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Good day, ladies and gentlemen. Welcome to the Q3 2018 investor call. I'd like to turn the meeting over to Ms. Aurora Davidson. Please go ahead.
Thank you. Welcome to the third quarter 2018 investor conference call of Amerigo Resources. I am Aurora Davidson, Executive Vice President and Chief Financial Officer. Before we begin the presentation, let me caution you that our comments and discussion will include forward-looking information within the meaning of applicable securities legislation. Forward-looking information will include, among other things, forecasts and projections about our copper production for the year, which involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from such forecasts and projections. Therefore, although we believe that anticipated future results, performance or achievements expressed or implied by the forward-looking information are based on reasonable assumptions and expectations, you should not place undue reliance on such forward-looking information. We direct you to our press release issued on November 5 and our other documents filed with the securities authorities in Canada, including our annual information form under the heading Description of the Business Risk Factors. This document describes the material factors and assumptions that were applied in drawing the conclusions and making the forecasts and projections as reflected in the forward-looking information, and the material factors that could cause actual results, performance or achievements to differ materially. Except as required by law, we undertake no obligation to update or revise any forward-looking information made in this presentation. Rob Henderson, the company's President and CEO, will now provide an operational and a corporate update.
Thank you, Aurora, and thank you, everyone, for joining the call. We had a great third quarter this year, and the MVC's steady ramp-up in production is what we expected from the Phase 2 expansion project. MVC achieved record copper production of 17.6 million pounds of copper in the quarter. And perhaps more importantly, our cash costs dropped to $1.38 per pound, the lowest they've been in the decade. The company continues to expect 2018 production of 65 million to 70 million pounds of copper at a cash cost of $1.45 to $1.60. But our molybdenum guidance has been increased to 1.8 million pounds this year. And the only thing not performing well so far is the copper price. After waking up last year, the mining industry appears to have hit the snooze button again. In 2017, the copper price broke the 7-year downward trend and rose to $3.20 a pound in the first half of this year. But since then, the copper price has dropped back down and appears to have plateaued at about $2.80 per pound.Worldwide demand for copper continues to grow and very little new supply is appearing. So the fundamentals supporting a higher copper price still remain very positive. We remain unhedged to copper price and have kept our heads down and focused on increasing production and decreasing cost to MVC.The copper price for the quarter was $2.74 a pound, which is a significant drop from the Q2 price of $3.16 a pound. However, despite these lower prices, we still reported net income of $1.4 million. Molybdenum production in the quarter was strong at 0.6 million pounds and the byproduct credits from moly helped keep our cash costs lower than planned. And these results allowed us to generate $6.2 million in operating cash flow, improve the cash balance to $23 million and allowed us to fully repay the $17 million loan from El Teniente. The Q3 production of 17.6 million pounds of copper included the strong production from Cauquenes and about 5.7 million pounds of copper from fresh tailings. The construction efforts -- MVC's construction efforts on the Cauquenes Phase Two expansion projects are now essentially complete, and most of the contractors have demobilized from the site. Recovery of copper from Cauquenes is ramping up nicely, and we continue to expect that the projects will achieve commercial production this quarter.Although the work was completed within schedule, the CapEx estimates has increased to $39.9 million. It was about 13% over-budget, primarily due to the 9% appreciation of the Chilean peso during the construction period in the first half of the year. But a second factor in Q3 was the complexity of commissioning the new plant adjacent to the existing plant. We had to incur extra costs for temporary equipment, and additional contractor man-hours were required to ensure that no conflicts occurred with the operations. The third factor is the delay in the regrind mill from China. So MVC are currently operating satisfactorily without the mill, but it will be required next year, and the plan is to have this mill in operation in April 2019. So in summary, we've had an excellent third quarter, headlined by our record production in copper and molybdenum plus a very low cash costs. We are continuing to deliver on our promises, and the company is very well positioned to benefit from future increases in copper price. I will now hand over to Aurora to discuss the financials.
Thank you, Rob. While Rob has provided a very good summary of the operational and financial performance for the third quarter of the year, the 2 main themes for the quarter were: Amerigo achieving record production as the Phase Two expansion equipment started to come online; and posting a low cash cost of $1.38 per pound, which is a fundamental driver to a stronger corporate risk profile. A third theme to mention is that results continue to be aligned with guidance and with the company's annual objectives. Rob has mentioned the lower copper price in Q3, which moved from an average of $3.16 per pound to an average of $2.74 per pound, affecting Q3 sales and also resulting in material settlement adjustments of $5.3 million to Q2 production.Given that MVC currently has an M+3 pricing for its copper production, we remain exposed to changes in copper prices in the following quarter. A good rule of thumb as to what may occur in Q3 is that a 10% increase or decrease from the $2.74 per pound price would result in approximately $4.8 million in revenue adjustments in Q4.In October, the average price was $2.82, and it has remained at that level. Should that price remain in place through this quarter, there would be approximately $1.5 million in positive revenue adjustments in Q4. Despite this important adjustment to revenue, Amerigo continued to operate in the black, with net income of $1.4 million or $0.01 per share and generated operating cash flow of $6.2 million before changes in working capital. On a year-to-date basis, Amerigo has posted net income of $5.4 million or $0.03 per share and operating cash flow before changes in working capital of $18.6 million.A major driver in remaining profitable in Q3 despite the double effect of the drop in copper prices was the lower cash cost of $1.38 per pound. While cash cost is positively affected by higher production, in Q3, we also saw total cost reductions of various important items such as power and lime. Another important item in the cash cost computation are moly byproduct credits, which were $0.30 per pound. MVC is benefiting from higher moly production and strong moly prices. In Q3, MVC's moly price was $1.77 per pound.During the quarter that ended, MVC repaid in full the $17 million loan provided by El Teniente. The company's bank debt, currently $73 million, which finance the company's expansion without dilution to shareholders, has a term to 2021 and the potential of earlier repayments through cash sweeps that should start in 2019 if copper price cooperates. Debt at year-end will be $67.5 million. 2018 has been an intensive capital expenditure or CapEx year. The Phase Two expansion project had a budget of $35.3 million, and actual CapEx is estimated to reach $39.9 million, driven by a more expensive peso, additional equipment and a complex commissioning of equipment to ensure continuity of operations. Of the $39.9 million of the project, $11.4 million were incurred in 2017. The vast majority of the remaining $28.5 million have been incurred or are expected to be incurred fully this year, although a final installation cost of the regrind mill will be incurred in 2019. The company's ending cash position was $23.3 million. Our cash flow projections for the rest of the year, as the present copper prices are strong and show our ability to make scheduled repayments, raise our funding and financial covenants at year-end. Rob and I will now take questions from call participants.
[Operator Instructions] First question is from Joseph Reagor from Las Vegas.
I guess, first thing, probably for Aurora, what does the capital spend look like starting next year on a sustaining basis?
Our sustaining CapEx is roughly $5.5 million plus inflation adjustments to prior year. So it's just short of $6 million, in that territory.
Okay. And are there any onetime items in the, let's call it, next 5 years or so we should think about on the CapEx front?
We currently have nothing of that sort. We are basically working on the basis of normal sustaining CapEx in the foreseeable future.
Okay. It's good on the CapEx front. Then probably more for Rob. Now that the Cauquenes expansion is done, what's kind of the next big-picture item for the company? Is it -- are there any other tailings, opportunities in the area? Is it looking at growing the company through a second operation somewhere? What are your thoughts there?
Joe, yes, we certainly expect to be -- complete our commercial production this quarter. So we're not done yet, but we do expect in Q1 to be free of our covenants from the banks, and that will allow us to get back into a dividend-paying mode. We do have a dividend policy of 1/3 of our earnings returning back to the investors. We've had 5 positive earnings quarters so far, so things are looking good. We do expect copper price to go up. So the company is very well positioned to benefit from increasing copper prices, and the primary aim would be to establish dividends again. With that, we would accelerate the paydown of debt, so to get our books in a little bit of better shape. So we'll both simultaneously pay dividends and accelerate paydown of debt. And then all the time, which we've been doing all along, look for another tailings operation. I believe that's where the biggest synergies are for the company. That's where our expertise is. I don't think we'd look at doing any mergers and acquisitions on exploration companies. That really isn't in our wheelhouse of expertise. So carry on looking for other tailings opportunities and execute on them when we find one. But we haven't found one yet, but we carry on looking.
And you touched on what would have been my dividend question. So you beat me to it.
The next question is from Terry Fisher from Toronto.
You've just about put this over the line, and we can see the finish line, and you're to be congratulated. It's been a long struggle. I know that. These things are never easy, and -- but the payoff is happening. So my questions all just got asked by my fellow shareholder. But it did prompt one other one in my mind, which is there are all different kinds of tailings situations around the world, and I would assume that you're looking at ones that allow for recovery of materials, whether copper or some other metal. But there's a lot of work being done because tailings ponds are not nice things environmentally. They just simply remediate the site. So it's an environmental type of activity rather than a recovery of a metal. So would you be just restricting yourself to a recovery situation? Or would you also look at environmental types of treatments on tailing ponds?
Terry, yes, thanks for your question and your support. We are, as you say, approaching the finishing line, and it's been a long 4 years since we started in Cauquenes, but we're almost there. What's next for us, as I mentioned to Joe, our experience is in moving high volumes of low-grade material positively. And we are seeing more -- so it's not just environmental issues. You're also seeing legal issues with tailings now. Companies' lawyers are realizing that old tailings dams built decades ago may not be structurally to today's specifications. And if there were any issues, the company is liable to huge lawsuits. So we're seeing environmental and legal pressures on companies with old tailings deposits. So I think the impetus is coming from legal. It's coming from environmental, and we all know that moving this material has big costs. And if you can offset it by recovering some of the metals contained with it, then a big company can either decrease their liability costs or even make a profit, as of [ community ] is doing. So I think we would certainly look at each situation as it comes. But whether it's an environmental driver or a legal driver or a sheer profit driver, I think we can handle any of those situations.
Well, there are precedents as well for large companies that have environmental and let alone legal liabilities from these types of tailings ponds, but there are other things. There are sludges and tanks and holding tanks for tank farms. So there's all those kinds of things. There's precedent in those situations for the company because it's a large company. You'd be a small part providing the service to them for them to like front-end the capital cost of the equipment or perhaps even own it, so that, that would reduce your capital commitment. You're really just bringing to the table your expertise. So that's something I just suggest you look into...
Absolutely.
There is a precedent -- it was a company called Newalta that used to do this kind of thing, particularly with the tank farms. But anyway, that's my comment.
[Operator Instructions] The next question is from Stephen Ottridge from Vancouver.
What is going to be your expected cash cost for Q4 this year and into 2019?
Stephen, we're still working on the budget for 2019. It's a little bit of a moving target at this stage because we're just trying to nail down what the variables are going to be in the new plant. We're still figuring out different mine plans. But Q4 so far looks like it's going to be very similar to Q3 in terms of cash costs. So what we've seen so far, that's a trend towards the low cash cost in Q3. It's going to be maintained in Q4, but we're not in a position to give any guidance on 2019 yet. But previously, we said $1.45, and there's no strong reason to change that yet.
Okay. Another question. The concentrate regrind mill going in, in April next year, it said in the news release that this will substantially strengthen cash generation. How does it do that?
It's not so much the regrind mill, Stephen. It's completion of the project. So we expect to achieve completion this quarter. The regrind mill, we don't really need it right now. The mill's performing quite fine without it. We do ultimately need it. And as I said, we're going to be putting it in next year, but it's not so much the regrind mill that's going to have the desired outcome but the completion of the project this quarter. Yes, the phrasing in the sentence should be that the completion is going to have the effect, not the mill.
Okay. Just a question on the debt, the Phase Two debt is $39.9 million. I'm wondering what Phase One debt is, and I thought that the rest is a different debt of $67.5 million.
The difference is either accrued interest or construction costs that for accounting purposes are deducted from the debt and then are amortized, Stephen. But the actual balances are the old in terms of principal are the ones that I was mentioning earlier, which are $73 million currently and $67.5 million at year-end. We have a debt repayment coming in December.
Okay. And that debt repayment is what -- is going towards Phase One debt?
It is Phase One debt. Phase Two will commence, the first repayment of capital, in June of 2019.
Okay. Okay. That's good. Yes. I guess one other thought, there is getting to be a worldwide shortage of sand and aggregates. And I was wondering with these tailings that you're producing now, I assume they're going to be a very consistent kind of site. Is there any possibility of using that as aggregate in the future somewhere?
There is. I've looked at this possibility in my previous slide. We haven't looked at it in detail at MVC. But typically, mine tailings have sulfides in them and they ground pretty fine. So most mine tailings are actually not that suitable for making concrete out of because you've got the sulfide issue, which goes acid on you. And then you've got the grain size, which is very sharp because it goes through crushing and what have you and typically too fine for good cement aggregate. So on average, a mill tailings doesn't really give you good concrete aggregates. And as I said, we haven't really looked at it in detail in MVC, but we sure do have a lot of tonnage. So it could be an option.
Okay. Okay. I just asked because I've been reading about the shortage of sand around the world.
Yes, I know. People are digging up beaches around the world. It's terrible.
Yes. That's not good news. One other thing, Robert. You've got onto the Board of Directors of a Vancouver company, BQE, and they're very involved in China. So is that perhaps where maybe you would be looking for tailing stamps to work on?
There's potential. The guys at BQE are doing a very good job treating wastewater. So there are synergies with Amerigo. But as of yet, we haven't really looked at any large-scale tailings operations in China, but there's no reason why we wouldn't.
And Ms. Davidson and Mr. Henderson, there are no further questions. Please go ahead.
Thank you very much for attending the call where we have provided our Q3 results. We will not have another conference call this year as we will be reporting our 2018 annual results sometime in February of next year. So we appreciate the support through the year, and we will talk again in 2019.
The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.