Q1 2022 Taseko Mines Ltd Earnings Call

May 5, 2022

Good morning, My name is Miranda and I will be your conference operator today.

At this time I would like to welcome everyone to <unk> 2020, Q1 earnings and production conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

We would like to withdraw your question. Please press Star then the number two thank you.

Mr. <unk> you May now begin your conference.

Thank you Miranda welcome everyone.

Welcome everyone and thank you for joining <unk> first quarter 2022 conference call. The news release announcing our financial and operation operational results was issued yesterday after market close.

And is available on our website to see <unk> dot com.

On the call with me today is <unk>, President and CEO Stuart Mcdonald to Cecos, Chief Financial Officer, Bryce Hamming, and our senior VP of operations Richard translate.

Before we get into open 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 work.

For further information on these risks and uncertainties I encourage you to read the cautionary note that accompanies our first quarter MD&A and the related news release as well as the risk factors particular to our company.

I'd 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'll now turn the call over to Stuart for his remarks.

Okay. Thank you, Brian and good morning, everyone. Thanks for joining us today to review, our first quarter 2022 financial and operating results and it continues to be a great environment for copper miners and even with the pullback in copper prices over the last week or so we remain very optimistic.

About the year ahead, so in the first quarter, we actually had our highest ever realized selling price of $4 59 per pound of copper.

And that strong pricing combined with our 75% share of Gibraltar sales volumes resulted in $38 million of adjusted EBITDA and $52 million of cash flow from operations.

Sales volumes exceeded production by 6 million pounds as we were able to move the excess inventory that was carried over from the last year.

So it was a lower production quarter, which we anticipated in signals on the last call and that was mainly due to lower copper grades.

We've recently transition mining operations to the Gibraltar pit, which will be the primary source of ore for the remainder of this year.

As is always the case that you brought to the upper zones of the deposit are lower grade with smaller disjointed zones of war.

That's where we were in the first quarter as.

As mining advances to deeper benches, the grade and ore quality will gradually improve and.

We expect to see much stronger production in the second half of the year.

Mill throughput was a real focus for the site operating team in the first quarter. The carryover of weather impacts from Q4 meant that we had a slow start to the year in January and February .

And for the first quarter mill throughput averaged 78000 tons, a day, which is below the design capacity of 85000.

But with the weather issues behind us and a higher percentage of our ore coming from the Gibraltar pit, we saw a significant improvement over the last two months.

In March we averaged over 80080 7000 tons a day and then 90000 for the month of April .

So we're now realizing the benefit of softer ore in the Gibraltar pit, which is what we expected based on historical performance.

We are very pleased with that.

Recoveries are still on the lower side of where we'd like them as the mill operations team works to optimize performance with the new ore from the new Gibraltar pit.

We also have a number of improvement initiatives underway in the mail, including our data analytics project, which is <unk>, which is showing some positive results so far.

Overall, we expect to improve recoveries over the course of this year is great and our quality improves.

But I would like to be clear that our original production guidance of 150 million pounds of copper.

Plus or minus 5% is still our guidance hasnt changed.

On the cost side, we're seeing inflationary pressure like everyone else in the industry. The most significant impact is on diesel prices, which has historically represented about 10% of our total operating costs.

We use over 35 million liters of year at the mines. So when the cost increases from roughly 80 <unk> leader as it was a year ago to around $1 60, a leader today that has a big impact on us that translates to about 20 U S cents per pound of copper for additional fuel costs.

Grinding media is the other one although the dollar impact on that is much smaller.

There were several other factors that drove higher <unk> cost this quarter, including production sales volumes and capital strip allocation from.

Bruce will talk more about those in a minute.

What's important to note is that our operating cost per pound will revert to more normal levels as grades in copper production increases in the coming quarters.

For the past two years to bolster <unk> costs have averaged about at around $1 90, a pound adjusting for fuel prices and other input costs as they are today, we can expect something more like $2 20 to $2 30, a pound.

And that's a range, we're expecting to see for the remainder of this year.

Subject of course to any further.

Changes in input costs.

In the first quarter, we also announced a new mineral reserve for Gibraltar, extending the mine life from 16 to 23 years.

This was mainly a result of new of running new pit designs using a 305 copper price up from $2 75, which our previous reserves will run out.

The new plant has the same average cost copper grade on a slightly higher strip ratio in the back half of the mine life.

At a consensus copper price of $3 50 per pound our share of the mine MPV is now $1 1 billion Canadian.

At today's copper price that NPV NPV jumps to nearly $2 billion.

We've now been operating <unk> for 17 years since the restart and it has a longer mine life today than we've ever had it's a great asset for us and will continue to generate good cash flows for many years to come.

Switching to Florence now Unfortunately, we're in a similar position as we were last quarter and that is waiting for the EPA to issue the draft underground injection control permit.

I wish I could offer more more or provide some new details about the regular updates we're getting from the EPA haven't changed.

They're making progress, but at a slower pace than they expected. They continued to assure us that there are no issues with the permit and that the process is moving towards the start of the public comment period.

We continue to expect a draft UIC permit to be issued shortly and then we can get into the public comment period.

In the meantime, we continue to advance other aspects of the project to prepare for construction.

In the first quarter, we incurred capex of $25 million, which included further payments for major processing equipment.

And other preconstruction activities, plus the ongoing site operating costs.

The expenditures to date are reducing execution risk on the construction project and mitigating the risk of shipping delays out of China in other ports around the world that we see right now.

The upfront procurement of long lead items is also reducing the risk of Capex inflation Florence is a relatively small construction project without the large equipment and infrastructure requirements of a conventional copper mine.

And we've now locked in over 50 about actually about $60 million U S.

Up approach of costs, including the major plant components and other items.

But we do still expect some inflation on the other aspects of the construction budget, including contract labor and well drilling costs.

It's a volatile market and we're monitoring it closely and as we get closer to the construction start date, we will be updating the original $230 million Capex estimate.

But we believe any increases will be manageable and offset by higher copper prices and we continue to expect to be able to fund the construction from our existing liquidity and Gibraltar cash flows.

As a final note on the first quarter I also wanted to mention that I attended the signing ceremony with the Williams Lake first nation.

In February and that was for the renewal of the Gibraltar mines participation and cooperation agreement.

The original agreement was actually signed in 2013 and it provides a framework for how the mine and willing sleek first nation work together to achieve environmentally responsible and economically beneficial mine development.

So we're happy to get that done and look forward to further strengthening our relationship.

We also continued our community community engagement work that are yellow had project as we prepare for the environmental assessment project at a process at that at our Yellowhead project.

And that the new prosperity project, we continue to advance our facilitate a dialogue with the so called <unk> National government.

And the BC provincial government.

Our senior management team has spent a lot of time on community and in an indigenous relations for all of our projects.

As it is an essential element to move our business forward and create long term value for all stakeholders.

We're in the process of finalizing our third annual ESG report, which which will provide a lot more detail on our approach to the environment communities, our employees and other sustainability topics.

So look for that report to be released later this month.

And with that I'll now turn the call over to Brian for Bryce for a review of the first quarter financials, and then we can open up the call for questions, but over to you Bryce.

Stuart and good morning, everyone.

I will discuss in further detail the financial results for the first quarter earnings released yesterday.

We realized sales of 27 million pounds at Gibraltar at a record copper price of $4 59 per pound and with an average FX rate of one seven times.

This resulted in total revenue of $118 million. This is the second highest quarterly revenue we have achieved at Gibraltar since its restart 18 years ago. This contributed to adjusted EBITDA of $38 million in earnings from mine operations of $43 million.

Our operating margin relative to our other recent quarters in 2021 were impacted by increased say cost as Stuart mentioned, we did see the total site costs increased by approximately $7 million relative to Q4, and Q1, 2021, which was substantially related to diesel costs for the mining fleet.

And the rising oil price and to a lesser extent some other site costly grinding media, which is driven by steel prices.

But a similar increase of $6 million and cost of sales was simply I FRS accounting related as we had significantly less mining costs allocated to capitalized stripping and deferred on the balance sheet this quarter compared to Q1.

Last year as we finish mining in the current phase pollyanna that difference in capitalized stripping in quarter over quarter was a difference of 30 a pound.

It's probably worth noting that we have included a new table in our MD&A to show total <unk> costs, including capitalized stripping to compare our total site operating spend more easily quarter over quarter. We expect total quarterly state operating costs, including capitalized stripping of approximately $75 million per quarter for our share of <unk>.

75% sure to be consistent for the remainder of the year, assuming that diesel prices remain at these current elevated levels.

We also have higher cost on a per pound basis that is not.

Naturally arises our sales volume exceeded production by almost 30% in Q1.

You will recall that our inventories were higher at the end of last year due to the extreme flooding events in southern BC last fall, we sold an additional 6 million pounds of finished inventory in.

In the quarter and brought our concentrate inventory back to more normal levels.

Our offsite charges, which are tied to sales volumes and not production volumes comprised half of the 23.

C. One cost variance attributed to the lower copper production.

As costs for this excess inventory were incurred last quarter. This explains where our cash flow from operations of $52 million was higher than our EBITDA of $38 million.

Earnings also benefited from lower depreciation in the quarter, given the new browser reserve updated that.

That we published at the end of March and decreased by $2 million quarter over quarter due to the extended mine life and additional units of quarterly production.

We expect depreciation of $14 million per quarter at these new lower rates for the balance of the year.

Lower moly revenue was also impacting earnings as we produced only 236000 pounds of moly this quarter due to lower grades and the Gibraltar pit ore, but this was partially offset by the strong moly price, which still hovered around $19 per pound for most of the quarter.

We had an unrealized loss on derivatives of seven 5 million at the end of the quarter and this was really timing related and due to the copper price closing at a high level on March 31.

With the decrease in the copper price. Since then this unrealized loss has been mostly eliminated or reversed.

Derivatives related to the copper color contracts that we've entered into that secure a minimum $4 per pound copper price with the ceiling between $5 40, and $5 60 and that covers 90% of copper production for two CECO share for the remainder of the year.

GAAP and adjusted earnings in the quarter was two cents, a pound and would have been a penny higher but for the cost of the copper color contracts that expired or the money in the quarter.

Our cash flow statement highlights that our operating cash flow from Gibraltar continued to fund Capex at Gibraltar and debt service and the debt service included $14 million U S for our February bond interest payment.

Our cash position decreased overall this quarter due to the continued investment at Florence copper, which included $25 million in total development expenditures this quarter not primarily relates to the long lead equipment purchases that are continuing for the commercial sx.

Facility.

We are also beginning to receive shipments of the Sx EW equipment in April to the Florida State, which is exciting to see.

We finished the quarter with $273 million in liquidity and our cash balance was $213 million at current copper prices and with our strong balance sheet. We continue to be in a position to fully fund Florence within our own means.

That said, we are still considering ancillary financing options, where the cost of capital and synergies with the financing party are supportive of our strategic plans.

I'll now turn it back to the operator for any questions. Thank you.

Thank you we will now be <unk>.

During the question answer session.

Should you have a question. Please press star then.

And then the number one on your telephone keypad.

If you would like to withdraw your question. Please press Star then the number two.

One moment for your first question.

First question will be coming from Ed <unk> with Barclays. Please go ahead.

Hey, everybody. Thanks for taking the questions. This morning.

So.

I know you may not be able to give us this but I just wanted to ask.

What is the reason that the EPA is giving you for taking.

It's taking longer than I guess I expected to get the UIC drafts.

I know previously it was COVID-19 kind of holding them up and there is a backlog for them, but I imagine that would have been worked through and we would've been able to get that draft and go into the comment period. So I just wanted to get your thoughts on that and then.

Kind of your best case scenario timeline.

Yes.

Good morning, Ed It's Richard Trombley.

Really the message from EPA continues to be the same there is nothing specific that's causing them to not get into the public comment period, it's just going through the administrative processes.

Getting the final kind of things a range to be able to to.

Launch into the public comment period so.

Unfortunately, yes, there is no.

Nothing specific that they're providing or pointing to talk about everything from manpower levels and stuff like that being a bit of a challenge for them, but those are those are kind of normal things that occur just the process is going quite slow.

But is advancing.

And in terms of.

The timing we continue to expect.

Very soon.

In a moment now to get notification on exactly when the public comment period will start which they've committed to giving us.

Got it.

That's helpful and then.

Excited to see your ESG report come out too I saw some news.

Of course, a foreign to achieve some I think it was nominations for some environmental awards in Arizona I was wondering to get your thoughts on kind of a disconnect between.

That getting nominations for environmental awards versus some of the doubters.

Debt that have issues.

And since you're mining practices being hazardous.

Ed It's Stuart Stuart Mcdonald here I can take that one really in our view there aren't many doubters left if you look back at.

The history going back 10 years, perhaps there was there was some some questions about the projects and some opposition from the town Council really over the last.

10, or 12 years, we've worked through that.

The test facility that we operated for two years as has obviously been a big contributor to that net and if you look back in 2020, when we went through our state.

ATP permitting process, we had a public hearing in a public comment period and it was overwhelmingly positive.

Commentary I think there was only one negative comment at the whole hearing so we're very happy with the support we have for.

For the project the Environmental award is.

Is reflective of the good work that we're doing at the site and so yes, we just look forward to getting the permit and getting going on the project.

Thanks, and then one more for me and congrats on.

The.

Extension of Gibraltar, so with the improved mine lives.

Then the increased.

And PV.

Does that affect your plans at all probably not for Florence in the short term, but you know.

Maybe longer term thoughts on yellow had and your confidence in or maybe the funding of that project.

I'm, sorry, I didn't quite understand the question are you, referring to the Gibraltar reserve or the funding of yellow head.

Just brought to reserve.

And the improvement in <unk>.

The mine life.

Increasing the NPV overtime, and just thoughts on how you're how you're looking at funding on over on yellow had in that in that context.

Yes, I mean, I think I think what we have at Gibraltar and what we've shown over time, it's just the value of a long life asset and if you look back at the history.

We restarted it we had.

Four or five year reserve when we did and that was in 2005, when we did the GDP extension.

In both 10 years ago GDP three extension, we have devoted I think we had close to 15 or a 20 year mine life and then today with with 10 years later, we still have a 23 year mine life. So the value of long life assets is great that NPV does not depreciate. It is still there and actually with copper prices.

As you see it is growing in value over time and not depreciating. So yes. So Gibraltar is a great asset and we think yellow head has a potential as well.

<unk>.

We've got some work to do on permitting but it's a valuable asset as well and these are these are rare these are unique.

Assets that can be built and we think yellow has the type of project that needs to get built and financed to to fill the supply gap in copper in the coming years. So.

When we get when we get Gibraltar and Florence running I think that the company is going to be in a very different place financially and we will be in a good position to take on a project like Yellowhead.

Potentially and certainly JV partners.

We will be interested in that type of asset as.

Well, that's an option for for funding as well so but we've got a few years before we have to make any.

Any decisions on that one.

Got it thank you.

Your next.

Question will be coming from Alex <unk> with Stifel. Please go ahead.

Hey, good morning, guys.

Couple of questions just on Florence first.

I appreciate that youre going to give us an update on capex when.

When you move forward with that project, but now that you are spending some money on it.

Can you to the extent you can.

Cost looking relative to the prior expectations.

And the second question on the spending there is.

I think I can take the spending as your confidence that you will get the UIC dropped and sole process going forward.

I guess the question is should there be material delays of any sort is there any sort of.

Our recourse or refund effectively that you can use to kind of recoup some of the capital that you've been spending.

Sure, Yes, sorry.

Sorry, Alex it's Stuart here.

And thanks for the question.

Yes, I mean, most of the spending that we've done in most of the commitments we've made relate to.

Major components for our Sx EW plant.

We've committed as I said in the notes there we've committed up about $60 million U S. In total and that would be the vast bulk of it so that that's equipment that is.

On route now to our site in Arizona, and it's going to be ready when we get into construction.

It's specialized equipment I mean, I assume that might have some sale value, but it has been designed for our plants, specifically and what comes out of the detailed engineering work that we've done.

Yes.

You're right as you said, it's a sign of I believe.

We wouldn't be spending that money in our board wouldn't have approved those expenditures unless we were very confident that we're going to get the permit and move forward. So.

Yes, Sir.

We're ready to get going.

Okay, and then just on costs I mean other tracking so far.

The cost the cost piece.

The money that we have committed where essentially it's essentially on budget. It's essentially in line with the 27th with the numbers in the 2017.

Feasibility study.

So we haven't we haven't seen any inflation on those pieces, but as I said in my comments, we are expecting.

Some inflation on the pieces that we haven't committed to yet and that relates to some of the labor market in Arizona, which is pretty hot contractors and things like that are in high demand.

And well drilling costs as well.

Where we expect to see expect to see higher numbers, but yeah as we get closer we'll we can give some more specifics on that.

Okay, Great and then maybe just one question for Gibraltar.

I understand mall later, sorry, copper grades were low but did that impact Molly grades as well I mean I guess the question is can we get back to the 500000 pounds or so multi per quarter that you saw in the past is that a reasonable number to expect going forward.

Yes, so the moly grade in the Gibraltar pit is lower.

As a little bit lower.

Naturally the entre alter as you move to the west side of the property the Baltic rate is.

It goes a bit lower than.

The east side of the property so we.

We will see similar grades that we saw this past quarter with maybe some slight improvements as we mine through the into the deeper zones in Gibraltar pit.

Okay.

It for me thank you.

Ladies and gentlemen, as a reminder.

Did you have a question. Please press star followed by the number one.

Your next question is going to be coming from Craig Hutchinson from TD Securities.

Please go ahead.

Hey, good morning, guys.

So your question is on Mali as well so just to.

Kind of model the same grades.

Q1 are we assuming production is generally on the order of 1 million pounds. This year.

We have a fair estimate.

No we will see production.

Sure.

Less than 2021.

Q1 2022 Taseko Mines Ltd Earnings Call

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