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Edited Transcript of III.TO earnings conference call or presentation 3-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Imperial Metals Corp Earnings Call

VANCOUVER Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Imperial Metals Corp earnings conference call or presentation Monday, April 3, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andre Henry Deepwell

Imperial Metals Corporation - CFO and Corporate Secretary

* J. Brian Kynoch

Imperial Metals Corporation - President and Director

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Conference Call Participants

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* Brett Matthew Levy

Loop Capital Markets LLC, Research Division - Research Analyst

* Howard Goldberg

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Imperial Metals Corporation Year-end 2016 Financial Results Conference Call. (Operator Instructions) This call is being recorded on Monday, April 3, 2017. I would now like to turn the conference over to Mr. Brian Kynoch. Please go ahead.

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [2]

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Thank you. Welcome to the Imperial Metals conference call to review our 2016 results.

First, I'd like to note that our comments may contain forward-looking statements, which by their nature are subject to risk and uncertainty, and the actual results may materially differ than those expressed today.

For further information on the risks and uncertainties, please have a look at our cautionary note that is attached to our news release.

I'll start the call with brief updates on our major projects, and then have Andre Deepwell, our CFO, go through the highlights of the financial statements.

I'll start with Mount Polley. During 2016, we treated 6.68 million tonnes of ore for an average throughput of just over 18,000 tonnes a day compared to a throughput of only 1.7 million tonnes in 2015 when the mill was only operated after restart of operations on August 5 and then only on a week-on, week-off basis for much of 2015. Thus, the metal production for 2016 of 25.3 million pounds of copper was up and 46,000 ounces of gold was up significantly from the 2015 production.

During the past 2 years at Mount Polley, we've completed extensive rehabilitation work in the areas affected by the tailings dam breach, and we'll continue to do the necessary rehabilitation and monitoring of those areas. The Springer pit water, where we stored the water while we couldn't use the tailings facility, is being treated and discharged, and we target having that pit dewatered this summer.

Mount Polley has applied for an amendment to its Environmental Management Act permit to enable us to implement a long-term water management plan. This permit will allow for the installation of a water line from the water treatment plant to diffusers deep in Quesnel Lake and allow us to complete the works required to return all of Hazeltine Creek back to fish habitat.

In 2016, the underground operations in the Boundary zone supplied about 315,000 tonnes of mill feed grading 1.29% copper and above 0.8 grams a tonne gold. This year, we only expect a small tonnage, about 20,000 tonnes, to come out of the underground operations.

Just a sec. To try and find some additional reserves, we conducted a 6,600-meter underground drill program early in 2017. This recent drilling further defined a portion of the Martel zone, located beneath the Wight pit and approximately 400 meters east of the Boundary zone. Some of the holes extended into -- extended to test the sparsely drilled Green zone located even further east. Once all the results are received from this underground drilling program, the information will be used to revise the resource estimate, and then that will be followed by mine planning to determine if the economics of developing this new zone for underground mining.

At Red Chris, metal production was 83.6 million pounds of copper and 47,000 ounces of gold in 2016, up significantly from 2015's production of 58.5 million pounds of copper and 25,000 ounces of gold. Throughput for 2016, the first full year of operations was 9.65 million tonnes, about 88% of the design capacity. Although recoveries were up and copper recoveries were up, we achieved 77.5% in 2016 versus 68% in 2015, we continue to try to make progress on improving our copper recoveries as we have not yet designed -- reached the designed copper recoveries.

Our revised reagent scheme, started in October, has had a positive impact, and we are conducting an extensive off-site program with metallurgical test work on Main zone ores to see if other reagents may further improve recoveries. Construction on the installation of an additional rougher cell is proceeding with the required concrete work now complete. We target commissioning this additional cell in the second quarter of 2017.

In 2016, the mill achieved an average throughput of 26,300 tonnes per calendar day, up from the 25,600 tonnes per day in 2015. Throughput is less than design capacity and is largely due to lower-than-budgeted operating time. To increase the operating time, a bypass conveyor is being installed that will allow the SAG mill to continue operating when the SAG mill pebble conveyor is down for repair.

In 2017, all of the ore at Red Chris will come from the Main zone pit, and we expect copper grades to be higher in the second half of the year as mining proceeds into the better grades that are located deeper in the Main zone pit. As a result, copper production is expected to be higher in the second half of the year compared to the first.

The permits required to use the TSF impounded -- area impounded by the South dam has been obtained, but we currently do not plan to use that portion of the basin to start tailings until after spring runoff in 2017. At Red Chris, the focus of our efforts will continue to be on milling operations, increasing the operating time and milling rate to get to design capacity and work on improving copper recovery.

On August 31, 2016, Huckleberry Mine operations were suspended, and the mine has been placed on care and maintenance. During the suspension, the focus will be on -- will be to maintain the Huckleberry Mine site and plant, so that operations can quickly and efficiently be restarted. Mine planning work will continue to determine the possibility of extending the mine life and improving the mine's efficiency, so that the mine can be more competitive when it reopens.

One other thing of note is during some prospecting work in 2016, we got a grab sample of an oxidized quartz-carbonate veined sandstone rock outcrop that assayed 5.5 grams in a previously unexplored portion of the Giant Copper property. We were unable to follow up on this exciting new discovery prior to snow falling, but we are keen to follow up on this as soon as the snow melts. With those brief summaries, I will have Andre go through the financials, and then we'll have a question period. Andre?

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Andre Henry Deepwell, Imperial Metals Corporation - CFO and Corporate Secretary [3]

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Thank you, Brian. Our revenues in 2016 were $428.2 million compared to $128.7 million in 2015. The increase was a result of a full year of commercial operations at Red Chris and the restart of the Mount Polley mine on a full operating basis in mid-2016 compared to only operating at part capacity and for part of the year in 2015.

For 2016, Imperial incurred a net loss of $54.1 million versus a $97 million loss in 2015. The lower net loss is primarily due to an unrealized foreign exchange gain in 2016 as opposed to a unrealized foreign exchange loss in 2015, both net of foreign currency swaps. Please refer to the table on Page 3 of the MD&A labeled Select Items Affecting Net Loss for further details.

Turning to the December 2016 quarter. Our revenues increased to $78.1 million compared to $69.5 million in the comparative quarter, an increase of $8.6 million. This increase was almost entirely due to the change in revenue revaluations, which were negative $6 million in 2015 compared to a positive $2 million in 2016.

In the December 2016 quarter, Imperial had a net loss from mine operations of $10.5 million compared to a $14.4 million loss from mine operations in the comparative quarter. A reduction in loss is all related to revenue revaluation noted earlier.

In the December 2016 quarter, Imperial took a $7.3 million impairment charge on the Sterling mineral property to reflect the value implied by the letter of intent that was agreed to in February for the proposed sale of Sterling.

The company's share of Huckleberry's loss in the December 2016 quarter was $1 million higher than in the comparative 2015 quarter as the Huckleberry Mine was on care and maintenance and had no revenue. As a result of these factors, Imperial recorded a net loss of $47.1 million in the December 2016 quarter compared to a net loss of $35.9 million in the comparative 2015 quarter.

At December 31 and currently, the company has no derivative instruments for copper, gold or foreign exchange. Imperial's capital expenditures were $88.3 million in the December 2016 quarter, up from $7.1 million in the comparative 2015 quarter. These capital expenditures included $57.2 million related to the obligation of the company to reimburse BC Hydro its portion of cost related to the BC Hydro's construction of the Northwest Transmission Line that provides power to the Red Chris mine. Payments of this reimbursement are to be made over 48 months commencing December 2016.

The most significant other capital expenditures in the December 2016 quarter was related to the tailings dam construction at Red Chris, which totaled $13.4 million.

The company reports 4 non-IFRS measures: adjusted net income, adjusted EBITDA, cash flow and cost per pound copper produced. On an annual basis, the adjusted net loss was $56.8 million compared to $50.3 million in 2015. The adjusted EBITDA in 2016 was $106.6 million, a great improvement over the $3.4 million amount in 2015.

Cash flow was $107.6 million in 2016, also a large improvement from the $14.1 million recorded in 2015. The cash cost per pound of copper produced for the company's 2 main operating mines were USD 1.37 per pound for the Red Chris mine in 2016 and USD 1.83 per pound for the Mount Polley mine in 2016.

Looking at these same metrics for the December 2016 quarter, the adjusted net loss for that quarter was $22.9 million -- sorry, $30.7 million compared to $22.9 million in the December 2015 quarter. The adjusted EBITDA was $7.6 million in the December 2016 quarter compared to $3.4 million in the comparative 2015 quarter.

Cash flow was negative $400,000 in the December 2016 quarter compared to a cash flow positive of $2.8 million in the December 2015 quarter. In terms of the cost per pound, the amount was USD 2.41 for Red Chris in the December 2016 quarter and USD 2.79 for the Mount Polley mine in the December 2016 quarter.

The cash cost per pound was increased as a result of milling lower grade ore as well as unanticipated downtime at the Red Chris mill during the quarter, which reduced the pounds of copper produced. In addition, the lower by-product to revenues from gold production also had a significant impact on the cost per pound of copper produced.

Lastly, liquidity improvements in the December 2016 quarter included the following. Firstly, the deferral of an additional $3.9 million in power bills under the BC Hydro payment deferral plan. However, repayment of deferred amounts did commence in December and continued into the first quarter of 2017 as the copper price exceeded CAD 3 per pound. Secondly, in the second -- sorry, in the fourth quarter of 2016, Imperial sold the balance of the original USD 110 million cross-currency swap for proceeds of $19.7 million. Thirdly, on December 30, 2016, the company completed a private placement of common shares to raise gross proceeds of $65 million. A majority of those funds were applied to reduce the balance owing on the senior secured revolving credit facility, which had almost $50 million available at year-end. The company ended the year with $14.3 million cash.

In February 2017, the company entered into a letter of intent to sell the Sterling mine for cash proceeds of USD 10 million plus additional consideration.

Those are my comments. I turn it back over to Brian.

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [4]

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Thanks, Andre. So we'll proceed to the questions now then.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Brett Levy from Loop Capital.

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Brett Matthew Levy, Loop Capital Markets LLC, Research Division - Research Analyst [2]

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I know given the timing of the quarterly call when the next quarter is done, it's a little bit precarious. But just from a liquidity standpoint, has liquidity gotten any tighter in the passing months? Are there any covenants that you're particularly concerned about? And were there any surprises in the months on an operational basis that we were probably -- we should probably be told about?

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [3]

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I'll talk about the operations, and Andre can talk about liquidity. As we've said, at Red Chris, we expect to have lower grades in the first half of the year compared to the second half, and I would say we had a reasonable quarter in terms of production there although, like I say, down compared to the average over the year. At Mount Polley, we -- I think we're probably a little bit under our budget, but that 20,000 tonnes of higher-grade underground ore is just starting to enter the plant now, and I think that will help us probably in the second quarter. At any rate, I don't think there is a lot of terrible difference from our budget in the first quarter. Andre, maybe you could talk about the liquidity.

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Andre Henry Deepwell, Imperial Metals Corporation - CFO and Corporate Secretary [4]

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Okay. In terms of our liquidity for the first quarter, we are expecting to meet our liquidity covenants. As you probably know, we did revise those in February, and the liquidity amount that is required to be kept on is now lesser than it was in the original agreement that we renegotiated in March of 2016. So we currently have availability on the senior revolving credit facility.

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [5]

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Let me make one other point. Part of our logic for looking to sell Sterling was to increase our liquidity. So I'm hopeful that will go through -- that transaction will go through by probably early in May, and so that will help our liquidity situation as well.

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Brett Matthew Levy, Loop Capital Markets LLC, Research Division - Research Analyst [6]

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All right. And then I think is there any kind of funding gap that you see? What is CapEx likely to be in 2017? And if you hit your production and ore grade targets in the back half of the year, do things start to turn around, I guess, is the question?

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [7]

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I would say yes, that's true. We need to work through the front half to get to that higher-grade material at the back half. I'm also hopeful that we -- we adjusted our recoveries this year. So that we're actually -- we reduced our recoveries that we expect from -- down from the feasibility design levels, and I'm hopeful as we get deeper into that higher-grade, less-clay content ore in the second half of the year -- in the second half of the year, we're quite a bit deeper in the Main zone pit and not only could the grades be higher, but I'm hopeful that we can get our recoveries up from what we plan to have this year as well.

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Brett Matthew Levy, Loop Capital Markets LLC, Research Division - Research Analyst [8]

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And then is there like a month that you -- I mean, due to coupon payments or something like that, is there a month that you sort of have a liquidity trough? And can you give us -- give us some sense as to sort of how close -- I don't know, within a range that you think you are of kind of like 0 balances.

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [9]

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I know September is a tough month because we've got a big payment, but I'll let Andre answer that question.

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Andre Henry Deepwell, Imperial Metals Corporation - CFO and Corporate Secretary [10]

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Well, yes, we -- this is not the first time obviously that we've had these interest payments for March and September on the high-yield notes, which is always the time where we need to really work around our cash flow and make sure that we've got those funds available, and we've always met the payments in the past, and we expect that, based on our projections and plans, that we'll be able to meet those payments as they are due.

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Brett Matthew Levy, Loop Capital Markets LLC, Research Division - Research Analyst [11]

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And this is the last one. It's -- the world seems to be in somewhat of a shortage, if you read kind of the popular press, of good copper mining projects that are coming on. And have you guys taken any steps to, I don't know, withstand a hostile takeover or something along those lines? Because this is kind of a very transitional point for you, and if someone sees an opportunity, maybe they go after you.

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [12]

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Well, we have 2 major shareholders that control more than half our shares, so that path would have to go through them, and they've both told me that they're keen on growing Imperial and developing Red Chris to its full extent. And as you know, if you look at it, the Red Chris project, we're kind of in the small mine on the top right now, and there's a much better mine at depth at Red Chris.

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Operator [13]

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(Operator Instructions) Our next question comes from [Howard Goldberg].

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Howard Goldberg, [14]

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I just wanted to squeeze one in. I apologize. I'm not familiar with the details of your arrangement with BC Hydro. The $57-odd million item that got recorded as capital expenditures in the fourth quarter, was that a cash amount? Or does that represent amounts that are going to be spent over the next 48 months?

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Andre Henry Deepwell, Imperial Metals Corporation - CFO and Corporate Secretary [15]

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That amount is payable over 48 months. So the first payment of $1.192 million was made in December of 2016. We've been making monthly payments since then. It was always to be spread out over a period of time as per the tariff that is -- that charges that to us and to anyone else that actually connects to that Northwest Transmission Line. So we originally were planning to pay that on a monthly basis, and that was always the way it was going to be. It wasn't originally going to be capital, but we reexamined the accounting for that and put it on the books as capital, and it's shown as an other obligation in our financial statements with 12 months worth of payment shown as current and the balance shown as noncurrent.

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Operator [16]

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

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J. Brian Kynoch, Imperial Metals Corporation - President and Director [17]

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Okay. Thank you so much for attending our call.

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Operator [18]

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