Turquoise Hill Resources today announced its financial results for the quarter ended June 30, 2019. All figures are in U.S. dollars unless otherwise stated.
“The Oyu Tolgoi open pit mine continued its strong performance through the second quarter of 2019,” said Ulf Quellmann, Turquoise Hill’s Chief Executive Officer. “Revenue of $382.7 million in Q2’19 was a 12% increase on a year-over-year basis, while copper and gold production were essentially flat and up 44% over Q2’18 respectively.
“As discussed in our second quarter 2019 production update conference call on July 16, the underground development during Q2 was very strong with the completion of critical infrastructure components, Shaft 2 transitioning into rope up phase, shafts 3 & 4 progressing well, and a record month of lateral development in June.
“We continue to review mine design modifications with Rio Tinto and are assessing the potential impact on the cost and schedule of the underground project. Critically, all underground development to date has not been impacted at all by pending changes to our mine design, and all infrastructure developed to date remains usable and in the appropriate locations for all of the mine design options under review. Supported by our current liquidity of $3 billion we continue to drive forward with the underground development of the Oyu Tolgoi mine whilst we are reviewing a variety of funding options.”
• Oyu Tolgoi achieved another strong All Injury Frequency Rate of 0.12 per 200,000 hours worked during the six months ended June 30, 2019.
• During Q2’19, Oyu Tolgoi produced 39,156 tonnes of copper and 71,825 ounces of gold, with copper guidance remaining unchanged while the upper range of gold production has been increased from 220,000 to 230,000 ounces.
• Revenue of $382.7 million in Q2’19 is an increase of 12% over Q2’18 primarily reflecting the large increase in gold production as Oyu Tolgoi benefitted from the processing and sale of Phase 4 ore in Q2’19 that contained higher gold content.
• For Q2’19, Oyu Tolgoi cost of sales was $2.19 per pound of copper sold, C1 cash costs were $0.79 per pound of copper produced, and all-in sustaining costs were $1.54 per pound of copper produced.
• Operating cash costs1 of $206.7 million in Q2’19 increased 2.5% over Q2’18. This was principally due to higher royalty costs associated with higher sales revenue and higher power study costs.
• For Q2’19, the Company recorded a loss of $736.7 million, and a loss attributable to owners of Turquoise Hill of $446.5 million or $0.22 loss per share. Results reflect the impact of adjustments made for the $0.6 billion impairment of the Oyu Tolgoi cash-generating unit and deferred tax asset de-recognition adjustments in the period.
• At the end of June 2019, Turquoise Hill has approximately $3.0 billion of available liquidity, split between remaining project finance proceeds of $1.4 billion and $1.6 billion of cash and cash equivalents. In addition, we expect to generate free cash flow at our existing open pit operations which will also be available to help fund the underground development. We currently expect to have enough liquidity to fund our operations and underground development through the end of 2020.
• Capital expenditures for 2019 on a cash-basis for open-pit operations are unchanged at $150 million to $180 million. For underground development, we now expect capital expenditures of $1.1 billion to $1.2 billion compared with the $1.3 billion to $1.4 billion previously disclosed.
• During Q2’19 underground expansion spend was $292.0 million, resulting in total project spend since January 1, 2016 of approximately $2.9 billion.
• Turquoise Hill generated cash flow from operating activities before interest and taxes of $262.6 million in Q2’19, an increase of 75.5% versus Q2’18.
• Underground development progressed during Q2’19, with 3.2 total equivalent kilometres completed during the quarter.
• Since the restart of underground development, 24.4 total equivalent kilometres and 18.9 equivalent kilometres of lateral development have been completed.
• Shaft 2 Rope up preparation was well advanced in Q2’19 and related work is expected to continue through Q3’19.
• Shafts 3 and 4 are progressing well and as of June 30, 2019 were 52 metres and 80 metres below the shaft collar respectively.
• Improved rock mass information and geotechnical data modelling has confirmed that there are stability risks associated with components of the existing mine design. Therefore, to address these risks, Rio Tinto, in its role as manager of Oyu Tolgoi, has advised that it continues to review mine design options for the completion of the underground development of Oyu Tolgoi. These options include assessment of the impact of the mid-access drives, location of the on-footprint components of the ore handling system, the sequence of crossing the panel boundaries during mining operations, and an option that alters the panel boundary approach and would leave temporary pillars in ore that would then be recovered later in the mine life, sub-blocking the previously planned three panels into five or more panels.
• Given the further technical work that is needed, the definitive estimate review is now expected to be delivered in the second half of 2020, reflecting the preferred mine design approach.
• Preliminary estimates indicate that sustainable first production could be delayed by 16 to 30 months compared with the Q1’21 estimate in the original feasibility study guidance in 2016, and the development capital spend for the project may increase by $1.2 billion to $1.9 billion over the $5.3 billion previously disclosed.
• All infrastructure developed to date remains usable and in appropriate locations with no material expenditure as of June 30, 2019 that is not required for first or ongoing production.
1 Please refer to Section 14 – NON-GAAP MEASURES – on page 21 of the MD&A for further information.
• The Company received an automatic notice from the New York Stock Exchange (the “NYSE”) on July 31, 2019 that the Company is no longer in compliance with the NYSE’s continued listing standards because the average closing price of the Company’s common shares has fallen below US$1.00 per share over a consecutive 30 trading-day period. The Company will notify the NYSE that it intends to pursue measures to cure the share price non-compliance. Further details can be found below, under Corporate Activities.
Loss in Q2’19 was $736.7 million compared with income of $204.4 million in Q2’18. The principal reason for this change is the impairment charge of $0.6 billion recorded in Q2’19. The other reason is the $0.4 billion difference in deferred tax asset recognition in Q2’19 when compared to Q2’18. Both items were impacted by the Company’s update on the Oyu Tolgoi underground project which was affected by a range of possible further delays to sustainable first production now expected between May 2022 and June 2023, compared with the previous estimate of Q1’21. Additionally, both items were also affected by a projected increase in underground development capital ranging between $1.2 billion and $1.9 billion above the $5.3 billion previously disclosed. These adjustments increased the loss in Q2’19 when compared to Q2’18 and were partly offset by the $41.0 million increase in sales revenue in Q2’19 versus Q2’18 driven primarily by the increased gold revenue in the period arising from the higher gold production, partly offset by the impact of lower copper prices.
Cash generated from operating activities in Q2’19 was $141.5 million compared to cash generated of $48.4 million in Q2’18. Cash generated from operating activities before interest and tax was $262.6 million in Q2’19 compared to $149.6 million in Q2’18 primarily reflecting the impact of higher sales revenue and benefits incurred from movements in working capital. Interest paid in Q2’19 totalled $139.8 million compared to $118.6 million in Q2’18 reflecting the bi-annual payment of interest on the project finance facility, with the amount paid increasing due to higher LIBOR rates in the period.
Capital expenditure on property, plant and equipment was $335.0 million on a cash basis in Q2’19 compared with $318.0 million in Q2’18, attributed principally to underground development ($292.0 million) with the remainder related to open-pit activities.
Turquoise Hill’s cash and cash equivalents at June 30, 2019 were $1.6 billion.
The Oyu Tolgoi mine is approximately 550 kilometres south of Ulaanbaatar, Mongolia’s capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) of deposits throughout this trend. They include, from south to north, the Heruga Deposit, the Oyut deposit and the Hugo Dummett deposits (Hugo South, Hugo North and Hugo North Extension).
The Oyu Tolgoi mine was initially developed as an open-pit operation. The copper concentrator plant, with related facilities and necessary infrastructure, was originally designed to process approximately 100,000 tonnes of ore per day from the Oyut open pit. However, since 2014, the concentrator has improved operating practices and gained experience, which has helped achieve a consistent throughput of over 105,000 tonnes per day. Concentrator throughput for 2019 is targeted at 110,000 tonnes per day and expected to be approximately 40 million tonnes for the year.
In August 2013, development of the underground mine was suspended pending resolution of matters with the Government of Mongolia (Government). Following signing of the Oyu Tolgoi Underground Mine Development and Financing Plan (Underground Plan) in May 2015 and the signing of a $4.4 billion project finance facility in December 2015, Oyu Tolgoi received formal notice to proceed approval by the boards of Turquoise Hill, Rio Tinto and Oyu Tolgoi LLC in May 2016, which was the final requirement for the re-start of underground development. Underground construction recommenced in May 2016. Prior to suspending underground construction in August 2013, underground lateral development at Hugo North Lift 1 had advanced approximately 16 kilometres off Shaft 1.
At the end of Q2’19, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 15,500, of which 92% were Mongolian.
Underground development progress
Turquoise Hill, in conjunction with Rio Tinto, in its role as manager of Oyu Tolgoi and underground construction contractor, continues to review mine design options for the completion of the underground development of the Oyu Tolgoi mine and assess the impact on overall cost and schedule for the underground development. As previously disclosed in connection with Turquoise Hill’s project development update on February 26, 2019, this review will result in a revised development plan reflecting appropriate risk reduction efforts.
Shaft 2 construction work is progressing well and holding to the October 2019 commissioning schedule. Shaft 2 auxiliary hoist and emergency hoist inspections have been conducted and regulatory approval has been received. These hoists are now in use for the final Shaft 2 installation and commissioning work. Turquoise Hill completed an independent review of the construction and preparation for rope up in July verifying this schedule and the associated risks. Service hoist no-load commissioning commenced in June. Rope up work commenced in late July on the first of the two remaining hoists to be commissioned in Shaft 2. The service cage is at the shaft collar ready for installation and the service hoist counterweight has been installed in the shaft. The Shaft 2 jaw crusher has been no-load commissioned and is ready for load commissioning once the production hoist rope up is completed.
Improved rock mass information and geotechnical data modelling has confirmed that there are stability risks associated with components of the existing mine design. Therefore, to address these risks, a number of mine design options are under consideration to complete the project. These options include assessment of the impact of the mid-access drives, location of the on-footprint components of the ore handling system, the sequence of crossing the panel boundaries during mining operations, and an option that alters the panel boundary approach and would leave temporary pillars in ore that would then be recovered later in the mine life, sub-blocking the previously planned three panels into five or more panels.
A number of options are being evaluated to determine the final design of “Panel 0,” and this work is anticipated to continue into early 2020. Following a period of additional data collection and model updates, two phases of geotechnical modelling work are planned to inform staged mine design updates. The geotechnical modelling is expected to continue into early 2020 with final design decisions to be made at this time. A period of detailed design, schedule and cost estimation will follow resulting in the delivery of a final definitive estimate in the second half of 2020, reflecting the preferred mine design approach.
All options under consideration present a clear pathway to sustainable first production, albeit with different cost and schedule implications. To date, these have been defined to a level of accuracy associated with a conceptual study or order of magnitude study; therefore, significantly more work is required to complete the final assessment. All infrastructure developed to date remains usable and in appropriate locations with no material expenditure as of June 30, 2019 that is not required for first or ongoing production.
Based on these options, preliminary estimates indicate that sustainable first production could be delayed by 16 to 30 months compared to the original feasibility study guidance in 2016. This range includes contingency of up to eight months2 reflecting the unexpected and challenging geotechnical issues, complexities in the commissioning of Shaft 2, and reflects the detailed work still required to reach a more precise estimate. The development capital spend for the project may increase by $1.2 to $1.9 billion, inclusive of contingency, over the $5.3 billion previously disclosed. This results in sustainable first production now being expected between May 2022 and June 2023. The first drawbell is now expected between October 2021 and September 2022, and is delayed by 16 to 30 months. The range of project durations under consideration are largely driving the differences in capital costs estimated to complete the project and the increase includes the Shaft 2 delay related costs. These ranges incorporate a range of productivity assumptions, and a new program of productivity work is underway at site to optimize performance as well as ongoing technical review to guide the final inputs into the definitive estimate.
2 As described above, the level of accuracy of these estimates is preliminary in nature and subject to a range of variables. The confidence level of these estimates is at a level associated with a Conceptual or Order of Magnitude Study, and further work is required between now and the second half of 2020 to refine the mine design options and study them to a level of confidence and accuracy associated with Feasibility Study quality estimates. The estimate of up to 8 months contingency is the result of the use of simulation techniques to assign an appropriate level of contingency to the deterministic schedule.
In addition to working closely with Rio Tinto, Turquoise Hill has engaged independent third-party consultants to provide the company with insights into the planning and estimate process currently underway, as well as progress of key construction work at the mine site.
Current information indicates that Oyu Tolgoi mineral reserves will not be materially impacted by the Hugo North mine design options being considered; however, ongoing reviews will be conducted as the work progresses.
The Company will continue to focus on minimizing the impact to the project schedule and cost as it works through the detailed analysis and testing of each mine design option, and work continues concurrently to finalize the critical underground infrastructure and shaft construction.
Underground development progressed 3.2 total equivalent kilometres during the quarter. Since the restart of underground development, 24.4 total equivalent kilometres and 18.9 equivalent kilometres of lateral development have been completed. The following table provides a breakdown of the various components of completed development since project restart:
Total Equivalent Kilometres Lateral Development (kilometres) Mass
(’000 metres1) 2016 1.6 1.5 3.0
2017 6.1 4.8 31.7
2018 10.3 7.9 59.5
Q1’19 3.2 2.3 21.4
Q2’19 3.2 2.4 19.3
Total 24.4 18.9 134.8
1. Totals may not match due to rounding.
This period also witnessed the completion of final construction activities including the central heating plant upgrade, the mine dry, offices and control room facility. Shafts 3 and 4 are progressing well and as of June 30, 2019 were 52 metres and 80 metres below the shaft collar respectively. In June, the team achieved a record 1,000 metres of lateral underground development. We also commissioned the surface discharge conveyor, which links Shaft 2 to the existing overland conveyor.
Oyu Tolgoi spent $292.0 million on underground expansion during Q2’19. Total underground project spend from January 1, 2016 to June 30, 2019 was approximately $2.9 billion. Underground project spend on a cash basis includes expansion capital, VAT and capitalized management services payment and excludes capitalized interest. In addition, Oyu Tolgoi had further capital commitments3 of $0.9 billion as of June 30, 2019. Since the restart of project development, Oyu Tolgoi has committed over $2.6 billion to Mongolian vendors and contractors.
Q2’19 open-pit operations performance
Key financial metrics for Q2’19 are as follows:
Oyu Tolgoi Key Financial Metrics(1)
($ in millions, unless otherwise noted)
2Q 2018 3Q 2018 4Q 2018 1Q 2019 2Q 2019 1H 2019 1H 2018 Full Year 2018
Revenue 341.7 246.5 346.2 352.7 382.7 735.4 587.3 1,180.0
Revenue by metals in concentrates
Copper 273.7 180.4 210.3 223.9 232.4 456.3 475.8 866.5
Gold 64.1 63.3 132.7 125.7 146.8 272.5 104.3 300.4
Silver 4.0 2.9 3.0 3.1 3.5 6.6 7.2 13.1
Cost of sales 239.6 181.0 187.7 169.1 224.7 393.8 408.5 777.2
Production and delivery costs 174.2 135.9 143.3 126.0 170.1 296.1 288.8 568.0
Depreciation and depletion 64.1 45.2 44.6 44.6 54.6 99.2 119.7 209.5
Capital expenditure on cash basis 318.0 328.8 371.8 325.3 335.0 660.3 603.8 1,304.3
Underground 291.2 304.8 347.3 296.4 292.0 588.4 561.7 1,213.8
Open pit(2) 26.8 24.0 24.5 28.9 43.0 71.9 42.0 90.5
Royalties 20.3 15.5 20.1 19.7 20.7 40.4 35.2 70.8
Operating cash costs(3) 201.7 196.4 242.3 198.1 206.7 404.8 378.4 817.1
Unit costs ($)
Cost of sales (per pound of copper sold) 2.36 2.28 2.12 1.99 2.19 2.10 2.30 2.25
C1 (per pound of copper produced)(3) 1.72 1.65 1.24 0.77 0.79 0.78 1.74 1.59
All-in sustaining (per pound of copper produced)(3) 2.42 2.29 2.01 1.45 1.54 1.48 2.25 2.20
Mining costs (per tonne of material mined)(3) 2.12 2.18 2.28 2.10 2.05 2.07 2.03 2.13
Milling costs (per tonne of ore treated)(3) 6.70 7.38 6.82 8.06 6.17 7.06 7.05 7.11
G&A costs (per tonne of ore treated) 2.25 3.43 4.55 3.65 3.34 3.35 2.08
(1) Any financial information in this press release should be reviewed in conjunction with the Company‘s consolidated financial statements or condensed interim consolidated financial statements for the reporting periods indicated.
(2) Open-pit capital expenditure includes both sustaining and non-underground development activities.
(3) Please refer to the NON-GAAP MEASURES section of this press release for further information.
Revenue of $382.7 million in Q2’19 increased 12.0% compared to $341.7 million in Q2’18. This increase was primarily due to the 44% increase in gold production, as Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold content in Q2’19. This was partly offset by lower copper revenue driven by the 11.0% decrease in average copper prices in Q2’19 compared to Q2’18.
Cost of sales for Q2’19 was lower at $224.7 million compared to $239.6 million in Q2’18, which was due primarily to the reduced depreciation and depletion on certain long-lived assets reaching the end of their depreciable lives during 2018.
Capital expenditure on a cash basis for Q2’19 was $335.0 million compared to $318.0 million in Q2’18, comprising amounts attributed to the underground project and open-pit activities of $292.0 million and $43.0 million, respectively.
Total operating cash costs4 at Oyu Tolgoi were $206.7 million in Q2’19 compared to $201.7 million in Q2’18, which was principally due to higher royalty costs associated with higher sales revenue and higher power study costs. Operating cash costs include the 5% royalty payable to the Government of Mongolia and exclude deferred stripping costs.
Cost of sales was $2.19 per pound of copper sold in Q2’19 compared with $2.36 per pound of copper sold in Q2’18, reflecting the impact of reduced depreciation and depletion due to certain long-lived assets reaching the end of their depreciable lives during 2018.
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