Taseko Mines - Q2 2024

Transcript

Operator (participant)

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 Q2 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A 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 number two. Thank you. Mr. Brian Bergot, you may begin your conference.

Brian Bergot (Head of Investor Relations)

Thank you, Ina. Welcome, everyone, and thank you for joining Taseko's Q2 2024 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 COO, Richard Shaw. 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 Q2 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 will open the phone lines to analysts and investors for questions. I'll now turn the call over to Stuart for his remarks.

Great. Thanks, Brian, and good morning, everyone. Thanks for taking the time to join us today to review our Q2 operating and financial results. It's been another eventful quarter and a busy first half, really. We've had a number of significant accomplishments so far this year, including consolidating 100% ownership of our Gibraltar mine, refinancing our bonds, completing Florence project financing, and then having a very positive start to construction activities at Florence. And more on that in a minute, but I'll start with Gibraltar operations. The mine produced 20 million pounds of copper and 185,000 pounds of molybdenum in the Q2. Production was impacted by the planned downtime in mill number one for the crusher move project and for maintenance on the SAG mill.

Also a strike of the mine's unionized workforce, which shut down both mills and the whole site for 18 days in June. All of that downtime resulted in total tons milled being about 25% below nameplate capacity, and that, of course, has a direct knock-on effect to copper production. Copper head grades averaged 0.23%, which was generally in line with our expectations, and copper recoveries were 78%, slightly below plan due to the inconsistent mill operating time, as well as processing some partially oxidized ore from the upper benches of the Connector Pit. Mining rates were also impacted by the labor disruption, but our strip ratio remained in line with plan. We started accessing initial sulfide ore from the new connector pit, and the transition into that new pit will continue over the next few months.

We'll be completely out of the Gibraltar pit this fall. Running part of the quarter with only one mill obviously has an impact on unit costs, and our total operating costs, or C1, increased to $2.99 per pound in Q2. The copper prices were very strong, with a realized price, our realized price of almost $4.50 a pound in a quarter. The strike in June was a disappointing outcome for us, you know, but we're pleased to be able to resolve that with a new 3-year union contract and get all operations back to normal in the third week of June. In terms of earnings, it was our first full quarter, reflecting 100% ownership of Gibraltar, and we generated CAD 71 million of adjusted EBITDA and CAD 77 million of earnings from mining operations.

Those numbers included a CAD 26 million insurance recovery related to repairs that were done earlier in the year. Nonetheless, a very good result considering the operational disruptions, and it demonstrates the earnings potential when we get Gibraltar back to full production levels here in the second half of the year. I'm happy to say that the in-pit crusher relocation was successfully completed in early July without any issues. This was a two-year, CAD 50 million project and a major undertaking for our project team, so congratulations to everyone involved. Concentrator number one is back up, and with both mills now running at capacity, we're looking forward to a strong second half.

We obviously lost some production during the strike, but looking at the potential to increase our mining rate slightly in the coming months, and we also believe there are opportunities to push mill throughput to get back some of the lost pounds. Overall, we expect total copper production for the current year to come in between 110 and 115 million pounds, and that's slightly below our original guidance of 115 million pounds. So that means a 20% to 30% increase in production in the second half over the first half of the year. Looking ahead to 2025, it's shaping up to be a good production year, and our concentrate production will be supplemented by additional pounds from the restart of the Gibraltar SX/EW plant.

That plant was actually built in the 1980s and operated for about 13 years, producing on average 6-7 million pounds per year. Taseko then restarted it in 2007 and operated again until 2015. So it's a well-established operation. Over the last few quarters, we've been stacking new oxide ore from Connector pit onto the old leach pads. By next year, we should have well over 50 million pounds of contained copper on the leach dumps, and we have advanced plans to refurbish the plant over the next year at a cost of around CAD 8 million, and expect to be able to restart cathode production in Q2 next year, which is a year ahead of the previous schedule and our previous thinking.

Our updated modeling indicates the plant could provide an additional 4 million to 5 million pounds of copper production annually for many years to come. So it's positive news and a great outlook for the mine going forward. Moving to Florence, construction of the commercial facility is advancing on schedule. Construction activity really ramped up in the Q2. We now have over 200 contractors at site, in addition to our owner's team, and site management. Wellfield drilling has gone according to plan so far, with 18 wells completed at the end of June. We had two drill rigs drilling the production wells during the Q2, and we added a third drill in July, now assessing the need for potentially adding a fourth. At the plant site, construction focused on earthworks and pouring the concrete foundations for the SX/EW plant and related infrastructure like tank containment systems.

Construction CapEx in the Q2 was $37 million and $55 million year to date. In the next few months, earthworks will be complete, and we expect to begin mechanical installations and structural work on the SX. We've recently added some construction photos to the Florence section of our website, and I'd encourage everyone to keep an eye on that, and we'll be adding more in the coming months so you can follow our progress. But pretty exciting to see things happening on the ground. So it's great. On the recruiting side, we've been very successful at building the permanent operating team for the project. We'll eventually have about 170 full-time staff and operators for the commercial production phase. Right now, we've hired so far about 70 of those positions.

Florence is in the middle of a great copper belt in central Arizona. There's a lot of highly qualified candidates already living in the region, and we have a very innovative, exciting mining project that's getting a lot of attention. So there's a lot of interest in applicants for all of our job searches and postings. That's all going very well. I was actually down in Florence not too long ago and had an opportunity to see the progress and meet some of the new team members of the Florence team. And, yeah, very impressive with everything that's taking place on site. We have a great project happening, supported by an experienced and dynamic team, and we're now less than 18 months away from first copper.

As we've talked about in the past, we believe Taseko is in a very unique position with a low-cost copper project in a Tier One jurisdiction and now so close to first production. Despite the pullbacks in prices over the last couple of months, we believe that the medium to long-term fundamentals for copper have never been stronger. There continues to be very little in the way of new copper supply available to come online in the next 5 years. We saw some significant financial flows into and then out of the copper markets over the last 6 months, and I think it's a matter of time before we have a real supply deficit, and then the financial players will really move, and it's going to be interesting at that time to see where prices go.

The short-term predictions are always difficult, and that's why we continue to keep our price protection program in place. To remind everyone, we have a minimum price of $3.75 a pound protected for the rest of this year and a minimum price of $4 a pound protected for all of next year. These are copper collars, but the ceiling prices are high and provide Taseko with a lot of pricing upside over the next 18 months. Just one more topic before I pass the call over to Bryce, just regarding our Yellowhead project. Certainly, let's, let's not forget about it. It's a large open pit copper project in a great location, just north of Kamloops, BC.

We updated the feasibility study a few years ago, which outlined a project that will produce an average of 180 million pounds of copper a year over a 25-year mine life. That would make it one of the largest copper mines in North America. We're getting ready to initiate the EA process. In connection with that, we've recently opened a project office to support community engagement, and we're also doing a small field program this year, which includes geotech drilling and test pitting to gather data that we're going to use going forward as we move through permitting. So on that note, I'm going to pass the call over to Bryce, who can provide some more color on our financials.

Bryce Hamming (CFO)

Thanks, Stuart. Yes, there were a few accounting one-off events during the Q2, making it somewhat complicated from an accounting standpoint. So I'll start with explaining these further. We posted a GAAP net loss of $11 million, but on an adjusted basis, we derived adjusted net income of $30.5 million, $0.10 a share. So some notable key items that were expensed in the quarter for GAAP over and above our usual unrealized derivative and FX losses, these additional items that we adjusted for in our adjusted earnings were. Just I've got a list here. So the first was $10.4 million in other operating costs that we incurred in Q2 that related to the cost for the actual physical move of the primary crusher.

Those are expensed under IFRS, although they relate to the overall capital project. And then we also had site care and maintenance, while the operations were suspended in June, for that 18-day strike that we had. We also had CAD 8 million in inventory costs that were written up, back in March when we acquired the remainder of Cariboo. And when we sold or processed those in the current quarter, we charged that right up to cost of sales and had higher costs, which we reversed in our adjusted earnings. We also had CAD 10.5 million in accretion on our Caribou liability, for our deferred consideration and for our Florence royalty obligations. And that arose due to the rising copper trends as well as the more positive outlook for copper prices in the years ahead.

We also had a CAD 10 million one-time call premium that we paid on our bond refinancing, as well as a CAD 3 million write-off of our deferred financing costs related to the 2026 notes. So we consider all those items as either not reflecting the underlying, underlying operational performance of our business, extraordinary or unrealized, and definitely not indicative of future operating results. So therefore, we adjusted them. So financial performance in the quarter was strong. We had Adjusted EBITDA of CAD 71 million and earnings for mine ops before depletion of CAD 77 million. Sales volumes were strong at 23 million pounds. That's 100% of Taseko's account, now that we own 100%, and it exceeded our production. We were able to draw down inventories by 2.4 million.

We also benefited from a strong copper price in the quarter. We realized at just shy of $4.50 a pound, and that was 60%, or sorry, $0.60 higher quarter-over-quarter from Q1, and nearly 20% higher than the same quarter last year in 2023. One notable positive impact on financial performance was the $26 million insurance claim that Stuart mentioned. We did finalize that in June with the adjuster, and we've recorded it in the Q2, and we had mentioned that on previous calls. Given Gibraltar is our only producing asset, we carry business interruption insurance on top of our property insurance, and that protects our gross profits should any of our milling or machinery at the Gibraltar Mine break down.

We're working with our adjusters. We determined that Gibraltar would have produced an additional 8 million copper pounds last year, if not for a component that we needed to replace in Mill Two. This insurance is being received as we speak. We've received about 30% of it already in July, and we expect the rest of it in the Q3. Total site spending at Gibraltar was CAD 91 million in the Q2, and that's CAD 20 million lower than the previous quarter. Our general run rate, this is mainly due to the 18 day labor strike. During those two and a half weeks in June, we significantly reduced our cost at the Gibraltar mine, as we put it on temporary care and maintenance.

Going forward, we expect Gibraltar's total site cost to revert back to more normal levels, which are usually between CAD 100 million to CAD 110 million per quarter, including capitalized strip. Unit costs in the Q2 were $2.99 per pound. Biggest driver of the increase from the prior quarter was obviously lower copper production, and that should decrease obviously in the Q3 and Q4 as production increases, as Stuart outlined. Starting in the Q3, we'll also benefit from the new copper offtake agreements we signed. They have extremely low TCRC, the treatment and refining charges we pay to our co, our customers. On some of these contracts, they're even negative. This will have notable impact on our C1 costs, reducing our off-site costs by, you know, $0.15 or more per pound produced.

Cash flow from operations was impacted by the downtime in Q2, but we still generated CAD 35 million in the quarter, which was higher than the same period in 2023. That's due to the higher copper prices, but also we drew down the finished inventory. In June, we submitted a concept paper to the U.S. Department of Energy for a tax credit under Section 48C. We believe Florence Copper may qualify as a critical mineral processing facility, given that we will be producing finished copper cathode for use in the United States. We expect to hear back from the DOE later this month, at the end of August, and whether we'll be eligible for it. And then, the application, we'll hear later in the year. The award itself would be in early 2025. The credit is transferable, and we can monetize it.

This incentive funding could further assist with funding our Florence spend in 2025. Last but not least, while we spoke a bit about it, last quarter, was our bond refinancing. That was an important refinancing transaction, that did not close until this Q2. So the impact of that $500 million refinancing, which is now due in 2030 and pushes our debt maturity out, was included in our Q2 financial results, as well as our cash position. So factoring that, as well as the $10 million we've received from Mitsui on their installments, we ended the quarter with a cash position of CAD 199 million, and we have available liquidity over CAD 300 million when we factor in our CAD 80 million undrawn revolving credit facility.

From a liquidity and funding perspective, we're in a very comfortable position as we continue the construction spend at Florence over the coming quarters. 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 Q&A 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 your request. 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 on the line of Craig Hutchison from TD Cowen. Please go ahead.

Craig Hutchison (Senior Equity Research Analyst)

Hi, good morning, guys. Thanks for taking my question.

Richard Shaw (COO)

Good morning, Craig.

Craig Hutchison (Senior Equity Research Analyst)

Yep, a couple of questions in Gibraltar. Just the recoveries have been trending lower for the last few quarters, and I know it's partly due to the connector pit, but can you give us some guidance in terms of, you know, what the kind of recoveries look going forward? Is it gonna be similar to what we saw in Q2, or is that impacted by the disruptions with the labor strikes?

Richard Shaw (COO)

Yeah. Hi, Craig, Richard here. Yeah, I know you're, you're right. The recoveries have been impacted by the move in the connector pit, and, similar to what we've seen in other-- when we transitioned to other mining areas, the ore at the top of the deposit is, more of a transition in nature, and, connector pit has, higher degrees of oxidation. So as we mine through that ore, we'll continue to see the recoveries improve as we go forward and get back and more in line with what we've seen, in the past when we're into the heart of the ore zones.

Craig Hutchison (Senior Equity Research Analyst)

Okay. And maybe as a follow-up, to get to your guidance, the 110 to 115, like, you know, what should we be assuming here for throughput, and grade to the back half of this year? I know you've had lost some throughput in the beginning of July, just completing the work you guys were doing there. But, you know, should we assume your back half is a full design, 85,000 tons a day and kind of 0.24% copper grades for the back half of this year?

Stuart McDonald (President and CEO)

Yeah, I think certainly had a little bit of obviously continued downtime in the first part of July. But since concentrator number one came back online, you know, we ramped up for a week or so, but it's been running very well. And yeah, we see good opportunity there to potentially push throughput over 85,000 tons a day for the next couple quarters. So yeah, pretty optimistic on the throughput side. Grades, generally, I think, you know, should stay fairly consistent with what you saw in the first half. I think the opportunity obviously comes from having continuous mill operating time, and with both mills repaired and running well, we should be, you know. Yeah, should be good upside on the throughput.

So we've given, we've given a range. We don't like to be too precise in our, in our, the different components of the guidance, but, you know, that's hopefully that's helpful.

Craig Hutchison (Senior Equity Research Analyst)

It is. Thank you. And then just on the SXEW, expecting to come back online next year, any sense in terms of what the cash costs are at this point for that kind of level of production?

Stuart McDonald (President and CEO)

I mean, something in the range of $2 a pound is what we're seeing. Obviously, you know, yeah, not dissimilar from the rest of the operation based on what we're seeing at this point.

Craig Hutchison (Senior Equity Research Analyst)

Yeah. Okay. Then one last question for you. Just on the Florence, you mentioned the potential to get the credits from the U.S. government. Yeah, are we, are we talking... What's sort of the level of credits we're talking about? Is it, like, 30% of the cost of the SXEW facility? And can you kind of give us a magnitude of what it could potentially be?

Richard Shaw (COO)

Yeah, we're looking at that closely, Craig. I think the real question is how much of it is eligible and then what rate is the tax credit? I think conservatively, like, we're probably looking at about a CAD 20 million credit based on our spend. That's based on a 6% tax credit rate. There's ability for it to go as high as 30%, so it could be up to five times that. But exactly where we land on that, we'll probably have better guidance on it in Q3 once we've submitted the application.

Craig Hutchison (Senior Equity Research Analyst)

Thanks for that, guys. I'll turn it over to somebody else.

Stuart McDonald (President and CEO)

Thanks, Craig.

Operator (participant)

Thank you. Your next question comes from the line of Ben Davis from Panmure Gordon. Please go ahead.

Ben Davis (European Mining Analyst)

Great. Thanks, guys. Thanks for the call. A couple of questions from me. A simple one, firstly, just on the wage agreement, did that cover the whole workforce? And then secondly, another one on just kind of system inventories. Obviously, a bit of a drawdown with more sales and production over the past couple of quarters. Do you expect to rebuild those, and at what pace, kind of going forward? Thanks.

Stuart McDonald (President and CEO)

Hi, Ben. It's Stuart speaking here. Generally, on the workforce, I mean, these are rough numbers, roughly 750 employees at the mine, and roughly 550 of those are in the union. So the new contract applies to, you know, that 550 portion of the total. Yeah, so we're happy to get that deal behind us. That'll be in place for the next three years. On the inventory side, yeah, on finished goods, we had a bit of a drawdown this quarter.

I suppose, the some of the mill downtime allowed us to move out a little bit of extra inventory, perhaps, but not unusually low inventory at quarter end, so we should see something in those ranges continue for the future. Yeah, so nothing, no surprises coming, I don't think, on in terms of finished goods inventory in the next few quarters.

Ben Davis (European Mining Analyst)

Okay, great. That's helpful. And actually just following up on the SX/EW, so cash costs hopefully around the $2 mark, but with the restart, was the thinking about basically securing enough ore, or was there also a price equation within that as well?

Richard Shaw (COO)

Sorry, Ben, Richard here. The question was, what's triggering the restart?

Ben Davis (European Mining Analyst)

Yeah, exactly, is this just now you've rebuilt stockpiles sufficiently that it now makes economic sense to do a restart?

Richard Shaw (COO)

Yeah.

Ben Davis (European Mining Analyst)

-of the SX/EW?

Richard Shaw (COO)

Yeah, that's correct. The connector pit releases a significant portion of oxide ore that's been, you know, now been placed on the dump and allows. It's economic now to restart the plant, 'cause we basically replenished the leach pads.

Ben Davis (European Mining Analyst)

Gotcha. Okay, great. That's, that's all for me. Thanks.

Operator (participant)

Thank you. That concludes our question and answer session. I will now hand the call back to the Taseko management for any closing remarks.

Stuart McDonald (President and CEO)

Okay, thank you very much, everyone, for joining our call, and we'll talk to you again next quarter. Enjoy the rest of the summer. Bye now.

Operator (participant)

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