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spk01: Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to TSECO's third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star 2. I would now like to turn the conference over to Mr. Brian Burgot. Please go ahead, sir.
spk02: Thank you, operator. Welcome, everyone, and thank you for joining Teseco's third quarter 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 tesecomines.com and on CDAR. I am joined today in Vancouver by TSECO's President and CEO, Stuart MacDonald, TSECO'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 third 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. Following open remarks, we will open the phone lines to analysts and investors for a question and answer session. I'll now turn the call over to Stuart for his remarks. Thank you, Brian.
spk05: And good morning, everyone, and thanks to all today to seek those third quarter operational and financial results. But before we get into those details, let's start with an update on our Florence copper project, as there were a number of positive developments this quarter. In mid-August, the US EPA issued the draft underground injection control permit. This is the final key permit required for the commercial production facility. Although the timing was several months later than we would have liked, the permit wording was as expected. No surprises. The public comment period ended in late September, and the feedback from local residents, community leaders, and statewide organizations was overwhelmingly positive. 98% of the written comments were supportive, and there was no negative commentary at the public hearing. The positive response we've received through both the state and EPA processes is a direct result of the prudent approach that we've taken in developing the project. the efforts we've made to inform the Florence community, and, of course, the low-impact nature of the mining operation. For next steps, it's back to the EPA now to respond to the public comments received. We've reviewed all the comments and have had initial discussions with the EPA, and based on that, we're confident they'll be able to address all the comments before issuing the final UIC permit in the coming months, and we'll be ready to begin construction at that time. Switching to Gibraltar now, and the improved copper production in Q3 drove a significant rebound in financial performance. 34 million of adjusted EBITDA and 19 million of earnings from mining operation, both much stronger than the last quarter. Copper production at Gibraltar increased to 28 million pounds, which is nearly a 40% increase over Q2, mainly a result of higher copper grades, but also from an increase in mill throughput. In fact, the two mills averaged over 89,000 tons a day for the period. That's 5% above design capacity and our best quarter yet in terms of throughput. We're definitely benefiting from the softer Gibraltar pit ore as we expected. Head grade, on the other hand, while it did improve over Q2, was lower than where we expected it to be, and that also impacted recoveries. We're seeing higher than normal mining dilution in the Gibraltar pit, and we have a number of operational initiatives underway to reduce that going forward. But it's a work in progress, although we do see an improving trend and we're now into larger, more consistent ore zones. Production in the fourth quarter is forecast to be roughly 10% higher than Q3 and will continue at those higher rates for the next few quarters. Gibraltar pit will be the primary source of ore now through the end of 2023, Waste stripping of the new connector pit has begun and will continue through next year. In order to get full access to that new war zone, we need to move an in-pit crusher. That capital project started this summer and is well advanced. We're planning to complete the crusher move in the third quarter next year. Operating costs in the quarter declined quite dramatically, but we're still being impacted by the same inflationary pressures that the rest of the industry is facing. Diesel costs were up. about 55% higher than the same period last year, and that added $0.26 per pound of copper to our cost structure. We have some diesel hedging in place now to protect against further price escalation. Capitalized stripping was also unusually low this quarter, which drove up our unit operating costs. In the present environment, we're obviously very focused on cost control and managing copper price risk. We have a long-standing strategy to opportunistically acquire downside copper price protection through both copper puts and callers. And that approach again paid large dividends this quarter. We realized cash proceeds of just under $19 million from copper put options, and we have price protection in place at $3.75 per pound until the middle of next year. On top of that, we have a pricing strategy where we fixed prices at around the time of shipment. So it's notable we have very low provisional price adjustments this quarter, whereas many of our peers have larger losses. We're well positioned for when copper prices rebound, which they inevitably will do. And as we see with markets today, when prices move up, it happens quickly. Global inventories are low and physical demand fundamentals are strong. So we remain optimistic about our copper business long term. We have a great portfolio of assets here in North America and focused on copper. But in the meantime, with the global economic uncertainty, we are managing CapEx carefully. At Florence this quarter, we spent a further $27 million mainly related to procurement of major components for the SXEW plant and a few other long lead time items. Those items were ordered earlier this year and are now being delivered to site We won't be making any more significant capital commitments now until we have a clear view on permit timing. We've been successful in locking down pricing on long lead items, but we are seeing inflationary pressures on other project costs, including drilling contractors and construction labor. Arizona, in particular, has been a hot market. But it's also a very volatile market, and we'll wait until we have a firm review of the construction schedule before updating our CAPEX estimate. The balance sheet remains in a strong position with available liquidity of $210 million. That includes the undrawn revolver. We have a solid hedge position in place and improving production from Gibraltar. We're also seeing a lot of interest from royalty providers, which is a potential additional source of funds for Florence. And on that note, I'll pass things over to Bryce for a financial update.
spk12: Thanks, Stuart. Good morning, everyone. I'll provide some further details on our third quarter financial results. Sales for the quarter for Gibraltar on a 100% basis worth 27 million pounds of copper at a realized price of $3.48 US per pound, which was similar to the LME average price. We only realized negative provisional price adjustments of half a million in the quarter, and this was attributed to a relatively range-bound copper price prevailing between $3.30 and $3.70, and our long-standing practice and discipline of fixing the price of substantially all of our concentrate shipments at the time of shipment This practice reduces copper price exposure and volatility over quotational periods with our customers. We either fix that price directly with the customer or we enter into a QP hedge with banks, which has reduced the volatility in our revenues this quarter compared to some of our peers. Total site costs, including capitalized strip, reduced by $5 million from the last quarter, but it's still up $10 million over the same quarter in 2021. Higher costs are mainly due to the elevated diesel prices, and to a lesser extent, steel and reagents used in the milling process. We also only capitalized 1 million of mining costs as capitalized stripping to the balance sheet this quarter as mining was focused in the Gibraltar pit. Gibraltar's C1 operating cost per pound of copper dropped 22% to 272 per pound in the quarter. This was due to the higher pounds produced and in spite of the fewer mining costs that were capitalized. Earnings from mine operations before depreciation were $19 million. We also recognized gains on our copper put hedges of $60 million, so those together resulted in adjusted EBITDA of $34 million. We have in place copper price protection, as Stuart mentioned, of $375 to the middle of next year, which still gives us copper price upside if copper prices recover as they are today. The value of this protection is shown on the balance sheet of $30 million within our other financial assets. During the quarter, we also purchased diesel coal options, which will protect us from further diesel price escalation through to mid-2023. So with our expectations of further increased production in the fourth quarter and into next year, we should see a further decline in operating costs on a per pound basis. Adjusted net income for the quarter was $5 million or $0.02 per share and benefited from the $16 million of realized gains on the settled copper put options in the quarter. We had a gap net loss of $24 million, or $0.08 per share. That was mainly impacted by the unrealized foreign exchange losses associated with our U.S. dollar denominated notes. The offsetting translation of our U.S. dollar investments in Florence are obviously not put through the profit and loss statement, and so we don't have a perfect match. We continue to invest in Florence this quarter with further spend of $27 million Canadian We still expect to incur about, in US dollars, $15 million for Q4 as we finish receiving the last shipments of our SXEW equipment by the end of the year. Our cash balance declined over the previous quarter, but that was really attributed to the continued spending at Florence and certain projects underway at Gibraltar, including the crusher move that feeds Mill 1, which is expected to be moved in Q3 next year. By the end of this year, TSEC will have incurred about $18 million in total on this project for its share to date. We ended the quarter with $142 million in cash and $210 million of available liquidity. We stand in a good position to manage any volatility in the macro environment ahead as we prepare for Florence. Lastly, on the topic of Florence financing, as we mentioned on the previous earnings call, we are continuing to look at ancillary financing opportunities with copper prices pulling back since the first half of this year. We've been very successful to date since acquiring Florence not to encumber it. So we have all financing options available to support our own cash and our cash flow. With that, we are now ready to take questions over back to the operator. Thank you.
spk01: Thank you, sir. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw it, please press star followed by the number two. If you are using a speakerphone, please lift your handset before pressing any keys. Please stand by for your first question. Your first question comes from Orist Wokedaw of Scotiabank. Please go ahead.
spk04: Hi, good morning. I have some questions about Florence. I guess the old feasibility is now five years old and the capital cost estimate for that project was US$230 million. Can you give us how much of that $230 million has been spent as of the end of Q3? Obviously, we're in an environment of high inflationary pressures. I'm just trying to get a sense of how much has been incurred versus how much is left and what the risk could be to a materially higher estimate than that.
spk05: Hi, Oris. This is Stuart here. No, you're absolutely right. We're in an inflationary environment, as I noted in my comments. Yeah, the original fees from 2017 is definitely a dated number now. We did update that actually in 2019 prior to our London listing. which was a similar number. But since then, we have definitely seen inflationary pressure. As we sit today, we've committed approximately 80 million US of the project spend. That hasn't all been spent yet, but in my mind, it's committed, it's gone, and the price is fixed. But yeah, on that remaining piece, and the spend is primarily on equipment, SXE, major components for the SXEW, you know, steel and the like. So that's been priced, and that came in similar to budget, similar to the original budget, actually. But on the remaining piece, inflation, we're seeing inflation on labor, construction labor in Arizona. As I noted, it's a volatile market. We're not going to put out a new number at this point. You know, things are changing from week to week and from month to month. So you don't see a point in putting out a number now and then having to update that again in a few months when we have a construction schedule. So we'll wait here. We'll let the dust settle. I think that as we move into next year, it'll be, you know, who knows, we could be going into a recessionary environment and the number could change. So we'll see. But yeah, on a whole, you know, some of the other projects, as you know, you look around, there's inflation in the range of, 30%, give or take, on some of these capital projects. And that's the type of number you might expect to see on Florence as things hit today. But again, we're not a little bit cautious and not putting out anything firm at this point.
spk04: Okay. What about the operating costs as well? I mean, we've heard a lot about asset pricing being a lot higher over the last couple of years. Any sense on where Given current input costs like asset and labor and everything else, where would the cost profile move to on Florence?
spk05: Asset right now is up around $200 a ton, I believe, in the Arizona market. I think our original fees was at $120 a ton. Again, it's a volatile market. As you know, prices move up and down. We have actually seen some new supply, potential new supply coming into Arizona. There's actually potentially a new acid plant being built by a third party quite close to Florence. So that's positive. But yeah, it's acid prices are moving. I think as a whole, though, we have obviously a very low cost operation at Florence. I think our 2017 study called for $1.10 operating costs, roughly. So we've got lots of wiggle room there without jeopardizing the overall economics. We'll use about 200,000 tons a year of sulfuric acid when we reach full run rate. So you can kind of run a sensitivity off that. OK.
spk04: I mean, upon final permits, is the plan then to put out a completely updated sort of feasibility technical study that would have updated CAPEX, OPEX production expectations?
spk05: Yeah, that would be the plan. Okay.
spk08: Okay, thank you.
spk01: Your next question comes from Ed Brucker of Barclays. Please go ahead.
spk03: Hey, thanks for the question today. First one, just on some of the additional funding needs, I just want to get, if you're able to provide it, your favored source of funding, and then just using kind of the base of the 230, and I guess the $150 million left you have to spend on that, how much additional funding are you looking for?
spk12: Yeah, it's still obviously a bit of a fluid environment. I think we're still not absolutely clear exactly when Florence is getting the final UIC permit, so that's a bit of a moving target. Obviously, copper price is the other factor, how much cash flow we make from Gibraltar. Again, we finished the quarter in a good liquidity position. We had $210 million. We do have an undrawn revolving credit facility there. I think as far as preferences, I think Again, it's not an encumbered asset. We don't have any financing to date at the Florence level, and so we have a number of options, and I think probably one that we're looking at, and we've just seen development in the market over the last few years is on the royalty and stream market. So we think naturally that would be a market we'd look to first, which would be a good source of flexible capital. We also have some equipment that we've procured that would be eligible for some equipment financing. So we're looking for sort of smaller tranches of financing and really we'll look to top those depending how those other variables play out.
spk03: That's helpful. And just on Florence, is the timing from the final UIC permit given to production, is that still 18 months that you had given previously or does that timing change or your thoughts around the timing change given what's going on in the market more uncertain times and I guess lower copper prices too?
spk05: I know it's an 18-month construction schedule. That hasn't changed. In fact, it's probably been de-risked to some extent because of some of the procurement activities that we've done. So we're comfortable with that timeline still.
spk08: Got it. Thanks for the time.
spk06: Your next question comes from Craig Hutchison of TD Securities.
spk01: Please go ahead.
spk07: Hey, good morning, guys. Just a follow-up question. You mentioned potential for royalties and streams on Florence. Can you give us a sense in terms of what percent of the metal you'd be willing to stream?
spk12: Again, we've got a few legacy royalties on the property. Aside from that, and that's included in our in our costs that we speak of when we talk about $1.10 per pound from our 2017 report. So, you know, I think when we're talking about royalties, I think we're talking about sort of in that sort of 2% plus range of potential encumbrance. It would obviously depend how much we need in that, but that would be, you know, something like $0.07 a pound.
spk07: And if we do go into weaker markets next year, potential recessionary situation, is there a price for copper, which you would not hit the kind of green light for Florence, just considering, obviously, there'd be pressure on the margins at Gibraltar at that point?
spk05: Craig, no. I mean, we look at Florence as a standalone project, right, with a strong I think even at $3 copper, it had an IRR in the range of 35% on the previous feasibility. As I said, there's lots of room for copper price movement on the Florence project. Obviously, Gibraltar, we want to make sure that we do have levers to pull that Gibraltar to in downside scenarios, as we've talked about in the past. But the most important thing we have now, I think, which is giving us comfort, is the hedge position, which covers us through the middle of next year.
spk07: Okay. Maybe one last question. You guys are mentioning the stripping activities will commence at the new connector pit next year at Gibraltar. Also, you've got the primary crusher for Mill 1 that will need to be moved. Are those fairly capital-intensive projects in any sense you can give us in terms of overall stripping for next year costs and the movement of Mill 1? We'd appreciate it.
spk05: I guess maybe on the mining rate as a whole, we are thinking about there will probably be a small increase in our mining rate as we move from 2022 to 2023. But beyond that, it's really, in terms of mining costs, it's an allocation between operating and capital, in terms of operating costs and capitalized strip. We just came off a quarter with a very low capitalized strip allocation. Next year, we'll have a much higher portion of our costs being capitalized. But the overall site costs won't be that different. The Crusher project... Do you want to maybe talk about that, Richard, the timing and the cost around the crusher capex?
spk11: Yeah. So the crusher work started this past summer, and the crusher will actually move next August or next Q3 next year. In terms of capital cost, looking in the – 40 to 45 million range for the total project to be completed.
spk05: A good portion of that's already been spanned, right?
spk11: That's correct. Yeah.
spk05: And that's on a 100% basis?
spk08: And on a 100% basis, yeah. Okay, great. Thank you.
spk06: Your next question comes from Alex Tarantu of Stiefel.
spk01: Please go ahead.
spk13: Yeah. Hi, everyone. I have a lot of questions that Florence already asked, and I got answers there. But one of my questions is, if you get the permit, UIC permit, say Q1, are you ready to hit the ground running right away? I mean, I would imagine you've already done a lot of the internal studies on updated capex and so forth, but I understand kind of waiting to update the market based on timing. But should the permit be received in the next few months, are you ready to begin immediately thereafter?
spk05: I think operationally we're ready. We have our engineering well advanced. We have our procurement well advanced. As we've noted here, we have a bit of likely a financing to complete here in the next few months. But yeah, then we'll be ready to go. Okay.
spk13: Okay, good and then you just want to follow up a question you did or sorry comic you just made on the crusher spend for next year. There are well 4045 million is the full full cost of the project, you said a good portion of that's already been spent so i'm just trying to get a sense of spending on that event for next year, what sort of number should we think about.
spk12: Yeah, I think as Richard said, it's on a 100% basis, the total projects in that sort of 40 to 45 range, and we will have incurred about half of that this year. I think at the end of this year, it will be about $25 million completed on a 100% basis.
spk13: Okay, that's good.
spk08: Okay, that's it for me. Thank you.
spk01: Your next question comes from Alex Bedwani of Canaccord Genuity. Please go ahead.
spk09: G'day, guys. Good to see the grades up again in the last quarter, so congratulations. I think all of my questions have been answered except one, just on the amount of ore that's being milled. So that was obviously up quite a bit in this quarter. How sustainable do you think that is and what was the key driver of the uptick in that? Is it that the ore is softer that you're going through at the moment and the conditions are going to go back to... what you would call sort of steady state or normal in the coming quarters?
spk11: Yeah, so this is Richard. The ore from Gibraltar pit is softer, which allows the higher throughput rate. So with 2023 being the source of ore for the site, we're going to see continued high throughput continue into 2023. And as long as we're mining it, the Gibraltar pit ore is much softer and it processes through the grinding circuit quite well.
spk09: Okay, and how does collector look in comparison?
spk11: Sorry, say that again?
spk09: How does the collector pit look in comparison to Gibraltar?
spk11: Connector pit will not be as soft as Gibraltar pit, but it'll be more typical of our historical granite, Pollyanna pit areas.
spk08: Okay, thank you, guys.
spk06: Your next question comes from Mike Kozak of Kantor Fitzgerald.
spk01: Please go ahead.
spk10: Yeah, morning guys. Congrats on the solid quarter. We've already answered all the questions I had on Florence, so thanks for that. Just one left for me on Gibraltar. On the mining dilution you flagged in the quarter, what exactly is that? Is that a re-handling issue, something maybe related to blast pattern design or just more selectively mining with smaller excavators? Could you give more detail on what you mean when you say you know, initiatives are underway to lower the mining dilution. Thanks.
spk11: Yeah, it's really around, which is a process we began early in Q3, just reviewing all our controls and procedures and seeking to identify opportunities to reduce the dilution that we're incurring. It is a function of the ore cuts, the ore orientation, We're actually going to bring in a third party to assist us to ensure we're not missing anything or there's not improvements or better tools that we could bring into play and assist us with just dealing with this. We've already seen some improvements and I'm hopeful we're going to be able to continue to see further improvements as we go. And we also benefit as we mine deeper, the ore zones become more consistent and less irregular in terms of what we have to deal with when we make the ore cuts.
spk08: Got it. Thank you.
spk01: At this time, there are no further questions from the telephone lines. I would like to turn the conference back to management for any closing remarks.
spk05: Okay. Thanks, everyone, for joining us. We'll wrap it up there and talk to everyone next quarter. Okay. Thank you. Bye.
spk01: Ladies and gentlemen, this concludes your conference call for this morning. We would like to thank you all for participating and you may now disconnect your lines.
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