Turquoise Hill announces financial results and review of operations for the third quarter of 2020

MONTREAL , Nov. 13, 2020 /PRNewswire/ - Turquoise Hill Resources Ltd. (" Turquoise Hill " or the " Company ") today announced its financial results for the period ended September 30, 2020 . All figures are in U.S. dollars unless otherwise stated.

"Despite ongoing challenges related to the COVID-19 pandemic, Oyu Tolgoi posted another excellent quarter from a safety, productivity and underground development perspective. The open pit continued to operate uninterrupted, and first sustainable production is now trending towards the earlier months of the previously guided range of October 2022 to June 2023 , with a revised base case of October 2022.  Our thanks also go to the Government of Mongolia for its continued support and cooperation in helping Oyu Tolgoi remobilise the required specialist resources back into the country."

Our Oyu Tolgoi Technical Report (OTTR) issued in late August has provided further evidence of Oyu Tolgoi's progress towards becoming a Tier 1 asset that is on track to become one of the largest copper mines in the world with first quartile cash costs. As part of the Financing MoU that we signed with Rio Tinto we have also provided clarity on our funding plan which prioritizes incremental funding by way of debt and/or hybrid financing over equity funding for the eventual balance of Oyu Tolgoi's funding requirements.  We are actively engaging with market participants to source attractive and executable financing options designed to be in the best interests of Oyu Tolgoi and our shareholders.

We look forward to the pending definitive estimate solidifying Turquoise Hill as one of the premiere copper related investments in the world," stated Ulf Quellmann, Chief Executive Officer of Turquoise Hill.

HIGHLIGHTS

• Oyu Tolgoi's commitment to safety is evidenced by an AIFR of 0.17 per 200,000 hours worked for the nine months ended September 30, 2020 , which includes an outstanding Q3 AIFR of 0.03.
  
  

• In Q3'20, the Oyu Tolgoi open pit continued to operate uninterrupted and produced 36,286 tonnes of copper and 36,743 ounces of gold.
  
  

• Copper production remains on track to achieve guidance of 140,000 to 170,000 tonnes, while forecast 2020 gold production is trending towards the higher end of the previously announced 155,000 to 180,000 ounce range.
  
  

• Q3'20 mill throughput was 0.3% higher compared to Q3'19 due to slightly higher mill availability.
  
  

• Revenue of $264.4 million in Q3'20 increased 26.4% from $209.2 million in Q3'19. Copper revenue increased by 29.5% driven by higher sales volumes and a 12.5% increase in average copper price. Gold revenue increased by 16.6% driven by a 29.7% increase in average gold price partly offset by lower volumes of gold in concentrate sold.
  
  

• Income for the period was $161.7 million compared with $45.1 million in Q3'19. This difference was primarily due to a $55.2 million increase in revenue versus Q3'19 together with $86.1 million of additional deferred tax assets recognized in Q3'20 versus Q3'19. Income attributable to owners of Turquoise Hill in Q3'20 was $128.6 million or $0.64 per share, compared with $71.7 million or $0.36 per share in Q3'19.
  
  

• Cash generated from operating activities before interest and taxes in Q3'20 was $89.2 million , versus $13.1 million used in operating activities in Q3'19, primarily due to a $61.5 million improvement in gross margin resulting from higher sales revenue, together with more favourable movements in working capital.
  
  

• 2020 capital expenditure guidance on a cash-basis for open-pit operations has been reduced to approximately $60 million to $70 million from $70 million to $90 million .
  
  

• In Q3'20, cost of sales was $2.22 per pound of copper sold and C1 cash costs ¹ were $1.48 per pound of copper produced. All-in sustaining costs ¹ were $1.88 per pound of copper produced.
  
  

• Total operating cash costs ¹ of $181.4 million in Q3'20 increased 3.6% from $175.1 million in Q3'19, principally due to higher royalty costs resulting from higher sales revenue, partially offset by lower milling costs.
  
  

• Total operating cash costs ¹ and C1 cash costs ¹ guidance ranges for 2020 are based upon estimated costs of sales of $2.10 to $2.50 per pound of copper sold. Operating cash costs ¹ guidance remains at $780 million to $830 million . C1 cash costs ¹ guidance range has been reduced to $1.30 - $1.70 per pound of copper produced from $1.60 - $2.00 per pound of copper produced.
  
  

• During Q3'20, underground development spend was $242.1 million , resulting in total project spend since January 1, 2016 of approximately $4.2 billion .
  
  

• As at September 30, 2020 , Turquoise Hill has $1.3 billion of available liquidity, which under current projections is expected to be sufficient to meet the requirements of the Company, including its operations and underground development, into Q2'22.
  
  

• On September 9, 2020 , Turquoise Hill and Rio Tinto plc (Rio Tinto) signed a non-binding Memorandum of Understanding (MOU) concerning the funding of Oyu Tolgoi that reflects the parties' understanding to pursue a re-profiling of existing project debt in line with current cash flow projections, and further to seek to raise supplemental senior debt (SSR) in the aggregate amount of up to $500 million .
  
  

• Overall, underground lateral development has now reached 48,604 eqm, and progress continues broadly in line with expectations set forth in the Oyu Tolgoi Technical Report filed on August 28, 2020 (OTTR20).
  
  

• All surface infrastructure required for first sustainable production is complete and the team is focused on the safe and efficient delivery of the critical underground Material Handling System 1 (MHS1). The balance of project infrastructure to be delivered post the completion of MHS1 is not needed for first sustainable production; however, it is needed to support the production ramp-up profile and the life of mine production capacity.
  
  

• Although shafts 3 and 4 continue on care and maintenance, some commissioning activities have advanced in preparation for shaft sinking, including rope installation and no-load testing of the Shaft 4 hoisting system. Further substantial progress will require the remobilisation of international shaft-sinking specialists, and subject to local border restrictions, preparation is underway to mobilise these contractors and commence sinking before the end of Q4'20. The review of the impacts of the shaft 3 and 4 delays are ongoing, but first sustainable production is not anticipated to be affected. We will communicate any implications, particularly for Panel 1 and Panel 2 ramp-ups that shaft 3 and 4 will support, at an appropriate time.
  
  

• Preliminary indications from the definitive estimate process are that first sustainable production is trending towards the earlier months of the previously guided range of October 2022 to June 2023 , including a base case of October 2022 , and that the forecast development capital cost remains within the range of $6.6 to $7.1 billion with a base case of $6.8 billion . Turquoise Hill is undertaking an independent technical assurance process into the preliminary definitive estimate communicated by the manager. The cost and schedule range assumes an easing of travel restrictions and COVID-19 related controls from the time of reporting, which will continue to be monitored and reviewed.
  
  

• During Q3'20, Turquoise Hill built an exploration team, employing six skilled personnel to add to the Ulaanbaatar-based technical services team. Turquoise Hill is well-placed to be a leader of exploration in South Gobi by harnessing the experience and knowledge of the new team together with our established in-country presence.
  
  

• Subsequent to the end of the quarter, on November 4, 2020 , the Company announced that it commenced arbitration proceedings seeking a declaration to clarify the provisions of certain agreements with Rio Tinto International Holdings Limited (RTIHL) relating to their role and obligations to support the Company in seeking additional financing for the Oyu Tolgoi project. The arbitration was commenced in British Columbia , in accordance with the relevant agreements between the parties.
  
  

• The Company recognises the unprecedented situation surrounding the ongoing COVID-19 pandemic. Turquoise Hill has established a business resiliency team and is closely monitoring the effect of the COVID-19 pandemic on its business, operations and our people and will continue to update the market on the impacts to the Company's business and operations in relation to these extraordinary circumstances. See the "RISKS AND UNCERTAINTIES" section of the Company's management discussion and analysis of financial condition and results of operations for the nine months ended September 30, 2020 (the Q3 2020 MD&A).

OPERATIONAL OUTLOOK FOR 2020

Oyu Tolgoi production guidance from both the open pit and the commencement of processing of underground development material remains within the ranges of 140,000 to 170,000 tonnes of copper and 155,000 to 180,000 ounces of gold respectively, with gold production trending towards the higher end of the range. Although the mid-point of the 2020 copper production range guidance is higher than 2019 production, lower gold production is expected for 2020 compared to 2019. This is due to the need to mine through lower gold 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. Initiatives implemented by Oyu Tolgoi have thus far been successful in bringing forward into 2020 the higher gold bearing ore that was previously scheduled to be mined in 2021, and this is expected to continue through the remainder of the year. Even assuming these initiatives bear success in 2020, the Company has maintained its 2021 gold production outlook. Mill throughput for 2020 is expected to be approximately 40 million tonnes.

Operating cash costs ²  and C1 cash costs ²  for 2020 are based upon an estimated costs of sales of $2.10 to $2.50 per pound of copper sold. Operating cash costs ²  for 2020 are expected to be $780 million to $830 million . C1 cash costs ²  are expected to be in the range of $1.30 to $1.70 per pound of copper produced, reduced from $1.60 to $2.00 per pound of copper produced, where unit cost guidance assumes the midpoint of expected 2020 copper and the high end of gold production ranges and commodity price assumptions of $2.74 per pound of copper and $1,837 per ounce gold. C1 cash costs ²  guidance range has been reduced due to the impact of gold production which is expected to trend towards the higher end of the 155,000 to 180,000 ounce range as well as the impact of improved gold price estimates.

Capital expenditure for 2020 on a cash-basis is expected to be approximately $1.0 billion to $1.1 billion for the underground development.

Capital expenditure for 2020 on a cash-basis for open-pit operations has been reduced to approximately $60 million to $70 million from $70 million to $90 million due primarily to a deferral of projects into 2021.

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.

2021 OUTLOOK  

Production in 2021 is expected to remain in a range of 170,000 to 200,000 tonnes of copper, and 500,000 to 550,000 ounces of gold as we continue to transition to the higher grade ore in the lower benches of the southwest pit and continue to increase the amount of underground development material processed.

OUR BUSINESS  

Turquoise Hill is an international mining company focused on the operation and continued development of the Oyu Tolgoi copper-gold mine in Mongolia , which is the Company's principal and only material mineral resource property. The Company's ownership of the Oyu Tolgoi mine is held through a 66% interest in Oyu Tolgoi LLC; the remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian state-owned entity.

The Oyu Tolgoi property is located approximately 550 kilometres south of Ulaanbaatar, Mongolia's capital city, and 80 kilometres north of the Mongolia - China border. The property is cut by the Oyu Tolgoi trend, a 12 kilometres north-south orientated corridor which is host to the known deposits, Hugo North, Hugo South , Oyut and Heruga. Open pit mining operations commenced at Oyut in 2013. The Hugo North deposit (Lift 1) is currently being developed as an underground 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 consistently achieved a throughput of over 105,000 tonnes per day due to improvements in operating practices. Concentrator throughput for 2020 is targeted at over 110,000 tonnes per day and expected to be approximately 40 million tonnes for the year due to improvements in concentrator performance and more favourable ore characteristics.

At the end of Q3'20, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 12,500, of which 93% were Mongolians.

SELECTED FINANCIAL METRICS   ⁽¹⁾ 

Q3'20 vs Q3'19

• Revenue of $264.4 million in Q3'20 increased 26.4% from $209.2 million in Q3'19. Copper revenue increased by 29.5% driven by higher sales volumes and a 12.5% increase in average copper price. Gold revenue increased by 16.6% driven by a 29.7% increase in average gold price partly offset by lower volumes of gold concentrate sold.
  
  

• Cost of sales in Q3'20 of $168.0 million decreased 3.6% versus $174.2 million in Q3'19 due to a 9.0% decrease in the unit cost of sales per pound of copper sold, partly offset by a 6.9% increase in the volume of concentrate sold.
  
  

• Q3'20 unit cost of sales of $2.22 per pound of copper sold decreased 9.0% from $2.44 in Q3'19 reflecting improved head grades and lower milling costs ³ benefitting from the processing of softer ore.
  
  

• Income in Q3'20 was $161.7 million compared with $45.1 million in Q3'19. This difference was primarily due to a $55.2 million increase in revenue versus Q3'19 together with $86.1 million of additional deferred tax assets recognized in Q3'20 versus Q3'19. Income attributable to owners of Turquoise Hill in Q3'20 was $128.6 million or $0.64 per share, compared with $71.7 million or $0.36 per share in Q3'19.
  
  

• Capital expenditure on a cash basis in Q3'20 was $254.5 million compared to $329.2 million in Q3'19, and is comprised of $242.1 million attributed to the underground project and $12.4 million to open-pit activities.
  
  

• Total operating cash costs ³ of $181.4 million in Q3'20 increased 3.6% from $175.1 million in Q3'19. This was principally due to higher royalty costs resulting from higher sales revenue partially offset by lower milling costs.
  
  

• Oyu Tolgoi's C1 cash costs ³ of $1.48 per pound of copper produced decreased 30.8% from $2.14 in Q3'19, primarily reflecting the impact of the 27.8% increase in copper production from Q3'19 to Q3'20. This had a positive impact on the unit cost basis for both operating cash costs ³ per pound of copper produced and C1 cash costs ³ per pound of copper produced. The remaining decrease in C1 cash costs ³ per pound of copper produced in Q3'20 was due to ongoing cost savings initiatives and lower milling costs.
  
  

• All-in sustaining cost ³ of $1.88 per pound of copper produced in Q3'20 decreased 33.8% from $2.84 in Q3'19. Similar to C1 cash costs ³ , the decrease was primarily due to the positive impact of the increased copper production on a unit cost basis. In addition, all-in sustaining costs ³ in Q3'20 were further impacted by lower sustaining capital expenditure. This was then partly offset by higher royalty costs resulting from the higher sales revenue in Q3'20 compared to Q3'19.
  
  

• Mining costs ³ of $1.93 per tonne of material mined in Q3'20 increased 3.2% from $1.87 in Q3'19. The increase was mainly due to lower total material mined together with higher mine maintenance service costs and higher consumables costs.
  
  

• Milling costs ³ of $5.90 per tonne of ore treated in Q3'20 reduced 14.7% from $6.92 per tonne of ore treated in Q3'19. The decrease was mainly due to lower consumption of grinding balls and reagents, lower power costs benefitting from a weaker Chinese yuan, and lower maintenance service costs due to the planned major plant shutdowns for 2020 taking place in Q2'20 versus in Q3'19.
  
  

• G&A costs per tonne of ore treated of $2.98 in Q3'20 was consistent with $2.97 per tonne of ore treated in Q3'19.
  
  

• Cash generated from operating activities before interest and taxes was $89.2 million in Q3'20, an increase from $13.1 million used in operating activities in Q3'19, primarily due to a $61.5 million improvement in gross margin resulting mainly from higher sales revenue, together with more favourable movements in working capital.

OYU TOLGOI  

Safety performance and COVID-19 Response

Oyu Tolgoi's safety performance improved with AIFR decreasing from 0.22 per 200,000 hours worked for the six months ended June 30, 2020 to 0.17 per 200,000 hours worked for the nine months ended September 30, 2020 , with the AIFR for the quarter 0.03 per 200,000 hours worked. In addition to the continued commitment to reducing health and safety risks and injury at Oyu Tolgoi, preventing the spread of COVID-19 is a key priority for Oyu Tolgoi and Turquoise Hill. While the open pit and ore processing operations at Oyu Tolgoi have continued to operate uninterrupted despite COVID-19, the unprecedented impact of this pandemic has seen restrictions imposed by the Government of Mongolia on travel and movement of goods and people both across and within its borders, and these circumstances have made it difficult for teams from Oyu Tolgoi, Rio Tinto and our construction partners to access the site. Restrictions imposed on total personnel numbers at site and excellent lateral development productivity allowed the redeployment of lateral development crews onto  critical  materials handling infrustructure construction activities in Q3'20 in order to minimise any potential COVID-19 impacts. Crews being redeployed away from lateral development activities resulted in an associated reduction in lateral development equivalent metres however this repriotisation of work is not anticipated to impact first sustainable production. Forty expatriates returned to Mongolia in July, which marked the first time personnel from outside of Mongolia were able to travel to the site since the onset of the pandemic. Further flights are planned in order to return the required specialists to site with two additional flights having arrived in early November. COVID-19 related impacts to production and ramp-up from the affected infrastructure will be included in the definitive estimate due later in Q4'20.

On November 11, 2020 , two cases of COVID-19 were reported in Ulaanbaatar. As a consequence, the local authorities have taken steps to minimise transmission and announced initial restrictions until November 17, 2020 , including a temporary halt on domestic flights which includes travel to and from the Oyu Tolgoi mine site. As a result, although OT Operations and Project work continues, COVID-19 restrictions in place at site are being reviewed in conjunction with the relevant authorities. At this early stage the situation is still under assessment and further information will be provided as required.

Key operational metrics for Q3'20 are as follows:  

Oyu Tolgoi Production Data
All data represents full production and sales on a 100% basis

Copper production in Q3'20 increased 28% compared to Q3'19 due to a planned increase in head grade as the open pit moves deeper into the higher grade Phase 4B area of the open pit.

Gold production in Q3'20 increased 43% over Q3'19 due to increased head grade as the open pit moves deeper into the higher grade Phase 4B of the open pit.

Q3'20 mill throughput was slightly higher than Q3'19 due to slightly higher mill availability and an increased milling rate associated with softer ore.

Underground development

On May 13, 2020 , Turquoise Hill announced a new block cave mine design for Panel 0. Preliminary indications from the definitive estimate process are that first sustainable production is trending towards the earlier months of the previously guided range of October 2022 to June 2023,  including a base case of October 2022 , and that the forecast development capital cost remains within the range of $6.6 to $7.1 billion , with a base case of $6.8 billion . The cost and schedule range assumes an easing of travel restrictions and COVID-19 related controls from the time of reporting, which will continue to be monitored and reviewed. Turquoise Hill is undertaking an independent technical assurance process into the preliminary definitive estimate communicated by the manager. Turquoise Hill's assurance and approvals program related to the definitive estimate is underway and expected to be completed in Q4'20. On July 2, 2020 , Turquoise Hill announced completion of the 2020 Oyu Tolgoi Feasibility Study (OTFS20) incorporating the revised mine design and updated Mineral Reserves and Mineral Resources. On August 28, 2020 , Turquoise Hill filed an updated technical report based on OTFS20.

The definitive estimate is scheduled to be completed before the end of 2020 and is expected to provide an update to the Panel 0 boundaries informed by optimisation and further review of geotechnical data, minimising the exposure of drawpoints to the lower fault area. Turquoise Hill is undertaking an independent technical assurance review of the indications and findings of the definitive estimate communicated by the manager.

Although Shafts 3 and 4 continued on care and maintenance during Q3'20, preparation activities for the resumption of sinking activities are underway, including rope installation and no-load testing of the Shaft 4 hoisting system. Further substantial progress in this regard will require the remobilsation of international shaft-sinking specialists, which the Company expects will occur before the end of Q4'20, subject to local border restrictions which currently remain in place to help curb the spread of COVID-19. During Q3'20, strategic redeployment of lateral development crews to essential underground material handling infrastructure work, including the construction of primary crusher one, was undertaken in order to support the pathway to sustainable first development and minimise any COVID-19 related schedule impacts.

Underground development continued with a focus on productivity gains in the most critical development areas, progressing 4.7 total equivalent kilometres and completing 14.3 thousand cubic metres of mass excavation during Q3'20. Since the restart of underground development, 48.6 total equivalent kilometres and 183.4 thousand cubic metres of mass excavation have been completed. The following table provides a breakdown of the various components of completed development since project restart: