Taseko Mines - Q1 2024

Transcript

Operator (participant)

Good morning. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to Taseko's first quarter earnings conference call. 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, and if you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Mr. Bergot, you may begin your conference.

Brian Bergot (Head of Investor Relations)

Thank you, Ina. Welcome, everyone, and thank you for joining Taseko's first quarter 2024 results conference call. The news release and regulatory filing announcing our financial and operational results was issued yesterday after market close and is available on our website at tasekomines.com and on SEDAR+. I'm joined today in Vancouver by Taseko's President and CEO, Stuart McDonald, Taseko's Chief Financial Officer, Bryce Hamming, and our COO, Richard Tremblay. 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 first 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. And finally, all dollar amounts we will discuss today are in Canadian dollars, unless otherwise specified. Following opening remarks, we'll open the phone lines to analysts and investors for questions. I will now turn the call over to Stuart for his remarks.

Stuart McDonald (President and CEO)

Thank you, Brian, and welcome everyone. Thanks for joining us today for our quarterly conference call. As usual, I'll start with a brief overview of the quarter, and then I'll turn it over to Bryce for some more detailed commentary on our financials. It's obviously been a very busy few months for us here, with construction activity ramping up at Florence, the buyout of our JV partners at Gibraltar, and also our recent bond refi. But before we get into that, let's start with a brief comments on Gibraltar operations. The mine has been running smoothly, and our production results are generally on plan for the first quarter. Gibraltar produced 30 million pounds of copper and 250,000 pounds of molybdenum.

Grade for the quarter was 0.24%, which is right around where we expect to average for the year. As we've previously talked about, one of our two concentrators was shut down for a planned major maintenance in January. The mill was down for about 12 days, but actually, since it's come back online, our total mill throughput has been very strong, averaging just over 90,000 tons a day, which is 6% over nameplate capacity. Copper recoveries for the quarter averaged 79%, slightly lower than planned on higher throughput, and also milling of some partially oxidized material. In terms of cost, our total site costs were consistent with the prior quarter, with Q4 last year. But lower copper production and a lower capital strip allocation had an impact on our unit costs.

Our C1 operating costs came in at $2.46 per pound for this quarter. That's U.S. dollars. With a realized sales price of $3.89 per pound, we were able to generate CAD 50 million of adjusted EBITDA and CAD 60 million of operating cash flow. So overall, strong financial results, and Bryce will provide some further detail on that in a minute. Looking ahead to the next few months, we have a pit transition underway. The Gibraltar pit was the main source of ore in the first quarter, and the Connector pit supplied about 25% of the mill feed. By mid-year, the Connector pit will become the primary pit, and to facilitate that transition, we're getting ready to move the in-pit crusher this quarter. Our contractor, TAKRAF, has begun mobilizing their equipment to site ahead of the move.

Mill number one will be down for a few weeks, and we'll take advantage of that downtime to complete some other proactive maintenance in the mill. Mill number two will continue operating normally during that time, and mining activity will also continue as normal during that down. The operation remains on track to achieve annual production guides of 150 million pounds of copper. At the end of the first quarter, we closed the acquisition of the remaining 12.5% interest in Gibraltar, so the second quarter will be our first full period of 100% ownership. This is a great transaction for us. It provides immediate cash flow and a deferred payment structure that preserves our liquidity for Florence development over the next two years.

As part of the deal, we also got back the 30% life of mine offtake contract that was held by our JV partners, Dowa and Furukawa. Those additional offtake rights have come to us at a time where smelter treatment and refining costs are near record lows, and we've been able to take advantage of that by selling additional spot shipments in the second half of this year at negative TCs. So that's a premium. In other words, Taseko is being paid by traders to take the concentrate, which is something I've never seen before, and I don't think we've ever had that in 20 years of operating Gibraltar. But it certainly shows us the value of clean concentrate in the current market. Comparing this to our previous benchmark contract, cost savings in the second half of 2024 are about CAD 10 million.

We've also marketed recently significant additional tons for 2025 and 2026, and that material has also been sold at negative TCs. So it's clear that the traders do not see the copper concentrate shortages ending anytime soon. The market for refined copper is also strong, and as we've seen, the big price move up since quarter end, up to the $4.50 a pound range. That's about $0.60 higher than our realized price in Q1. So it's a great time to be bringing on additional production, which is exactly what we're doing at Florence here in the next 18 months. Initial construction activities and wellfield development at Florence have been running smoothly. We have three drills operating, with the fourth to be mobilized in May. To date, 10 new wells have been drilled in line with our planned timing.

Earthworks and site prep for the plant and other construction and other surface infrastructure has also been a key focus. Last week, we had the first concrete pour in the plant area. Last quarter, or sorry, in the first quarter, we spent $18 million on construction of the commercial production facility out of the original estimate of $232 million from our technical report last year. That spending will continue to ramp up in the coming months as we get into full construction of the SX/EW plant.

As noted in our MD&A, we also had $15 million of other CapEx at Florence, which includes final deliveries of long lead equipment that was ordered in 2022, and also the costs to construct an additional evaporation pond, which was previously planned for year two of operations, but we decided to bring that work forward to give us additional flexibility on site water management. So overall, we're very pleased with the progress on Florence. Recruiting is going well. The site operating team continues to prepare for initial wellfield operations and construction and copper production late next year. We've completed a number of key financings in recent months, and we consider the Florence project to now be fully funded.

The remaining project costs can be funded by our available liquidity, through the remaining installments coming from Mitsui, and of course, cash flow from Gibraltar. Our hedging program has also been extended, recently to secure a minimum copper price of $4 a pound for 2025, and that gives us additional protection through the Florence construction period as well. Last but not least, I wanted to make a few comments on our bond refinancing that was just completed, in April. We're very happy with the result and believe it was a significant de-risking event for the company. It was something we wanted to complete this year, and bond market conditions were such that it made sense to move forward with the refinancing immediately following the announcement of our Gibraltar transaction.

Upsizing the senior notes from $400 million-$500 million provides additional proceeds that can replace more costly bank debt alternatives at Florence. Pushing out the maturity date from early 2026 out to 2030 gives us plenty of time to generate cash flow from Florence and Gibraltar, so we can look to deliver our balance sheet in the future. With that, I'll pass the call over to Bryce.

Bryce Hamming (CFO)

Thank you, Stuart. Yes, it has been quite a busy start to the year between the various financing, operating, and construction initiatives. Just to add a little more information about the bond refinancing to start. We're very happy with the outcome of this process, and we moved very quickly into refinancing mode after closing of the second Cariboo transaction in March. Being able to refinance and upsize the new notes to $500 million with an 8.25% coupon is quite attractive, seeing bank debt is more than 9.5% at the moment. Originally, we expected that we would be refinancing later this year with the expectation that interest rates may have started to decline by now.

As the expectation of lower rates diminished in recent months and weeks, we made the decision to move forward sooner as the high yield market was open and constructive. And even though we are in a much higher interest rate environment today as compared to our last bond financing in 2021, the credit spread within the high yield rate is historically low and notably better for us by more than 2% than it was for Taseko in 2021. An important factor that investors looked at was our increased ownership in Gibraltar since our last issue and our flexible payment terms we achieved with those acquisitions. Today, our production and financial metrics are 33% higher than in early 2021, with copper prices more than $1.50 more per pound.

The fact that our deal was roughly four times oversubscribed shows that bond investors are now able to see the credit re-rating that will come with Florence cash flow in the not-too-distant future. Having two copper-producing, cash-flowing assets will make a significant difference to our credit profile and our objective of de-leveraging in the years ahead. The recent Gibraltar acquisition with Dowa and Furukawa was a great deal for us in several ways. First, we agreed to pay them back their invested capital into Gibraltar of CAD 117 million. That was on the agreement, we would essentially only pay them from cash flow from Cariboo, the 25% owner of Gibraltar that we acquired.

We agreed to a term of 10 years to pay this back, with any amounts not paid over that time to be made up in a final balloon payment in 2034. We also agreed a payment framework that was based on copper prices, so that if copper prices are higher, they get a higher annual payment, but we obtain downside protection in lower copper price environments. For example, at $4 copper, we would pay them only $6 million per year, and at a $5 copper price, we would pay them no more than $15 million a year. We also achieved, most importantly, a two-year holiday for any payments to ensure we had the runway in the near term to build Florence. The obvious question is, why did they sell it to us on such favorable terms? The answer is simple.

Last year, both Dowa and Furukawa exited the Onahama smelter in Japan and sold their interest to Mitsubishi. They no longer needed the concentrates from Gibraltar to feed that smelter. With the acquisition of Sojitz in the prior year, Taseko was the only natural buyer. Dowa and Furukawa agreed to work with us so we could achieve our mutual objectives. We think this will be a very valuable deal to Taseko in the short term and, of course, in the long term. All this said, this Cariboo transaction did create some different accounting in our Q1 financials, so I'll talk about that now. When we moved from 87.5%-100% ownership, we are required under IFRS to move from joint control, proportionate consolidation accounting, to full consolidation.

Under IFRS, we need to revalue our existing 87.5% interest on this deemed acquisition date. This required us to write up the book value of our inventory at March twenty-fifth to its fair value or net realizable value, which resulted in a $15 million gain in the income statement. It's noted as a gain on acquisition, but $13.3 million of that accounting gain was actually realized by the end of March, as we had a concentrate shipment in that last week. Thirteen million of that was really a realized gain, which otherwise would have been operating margin. We have illustrated this in our adjusted earnings reconciliation, so it's clear to the reader what happened there, that this gain on acquisition was substantially just operating margin in the quarter. Just reclassify it to this other category called Gain on Acquisition.

Sales volumes in the first quarter were 32 million pounds, at an average realized price of $3.89 per pound. Our share of these sales generated under CAD 47 million of revenue in the quarter. Sales exceeded production as we brought down our copper inventories again to a more typical level of less than five million pounds. While the copper price year-over-year was very similar, the 25% higher revenue was driven by increased production and sales, and the increased ownership of Gibraltar. Total site costs at Gibraltar were CAD 110 million in the quarter, in line with the prior quarter and the first quarter last year. Overall, site spend at Gibraltar is quite consistent quarter-over-quarter, and we expect this level of spend over the next quarters and for the rest of this year.

On a cost per pound basis, our C1 costs in Q1 were $2.46 per pound. Adjusted EBITDA for the quarter was CAD 50 million, including that CAD 13 million of margin from inventory on hand at March 25th, and sold before the end of the quarter. Our cash flow from operations was CAD 60 million, significantly higher than the first quarter of 2023. This was driven by increased production and higher sales, including that two million pounds of inventory that we drew down over our production, as well as the increased ownership of Gibraltar. Adjusted net income was CAD 8 million or CAD 0.03 per share, which was also higher than we reported last year. GAAP earnings for the quarter was CAD 19 million or CAD 0.07 per share, and it included that CAD 47 million gain on the Gibraltar acquisition from Dowa and Furukawa.

That's also known as a bargain purchase gain, similar to what we had with Sojitz. Capital spending at Gibraltar in the quarter was CAD 22 million, including CAD 14 million for capitalized strip and CAD 6 million in general sustaining, as well as CAD 2.5 million for capital projects, mainly that crusher relocation project, which is progressing this quarter. That will wrap up, and we expect about another CAD 8 million to go on it for spending. With the Mill Two downtime in January to replace a major component, we are now in the process of finalizing our insurance claim for that. We have received $3.5 million on that in US dollars to date, and we expect to receive a total claim of at least $20 million or more still to come in the coming months.

We ended the quarter with $158 million of cash, which includes the $50 million received from Taurus and the first $10 million from Mitsui. In April, we received the additional proceeds of CAD 110 million from the bond refinancing, and we've also now paid down CAD 20 million that was outstanding on the revolving credit facility. As Stuart mentioned, we've taken advantage of the recent copper price move by adding additional price protection for 2025. We now have a minimum price secured for $4 for all of 2025, in addition to the $3.75 per pound we have for the second half of this year for 42 million pounds.

These 2025 hedges were for copper price collars that we purchased for around $0.03 per pound for premium, with the ceiling achieved of $5 for the first half and $5.40 for the second half of the year. We've covered a total of 108 million pounds of copper for 2025. It's important for us to protect the downside with our capital commitments and leverage while retaining upside to fund Florence. The current copper price environment is definitely benefiting us, and as we are participating fully in the recent rise, especially now that we own 100% of Gibraltar. So with that, I'll turn it over to the operator for questions. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging requests. Questions will be taken in the order received. Should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Craig Hutchison from TD Bank. Please go ahead.

Craig Hutchison (Mining Equity Research Analyst)

Hi, good morning, guys. Thanks for taking my questions. Just a question on the TC/RC. It's obviously very positive to see you guys are gonna recognize negative TC/RCs, but can you give us a sense in terms of what % of your concentrate that you expect to produce, say, this year, next year and 2026 is actually under contract?

Stuart McDonald (President and CEO)

... Sure, yeah. Hi, Craig, it's Stuart speaking here. Essentially, we are-- we have sold, previously sold, all of our, all of our material for the current year, for 2024. But what happened with the Cariboo deal, we got about 50,000 tons of concentrate back for the, their shipments that were scheduled for the second half. So those have been remarketed at negative TC's. So that's, that's 50,000 this year in the second half, and that's, I don't know, roughly 40% or 50% of our, of our shipments. No, maybe, maybe 30% or 40%. 30% or 40% of our shipments in the second half. And then for 2025 and 2026, yeah, we've now sold, two hundred and twenty thousand tons of, of concentrate.

160 of that in both years was what we've just marketed. So, and 60, the other 60 was sold previously under a long-term deal. So that gives you an idea of what we've done. So the new, you know, it's pretty significant. It's 75%-80% of our production in 2025 and 2026 that we've just sold in the current market.

Craig Hutchison (Mining Equity Research Analyst)

Great. Just a question on transportation costs. Just kind of looking year-over-year, looks like they're up 100%. I know some of that is just, you know, you recognizing, owning a larger interest in Gibraltar. But can you give us a sense of, you know, why they're up so much? And, you know, is that something we should be modeling going forward?

Richard Tremblay (COO)

Yeah. Hi, Craig, Richard here. Really, the story in transportation cost is, we've had to utilize trucking to move concentrate from Gibraltar down to the coast over the last few years, and it's become a regular part of our business. We're working hard to get back to being able to rail it all. So that's really the, I guess, the objective on a go-forward basis. But we'll continue to utilize trucking as, you know, as a backstop to inefficiencies in being able to rail the concentrate.

Craig Hutchison (Mining Equity Research Analyst)

Okay. What, what's the sort of limitation on the, on the rail side of things? Does it need more cars, or give us a sense of what that issue is?

Richard Tremblay (COO)

Yeah, it, it's quite, it's quite complex, but I guess to simplify it would be, it comes down to how fast the cars are cycling on the route. Back a number of years here, just over two years, there was a route change where the cars now started traveling north instead of going south out of Williams Lake, and that added cycle time to the cars returning. So that's been one of the challenges. And then the other obvious one is when you get FM events like the flooding or the port strike last year, which impacted or backed concentrate up at site, which then we had to resort to trucking to be able to move.

Craig Hutchison (Mining Equity Research Analyst)

Okay. And just another question for Gibraltar. The decision or the consideration to restart the oxide SX/EW plant, what's some of the factors that you're thinking about there? Is it just sulfuric acid prices? And can you give us some kind of sense in terms of what the production would look like if it was to restart?

Richard Tremblay (COO)

Yeah, Craig, Richard again. Really the driving factor there is having sufficient oxide ore placed on the dumps to justify the capital investment, and the, you know, the operating costs, to be able to kind of restart that plant and then run it sustainably. I think as we've indicated previously, we're, you know, 2026 is the timeframe we're looking at. But also looking at with some of the additional tons that have been placed on the dump at the end of last year and through the beginning of this year, looking at potentially trying to accelerate that. So,

Craig Hutchison (Mining Equity Research Analyst)

Okay.

Richard Tremblay (COO)

Works underway in that regard.

Craig Hutchison (Mining Equity Research Analyst)

Okay, great. Maybe one last question for me. Just on Florence's spending, can you maybe talk to the cadence of the spending here throughout the year? Should we expect a significant uplift in Q2, or is it more starting, the big spend starting Q3, Q4? Thanks.

Stuart McDonald (President and CEO)

No, I think you're gonna see a step-up in Q2, probably another step-up in Q3, and then, yeah, kind of steady, steady for a couple quarters from there. And then ramp back down a little bit in, as we get later on in 2025. So yeah, it's gonna, it's gonna pick up here definitely in Q2.

Craig Hutchison (Mining Equity Research Analyst)

All right. Great. Thanks, guys.

Operator (participant)

Thank you. Once again, should you have a question, please press star five followed by the one on your telephone keypad. Once again, that is star and one to ask a question.

Stuart McDonald (President and CEO)

I think we're good, operator. So, we can probably stop it there, and look forward to chatting with everyone again next quarter.

Operator (participant)

Thank you. That concludes our conference for today. Thank you all for participating. You may all disconnect.