Copper Mountain Mining Corporation (CPPMF) Q4 2022 Earnings Call Transcript

Copper Mountain Mining Corporation (OTCPK:CPPMF) Q4 2022 Earnings Conference Call March 27, 2023 10:30 AM ET

Company Participants

Gilmour Clausen - President and Chief Executive Officer

Donald Strickland - Chief Operating Officer

Letitia Wong - Chief Financial Officer

Patrick Redmond - Senior Vice President, Exploration and Geoscience

Conference Call Participants

Orest Wowkodaw - Scotia Capital

Craig Hutchison - TD Securities

Stefan Ioannou - Cormark Securities

Alex Terentiew - Stifel Financial Corp.

Operator

Good morning, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Copper Mountain Mining Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers remarks there will be a question-and-answer session. [Operator Instructions]

Please note that comments made today that are not of historical factual nature may contain forward-looking statements. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from actual outcomes. Please refer to Slide 2 of today's presentation and Copper Mountain's fourth quarter and full year 2022 Management's Discussion and Analysis for more information.

I will now turn over the call to Gil Clausen, President and CEO of Copper Mountain. Please go ahead, sir.

Gilmour Clausen

Thank you, Operator. Good morning, everyone, and thanks for joining us. Starting on Slide 3. Presenting with me today are Don Strickland, our Chief Operating Officer; Letitia Wong, our Chief Financial Officer; and Patrick Redmond, our Senior Vice President of Exploration and Geoscience.

I will begin the call with an overview of our fourth quarter results and a summary of the key objectives that were attained last year. Don will follow presenting our operating results and our '22 ESG achievements and Letitia will provide our financial update and present our newly issued 2023 guidance. Finally Patrick will conclude with an update on our exploration program.

Now turning to Slide 4, and our fourth quarter and full year results. As you all know, last year was an especially challenging year for our company as we faced numerous operational setbacks. From the start of the year the mill was running at reduced rates from damage to the secondary crusher main shaft , then we encountered more oxidized ore in the North Pit than anticipated. We had worn eccentric bushing in our primary crusher and grinding ball breakage issues and general quality problems with the supplier of grinding balls last summer. On top of which, the year culminated with a ransomware attack in late December.

Concurrently, we were completing all our plant optimization projects, so there was a large amount of committed project capital being spent at the same time we were experiencing these operational challenges. Clearly, we did not meet our expectations in 2022, but we are having a solid start to 2023. This year will be focused on operational execution and advancing our exploration of multiple target areas that we’ve recently identified which Patrick will speak more about in a moment.

But first onto the fourth quarter results. Net earnings were $0.35 per share including the gain on sale of the Eva Copper Project. On an adjusted basis, we reported a net loss of $0.10 per share. The adjusted net loss was partially driven by fourth quarter production of 13.3 million pounds of copper which fell short of our budget. Mill throughput was lower because of the failure of the [technical difficulty] eccentric bushing of the primary crusher and later because of the ransomware attack. We also saw lower than planned grade as higher tonnage again, came from the North pit. With production lower-than-expected during the quarter, our all-in cost came in at $4.20 per pound.

Looking ahead, however, we see a strong year in front of us. Production is expected to improve significantly. We see production to be between 88 million to 98 million pounds of copper. And so far this year, our results are in line with our budget. We are also expecting cost to be materially lower due to higher production shorter haul distances, minimal expansionary capital with many one-time project costs now behind us.

Turning now to Slide 5. Despite the operational challenges that we experienced during 2022, we did successfully deliver several important catalysts during the year, which have solidly improved the company and positioned us well for 2023 and beyond. We reported a 70% increase in mineral resources with an updated life of mine plan that outlines a 32-year mine life based only on reserves and it supports a future 65,000 ton per day mill expansion.

We completed the plant optimization projects we set out to do and commissioned during 2022. We announced the sale of our Eva Copper Project, generating an attractive return on our initial investment in Eva. And with the proceeds from the sale, we materially reduced our outstanding debt and strengthened our balance sheet.

Finally, as ESG principles are foundational to our strategy, I'm pleased to say that we achieved our goal of meeting or exceeding an A rating on each of the Mining Association of Canada towards sustainable mining protocols again in 2022.

I will now turn the call over to Don, who will provide further details on our operating results.

Donald Strickland

Thanks, Gil. Starting with Slide #6. We continue to advance mining of the Main Pit and the North Pit during the quarter. We have now mined to the top oxide level of the North Pit into solid sulfide mineralization and continue to mine deeper in Phase #4 of the Main Pit. With primary crusher mechanical breakdown early in the quarter, and the reduced copper production, we focus on minimizing operating costs.

We decreased mining from Phase #4, which reduced the strip ratio for the quarter, and we increased our ore supply from the significantly lower cost North Pit. This resulted in approximately 35% of the total mill feed from Phase #4 with grades averaging 0.29% copper and 65% of the mill feed from the North Pit with grades averaging 0.22% copper for a total mill feed grade of 0.24% copper.

Looking ahead for 2023, we are budgeting an average mill feed grade of approximately 0.31% copper with the grade increasing through the first three quarters and the highest grade scheduled for Q3. The higher grade from Phase 4 is expected to be the main ore supply for the year.

Phase #4 was connected to the Trolley Ramp at the end of 2022, and Trolley Assist has now been fully incorporated into our mine production. Trolley Assist is a key step in our GHG reduction objective, but also key to increasing productivity and reducing operating costs.

Looking ahead with a focus on mine productivity and efficiency, we have a new large production loader scheduled to start operation in June, a new large electric mining shovel schedule for operation -- to start operation in August and a new large electric production drill scheduled for delivery in early 2024. These units will improve productivity and reduce operating costs, while also achieving our sustainability target of reducing GHGs by replacing diesel equipment with electrically operated equipment.

Turning to Slide #7. During the fourth quarter, the mill processed a total of 3.1 million tonnes of ore. Mill availability was low at 77%, with the primary crusher mechanical failure in October and the ransomware attack in December. The failure of the primary crusher, lower eccentric bushing resulted in 7 days of materially reduced mill tonnage followed by a 2-day mill shutdown.

The ransomware attack at the end of the quarter resulted in the shutdown of the mill for another 4 days. The events throughout 2022 have resulted in mill operating time of 85.4%, which is low compared to historical annual mill operating time of 92% to 93%. We expect to achieve 92% going forward.

Offsetting the downtime events, the mill operated in excess of the design tonnage rate of 45,000 tonnes per day for extended periods and achieved record daily mill tonnage rates during the quarter, demonstrating the ability for the mill to operate at design tonnage rates.

Copper recovery improved during the quarter to 81.2% as the North Pit was developed beyond the upper oxidized benches and the rougher expansion project was commissioned. The rougher expansion project is demonstrating positive recovery benefits. Copper recovery is expected to improve with full operation and optimization of the rougher and cleaner flotation expansions and optimization of the grinding circuit to achieve consistent fine grinds.

We are budgeting an average recovery of approximately 84% this year. We have taken a conservative approach planning for a gradual increase in recovery over the year as we optimize these circuits and move towards achieving the design recoveries as outlined in our technical report.

Turning to Slide #8. I want to highlight some of the great progress we made last year on our ESG initiatives, which is an important pillar of our company. As Gil noted, we successfully met our 2022 target of achieving a minimum rating of A or higher on each of the Mining Association of Canada towards Sustainable Mining or TSM protocols.

2022 was our second year of reporting against the TSM standard, and we continue to use TSM to make our systems more robust. Copper Mountain has dedicated leaders for each of the TSM protocols and meeting our sustainability targets again in 2022 demonstrates our team's commitment to this focus.

We probably achieved the TSM Environmental Excellence Award in recognition of a Trolley Assist project, which reduces diesel consumption and is a key component in moving towards our net zero Scope 1 and 2 GHG objective. As discussed earlier, this project is fully incorporated into our production, and we are working with our partners to evolve the technology, and we are designing expansion opportunities in our mine plans.

In addition to the Trolley Assist project, we are finishing a full year renewable diesel trial on two haul trucks. We are working in partnership with Cummins, Komatsu and SMS to define impacts on engine performance and reliability. All indications are positive at this point.

Also as noted earlier, we are moving ahead with our GHG reduction strategy with further electrification of production shovels and drills. In addition to our GHG reduction efforts, during the year, we received an outstanding achievement in mine reclamation. We started this process of progressive reclamation in 2018 and continue to build on it every year.

With the publishing of our inaugural ESG report in 2022, we’ve received the highest ranking on the ISS governance quality score. We will provide a further update on our initiatives in the coming months when we release our second annual ESG report.

I will now hand the call over to Letitia.

Letitia Wong

Thanks, Don. Turning to Slide 9. In December, we completed the sale of the Eva Copper Project and our exploration land package in Australia for US$230 million, which includes upfront cash of US$170 million and future contingent payments of up to US$60 million. Net of withholding taxes and certain adjustments, we received cash of approximately US$149 million.

We purchased this property for about US$30 million in early 2018, so a really great return. As a result of the sale, we recognized a gain on the disposal of this asset of approximately CAD$143 million before taxes and other costs or CAD$84 million after these adjustments.

With the proceeds from the sale, our net debt decreased by 54% from the third quarter to CAD$152 million or excluding capital leases of about CAD$92 million. And in January, we used this cash proceeds to repurchase US$87 million of our bonds. This reduced our bonds outstanding to US$140 million.

We are very pleased that we were able to accelerate one of our key objectives of strengthening our balance sheet. Also in January, we implemented zero-cost collars for 3.32 million pounds of copper per month for the first 6 months of the year, January to June, with a floor price of US$360 per pound and a ceiling price of US$440 per pound.

Last year, we entered into zero-cost collars for 3.3 million pounds a month for the full year with a floor of $4 and an average ceiling price of $4.91. We were in the money for the last 6 months of the year as the copper price fell below $4, and we received proceeds of a little over CAD$11 million.

Now moving on to being a little more forward-looking. Our 2023 guidance is on Slide 10. We expect production this year to increase significantly from 2022. We see 2023 being a very solid year for us. We expect copper production to be between 88 million and 98 million pounds this year. And so far, we are on budget and on track to achieve our guidance.

We are forecasting production in grade to increase sequentially through the first three quarters with a third quarter forecast to be the strongest of the year. Average grade for 2023 is budgeted to be 0.31%. We also expect mill throughput to average 45,000 tonnes per day.

With our production returning to much stronger levels, we expect to see a meaningful decrease to meaningfully decrease our unit cost metrics with our guidance for C1 cash costs of US$2 to US$2.50 per pound. All-in sustaining costs of US$240 and US$2.90 per pound and all-in cost of US$2.45 to US$2.95 per pound.

As you will have seen during the fourth quarter, with our plant improvement projects now complete, our capital spending has begun to meaningfully decrease with expansionary capital around US$7 million for continuing operations and zero for deferred stripping. Overall, for 2023, we see much lower capital spending driven by lower deferred stripping and lower expansionary capital.

We've also budgeted about US$3 million for capitalized exploration for our Phase 1 exploration program. We have a very exciting program plan for this year, and Patrick will spend some time going over our plans. But before I turn it over to him in summary, we see 2023 to be a year of increased production, decreased costs and low capital commitments, which we expect should result in a great year of solid free cash flow.

Patrick Redmond

Okay. Thanks, Letitia. Following a successful 61-kilometer exploration drilling program in 2021, 2022, the Copper Mountain mineral reserve increased by 57%. The deposit, however, remains open, both laterally and the depth and there is clear potential to find higher-grade zones of copper gold mineralization.

Slide 11 shows our tenure [ph] outline in yellow, the 2022 resource outline in red, all of our drill holes color coated by copper grade and the location of 7 Titan 24 IP geophysical lines. The reasons we believe that Copper Mountain has significant upside exploration potential are as follows: Firstly, the deposit has not been deeply drilled and multiple historical drill holes end in copper gold mineralization.

Secondly, the style and high-grade nature of mineralization in the most westerly drill holes at New Ingerbelle indicate that our drilling has not found the Western age of the deposit. Thirdly, Titan 24 geophysical data from 2007 shows IP chargeability features, extending hundreds of meters below the current known resource and strongly suggests that the ore forming system extends to significant depth as shown in the top image on Slide 12.

So turning to Slide 12, a comparison with other similar alkalic porphyry copper gold deposits also informs our view of the size potential of Copper Mountain. Copper Mountain is the same age as Red Chris and has the same style of high-grade [indiscernible] hosted copper gold mineralization, particularly in the New Ingerbelle zone. Copper Mountain and Red Chris are both similar to the Cu-Au deposits in Australia. And this slide shows cross-sectional views of all 3 of these deposits, all shown at the same scale. It also lists the total mineral inventory, which has passed production plus current resource of these deposits.

The top image on the slide shows all diamond drill holes at Copper Mountain collar coated by copper grade. And the image also shows in red the 35 milli-volt per volt chargeability 3D model based on the Titan 24 IP data. Note that this survey did not cover the New Ingerbelle zone on the left hand side of the image. From measurements on core, we can show that chargeability at Copper Mountain is controlled by the sulfide content of the rock, copper iron sulfides and pyrite. And you can see that this chargeable zone extends from surface to around 1 kilometer depth, indicating that the mineralizing system extends to significant depth.

In summary, our 2023 exploration program is designed to look for higher grade zones below and adjacent to the current resource, similar to the high-grade zones that have been found at Red Chris and Katy Ridgeway.

So turning to Slide 13. This slide summarizes our ongoing 2023 exploration program. Following completion of drilling last year, we embarked on a relogging and resampling campaign of historical drill core and a reinterpretation of the geological model of the deposit. Significantly, we found porphyry dikes with A type [indiscernible] mineralization in multiple historical drill holes, and the style of mineralization had not been previously recognized at Copper Mountain.

We have developed a number of target areas based on geological and geophysical data and our highest priority target areas are shown by the red elypses. Drill testing of these targets started in February. Phase 1 of this program will include 8,000 meters of diamond drilling plus a large geophysical program designed to infill and extend previous coverage. Phase 2 will include an additional 10,000 meters of diamond drilling, and we expect to have results by midyear, and we look forward to updating you again on our program during the year.

So with that, I will now hand back over to Gil for some concluding comments.

Gilmour Clausen

Okay. Thanks, Patrick. To conclude, 2023 will be all about operational execution and exploration investment at the Copper Mountain Mine, and we will see a very strong year ahead of us. Earlier this month, you will have seen that we announced the appointment of my successor, Pat Merrin, to be the incoming President and CEO of Copper Mountain following my retirement. Pat was appointed after a comprehensive global executive search. She has extensive operational and technical mining experience and is the right person to lead the company through its next phase. Pat will be joining us on our first quarter conference call in about a month in April. And together, we are looking forward to providing you an update then.

With that, operator, we can open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Orest Wowkodaw at Scotiabank. Please go ahead.

Orest Wowkodaw

Hi, good morning. Obviously, a very challenging operating 2022. When I look at your guidance, official guidance now for 2023, the 88 million to 98 million pounds, can you please explain to us how that has changed from the technical report that was put out last fall that indicated a much higher production of 112 million pounds. Like what's the delta between then and now?

Gilmour Clausen

Hi, Orest. Thanks for the question. I think there's two things that we will probably point out here to differentiate a little bit between our guidance and the technical report. Firstly, the technical report. If you look at the first 5 years, you can see a lot of variability in production over the years. What we did after the technical report was published in January is -- and with our budget process, we revised and detailed out significantly the 5-year plan to try and smooth out some of those years because there was varying equipment requirements that would have us kind of increasing the workforce, decreasing the workforce, et cetera.

So what we did was we kind of smoothed out the 5 years and it took a little bit off the front end, but it took out some of those really low years in the 5-year plan where production dropped back down 20 million pounds lower than the average. So it was more or less a smoothing in that schedule. And what that did, in essence, is it reduced our costs that allowed us to optimize some of our cycle times and basically get a better 5-year plan out. So that was refinement after the technical report. But overall, in the first 5 years, it's the same production [ph].

The second feature here is that we wanted to make sure that we had a -- we are reasonably conservative with respect to our recovery rates. As Don mentioned, we are kind of building them up to the feasibility rate over the year. And I think both those factors brought us to the range that we have right now, which we feel comfortable with.

Orest Wowkodaw

Okay. Just as a follow-up, how long do you think it will take to get back to the recovery rates, assumed in technical report? Is that sort of we should see that now in '24, or could it take longer?

Gilmour Clausen

Yes. Yes, most definitely. I think we've -- we started off the year. You saw where we ended up the fourth quarter about 81%, 82% recovery. The original feasibility study had us at about 84% recovery. And then we had increasing recovery with the rougher expansion project in place. So you'll see the recovery rates, as Don pointed out, average about 84% this fiscal year, and we will keep that progress going, and we should hit the recovery rates in the feasibility study, which were just a little bit higher than that, I think so.

So yes, we're pretty comfortable with what we have now. We have a lot of retention time in the mill. We have the grinding capacity that we need, and we have the back end with the new cleaner flotation cell and the additions to the filtering capacity in the plant to handle the grade and the tonnage.

Orest Wowkodaw

Okay. And just a final question for me. The throughput guidance for the year, I think it was 45,000 tonnes a day. Do you expect to achieve that even in Q1 given the winter or is that more -- should we expect lower than that in the first half of the year and then maybe above that in the second half of the year?

Gilmour Clausen

I think it will build up a little bit. I mean we had good grade in the quarter. So I would suggest that you will see the tonnage rate build up a little bit. We've been operating at a good tonnage rate in the mill. But we will wait till the quarter is up to see what our average daily rate is. But I think 45,000 tonnes per day is very achievable with this plant for the balance of the year.

Orest Wowkodaw

Thanks very much and good luck, Gil.

Gilmour Clausen

Hey, thanks, Orest.

Operator

Your next question comes from Craig Hutchison of TD Securities. Please go ahead.

Craig Hutchison

Hi. Good morning, guys.

Gilmour Clausen

Hi.

Craig Hutchison

Just a follow-up question on Orest's question about grades. And obviously, Q1 is effectively done here. How sharp is the transition to 0.31% copper happening is? Can we expect somewhere close to that in Q1, or is it effectively closer to the Q4 results in terms of the overall grades?

Gilmour Clausen

No, the grades will be higher than Q4, definitely, and they'll be probably just under the average for the year. So we are really building up in grade to the third quarter. Third quarter is really the highest grade quarter of the year in terms of our budget. And -- so on average, we will be 30.31% for the year according to our budget. But as Letitia and Don pointed out, we are really tracking to our budget plan right now. So -- and our grades and reserve reconciliations are really positive in Phase 4. So, yes, we are looking forward to a solid grade year, Craig.

Craig Hutchison

Okay, great. And just a question, I guess, from Q4, there was mentioned at some lower grade material on top and deposit from the Phase 4 pit. Has that now been resolved? Have you guys gone lower in the benches and kind of gotten to [multiple speakers]

Gilmour Clausen

Yes, we are solidly into big ore zones in Phase 4. So we are into the meat of the deposit. We are not at the top end anymore.

Craig Hutchison

Okay. That was it for me guys. Thanks.

Gilmour Clausen

All right. Thanks, Craig.

Operator

Your next question comes from Stefan Ioannou of Cormark Securities. Please go ahead.

Stefan Ioannou

Hey, great. Thanks, guys. Just curious on the exploration, you mentioned the Phase 1 and the Phase 2 programs. And I think on the one map you show a bunch of red circles with target areas. Is it fair to assume that the Phase 1 will test all those red target areas? And then Phase 2 will follow-up where the positive results were or the red circles kind of split between Phase 1 and Phase 2? I'm just wondering what the strategy is here in terms of sort of really testing this depth potential throughout New Ingerbelle and Copper Mountain proper, if you will.

Gilmour Clausen

Hey, thanks. I'm going to turn this over to the expert, Patrick.

Patrick Redmond

Our strategy to begin with is to test a number of those different target areas. And I would say, we will -- we've tested about half of them with the first phase of the drilling depending on how results go strategic. We'd like to test as many as possible and then come back with the second phase to follow-up once we get the RCA [ph] results back.

Stefan Ioannou

Okay. Yes, there's an interesting IP anomaly directly to the East, I guess, of Copper Mountain proper, so that would be good to see. Anyways, that’s great and that’s helpful. Thanks very much.

Operator

Your next question will come from Alex Terentiew of Stifel. Please go ahead.

Alex Terentiew

Hi. Good morning, everyone. Look, I think most of my questions have been asked, but I just wanted to one kind of follow-up to your comments earlier about the grade resequencing. So if 2023 is a little bit lower than the tech report, can I infer from your smoothing out comment then that 2024 and 2025 would maybe be a little bit higher because I think I believe in the plan '26 and '27, were supposed to be pretty strong years. But can I just assume that we would see a little bit less troughs and peaks then in 2024 could be a little bit better than the tech report guided?

Gilmour Clausen

Yes, I think it's basically smoothing out those low years that we accomplished when we redid the 5-year plan. And we are looking at opportunities to shorten our halls and adjust our mining sequence and do some adjustments to our phase plans as well. So I guess the short answer to your question is, yes, there will be some moderation in there. And as I said earlier, over the 5 years, production is about the same.

Alex Terentiew

Okay. And just as a follow-up, I know your balance sheet obviously is quite strong now with selling Eva. But with that slight adjustment, no big spend in any sort of a capital spend to make that plan happen is there?

Gilmour Clausen

No. I mean just -- I think just some of the ones that Don announced, we have some equipment that will go into our lease category, new mining shovel loader and drill. But -- no, it's -- we are not expecting any major capital over that period of time, just normal mine development activities.

Alex Terentiew

Okay. Perfect. Thank you.

Gilmour Clausen

Thanks, Alex.

Operator

At this time, there are no further questions. So I will turn the conference back to Gil Clausen for any closing remarks.

Gilmour Clausen

Thanks, everybody, for joining us today, and we look forward to catching up with everybody again in a month from now with Patrick basically just getting kicked off in his new role. So it would be nice to be able to introduce him to everyone. Thanks for joining us this morning. Bye. [Indiscernible].

Operator

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask at this time, you please disconnect your lines.