Q2 2021 Taseko Mines Ltd Earnings Call

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Good morning, My name is Michelle and LDL conference operator today at this time I would like to welcome everyone to the dish.

Mines backup second quartile.

Production results conference call.

Lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number 1 on your telephone keypad, if you'd like to withdraw your question. Please press star and the number 2 thank you.

You may begin your conference.

Thank you Michelle.

This is Brian <unk> and welcome everyone and thank you for joining <unk> second quarter 2021 conference call.

The news release announcing our financial and operational results was issued yesterday after market close and is available on our website at to CCAR mines Dot com.

With me on the call today is <unk>, President and CEO Stuart Mcdonald to Chico's, Chief Financial Officer, Bryce Hamming, and our senior VP of operations Richard traveling.

As usual before we get into opening remarks by management I would like to remind our listeners that our 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 stated outcome to differ materially from the actual outcome for further information on these risks and uncertainties I encourage you to read the cautionary note that accompanies our second quarter MD&A and the related news release as well as the risk factors particular to our company.

I would also like to point out that we will use various non-GAAP measures. During the call you can find explanations and reconciliations regarding these measures and the related news release.

After opening remarks, we will open the phone lines to analysts and investors for a question and answer session. I will now turn the call over to Stuart for his remarks.

Okay. Thank you, Brian and good morning, everyone and thanks to you all for joining our second quarter earnings call and webcast.

Just feel a bit odd to not be following <unk> remarks today, but I'm very excited to be in the expanded role and certainly committed to filling the void left by his retirement and June and fortunate to have worked with Russ over the last 8 years.

And we've worked particularly closely and the last 2 years since I became president and to ensure that we have a seamless transition here.

Also today wanted to welcome Richard <unk>, who has been promoted to the role of senior Vice President operations.

I'll, let them introduce himself and a minute.

But he is certainly not new to CECO, having been with the company now for 7 years, including 5 years as general manager of our Gibraltar mines and for the last 2 years. He has also been responsible for all aspects of our project pipeline.

<unk> Florence project so.

And we fully expect to seamless transition and on the operations side of the business as well.

Turning to the second quarter now and it was another strong quarter for copper prices and.

And with yellow and the price averaging $4.40 per pound.

And in recent weeks of price and pulled back slightly to the $4.30 range, but that's still a very attractive price from minors.

The last time copper was about $4 was back in 2011, and we appear to be and a very different environment and this time around it's more than just the China story now we know we have a global economic recovery underway.

And with huge stimulus spending new demand coming from electrification and the transition to green economies.

So we're now seeing a growing realization and the market and among metals analysts that copper prices are going to average above $4 for the next few years and.

And I personally think that's where they need to remain in order to incentivize miners to build the capacity that we need to meet demand over the next decade.

As we've talked about in the past developing new copper mine of scale is a risky endeavor and many other required projects are and challenging jurisdictions.

With political environmental and social risks at the forefront.

And even now in Chile, and Peru, and hop to producing countries, we see risks of delayed investment decisions because of political and tax uncertainty.

So with our portfolio of copper projects located in Canada, and the United States. We believe we are and we believe we're very well positioned.

For the future.

Our second quarter operating performance at Gibraltar was generally in line with our expectations. We had seen 2 lower production quarters in a row and as communicated to the market, we expect it to see and increase in grade and Q2.

The higher grade ore was accessed and the latter part of the quarter and along with steady throughput and copper recoveries. The mine produced 27 million pounds of copper.

It's a 20% increase over the prior quarter and.

The improved production drove significantly higher financial performance and the quarter adjusted.

Adjusted EBITDA of $48 million was a 100% increase over Q1 and almost half of what we generated all of last year.

Earnings from mining operations of 54 million was up 80% over the prior quarter and we also had $72 million of cash flow from operations.

But the improved results and Q2 are just the beginning as we expect even higher grades for the balance of 2021 as.

As we get deeper into the Pollyanna pit and also begin to mine initial ore from the new Gibraltar pit.

We're expecting copper production and the second half to be at least 40% higher than the first half.

And that will lead to lower unit costs and improved cash flows and earnings over the rest of this year.

Because of the slower start to 2021, it looks like total copper production for the year will come in and around 120 million pounds.

Which is within the typical plus or -5% of guidance range that we get.

Some of you may be aware of the wildfire situation and BC right now this summer to.

To date, we haven't seen any fire activity near our chip rolls from mines.

Although some of the fires to the south of US have disrupted rail service and the flow of our concentrate by rail to port and Vancouver.

Was temporarily interrupted.

The traffic is moving again, and we've been able to add trucking capacity to offset the lost real time.

So at this point, we don't see any significant impact on our Q3 sales volumes.

Looking ahead, we're planning and exploration drill program at Gibraltar to follow up on some interesting anomalies that were identified and our recent geophysical survey.

So expect to hear more on that and the coming months.

We currently have 17 years of reserve life remaining and we expect to be able to add to that with additional drilling.

We also have a number of exciting productivity and technology initiatives underway at the mines and Richard can talk more about those and a minute.

At Florence, we're continuing to advanced detailed engineering and that work has progressed to the point now where we're ready to order key components for the Sx EW plant.

We're planning to do that in the coming days and expect related Capex of roughly 20 million U S over the remainder of this year.

By making financial commitments now we can ensure that these long lead time items don't impact our construction schedule later on and.

And we can maintain early 2023 for our first copper production.

On the permitting front the EPA has indicated that they expect to issue the draft UIC permit next month.

Later than we would've liked but the important point here is that there are no issues arising as the agency completes its final internal reviews.

And that announcement will be an important milestone for the project and we look forward to the commencement of the public comment period in the coming weeks.

And as a final note, we recently announced the sale of our Harmony Gold project.

Many of you may not be aware of this project is to CECO hasn't done any substantial work on it and in a number of years.

And our view, it's a project with lots of potential of.

A 3 million ounce gold deposit located on the main island Heidrick why off the West Coast and British Columbia.

But we expect Florence and yellow head will be keeping us busy for the foreseeable future and we felt the sale of harmony was the best way to realize value from non core asset at this time.

<unk> energy and mining is a well respected mine developer with a solid track record and Western Canada.

There'll be the new operator, and we'll take the project forward and a new company Jds Gould and will participate and their success through a 15% equity interest and the company and.

And Thats a carried interest through the IPO and we will also keep a 2% MSR royalty on the project, which could also become a valuable asset for us as the project is de risked.

So we see this as a potential win for CECO shareholders, and we'll continue to look for other ways to create value.

From a pipeline of projects.

And with that I'll turn the call over to Richard for and introduction and a few additional comments on Gibraltar.

Thanks, Stuart good morning.

Everyone to start with some additional background on myself I came to Gibraltar from cost for a junior thermal coal company looking to permit build and operate a thermal coal mines southeast of Hinton, Alberta.

And as Vice President of operations, there I was responsible for all operations and permitting activities associated with the project.

Prior to cost per hour worked and the Elk Valley for 20 years with Teck coal and associated precursor companies out valley call and forwarding cold.

During that time I was general manager of the Fording River operation for 6 years and line Creek operation for 2 years and prior to that I worked for Noranda Falcon Bridge indicate creek operation and Mattagami operation back East.

Background is and processing and over the course of my career I have developed strong open pit operational and engineering knowledge.

Shifting to the operating results for the second quarter as Stuart mentioned, we are pleased with performance of Gibraltar.

Overall, the mine performed to plan during the quarter and as expected grade improved as well as copper recoveries and the mine. We continue to see equipment productivity is at or above planned levels as we optimize and improve our fleet management system performance.

Copper feed grade improved through the quarter as mining and pollyanna progress to deeper benches, and the higher grade ore resulted in higher copper recoveries.

So between grade and recoveries production increased by 20% over the first quarter.

Now as Stuart highlighted I would like to touch on a couple of business improvement initiatives underway at Gibraltar, which we believe have the potential to improve performance and efficiencies and the mine and mill.

For the past couple of quarters and the mine, we have been evaluating the mindset of system, which analyzes ore grade real time, while mining, thereby allowing us to maximize oil recovery and minimize dilution.

To explain and more detailed the system, which use X ray fluorescence tubes mounted on the shovel bucket estimates of greater material on the bucket, ensuring only or sent to the mill. We are quite excited about the increased capability of this system provides to selectively mine and transition zone and appropriately category categorize or from waste and vice versa.

<unk>.

And the mill and our operations team continued working with Mckinsey on Trialing their Optimus AI solution. This proprietary system Leverages artificial intelligence to optimize plant operations and enable our operating teams to make better timely decisions. This project is entering the proof of concept phase.

This quarter.

In closing as Stuart mentioned, we are also undertaking exploration work at Gibraltar and this summer we have recently completed a deep induced polarization study, which identified a number of interesting targets.

And the plan is to drill some of these targets later this summer and into the fall.

With that I will now pass things over to price.

Thanks, Richard and good morning, everyone.

For the second quarter, we reported significantly improved financials from Q1 earnings from mine operations before depreciation was $54 million and 80% increase over the first quarter and adjusted EBITDA was $48 million or 100% increase over the prior quarter.

And the increased average copper price and the second quarter, along with Gibraltar is higher production were the main drivers to our improved financials. Additionally, the higher copper pricing trends provided $3 million of positive provisional price adjustments, resulting and it realized copper price of $4.48 per pound for the quarter call.

Copper sales for the quarter were 27 million pounds, resulting in $100 million of revenue sales were in line with production, so copper and inventory remained relatively flat at $3.5 million pounds.

And increased production and the quarter resulted and see 1 total operating costs declining to $2 and <unk> <unk> per pound cost per pound were lower than Q1, despite lower capitalized stripping at $15 million decreased mining and stripping rates contributed to the lower cap strip and shorter hauling distances, we're more of a factor and the <unk>.

First quarter these stripping rates and quarterly dollar amounts for capitalized stripping should continue for the balance of the year.

And we achieved a very strong off say cost per pound and the quarter of 25.

Which was attributed to some great concentrate tender results, we have for Gibraltar concentrate earlier this year and the low <unk>, we achieved and awarding those contracts.

Gibraltar concentrate is sought after and Eze and <unk>.

Great example of how we keep inflationary.

Cost pressures and checkout at Gibraltar, We also extended our long term off take contract and the quarter for about half and Gibraltar production starting in 2022 for up to 5 years, achieving a discount ranging between 40% to 50% off of the TCR benchmark. This should help control offset cost inflation.

<unk> and the future.

Cash flow from operations was $73 million, a large jump from the previous quarter due to the higher copper price sales and also from a $24 million working capital adjustment due to the timing of shipments from the previous quarter that working capital adjustment is reflected in the reduction in accounts receivable at June 30th.

GAAP net income for the quarter was $13 million or <unk> <unk> per share after adjusting for the unrealized foreign exchange gain on our U S dollar.

Denominated debt our adjusted net income was $10 million of force <unk> a share.

As far as investing activities and the quarter Capex at Gibraltar was $8 million higher than the previous quarter due to our scheduled fleet and shovel maintenance.

Lawrence Capex was 6 million similar to our spend in Q1 also includes the detailed engineering for the commercial facility.

Which is now 60% complete we should see an increase and foreign spending in the coming quarters as we begin to secure contracts and long lead times for the Sx EW plant and make some initial deposits as Stuart just spoke about.

We also invested a further $5 million for copper price collars, we put in place for the first half of 2022.

We did this near the top of the market there and May we now have most of the production for the next year secured and minimum price.

And 375 per pound from the balance of 2021 and $4 per pound for the first half of 2022, we will continue to look for hedging opportunities in the coming months free H, 2.2022 and beyond to support our capital program at Florence, which is picking up momentum.

With the higher copper grade and production and the back half of the year and the continued strong copper pricing environment. We're seeing we do expect robust financial performance to round out a remarkable 2021 for the company with a cash balance of $226 million Florence copper should now be substantially funded.

These current copper prices and the low to mid $4 range prevail or increase further if any residual funding is needed. We still have all the options available that we've spoken about on.

And on all these calls over the last quarters.

Flexibility to various financing options is key and this market to ensure we unlock the.

<unk> value for our shareholders on Florence and our other development assets I will now turn it back to the operator for any questions. Thank you.

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 number 1 on your Touchtone phone and you will hear 3 Cohen from acknowledging your request and your questions will be Paul.

And <unk> should you wish to decline from the polling question. Please press star followed by the number too.

If you are using a speaker phone please lift the handset before pressing and 1.

1 more mindful of your first question.

Okay.

Your first question comes from Ed <unk> from Barclays. Please go ahead.

Hey, guys.

Thank you for taking the question today.

And the timeline for the EPA has been pushed back obviously, it's been kind of topical and top of mind, but I was wondering if this pushed back the time on and commercial production for Florence vs. What you said kind of doing the deal and January and February and then can you give us your confidence that the EPA will push it back again.

Yes.

Sure, Yes, Hi, Ed It's Stuart speaking here, yes, certainly the EPA sketch.

Schedule I would say is moved.

More slowly than we than we would've liked for sure.

But as indicated in my comments there.

We really don't see any any issues coming up.

And we remain highly confident that the <unk>.

Permit is going to be issued so we see now.

And their final reviews.

That document and expecting to see that and the next few weeks likely in September.

And that's our.

And Thats.

That's our view that's what the EPA is telling us and we remain pretty confident and that schedule now.

As we get closer I think to have to hit our confidence obviously.

And increases.

I think what that any expense.

Sir you touched on and on the rest of the schedule that mean heading out to commercial production.

I think early 2023 is still.

Barry.

Very achievable with some obviously some.

Our construction schedule roughly roughly an 18 month construction schedule to fit.

And there and we are doing with some of the procurement that we're doing.

And right now, we're ensuring we protect that schedule so.

Early 2023 is still is still the target.

Got it.

Very helpful and then.

And.

It's been on the news this morning, but by and.

And have a PV mandate, Alex and electric vehicle mandate that half the cars could be electric by or I guess clean by 2030.

Versus what it looks like it's about low single digits now so is there.

But how would you quantify the demand for copper.

Yes in general or more broadly and then more specifically how do you how do you look at debt versus.

Bruce to CECO overtime.

I mean, we're excited to build the market.

Excited about the demand growth the new the new sources of demand are great for copper miners and particularly in the U S. I think we're seeing even and the last couple of weeks evidence of.

Real real shortages of copper domestically, there and the U S. I think we saw a 13% or sorry, a 13%.

<unk> premium over al and need within the last couple of weeks.

There is clearly demand for copper and the U S and.

And our Florence project is going to fit perfectly.

And to that market with a major new supply.

Refined copper and the southwest so yes.

We're excited about that growth and we think our story fits very well into it.

Got it and my last 1.

I just wanted to get a refresh on the timing of yellow had and.

And then and thoughts around and financing that 1.3 billion and the capital cost there.

Yes, yellow had we've got some work to do still on the permitting.

We've got probably 2 to 3 years of permitting work before we have a construction decision there.

It is.

Work and we can advance at a relatively low cost over the next year or so and we don't have major expenditures planned.

As we get out to a construction decision and 2 or 3 years, it's it's $1 billion U S of Capex give or take.

Would obviously, a big and bigger much bigger bite for CECO, but pay with when we have the 2 mines running we think we're going to be a different company in terms of EBITDA and cash flow generation with Florence Andrew Perlmutter.

And with.

Potentially with the JV partner at Florence, We think it's something that we could take on potentially down the road. So we'll see how it goes but it's definitely.

Good good growth option that we have going forward.

And.

That's perfect congratulations and thanks.

Great. Thanks.

Okay.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the number 1 on your touch tone fueling your net.

Next question comes from Craig Hutchinson from TD Securities.

Okay.

Okay.

And.

Can you provide some additional color in terms of the capital spend you guys are looking to spend here at Gibraltar over the back half of this year it seems to be trending above certainly and my expectations for the first 2 quarters.

If you can provide and maybe break it down by sustaining capex and and deferred stripping and that'd be helpful.

Yes, I think I think cap capital strip this is definitely.

Our higher capital strip year.

I think we did $15 million and the second quarter, and I think thats, probably a reasonable number.

To see continuing and the second half so the second half the stripping activity will shift more towards the Gibraltar pit.

Okay and the range of what you saw in Q2 is reasonable to expect going forward for GAAP straight.

Yes.

And then and then on the sustaining Capex I think probably the first half of the year was a little higher than normal.

And the activity we saw there was.

And some of the prep work that we had to do to set up the chip relative paid and dewatering and a pumping system that we had to put in there that's behind us So I would expect the capex.

On the sustaining capex to kind of revert back to a more.

Run rates and the second half.

Yes.

That's helpful.

And just in terms of the milling rates and Gibraltar, there seem to be trending a little bit below design and is that a function and just the higher strip and you guys are more batching youre mining rates are.

There something particular and sort of the first half in terms of your overall bell throughput.

No mill throughput and the first half.

We did encounter harder to mill or coming out of Pollyanna and.

And then we took operating.

The adjusted from operating variables.

Essentially improve the milling performance and.

And we saw that occur we saw that kind of come into effect at the latter part of the second quarter here and don't expect any issues for the remainder of the year. So really looking for the mill to perform as per design for the second half of the year.

Okay.

And maybe 1 last question from me guys.

Are you guys from 90% to 60% debt the detailed engineering and are you starting to see any inflation pressures in terms of cost.

Yes good.

Good question and it's certainly topical we've done.

A pretty recent review of the of the Capex at least on the plant infrastructure side and it looks.

It looks it looks pretty good we're not seeing any inflation there at this point and and.

And the number of $230 million that we put out.

And publicly I think is still a reasonable estimate.

But as we get further along here and the fall we will be.

Going out for proposals on some of the big contracts that drilling contractor the GC.

General contractor work and we.

We'll probably.

Be able to refine our estimates later in the year, but at this point.

Yes, we're not seeing.

Not seeing any any changes to our previous estimates.

Okay, great. Thank you guys.

Yes.

And there are no further questions at this time I will turn it back now to Brian Bedell.

Thank you very much everyone have a great summer and we'll talk to you again and the hall.

Ladies and gentlemen, this concludes your conference call for today and we thank you for participating and ask that you. Please disconnect your lines.

Okay.