Taseko Mines Limited (AMEX:TGB) Q4 2022 Earnings Call Transcript

Taseko Mines Limited (AMEX:TGB) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good morning, and welcome everyone to Taseko’s 2022 Year-End Earnings Conference Call. I would like to turn the conference over to Mr. Bergot. You may begin your conference.

Brian Bergot: Thank you, Sergio. Welcome, everyone, and thank you for joining Taseko’s Fourth Quarter and Full Year 2022 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 fourth 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 we will use various non-GAAP measures during the call. You can find explanations and reconciliations regarding these measures in the related news release. Following opening remarks, we will open the phone lines to analysts and investors for questions. I will now turn the call over to Stuart.

Stuart McDonald: Okay. Thank you, Brian, and good morning, everyone. Thanks for joining our fourth quarter earnings call. I’ll start with some high-level comments about the quarter and a project update, and then I’ll turn it over to Bryce for some specifics on our recent financials. In the fourth quarter, we continued to benefit from a strong copper price environment, the price averaging about $3.65 per pound, modestly higher than the average price for Q3. But the trend was upwards, ending the year at $3.80 per pound and today sitting right around $4. Molybdenum prices have also risen dramatically over the last 6 months and today are sitting at around $37 a pound. That’s double the price of a year ago, and moly continues to represent an important byproduct credit at Gibraltar, about $0.40 a pound in Q4.

We generated adjusted EBITDA of $35 million in the fourth quarter and for the full year $110 million. The fourth quarter was a slight improvement over the third quarter, and the majority of our EBITDA for the year was generated in the second half as head grade and production in the first half of the year were unusually low. Operating cash flows for the year were $82 million, and Bryce will provide some further details on the cash flows and earnings in a minute. In terms of Gibraltar operations, we had a strong start to the quarter, but were hit with mill availability issues in December. The main issue resulted from a site-wide power outage that we press released in January. This was caused by extreme weather conditions. And although the actual power outage only lasted 24 hours, temperatures at minus 35 Celsius caused frozen lines in the mill and nearly a week of downtime.

The impact of that and mining dilution resulted in fourth quarter copper production of 27 million pounds, which was lower than we expected. For the year, Gibraltar’s production was 97 million pounds on a 100% basis. In terms of production, it was definitely a tough year from start to finish. But I do think in terms of the mine plan, we’re in a much better position today than we were last year at this time. Mining operations have advanced deeper into the Gibraltar pit, and we’re now well situated in the ore body, which is the sole source of ore for 2023. We’ve made recent progress on addressing the higher-than-normal mining dilution. A number of operating initiatives have been identified and we’re in the process of implementing and expect improvements to increase mill head grades going forward.

As we’ve spoken about previously, as we mine deeper into the Gibraltar pit, this issue naturally improves with the larger and more continuous ore zones. So we expect higher grades in 2023. We’ve already seen the benefits of the softer ore in Gibraltar pit. Prior to December, we ran for 5 months at about 89,000 tons per day, and that level should be achievable going forward. Also in Q4, we saw improved copper recoveries over 83%, which was a bright spot for the quarter and continues to be a focus for further improvement going forward. So for the year ahead, we’re expecting to benefit from higher grades and milling opportunities. One offset will be a 2-week shutdown of mill #1 in the third quarter when the in-pit crushers relocated. That needs to happen to allow stripping activity to advance in the connector pit.

But taking that into account, we expect 2023 copper production to improve to 115 million pounds, plus or minus 5%. On the cost side, our C1 costs in 2022 were impacted by a number of factors, including low copper production, lower capital strip allocation and higher diesel costs and TC/RCs. Bryce will provide more details on that in a minute. But as production improves in 2023, we should naturally see a significant reduction in unit operating cost per pound. In addition to the expected production improvements at the mine level this year, we’re also going to get immediate production growth from our acquisition of a further 12.5% interest in the mine. This week, we signed an agreement with Sojitz to acquire their 50% interest in Cariboo Copper, which is a holding company that owns 25% of the joint venture interest in Gibraltar.

This is a great deal for Taseko. It’s immediately accretive, and the deferred payment structure allows us to protect our cash balance. Consideration is a minimum amount of CAD 60 million payable over 5 years. We’re bullish on copper prices over that period and expect there will be additional contingent amounts paid, but those should be covered by cash flows from the acquired 12.5% interest, and the total cost is capped at CAD 117 million. Shifting over to Florence now, to highlight another important transaction that we announced in December, we entered into a strategic partnership with Mitsui for that project. And under the terms of the deal, they will provide an initial USD 50 million investment to fund construction of the commercial facility.

They also have the option to invest an additional USD 50 million for a total of USD 100 million, which would convert into a 10% JV interest in Florence. Mitsui is a global leader in technology innovation with a focus on sustainability and the energy transition, and their existing U.S. cathode trading business is another reason why the partnership is a great fit for this project. The deal implies a future valuation for Florence of USD 1 billion, which shows the potential opportunity for shareholders as we continue to advance the project towards production. Most of the major components for the SX/EW plant have been acquired and are now on site. Detailed engineering is complete and discussions with construction and drilling contractors are well advanced.

We’re planning to file an updated technical report and capital cost estimate later in March, and we’ll be ready to go when the final Underground Injection Control permit is issued. Based on our discussions with the EPA, we know they are actively moving the process forward. We’re not aware of any new issues arising and expect the thorough process to conclude in the next few months. On the financing front, in addition to the Mitsui news, we also announced a $25 million equipment lease commitment from Bank of America and an extension of our corporate revolver that now includes an accordion for potential upsize to USD 80 million. Taseko currently has CAD 190 million of available liquidity, and we’re in a strong position to fund the development of Florence.

We remain optimistic on copper prices going forward, but we’ll continue to protect the downside and our price protection strategy is a key piece of the Florence funding plan. We have a floor price of $3.75 in place for most of Gibraltar production through the end of this year. Before I hand the call over to Bryce, I want to make a few quick comments about our longer-term development pipeline. We spend most of our time on these calls talking about Gibraltar and Florence, but I really think what makes our company unique is that we also have longer-dated growth options in our portfolio, almost 15 billion pounds of copper in reserves. That’s more than any of our peers in the mid-cap copper space and all of it located in North America. At Yellowhead, we’re advancing into an EA process this year and focused on community engagement.

At New Prosperity, the facilitated dialogue has made progress over the last 12 months, but isn’t completed. The standstill agreement with the Tsilhqot’in National Government has been extended again, and we see a future opportunity to resolve that conflict with a positive outcome. And at our Aley Niobium Project, we’ve initiated a study to look at niobium oxide production, which could supply the fast-growing market for niobium-based battery materials. So there’s a lot happening in the background on those projects. It takes time to develop them, but each of them has the potential to create significant value for shareholders in the future. And with that, I’ll turn the call over to Bryce.

Bryce Hamming: Thank you, Stuart. Good morning, everyone. I will now provide some additional color on our fourth quarter and annual financial results. Copper sales for the fourth quarter were 26 million pounds on a 100% basis at an average realized price of $3.66 per pound. For the year, Gibraltar sold 101 million pounds at an average realized price of $3.96 per pound. Our proportionate share of sales generated revenue of $392 million for the year. In fact, it is the second highest revenue we have had as a company after a record year last year. It’s actually very comparable to 2021 revenues when you account for the fact that this reported revenue for 2022 didn’t include proceeds from our copper puts, which were $23 million in 2022.

2022 was a tale of 2 years in 1, with the first half benefiting from record copper prices that peaked at over $5 in March, followed by a sharp drop in mid-June with prices holding in the mid-$3 range in the second half of 2022. This volatility we saw underpins our long-term strategy of purchasing copper price protection. We don’t try to time it perfectly, but instead be consistent in our put purchases and aim to execute trades when the copper price is recovering, like we did in June of last year and in February of this year. This consistency protects if and when copper pulls back, even as it is today. We have 72 million pounds of copper protected for 2023 at a put price of $3.75 per pound, and we will look to add to this as we prepare for further capital programs at Florence.

The story in ’22 was all about cost and the impact of inflation on our business. We saw total site spending which includes capitalized strip for Taseko’s 75% share increased $40 million or 15% in ’22 from $262 million to $301 million. Diesel costs alone accounted for $23 million of that increase as we saw prices rise more than $0.70 per liter, higher than historical levels. Pre-COVID, they were typically around $1 per liter. And we consume around 40 million liters per year at Gibraltar. We also saw other input costs increase like steel and our grinding media. Today, site-landed diesel costs are down to about $1.35 per liter. So we expect if that continues, that would save Taseko $12 million alone in 2023. With our share of total site spending at $302 million per year, that results in a quarterly average of $75 million a quarter, which is the run rate we expect into 2023 for quarterly total site spend.

Total site spending in the fourth quarter was $80 million and was higher than the quarterly average by $5 million due to elevated diesel costs, the timing of repairs on our equipment and some wage-related costs. To protect against diesel price risks, we did purchase diesel call options for 2023 for the full year, providing a ceiling for diesel costs at Gibraltar, effectively at around $1.75 per liter. As always, just as important as having downside copper price protection in place, locking in or capping costs where we can provide certainty for our cost structure. With the lower production in 2022, our C1 cost per pound also increased from $1.90 to $2.98 per pound. Our MD&A includes a bridge graph, which provides a good breakdown of how this dollar per pound increase is explained.

In addition to the 15 million fewer pounds produced at Gibraltar, we also capitalized noticeably less mining costs in 2022 as mining was focused in the Gibraltar pit. This was 28 million less than 2021. For 2023, we expect significantly more of our site costs to be allocated to capitalized strip as stripping begins in the new connector zone. C1 costs in the fourth quarter were in line with the third quarter at $2.75 per pound. Unit costs were lower by 17% in the second half of the year compared to the first half due to the higher production. We expect C1 cost per pound to decrease further into 2023 with further improvements in production as more stripping costs are capitalized and with some inflation relief seen in diesel and other inputs. Also of note is that the recent move in moly price, which is currently $37 per pound has been quite significant.

And in the fourth quarter, generated a positive provisional price adjustment of $4 million. Earnings from mine operations before depreciation in the fourth quarter was $38 million, $19 million higher than the third quarter. For the year, earnings from mine operations before depreciation for Taseko share was $106 million or about $1.05 per pound. In 2022, we had GAAP net loss of $26 million or $0.09 per share. This included an unrealized $30 million foreign exchange loss associated with our U.S. dollar-denominated notes. On an adjusted basis, we had net earnings of $2 million for the year or per share. For the fourth quarter, we reported adjusted net income of $7 million or $0.025 per share. Cash flow from operating activities in the year were $81 million and nominal in the fourth quarter.

Fourth quarter cash flow was impacted by a number of working capital adjustments totaling $32 million. They related to increased inventories for finished goods, but most notably our stockpiles as well as a pay down of our accounts payable in the quarter. In the fourth quarter, a total of $42 million was spent on capital programs with $13 million at Gibraltar and $29 million for development costs at Florence. For the full year, we invested $181 million into CapEx, including $100 million of that, that was spent at Florence, most of which was related to the purchase of equipment for the commercial facility. This spend on Florence caused our overall cash balance to decrease since December of last year. During the fourth quarter, we refinanced some of our mining equipment at Gibraltar as we have been paying this down over the last 4 years.

Net proceeds from this financing was $25 million to Taseko’s account. Cash on hand at December 31 was $121 million. And including our undrawn USD 50 million credit facility, the company has about $190 million of available liquidity. In January, we extended the maturity date of our revolving credit facility by an additional year to July of 2026. In addition to the extension of the facility, we added an accordion feature, which will allow us the amount of the facility to increase by an additional $30 million for a total of $80 million as allowed under our bond indenture. We will be reaching out to banks in the coming months for credit to upsize the facility to this larger size. We are beginning 2023 in a good place financially, especially with the growth that has come from the acquisition of 17% more at Gibraltar production.

As we get closer to starting construction at Florence, we may add additional sources of funding at Florence level, like a small debt facility or royalty to supplement the investment from Mitsui and the facility commitment from the Bank of America. We continue to keep options open. With that, we are ready to take questions, operator.

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Q&A Session

Operator: Your first question comes from Craig Hutchison from TD Securities.

Craig Hutchison: Just a question on the Sojitz transaction. Is that retroactive to the start of the year?

Stuart McDonald: Yes, that will be — like we signed the agreement, but we still have to close. It will be effective as of the close. That’s how I view it.

Craig Hutchison: Do you expect it to close this quarter or —

Stuart McDonald: Yes, we do.

Craig Hutchison: Okay. And then maybe a second question on that. Will that trigger any change to the accounting that you guys have? Right now, I think you use proportional accounting. Would that make any change given your increased interest?

Bryce Hamming : Yes, Craig, this is Bryce. Yes, the accounting, we’re still reviewing that. I think our expectation at this stage is that it’s going to be proportionate consolidation as we’re only requiring 50% of Cariboo and therefore, not control. So we expect to be proportionately consolidating 87.5% going forward.

Craig Hutchison: Okay. Perfect. And then just for Gibraltar, in terms of — you mentioned there will be a higher degree of capitalized stripping this year. So C1 costs will go down. But just in terms of overall costs, can you give us a sense of maybe just what you’re thinking in terms of total capital, including stripping, sustaining and other capital projects at Gibraltar?

Bryce Hamming : Yes. So it’s Bryce again. So I think for this upcoming year, when we look at total capital, I think what’s first and foremost is the crusher work that we’re doing. That was a program we started last year. In our CapEx, you see there that we incurred about just shy of $25 million on a 100% basis. And we have about that amount to go forward for the crusher move and some ancillary projects there. So that’s, again, on a 100% basis Canadian for this upcoming year. That’s a project we’re committed to. I think sustaining capital will be a similar level as last year is what we saw in 2022. And then I think as we said, the capitalized strip will be a bit higher. Last year was a bit lower. So I think we’re going to be another, call it, $0.15 per pound or $0.20 a pound there in capitalized strip.

Operator: Your next question comes from Alex Terentiew from Stifel.

Alex Terentiew: I just had a follow-up question similar to Craig’s there on the cost. At the beginning of the call you mentioned a bunch of on-site operating costs, different allocation between operating and capitalized strip. Can you just remind me kind of what you said there about those numbers? I just wanted to — just given that Florence is hopefully around the corner and the additional stake in Gibraltar, I just wanted to take a look at my numbers to make sure I kind of got good handle on cash flow expectations for this year?

Stuart McDonald: Yes, Alex, I’ll take that one. It’s Stuart speaking. Yes, generally, when we look at our site spending, we think about it in terms of the total of operating — site operating cost and capitalized strip. And that number is going to continue at basically around the same level that you’ve seen in recent months that you saw in Q4 in our MD&A. Now as we noted that there is an allocation issue there between what’s capitalized and what’s operating, we think a higher proportion of that will be capitalized this year. But just thinking about cash flow, that’s the way you should be thinking about it at the Gibraltar level.