Q1 2019 Earnings Call: Managementâ€™s DiscussionMay 09, 2019
Russell Edward Hallbauer, President, Chief Executive Officer & Director
Good morning, everyone. Thank you for joining us today. The first quarter of 2019 has begun like we began 2018 with cyclically lower head grades as we began a new pushback at Gibraltar.
Copper recovery of 85% was very good considering the head grade of 0.22%.
We estimate we lost roughly 4 million pounds of copper metal over the quarter because of difficult operating conditions. We had pretty abysmal shovel availabilities during the quarter for a number of reasons. But in general, those were tied to cold weather issues, which remained in the minus 30 Celsius range for 6 weeks.
If we add the equipment issues along with the hard ore at the top of the pushback, the combination of those caused our concentrator throughput drop dramatically to 76,000 tons per day, the lowest in many years on a quarterly basis.
However, on an upbeat note, we saw performance out of our moly plant increase 67% year-over-year with over 720,000 pounds of production for the quarter, up from 437,000 in the same quarter last year. If the throughput tons had been produced, we would have had a very good quarter. However, even with lower production, we still managed to generate an operating profit of just under $16 million and adjusted EBITDA of $10 million off of a 0.22% head grade. So overall, our efficiencies were good.
I would like to think if copper and moly prices stay in this range for the year, we will have similar financial results by year-end as we had in 2018. If, however, metal prices increase, our leverage to the price is great, and we could do much better financially.
As per previous commentary, Gibraltar continues to generate cash, allowing us to invest in growing the company and specifically, Q1 has seen a lot of activity with the company. In February, we closed our acquisition of Yellowhead Mining. This purchase will add over 3.4 billion pounds of copper to our reserve base, which has now been expanded to roughly 9 billion pounds. We’ve begun the process of applying to the provincial and federal governments, to start the environmental assessment process for Yellowhead and have submitted a project description to them. We are presently working on a new development plan that, at first brush will improve the project NPV while lowering overall cost. We should be able to provide expanded details in the months ahead.
One of the many initiatives we take before we acquire an asset, especially one as advanced as Yellowhead, is to methodically digest the feasibility study or any studies available. If anyone remembers, we invested in Yellowhead many years ago, and the dollars we put into it went into drilling and reserve definition. With that information over the course of a number of years, we ascertained what the Yellowhead asset could actually become. We knew we could raise the cutoff grade, slightly increasing the strip ratio and cash flow, increasing the NPV dramatically because we had ascertained a large amount of ore that runs approximately 0.32% copper equivalent was available to us. Enough of 0.32% to run a 90,000 tonne per day concentrator for the first 5 years of operation at a high head grade. Many folks confuse head grade with profitability. What needs to be looked at is gross margin. One could have a high head grade resulting in rock value of, say, $30, but costs of $25 ton and there wouldnâ€™t be enough margin to run your business properly.
The reason we bought Yellowhead is because it has high margins even with perceived low head grade. The Yellowhead ore is at long-term metal prices worth approximately C$22 per tonne. The estimated operating costs are roughly $8 per ton resulting is a gross margin of $14 per tonne. On a 90,000 tonne per day concentrator, that’s approximately $1.3 million per day in our operating margin or over $400 million annually. No one should be distracted by head grade if they understand the operating side of the equation.
For us at Taseko, investing in mining progress means looking at the whole economic picture, not just a portion of it. We have a plus $1 billion NPV asset, which we know will grow in value. We acquired it for less than $15 million. We believe it can produce up to 200 million pounds of copper per year during its first 5 years of production at very low and competitive C1 cost. And as we continue our engineering work, we know that the project will get increasingly better. As I said, combine this with the $8.22 estimated cost per tonne milled cost, and you have a world-class asset that actually no one knows about. If someone wants to look at comparable valuations in ore body, I think one likes to look a little further on the valuation that the recent Sumitomo Tech deal in Quebrada Blanca was done. Sumitomo’s investing a little over US$1.5 billion to get roughly 170 million pounds of annual copper production. We have an asset that will cost roughly C$1 billion to build out and produce more pounds of copper than the Sumitomo interest. At present, there’s not a company our size that has the reserves we have, reserves we have purchased at bargain basement prices that have decades of wealth generate ahead of us.
Having long-life reserves gives us another opportunity, which gives us great financial flexibility as we’re able to sell off portions of these, after we have unlocked value, to other companies. And I go back to the fact that we sold an interest in Gibraltar to a Japanese trading company many years ago that allowed us to expand and increase production at Gibraltar, and that will continue on in these other assets. And so we’ve had many interested parties that are looking for investments, and this allowed us to avoid shareholder dilution while maintaining the strong balance sheet.
So we are in a very enviable position. If you don’t have reserves, you don’t have assets. The point of example, we are excited about our flagship Florence copper project. As you’ve seen in the press releases, we are now operating our wellfield and SX/EW plant and producing LME-grade copper metal. And we’re very excited about that. We expect to be in a position shortly to modify our present permits for the operating permits for the commercial facility, and the path forward appears to be a clear runway.
Stuart will speak about that path forward with respect to Florence financing and other matters, and I’d like to now turn the call over to him. Stuart?
Stuart McDonald, Chief Financial Officer
Okay. Thanks, Russ, and good morning, everyone. I’m happy to provide some further detail on the Q1 financials and also, a quick update on the Florence financing progress. As noted in our earnings release yesterday, we see copper production improving in the remainder of this year, and we’ve not changed annual guidance. And although Q1 was a lower production quarter, we still reported earnings from mine operations before depreciation of $16 million and adjusted EBITDA of $10 million. Revenues for the period were $70 million based on our 75% share of Gibraltar sales volumes, which were 23 million pounds of copper and 770,000 pounds of molybdenum. Copper production was slightly higher at 25 million pounds, so we had a small inventory buildup in the quarter.
Our realized copper price was $2.91 per pound and included positive provisional pricing adjustments for about $0.04 per pound. Moly production was a bright spot again this quarter, and the price remained in the range of US$12 per pound. And with that, we generated almost $9 million of moly revenues and a byproduct credit of $0.32 per pound of copper. Total spending on site operating costs and capital strip was 7% lower than the previous quarter, but our operating costs per pound were slightly higher than Q4 last year because of changes in the amounts allocated to capital strip.
The first quarter P&L included a $6.7 million unrealized foreign exchange gain on our U.S. dollar debt and a $0.3 million unrealized loss on copper production. GAAP net loss for the period was $7.9 million and after adjustments for the foreign exchange gain and derivative loss, we’re reporting an adjusted net loss of $14.4 million or $0.06 per share.
Turning to cash flows now. We had just over $7 million of operating cash flows for the quarter, which was used to fund CapEx and debt service. Capital expenditures included $8 million for capitalized stripping, $3.4 million for other items at Gibraltar and $2.1 million of Florence for the PTF operations. The acquisition of Yellowhead closed in February and other than legal and other fees associated with the acquisition, we didn’t have any other significant spending on the project.
We ended Q1 with a cash balance of $34.5 million. And subsequent to quarter-end, we completed an equipment loan for additional cash proceeds of $12.5 million. The new loan is secured by existing mine equipment at Gibraltar and repayable over 5 years at an interest rate of just over 5%. This is relatively low-cost financing for us, and we’re currently looking at other proposals for equipment loans. And it’s notable that we still have $36 million in restricted cash and deposits, which are being held as security for reclamation bonding at Gibraltar. We’re actively pursuing other forms of security that we can put in place, which would release that cash to Taseko and further boost our working capital. We’d like to build our cash balance as we look ahead to a capital program at Florence next year.
And in terms of the Florence project financing, we are seeing a high level of interest from finance providers, including lenders, streaming and royalty companies and potential joint venture partners. Initial feedback has been positive on all fronts, and with the PTF wellfield now operating and producing copper, we’re in a good position for a more advanced discussions and due diligence in the coming months. We’re not in a rush. We have some time, and we’re targeting to have committed financing in place by late this year or early next, and we’ll be able to provide further updates on financing progress next quarter.
And with that, I’ll turn it back to Russ.