Turquoise Hill Resources Ltd (TRQ) Tops Q1 EPS by 3c, Revenues Miss

Turquoise Hill Resources Ltd (NYSE: TRQ) reported Q1 EPS of $0.03, $0.03 better than the analyst estimate of $0.00. Revenue for the quarter came in at $130.7 million versus the consensus estimate of $253.77 million.

Q1'20 vs Q1'19

• Revenue of $130.7 million in Q1'20 decreased 62.9% from $352.7 million in Q1'19, primarily due to both a 78.2% decrease in gold production and a 23.1% decrease in copper production, reflecting the planned transition from mining Phase 4A and Phase 6A to lower grade Phase 4B, Phase 6B and stockpiles. Further, the average price of copper fell by 9.1% from Q1'19 to Q1'20 primarily due to the impact of COVID-19 on global copper demand.
• Income for the period was $19.0 million compared with income of $105.2 million in Q1'19. This was primarily due to $198.8 million lower gross margin driven by the reduced revenue partly offset by a higher deferred tax recovery of $107.7 million resulting from higher deferred tax assets recognised in Q1'20 compared to Q1'19. Income attributable to owners of Turquoise Hill in Q1'20 was $55.4 million or $0.03 per share, compared with income of $111.2 million or $0.06 per share in Q1'19.
• Cost of sales of $145.9 million decreased 13.7% from $169.1 million in Q1'19 reflecting 31.9% lower volumes of concentrates sold partly offset by the impact of increased unit cost of sales per pound of copper sold due to decreased head grades of the material mined in the period.
• Unit cost of sales of $2.57 per pound of copper sold increased 29.1% from $1.99 reflecting lower average mill head grades and recoveries reflecting the transition from mining Phase 4A and Phase 6A to lower grade Phase 4B, Phase 6B and stockpiles.
• Capital expenditure on a cash basis of $301.1 million compared to $325.3 million in Q1'19, comprised of $291.5 million attributed to the underground project and $9.6 million to open-pit activities.
• Total operating cash costs3 of $188.1 million in Q1'20 decreased 5.1% from $198.1 million in Q1'19. This was principally due to lower milling and mining costs due to lower maintenance costs and lower fuel costs. Additionally, royalty costs were lower as a result of lower sales revenue.
• Oyu Tolgoi's C1 cash costs3 of $2.07 per pound of copper produced increased from $0.77, primarily reflecting the impact of the 74.9% lower gold sales revenue credits in Q1'20 compared to Q1'19.
• All-in sustaining costs3 of $2.39 increased 64.8% from $1.45 in Q1'19. Similar to the C1 cash costs, the increase was primarily due to a reduction in gold revenue credits, partly offset by lower royalty costs resulting from the lower sales revenue in Q1'20 compared to Q1'19.
• Mining costs3 of $1.73 per tonne of material mined decreased 17.5% from $2.10 in Q1'19. The decrease was due to lower fuel and maintenance costs coupled with higher material mined benefitting from lower cycle times as mining in Q1'20 was focused on higher benches of the open pit compared with Q1'19.
• Milling costs3 of $5.58 per tonne of ore treated decreased 30.7% from $8.06 of ore treated in Q1'19, mainly due to higher milled ore resulting from the deferral of major plant shutdowns together with lower maintenance service costs.
• G&A costs per tonne of ore treated of $2.49 in Q1'19 decreased 19.3% from $3.65 per tonne of ore treated in Q1'19, mainly due to the impact of higher milled ore in the period.
• Cash used in operating activities of $24.4 million in Q1'20 was higher than the $5.7 million used in Q1'19. This was principally due to 62.9% decrease in sales revenue partly offset with $51.7 million lower interest paid in Q1'20 compared to Q1'19, resulting mainly from the difference in timing of payment of the completion support fee.

The block cave design anticipates a delay to OTFS16 key project milestones of sustainable production by 25 months (with a range of 21 to 29 months) and an increase in development capital cost of $1.5 billion (with a range of $1.3 to $1.8 billion). The preferred block cave design is a more resilient mine plan that provides the best opportunity for success based on an extensive trade-off analysis taking into account the reserve recovery, geotechnical, constructability, operability, schedule, cost and value risks. Given the importance of the Panel 0 mine design, Turquoise Hill engaged subject matter experts to undertake an external and independent assurance process that focused on the technical review of the proposed mine re-design options, and a review of the schedule and estimating process.

As at March 31, 2020, Turquoise Hill has $1.8 billion of available liquidity, which is sufficient to fund operations, underground and power development into Q3 2021. The Company is well progressed in its discussions with Rio Tinto regarding its proposal for sourcing incremental interim funding to provide flexibility to explore and evaluate long term financing options." stated Ulf Quellmann, Chief Executive Officer of Turquoise Hill.

OPERATIONAL OUTLOOK FOR 2020

Oyu Tolgoi is expected to produce 140,000 to 170,000 tonnes of copper and 120,000 to 150,000 ounces of gold in concentrates in 2020 from both the open pit and the beginning of the underground development material being processed. Although the mid-point copper production range guidance is higher in 2020 versus the 2019 guidance, a lower gold production year is expected for 2020. This is due to the need to mine through lower grade material on the periphery of the South West pit as Phase 4B sinks towards the highest gold and copper grades lower in the pit. It is anticipated that the higher grade ore will be accessed in 2021, resulting in a significant increase in gold production in 2021. Initiatives have been implemented by Oyu Tolgoi to bring forward some of the higher gold bearing ore into 2020; consequently, if these initiatives are successful, we anticipate gold production will be at the upper end of the guidance range. Mill throughput for 2020 is expected to be approximately 40 million tonnes.

Operating cash costs2 for 2020 are expected to be $800 million to $850 million.

Capital expenditure for 2020 on a cash-basis is expected to be approximately $80 million to $100 million for open-pit operations and $1.0 billion to $1.1 billion for the underground development, exclusive of any expenditure on power. The upper end of the open-pit operations guidance range was reduced from $120 million due to lower capitalised deferred stripping costs and lower estimated spend as a result of COVID-19. The underground development guidance was reduced from the original range of $1.2 billion to $1.3 billion as a result of the estimated impact of COVID-19, which has restricted access to the mine for teams from Oyu Tolgoi, Rio Tinto and our construction partners.

Open-pit capital is mainly comprised of deferred stripping, equipment purchases, tailings storage facility construction and maintenance componentization. Underground development capital includes both expansion capital and VAT.

C1 cash costs2 are expected to be in the range of $1.80 to $2.20 per pound of copper produced, up from 2019 guidance largely reflecting the reduced gold production estimate. Unit cost guidance assumes the midpoint of expected 2020 copper and gold production ranges and commodity price assumptions of $2.39 per pound copper and $1,513 per ounce gold.

For earnings history and earnings-related data on Turquoise Hill Resources Ltd (TRQ) click here.

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