Copper Mountain Mining Corporation (OTCPK:CPPMF) Q2 2020 Earnings Conference Call July 29, 2020 10:30 AM ET

Company Participants

Gil Clausen – President and CEO

Don Strickland – COO

Rod Shier – CFO

Conference Call Participants

George Topping – Industrial Alliance

Stefan Ioannou – Cormark Securities

Oscar Cabrera – CIBC

Operator

Good morning. My name is Christine, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to avoid any background voice. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]

Please note that the 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 outcome to differ materially from actual outcomes. Please refer to Slide 2 of today’s presentation and Copper Mountain’s second quarter 2020 Management’s Discussion and Analysis for more information.

I would now like turn the call over to Gil Clausen, President and CEO of Copper Mountain Mining. Please go ahead, sir.

Gil Clausen

Thank you, and good morning, everyone. Starting on Slide 3, as you can see, I have with me Don Strickland, Copper Mountain’s Chief Operating Officer; and Rod Shier, our Chief Financial Officer. I’ll begin by providing a brief update and summary of the quarter. Don will provide a more detailed discussion on our operation, followed by Rod, who will speak to our financial results. I’ll then wrap up and open the call to questions.

Turning to Slide 4, we had a strong second quarter, despite the pressure on copper prices due to COVID-19. This is a result of the fast response we had in implementing our revised mine plan in early March. We were able to navigate through the low copper price environment and exceed our plan expectations. This adjustment kind of demonstrates the sequencing flexibility of the Copper Mountain Mine and our team’s ability to adapt quickly to the changing market conditions.

Copper equivalent production in the second quarter of 2020 was up 8% compared to the second quarter of last year to 23.9 million pounds of copper equivalent, which includes 18.1 million pounds of copper, nearly 7,500 ounces of gold and over 86,000 ounces of silver.

A meaningful contributor to our strong quarter was our precious metals production. Gold production was up 8% and the gold price was up 32% in the quarter compared to last year. As you are well aware the gold price has continued to rise since. Silver production was also up, it increased 31%, and silver price was up 11%. Silver price has gone up significantly post the second quarter.

And just as a reminder, that Copper Mountain Mine has a reserve of 1.5 million ounces of gold and over 10 million ounces of silver. And if you look at our life of mine plan, you’ll see that in many years, we expect to produce 50,000 to 70,000 ounces of gold and about 550,000 ounces of silver, all of which is completely unhedged. At today’s metal prices, gold production represents about 30% of the value of Copper Mountain Mine reserves, or 25% when you factor in recoveries. This is a material precious metals byproduct exposure, which differentiates Copper Mountain from a lot of our copper producing peers.

In the quarter, we were successful in reducing costs on all fronts. C1 costs decreased 15% to $1.48 per pound, AISC down 9% to $1.67 and all-in costs 29% lower to $1.67 per pound. AISC and AIC were the same as there was no deferred stripping or low-cost stockpile inventory mining costs incurred in the quarter.

We’re on track to achieve our 2020 production guidance of 70 million to 75 million pounds of copper. Production is expected to improve in the second half of the year as the result of slightly increased grades, but increased recovery. Don will go into more detail on our mine plan later on this call.

All-in cost is currently tracking below our guidance range. And while we expect to continue to experience lower AIC in the second-half of the year, we’re maintaining our guidance in light of any unforeseen impacts that could occur in relation to COVID-19. However, we will reevaluate our cost guidance next quarter.

Turning to Slide 5, on the financial front, revenue increased this quarter by 40% to CAD91 million when compared to last year, largely driven by a positive mark to market adjustment of 19 million as a result of increasing copper prices.

Gross profit, earnings and cash flow also increased significantly this quarter compared to last year, with metal prices improving and lower costs. Our objective is to build our cash position to allow for a rapid restart of the installation of the third ball mill, which is the second stage of the 45,000 tonne-per-day mill expansion project.

We completed the first stage, the installation of the direct flotation reactors in early July, on time and on budget. We anticipate recommencing installation of the third ball mill late this year or early 2021, dependent on market conditions.

In the quarter, we also completed a bankable feasibility study on our Eva Copper project in Australia. We improved Eva economic and operating metrics across the board – MPV, IRR, production and mine life, and lowered costs. It was a great result.

I’ll now turn over the call to Don to go over our operational results for the quarter.

Don Strickland

Thanks, Gil. Starting on Slide 7, as Gil highlighted, we quickly revised our mine plan in March in response to the COVID-19 pandemic. The mine has not had any COVID-19 cases. The team has worked very closely with the BC Ministry of Mines, the BC Chief Medical Officer, the Mining Association of BC and our local communities to mitigate risk associated with COVID-19. It is through this coordinated effort that we’ve been able to safely maintain full operations as per our revised mine plan.

Mine performance was in line with expectations during the quarter. As shown on this slide, in Q2, we focused on mining Phase 1 as a main ore supply, with some supplemental ore supply from Phase 2. Phase 3 mining was deferred during the quarter, with mining restarted in early Q3. Phase 1 will complete in early Q3, and we will transition to Phase 3 ore as our main ore supply, providing higher grade for the second-half of the year and for 2021.

The western lobe of Phase 1 has been mined out and is presently being backfilled with waste from Pit 3, or Phase 3. This provides a short waste haul. We will continue to operate on our revised mine plan for the remainder of the year, with lower mining cost due to the short waste hauls and the lower strip ratio.

Turning to Slide number 8, this is a picture of the world’s first hydraulic shovel operating with Minesense’s XRF technology. We are presently sorting ore and waste at the shovel bucket with the shovel. A couple years ago, we reviewed available ore sorting technology and decided to move forward with Minesense. Two years ago, we completed both pilot work and confirmed the potential of this technology for our ore body. We then moved forward with production development.

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Over the last year, we’ve been working in close partnership with Minesense, advancing the technology on the shovel. The objective was to achieve reliable results with a robust equipment design that can stand up to this application. We have evolved to the installation that you see located between the pins of the shovel bucket. We are pleased with the results to-date. We are now finalizing the system automation and integration into our fleet management system. We are also commissioning a system on our loader and will be installing the system on our largest hydraulic excavator later this year.

We believe in this technology and we believe the transparent partnership between Copper Mountain and Minesense and our respective innovative cultures will support capturing full potential of this technology.

Turning to Slide number 9, the mill continued to operate very consistently on all metrics during the quarter, and performance was in line with expectations. Recovery has returned to historical levels as we transition to courser mineralogy and complete milling of the small reserve tonnage of fine mineralogy ore that is associated with Phase 1.

Turning to Slide number 10, we completed the installation of the DFR circuit and started commissioning it in early July. It is a low-CapEx, high-value project, and it was completed on schedule and on budget even with the additional challenges presented with COVID-19. This highlights the capability of our project and operating teams to deliver this project on schedule and on budget under these unprecedented conditions. The objective of this project is to increase the final concentrate grade from 25% to 28% copper, a 12% increase, which will reduce cost and increase revenue. The target was quickly achieved and we are now focused on optimizing the circuit.

Turning to Slide 11, Copper Mountain is fully committed to responsible mining and implementing the Mining Association of Canada TSM, or Towards Sustainable Mining standard. We have achieved a AA rating on Tailings Management and are committed to achieving AA ratings on Safety and Health and Aboriginal Community Outreach in 2020, followed by A rating on the remaining protocols by the end of 2021.

Turning to Slide 12, In Q2, we published the updated feasibility study on the Eva project. The project now has a longer 15 year mine life, with increased copper production, averaging 100 million pounds per year. This has significantly improved the project economics, increasing the after-tax NVP 8% to $437 million with a 29% IRR.

Some of the key updates include the additional exploration drilling completed on Blackard in 2019; the inclusion of Blackard and scaling deposits in the mine plan, following extensive metallurgical test work and associated flow sheet updates, and mill flow sheet changes to increase the tonnage rate and reduce operating costs. Eva is a robust, low-capital-intensity project in a Tier 1 mining jurisdiction.

I now turn the call over to Rod to go over our financial results.

Rod Shier

Thank you, Don. As noted on Slide 14, revenue for the second quarter was CAD91 million on the sale of nearly 19 million pounds of copper, approximately 6,300 ounces of gold and a little over 80,000 ounces of silver. Higher revenue in Q2 2020 as compared to Q2 2019 was a result of higher pounds of copper being sold during the quarter and a 19 million dollar positive mark to market adjustment on revenue for unsettled shipments at the end of the quarter. In addition, stronger precious metal pricing in Q2, 2020 also helped bolster revenues during the quarter.

Cost of sales for the second quarter of 2020, was CAD60.8 million as compared to CAD63.5 million for the second quarter of 2019. Despite the revised operating plan announced in early March 2020 that has 15.5 million fewer tonnes of rock being mined this year, cost of sales was relatively unchanged when compared to the same period in 2019. This is a result of higher deferred stripping cost experienced in 2019 as compared to 2020, as this has the effect of reducing cost of sales for that comparative period. This all results in a gross profit of CAD30.2 million for the second quarter of 2020 as compared to CAD1.6 million for the same period in 2019.

Turning to Slide 15, net income was CAD31.9 million in Q2, 2020, or about CAD0.12 per share as compared to CAD600,000 or CAD0.01 per share for Q2, 2019. Net income for Q2 2020 included a non-cash unrealized foreign exchange gain of about 14.5 million as compared to a non-cash unrealized foreign exchange gain of about 6.7 million in Q2 2019, a differential of approximately 7.8 million, which was primarily related to the company’s debt that is denominated in U.S. dollars. In the second quarter of 2020, EBITDA was CAD49 million, while adjusted EBITDA was CAD15.7 million.

Cash flow from operations was CAD41.5 million before working capital changes, and about CAD15.6 million after working capital changes. We made investments of 9.6 million during the quarter into capital projects like the DFR project and long-lead items for the Ball Mill 3 expansion. In addition, we further reduced down debt by 11.5 million, made up of lease payments and the senior credit facility principal and interest payments. This allows us to end the quarter with approximately CAD 29million in cash.

Cash flow is growing as evidenced by the quarter end 19 million mark to market adjustment, which was based on a copper price of about $2.72 a pound copper. And as these metal prices continue to remain strong, the company is very well positioned to add significant dollars to its cash balance by the end of the year.

And now, Gil will provide some closing remarks.

Gil Clausen

Thanks, Rod. On Slide 17, we’re highlighting the catalysts we have planned for the remainder of the year. We’ll update the reserve and the resource for Copper Mountain Mine in the fourth quarter, which will include the drilling that is currently underway. And having greatly expanded our reserves to 31 years over the last year or so, we’re now in the enviable position where our reserve life materially out-sizes our annual production rate.

So it’s obvious and becomes very important that we evaluate a further expansion study to test an increase in production rate at the Copper Mountain Mine to 65,000 tonnes per day. We expect to announce the results of this expansion study within the next several months. Again, we anticipate restarting the installation of the third ball mill, depending on market conditions as we build up our cash position over the next quarter or two.

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We do have the ability to rapidly restart this Ball Mill 3 installation project as we have the mill on site and we have maintained expenditures on all long-lead items. With the third ball mill in place, we expect production to increase by 15% to 18% as a result of higher throughput and improved recoveries.

And before we conclude, I just want to remind our shareholders that our AGM is planned for September 9, and that our proxy circular will be sent to our shareholders in early August.

With that, I will now open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of George Topping from Industrial Alliance. Your line is open.

George Topping

Well done. That was a good quarter. On the all-in sustaining cost guidance, could you tell me or just remind me what your gold and silver prices byproducts at two years for that?

Gil Clausen

Well, we used a lower price of about 1,450 when we put that guidance together. Rod, do you have that number handy?

Rod Shier

I don’t have that guidance number off the top of my head, unfortunately. George, I’ll get you that offline, what we set the — you’re talking about the budgeted or revised budget —

George Topping

Yes.

Rod Shier

…precious metal pricing?

Gil Clausen

Yes, it was in that range, 14…

Rod Shier

It was in that range for sure.

Gil Clausen

1,450 to 1,500, was in that range.

George Topping

All right. Good. Then so secondly, just off the First Quantum call, they’re 50% hedged for the next 12 months on copper, but I’m not suggesting that you do the same. I think that’s a mistake. But on the precious metals side, have you any thoughts about hedging on the Canadian dollar or precious metals?

Gil Clausen

I didn’t hear that first part again, George. Could you repeat? We remain unhedged on all our metals. So what was the —

George Topping

The question was whether or not you would entertain hedging on the precious metals portion or the Canadian dollar portion as you move towards the expansion.

Gil Clausen

We have no plans at this time to put any hedges in place.

George Topping

Okay. Just lastly, before I give somebody else a shot. On the Eva project, are you entertaining industry peers at this point on site? Or any movement there on what your strategy might be for Eva?

Gil Clausen

I think with respect to Eva, our strategy remains unchanged. We’ve talked a lot in the past about the value and the optionally that Eva provides to our shareholders and that we would be looking for various non-dilutive ways to develop and advance that project. And certainly one of them is to look at project partners. We’ve seen interest from third parties in that project in particular. So we continue to have dialogue.

And my sense is that at the Eva project, obviously as a low-capital-intensity and high-value project in a Tier 1 jurisdiction, will most certainly be developed. It’s a matter of, from our perspective, making sure that we have the right development plan in place. So we’re working on that as a team right now and that’s a significant focus of our corporate team, to put together a plan for Eva. And hopefully within the next little while we’ll be able to discuss that more broadly.

Operator

Your next question comes from the line of Stefan Ioannou from Cormark Securities.

Stefan Ioannou

Good looking quarter. I’m just wondering, just maybe a little bit on the minutia of the production profile through the second quarter. I know originally sort of I think the plan was that you’d be in the sort of basically confined to Pit 1 during the quarter, where it’s finer grain mineralization with lower recoveries. But obviously it was great to see the recovery up at 79%. And yet you mentioned that you were getting back into sort of courser grain material at the end of the quarter.

Was that coming from Pit 1 or did you actually make it into Pit 3 before quarter’s end, which helped to boost the grades? Just wondering how the sort of the feed characteristics versus the recovery played out in terms of where it was coming from and stuff?

Gil Clausen

Yeah, the tonnage has grown [ph]. We were still mining on the outer edges of Pit 1 and a little deeper in Pit 1 and some ore supply from Pit 2. So what we’ve seen is as the quarter moved forward, we got higher recoveries towards the latter part of the quarter, which helped our overall quarter recovery.

Stefan Ioannou

Got it. Got it. But you’re not formally — are you actually in Pit 3 now or is that coming? Or where are you at with that?

Gil Clausen

No, we’re not officially in Pit 3 yet. We just started some waste development in Pit 3, and so that comes a little bit later.

Stefan Ioannou

Okay. And is the plan still to defer some of the higher grade mineralization in Pit 3 until next year and just sort of focus on maybe some of the lower grade courser grain mineralization for now?

Gil Clausen

No. Our revised plan is we’ll be mining Pit 3 in the second half and all through 2021.

Stefan Ioannou

Okay. And is Pit 3 all good grade stuff? Are you again focusing on — are you leaving some of the highest grade nuggets of Pit 3 until later or are you going to go after them right away?

Gil Clausen

Certainly as we get deeper, the grades in Pit 3 are much, much more robust.

Stefan Ioannou

Okay. Got it. Great. Thanks very much. I appreciate it.

Gil Clausen

Yes, Stefan, I’d have to say that we’re sort of back on the Pit 3 development plan that we deferred, basically in the first quarter. So and as you may recall, the reason for a lot of that deferral was to move into lower mining costs and reduce, actually, our fleet requirement in mining because we eliminated that long uphill haul out of Pit 3. Now that we’ve completed the western lobe of Pit number 1, we’re back in Pit 3 right now with a shovel and we’re putting the waste into that western lobe, which is at the final ultimate pit, Pit number 1. And now we start opening up the ore phases in Pit 3.

So it’s working out that now we’re in Pit 3 with a lower cost profile than we had originally intended on our original mine plan.

But again, I just want to reiterate to everybody, it demonstrates the flexibility we have at Copper Mountain. We have a lot of open faces and a lot of open areas that we can get to and without changing our life of mine plan or our ultimate plan or our overall stripping or anything else. But we have flexibility on a quarter-in/quarter-out basis to be able to adapt.

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Stefan Ioannou

Okay. That’s great. No, I appreciate that minutia clarity. Much appreciated.

Operator

Your next question comes from the line of George Topping from Industrial Alliance.

George Topping

Just a follow-up on the exploration that you mentioned, the MD&A pushing exploration from the main cutout to Ingerbelle, are you planning any exploration or resource updates ahead of the year-end release on the drilling specifically, and what your plans are there for exploration?

Gil Clausen

I think I’m going to let Don talk a little bit about that. But I do want to talk just broadly. We’ve done a lot of, this year, we’ve done a lot of resource extension or I would call definition drilling. But on the pure exploration side, we’re looking at the eastern wall of Pit 3 and we’re looking at the extension down, down dip of Pit 2 towards Ingerbelle. But we’re also doing some pure wildcatting in Ingerbelle.

Interesting aspect of this deposit, as you may know, is that the gold ratios increase from the Copper Mountain site towards Ingerbelle. Ingerbelle has a higher gold content. And if you look at the Ingerbelle deposit in itself, the gold ratios tend to increase with depth.

So there’s a lot of interest and I think a lot of, I think a timely view from our company and our team that we should be drilling deep holes at Ingerbelle. And we’ve got a couple of deep holes underway right now, just to test the hypothesis of increasing gold content with depth. The geological model is, I think very good. But we need to test that hypothesis at depth. So we are doing that currently and we hope to be announcing some exploration results this year as well.

Operator

Your next question comes from the line of Oscar Cabrera from CIBC.

Oscar Cabrera

Yes, congratulations on the strong result, guys. I apologize. I joined your call late. So I apologize if someone already asked this question. But you pointed to Pit 3 with higher grade the second-half of this year, and then restarting or installing the or continuing the mill expansion the first-half of next.

I was wondering if you could provide context around what you expect to see with your grade profile into 2021 and how long, if any, the mill would be stopped for that installation or if you see any changes with throughput as you going into 2021.

Gil Clausen

Thanks, Oscar. We don’t anticipate any downtime related to the installation of Ball Mill number 3. We normally do our major work during existing downtimes that we’re doing liner changes in the SAG mill or anything like that. So we’ve always timed our installation work, whether it’s the DFRs or major screen work or transformer work that we did last year, to coincide with normal operating downtimes in the mill. We see no difference with Ball Mill number 3. We did all the tie-ins earlier in the year.

A lot of the construction activities take place in what is an existing empty bay right now. The piping runs have been done. The electrical runs just need to be done and connected to the new E House, which is going outside of the mill. And we should be able to isolate the construction activities in that one bay when we install the mill. So we don’t anticipate any downtime related to that.

With respect to grade, if you look at our long-range plan, you can see that we are getting into some pretty good grade runs. And when we gave our three year guidance, before we had some pretty good-looking grades going into this year and next. As a result of the modifications to the plans, we’re just deferring some of that high grade at a lower cost. So you can anticipate as the year progresses and we get more and more into this Pit 3 material, that our grade profile will increase and get back to where we were sort of forecasting on our guidance.

But with the mill expansion slightly delayed, you’ll see, obviously, that delay in the extra production as a result of the throughput be put off by about six months. But we’ll put out guidance again like we normally do at the beginning of next year. But I think we should start to see an improvement in the grade profile, certainly.

And as Don pointed out before, with getting into the areas of the pit, either in Pit 2 or Pit 3 that have coarser grain mineralization, we’ll get back to our normal recovery ranges again. Certainly, the ball mill, with the ability to fine grind or grind finer, I should say, will increase our recoveries further.

So we’re anticipating getting back to our normal recovery range of 80%, 81%, or so. And then with the expansion project complete, we should be up around 84%, 85% recovery or anyway 83% to 86%, in that range.

Oscar Cabrera

Okay. That’s helpful, Gil. Thank you very much. Now with copper prices recovering even to pre-COVID-19 levels, any updated thoughts in terms of your capital structure? I know you have, with your partners you maintain a strong balance sheet. But any thoughts with regards to additional capital that could be available to you through the market?

Gil Clausen

I’d say we’re in a pretty enviable position right now that we’re going to be generating some pretty significant cash flow for the operation of the mine. If you look at our balance sheet, although the sum total of our debt looks high, it’s in very friendly hands. It’s mostly related party debt and between ourselves and our partners. So we consolidate all debt, but some of that debt is even due to us as the parent. And the two parents themselves hold the largest portion of the debt outstanding.

So, I would say that we’re in pretty friendly hands right now. We do now have 31 years of reserves. And we’ll come into the tail end of the project financing, it would make logical sense for us to look at that senior facility and maybe look at an opportunity to restructure some of debt package. And certainly with the original mine life of, I think Rod, that was about 15 years or so or 14 years, including three or four years of stockpile mining, and now we’re at 31 years, we should have a solid opportunity to be able to look at a potential restructuring of that debt or re-amortization of that debt.

And that’s one of the things that our partners, Mitsubishi and ourselves are working, looking to potentially do.

Operator

And there are no further questions at this time. I turn the call back over the Gil Clausen.

Gil Clausen

Again, thank you very much for attending the call today and everybody stay safe and stay healthy. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.



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