Copper Mountain Mining Corp

TSX:CMMC

Earnings Call Transcript

[Operator]

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation's 2017 Year-End Earnings Conference Call. [Operator Instructions] Rod Shier, Chief Financial Officer of Copper Mountain Mining Corporation, you may begin your conference.

[Rodney A. Shier]

Thank you, Chris. After remarks by management, we'll open the lines to participants for questions as noted. Please note that comments made today that are not of a historical factual nature may contain forward-looking statements. This information by its nature is subject to risks and uncertainties that may cause the stated outcomes to differ materially from actual outcomes. Please refer to the bottom of our latest news release and MD&A for more information. For those of you following along the webcast, we will be referring to page number of the supporting slides. I'll now turn the call over to our CEO, Jim O'Rourke, for his remarks.

[James Calhoun O'Rourke, Chairman, President & CEO]

Good morning, everyone, and thank you for joining us this morning. Today, we'll discuss the 2017 year-end results of the operation at the Copper Mountain Mine and our corporate financials. I'll briefly summarize the financial results and provide an update on the various operational activities, after which, Rod will provide financial details for 2017 year-end. Turning to Page 2. First, 2017 was a good year for Copper Mountain as the improved copper price, coupled with the [indiscernible] production rate, allowed us to increase our cash position to $45 million after senior debt payments. During the 2017 year, Copper Mountain completed a total of 13 shipments of copper concentrate, which generated $304 million in revenue, net of treatment and refining charges and price adjustments. Gold and silver revenues accounted for about 14% of the gross revenues during the year. The total production for 2017 year was 88.3 million pounds of copper equivalent, which included 75.9 million pounds of copper, 23,600 ounces of gold, 277,000 ounces of silver. Copper production was within guidance but at the lower end, reflecting the 2-week planned shutdown of the concentrator while we changed the SAG mill bull gear. Now I'll refer you to Page 3. Mining activities for 2017 continued to be focused in the Pit 2 Saddle-Oriole Super Pit, a major -- majority of the ore coming from the Pit 2 area. The Oriole Pit, which is at the south end of the Super Pit, provided about 8% of the ore processed during the period. During the year, a total of 72.6 million tonnes of material was mined, including 26.2 million tonnes of ore and 46.4 million tonnes of waste for a strip ratio of 1.77:1. Our mining fleet continues to enjoy high mechanical availabilities, which helped contribute to the 198,900 tonne per day mining rate achieved. This rate was above our 2017 mining guidance rate of 180,000 tonnes per day. Mining costs per tonne during 2017 averaged $1.69 per tonne moved. I'll now refer to Page 4 to provide an overview of the mill performance. During the year, the mill processed a total of 14.1 million tonnes of ore, creating 0.32% copper. Gold recoveries averaged 77.2% for the year, while mill operating time was 90.3%. The mill achieved an average throughput rate of 38,600 tonne per day during the period. Mill throughput and mill operating time averaged 40,600 tonne per day and 93.2%, respectively, during the second half of the year, reflecting the normal operation following the downtime at the first half when the SAG mill gear was replaced. Now move on to Slide 5. 2017 site costs were USD 1.38 per pound of copper produced, and total cash costs were USD 1.81 per pound sold, both net of precious metal credits. These are compared to the site costs of USD 1.17 per pound copper produced and total cash costs of $1.60 per pound copper sold, net of precious metal credits for 2016. Now we refer you to Page 6. We continue to strive for improvements at the mine site, and the gains made in the past few years have positioned the company well to take advantage of the projected higher copper prices. 2018 production is estimated to be 80 million pounds of copper, plus or minus 5%. Based on a mill feed grade of 0.31% copper, mill throughput rate of 40,000 tonne per day and a planned mining rate of 190,000 tonne per day. The mine operation is well-equipped to meet our guidance with the challenges being mill recoveries. A total -- a number of programs have been initiated, which includes limiting the mill tonnage to obtain a finer grind to improvement or liberation, plus adding flash flotation and upgrading [ scavengers ] at the cleaners. I'll now refer to Pages 7 and 8 and discuss exploration. On the exploration front, the company completed 2 drill programs in 2017. The first drill program was within the active mining areas and focused on extending the mineralization in Pit 2 further to the west as well as adding additional resources in the Saddle Zone. This program had some success with a modest increase in mineable tonnes. The second drill program was in the New Ingerbelle deposit located 1 kilometer West of the Super Pit. The objective was to validate and confirm historical data. The program was successful in both confirming the historical data as well as expanding mineralization, both at depth and laterally. Resources previously estimated from historical data can now be upgraded to the measured and indicated status, thereby allowing the advancement to reserves. The New Ingerbelle deposit has a potential to add an extra 10 years to the mine life. Additional drill programs are planned to follow up the 2017 drill programs, and they will be completed during the summer. I'll answer specific questions during the answer-and-question period for those wishing more detail. I'll now ask Rod to review the 2017 year-end financials.

[Rodney A. Shier]

Thank you, Jim. As noted on Slide 9, the company recognized revenue of $304 million for the period ended December 31, 2017, after pricing adjustments and treatment charges. And this is based on sales of 73.9 million pounds of copper, 23,800 ounces of gold and 264,800 ounces of silver. The average realized copper price for the 2017 year was USD 2.82 per pound as compared to USD 2.19 per pound for the period ended December 31, 2016. Copper prices increased by about 28% year-over-year. As noted on Slide 10, cost of sales for the year ended December 31, 2017, was $245 million, which resulted in a gross profit of $59.1 million as compared to cost of sales of $258 million, which resulted in a gross profit of $19.6 million for the year ended December 31, 2016. General and administrative expenses, which include some mine site administrative expenses, were $6.7 million for the year ended December 31, 2017, slightly above the $5.6 million for the comparative 2016 year. For the year ended December 31, 2017, the company recorded finance expense of $13 million, on par with the finance expense of $12.6 million for the year ended December 31, 2016. Finance expense primarily consists of interest on loans and the amortization of our financing fees. For the year ended December 31, 2017, the company recognized a noncash unrealized foreign exchange gain of just under $21 million compared with the noncash unrealized foreign exchange loss of $13 million for the year ended December 31, 2016, which primarily relates to the company's debt that is denominated in U.S. dollars. During 2017, the company recognized a noncash unrealized loss on the interest rate swap of only $87,000. This compares with a noncash unrealized loss on the interest rate swap of $91,000 for the year ended 2016, and this is all related to the revaluation of this interest rate swap liability required on the company's loan agreements. It should be noted that these adjustments income are required under IFRS, are noncash in nature, as outlined in the company's MD&A and statement of cash flows. For the year ended December 31, 2017, the company recorded a current resource tax expense of $1.88 million as compared with the current resource tax expense of $1.15 million for the previous year. This all resulted in a net income attributable to shareholders of the company for the year ended December 31, 2017, of $47.9 million or $0.36 per share as compared to net income of $7.7 million or $0.06 per share for the period ended December 31, 2016. As you can see, our income statement, foreign exchange gains and losses can vary significantly on a quarter and yearly basis, therefore, we really need to look at adjusted earnings, adjusted EBITDA to better measure the company's financial performance. After removal of all the accounting noncash items, the company reported adjusted EBITDA of $90.9 million and an adjusted earnings of $35.8 million or about $0.27 a share for the year ended December 31, 2017 compared with an adjusted EBITDA of $55 million and an adjusted loss of $11.7 million or $0.09 per share for the year ended December 31, 2016. This increase in adjusted earnings is primarily due to the increase in the copper price and clearly demonstrates the company's leverage to the copper price. As noted on Slide 11, the company had cash flow from operations before working capital changes of $102 million during the 2017 year or about $0.77 per share as compared to $68.9 million for the 2016 year or about $0.55 per share. The company continued to add cash to the balance sheet and pay down debt and ended 2017 year with $45 million in cash and cash equivalent, and this is after paying down $50 million in principal and interest since the start of the year. At the end of the year, the company also had an additional $15.4 million in concentrate sales receivable and $11.3 million of concentrate inventory ready to be shipped. In conclusion, we enjoyed a strong operational year and has paid down debt and placed cash on the balance sheet. We hope to enjoy a continuing positive copper price trend as we add resources and reserves work towards increasing our mine life and continue to implement our business growth strategy with the acquisition of Altona that is scheduled for our shareholder vote on March 26. We would now like to open the lines for any questions people may have.

[Operator]

[Operator Instructions] Your first question comes from Orest Wowkodaw of Scotiabank.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

I was hoping we can get an update on the Altona transaction, specifically when we could expect, I guess, a circular filed from the Copper Mountain side. And then I had some questions also about the required vote from both companies. Can you give us the specific thresholds that need to be met in order to approve this transaction from both sides from a shareholder vote perspective, please?

[Rodney A. Shier]

Yes, sure. On the -- with respect to the transaction, the record date for both companies was last Friday, February 16. You're going to be seeing circulars mailed out this week on the 22nd. With respect to Copper Mountain, we have a single threshold for vote -- and that's just a majority of votes at the shareholder meeting with...

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Did that require like 50.1%? Or is that...

[Rodney A. Shier]

Exactly, yes, exactly. Orest, that's right.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay, 50.1%. Okay.

[Rodney A. Shier]

And then down with respect to Altona's shareholders, the -- yes, and our vote -- as I noted in the top there, we're voting on the 26th of March. With respect to Altona's shareholders, they need to get 75% of their shareholders voting and get a majority vote at the meeting, so 50.1% of those at the meeting. So there's sort of a two-tier threshold there.

[Orest Wowkodaw, Senior Equity Research Analyst of Base Metals]

Okay. And both those votes are on the same day?

[Rodney A. Shier]

Yes, they are.

[Operator]

Your next question comes from Stefan Ioannou of Cormark Securities.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Just wondering, just looking with exploration going forward this year, have you set a sort of a budget yet in terms of how much drilling you might do at New Ingerbelle or what additional drilling needs to be down there to really sort of get your hand around the resource? Or do you -- I mean do you have enough drilling right now to sort of update the resource? Or do you want to do some more drilling before you do that?

[James Calhoun O'Rourke, Chairman, President & CEO]

Well, there is a -- yes, we need about -- if we want to expand the resources, looking at probably around 10,000 to 15,000 meters of additional drilling that we would like to complete. Hopefully this year, but the budget has not been set at this time.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Okay. That's great. And is there much drilling plan in the Super Pit areas still? Or is that sort of just as we've been seeing over the last years? Or is there any major change this year in sort of Super Pit drilling?

[Rodney A. Shier]

I guess where we are, Stefan, just to just clarify that point. We have -- as you know, we have to get approval from our banks every year. So we put a placeholder in there of about $1.5 million for exploration drilling this year, and Peter needs to put that program in and get approved as a second step by our board before we can go spend that money.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Okay, okay. And so just back on New Ingerbelle. So you -- I mean assuming that you could do 10,000 to 15,000 meters of drilling there if the budget permits it, you would do that. And so would we see a New Ingerbelle resource update like late this year then? Would that be sort of the anticipated timing for that?

[James Calhoun O'Rourke, Chairman, President & CEO]

No, I think what we're looking at, we have the drilling right now to do an updated resource.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Okay, you do yes.

[James Calhoun O'Rourke, Chairman, President & CEO]

We plan to put that out probably midyear.

[Stefan Ioannou, Analyst of Institutional Equity Research]

Okay, and then you'd just beef it up with potentially some additional drilling through the summer?

[James Calhoun O'Rourke, Chairman, President & CEO]

Right, yes, we'll continue to try and expand it.

[Operator]

Your next question comes from Alex Terentiew of BMO Capital Markets.

[Alex Terentiew, Analyst]

Just a couple of questions for me. First, cash cost in the quarter, $2.05 a pound. They're up this quarter from previous quarters. Can you just give a bit of color what drove that? And if you're seeing some cost inflation come back to the mining industry now that the industry is doing a little bit better again. I'll let you answer that, then I'll ask my next one.

[James Calhoun O'Rourke, Chairman, President & CEO]

You can go first.

[Rodney A. Shier]

Yes, Alex, December is a year where we pay out the bonuses to the employees of the mine site, and they did achieve their production cost and production target numbers, so they got full bonus this year. So there'd be a little bit extra expenses in there, and that would see it increase. You'll note -- I did that because I noticed that too and I did the calculation. If we did a similar production year as last year, our cost would have been very similar. I think it was an all-in at $1.65 compared to where it was, so I think it's also the little bit lower production.

[James Calhoun O'Rourke, Chairman, President & CEO]

I think also you have probably noticed that our gold production was down a little bit so the credits were a little less. But with regard to your question about pressure on the cost, so far, we haven't experienced too much, but we have a little bit in labor. We've had decoupler trucks this year, which will add to the cost bottom line. And also, I think fuel is probably one of our biggest uncertainties as you see us mark gold economy strengthens a bit. Maybe fuel prices will go up, and that has an effect on us. [indiscernible].

[Alex Terentiew, Analyst]

Okay. That's very much in line with kind of what we're hearing from some other companies, but I just wanted to check. Last question, I understand a new technical report and mine plan update is in the works, but I just wonder if you could walk through us a little bit the changes between the 2015 tech report which called for higher grades of around 0.37% copper in 2018 versus your guidance now for a 0.31%. Maybe just walk us through what's changed in your mine plan and maybe what could we expect in this new update.

[James Calhoun O'Rourke, Chairman, President & CEO]

I think the biggest change was during the period of low copper prices. We moved more to the north of the Super Pit area, where the gold grades were a little higher and the copper grades were lower. So in Pit 2, we had moved there away from the Pit 3 area where you have the higher copper grade. But I guess if you look at last year's results, we produced about 30,000 ounces of gold last year and only about 23,000 this year. So the gold grade has been lower but -- sorry, the gold grade has been lower this past year, probably a lot due to the recovery and whatnot but also depending on the areas of the pit we're in. But there was a conscious decision to move in the probably 2015, 2016 era from the Pit 3 area, which had the higher copper grade, to the Pit 2 area, which had the lower copper grades and the higher gold grades.

[Alex Terentiew, Analyst]

Okay. And for the new mine plan, like I said, I understand it's in the works. But are you kind of thinking of a relatively smooth grade profile? Or will there be some periods of peaks where, like I said previously, you had some going to 0.37%, I think maybe even a little bit higher but then obviously offset by some periods of lower grades as well.

[James Calhoun O'Rourke, Chairman, President & CEO]

Well, I think one of the things you probably noticed is that the 2016 drill program was quite successful in extending the Pit 2 area to the west, and we do have some provisions ultimately to backfill Pit 2 once it's mined out. And we don't want to sterilize that extension, so we will be probably a little longer into that northern area of the Super Pit.

[Operator]

[Operator Instructions] Your next question comes from Marco Rodriguez of Stonegate Capital.

[Marco Andres Rodriguez, Director of Research & Senior Research Analyst]

Just wondering if you can maybe talk a little bit more about your thoughts here regarding recovery rates for fiscal '18 and beyond. I know you made some comments in terms of some items that you're looking to do to kind of bring that up. Should we be thinking that it kind of stay steady here on that 77% rate? Or should we think that you can kind of make some meaningful improvements there?

[James Calhoun O'Rourke, Chairman, President & CEO]

Well, we're planning about 79%.

[Marco Andres Rodriguez, Director of Research & Senior Research Analyst]

Got you. Okay. And last question here. I'm not sure if I missed this on the call. But was there any sort of CapEx guidance in the fiscal '18?

[James Calhoun O'Rourke, Chairman, President & CEO]

No, we didn't give any guidance, but we're typically around $5 million, $6 million a year.

[Operator]

There are no further questions at this time. I'll return the call to our presenters.

[Rodney A. Shier]

Okay. We'd like to thank everybody for dialing in. And as usual, if you have any direct questions, please call or e-mail Jim or myself directly, and we'd be more than happy to answer them. Thank you very much, and have a great day.

[James Calhoun O'Rourke, Chairman, President & CEO]

Bye.

[Operator]

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