HBM Q4 2021 Earnings Call

Operator: Good morning. My name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Fourth Quarter and Full Year 2021 Results Conference Call. Note that all lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Please note that comments made today that are not of a historical factual nature may contain forward-looking statements. This information by its nature is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual outcomes. Please refer to Slide 2 of today's presentation and Copper Mountain's fourth quarter 2021 Management's Discussion and Analysis for your information. I will now turn the call over to Gil Clausen, President and CEO of Copper Mountain. Please go ahead, sir.

Gil Clausen: Good morning everyone and thanks for joining us. We are starting on Slide 3. Presenting with me are Rod Shier our Chief Financial Officer and Patrick Redmond our Senior Vice President of Exploration and Geoscience. Unfortunately, Eric Dell our Senior Vice President of Operations won't be able to participate this morning. I'll begin by highlighting some of our main achievements in 2021, then give a more detailed discussion on our operations during the quarter along with an update on some of the projects we have at the Copper Mountain Mining. Rod will speak to our financial results and Patrick will provide an update on our job programs. I will wrap up with a further update on our Eva Copper project in a brief discussion of our 2022 guidance. We will then open the call to questions. Turning to Slide 4. We had a strong 2021 finishing the year with record revenue, net income, EBITDA, and cash flow. These results were driven by record annual production of about 90 million pounds of copper and higher copper prices. This was achieved in the face of a very demanding fourth quarter in which we experienced severe weather impacts and a major failure of our secondary crusher. We had heavy rains and flooding followed by severe cold temperatures which caused extremely difficult operating conditions in December, I'm very proud of our team for coming together and pulling through. It's because of them that we met our production guidance range which we had increased earlier in the year. We ended up coming right in at the mid-point of our original guidance and the bottom of our revised guidance range. With these strong financial and operating results we finished the year in a very solid financial position with nearly 180 million of cash and a low net debt to EBITDA ratio of 0.6. This was a significant improvement from the end of 2020 and also we completed a transformational financing earlier in 2021 with the U.S. $250 million bond raise, allowing us to repay the more restrictive debt we had in place so that now we can access 100% of our cash flow from the mine. Also in the year we commissioned our new Third Ball Mill which completes the 45,000 ton per day mill expansion project. This increases throughput and improves recovery resulting in higher production going forward. We made another step forward in our growth plans with the approval of construction for the Eva Copper project contingent of course on the lifting of COVID-19 restrictions in Queensland, easing of material and labor flow, getting project financing complete, and completing the detailed engineering to an 80% level. A big achievement in 2021 that we're very proud of is hitting our sustainability targets for the year. Our goal was to meet or exceed an A rating in each of the TSM protocols and we did just that. I will now detail our operating results and development plan but first I am going to start with an update on safety. We saw a significant reduction in our total injury frequency rate in 2021 compared to 2020, achieving a record low since the start of Copper Mountain’s operations. Our lost time injury frequency rate is also below PC average for mines, so we're proud of the accomplishments for this year and we're demonstrating that steady trend of declining injury frequency rate. I will now move on to production turning to Slide 5. As I mentioned, the fourth quarter was challenging with production of 16.7 million pounds of copper, production was lower than the fourth quarter of 2020 due to lower grades and reduced throughput. The lower grades was a result of ore being mined mainly from the lower grades Phase 2 area for most of the quarter. We did plan this for the commissioning of Ball Mill 3. Lower throughput was a result of that commissioning, damage to the secondary crusher’s main shaft in the second half of November, and severe cold weather in December. The severe cold weather created more difficult operating conditions including frozen bins and conveyor system damage due to frost chunks in feeders, particularly for the feeder belt from the SAG Mill. The secondary crusher main shaft was temporary fixed, weld repaired by early November. However, the temporary nature of that fix required us to reduce power to preserve that shaft repair and that reduced power results in coarser crushed products and so therefore we have lowered SAG throughput as a result. Because of temporary nature of this fix the mill throughput is expected to remain at a reduced level of about 35,000 to 38,000 tons per day as we baby this crusher along through to [mid 2] (ph) and that's when we expect to install a new main shaft at in or around the end of April. We expect production to be stronger in the second half of the year compared to the first half of the year with the installation of the new crusher shaft, the completion of our plant’s improvement projects, and as we begin to mine higher grade ore from Phase 4. Just to touch on cost before we move on, cash costs on a per pound basis were higher in the fourth quarter largely due to lower production and higher operating costs from diesel and steel grinding media supply and subsequent cost pressures. Turning to Slide 6. As mentioned most of our ore came from the lower grade Phase 2 area of the main pit. The Phase 4 push back continued in Q4. We moved 5.4 million tons of waste from Phase 4 accounting for 65% of the total waste movement in the quarter. Phase 4 mining is continuing to progress and it will be the main ore source for the second half of 2022 and into 2023. We have now started the North Pit pre-stripping development as well. Turning to Slide number 7. The company has been investing at our plant to improve efficiencies, copper recovery and production. We achieved a significant milestone with the commissioning of Ball Mill 3. The new mill will allow us to increase throughput as I mentioned to 45,000 tons per day and achieve a finer grind and that will help us improve our overall metal recovery by about 3% to 5%. We have run Ball Mill 3 up to capacity but we won't be able to get to a steady 45,000 tons per day until we fully repair the secondary crusher and it begins to grind at its design rate. So the SAG Mill won't be able to get up to feeding the 3 Ball Mills fully until that crusher is repaired. We're also installing another concentrate filter press and increasing cleaner circuit flotation capacity. This new filter press will be installed in an extension to the existing concentrate storage building -- sorry, as shown on the bottom left of this image. A new large flotation column cell is being installed inside the existing mill building and an expansion of the rougher flotation circuit will take place to the North of the building. Turning to Slide 8, this new filter press will allow the mill to maintain maximum tonnage rates while processing higher grade ore for extended periods. Concrete installation is nearing completion and the filter press is expected to be delivered on site by the end of March. The cleaner column expansion will support maximum cleaner circuit recovery for all ore types, eliminating a production bottleneck at higher grade and tonnage. The concrete work has been -- now been completed and we're starting the assembly of the column. The expansion of the rougher flotation circuit will enhance a rougher recovery for all ore types and provides expanded retention time in the rough re-circuit. All of these projects are advancing well, and we expect to complete construction by the end of Q2 this year. These projects are part of our longer-term growth plan and they will generate significant value by increasing our overall return on invested capital in the mill. Turning to Slide 9, we're rather excited about this project at Copper Mountain, it's the Trolley Assist project. It will significantly reduce our greenhouse gas emissions as we reduce our diesel usage. We completed the 1 kilometer haul road in the third quarter last year, the Trolley e-house is being delivered to site and installed and we finished installing the 25 KV transmission line to the e-house. We're targeting to commission the first four Trolley Assist haul trucks by the end of Q1 2022. I'll now turn the call over to Rod to go over our financial results.

Rod Shier: Thank you, Gil. Starting on Slide 10, and as noted by Gil, the company had a record-breaking year and the financial results and the year-end cash position definitely show it. Revenue for the fourth quarter of 2021 was $137 million. On the sale of nearly 19.4 million pounds of copper, approximately 6,300 ounces of gold and about 108,000 ounces of silver. Increased revenue was a result of higher copper sales and prices, which averaged about U.S. $4.44 per pound of copper for the quarter versus U.S. $3.35 per pound of copper for the fourth quarter of 2020. Revenue for the full year of 2021 was $578 million on the sale of 93 million pounds of copper, approximately 29,700 ounces of gold and 533,000 ounces of silver compared to revenues of $341 million for 2020. The increase in revenue was due to higher copper prices realized during the year as well as due to selling more pounds of copper and more ounces of gold and silver. Cost of sales for Q4 2021 was 64.6 million as compared to 59 million in Q4 2020. The increase in cost of sales can mainly be attributed to the increase in pounds of copper sold in Q4 2021 as compared to Q4 2020. Cost of sales was also affected by the allocation of line operating cost to deferred stripping with 5.3 million allocated to deferred stripping in Q4 2021 as compared to 8.4 million in Q4 2020. This resulted in a gross profit of 72 million for the fourth quarter of 2021 as compared to 47 million for the fourth quarter of 2020. Cost of sales for the year ended 2021, were 257 million compared to 237 million for the prior year. This increase in cost of sales is mainly a result of increased volumes of copper sold during the year. It should be noted that cost of sales for 2021 is net of 35.5 million of mining costs allocated to deferred stripping as compared to only 23.8 million in the prior year. This resulted in a gross profit of about 321 million for 2021 compared to 105 million in 2020. Now turning to Slide 11. Net income for the fourth quarter of 2021 was $31.5 million or $0.11 per share as compared to $28 million or $0.10 per share for the fourth quarter of 2020. Net income for the fourth quarter of 2020 includes a noncash unrealized foreign exchange gain of about $13.9 million compared to a noncash underlined foreign exchange gain of only $1.2 million for 2021. For the fourth quarter of 2021, the company recorded EBITDA of $67.7 million. And after backing out the unrealized foreign exchange gain, and the mark-to-market adjustments for the quarter, adjusted EBITDA was approximately $59 million. The company recorded EBITDA of $306 million for the year ended 2021 as compared to $118 million for the prior year. Adjusted EBITDA was $288 million for the year ended 2021 as compared to $88 million for the prior year. Again, this strong showing of EBITDA and adjusted EBITDA is directly attributable to the increased sales and higher metal prices realized during the year. Cash flow from operations was $47 million for the fourth quarter of 2021 and $312 million for the full year. This strong result has allowed us to end the year with approximately $180 million in cash on hand and a net debt to EBITDA of 0.6, which is significantly lower than the prior year. This was very much a strong year for the company, which saw the balance sheet improved significantly. I will now turn the call over to Patrick.

Patrick Redmond: Thanks, Rob. We've been drilling extensively on the Copper Mountain mine property. The current drill program comprises around 37,000 meters of diamond drilling and 14,000 meters of our sea drilling and will be completed in Q1. Slide 12 summarizes the ongoing New Ingerbelle portion of the program, comprising approximately 27,000 meters of diamond drilling. The inset map on the right shows the historical New Ingerbelle pit outlined as the dash black line and the current reserve pit at the dashed red line. The long section also shows the historical pit outline at a dash black line and the current reserve pit as a shaded gray area. You can see the extent of the deeper drilling below the current reserve pit, which is double the vertical expense of copper mineralization as well as extending mineralization to the West. The long section also shows the most recent positive drilling results, which we expect will result in a significant increase in the New Ingerbelle resource and reserve. We will complete the drill program this quarter and incorporated results into an updated resource and reserve estimates to support a new life of mine plan for publication around mid-year and this new life of mine plan will also include a larger mill expansion study. And now I'll turn it back to Gil.

Gil Clausen: Thanks, Patrick. Turning to Slide 13. During the quarter, our Board approved the construction of Eva subject to the completion of detailed engineering to an 80% level, having project financing commitments finalized, and most importantly, as I mentioned before, the lifting of COVID restrictions in Queensland that would allow for the normal flow of labor and materials for construction. Project financing and detailed engineering are advancing well, and we expect to be complete in Q3. Concluding on Slide 14, the company is providing two-year production guidance as we expect our life of mine plan to change materially beyond 2023 with the release of a new life of mine plan mid this year. The study will be based on a new mineral reserve and mineral resource estimate at the Copper Mountain Mine and increased throughput rates at the mine. We're guiding this year's production to be around 80 million to 90 million pounds, which is slightly lower than last year due to some lower head grades and lower throughput in the first half of the year. Grades will be lower as we will mine from Phase 2 in the first half of the year in advanced stripping in Phase 4 of the main pit and do the North pit development. Production is expected to be higher in the second half of the year as we increase throughput, also with the installation of the new replacement secondary crusher shaft in Q2, and we commissioned our plant improvement projects by midyear. But most importantly, we'll begin delivering the higher-grade Phase 4 ore at the mill in the second half of the year. We will mine from Phase 4 through the following year, which drives higher production guidance range of 90 million to 105 million pounds of copper for 2023. Our all-in cost per pound in 2022 is expected to be in the range of U.S. $2 to U.S. $2.50, a wider and higher range than last year due to the forecasted copper production slightly lower, inflation pressure uncertainty and COVID-19 and its potential impact on our supply chains and labor. Our all-in cost includes U.S. $10 million of sustaining capital and U.S. $27 million of deferred stripping. Phase 4 and North pit development accounts for most of our deferred stripping this year. Other costs for 2022 include expansionary capital, which we are budgeting to be approximately U.S. $60 million total for Eva development and our Copper Mountain concentrator improvement projects. We are about U.S. $4 million in exploration, about $2 million for the Copper Mountain Mine focused on reserve and resource expansion and the other U.S. $2 million for Australia. 2022 will be a year we invest in growth. We expect to see large reserve and resource expansion growth at the Copper Mountain Mine and new life of mine study will demonstrate its scale potential. The concentrator improvement projects now in construction will allow for further improved metal recoveries and higher copper concentrate output. On top of that, we're advancing Eva, a big contributor to future production growth and with lower exploration upside at Cameron Copper, we have clearly begun a transformative organic growth phase for the company. With that operator we can open the call for questions.

Operator: Thank you sir. [Operator Instructions]. And your first question will be from Orest Wowkodaw at Scotiabank. Please go ahead.

Orest Wowkodaw: Hi, good morning. I realize there's a lot of moving parts that are embedded in the guidance, the production guidance for 2022, 2023 but I was wondering if we could get a better granularity specifically in terms of what you're expecting on average throughput and head grades for copper in 2022 and 2023?

Gil Clausen: Hi Orest, sure. Throughput rates as we mentioned in the first half of the year are going to be reduced due to that pressure impact. And it was we -- the whole -- the crusher shaft was severely damaged we had to weld repair that shaft to gouge out the cracks and weld repair it. During that period of time, we were running the SAG Mill on just primary crusher course ore feed, and that really knocks our throughput down. Once we got that crusher reinstalled, we had to replace a bushing and the frame was cracked we had to repair that and the main shaft repair. Once we got that back up, we've been operating at a reduced power rating on that crusher. So we've cut the power to the crusher and opened it up to get a coarser crush product. So that's really knocking down our throughput rate. So that's why we're saying about 35,000 to 38,000 tons per day you should expect through till the end of April. We have a new shaft coming online and that to be installed at that time, so in April, we'll be installing the new secondary crusher shaft. The other parts have been repaired so -- and exchanged. So that will be the main driver of getting the throughput rate up. So we really can't take full advantage of the 3 Ball Mills we have because the SAG Mill can't provide enough feed with the coarse - with its reduced levels as a result of the core secondary product. So now we're in a situation where we've got the lower tonnage or lower grade in the first half of the year. So I would expect that Q1 and Q2 to have a lower grade, lower tonnage. On average for the year, you could expect grades in the range of about 0.27. And we should also expect for 2023 that the head grade will be higher, somewhere around 0.32, 0.33 somewhere in that range.

Orest Wowkodaw: Okay, that's really helpful. Thank you.

Gil Clausen: No problem Orest. As they say, crap happens sometimes you just have to deal with it.

Orest Wowkodaw: Absolutely.

Operator: Thank you. [Operator Instructions]. And your next question will be from Craig Hutchison at TD. Please go ahead.

Craig Hutchison: Hi guys, good morning. Can you provide a bit of a breakdown in terms of the growth CapEx of $60 million, how much of that is at Eva versus the Copper Mountain Mine?

Gil Clausen: I'll turn that over to Rod.

Rod Shier: Sure, Craig. It's -- the split there is about 50:50 on what we have planned budgeted for Eva and work is still ongoing at the mine.

Craig Hutchison: Okay. And is that -- the money you spend at Eva, can we consider that a direct subtraction to the capital estimate you guys provided in the fall?

Rod Shier: Yes.

Craig Hutchison: Okay. And then in terms of just the plant improvements this past year, the filter press expansion, the cleaner column expansion, and the rougher flotation, circuit expansion, what kind of throughput do those upgrades allow you to get to, is it just the 45,000 tons or could you go beyond that with those upgrades that you've made?

Gil Clausen: So, the improvements to the concentrator itself, those projects, so they have reduced the bottleneck that we had in flotation, both in the rougher flotation circuit and the cleaner flotation circuit and the actual production of copper concentrate. So we will no longer have that sort of bottleneck where we have to throttle our tonnage, so to speak, in order to not overflow the circuit when we have high grade. It was just kind of a problem we were running into earlier in 2021. So we have designed these to be, I guess, in line with our previous expansion study to bring normal operation up to 65,000 tons per day, let's say. So at lower tonnage rates that we have right now, we won't have the limitation on our existing grinding circuits. So we should be able to bring it up from 45,000 and we'll test bringing it up to maybe 50,000 tons a day if we have that opportunity to do so with the grinding circuit, the current grinding circuit. So I think 45,000 tons per day is a good healthy target, but we have the ability, if we have higher grade and we have good grinding days, we should be able to run it at a good high grade, but it will definitely improve recoveries. Our goal on the recovery side with these expansion projects is to move recoveries higher than what we announced with the Ball Mill 3 circuits. So where we have 3% to 5% improvements in recovery with the addition of Bal Mill 3 and the finer grinds that we now have, we're anticipating with these projects in place, we can continue to work that recovery out. And our targets will be to continue pushing recovery to see if we can't get closer to 90% recovery than 85%. So there'll be a slow -- slowly work throughput and grind and see where we optimize. But now we don't have the bottlenecks that we had previously.

Craig Hutchison: Okay, thank you. So can we expect those recovery improvements for second half of this year or is that still kind of post the Ball Mill ramp-up?

Gil Clausen: Yes, I think we'll be just optimizing our circuit at 45,000 tons a day initially at first. And once we feel comfortable with the full operations with the new secondary shaft and we've got the circuit running properly and the new expansion circuit, we'll continue to work our recoveries up through the second half of the year.

Craig Hutchison: Okay, thanks guys.

Operator: Thank you. And your next question will be from Pierre Vaillancourt at Haywood. Please go ahead.

Pierre Vaillancourt: Hi Gil. I just wanted to get a little clarification on the plans for Eva. So recognizing that the situation in Australia with respect to COVID is improving, what can you tell us about milestones and really probability of starting construction and completing financing. I mean have you set targets for that based on where things are at in Australia right now?

Gil Clausen: Yes. There are two things that we have committed to complete, Pierre, and one was basically taking all the -- a lot of the execution risk out of a normal project by getting the detailed engineering up to about an 80% level before we break ground. And that's really detailed engineering complete so that you can take away a lot of the execution risk and the contingency requirements in the project. We anticipate that work being done by Q3 and concurrent with that will be a finalized construction estimate. We're already starting to see -- we put together our update, and we published it in December, and it was kind of at the peak of pricing. We've already seen steel prices coming down and some other commodity costs coming down that we had baked into that construction estimate in December. So we'll just do an update at that time presented to the Board, along with the project financing commitments. So as we advance that estimate and start to finalize that estimate, we can then finalize the financing package with the lenders. So we've been doing a lot of work on the project financing side. We just need to plug in these final -- some of these final estimates into the financial model so that the lenders can go over there, back to their respective credit committees with the timing for completion in the third quarter as well. And we'll bring it all back to the Board. So I would - for a start decision. So I would anticipate that given that sort of timing we would likely, in the event of a positive decision, be thinking about an early start to Eva in the beginning of the following year 2023.

Pierre Vaillancourt: Okay. And are COVID restrictions, are they improved enough to allow for that or based on where things are at right now?

Gil Clausen: Well, Australia has been opening up, and they've got a good level of vaccination there now. Western Australia is still closed up. So from our perspective, to start a project like this, and I think this is the real important point, you've got to have the ability to have unrestricted labor flow. You've got to be able to move people in and out. You've got to have your construction force to be able to mobilize, you've got to have the skills available, whether it's mechanical or electrical, principally, those are the most important skills on a construction project. And you have to have free flow of goods and materials through the port and the rail system is available to get to the project area. So we're not there yet. I mean, there's still a bit of a backlog in Queensland and Australia with respect to material flow, but it's making progress in the right direction. So we're just going to keep monitoring that. And when we feel comfortable we can execute the project cleanly without any risk of delays or disruptions with the supplies and the suppliers, we'll be ready. So I would anticipate by the third quarter, that should be cleaned up as well, but we're going to be watching it very closely.

Pierre Vaillancourt: Okay. So start of construction, let's say, in early 2023 puts you on target to be in production by 2025, let's say?

Gil Clausen: Yes. That's the goal.

Pierre Vaillancourt: Okay, alright. Thanks Gil.

Gil Clausen: Hey, thanks Pierre.

Operator: Thank you. [Operator Instructions]. Your next question will be from Bryce Adams at CIBC Capital Markets. Please go ahead.

Bryce Adams: Yeah thanks Gil and team. Good morning and sorry if I missed it, but on the crusher damage, can you talk to what happened, what caused that shaft failure, and any protections you're putting in place to prevent a recurrence?

Gil Clausen: Yes, we had an issue where we had in July, we had basically a chunk of underground steel get through the primary crushing system, and it wasn't picked up by our metal detection before the crusher and we sustained some damage back in July of the year. And then we've Phase 3 of which is our high grade -- which is our high-grade area, we've been mining through underground working. So there's always a little bit of trapped steel from the underground development and workings that are there. So we have work detection systems or sorry, metal detection systems in place. And what we've done is we've fixed that system and improved its operation. But as you mine through these underground work you have got to be very cognizant of it. So we had a piece that did go through and caused initial damage, which was exacerbated in November when we had the bushing failure and the failure to the main shaft. Now there was some cracking earlier, we just had cracks that were propagated further in November. And the bushing burned out in November as well. So with that failure, we did a couple of things. We made sure that we improved the heat detection systems for the heat on the bushing and we've doubled our efforts in terms of steel and tramp metal detection on the system as well.

Bryce Adams: Thanks for the extra color. That piece of steel that made it through, how big are we talking?

Gil Clausen: It was -- I don't know, it's just a chunk of either support steel underground that got its way through. I would imagine it would be no bigger than on one side, at least 6 inches because it had to get through the close side setting of the primary crusher, so 4 to 6 inches in 1 dimension to be able to slip through.

Bryce Adams: Okay, thanks a lot. Talk soon.

Gil Clausen: Alright, thanks Bryce.

Operator: Thank you. And at this time, we have no further questions. I would like to turn the call back over to Mr. Clausen.

Gil Clausen: Alright, everybody. Thank you for joining us today for the call. Stay healthy and safe, and we all look forward to COVID-free 2022. Anyway, take care everyone. Bye-bye.

Operator: Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.