Canada Markets open in 8 hrs 28 mins

Edited Transcript of CMMC.TO earnings conference call or presentation 31-Oct-18 2:30pm GMT

Q3 2018 Copper Mountain Mining Corp Earnings Call

Vancouver Nov 16, 2018 (Thomson StreetEvents) -- Edited Transcript of Copper Mountain Mining Corp earnings conference call or presentation Wednesday, October 31, 2018 at 2:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Donald Strickland

Copper Mountain Mining Corporation - COO

* Gilmour Clausen

Copper Mountain Mining Corporation - President, CEO & Director

* Rodney A. Shier

Copper Mountain Mining Corporation - CFO & Corporate Secretary

================================================================================

Conference Call Participants

================================================================================

* Orest Wowkodaw

Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals

* Stefan Ioannou

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions)

Please note that comments made today that are not of historical factual nature may contain forward-looking statements. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual outcomes. Please refer to Slide 2 of today's presentation and Copper Mountain's Third Quarter 2018 Management Discussion & Analysis for more information.

I will now turn the call over to Gil Clausen, President and CEO of Copper Mountain Mining.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [2]

--------------------------------------------------------------------------------

Good morning, everyone, and thanks for joining us. As you can see on Slide 3, today I have with me Rod Shier, Copper Mountain's Chief Financial Officer; and Don Strickland, our Chief Operating Officer.

I'll begin by providing brief highlights on the quarter. Rod will provide a more detailed discussion on our financial results, followed by Don, who will speak to our operations. We'll then wrap up and open the call to questions.

Moving to Slide 4. In the quarter, we produced 22 million pounds of copper equivalent, and this includes 18.3 million pounds of copper, 7,500 ounces of gold and 64,900 ounces of silver. Production was lower in the second quarter -- production was lower than the second quarter but was on forecast. We previously guided that copper production would be about 10% lower this quarter compared to our annual average, and that's as a result of lower grades. We came in about 8.5% lower, and on a copper equivalent basis, production was only about 5% lower. That was largely due to higher gold production. We installed and commissioned a flash flotation circuit in the concentrator, and we're seeing positive improvements in gold recovery, copper concentrate and filtration efficiency. Looking forward, we expect the fourth quarter to be strong, offsetting the lower production in the third quarter.

Revenue in the third quarter was about $61 million. Revenue decreased year-over-year due to lower realized copper prices and lower sales. Sales were impacted by lower production and a delay at the Port of Vancouver over the quarter end. The delay resulted in some shipment revenue not being recorded in the third quarter. That revenue will come early in Q4.

At the Copper Mountain Mine, we increased reserves from the end of last year to 210 million tonnes. This reserve includes the low-grade stockpile, which is why the reserve copper grade appears lower. We announced the results for the Eva Copper feasibility study this quarter, which showed solid economics with an after-tax NPV of USD 256 million and an after-tax IRR of nearly 30%. Eva is expected to produce over 950 million pounds of copper over its 12-year life.

We also completed the Phase 2 drilling program at New Ingerbelle and subsequently announced an upgraded mineral resource, shortly after which we provided a base case mine development and production preliminary economic assessment, which demonstrated strong economics, an after-tax NPV of USD 394 million and an after-tax IRR of 65%. New Ingerbelle, just as a base case, is expected to produce 768 million pounds of copper and over 1 million ounces of gold. We're very excited about New Ingerbelle as it's projected to provide a very low-risk and low-cost production profile. As you can see, we had a very busy third quarter.

I'll now turn over the call to Rod, who will review our financial results in more detail.

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [3]

--------------------------------------------------------------------------------

Thank you, Gil. As noted on Slide 6, revenue was $61 million for the quarter ended September 30, 2018, as compared to $77 million for the same period last year. Q3 2018 revenues were down from the same period last year as a result of lower copper prices realized during the quarter combined with fewer pounds of copper being sold, which was impacted by the loading delay at the Port of Vancouver, as noted by Gil.

Cost of sales for the third quarter 2018 were $70.3 million as compared to $57.6 million for the same period last year. The increase in cost is primarily due to a $5.3 million inventory adjustment to the low-grade stockpile as required under IFRS as a charge to cost of sales and to some upward cost pressures on items like fuel, power and steel. This resulted in a gross loss of $9.6 million for the Q3 2018 quarter.

General and administrative expenses, which include some mine site administrative expenses, were $2.2 million for the third quarter this year compared to $1.3 million for the same period last year. The increase is mostly due to increased corporate activity within the company on advancing our technical studies after the acquisition of Altona.

For the quarter ended September 30, 2018, the company recorded finance expense of $3.6 million, which compares to $3 million for the same period last year. Finance expense primarily consists of interest on loans and amortization of loan-related financing fees. And therefore, with the rising interest rates, we have experienced higher financing expenses as the majority of our debt is based off of 6-month LIBOR rates.

For the third quarter of 2018, the company recognized a foreign exchange gain of $5.4 million as compared to a gain of $12.4 million for the third quarter of 2017, which primarily relates to the company's debt that is denominated in U.S. dollars. This all resulted in a net loss attributable to shareholders of the company for the third quarter of 2018 of $4.3 million.

As noted in past conference calls, foreign exchange gains and losses can change quarterly and yearly and can result in significant cost swings. This is not the case this quarter as our unrealized foreign exchange loss was offset by our pricing adjustment on metal sales, resulting in very similar adjusted EBITDA and adjusted earnings figures as compared to EBITDA and net income.

The company's cash flow from operations before working capital changes in the third quarter of 2018 were $1.2 million. The quarter's cash flow was negatively impacted by the shipping delay at the Port of Vancouver. As a result of the shipping loaded on the last day of the month, we were not able to receive a cash payment of $19.2 million until October 3, shortly after the end of the quarter. Because of this shipping delay, we recorded an increase in accounts receivable. Had we been able to receive the payment for the September shipment in the month that it was loaded, which is the normal course most of the time for our ships, our quarter-end cash position would have been $61 million instead of the $41.7 million that you see on our Q3 2018 statements.

In conclusion, we were impacted by several nonrecurring items in the quarter, and we do not anticipate them to recur. And with the improvement in production expected during the fourth quarter, we anticipate finishing the year in a strong financial position.

And now Don will provide the Q3 2018 operational update.

--------------------------------------------------------------------------------

Donald Strickland, Copper Mountain Mining Corporation - COO [4]

--------------------------------------------------------------------------------

Thank you, Rod. Starting on Slide 8. Mining activities continued in the Pit 2 west, Pit 3 west and Saddle areas during the quarter. The mine continued with the next pushback on Pit 2 west, resulting in a strip ratio of 2.3 for the quarter. This was a significant improvement in the strip ratio from Q2, and we expect the strip ratio to continue to improve in the fourth quarter.

A total of 18.5 million tonnes of material was mined, including 5.6 million tonnes of ore and 12.9 million tonnes of waste. The mine averaged 201,000 tonnes per day mined, above our guidance of 190,000 tonnes per day. Shorter haul profiles and above-average efficiency supported these higher mining rates.

Turning to Slide 9. During the quarter, the mill processed a total of 3.8 million tonnes of ore, averaging over 41,000 tonnes per day. Mill operating time averaged 92.7%. The mill feed grade averaged 0.28% copper, lower than the prior quarter but in line with expectations. We expect grades to improve in the fourth quarter. Copper recovery averaged 79%, while gold recoveries averaged 64% for the quarter. The newly installed flash flotation circuit supported higher gold recovery.

Turning to Slide 10. As Gil noted, we have been very active with exploration and project development. We completed a feasibility study on our Eva Copper Project. This project has solid economics, as you can see on the slide. Eva Copper is expected to produce over 120 million pounds of copper annually in the first 2 years of production, providing a short project payback period. Eva Copper has one of the lowest capital intensities of global greenfield projects.

Turning to Slide 11. Also during the quarter, we completed the Phase 2 drilling program and a new resource estimate for New Ingerbelle. The measured and indicated resource exceeded 150 million tonnes with an average grade of 0.29% copper, 0.18 gram per tonne gold, and that's based on 0.16% copper cutoff grade. The results from the Phase 2 drilling program were better than expected and exceeded our plan for Phase 3 program.

We used the new resource estimate for a base case PEA. In this PEA, we assumed the New Ingerbelle material would be trucked to the Copper Mountain mill using the existing mine equipment fleet and displace the Copper Mountain ore. It also assumed using the existing Copper Mountain mill and tailings facility. The PEA results are summarized on this slide.

In conclusion, more favorable grades, low-risk production, lower cost and very robust economics. This is a solid base case, and we are now working on various options to determine the optimal timing and method of integrating New Ingerbelle into the Copper Mountain Mine plan. This analysis will go into a prefeasibility study, which we expect to release in the first quarter of 2019.

Turning to Slide 12. With our acquisition of the Altona Mining in April of this year, we hold a significant mineral land position of approximately 4,000 square kilometers in the Mount Isa inlier area of Australia. We started a regional exploration program earlier this year, which we plan to complete in the fourth quarter. So far, we have collected and analyzed 22,000 soil samples and completed 3,800 meters of drilling. Lab analysis for the drill samples is currently in progress, and we expect to be announcing results around the end of this year and into early 2019.

And with that, back to Gil to conclude.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thanks, Don and Rod. Turning to Slide 13, we're maintaining our guidance for the year. Production was on track as planned year-to-date. We expected production to be lighter in the third quarter as a result of planned lower grade being mined. Production is expected to improve with increased grades in the fourth quarter to offset this last quarter. So we're on track to meet annual production guidance of 80 million pounds of copper, but we don't expect to be over 80 million pounds of copper as we're making up ground in the fourth quarter.

In conclusion, this quarter was all about laying the foundation for organic growth. Our flagship asset, the Copper Mountain Mine, provides a solid base to grow from, as you can see on Slide 14. We then layer on growth from our shovel-ready Eva project. We have New Ingerbelle, where we've completed a base case PEA, and then what we currently see as our next significant exploration target, Cameron Copper, which is about 30 kilometers south of Eva in the Mount Isa inlier.

We have, in our view, the best portfolio of growth assets amongst our peers, and we see that growth as low-risk. We're currently looking at restructuring our existing debt to include funding for Eva. We are in advanced discussions on debt financing. We anticipate completing this work in the first quarter of 2019. Until we have this funding in place, we will be very conservative in advancing our projects with minimal spend. We will take a prudent and disciplined approach to advancing and funding these terrific growth projects. And that growth is timed perfectly, in our view. Copper markets look to be strong over the next 6 to 8 years, and no other company in the copper sector of our size has this type of manageable growth profile with a potential to create so much low-risk value for shareholders.

And that concludes our presentation today. Operator, if we could open up the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Orest Wowkodaw with Scotiabank.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [2]

--------------------------------------------------------------------------------

Wondering if we could get better color on the cost at Copper Mountain. And when I look at kind of where the implied cost per tonne milled have been, I guess this year and last year, they've been tracking around $13 to $14 a tonne. Your new mine plan that came out a few weeks ago seemed to imply that -- a much higher cost per pound, which, I guess, imply higher cost per tonne. And I'm just wondering whether the current run rate -- you guys expect the current run rate of lower cost per tonne to just be maintained moving forward, and we should look through those higher C1 costs that were in Copper Mountain Mine plan.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Orest, yes, I appreciate that question because, as you well know, when we put out 43-101 production plan like that, it's a plan that only includes 2P, of course. And traditionally, we carry in our mine plans, some inferred material or inferred high-grade as well. And the extra costs that are accumulated in that report basically come from treating that inferred, which could be as much as anywhere from 5% to 15% of our typical mine plan, as waste. So therefore, we actually have to strip more to uncover that. So that gets built into that long-term model. So if you look at that model and you look out over the next 3 years, we would anticipate in our normal mining as we convert, and we have a very high -- very, very high conversion rate of inferred into 2P, that you can assume our cost profile should not differ significantly from what we've been doing.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [4]

--------------------------------------------------------------------------------

Okay. And does that assume then, I guess, that the strip ratio that you're actually going to mine is going to be lower than what you're constrained by with respect to 43-101?

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Orest Wowkodaw, Scotiabank Global Banking and Markets, Research Division - Senior Equity Research Analyst of Base Metals [6]

--------------------------------------------------------------------------------

Okay. And just in terms of the capital at Copper Mountain, can you give us a sense of what the sustaining capital looks like for that mine next year outside of anything you might do with Ingerbelle and whether the tertiary grinding spending is still kind of on the table for next year? Or has that been deferred?

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [7]

--------------------------------------------------------------------------------

We're looking at some very similar capital expenditure profiles as what we've had. There are some projects that we're assessing right now, one of which is the replacement of a screen deck on the SAG mill, which would improve our operating uptime in the mill. We've had some maintenance issues with that screen deck and its efficiency, and its costs are higher than we would like. But outside of that, and we've already disclosed and talked about wanting to replace a couple more of those dry transformers with oil-filled transformers, those aren't like significantly large capital items. So we don't see materially different sustaining capital over the next 3, 4 years at Copper Mountain. But as everything, sustaining capital could be a little lumpy depending on the timing of equipment replacements, et cetera.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Stefan Ioannou with Cormark Securities.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [9]

--------------------------------------------------------------------------------

Just a little bit curious, maybe just a little bit more detail on the shipping delay in Vancouver. You mentioned that the boat didn't go out till, I guess -- or the boat wasn't loaded until the -- post the quarter-end, and so because of that, you lost $19.2 million. So is that -- are you guys saying that you didn't get paid for the entire boat or part of the boat?

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [10]

--------------------------------------------------------------------------------

Yes. Good question, Stefan. We didn't lose the money, and we still got the money. It just came in at the end of the quarter. What happened was the boat was delayed in loading, and so it actually loaded and straddled the end of the quarter. And we had about, I'd say, about 90% of the load loaded at the time. The impact to our revenue, we could only then record revenue for that quantity of concentrate that actually passed the ship rail by midnight on the 30th. So the impact was we had about $3.6 million in revenue that was pushed into the fourth quarter. But the more significant, I guess, visual impact that you have is you didn't get paid for that product in your quarter, which is normally the normal course for us. So your cash at the end of the quarter was $19.2 million lower than it would have been if we had finished the loading as planned and we got paid before the end of the month.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [11]

--------------------------------------------------------------------------------

Okay. So basically, you didn't get -- and I understand. The material is on the boat, but you basically didn't get paid for the boat until, effectively, Q4?

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [12]

--------------------------------------------------------------------------------

That's right. There was a receivable at the end of September 30. It's a receivable, and we got the money on October 3.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [13]

--------------------------------------------------------------------------------

Okay. I guess my only confusion -- yes, I understand now. My confusion is just, in the MD&A, it mentions that there was 1.1 million tonnes of copper and a bit of gold and silver that wasn't recorded in Q3. But really, it was the entire boat load that wasn't recorded in Q3, right?

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [14]

--------------------------------------------------------------------------------

Well, no, no. The revenue was recorded in Q3, but there was a little bit of the concentrate that got loaded on October 1, and that equated to about $3.6 million in revenue. And that revenue was not recorded in Q3. It will be a Q4 revenue item.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [15]

--------------------------------------------------------------------------------

Right. Stefan, just to make sure we don't mix revenue with cash. So the revenue recognition for the concentrate that goes over the rail up to midnight is counted in the quarter. But the payment for the shipment, which is the cash on -- shows up on the cash -- in the cash flow doesn't -- the whole ship doesn't get paid until it's loaded and shipped. So from a cash perspective, you have that roughly $19 million.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [16]

--------------------------------------------------------------------------------

I see. So you recognized it as revenue, but you didn't actually get the cash in the bank.

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [17]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [18]

--------------------------------------------------------------------------------

Correct.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [19]

--------------------------------------------------------------------------------

Got it. Okay, okay. Okay. And then just -- obviously, provisional pricing has been hammering a bunch of your peers this sort of financial reporting season, and you mentioned sort of the existing unsettled position. Was there any significant prior period adjustments in the quarter that we should know about or -- for sales that got formally settled in Q3?

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [20]

--------------------------------------------------------------------------------

Yes. The ones that settled in Q3, we did have some negative adjustments. I mean, as noted in our -- in your revenue note, note 11, you can see that negative pricing adjustment for the quarter was about $2.4 million negative for your copper concentrate that has to be mark-to-market at September 30.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [21]

--------------------------------------------------------------------------------

Okay. But was there any -- I guess, was there any from like prior period adjustments, though, for contracts that actually closed, but they were formally settled finally in Q3? Like the Q2 sales then...

--------------------------------------------------------------------------------

Rodney A. Shier, Copper Mountain Mining Corporation - CFO & Corporate Secretary [22]

--------------------------------------------------------------------------------

Yes. We did have a couple of shipments that had -- that were negatively impacted by pricing as you see the pricing coming down but they were not significant from a cash flow point of view, in the area of negative $1.2 million.

--------------------------------------------------------------------------------

Stefan Ioannou, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [23]

--------------------------------------------------------------------------------

Okay, okay, so it's not -- okay, not material. Okay, great.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And we have no further questions in queue. I will now turn the call over to Mr. Gil Clausen for any final remarks.

--------------------------------------------------------------------------------

Gilmour Clausen, Copper Mountain Mining Corporation - President, CEO & Director [25]

--------------------------------------------------------------------------------

I just want to thank everybody for listening to our conference call today. This is a very exciting time for Copper Mountain Mining. We have a lot of value-driving catalysts in the near term and an incredible amount of growth in the company.

And with those remarks, I want to conclude this conference call and, again, thank everybody for joining.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.