Taseko Mines Limited (AMEX:TGB) Q1 2024 Earnings Call Transcript

Taseko Mines Limited (AMEX:TGB) Q1 2024 Earnings Call Transcript May 4, 2024

Taseko Mines Limited isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Taseko's First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Mr. Bergot, you may begin your conference.

Brian Bergot: 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 closed 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 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: 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 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 were 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 costs, 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. And our C1 operating cost came in at USD 2.46 per pound for this quarter. With a realized sales price of $3.89 per pound, we were able to generate $50 million of adjusted EBITDA and $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 midyear, 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, [indiscernible] 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 guidance of 115 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 the 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. And comparing this to our previous benchmark contract cost savings in the second half of 2024 are about $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 well field 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 surface infrastructure has also been a key focus. And last week, we had the first concrete pour in the plant area. Last quarter -- or sorry, in the first quarter, we spent USD 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 USD 15 million of other CapEx at Florence, which includes final deliveries of long lead equipment that was ordered in 2022 and also the cost 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 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 results and believe it was a significant derisking 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 our -- the announcement of our Gibraltar transaction.

Upsizing the senior notes from $400 million to $500 million provides additional proceeds that can replace more costly bank debt alternatives at Florence, and 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 delever our balance sheet in the future. And with that, I'll pass the call over to Bryce.

Bryce Hamming: Thank you, Stuart. Yes, it has been quite a busy start to the year between the various financing, operating and construction initiatives. So 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 Careview 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 $1.5 more per pound. And the fact that our deal was roughly 4x oversubscribed, shows that bond investors are now able to see the credit rerating 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 deleveraging in the years ahead. The recent Gibraltar acquisition with Dowa and Furukawa is a great deal for us in several ways. First, we agreed to pay them back their invested capital into Gibraltar of CAD117 million, but 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 the 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 obtained 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 have 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. And with the acquisition of Sojitz in the prior year, Taseko was the only natural buyer. So Dowa and Furukawa agreed to work with us, so we could achieve our mutual objectives. But 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 move from 87.5% to 100% ownership, we are required under IFRS to move from joint control, proportionate consolidation accounting to full consolidation. And 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 25 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. So $13 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 reclassified 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 $147 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 5 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 gains at Gibraltar were $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 $50 million, including that $13 million of margin from inventory on hand at March 25 and sold before the end of the quarter. And our cash flow from operations was $60 million, significantly higher than the first quarter of 2023. This was driven by increased production and higher sales, including that 2 million pounds of inventory that we drew down over our production as well as the increased ownership of Gibraltar. Adjusted net income was $8 million or $0.03 per share, which was also higher than we reported last year.

GAAP earnings for the quarter was $19 million or $0.07 per share, and it included that $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 $22 million, including $14 million for capitalized strip and $6 million in general sustaining as well as $2.5 million for capital projects, mainly that crusher relocation project, which is progressing this quarter. That will wrap up, and we have -- we expect about another $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 U.S. 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 USD 50 million received from Taurus and the first USD 10 million from Mitsui. In April, we received the additional proceeds of CAD110 million from the bond refinancing, and we've also now paid down $20 million that was outstanding on the revolving credit facility. And 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, and 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.

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