Edited Transcript of TKO.TO earnings conference call or presentation 30-Apr-20 3:00pm GMT

VANCOUVER May 11, 2020 (Thomson StreetEvents) — Edited Transcript of Taseko Mines Ltd earnings conference call or presentation Thursday, April 30, 2020 at 3:00:00pm GMT

* John W. McManus

* David I. Barilla

Benefit Street Partners L.L.C. – VP

Good morning. My name is Colin, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Taseko Mines Q1 Earnings and Production Results Conference Call. (Operator Instructions)

Taseko, you may begin your conference.

Thank you, Colin. My name is Brian Bergot, and I’m the Vice President, Investor Relations for Taseko. Welcome, everyone, and thank you for joining us today to review Taseko’s financial and operational results for the first quarter 2020. News release announcing our financial results were issued yesterday after market close and are available on our website at tasekomines.com.

With me today in Vancouver is Russ Hallbauer, Taseko’s CEO; Stuart McDonald, our President; John McManus, our COO; and Taseko’s Chief Financial Officer, Bryce Hamming. After opening remarks by management, which we’ll review first quarter and business and operational results, we will open the phone lines to analysts and investors for a question-and-answer session.

Before we proceed, 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 first quarter MD&A and the related news release as well as the risk factors particular to our company.

I will now turn the call over to Russ for his remarks.

Thank you, Brian. First of all, I’d like to wish everyone on the call good health for yourselves and your families, and that we get back to some form of normality in our lives in the not-too-distant future. While talking about business in these chaotic times seems to be misplaced, businesses of all sorts will be very important aspect of a return to normality.

Taseko has been very fortunate in many ways in the past few months. First, our Gibraltar mine is a community-based mine. Our employees all sleep in their own beds every night, not confined to a cafeteria and/or camp. This allowed us early on in the onset of the COVID pandemic to be able to immediately begin health protocols to protect our employees and to continue to run our operations.

Secondly, we have a battle-hardened workforce. We’ve been through this before. We survived the great financial crisis of 2008, 2009. We survived the copper price drop in 2016, and we survived the central BC wildfires 3 years ago. We were on our health protocols at the end of February well before the government protocols came out. And we’ve got to this point at this juncture in very sound shape with respect to all of that. As we go forward and we get to this point, I think the balance sheet and cost structure we now have in place and going forward illustrates all of that, and Bryce and Stuart will speak about that in a few minutes.

With our site costs now anticipated to drop by $0.40 to $0.50 going forward, we’re in very good shape to weather whatever is thrown at us. The great thing about Gibraltar likely many people do not really understand that is a collection of ore bodies at surface, unlike so many others that are just one big ore body. They are all connected at depth, but the pits we are developing all come to surface. So we have the Granite Pit, the Pollyanna Pit, the Connector Pit, the Gib West Pit and the Gib Extension Pit. So it’s much big — much different than many other big open-pit mines. So when we get into these types of situations we are into right now, we go back to basics. What is ore in the context of the day? What can we do to access and develop quickly new order releases? And can we provide continuity and consistency of operations year-over-year going forward?

This time, we really focused on the rest of 2020 and out into ’21, ’22 and ’23. Our immediate concerns was we generate operating profit. So for 2020, we’ll get our cost to the USD 1.40 per pound range, while we develop new order release pushbacks in some of these pits that I spoke about. This exercise that we’ve undertaken has proven very insightful and further gives us confidence in ongoing lower cost going forward.

As well, we are in the higher grade, as we’ve spoken about in the past, through the cyclical nature of our ore body developments. And then we’re in the lower portion of the Granite pushback, so things are presently going the way we expect to be, and we expect to be at the high end of our guidance based on graded production, which is obviously timely in these times. And John can take those questions on the operating side in a few minutes when we get later into the program.

I’d like to now turn the call over to Stuart to talk first about the financials.

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Stuart McDonald, Taseko Mines Limited – President [4]

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Okay. Thanks, Russ, and good morning, everyone. I’m now going to give an overview of our first quarter operating results and some of the recent initiatives that we put in place in response to the current environment.

And yes, at Gibraltar, in the first quarter, we produced just over 32 million pounds of copper and a total operating cost of $1.82 a pound. The first quarter production and costs were generally in line with our expectations that we had at the beginning of the year. And as Russ noted, the COVID-19 virus has not impacted our operations. We operated continuously through the quarter and up to date. But as we know, the virus has had a major impact on the global economy and the copper prices fell dramatically in the second half of March, ending the first quarter at about $2.17 a pound, and that price has had a significant impact on our financial results for the quarter.

Adjusted EBITDA was $5.3 million and adjusted net loss was $21.6 million, which is $0.09 a share. Both of those amounts include negative provisional price adjustments of $13.6 million related to the decline in copper price, and some of those provisional adjustments have already reversed in the second quarter with the improving copper price.

In late March, we took quick and decisive action to respond to the lower copper price environment. As Russ described, we have a lot of operating flexibility at Gibraltar, and we’ve made adjustments to our 2020 operating plans, which will reduce costs significantly without impacting the long-term mine plan requirements. We’re lowering mining rates, which saves money as well as deferring major equipment rebuilds where possible, and we’re also realizing input cost savings in a number of other areas. Most notable is the diesel prices, which are now 35% lower than the average price last year, which is equivalent to a $10 million annualized saving. The Canadian dollar has also weakened, which benefits us with our Canadian dollar cost structure.

We’re also expecting higher grades in copper production over the next few quarters, which will further reduce our unit costs. We’re reiterating our annual guidance of 130 million pounds of copper, plus or minus 5%. And actually, we now expect to be at the higher end of that range based on the revised plan. Taking into the cost — taking into account the cost-reduction initiatives and the increased production, we expect total site spending will fall by USD 0.40 to USD 0.50 per pound for the coming quarters, and that’s compared to Q1. That will ensure that Gibraltar maintains a solid operating margin and continues to produce free cash flow.

Our cash position remains strong. We ended the quarter with $50 million in treasury. And in April, we added $8.5 million to that through a transaction with a Osisko Gold Royalties. We’ve amended our existing silver stream agreement with Osisko to eliminate the delivery price of $2.75 per ounce of silver. So it’s a good transaction for us, and we’re happy to further develop our relationship with a supportive partner like Osisko.

We have a number of other levers available to manage our working capital this year, including opportunities to defer BC Hydro power costs and equipment lease payments. We’ll also be receiving additional cash proceeds from our April put options that expire this week.

So we’re quite comfortable with the balance sheet, and we continue to advance our growth strategy with a near-term focus on development of the Florence Copper Project. The production test facility operated as planned throughout the first quarter. We’ve been producing copper there for over a year now, and the operating results continue to validate the assumptions in our feasibility study and also provide valuable operating experience for our team with the in situ mining process.

Permitting for the commercial facility is progressing well with the Arizona state regulator. We expect a draft offer protection permit to be issued in the coming weeks with a public hearing to follow 30 days later. Discussions are ongoing with potential JV partners, and we believe that the sale of a minority stake in the project could represent a significant portion of the overall financing package for the commercial phase. We’re also planning to recommence discussions with lenders in the summer, with the objective of having a committed financing package in place prior to receipt of permits.

In the background, we continue to quietly advance our other long-term growth projects, and that includes permitting and First Nations initiatives to both Yellowhead and New Prosperity, and we expect further news on those initiatives in the weeks and months.

And with that, I’d like to now hand the call over to our CFO, Bryce Hamming.

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Bryce Hamming, Taseko Mines Limited – CFO [5]

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Thanks, Stuart. Good morning. I’d like to cover in further detail the first quarter financial results. The results of our operations this quarter are best seen in our cash flow statement. Despite the dramatic drop in copper prices in the second half of March, we had cash flow from operations of $18 million and really $21 million if you include the $3 million net proceeds from our copper puts that we purchased in January. This operating cash flow funded our ongoing capital spend at Gibraltar of $15 million, and our debt service on equipment loans of $5 million. The overall decrease in our cash of $3 million in Q1 from $53 million to $50 million is, therefore, really attributable to our continued investment in our near-term growth prospect, Florence, which totaled $5 million.

For the first quarter, we reported earnings from mine operations before depletion and amortization of $5.9 million. Earnings were clearly affected by the lower copper price and the timing of our shipments in the quarter. We also had $13.6 million in provisional price adjustments, half of which related to the 2019 shipments that were revalued in the first quarter. At the end of March, we still had 18 million payable pounds for Taseko share that was repriced in the second quarter. The recovery of the copper prices in April will result in at least $3 million of our $13 million provisional price adjustment reversing in Q2’s earnings.

We had concentrate inventory of 6.4 million pounds at the end of March. We did receive advanced payments on half of it, and we’ll be working to reduce inventory in subsequent quarters by working on the shipping schedule with our customers, especially given the higher production and sales expected under the revised mining plan.

Site operating costs were slightly reduced from the prior quarter and came in at $1.82 per pound due to the weaker Canadian dollar, diesel costs and other site cost savings that we’re beginning to see in greater capitalization of stripping costs in the quarter. We did purchase some fuel call options to provide a ceiling price on fuel at Gibraltar for the rest of this year. This will lock in a minimum $0.12 a liter savings for the remainder of 2020 compared to 2019. This is significant given we consume about 30 million liters of diesel at Gibraltar, but we still fully participate in these low prices we’re seeing.

Depreciation at $27 million remains higher compared to historic levels, but is generally in line with our previous guidance and should be at similar levels for the next 2 quarters. Adjusted EPS was a loss of $22 million or $0.09 per share due to the higher depreciation from Granite’s ore and the provisional price adjustments mentioned previously. GAAP net loss for Q1 was $49 million, which includes the $30 million unrealized foreign exchange, unrealized on our senior secured bond given the weaker Canadian dollar in the quarter.

Finally, we did do some housekeeping on the regulatory front, and I’ve just updated our base shelf prospectus, which expired earlier in the year. This was not filed in relation to any planned financing, just housekeeping and in line with our Q1 earning timing and filing of our AIF. So it’s in the normal course, and that we renew it every 2 years.

So I’ll now turn it back over to Russ for some closing remarks.

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Russell Edward Hallbauer, Taseko Mines Limited – CEO & Director [6]

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Thank you, Stuart and Bryce. In closing, before the Q&A, there’s something I’d just like to add. Most folks, they have little understanding of filling the concentrate screen and how long it takes, and certainly very few understand what it takes to ramp up a mining operation back up after a closure. There are 2 quarter factors missing in the copper supply demand discussion right now. First is scrap, and you’re starting to see it emerge as a point of contention. It’s just beginning to be spoken about, and it will have a major impact on the supply side flowing through to the final copper metal market.

Secondly, everyone just thinks when the suspensions are lifted in places like Chile and Peru on the big mine, it’s just back business as usual. Well, I’ll tell you, shutting down is easy, starting up is long and difficult.

Simplistically, if we look at it, end users of concentrate like China are starting to run out of concentrate. We’re starting to see that, and the spot TC/RC market is telling us this. Yesterday, a spot tender out of Escondida sold for 43 and 4.3, which indicates the tightness of the market. So the whole block of concentrate shut down 1.5 months ago is now being used up and depleted. It’s either in transit or docks or in inventories and is being used. Remember, freight time from Chile to China is over 3 weeks. So now a large portion of the screen is empty from the mine to the port, to the ships, to the smelters. Some may still be in transit, but likely 90% cleaned out at source. And how long to fill that screen back is the real question, and it’s not press the green button in a way you go immediately.

Simplistically, if you look at it, if you take 1 to 2 weeks for a recall of personnel, 1 week for a restart, if you have supplies. If you don’t, then it’s taking longer. If ore depleted before shut, you need to strip and expose ore, maybe 1 to 2 weeks. So anywhere between 2 to 4 weeks before you ship concentrate in a pipeline or a truck or port. Then you have to fill the port up. So to get a ship for 40,000, 50,000, 80,000 tons, that can take 2, 3, 4 weeks to fill the port for a ship, then 3 weeks to get it to a smelter. So best case, if you work back from that, you’re talking 10 weeks at best. So 2.5 months. And worst-case could go over 14 weeks, so almost 4 months. So there’s going to be no concentrate in the pipeline or limited concentrate. And that is what’s going to happen next. First indication is watching the spot TC/RCs, which, as I said 2 days ago or yesterday, Escondida spot contract win for ’20, 43 and 4.3, and we’re seeing smelter closures in China because of the lack of concentrate and the lack of spot or scrap metal. So that’s telling us a lot of what may happen in the next little while. Yes, you see inventories dropping slowly. But as concentrate dries up, that should accelerate. And that’s just a little insight from my years in the mining business.

So now I’d like to open the lines, operator, to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) So your first question comes from Craig Hutchison of TD Bank.

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Craig Hutchison, TD Securities Equity Research – Research Analyst [2]

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(technical difficulty) in terms of potential cost savings this year. Can you provide an approximate breakdown or how much of those savings is related to falling input costs? And how much is related to deferred spending on discretionary items and maintenance?

Just trying to get a sense in terms of as we return into better copper prices, how much of it will be a bit of a catch-up in terms of costs maybe next year or the year after?

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John W. McManus, Taseko Mines Limited – COO [3]

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All right, Craig, we missed the first, probably 30 seconds or more of your question, but I think I got the gist of it. It’s John here.

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Craig Hutchison, TD Securities Equity Research – Research Analyst [4]

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Okay. I can repeat it. John, in terms of the cost savings you guys quoted, the $0.40 to $0.50. I’m just trying to get a sense of how much of those cost savings are related to input costs like diesel and lower Canadian dollars? And how much is related to a cut to discretionary spending and maintenance?

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John W. McManus, Taseko Mines Limited – COO [5]

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Okay. Well, first off, none of it is related to Canadian dollar. We’re just talking about spending on the mine site. Second, it’s a blend of a whole bunch of different things that we’re doing. We’re working with our suppliers to reduce costs. We have reduced the stripping in the Pollyanna Pit because we just don’t need to do it right now. So strip ratio is going to be about 2 for the next while as we watch the copper price. And we’re also in higher grades, so we produced more copper with the same amount of effort. So that’s what brings our operating cost down. The stuff which is deferrals, we’ve included those in the costs of — if there’s a deferral like the BC Hydro, we’re taking that. That’s not in the $0.40 saving. That’s part of the spending because it’s just a deferral. So this — and the lower diesel prices, there’s some natural input decreases, diesel, explosives, steel, things like that. So I don’t have each one quantified. It’s a blend of the total.

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Craig Hutchison, TD Securities Equity Research – Research Analyst [6]

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So I guess you guys haven’t taken advantage of the hydro deferral program as of yet. But if you do, can you give us a sense of how much those cost savings would be on a monthly run rate?

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Stuart McDonald, Taseko Mines Limited – President [7]

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Yes. So we have actually applied it. We — there’s a special tariff that’s been put in place by BC Hydro, given the COVID situation. So we get a 3-month, minimum 50% deferral. But that, I think, what John — just to reiterate what John is saying is that’s not a benefit. So the first — for the first bill payment, we’re saving about, for Taseko share, about $1.5 million, but that savings isn’t being quoted by John when he’s talking about $0.40 to $0.50 of savings because that is just a deferral. So it’s a 3-month deferral, and we start paying that back in March next year over 9 months. And then on top of that, we have our long-standing deferral program where the copper price is below CAD 3.40 that will kick in. But at present, we’re just looking at the 50%. But if copper prices stay weaker, we’ll use the program longer, we’ll have the option to.

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John W. McManus, Taseko Mines Limited – COO [8]

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That program he’s talking about, Craig, was established in 2016 when there was a copper price crunch and the industry went to government and said, “Hey, you guys are charging us a lot for hydro.” And that program still exists. So there’s 2 in place for mining.

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Craig Hutchison, TD Securities Equity Research – Research Analyst [9]

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You guys still there?

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John W. McManus, Taseko Mines Limited – COO [10]

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Yes. Can you hear me?

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Craig Hutchison, TD Securities Equity Research – Research Analyst [11]

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Yes. You cut out. I mean it could be my phone, and I guess everyone is working from home these days. Maybe if I could, just one last question. If you guys structured a deal, I know you’re working on a potential minority sale for Florence, if you were to do a deal, would you look to use some of those proceeds at the corporate level, at the parent level? Or will it all be for future spending at Florence itself?

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Stuart McDonald, Taseko Mines Limited – President [12]

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Well, I mean the details of any deal are still being negotiated. But generally, partners are going to want to see their money going into the project that they’re investing in. And so my expectation is that any proceeds we get from that sale will be in — reinvested into Florence, and we’ll fund a big part of our Phase 2 CapEx. I mean they could also potentially fund some PTF operations in the near term, but those are relatively small dollars anyway. But no, generally speaking, we don’t expect big proceeds to be brought to the corporate level because we don’t really need proceeds at the corporate level. We’re pretty comfortable with the balance sheet that we have and the operating margins that we have at Gibraltar. So that’s basically where we stand today.

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Operator [13]

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Your next question comes from Edward Montgomery from Canaccord.

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Edward Montgomery;Canaccord Genuity;Director of Equity Sales, [14]

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I just had a quick question in relation to the Florence project in terms of just upcoming news flow. I know, Stuart, in your release, you mentioned the environmental permitting and everything. Any — I know you mentioned on the call, but any bit more color on that and how things have been impacted in the current markets or anything to articulate on that front, please?

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Stuart McDonald, Taseko Mines Limited – President [15]

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Yes. Just — so I guess the question was for a bit more color on the permitting process in Florence. And I think — yes, I mean, I think from the Arizona state side, they’re moving expeditiously, where they’re moving on a pretty clear time line. Draft permit should be coming in the next few weeks?

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John W. McManus, Taseko Mines Limited – COO [16]

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Yes.

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Stuart McDonald, Taseko Mines Limited – President [17]

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Yes. There’ll then be a public hearing. I don’t know, John, if you have anything to add on that front.

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John W. McManus, Taseko Mines Limited – COO [18]

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So there’s 2 permits that we need. One is from the state, and that’s the Aquifer Protection Permit. And the other is from the U.S. Environmental Protection Agency that’s called Underground Injection Certificate. The Arizona process is a little easier to foresee. They have time lines that they follow, and the state is very optimistic, and they’re very supportive of this project. So we expect that draft permit in about a week or 2 to go public. Then it’s 30 days wait and public comment, then there’s a hearing. Then the state alters the draft to what they need to, to satisfy any public comments. And then the final permit is issued, and we’re seeing that probably September.

With that in hand, the PTF, the production test facility, just continues on. We don’t need a new UIC from the EPA to continue the production test facility.

The EPA is a little more complicated and a little more, not as good see through on how long things take, but we’re working very closely with EPA in San Francisco. And they’re very attuned to the project. They’re also supportive, but they’ve got a process to go through. We see that coming. It could be by the end of this year. But again, it’s a little harder to predict.

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Operator [19]

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Your next question comes from Yuen Low from Shore Capital.

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Li Low, Shore Capital Group Ltd., Research Division – Research Analyst [20]

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I’m not sure whether I missed any of this because I had some interference on my line. Could you go a little bit more into the mine plan? I think you said the stripping is going to be down to about 2 for the next few quarters and that you’re into higher grades. Are you intentionally targeting higher grade parts of the ore body? Will the shipping has to be caught up at some point? And could you also talk to us about iron and recovery for the next few quarters?

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John W. McManus, Taseko Mines Limited – COO [21]

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Okay. That’s a lot of questions in one question. So as Russ mentioned, we’ve got a great deal of flexibility at Gibraltar because we have a number of different working phases. So in the normal course, we put all of our equipment to work and set ourselves up to maintain as much flexibility as possible, which gives us the opportunity to do what we’re doing right now is reduce the mining rate. What that does is we reduce the mining rate in the high-strip ratio area, and we actually accelerate the mining rate in the lower-strip ratio area, which is the Granite Pit. Most of our ore will come out of there for the next while until the end of the year, and it is higher grade than what we would have got from a Pollyanna Pit at the same time. Not a lot, but enough to push us towards the high end of the guidance. We also — by accelerating the Granite Pit, it gives us an opportunity to move water from the Gibraltar Pit into the Granite Pit because it will be done sooner, and then we can develop into the Gibraltar Pit. And that’s really the key to what we’ve been able to do here so that we’ve got out to 2023. We see no effect on production from Gibraltar and continued lower costs. We also don’t have to move the crusher, which was scheduled to be moved in 2022. So that’s a big capital expenditure that we can push out for a few more years.

Iron ore — or iron in the ore, if you get a high iron content, you have to try and depress that to maintain your concentrate grade. And when you do that, you end up losing a bit of the copper, too, so your recovery goes down. Does that help?

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Li Low, Shore Capital Group Ltd., Research Division – Research Analyst [22]

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Yes. I was just — I was just wondering what the levels of iron you will be seeing in this revised mine plan. Will we see recoveries back up to the usual level — more usual levels for the next few quarters? Or will they remain at quarter 1’s level?

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John W. McManus, Taseko Mines Limited – COO [23]

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In this portion of the Granite Pit, the iron is higher than normal. It’s not a lot higher, but it’s enough that it gives us some issues. In the flotation process, we are working with different reagents to get a better response. So I wouldn’t say that we expect to see recoveries down. And actually, with the grade going up, the recoveries go up naturally, too. So I think we’ll be more normal recovery for the foreseeable future.

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Operator [24]

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Your next question comes from David Barilla from BSP.

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David I. Barilla, Benefit Street Partners L.L.C. – VP [25]

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My questions have been answered. Appreciate that, thanks.

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Operator [26]

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Okay. So your next question then comes from Matt Vittorioso from Jefferies.

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Matthew Vittorioso, Jefferies LLC, Research Division – Analyst [27]

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I can see that you guys are doing a lot of work to, obviously, to lower cost, defer some spending. Just curious if you can talk about whether you think Gibraltar can generate enough cash to cover its interest and expected CapEx. I know you said you thought it would be cash flow positive. But just want to be clear, are we talking about being able to cover fixed charges, interest and CapEx this year? And I understand that copper price is a big variable there. But I guess just for the sake of argument, if copper were to stay here today, do you guys think you could be — do you think you could preserve the liquidity you have today at Gibraltar?

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Stuart McDonald, Taseko Mines Limited – President [28]

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Yes, yes, yes. Matt, yes, we’re here. We don’t have — we’re going to — these copper prices, we’re going to probably generate cash over the remainder of the year with this new plan we have at Gibraltar, and that’s cash at the corporate level. So as I said, we’ve taken $0.40 to $0.50 out of the cost structure here. We’re pretty comfortable with where we stand. I think in Q2, we should see the cash grow a little bit, maybe stay around where it is. It’s dependent on copper prices, obviously, which are moving every day. But yes, we ran our plans a month ago at $2.20 copper, and that’s the kind of scenario that we’re planning for. So yes, we’re pretty comfortable.

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Matthew Vittorioso, Jefferies LLC, Research Division – Analyst [29]

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Okay. Good to know. And then I guess, just on Florence and the financing there, I guess it’s potentially 2 components. One, selling an interest in the project. And secondly, some sort of debt financing. I guess, given where some of your corporate debt trades today, that would imply a high cost of capital for corporate debt. Are you contemplating then project-level debt? And if there’s any way to kind of quantify the 2 pieces, I guess, you still need to raise roughly the $200 million. Is that mostly a JV stake sale and maybe a small amount of debt? And then again, just where might that debt sit.

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Stuart McDonald, Taseko Mines Limited – President [30]

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Yes. In terms of where it might sit, and the current expectation is that it would likely be project-level debt. But again, that is — and that’s where lenders can be comfortable that they’re secured right at the Florence level and not be impacted by the bonds or anything else. So Florence, as you know, under the bond is not part of the bond security package. So that’s an unencumbered project at this point. In terms of our financing expectations, obviously, a lot of that will depend on how the negotiations go with potential JV partners. If we can get a good valuation and the valuation that we want, we could scale that investment up higher. If we don’t, it could be a smaller piece. But I would estimate anywhere from 100 to 125 potentially from a JV partner, and the remainder would be filled with project debt or potentially royalties as well. That’s another option that we will look at. So — but those are moving pieces and subject to a lot of further discussions.

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Operator [31]

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There are no further questions at this time. Please proceed.

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Brian Bergot, Taseko Mines Limited – VP of IR [32]

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Thanks very much, everybody. Have a good summer and we’ll talk to you soon. Bye.

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Operator [33]

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Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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