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 that 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 would like to ask 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 to 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 it to sequence dot com.
With me today in Vancouver, as Russ Hallbauer, Chico's CEO Stuart Mcdonald, our President John Mcmanus, our COO and to Cecos, 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 for question and answer session.
Before we proceed I would like to remind our listeners that her comments and answers to your questions will contain forward looking information. This information by its nature is subject to risks and uncertainties that may cause 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. We note that accompanies our I newpark first quarter Mdna and the related news releases.
Well the risk factors particular to our company.
Now turn the call over to rest for his remarks.
Oh I 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 chaotic 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 Jim older mind as a community based mine our employees all sleep in their own beds every night.
Not confined to a commentary enter Andorra camp.
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.
We were on or help protocols at the end of February well before.
The government protocols chemo.
And we've got to this point at this juncture and 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 going forward illustrates.
Illustrates all of that and based in Stuart will speak about that in a few minutes.
Well there site costs now anticipated to 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 he understands and is it could collection of ore bodies at surface. Unlike.
Unlike so many others that are just one big ore body, they're all connected in depth, but yes, we are developing all come to surface. So we have the Brad Pitt Pollyanna pit the connector pit the Jeff West pad the gym extension pet so it's much much different than many other big open pit mine so.
What do we get into these types of situations where into right now we 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 2020, we'll get our cost to the dollar 40 U.S. per pound range, well, we without new or release 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 and ongoing lowered costs going forward.
Well, we were in the higher grade as we've spoken about in the past through the cyclical nature of ore body development and the 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 on graded 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 the later into the the program.
I'd like now turn the call over to Stewart.
To talk Uh huh.
First about the.
The 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 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 and the total operating cost of $1.82 pound.
The first quarter production costs were generally in line with our expectation is that we had at the beginning of the year.
And as Russ noted the cobot 19 virus has not impacted our operations, we operated continuously or.
Through the quarter and up to date.
But as we know the virus has had a major impact on the global economy and the copper prices fell dramatically in the second half of March.
Ending the first quarter at about $2.17, a pound and not 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 costs significantly without impacting the long term mine plan requirement.
We're 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.
[noise] the Canadian dollar is also a 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're 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 of 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. per pound for the coming quarters.
And that's compared to Q1.
That will ensure that Gibraltar 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 levers available to manage your working capital this year, including opportunities to defer BC hydro power cost and equipment lease payments.
We'll 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 of performance copper project.
The production test facility operated as planned through up the first quarter.
We 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 instead you mining process.
Permitting for the commercial facility is progressing well with the Arizona State regulator, we expect to dropped 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 sale of 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 re commenced discussions with lenders in the summer with the objective of having a committed financing package in place prior to receive departments.
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 head 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 price having [noise].
Thanks, Stuart good morning, I'd like to cover in further detail the first quarter financial results. The results of our 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 at Gibraltar 15 million and our debt service on a quick.
<unk> owns a 5 million the overall decrease in or cash of 3 million in Q1 from 53 to 50 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 million 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 for it to CECO share that was repriced in the second quarter, Brett the recovery of the copper prices in April.
Resulting 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 and came in at $1.82 per pound due to the weaker Canadian dollar diesel costs and other site cost savings that we are beginning to see in greater capitalization of stripping costs in the quarter.
We did purchase some fuel call options to provide a ceiling price on fuel electric realtor for the rest of this year. This will lock in a minimum 12 cents a leader savings for the remainder of 2020 compared to 2019. This is significant given we consume about 30 million liters of diesel at Gibraltar, but we still fully participate in these little 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 granites or.
And the provisional price adjustments mentioned previously GAAP net loss for Q1 was 49 million, which includes the 30 million unrealized foreign exchange.
Unrealized owner senior secured bond given the weaker Canadian dollar in the quarter.
Finally, we did do some housekeeping.
On the regulatory front I'm just either.
Updated our 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 enough. So it's in the normal course and that we renewed every two years. So I'll now turn it back over to Ross for some closing remarks.
Thank you certain price I'm quoting before the Q and eight Theres something I'd just like at most folks out there of little understanding of filling a concentrate scream and how long it takes.
Certainly very few understand what it takes to ramp up of mining operations backup. After a closure there are two or four factors missing on the copper supply demand discussion right now first to scrap and you're starting to see it emerges as a as a point of contention is just beginning to be spoken about and it will have a major impact on the supply side flowing through to the final copper.
Metal market.
Secondly, everyone just thinks when the Sun benches are lifted in places like Chile, and Peru, and the Big mines is just back business as usual well I'll tell you are 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 we are starting to see that and the spot Tc RC market is telling us. This yesterday as bought tender out of Escondida sold for 43 and 4.3.
Which indicates the tightness of the market. So the whole block of concentrate shutdown a month month in half ago is now being used up and depleted it's either in transit or docs on inventories and is being used remember freight time from Chile to China is over three weeks.
So now a large portion of the screen is empty from the mine to the port to the shifts to the smelters suddenly still being trends, it 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 goal immediately.
Firstly, 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 concentrated.
A in a pipeline or truck report then you have to fill a portal so to get a shipper 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 month worst case could go over 14 weeks almost four months, so theres going to be no concentrate in the pipeline or limited concentrate and that is what's going to happen next first indications is watching the spot TCR sees which as I said two days ago or yesterday Escondida spot contract went for 2043 and 4.3.
And we're seeing smelter closures and in China, because of lack of concentrate and the lack of spot.
Scrap metal so that's telling us a lot of what may happen next expert awhile, yes, you'll see inventories dropping.
Slowly but.
As concentrate dries up that should accelerate.
And that's just a little insight from Uh huh.
Hi years in the mining business.
So now I'd like to open the.
The lines operator to questions.
Take care.
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 tone prompt acknowledging your request and your questions will be pulled on the order they ever see if you wish to decline from the pulling process. Please press star followed by the too yes.
You are using a speaker phone please lift the handset before pressing any keys one moment for your first question.
[noise]. So your first question comes from Craig Hutchinson of TD Bank.
Please go ahead.
[noise] terms of potential cost savings. This year can you provide 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 returning to better copper prices how much of the beer business I catch up in terms of cost would be next year thereafter.
Alright, great job remiss per person.
Probably 30 seconds or more of your question, but I think.
The strong here okay.
I can repeat it.
John in terms of the the cost savings you guys quoted the 40 to 50 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 cut discretionary spending and maintenance.
Okay, well first off 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 on par suppliers.
To reduce costs.
We have reduced the stripping in the pollyanna pit because we just don't need to do it right now.
So our strip ratios from Dupont two for the next.
While it was we watch the copper price.
And and we're also going higher grade so we produce more copper with the same amount like referred so that's what brings our operating cost all the stuff which is deferrals.
Included those in the costs of <unk>.
There's a deferral like the BC hydro we're taking that.
Yes, that's not in the 40 cents saving bats.
Part of the public spending because it's just a deferral.
So does.
And I sort of lower diesel prices, there's some natural input decreases diesel explosives.
Steel things like that so.
I don't how.
Each one quantified it's a blend of the total.
Sorry, I guess you guys haven't taken advantage of the hydro deferral 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 we 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 for the first bill payment were saving about purchase eco share about a million half, but not 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 March next year over nine months.
And then on top of that we have our long standing.
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 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.
Hi, guys your charge offs law for hydro and that program still exist. So [laughter], there's two in place for mining.
Two there.
So there.
Can you hear me.
Yeah, you cut out I mean, certainly lots going on I guess everyone's working.
Maybe if I could just one last question.
If you guys structure deal and how you're working on a potential then already sale or Florence. If your to do a deal would you look to use some of those proceeds at the corporate level.
The parent level already all before feature spending as lunch itself.
Well I mean, the did the details of the of any deal are still being negotiated but.
You know generally partners, they're going to want to see their money going into the project, but they're investing in and until 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, it could also potentially fund some TTF operations in the near term, but 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.
But we haven't 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 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 bomb into permitting it everything and each the but are you mentioned on the call but.
Well cut all on that didn't help.
Got it.
And the current markets a little anything to articulate on that please.
Yeah, just so I use the question was for a bit more color on the on the permitting process in Florence and I think.
Yeah, I mean, I think on 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, yes, we'll 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 state was very optimistic and they're very supportive of this project. So we expect a draft permit and about a week or two.
To go public spending 30 days, we've been 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.
Without in hand, the P.T. up to production production test facility just continues on [noise].
We don't need to New York see from many ph continuous production test facility.
The EPA is a little more complicated 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 we'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 I Miss any other People's lives I mean bucket into my line could you go it'll be more.
Mike I think you said stripping is going to be down to about two when an excuse to quantify.
And that you into higher grades are you intentionally oh.
Getting high agreed.
All body well done shipping have to be caught at some point and could you also talked to us about I intend to copy for an acute.
Thanks.
Okay, that's a lot of questions and one question.
So.
<unk> as Ross mentioned, we've got a great deal of 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 shutter selves up to maintain as much flexibility as possible, which give us the opportunity to do what we're doing right now is.
Reduce to 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 Toby ended the year and it is higher grade there what we would have gotten 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 granite pit gives us an opportunity to move water from the from the Gibraltar pit into the granite 'cause it will be done sooner and then we can develop into the <unk>. That's really the the key to what we've been able to do here. So that we brought up to 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 a few more years.
Iron ore or iron in the or you get hired content you have to try and depressed out to maintain your 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 Uh huh.
Are we likely by movies, he rikabi back up to the usual level more unusual levels.
Next few quarters, although they remain what the ones level.
And this portion of the granite truck the iron.
Is higher than normal I, just not a lot higher 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 the recoveries go up naturally 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 <unk>.
D.S.P. Please go ahead.
Oh my questions have been answered I appreciate that thanks.
Oh, Okay. Okay. So your next question then comes from Matt.
The virtual sill Oh from Jefferies. Please go ahead.
Thanks, Good morning.
I can see that you guys are doing a lot of work to obviously to lower cost a person spending just.
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.
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 gonna probably generate cash over the remainder of your 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.
I love 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 or grow grow a little bit maybe stay around where it is it's it's dependent on is 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.
Yeah, we're pretty comfortable.
Okay. Good to know thank you and then I guess just on Lawrence 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 or are you contemplating then project level debt.
And if there's any way to kind of quantify though 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 and 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 anything else. So fourth as you know onto the bonds is not part of the bond security package. So that's done 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 in the valuation 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 it be filled.
Project debt or potentially royalties as well that's another option that we will look out so.
Okay, but those are those are moving pieces and you know subject to a lot of a further discussion.
Thank you.
Thanks.
There are no further questions at this time. Please proceed.
Thanks, very much everybody or how does that summer we'll talk is soon bye.
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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