Turquoise Hill announces financial results and review of operations for the first quarter of 2019

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16/05/2019 15:59
Turquoise Hill Resources today announced its financial results for the quarter ended March 31, 2019. All figures are in U.S. dollars unless otherwise stated.
“Oyu Tolgoi has made a strong start to 2019,” said Ulf Quellmann, Turquoise Hill’s Chief Executive Officer. “Copper and gold production at our open pit operations are up 18% and 188% over Q1’18 respectively, and we remain on track to achieve our full-year 2019 production guidance. Over the last three months, Oyu Tolgoi has completed key surface and underground infrastructure, commenced sinking shafts 3 and 4 and also progressed underground lateral development.
“We remain engaged with our mine manager, Rio Tinto, to incorporate new geotechnical data into the mine design, and we expect to provide an update along with our mid-year results.
“Oyu Tolgoi is truly a world-class deposit, with the potential to produce low-cost copper over a multi-decade life. Turquoise Hill provides a unique opportunity for shareholders to directly participate in the world’s next Tier-1 copper mine.”
HIGHLIGHTS
• Oyu Tolgoi achieved a strong All Injury Frequency Rate of 0.09 per 200,000 hours worked for the three months ended March 31, 2019.
• During Q1’19, Oyu Tolgoi produced 45,800 tonnes of copper and 120,000 ounces of gold and is on track to achieve 2019 copper and gold production guidance.
• Revenue of $352.7 million in Q1’19 increased 43.6% over Q1’18 primarily reflecting the significant increase in gold production as Oyu Tolgoi benefitted from the processing of Phase 4 ore that contained higher gold content.
• For Q1’19, Oyu Tolgoi’s cost of sales was $1.99 per pound of copper sold, C1 cash costs were $0.77 per pound of copper produced and all-in sustaining costs were $1.45 per pound of copper produced1.
• Operating cash costs1 of $198.1 million in Q1’19 increased 12.1% over Q1’18 primarily reflecting higher freight and royalty costs associated with higher sales revenues, higher power study costs and increased community development costs.
• For Q1’19, the Company recorded income of $105.2 million and net income attributable to owners of Turquoise Hill of $111.2 million or $0.06 per share.

• During Q1’19, underground expansion spend was $296.4 million, resulting in total project spend since January 1, 2016 of approximately $2.6 billion.
• Turquoise Hill generated cash flow from operating activities before interest and taxes of $49.8 million in Q1’19, an increase of 239.5% over Q1’18.
• Underground development progressed during Q1’19, with 3.2 total equivalent kilometres completed during the quarter, an increase of 0.6 total equivalent kilometres from Q1’18.
• Since the restart of underground development, 21.2 total equivalent kilometres and 16.6 equivalent kilometres of lateral development have been completed.
• The Shaft 2 development jaw crusher is complete and currently being commissioned.
• The Surface Discharge Conveyor is complete and tied to the existing Overland Conveyor and is now in commissioning phase.
• Shafts 3 and 4 works are progressing well and as of March 31, 2019 were 10 metres and 50 metres below the shaft collar respectively.
• Rio Tinto, in its role as manager of Oyu Tolgoi, has advised that it has completed a detailed review of the Shaft 2 schedule and Shaft 2 is now expected to be completed by the end of October 2019.
FINANCIAL RESULTS
Income in Q1’19 was $105.2 million compared with $79.7 million in Q1’18 reflecting the $107.1 million increase in revenue driven primarily by the 187.6% increase in gold production and also the 18.2% increase in copper production. This was partly offset by the $58.1 million impact of the difference in deferred tax asset recognition in Q1’19 when compared to Q1’18, together with increased operating expenses at Oyu Tolgoi. Operating expenses were impacted principally by an increase in net adjustments to the carrying value of ore stockpiles caused by a reduction in medium-term copper price projections, as well as increased freight and royalty costs associated with higher sales revenues.
Cash used in operating activities in Q1’19 was $5.7 million compared to cash generated of $19.4 million in Q1’18. Cash generated from operating activities before interest and tax was $49.8 million in Q1’19 compared to $14.7 million in Q1’18 primarily reflecting the impact of higher sales revenue partly offset by increased operating cash costs in the period. Interest paid in Q1’19 totalled $78.6 million compared to $12.2 million in Q1’18 reflecting the timing of the annual payment of the completion support fee to Rio Tinto.
Capital expenditure on property, plant and equipment was $325.3 million on a cash basis in Q1’19 compared with $285.7 million in Q1’18, attributed principally to underground development ($296.4 million) with the remainder related to open-pit activities.
Turquoise Hill’s cash and cash equivalents at March 31, 2019 were $1.5 billion.
OYU TOLGOI
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 Q1’19, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 16,600, of which 92.6% were Mongolian.
Underground development progress
The principal focus of underground development for 2019 will be the fit out and commissioning of Shaft 2, underground lateral development, support infrastructure and the convey-to-surface decline. The completion of Shaft 2 remains the primary focus for the construction team and the structural, mechanical and piping fit out is now well advanced. The Central Heating Plant is also progressing well, with the Boiler 5 dry out and chemical cleaning completed during March, as well as Boiler 6 water wall cladding, plastering and economizer masonry brick installation. The Central Heating Plant expansion has now moved into the commissioning phase. Shaft 3 and 4 works are progressing well and are 10 metres and 50 metres below the shaft collar respectively.
As announced in April 2019, Rio Tinto, in its role as manager of Oyu Tolgoi, has advised that the fit-out and commissioning work on Shaft 2 is now expected to be completed by the end of October 2019. Rio Tinto has advised that this further delay to the completion of Shaft 2 is expected to contribute to the previously announced overall schedule delay to sustainable first production beyond the end of Q3’21.
Rio Tinto has also advised that more detailed geotechnical information and different ground conditions have required a review of the mine design and the development schedule. This includes potentially relocating the ore passes on the footprint and this may modify the initiation sequence within Panel 0. Rio Tinto has advised that the impact of these changes, including the further delay to Shaft 2, will be included in the definitive estimate review, which is expected to be completed towards the end of the year.
Oyu Tolgoi spent $296.4 million on underground expansion during Q1’19. Total underground project spend from January 1, 2016 to March 31, 2019 was approximately $2.6 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 commitments2 of $1.1 billion as of March 31, 2019.
At the end of Q1’19, the underground project had committed almost 94% of direct project contracts and procurement packages, of which 74% were to Mongolian companies. Since the restart of project development, Oyu Tolgoi has committed nearly $2.5 billion to Mongolian vendors and contractors.
Underground development progressed 3.2 total equivalent kilometres during the quarter. Since the re-start of development, a total of 21.2 total equivalent kilometres and 16.6 kilometres of lateral development have been completed. As previously announced, Oyu Tolgoi is currently reviewing the forecast underground development quantities for 2019. The following table provides a breakdown of the various components of completed development since project restart:

1 Please refer to the NON-GAAP MEASURES section of this press release for further information.
2 Please refer to the NON-GAAP MEASURES section of this press release for further information.

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https://www.turquoisehill.com/site/assets/files/5043/turquoise_hill_announces_financial_results_and_review_of_operations_for_q119_final.pdf

Operational outlook
Oyu Tolgoi is expected to produce 125,000 to 155,000 tonnes of copper and 180,000 to 220,000 ounces of gold in concentrates for 2019. Open-pit operations are expected to mine ore primarily from Phase 4 throughout the year, with contributions from Phase 6. Mill throughput for 2019 is expected to be approximately 40 million tonnes and it includes the processing of some material from mine stockpiles. Average gold mill head grades are expected to decline significantly over the remainder of 2019, particularly in the second half as softer, lower grade Phase 6 ore, and some material from mine stockpiles are processed. Average copper mill head grades are also expected to be lower over the remainder of the year. However, the Company remains on track to achieve full year copper and gold production guidance.
Operating cash costs for 2019 are expected to be $800 million to $850 million.
Capital expenditures for 2019 on a cash-basis are expected to be $150 million to $180 million for open-pit operations and $1.3 billion to $1.4 billion for underground development. Open-pit capital is mainly comprised of deferred stripping, equipment purchases, maintenance componentization and tailings storage facility construction. Underground development capital includes both expansion capital and VAT.
2019 C1 cash costs are expected to be $1.75 to $1.95 per pound of copper produced. Q1’19 C1 cash costs of $0.77 per pound of copper produced were below the full year expected range due to the impact of significantly higher gold sales revenue driven by the 120,000 ounces of gold in concentrates produced in the first quarter of 2019 (against an expected full year production of 180,000 to 220,000 ounces). Unit cost guidance assumes the midpoint of expected 2019 copper and gold production ranges and a gold price of $1,281 per ounce.

Turquoise Hill TSX:TRQ 09:45 1.81 CAD +0.10 +5.85% 281816 1.87 1.81



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