Taseko Mines Limited (TGB) Earnings Call Transcript & Summary

Thank you, everyone, for joining us post lunch. I really appreciate it. In this current panel, we have Taseko Mines. So from Taseko, we have Bryce, CFO, joining us. Thank you, Bryce, for joining us. If anyone out there has a question, please raise your hand. We'll get a mic to you, and you can ask your question.

Maybe to start off, Bryce, again, thank you very much for coming here. Maybe just provide a general overview, recent developments.

Yes, for sure. Thanks for having me as well. Enjoying the conference. Yes. So I think recent developments, it's really for Taseko Mines is really about Florence Copper this year. That's our newest asset that we've brought on stream. We finished the construction just recently, and we've started operations. So that's been our major achievement this year as far as recent developments. We've had actually all things firing on all fronts, including some developments on our more junior properties, including New Prosperity, we did a deal on in June. And then we also announced the permitting of Yellowhead starting, which is also very exciting for us. We also updated the economic study on that. So it's clear to the market what that asset is going to be for us. As people ask us what's next after Florence Copper, we have a pipeline of assets that we're advancing as well, all in copper, all in North America.

Maybe taking a step back, looking at kind of your ongoing mine at Gibraltar, I know you've typically provided like annual guidance, and it's kind of kind of taken a little bit of a step down to where it was initially. I guess what caused the downward revision? And how sustainable do you think that is? And what's the turnaround look like?

Yes, definitely in a turnaround position now. We had a tough start to the year for sure. We were always planning to process some stockpiled material and our mine fell behind plan with some of the weather challenges and pioneering that we had to do to open up this new phase of mining. So we had what we call like a pushback where we're opening up more mine feed. And then we got through that in the first half of the year. We stepped up the mining rates, deployed more trucks. We hired more people. Second half of this year, we're definitely at more normal run rates, had a good October that we announced, 11 million pounds, November, just shy of 10 million pounds. So we're definitely on track to how we guided there at the end of Q3. And then again, next year is a much more normal year. We won't have as much processing of stockpiled material, which impacted our production in the first half of the year.

What does that normal production look like over there?

Yes. So generally, like Gibraltar can do between 120 million to 130 million pounds. We expect to be back at those kind of run rates next year. The other thing that's helping is we've fired up our SX/EW plant. We have oxide material at the top of this pit that we've added to the leach dumps, and we've got our SX/EW firing again. We'll get a second dump going next year, and that will add production as well for cathode.

Great. That's good to hear. To your point, Florence, I think, has been extremely topical and has been kind of the focus of a lot of people, a new like 85 million pound run rate annual production project kind of nearing the end of that construction. Could you just maybe describe that project? What makes it unique? And just kind of update us on construction time line spend.

Yes. I think probably the one thing that's unique about it is it's a U.S. copper mine. We're very proud to be bringing it on at this time. Copper is obviously very critical to the U.S., and there's been a lot of focus on copper given the tariffs and the need to bring back U.S. domestic capacity. So we happen to be at this stage of bringing on the next copper mine. So I think that's what makes it unique to start. Obviously, there's a bit of a premium for U.S.-sourced copper with the COMEX price higher than the LME price, which we hope to capture. The other thing that's unique about it is the mining method. It's not your traditional open pit hard rock mine. It's an in situ recovery operation. That means that we -- instead of drilling and blasting and hauling rock, we actually get access to the ore body with wells. We have a well field there, and we pass the leach solution through the wells and capture the copper that way. There's 2 advantages to that. One is it's a lower cost. We didn't have as large a mine to build to begin with, but a lower operating cost going forward. It's also much less impact on the environment. It's lower water intensity, lower energy use and lower carbon. So all of those factors are -- make it unique. And so at these copper prices, it can contribute a lot of cash flow as we get it up to 85 million pounds a day. We've just finished construction of it. We finished it in line with our time and budget plan. We're within 2% of budget. So we have about $5 million more to spend before the end of the year. But yes, we started operation. That means we started the leaching, and we're going to see first cathode likely in January based on the current plan. And then we ramp up next year. Next year, we should be doing in the range of 30 million to 40 million pounds with our existing wells, but we're starting the drilling now to bring more wells. Right now, we have about 110 wells, and then we'll be building another 120. So doubling the well field, and we'll continue to do well field development. That's kind of our mining method. So analogous to stripping. It's really getting access to the ore. So we're going to advance that, and that's with the objective of getting it up to full capacity by 2027, that 85 million pounds that you were mentioning.

I guess the in situ mining, it's a little different of a mining method. It works really well in uranium. I guess what provides you confidence in this kind of sustainably being a successful mining method?

Yes, absolutely. In order to get the permit to do this, we had to do a test facility. So we actually constructed a well field there. We had around 20 wells that we operated for several years. And it was to demonstrate that it could work. We could operate it within our permitting guidelines. But also what we were able to do was take it all the way through the production process to finish cathode. And so we used all the same design parameters that we would have in our commercial facility. We tested it in the actual in-situ conditions that we have there. And that's a really important derisking step when it comes to solution mining is to actually test it in real-world conditions and then to, again, take it all the way through to the end product. So you know the quality of the product can meet the standards as well. And that isn't what -- I don't think it's as common to do that in in-situ. I think a lot of people will skip that step and then figure it out kind of as they go if they build a commercial size facility. Sometimes it works, sometimes it doesn't or sometimes it's -- again, they have to adjust on the fly. Whereas in our case, what we're really doing is scaling up, we're actually expanding the well field that we built for the test facility, and then we're just starting again from there. So we've built the wells that we built during construction in that area, and we're continuing to branch out from there. So it's really an extension of what we've already done there. And then again, we learned a lot by operating it, how it reacts, different well field strategies, reverse flow, different areas that we can target within the wells. It's actually quite an exciting little operation, a lot more flexible in some ways than a traditional open pit, which requires a lot of stripping of the mine to get access to ore. Here, we have a lot of levers that we can pull.

So I think currently, you said you have 110 wells, and you're looking to more than double that looking into next year. I guess, how do you think about looking into ramping into next year? Any key milestones, KPIs we should be tracking? And kind of how do you expect that production to cadence as well?

Yes, for sure. Like it starts with anything, it's a leach curve. We've got the 110 wells. And that gets us up to a certain run rate, but it's really this next phase of the 120 that we're building. That should -- I think by the end of next year, we're really trying to get it up to, I'll call it, our run rate. And so it's a pretty steady month-over-month increase. We start with about 1 million pounds in January. And by the end of the year, we're trying to target upwards of 6 million to 7 million pounds a month. So it's a pretty steady climb over that period. And then other operational metrics, we are investing in the wellfield. So there's quite a lot of well development expense related to that. And then it's really about making operating profit. This becomes quite profitable. We're seeing operating profit already in the second quarter next year and free cash flow at these copper prices, not far behind that. And then it's about scaling it up so it can truly make the $3-plus copper pound margin that we expect it can do in full operations. So we're definitely looking for that, getting it up to its run rate capacity by the end of the year and then, obviously, operating cash flow and free cash flow during the year next year. Working capital needs, we probably have -- I mentioned the $5 million more to go on the CapEx side and probably another $10 million to $15 million of working capital. Again, some of that varies here depending on what the copper price will do when January comes around. But so far, at these rates, should be pretty minimal on working capital.

And then I think you may have made a comment about roughly free cash flow breakeven-ish in Florence next year. Can you bridge us to that? And then how do we think about kind of ongoing sustainable free cash flow thereafter?

Yes. Look, I think for sure, at 85 million pounds, I think our study indicated that we could produce copper at about $1.10 a pound. That assumed a sulfur -- sulfuric acid price of about $130 per tonne. We're currently seeing landed cost at our site about double that right now. So that's adding about $0.40 a pound to our overall cost structure. That takes our C1 up to around $1.50. And then as I mentioned, we -- overall, we're going to have to build about 80 to 90 wells a year, and those wells are anywhere from $400,000 to $500,000 each to build. So you've got probably another $0.40 or $0.50 there. So all in, at these sulfuric acid prices, we could do it for about $2 a pound. And yes, it's still a very good margin when you're looking at a copper price north of $5. So yes, the potential to generate a lot of free cash flow coming out of next year.

You kind of mentioned one variable that seems to be changed in the sulfuric acid. How have you gone about securing enough supply? And how do you think about pricing today and going forward?

Yes, it's definitely elevated, as I mentioned. So that's -- we're susceptible to that. Right now, we have a 1-year contract. We're focused mainly on the ramp-up and getting our operations up and running. So we're a bit of a price taker. I think we have one supplier at the moment, so it's a 1-year contract. We're not at full usage rates yet, probably about 60% looking ahead to next year. But yes, to look at the overall needs, we'll probably have about 200,000 tonnes of acid that we'll use a year. We're going to be looking to, hopefully, sourcing from multiple suppliers. We could also look at a longer-term contract arrangement that could involve some investment either in a nearby sulfur burner or transload facilities in the area or even close to the site. Obviously, logistics are a big part of the sulfuric acid price. So we can look at different strategies with that. But I think next year, the focus is really on getting to steady-state operation and ramp up, getting that behind us, and then we can look at sort of a longer-term sulfuric acid. But we will -- I think the main thing is becoming a large consumer of it and then being able to contract and create competitive opportunities and potentially even looking at working with traders to try to secure some price protection from it. So you can participate in the spot price, but also protect against harder markets.

In 2022, I know Taseko agreed with Mitsui for a copper stream plus a call option on the asset -- on Florence. How are you thinking right now about that Mitsui stream and that call option? And is there any way for you to repurchase it?

Yes. I'd say that from Mitsui's perspective, we think that it's very likely they're going to exercise their call option. They're going to convert that stream plus another $50 million of investment into a 10% ownership interest in Florence. Their offtake right is really an initial right for them to get long-term exposure or opportunity with the offtake. They do need to convert to be our partner. If they don't convert, then we have the opportunity to buy it back at a fixed price, and we would do that if they don't convert. But I think all signs, especially in this market, I think Mitsui has identified that this is a very strategic asset with this backdrop in the U.S., but also globally. So they're very keen to be involved with it long term. So our expectation is that they will convert and become our partner. And once they do, they will market the product with us to the customers, which we expect to be in the U.S.

Is that stream kind of considered within your total?

Yes. The stream would be -- it's within our cost structure. When I -- when we talk about $1.10 per pound, it's not included in there. But again, we only expect the stream to be in place for the initial years of production. They have 3 years from mid-October. So it would expire in 2028. They would have the option expiry come due.

But to your point, given what the cost structure would look like, where copper prices are, production levels, $50 million for 10% stake is the...

Yes. Florence is -- at the time, it was quite different even when we did the deal, I'd say, 4 years ago, copper price was different. The U.S. focus on copper was different. But now given where it is, the value that Florence has, the copper price and the strategic nature of it, it's very attractive. So -- and we think they'll be a good partner for us. And again, it's a partnering model that we can look to deploy when we build other mines like Yellowhead.

I know recently, you kind of came to the equity market and you issued 42 million shares at USD 4. And I think you used those proceeds to repay your revolver for GCP. What is pro forma liquidity? And why did you decide to raise equity now?

Yes. We had a good -- obviously, we've had a great year in the equity market. Our stocks performed, I'd say, above copper and above our peers. So we've had a good year. It was an attractive price to do some equity. I think we wanted to not just use leverage to get through ramp-up and commissioning. So we wanted to take some of that pressure off. And again, we had a very favorable market and a lot of support from the equity market. So we thought it prudent just to take a bit of pressure off and pay down some of the revolving credit facility and just put ourselves in a good liquidity position to -- with the ramp-up ahead. So I think it positions us well to do exactly that, and that was the thinking behind it.

Looking today, do you need more liquidity or are you comfortable with the liquidity level?

I think -- no, I think we have good liquidity. Pro forma-wise, we ended Q3 at $90 million. I think our net proceeds from here would take us up to CAD 200 million pro forma after paydown of the RCF, plus we have USD 110 million of capacity in the RCF. So we have a fair bit of liquidity here going north of $300 million. So we're in a very strong position. So some uses I mentioned about the working capital needs in the finish of the construction, but really relatively modest. And again, we're getting pretty good cash flow out of Gibraltar at these copper prices.

If we look at your capital structure right now today, you have the $500 million, 8.25% secured bonds. Right now, your revolver undrawn. You have various equipment loans, leases, et cetera. I guess, how do you see your capital structure evolving, especially after Florence has ramped?

Yes. We definitely, I'd say, deleveraging. I think the easiest or the lowest hanging fruit there amongst that, obviously paid down the revolver already and then the next step would be the equipment. Some of that will be sort of paid down over the course of the next year or 2, and we can accelerate that, pay that down for pretty modest prepayment penalties. So that would be the first thing that we do. The bonds, there's opportunities potentially to take some of the bonds down. And again, we're probably talking a bit beyond 2026, but perhaps we're taking $50 million to $100 million of the bonds down. I think we want to -- obviously, the high-yield market has been good to us. It's rewarded us for the construction of Florence already, and they're obviously looking to Florence to contribute cash flow and delever us. But -- so it's a market we're going to stay in. I think after we pay down the equipment debt and some of the bonds, if we choose to, we could then look to potentially some shareholder type returns, whether it's a shareholder buyback program, an NCIB or something like a dividend, even a dividend policy that's maybe perhaps tied to copper price.

Do your bonds have that 10% at 103?

Yes. Our bonds still have a 10% at 103 feature. And then they -- or the non-call period ends next November.

So given where your bonds trade kind of...

Yes. Look, I think the first things first, I think we're focused on Florence. And I think we still have some more expensive debt with our equipment loan that we probably take down first, everything equal. But yes, there's opportunities. And a lot of it is tied to the copper price. The copper price is obviously giving us more degrees of freedom at the moment. So if that continues, yes, I think some of these opportunities could be upon us here next year.

I know it's early, bonds are at [ 106, ] trading around 6%, give or take. How are you thinking about refinancing that bond? Do you like an all-secured cap structure? Would you want some unsecured in there? How do you think about that?

Yes. I think we're definitely going to be moving towards an unsecured cap structure over time. Again, the refinancing of the bonds will be a bit situation dependent. I think part of what we're focusing on in the coming years is Yellowhead. We're going to be investing more in Yellowhead to get it ready for final investment decision. We have some engineering to do there, field studies, geotechnical work. And so that will be a growing use of cash flow as well. So we want to position ourselves to build Yellowhead and retain control of it, of course. And that's going to really kind of drive our bond strategy as to when and how to take that out and whether we're going to be ultimately using the bond market to finance Yellowhead, which would be probably one of our top choices if we -- as we have 2 assets to lever them to build our third mine. So that would be in the years ahead as we look to a 2030 maturity, that's something we could be looking to do, probably not in 2027, but more like in 2028, we'd be looking at adjusting the cap structure and perhaps moving unsecured, like you said, or even going deeper into the bond market to get capital to build our next mine.

Leverage right now elevated just given kind of the construction. How do you think about a leverage target longer term? Do you have a gross leverage number maybe you kind of are more comfortable with or thinking about as a longer-term target?

Yes. On the premise of staying in the high-yield market, I think there's good liquidity. If we stay around the $400 million level, I think you look at our future contributions of Florence together with 100% of Gib, I think we could then obtain something in the 1x or less leverage target level. And that, I think, is what we want to do is improve our credit rating here, get up to high single Bs, low BBs with the 2 assets and leverage in that sort of range ahead of building our second -- or sorry, our third mine, which would be later this decade.

So this $400 million-ish gross debt number, roughly less than 1x, is that kind of the -- what you set yourself as a target before you decide to kind of look at [indiscernible] in Yellowhead?

That's right, 2027 onwards. Yes.

And then maybe discuss a little bit more about Yellowhead. Obviously, you put out earlier this year, very interesting...

Yes, very exciting opportunity. I think we're announcing it amidst other development opportunities in North America and the U.S. There's some in Arizona, nearby us in Florence that are advancing. We think this is Canada's next greenfield copper mine. It will be the second largest one after Highland Valley and bigger than Gibraltar, has the potential to produce 200 million pounds of copper in its first years. And so it's a very strategic asset for Canada for the company. We've got our work to do on it. We're in the EA process. I think where we stand today, it could be in sort of that 3 to -- let's say, 3 years from now. And then it's about putting together the financing for that. We're focused on -- I think, in 2026, we're very focused on getting a partnership together with the First Nation there and then advancing towards getting an offtake partner that would work with us similar to what Mitsui has done and what we did at Gibraltar previously. I think the one advantage we have as a producer is we have strategic units of copper in Gibraltar. We're able to leverage those to attract a partner. So a partner could participate in Gibraltar and get feed from Gibraltar and while they're waiting for Yellowhead to get built. So we could look to do a partnering deal on that in the years ahead as part of the finance strategy in addition to looking at the bond market and other federal funding that might be forthcoming.

You kind of anticipated my next question there. Is this -- are you thinking for funding go forward like another copper stream? Or are you thinking actually like a JV partner kind of owning a stake into it or...

Yes. I think it would be more like the JV model they established. We saw one of our peers, Hudbay there did a deal earlier this year with Mitsubishi Corp. on their Copper World asset. It would be similar to that kind of a transaction. I think what you're finding is that buyers or the customers are doing these deals sooner before the permits. And that's, I think, something we could look to do is rather than waiting for the permits is to do it sooner. And again, we'd leverage the Gibraltar units to do that because we could provide them offtake as part of that strategy. So that's -- yes, that's going to be a growing focus of us in the years ahead is to unlock the value that Yellowhead will bring. And that has the potential to take us from, call it, 100,000 tonnes of copper a year to 200,000 tonnes. So it's pretty exciting, and that would really help us achieve our objective of becoming a true mid-cap North American copper producer.

After Florence has ramped, you kind of alluded to this a little bit by hinting at potential shareholder returns. I guess, how are you thinking about capital allocation policy priorities after Florence's ramp? Are you thinking about dividends? Are you thinking maybe land acquisitions around Florence? Obviously, Yellowhead, we've discussed, debt repayments, et cetera?

Yes. I think we're definitely focused on deleveraging. We want to keep emphasizing that. I want to improve our credit and cost of capital. I think as far as excess, we could definitely look at some shareholder return options. We'll have to weigh the pros and cons of dividends versus shareholder buybacks or some combination of those. We are looking to invest in Yellowhead. That's going to be a significant use of free cash flow in the years ahead. And then, yes, we've done historically to hold investments in other companies. So we could look to buy companies that have exciting deposits, reserves either in -- that are with a junior company or that is in need of partnering. So those are things that we could look to do. As far as reinvestment, we can always look to expand Florence, obviously. There's expansion potential there. I don't know about land consolidation, but we could look to other ISL opportunities for sure. I think we'll be the resident copper experts, and that's a global opportunity. We'll look both within the U.S. but globally for opportunities in ISL where we can deploy this expertise.

That's kind of an interesting opportunity that's a little bit unusual from other copper operators, that expertise and future...

Yes, there's definitely deposits out there that could be conducive, and there's definitely interest. We do feel that the world of copper is watching what's happening here in Arizona and how successful this mining method will be. We think it has a lot of potential to be deployed. You obviously need the right conditions, which we have at Florence Copper, but it could be used potentially elsewhere, and we'd like to be the leaders in that. So...

I think currently, you're using some copper price collars. How does that evolve as Florence begins to scale?

Yes. We've been very keen to hedge a lot of our copper price risk over the project finance build here over the last 2 years. So we've done these collar strategies where we've sold the call and bought the put. We've covered all the way to mid next year. We have $4 protected. As we come out of the ramp-up and start making money out of Florence, I think we'll probably go back to our older strategy, which is to probably just buy shorter-term protection. Maybe we're looking at buying puts just for premium and keep the upside for both bondholders, but more importantly, our shareholders who are keen not to cap it. It's very hard to sometimes see the top of where copper could end on this -- in this market. So it might be more of a short-term put strategy that we deploy across both assets.

To your point, copper has been moving up higher. Everyone is very bullish on copper, including people in our audience. And that's kind of led to a lot of discussion around consolidation. We've already seen a deal, a large deal happening. I guess, how does Taseko think about consolidation, M&A within copper and how they fit in?

Yes. I think there's definitely the buy versus build. I think in our world -- from Taseko's perspective, we're very focused on our organic growth. We have a lot of value still in our projects that we're looking to unlock here over the coming 3 to 5 years, first and foremost with Florence, but then Yellowhead. And we also have an asset in New Prosperity that we announced a deal on earlier this year. There's potentially an option to vend that out. That could be something we look to do over this time line. And again, we've had a lot of success buying into properties. So it's definitely something we are doing. We're evaluating opportunities. The producing companies, there's really a short list and the values are relatively high at the moment. So that's not something that's particularly attractive for us. But not to say, I think in this market, it's fair to say that there'll continue to be M&A opportunities and pressures. So -- but I think we'll just continue to focus on what we've done, which is build value through our organic growth.

On that big organic growth opportunity, Yellowhead, how much is the total CapEx that has to be spent?

Yes. So that one is -- we just announced -- so we updated the cost estimates to mid-2025. And we estimate that it's CAD 2 billion to build that. There's a new tax credit in Canada that they've announced, which will support copper mines like Yellowhead and that could cover 30% of the build. So that's not included in that [ CAD 2 ] billion, but that could be another $500 million that we received in the first years of operation to help fund it indirectly. So CAD 2 billion, which is, again, comparable to some of the other projects that are out there in the space, and we think is very financeable. Our estimates at these copper prices of $4.25 long term is that it can generate a 20% IRR or more.

So we think about it, $2 billion plus $500 million from tax credits, [ $4.5 ] billion JV partner in there, your own free cash flow plus raising debt is kind of how we think about funding?

Absolutely, yes.

Great. We're a little bit over, but do you have any closing thoughts, important items. I didn't touch on and things you want to emphasize or messages for bondholders before we close out?

No. I think, obviously, the bondholders have been patiently waiting to see Florence, and the company is excited to be bringing Florence on stream next year and adding to our credit profile.

Great. Thank you so much for being here, Bryce. Really appreciate it.

Thank you.

Thank you.