Taseko Mines - Q2 2023

Transcript

Operator (participant)

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko's second 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. 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 two. Thank you. Mr. Bergot, you may begin your conference.

Brian Bergot (VP of Investor Relations)

Thank you, Joelle. Welcome, everyone, and thank you for joining Taseko's second quarter 2023 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 am joined today in Vancouver by Taseko's President and CEO, Stuart McDonald, Taseko's Chief Financial Officer, Bryce Hamming, and our Senior VP Operations, 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 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. Finally, all dollar amounts we will discuss today are in Canadian dollars, unless otherwise specified. Following opening remarks, we will 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)

Okay, thank you, Brian, and good morning, everyone. Thank you for taking the time to join our call this morning. Operationally, it, it was a decent quarter at Gibraltar. We had copper production of 28 million pounds, which is up 12% from Q1, and unit costs also declined. As we've spoken about previously, the lower benches of the Gibraltar pit are producing higher grade, more continuous ore zones, and the pit is set up very well for ore release over the balance of this year. Head grade in the quarter averaged 0.24%, and we should see similar levels for the rest of the year. Mill availability was the main operational challenge that we faced in the quarter, and we had several maintenance shutdowns in April and May.

As a result, mill throughput for the quarter was just below 80,000 tons per day, which is below target. However, you know, since, since early July or since early June, the situation has much improved, and we've been operating at closer to 90,000 tons a day, and the softer ore in the Gibraltar pit is being processed very well. Improved mill performance allowed us to produce 11 million pounds in June and again in July. We're expecting second half copper production to be roughly 15% higher than the first half of this year, and we remain confident in our original production guidance of 150 million pounds of copper. Turning to our financial results now.

Sales volumes in Q2 were lower than production as we had a small inventory build, and the average realized price also dipped to CAD 3.78 per pound from CAD 4.02 in the prior quarter. It also averaged about CAD 4 last year. These changes have a meaningful impact on Gibraltar earnings and cash flow, and we have a lot of leverage to the copper price. The price trend in recent weeks has been positive, and it's currently hanging in the CAD 3.90 per pound range. That's up about CAD 0.20 per pound since quarter end. It's also notable this quarter that copper and molybdenum price changes led to a CAD 8 million write-down of our ore stockpile inventory. That's CAD 0.03 per share impact on GAAP earnings, adjusted earnings and EBITDA.

With that, we still reported CAD 22 million of adjusted EBITDA and earnings from mine operations of CAD 28 million. Our unit operating costs declined quarter-over-quarter, down to CAD 2.66 per pound. That's a 10% reduction over Q1, partly due to lower diesel prices and cost reductions in a few other areas, but the higher production level was the biggest factor. An offset was the lower molybdenum by-product credit, as average molybdenum prices dropped from CAD 33 per pound in Q1 to CAD 21 per pound in the second quarter. Overall, we expect our C1 unit cost to continue to decline in the second half of this year as copper production increases. Capital spending remained at elevated levels again in the second quarter, both at Gibraltar and Florence. Work continued on construction of the new site for the in-pit crusher at Gibraltar.

As we noted in the past, the actual crusher move has been deferred until Q2 next year. You know, but this, this has been a significant capital project for us, about CAD 50 million in total on a 100% basis. Most of that spending has already been done with about CAD 10 million left to go next year for the physical move. After that move, we'll be able to continue advancing into new ore zones in the connector pit. Of course, spending has continued at Florence as well, as we continue to receive long lead items on site in preparation for construction. Bryce can add some more details on CapEx in a minute, but certainly, the capital projects this year have impacted our cash flow, especially in light of a lower copper price in the second quarter.

With Gibraltar CapEx mostly behind us, we expect solid free cash flow generation from the mine over the remainder of this year. As far as permitting process at Florence, the message remains the same. We're in regular contact with the EPA, and we continue to see them taking the final steps towards issuance of the final UIC permit. We don't see any significant issues or concerns emerging. In fact, in June, the EPA circulated the final programmatic agreement for signature, which we see as another positive sign that they're readying to issue the UIC permit. It's been a lengthy and tedious process, and we need to keep patient and allow the agency to finish the final steps of their work. We do remain confident it'll be a a positive result very soon.

We're using the additional time to deliver the right financing package for the project. The remaining CapEx that we disclosed a few months ago was about $230 million. With our existing liquidity and the funding commitments received from Mitsui and Bank of America, we already have a large portion of that financing in place. We continue to advance discussions on project-level financings, which could include a copper royalty or a small project loan. Progress is being made on both fronts and tracking with the expected permitting timeline. Two last topics to touch on, and both have been in the news recently in B.C.. Firstly, the port strike. You know, that occurred in the first half of July, and it delayed copper concentrate shipments to begin our third quarter.

It was a two-week strike or a two-week labor disruption, at least, and created quite a backlog of cargo for Taseko and all the other shippers that operate on the West Coast ports. We're now supplementing our regular rail service with trucking to try to reduce the site inventory levels in the coming months. Secondly, the wildfire situation. It's been a very active fire season here in B.C. and in other parts of Canada as well. To date, there's been no impact to Gibraltar operations, although in July, we did have a fire breakout just a few miles from the mine site. It was contained and no longer presents any risks to the site. We're grateful for the work of the B.C. Wildfire Service and the many others that are working hard to keep communities around our province safe.

With that, I'll turn the call over to Bryce for some more details on the second quarter financials and an outlook. Over to you, Bryce.

Bryce Hamming (CFO)

Thank you, Stuart, and welcome, everyone. As Stuart mentioned, it was a fairly straightforward quarter, but I'll provide some additional details. Sales in the quarter were 26 million pounds of copper, generating CAD 120 million... sorry, CAD 112 million of revenue, both of which are in line with the first quarter. Taseko realized a price drop from $4.00 to, in Q1 to $3.78 per pound in the second quarter. Despite the drop in copper price, revenue remains strong as we now consolidate the 12.5% of Gibraltar that we acquired from Sojitz, and this was the first full quarter of that additional ownership interest in our financial results. In the second quarter, total site costs were CAD 105 million. This is CAD 7 million lower than the first quarter.

We saw lower diesel costs, as well as lower purchased electricity, natural gas, explosives, and contractor services in the quarter. Another significant impact on our C1 costs in the second quarter was the molybdenum by-product credit. As Stuart has already mentioned, the steep drop in molybdenum price from the low CAD 30 range in Q1, not only affected our revenue, but also resulted in negative price adjustments in the quarter for prior prior sales. Our by-product credit dropped from CAD 0.37 a pound to CAD 0.13 a pound in the second quarter. Going forward, we should see this increase. The lower site costs, combined with higher production in the quarter, drove our C1 costs from CAD 2.94 per pound in Q1 down to CAD 2.66. In spite of the lower by-product, we expect this to decrease further in the second half as production increases.

For the quarter, we had CAD 22 million of adjusted EBITDA. Earnings were negatively impacted by a notable write-down of our lower-grade ore stockpiles due to the decline in copper, molybdenum prices, and foreign exchange. This resulted in a charge to the PnL of CAD 8 million, which has also reduced adjusted earnings by CAD 0.03 per share, as we don't normalize for this non-cash charge. GAAP earnings in Q2 was CAD 10 million or CAD 0.03 per share, and an adjusted net loss of CAD 4 million or CAD 0.02 per share loss. Most significant difference between GAAP earnings and adjusted net loss was the unrealized foreign exchange gain related to the weakening US dollar, which reduces the value of our debt in Canadian dollar terms.

Based on our average realized price of $3.78 per pound in Q2, we continue to have a healthy operating margin of over $1 per pound. With ongoing volatility, it's worth highlighting, too, that we still have our price protection in place for the next 5 months, which secures a minimum copper price of $3.75 per pound for 35 million pounds or 7 million pounds a month. Copper price showing signs of recovering, we could look to add to this hedge position to cover 2024 in the coming months ahead if the markets allow and as we prepare for Florence construction. Capital spending in the second quarter was notably higher.

We spent CAD 31 million at Gibraltar in sustaining and capital project expenditures, with notable spend on the in-pit crusher relocation project, as well as a major maintenance on one of our large mining shovels, which was a CAD 10 million program in our sustaining capital costs. Most of that spending for the crusher is now complete until the equipment is physically moved next year in Q2. We also purchased some new equipment for the mill and did component replacements on our fleet in the quarter. Sustaining capital and spend on capital projects at Gibraltar will be much lower in the second half of this year. At Florence, we capitalized CAD 13 million in the second quarter for the total year-to-date spend of CAD 27 million.

We will see the Florence burn rate reduce in Q3 until the final permit is received and we begin construction. We ended the second quarter with approximately $180 million of available liquidity, with CAD 86 million in cash. Just to wrap up, I'll touch on some of our financing transactions that we announced and closed in the quarter. The first was the increase to our corporate credit facility from $50 million to $80 million. We had announced in February of this year that this facility had been extended, but also increased, subject to credit approval. In June, ING Capital was officially added to the syndicate, and the amendment to $80 million was fully credit approved. We continue to see commercial banks supporting us in our copper business and our growth ambitions.

The other significant transaction was an amendment to our Gibraltar silver stream with the Osisko Gold Royalties, a long-standing partner of the company. We increased the paid, payable silver from 75% to 87.5%, to coincide with our purchase of our 12.5% interest in Gibraltar from Sojitz in Q1. We received just shy of CAD 14 million for that increase in silver deliveries. Finally, we also put in place an ATM during the quarter as a standby option to support our Florence construction needs, if needed, over the coming years. We see this as just another tool in the toolbox that a company preparing for construction should have. We did not issue any shares under the ATM in the quarter. With that, we are ready to take questions now, operator.

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 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Ed Brucker with Barclays. Please go ahead.

Ed Brucker (VP and High Yield Credit Research Analyst)

Hey, thanks for taking the question today. My first one just is on Florence. You know, with a lot of, some of the pre-buys you've been doing machinery, there, do you think the, you know, production timeline for Florence has shortened at all, or do you think, kind of, start to finish, still 18 months?

Stuart McDonald (President and CEO)

Yeah. Hi, Ed, it's Stuart. It's still, it's still, in our view, an 18-month project. You know, I think that some of the spending that we've done has, has certainly de-risked that timeline, and it's allowed us to, to start, to start promptly on receipt of the permit, but it's still an 18-month project.

Ed Brucker (VP and High Yield Credit Research Analyst)

Got it. The time in between receiving the permit and construction is relatively short?

Stuart McDonald (President and CEO)

Relatively short. I mean, we certainly need to, you know, a little bit of time to mobilize the team. We have cut our spending, you know, in, in the last 6 months here at, in terms of, you, you know, contractor readiness and things like that. So it takes. It'll take, you know, 1 month or 6 weeks to get people mobilized, and then we'll, and then we'll be into it, and the schedule will, or the spending will ramp up from there.

Ed Brucker (VP and High Yield Credit Research Analyst)

Got it. Just my last question. You know, given that it's August now, hope to get the EPA decision there 18 months from now, kind of, puts you close to the... when the 2026s are, are going to go current. Just want to get your thoughts on that maturity, and if you would do anything proactive with it?

Stuart McDonald (President and CEO)

Well, yeah, I mean, certainly keeping, you know, it's, it's, it's not really top of mind for us right now. I think, you know, we want to get Florence permitted and financed and, and going into construction. Certainly, as we get into the second half next year, we'll, we'll, we'll be keeping a close eye on markets and looking for an opportunity to refinance that. I think we have a good, a good story to tell, obviously, with Florence coming online. It's going to be a very meaningful growth story for, for the equity and for bondholders as well, in terms of its cash flow generation and its, its impact on our credit, so. But, no, no specific plans on the refinancing at this stage.

Ed Brucker (VP and High Yield Credit Research Analyst)

Got it. Thanks, that's helpful.

Operator (participant)

Your next question comes from Craig Hutchison with TD Securities. Please go ahead.

Craig Hutchison (Mining Equity Research Analyst)

Hi, good morning, guys.

Bryce Hamming (CFO)

Morning.

Craig Hutchison (Mining Equity Research Analyst)

My question's on molybdenum. If I look at your technical report last year, you, you're kind of targeting an annual run rate close to around 2.5 million pounds a year. It looks like you're trending closer to 1 million pounds this year. Now that you're deeper in the benches at Gibraltar, can we expect a fairly significant uptick in molybdenum production over the next, say, couple quarters and into next year?

Richard Tremblay (SVP of Operations)

Yeah, good morning, Craig. Richard here. Molybdenum, at the start of Gibraltar pit, we saw grades being well below, kind of, life of mine averages, and we do expect the grade, as we keep going deeper, to kind of get back closer to the life of mine averages. That combined with the higher throughput in the mill, we'll see improved molybdenum production for the remainder of the year.

Craig Hutchison (Mining Equity Research Analyst)

Okay, great. Then just, you know, encouraged by your, your comments that you expect Gibraltar to generate free cash flow here in the second half, but can you give us kind of a sense of what the total capital spend is for Gibraltar? What I mean by that is, you know, capitalized stripping, sustaining, anything, you know, kind of, development related.

Stuart McDonald (President and CEO)

For, for the second half, you're, you're focusing on?

Craig Hutchison (Mining Equity Research Analyst)

Yeah.

Stuart McDonald (President and CEO)

I mean...

Craig Hutchison (Mining Equity Research Analyst)

Yes, please. Yeah.

Stuart McDonald (President and CEO)

It's really gonna, it, it's really gonna drop off on the capital projects. The crusher work, as we noted there, is essentially done for the year, and we'll the final piece there will pick up in Q2 next year. You know, the other piece that hit us in this quarter was major maintenance, CAD 10 million for the shovel, and that, you know, that's a one-off as well. It doesn't. We don't expect any of those items to hit us in the second half. We should be really kind of normal run rates for CapEx here in the second half. I don't know what that, you know, something in the range of, I don't know, CAD 10 million-CAD 15 million, perhaps, over the next 6 months.

Something, something more, something more typical, maybe closer to 10. Yeah, capital strip, capital strip is coming from our work. You know, we're deep into ore in the Gibraltar pit. The capital strip in the first half of the year came from the stripping we're doing on the connector ore zone. That's not much happening there in the third quarter. It'll pick up a little bit again in, at the end of the year, in the last few months. Generally, capital strip should be, you know, should be, should be pretty low here for the second half. You might, you might see another CAD 10 million in, in Q4, perhaps. That's a very rough number.

Craig Hutchison (Mining Equity Research Analyst)

Okay, great. Thanks, guys.

Operator (participant)

Your next question comes from Alex Terentiew with Stifel. Please go ahead.

Alex Terentiew (Managing Director of Metals & Mining and Institutional Research)

Hi, guys. Good morning, everyone. Just two questions for me. First, on Florence. I'm curious, Have you guys secured, I mean, obviously, I guess you haven't secured yet, since you don't have the final EPA permit, but, you know, acid sources for the mine when it gets up and going. You know, I'm wondering with acid prices in various regions coming down now, is there an opportunity to secure supply? I believe the prices now in the spot market are probably less than what you used in your tech report a few months ago. So that's the first question. The second one, at Gibraltar, you know, it's good to see costs coming down.

You guys are guiding to, to better costs in the second half of the year as well. What's driving that? You know, the strip ratio the last 2 quarters has been a little bit lower than I expected, so, so that's good. But, you know, I'm just curious, you know, what sort of strip ratio, are, are haul distances a little bit shorter, or, or what else is in there that's, that's driving the lower costs?

Stuart McDonald (President and CEO)

Do you, do you want to speak to acid supply there?

Richard Tremblay (SVP of Operations)

Yep. Yep, no problem. Yeah. Alex, this is Richard. For the acid supply, we've been in, we've been in ongoing discussions with suppliers in the market, and there's a lot of interest in supplying the Florence site. Certainly staying in close contact with what the market is doing. You know, we've, we've gotten really positive and strong indications from the acid suppliers about what we can expect going forward. You know, those conversations are, are ongoing, and really, we won't finalize anything until we get the UIC permit in hand and see the timing. There's some pretty interesting developments with supply or storage being put in place close to the project site, which greatly helps on the acid price.

Alex Terentiew (Managing Director of Metals & Mining and Institutional Research)

Yeah, okay. That's what I was hoping to hear, 'cause, I think otherwise, if you bring it in from California, it's, quite a bit more expensive for just-

Richard Tremblay (SVP of Operations)

Yeah.

Alex Terentiew (Managing Director of Metals & Mining and Institutional Research)

the transport cost.

Richard Tremblay (SVP of Operations)

Yep.

Stuart McDonald (President and CEO)

Yeah. Yeah, Alex-

Alex Terentiew (Managing Director of Metals & Mining and Institutional Research)

Okay.

Stuart McDonald (President and CEO)

Your question on, on the cost at Gibraltar, you know, I, I think the big item there is just production increasing, right? It's always the denominator, as you know, whether you, whether you're milling 0.22 or 0.25, or your costs are the same. And so it's getting the pounds out, which is the biggest driver of, of reducing our, our costs. I think we, we noted our, our site spending was a little bit lower in, in Q2 versus Q1. Diesel costs have come off, you know, and a few, a few savings here and there on the site. You know, it's, it's... Like I said, it's a, it's a fixed cost operation. We have our fleet running 24/7, and, you know, we really have to get the pounds up to get our unit costs down.

I think if you look at the, at the second half with the, with our production guidance, if we can achieve that, yeah, we should see a meaningful reduction in, in C1, you know, below, below, below Q2 levels.

Alex Terentiew (Managing Director of Metals & Mining and Institutional Research)

Okay. All right. Makes sense. Okay, that's it for me. Thank you.

Operator (participant)

Your next question comes from Alex Bedwany with Canaccord Genuity. Please go ahead.

Alex Bedwany (Senior Analyst)

Good day, guys, and thanks for taking the call. Just two questions for me. First one is, are you concerned at all with mill availability, given the rates over the last three quarters? I obviously acknowledge that the fourth quarter was affected by severe weather. The second one is along the lines of financing. Obviously, you've expanded the headroom on the revolver, and you've got the ATM facility there. You're also considering a royalty. How do you sort of think that these things will move once you get the permit? Will you be drawing down on all of the revolver? Will that happen in tandem with the ATM facility, or are they independent of each other?

Richard Tremblay (SVP of Operations)

Yeah, Alex, for the mill availability question, you know, the downtime that we've incurred here in the first half of the year has really been focused in the grinding circuit and dealing with some maintenance and alignment issues that we had going on in the grinding circuit. We have those resolved now. We're continuing to monitor closely as we go forward, but all indications from our performance in June and July is, we should be back to normal kind of downtime and concurrent, you know, downtime events in the mill, which mill availability then is gonna be in line with kind of our expectations. Don't expect that to continue. Long answer, don't expect that to continue.

Stuart McDonald (President and CEO)

Yeah, maybe just, maybe I can just speak briefly on the, on the financing, the way we're thinking about it right now, Alex, as Stuart's speaking here. We've got $75 million committed, you know, from Mitsui and Bank of America, and it's a $230 million of remaining spend. We're looking to raise, you know, something in the range of $100 million of, of project level financings, give or take. And that's, as I noted, that's as we've been talking about for a while, it's gonna be a combination of royalties and project debt. I think we're, we're making progress on those discussions, and we're optimistic. We'll have some announcements soon on that.

So that's CAD 175, you know, I think out of the CAD 230, I think the last, or would be, if we're, you know, if we're successful, the last, the last piece is going to come down from the corporate level, from Taseko, for the last CAD 50 million-60 million. As you noted, we have the revolving credit facility. You know, we have CAD 180 million of available liquidity right now, and cash flow from Gibraltar, and then we do have the ATM there as a backstop as well. It's not our intention to be using that as a primary funding source at this time, and we haven't drawn it yet. Yeah, that's, that's kind of how we're thinking about the total package.

In terms of the order of how we spend money, you know, I think that'll come down to how the final financing negotiations, play out at Florence in terms of, you know, whose, whose capital is going in first. We're, we're, yeah, you know, we're confident that, that the, that the money will be there and that we're in a strong financial position for it.

Alex Bedwany (Senior Analyst)

Great. Okay. Thanks, Stuart and Richard.

Operator (participant)

There are no further questions at this time. Please proceed.

Stuart McDonald (President and CEO)

Okay. Thank you. Thanks, operator. Thanks everyone again for joining. Enjoy the rest of your summer. We'll talk to you in the fall. Thanks.

Operator (participant)

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