Q2 2022 Taseko Mines Ltd Earnings Call
Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to Tocco's second quarter 2022 earnings and productions conference call. As a reminder, today's conference will be recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star.
then the number one on your telephone keypad. If you find your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit 2.
At this time, I would now like to turn your conference over to Mr. Burgo. You may now begin your conference.
Thank you, Sarah. Welcome everyone and thank you for joining to SECO's second quarter 2022 conference call.
The news release announcing our financial and operational results was issued yesterday after market close and is available on our website at tseco-mines.com.
On the call with me today is TSEACO's President and CEO , Stuart McDonald, and our Senior VP of Operations, Richard Tremblay. Bryce Hamming, our CFO , is travelling and unavailable to be on the call, so Stuart will provide the second quarter financial review.
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 a 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 in 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. Thanks for taking the time to join us today. I'll make some introductory remarks and turn it over to Richard for some specifics on operations for the quarter. And then we'll conclude with financial highlights before we open it up for Q&A.
And I'll start off today with a Florence permitting update, as we know it's a topic that shareholders are keenly focused on. And we are as well, and we are hopeful in fact that we would have had an announcement by now.
In fact, the EPA told us in June that they were aiming to issue the draft UIC permit and commence the public comment period in mid-July.
That slipped to late July and then to August 7th. And then late last week we were informed the dates had been pushed another week to August 14th.
So it's imminent and while the timing is definitely disappointing, the good news is there continues to be no issues raised by the EPA. We understand that all the documents are complete and expect the EPA's final internal approvals this week.
We certainly share your frustration with the length of time it has taken to start this process, but we remain optimistic that the extra time the EPA is taking today will pay off in the long run.
There is no dispute that the US needs projects like Florence Copper to supply their domestic needs and reduce reliance on foreign supply.
And when you look at the project in terms of surface disturbance, energy and water consumption, and GHG emissions, it's clear that Florence has one of the smallest environmental footprints of any copper project in the world.
So we're ready to get going on it.
Now turning to the second quarter results. There's no denying that it was a challenging quarter at Gibraltar, which is reflected in our financials.
Mining operations didn't produce the expected grade from the upper benches of the Gibraltar pit and therefore copper production was lower than planned.
As we've previously discussed, these upper ores are more complex and the already planned lower grade was further impacted by mining dilution.
Simply put, our large shovels are not designed to mine small, patchy ores with irregular boundaries. We are not designed to mine large, patchy ores with irregular boundaries.
So we end up taking a higher percentage of waste to the mill along with the ore.
Lower grade leads to lower recoveries and we ended up with 21 million pounds of copper production for the quarter. That's about 5 million pounds below our plan.
We're expecting to see significant improvements in the second half of the year as we mine deeper into the drip-alter pit and more quality improves.
And in fact, we're already seeing that improvement early in the third quarter with copper production on plan for the month of July at 9.5 million pounds.
So that should be a sign of things to come.
I'll now pass the call over to Richard for a more fulsome update on Gibraltar operations and the Florence project.
Thanks, Stuart. Good morning, everyone.
I'll talk a little more about operations in the second quarter, but more about what's ahead for the second half of the year. As Stuart mentioned, we definitely had our challenges in the mine.
While all the Gibraltar mine pits have a similar profile, with lower grade closer to the surface and the higher grade towards the bottom of the deposit, we had some additional issues which exasperated things in the corridor.
We found in the second quarter that there were unexpected ore gaps or gaps in the mineralization related to patchy complex ore and which were not evident from our previous drilling and geological modeling. So our mine plan had average grade for the quarter at 0.21%, but those gaps resulted in lower actual mine grade.
This was compared or this was compounded by the small ore zones, which are not ideal for the size of the equipment we run at Gibraltar.
Blasting of these small zones mixes the waste ore boundaries and makes it very difficult for our large shovels to separate ore from waste, so we end up sending more waste to the mill than we otherwise would.
Even with the MindSense technology we're using, which is designed for this purpose, it doesn't take a lot of waste to lower the grade from 0.21% to 0.17%, which is where we ended up for the quarter.
More importantly though is how will we deal with this in the back half of the year. First, the issue is naturally resolving itself as we dig deeper into the Gibraltar Pit where the ore zones become larger and more consistent. We've also done a significant amount of infill drilling over the last few months to confirm mine plan grades and ore continuity in the coming benches. What I can tell you is that the drilling is proving up the grade for the coming months and July head grades were 20% higher than June with further increases expected as a quarter progresses.
Another issue we've had to overcome in the first half of the year is increased absenteeism in the workforce, particularly from mine equipment operators.
All truck utilization rates have been lower than budget and therefore, tons of mine have lagged. But over the last few months, we have ramped up hiring and training new employees to get our mining rates back up, which will then allow us to progress deeper into the pit and accelerate the release of higher grade ore. So I feel confident the mine is set up very well for the back half of the year. Our copper production guidance of 115 million pounds plus or minus 5% still holds.
Although, based on our second quarter results, we are now looking to be at the lower end of that range.
Mill performance did improve in the corridor with mill throughput at the design rate of 85,000 tons per day.
This is a direct result of processing more or increased softer ore from the Gibraltar Pit. We continue to see upside opportunities for mill throughput over the second half of the year. In fact, for the month of July , we averaged 95,000 tons per day.
The challenge with pushing tons is finding the sweet spot balancing throughput and copper recoveries. Our operations team is currently working with a third party on a system to optimize mill performance.
Now turning to Florence, and Stuart already gave a permitting update, but I can make some additional comments about the process ahead. The issuance of the draft UIC permit will mark the start of a 45-day public comment period, which will include a public hearing.
So assuming the EPA issues a draft permit in mid-August and the public hearing would then happen in mid-September, then public comment period will wrap up at the end of September .
The process is very similar to that followed by the state regulator in 2020.
Following the public comment period, the EPA will then need to respond to comments received.
We do not know how long that step will take and it will largely depend on the number of comments received. I expect we'll have a better idea once the comment period wraps up and we see the extent of the comments.
Regardless, we are optimistic about the process moving forward and while it has taken some time to get here, we are confident that EPA's thorough process will result in an effective permit that ensures protection of the environment and also allows us to operate the commercial facility as required.
Meanwhile, the Florence site is starting to look more like an active construction site as components are arriving from the procurement which began last year.
We still have a number of key contracts to award such as the drilling contract for the initial well field but we will not move forward with those until we have a final permit in hand. Our engineering team is also engaged with vendors for the remaining capital items and we see costs fluctuating on a daily basis so we won't update the capital cost assessment until we get closer to starting construction.
It's a very exciting time for our company as we get closer to realizing the exceptional value of Florence. Now I'll turn things back over to Stuart.
Okay, thanks Richard. And as Brian mentioned earlier, Bryce is traveling today. So let me cover a few financial matters before we get to the Q&A.
Revenue for the second quarter was down from the first quarter, and that's partly due to lower pricing, but mainly because of lower sales volumes.
If you recall, our first quarter financials were boosted by an additional 6 million pounds of sales that carried over from the prior year.
Also reducing revenues this period was 5.5 million of downward provisional pricing adjustments.
which related to the drop in copper prices over the period.
Actually, in the context of the copper price dropping by a dollar in the quarter, our negative price adjustments are quite small and lower than some of the other copper producers this quarter.
That's because we've been minimizing QP exposure by fixing the copper price at around the time of shipment.
We do that with customers directly and through banks.
And that pricing strategy has worked very well for us in this last most recent downturn.
On the cost side, our total costs...
Our total site cost, and that includes capital strip, is up slightly over the first quarter, and about 11 million higher than the same quarter last year.
The main driver of that increase is higher fuel costs as diesel prices averaged about $1.70 Canadian a litre in Q2.
Prices have come down since the highs in Q2 and currently landing at site at around $1.50 per litre.
We do have a short-term hedging strategy in place which effectively caps our fuel price at between $1.65 and $1.70 per litre for the rest of this year.
So we're covered on diesel and with the exception of grinding media generally we're not seeing significant inflation impacts in our other site consumables.
I think our team has done a good job of working with suppliers and managing through a difficult environment.
Looking ahead with increasing copper production in the second half of this year, we'll see a big decline in our unit cost per pound.
potentially down into the range of $2.20 US a pound for the rest of this year.
We had a gap loss for Q2 of $0.02 per share.
The copper price drop generated a $31 million unrealized gain on our copper options.
We also saw a significant decline in the Canadian dollar FX rate, which resulted in an unrealized 4x loss of $12 million on our debt.
After adjusting for these two items, the adjusted net loss was 6 cents per share.
The drawdown in our cash balance in the second quarter was mainly a result of spending at Florence and on capital projects including the crushing move at Gibraltar.
Spending on the Crusher project will continue in the third quarter. We also have our bond interest payment upcoming in August .
At the Florence project, as at June 30th, we'd committed to about $65 million in commercial facility costs. That's approximately $mut.
Most of that was committed to late last year, but not all of that has been spent yet. Project CAPEX incurred in Q2 was $15 million US and there will be an additional CAPEX of $20 million US in the remainder of this year to complete the procurement that we've committed to.
I don't expect we'll be making any significant new commitments until we're much further advanced on permitting.
Overall, I think we have positioned the project very well and it's become clear that we saved significant money in this inflationary environment by securing our equipment purchases last year.
We will be ready to move into construction once the permitting process is complete.
From a financing perspective, quite a few things have changed in the last couple of months, most notably the copper price.
But with our cash balance of $176 million Canadian and our $50 million US line of credit, we're still in a very strong financial position.
The project remains unencumbered, so we have a number of options available if we do need to do a small project level financing.
including equipment financing,
a small royalty deal or a small debt facility.
Florence is a critical growth project for Tesico and will ensure that the necessary financing package is in place before we begin construction.
While the copper price has fallen by about 25% from its highs earlier in the year, the current price of around $3.60 is still at a very healthy level and sitting right around the new long-term consensus price.
Given the copper price drop, our price protection strategy is providing us with considerable stability right now.
Through collar contracts we've protected a minimum price of $3.75 a pound for most of our production through the middle of next year.
A few weeks ago when the price of copper dropped we made the decision to monetize a portion of our copper hedge position by re-pricing the $4 puts for the second half of this year down to $3.75 per pound.
This transaction combined with a payout on our July caller contracts netted us about $15 million dollars of cash.
So we have that additional cash in hand and we continue to have downside protection in place.
Effectively, we just advanced the cash the options would have paid out for the balance of the year. If copper prices recover, we will also capture that copper price upside.
Just a few closing remarks now. Obviously concerns about the global economy of weight on the copper market and every other commodity. But we still believe the medium to long term fundamentals remain intact.
The accelerated transition to a green economy combined with increasing challenges to bring new copper mines into production indicate a supply deficit is on the horizon.
Development timelines for new mines continue to lengthen and social, permitting and political risks remain high in many key copper jurisdictions around the world.
We continue to believe that Tesica was well positioned and will remain focused on a long-term goal of building a North American multi-asset copper producer.
And with that, operator, we can now open up the lines for questions. Thanks.
open up the lines for questions. Thanks.
Thank you. Once again, if you would like to ask a question today, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1.
And we'll pause for just a moment to allow everyone an opportunity to signal for questions. And once again as a reminder, if you find your question has been answered, you may remove yourself from the queue by pressing the star key followed by the digit 2. And again we'll pause for just a moment while we gather our Q&A.
And we'll take our first caller from Craig Hutchison, TD Securities.
Good morning guys.
My first question is with respect to Gibraltar. Obviously encouraging to see the grades in July , you said were 20% higher than they were in the previous quarter.
To hit the low in the guidance
Will you not need to be at or above your reserve grade? And maybe a question is that, is that what your expectation is here for the second half?
Good morning Craig Richard here. So the grade will trend back up towards the reserve grade. The other factor really is the softer ore and the throughput opportunity or the upside that we've seen in July and how that will carry through to the second half of the year.
We were about 95,000 tons a day roughly for July , so that kind of gives you an indication of what.
what the mind is capable of.
what the mind is capable of. Okay.
And in terms of just a total tons mined in the first half this year, a fair bit lower than the average you had last year.
Is that a function just kind of where you are in the mind plan, trickier or more selectivity? Can we expect that number to creep up here in the second half?
The tons mined is more a function of the haul distance. So with mining out of the Gibraltar pit, we have a longer haul out to the waste dumps and over to the crushers. So that's reflected in the truck product activities we're able to achieve with the fleet. So we'll see tons mined come up a bit as kind of we mine the different stages and the dump development advances through the remainder of the year but will not return to...
question. We just on Florence.
Given obviously that the week isn't expected, first half this year, just think about financing.
You mentioned, sir, your thoughts are more in a small kind of financing requirement, what do you think of Q3 2019
I mean, is there the possibility here that you need a much more substantial financing, with the order of $100 to $209, or am I not modeling that correctly?
No, that's not the way we're seeing it right now. Obviously Craig, it's Stuart speaking here by the way, there's a lot of moving parts on this of course. Copper prices have moved, Gibraltar production is going to improve which will improve our cash flow generation. We haven't got to 2023 at Gibraltar yet but obviously our cash generation at the rest of our business will be a key input.
and permitting timelines as well at Florence which are, you know, have flipped out a little bit. So, no, I don't think we're looking at any financings of that magnitude. Pretty comfortable with the balance sheet right now and as I said in my notes there, we do have lots of options if we need to add a...
a small royalty or equipment financing in the range of maybe $25 to $50 million.
So that's how we're thinking about it right now, but obviously as we get closer to that construction start date, we'll get more visibility and the picture will become clearer.
Okay guys, thanks and good luck.
Thanks, Craig.
Thank you. Next we'll move on to Ag Rucker with Berkeley's.
Hi guys, thanks for taking my question this morning. First one, just on the EPA, I just wanted to get a sense for how long the post-comic period took during the 2020 or the previous EPA timeframe to get through those comments. And then what kind of negative comments did you get and then do you expect those to come this time? And are you confident you can overcome those? Well, we previously had an adoption date for early 2020, but we are looking forward to what happens now.
Yeah, Richard here. As far as the previous process, what I mentioned in my comments regarding the 2020 process, that was actually the state process, ADEQ process for our APP permit, the other permit we require, which we have in hand now. And that was a 30-day public comment period. There was one comment received by one opponent that essentially got dealt
issues raised and previous concerns raised were more grounded around uncertainty on the technical aspects whereas now we've run the production test facility and demonstrated how the system performs and our ability to operate as we modeled and said we could operate. So it makes concerns on the unknown quite a bit less for the regulators to have to deal with their field from potential opponents. For more information visit www.fema.gov
Got it. And then my next question just on Gibraltar, I mean, with copper prices going lower, when – and I know you're hedged, but at what copper price generally does it start to get difficult? I guess thinking in the context of the 220 –
cost number that you gave And then what do you have in your back pocket to squeeze out cash flows at lower copper levels?
Yeah, I mean, Stuart speaking here, 220 a pound is our...
is our expected C1 cost for the back half of the year. And going forward, that's a typical level that you could see. It does reflect higher fuel costs, which we're experiencing now. And what we've seen in the past at Gibraltar and I guess across the industry, that if copper prices were to drop dramatically, that you also see input costs drop, fuel follows typically, and steel and all the other inputs. So as copper prices drop...
input costs also drop. So we're a long way from any kind of
cash flow issues or margin issues at Gibraltar. We've just got to get our grade up and we'll be fine.
Got it. My last question just on absenteeism and the hirings you've been doing, do you expect that to keep costs high throughout the year?
kind of as you as you train more people hire more people having to bring more people into the building.
Yeah, well, so Richard here. I don't expect it to cause an increase in cost, given it's already baked into our operating model and operating costs associated with that. Where it does rear its head is just getting those people trained and operating at the qualified operator level. There's a bit of a ramp up process that ensues and that's something that the way we do our training and…
speed and qualified and operating the equipment at the levels we know they can be operated at. So that's probably the, you know, I guess the biggest risk if we have one now, getting into kind of the level of hiring that we're doing right now.
Great, thanks for the time.
Thanks. Thank you. Thank you.
Thank you. Next, we'll move on to Alex. Okay. Okay.
Turn to with mindful. Sorry, capped? No? Mark?
Good morning, everybody. Couple questions for you. First, I just wanted to clarify for me, give me some color. I think you said, Florence, still about $20 million to be incurred capital spending over the rest of the year. I just want to see if you can confirm that. And then also, Gibraltar. Can you give us just a bit more color on the capital spend there, capitalized strip and others for the rest of the year? These both kind of relate to obviously cash flow and financing.
would be helpful. Thank you.
Okay, sure, Alex. Yeah, Stuart speaking here. In terms of Florence CapEx, yes, you're correct. 20 million U.S. is...
is roughly what we're expecting to spend on Florence capital project costs in the second half of this year. We have on top of that, we have an ongoing much smaller amount that keeps the site team in place there. I think it was 3 or 4 million Canadian a quarter. But that's Florence and Jibb.
JIB capital, we're seeing...
Capital strip you can expect that to continue along with historical rates. There's no, I guess the one capital project that's in progress right now is the crusher move.
You know, that will be more work on Q3 and then that will slow down as we get into winter. The construction season will come to an end. We could spend another...
you know, maybe 10 million bucks on the on the crusher move in the second half of the year. And then that project will wrap up in the first half next year.
But other than that, as I said, no major capital requirements.
at Gibraltar. Looking ahead to 2023,
You know, as you noted, we haven't put out guidance yet. We're working on our mine planning and budgeting right now. But you know, generally speaking, it's looking like it'll be a higher production year than 2022 certainly and trending back towards that kind of life of mine average of 130 million. So it's moving, it'll be moving towards that as a target and I think as we get towards the end of the year here we can give some more precise guidance, but it'll be a stronger year, next year for sure.
Okay, and strip ratio, I think from the last tech report just kind of called around two and a half for the next three or four or five years. Is that, you know, in the ballpark again of where you think stripping ratio will be?
Yeah, that's true.
Yeah, sorry, the strip ratio and the two and a half ranges is, yeah, that's where we'll be in the next couple years.
trip ratio in the two and a half ranges is the ad that's where we'll be in the next couple years. Okay.
All right, great. That's it for me. Thanks for watching.
Thank you. Next we'll move on to Edward.
Gooden with Panmere Gordon.
Thank you.
Thanks, bye guys.
Just a question on costs.
What percentage contribution does diesel have to...
the total cost at Gibraltar and then also on diesel.
What's the incurred cost for the hedge?
on the total diesel cost that you mentioned. Thanks.
Sure, yeah, I mean we generally use about 40 million liters of diesel a year at the mine. I mean, maybe slightly below that, but that's a round number. That's on a 100% basis.
As I mentioned in Q2, the average price was $1.70 a litre Canadian and that includes a delivery cost to site. So that's something like $65-68 million Canadian of annual diesel costs on a 100% basis.
So that's kind of the math there. I don't have the percentage off the top of my head, but that gives you an idea. And then, sorry, the other question was about the hedge. What we do on hedging is we buy call options.
on US Gulf Coast diesel. So that we pay a premium. I think we paid about.
300,000
dollars for that to purchase that contract for the second half of the year. And that effectively caps our diesel price at around between $1.65 and $1.70 a litre. So we've really, we've effectively capped the diesel price at around our Q2 cost level.
And actually currently the price is lower. The price right now is around $1.50, which is a positive. We've seen that price come off.
Okay, that's great. Thanks very much.
Thank you. And there are no further questions. I'd like to turn this conference back over to management for any additional or closing remarks.
Okay, thanks very much everyone for joining and we don't have anything further, so let's end the call here and everyone enjoy the rest of your summer. We'll talk to you after Q3. Thanks.
Thank you and that does conclude today's teleconference. We do appreciate your participation. You may now disconnect.
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