidence ongoing lower costs going forward.
As well we're in the higher graders, we've spoken about in the past through the cyclical nature of ore body development.
Whereas the lower portion of the granite pushed back so things are presently going the way, we expect to be and we expect to be at the high end of our guidance based on.
Great that production, which is obviously timing in these times.
And John can take those questions on the operating side in a few minutes when we get a later into the up into the program I'd like now turn the call over to Stuart.
Just talk.
First the boat.
Financials.
Okay. Thanks, Russ and good morning, everyone I'm now going to give an overview of our first quarter operating results and some other recent initiatives that we've put in place.
In response to the current environment and yeah. That's your broker in the first quarter, we produced just over 32 million pounds of copper.
Total operating cost of $1.82 pound.
The first quarter production costs were generally in line with our expectations that we had at the beginning of the year.
And as Russ noted the covert 19 virus has not impacted our operations, we operate it continuously or.
Through the quarter and up to date.
But as we know the virus has had a major impact on the global economy in the copper prices fell dramatically in the second half of March.
Ending the first quarter at about $2.17, a pound and that price has had a significant impact on our financial results for the quarter.
Adjusted EBITDA was 5.3 million an adjusted net loss was 21.6 million, which is nine cents a share.
Both of those amounts include negative provisional price adjustments of 13.6 million related to the decline in copper price.
And some of those provisional adjustments have already reversed in the second quarter with the improving copper price.
In late March we took quick and decisive action to respond to the lower copper price environment.
As Russ described we have a lot of operating flexibility at Gibraltar and we've made adjustments to our 2020 operating plans, which will reduce cost significantly without impacting the long term my plan requirements.
We are lowering mining rates, which saves money as well as deferring major equipment rebuilds, where possible and we're also realizing input cost savings in a number of other areas.
Most notable is the diesel prices, which are now 35% lower than the average price last year, which is equivalent to a 10 million dollar annualized savings.
[laughter] the Canadian dollars also weekend, which benefits us with our Canadian dollar cost structure.
We're also expecting higher grades and copper production over the next few quarters, which will further reduce our unit cost.
We are reiterating our annual guidance of 130 million pounds of copper plus or minus 5%.
And actually we now expect to be at the higher end to that range based on the revised plan.
Taking into the cost taking into account the cost reduction initiatives and the increased production. We expect total site spending will fall by 40 to 50 cents U.S. propel and for the coming quarters.
And that's compared to Q1.
That will ensure that you broke through maintains a solid operating margin and continues to produce free cash flow.
Our cash position remains strong we ended the quarter with $50 million and Treasury and in April we added 8.5 million to that through a transaction with Osisko gold royalties.
We've amended our existing silver stream agreement with the Cisco to eliminate the delivery price of $2.75 per ounces silver.
So it's a good transaction for us and we're happy to further develop or relationship with the support a partner like Cisco.
We have a number of other leavers available to manage your working capital this year, including opportunities to defer BC hydro power cost and equipment lease payments.
Well also be receiving additional cash proceeds from our April put options that expire this week.
So we're quite comfortable with the balance sheet and we continue to advance our growth strategy with the near term focus on development before its copper project.
The production test facility operated as planned throughout the first quarter.
From producing copper there for over a year now and the operating results continue to validate the assumptions in our feasibility study.
And also provide valuable operating experience for our team with the answer to mining process.
Permitting for the commercial facility is progressing well with the Arizona State regulator, we expect to drop off for protection permit to be issued in the coming weeks.
With a public hearing to fall 30 days later.
Discussions are ongoing with potential JV partners, and we believe that the sales a minority stake in the project.
Could represent a significant portion of the overall financing package for the commercial phase.
We're also planning to recommence discussions with lenders in the summer.
The objective of having a committed financing package in place prior to recede apartments.
In the background, we continue to quietly advance or other long term growth projects and that includes permitting and first nations initiatives that both yellow had and new prosperity.
And we expect further news on those initiatives in the coming weeks a month.
And with that I'd like to now hand, the call over two to our CFO. Please [laughter].
Thanks, Stuart good morning, I'd like to cover in further detail the first quarter financial results. The results were operations this quarter best seen in or cash flow statement.
Despite the dramatic drop in copper prices in the second half of March we'd cash flow from operations of 18 million really 21 million. If you include the 3 million net proceeds from our copper pilots that we purchased in January this operating cash flow funded or ongoing capital spend that you brought through 15 million in our debt service on a quick.
<unk> owns a 5 million.
Overall decrease in or cash of 3 million in Q1 from 50 350 is therefore really attributable to our continued investment in our near term growth prospect warrants, which totaled 5 million.
For the first quarter, we reported earnings from mine operations before depletion and amortization of 5.9 billion.
Earnings were clearly affected by the lower copper price and the timing of our shipments in the quarter.
We also had 13.6 million in provisional price adjustments, which related to the 2019 shipments that revalued and in the first quarter at the end of March we still had 18 million payable pounds were to CECO share that was repriced in the second quarter <unk> the recovery of the copper prices in April.
Result in at least 3 million of our 30 million provisional price adjustment reversing in Q twos earnings.
We had concentrate inventory of 6.4 million pounds at the end of March we did receive advance payments on how come that.
And we'll be working to reduce inventory in subsequent quarters by working on the shipping schedule with their customers.
Especially given the higher production and sales expected under the revised mine plan.
Site operating costs were slightly reduced from the prior quarter in came in at Dollarseighty two per pound due to the weaker Canadian dollar diesel costs and other site cost savings that we're beginning to see in greater capitalization of stripping costs in the quarter.
We did purchase some feel call options to provide a ceiling price on fuel at Gibraltar for the rest of this year. This will lock in a minimum 12 cents a liter savings for the remainder of 2020 compared to 2018. This is significant given we consume about 30 million liters of diesel at your browser, but we still fully participate in these low price.
It is we're seeing.
Depreciation at 27 million means higher compared to historic levels, but is generally in line with their previous guidance and should be at similar levels for the next two quarters.
Adjusted EPS was a loss of 22 million or nine cents per share due to the higher depreciation from grants or and that provisional price adjustments mentioned previously GAAP net loss for Q1 was 49 million, which includes the 30 million unrealized foreign exchange.
Unrealized honor senior secured bond given the weaker Canadian dollar in the corner.
Finally, we did do some housekeeping.
On the regulatory front I'm, just didn't updated or be shelf prospectus, which expired earlier in the year. This was not filed in relation to any planned financing just housekeeping and then inline with our Q1 earnings timing and filing of our yeah. So it's in the normal course and that we renewed every two years. So I'll now turn.
Back over to Ross for some closing remarks.
Thank you started rice I quoted before the Q and eight there's something I'd just like yeah. Most folks are there a little understanding of filling the concentrate scream and how long it takes.
Certainly very to understand what it takes to ramp up of mining operations back up after a closure there to work backers missing in the copper supply demand discussion right now first to scrap and you're starting to see it emerges as a point of potential. It's just beginning to be spoken about and I will have a major impact on the supply side flowing through to the final copper.
Metal market.
Secondly, everyone just things when the Sun benches are lifted in places like Chile, and Peru, and the Big mines, It's just back business as usual well I'll tell you is shutting down as easy starting up is long and difficult.
Politically if we look at it end users of concentrate like China are starting to run out of concentrate which were starting to see that and the spot Tc RC market is telling us. This yesterday a spot tender out of Escondida sold for 43 and 4.3.
Which indicates the types of the market. So the whole block of concentrate shut down a month month and half ago is now being used up and depleted it's either in transit or docs on inventories and is being used remember free time from Chile to China is over three weeks.
So now a large portion of the screen is empty from the mine to support to the shifts to the smelters somebody still being transferred but likely 90% cleaned out at source.
How long to fill that screen back is the real question and it's not press the green, but in a way you go immediately.
First degree if you look at it if you take one to two weeks for recall that personnel. One week for restarted you have supplies. If you don't and it's taking longer if or depleted before shot you need to strip and expose or maybe one or two weeks. So anywhere between two to four weeks before you ship concentrate.
A in a pipeline or truck report then you have to fill a portal so to get a shift for 40 50 80000 tonne that can take 234 weeks to fill the port for assume.
The three weeks to get into a smelter. So best case, if you work back from that you're talking 10.
10 weeks at best So two and a half once a worst case could go over 14 weeks almost four months. So there's going to be no concentrate on the pipeline or limited concentrate that is what's going to happen next first indications is watching the spot TCR season, which as I said two days ago or yesterday escondida spot contract win for 2043 and 4.3.
And we're seeing smelter closures and in China, because of the lack of concentrate and the lack of spot a or scrap metal. So that's telling us a lot of what may happen on next expert awhile, yes, you'll see inventories dropping.
Slowly but.
As concentrate dries up a that should accelerate.
And that's just a little insights from Uh huh.
My years in the mining business. So now I'd like to open the Oh the lines operator to questions.
Good figure.
Thank you ladies and gentlemen, we will now begin the question and answer session. So do you have a question. Please press star goal by the one on your Touchtone phone you will hear a three told prompt acknowledging your request and your questions will be pulled in the order they ever see I wish the clients on the pulling process. Please press star followed by the too yes.
You are using a speaker phone please lift your handset before pressing any keys one moment for your first question.
[noise]. So your first question comes from Craig Hutchinson.
TD Bank.
Please go ahead.
[noise] central cost savings. This year can you provide us an approximate breakdown of how much of those savings related to falling input costs.
Much is related to deferred spending on discretionary items maintenance trying to get a sense in terms of you know as we return into better copper prices, how much of the beer business I catch up in terms of cost would be next year as hereafter.
Alright, great job, we missed the person.
Probably 30 seconds or more of your question. Please.
Stronger okay.
I can repeat it.
John in terms of the the cost savings you guys quoted 40 to 60 cents. So just trying to get a sense of how much of those cost savings are related to input costs like diesel and and lower.
Dollars, how much is related to a card to discretionary spending and maintenance.
Okay, well first talk none of it is related to Canadian dollar, we're just talking about spending at the mine site.
Soc and it's a blend of.
A whole bunch of different things that we're doing we're working with our suppliers.
To reduce costs.
We have reduced the stripping in the pollyanna picked because we just don't need to do it right now.
So our strip ratio since you bought two for the next.
While it was we watch the copper price.
And and we're also in higher grade so we produce more copper with the same amount like Robert So that's what brings our are offered cost all the stuff which is deferrals.
Included in.
And the costs of.
If there is a deferral what the BC hydro we're taking that.
Yes, that's not in the 40 cents saving that.
Part of.
The spending because it's just a deferral.
So does that help lower diesel prices theres, some natural input decreases diesel explosives.
Steel things like that so.
Right I don't count.
Each one quantified it's implying that the total.
Sorry, I guess you guys haven't taken advantage of the hydrogen fuel program as of yet.
But if you do can you give us a sense of how much those cost savings would be on a on a monthly run rate.
Oh, sorry.
Yes, so we have actually applied it there's a special tariff that's been put in place by BC Hydro.
Given the Kobin situation, so we get a three month, a minimum 50% deferral.
But that I think what John just reiterate with John saying is that that's not that benefit.
So the first the first bill payment were saving about purchase eco share about a million in half, but that savings isn't in quoted by John when he's talking about 40 to 50 cents savings because that is just a deferral. So it's a three month Pearl and we start paying that back in.
In March next year over nine months.
And then on top of that we have our longstanding deferral program, where the copper prices below 340, Canadian that will kick in but at present, where we're just looking at the 50%, but if copper prices stay weaker we'll use the program longer well have the option.
To that that program is talking about Craig was established in 2016, when there was a copper price crunch in the industry went to government and said hey.
Guys are charges locker hydro and that program still exist. So [laughter], there's two in place for mine.
Yeah.
So there.
Yes.
Can you hear me.
Yeah, you cut out I mean, it's certainly last one I guess everyone's working.
Maybe if I could just one last question.
If you guys structure deal and now you're working on a potential than a resale Florence. If your to do a deal would you look to use some of those proceeds at the corporate level.
The current level already all before feature spending at lunch itself.
Well I mean, the did the details of the have any deal or you know still be negotiated but.
You know generally partners are going to want to see their money going into the project, but they are investing in and so my expectation is that.
Any proceeds we get from that sale will be in reinvested into into Florence, and we'll fund a big part of our phase two capex I mean, they could also potentially fund some TTF operations in the near term, but you know those are relatively small dollars anyway, but generally speaking we don't expect.
Well seats to be brought to the corporate level, because we don't we don't really need proceeds at the corporate level, we're pretty comfortable with the balance sheet.
The we have an operating margins that we have a gibraltar. So that's that's basically where we stand today.
Okay. Thanks, guys since taking my questions.
Sure.
Your next question comes from Edward Montgomery from Canaccord. Please go ahead.
Thank you had a quick question in relation to.
Salons project in terms of just upcoming news flow unless you in your release you mentioned, the let me do permitting it never been and each other you mentioned on the cool, but it won't cut all on Battenfeld leeny protected.
And the current markets a little anything to articulate on that please.
Yeah, just say the question was for a bit more color on the on the permitting process in Florence and I think yeah, I mean, I think when the Arizona state side, they're moving expeditiously, where they're moving or on a on a pretty clear timeline.
Draft permit should be coming in the next few weeks, yes, Yep will then be a public hearing.
No John if you have anything to the add on.
So there's theres two permits that we need one is from the state matched our preferred protection permit me others from Oh, U.S. Environmental Protection Agency, that's called an underground objection certificate.
The Arizona.
Processes, a little easier to foresee they have timelines that they follow and the states was very optimistic and they're very supportive of this project. So we expect a backdrop permit and about a week or two.
To go public spending 30 days, we've come public comments, then there's a hearing.
In the state.
Alters the draft to what they need to two to satisfy any public comments and then the final permit is issued we're seeing that.
Probably September.
With that didn't have the P.T. a productive production test facility just continues on [noise].
We don't need to New York see for many ph continuous production test facility.
<unk> EPA is a little more complicated is a little more not as good see through on how long things take but we're working very closely with EPA in San Francisco and they're very attuned to the project. There also supportive, but they've got a process to go through.
We see that coming it could be by the end of this year.
But again, it's a little harder to predict.
Okay understood. Thank you.
Okay.
Your next question comes from you in low from shore capital. Please go ahead.
Hi, I'm I'm not sure.
<unk>.
I mean look into my line could you go well good morning.
Mike I think you said stripping is going to be down to about two when the next Q2 quanta and that you're going to higher grades are you intentionally oh.
Getting high agreed.
All body well does shipping has to be called at some point and could you also talked Elizabeth I N rikabi for an acute.
Thanks.
Okay, that's a lot of questions and one question.
So.
As Ross mentioned, we've got a great deal or flexibility at Gibraltar, because we have a number of different working faces.
So.
In the normal course, we put all of our equipment working and shutters helps up to maintain as much flexibility as possible, which give us the opportunity to do what we're doing right now.
Yes.
Reduce the mining rate.
What that does we reduced the mining rate in the high strip ratio area, and we actually accelerate the mining rates in the lower strip ratio area, which is the granite pet.
Most of her will come out of there for the next.
While probably ended the year and it is higher grade the what we would have got from a pollyanna pit in the same time.
Not a lot but enough to pushes towards the high end of the guidance.
We also by accelerating the grant it gives us an opportunity to move water from the from the Gibraltar pet into the granite 'cause it will be done sooner and then we can develop into <unk> and that's really the the key to what we've been able to do here so that we've got.
The 2023, we see no no effect on production from Gibraltar continued lower costs. We also don't have to move the crusher, which was scheduled to go moved in 2022, So that's a big capital.
Expenditure, but we can push out for two more years.
Iron ore or are in the or you get hired contract you have to try and depressed that took me junior concentrate grade.
When you do that you end up.
Losing a bit of the copper too so your recovery goes now.
That's helpful.
Oh, Yes, I guess, what I was just wondering what the levels.
Oh, we'll be seeing in this oh.
I'll be likely by movies, he rikabi back up to the usual level more unusual levels next few quarters all of the mean, what the ones level.
In this portion of the granite truck.
Our is higher than normal I, just normal waqar, but it's enough that it gives us some issues in the flotation process. We are working with different reagents to get a better response, so I wouldn't say that we expect to see the recovery so actually with the grade going up good recoveries go up not true too. So I think we'll be more.
Normal recovery.
Oh.
Foreseeable future.
That's great. Thank you and much.
Huh.
Your next question comes from David Barillo from B.
D.S.P. Please go ahead.
My questions have been answered I appreciate that thanks.
Oh.
Okay. So your next question then comes from Matt.
The virtual school from Jefferies. Please go ahead.
Thanks, Good morning.
Can see that you guys are doing a lot of work to obviously to lower cost a person spending.
Just curious if you could just curious if you can talk about whether you think Gibraltar can.
Generating enough cash to cover its interest and expected Capex I know you said he thought.
It would be cash flow positive, but just want to be clear or are we talking about being able to cover fixed charges interesting capex. This year and I understand that copper prices as a big variable there, but I guess just for the sake of argument copper were to stay here. Today you guys think you could be do you think you could preserved the liquidity.
You have today at Gibraltar.
Yes, yes, yes, [laughter] not yet we're here we don't have you know we're gonna these copper prices, we're going to probably generate cash over the remainder of the year with this new plan, we have at Gibraltar and that's cash at the at the corporate level. So you know as I said, we've taken 40 to 50 cents.
Out of the cost structure here.
We're pretty we're pretty comfortable with where we stand yeah I think in Q2, we should see the cash.
Grow grow a little bit maybe stay around where it is it's it's dependent on it's dependent on copper prices, obviously, which are moving everyday but yeah. We ran our plans.
You know a month ago, it to 20 copper or not that's the kind of scenario that we're we're planning for so.
We're pretty comfortable.
Okay. Good to know thank you and then I.
I guess, just on Laurence and the financing there.
I guess, it's potentially two components, one selling an interest in the project and secondly, some sort of debt.
Financing.
I guess, given where some of your corporate debt trades today that would imply a high cost of capital for corporate debt are you contemplating then project level debt.
And if there's any way to kind of quantify the the two pieces I guess, it's still need to raise roughly the 200 million is that mostly a JV stake sale and maybe a small amount of debt and then again, just where might that that's it.
Yeah in terms of.
Where it might sit you know and the current expectation is that it would likely be project level debt.
But again that is you know, that's where I'm lenders lenders can be comfortable with their secured right at the Florence level and not be impacted by the bonds or for anything else. So fourth as you know under the bond is not part of the bond security package. So that's an unencumbered project at this.
In terms of our financing you know expectations, obviously lot of that will depend on how the negotiations go with potential JV partners.
If we can get.
You know a good valuation and evaluation that we wanted we could we could scale that investment up higher if we don't want it could be it could be a smaller piece, but I wouldn't I would estimate anywhere from 100 225 potentially from a JV partner and the remainder would be films.
Project debt or potentially royalties as well that's another option that we will look out so.
Okay.
Those are those are moving pieces and you know subject to a lot of a further discussion.
Thank you.
Thanks.
[noise], but there are no further questions at this time. Please proceed.
Thanks, very much everybody that summer, we'll talk is soon.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask you. Please disconnect your lines.
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