Turquoise Hill Resources Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2021

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Turquoise Hill Second Quarter Financial Results Conference Call. At this time, note that all participants are in a listen only mode. But following the presentation, we will conduct a question and answer session. Also note that the call is being recorded on Friday, July 30, 2021.

Speaker 1

And I would like to

Operator

turn the conference over to Roy McDowell. Please go ahead, sir.

Speaker 2

Thank you, Sylvie. Good morning. I'm Roy McDowell, Head of Investor Relations and Communications. Welcome to our Q2 2021 financial results conference call. Thursday, we released our Q2 2021 results press release, MD and A and financial statements.

Speaker 2

These items are available on our website and SEDAR. With me on the call today are Steve Thibault, our Interim CEO Luke Colton, our CFO and Joanne Dudley, our COO. This call and presentation includes certain forward looking statements and information. We refer you to the forward looking statements section of the annual information form dated March 8, 2021, and supplemented by our MD and A for the 3 6 months ended June 30, 2021. And now I'd like to turn the call over to Steve.

Speaker 2

Thank you, Roy, and good morning to everyone. Thank you for joining us For our Q2 2021 earnings call, Zoran, Luke and I will be available for Q and A following our presentation. Please note Slide 23 contain our cautionary statements, and I would encourage you to read through them. I will now walk through the Q2 2021 update and open the call up to The oligo goi turning to Slide 5. The oligo goi team turned in another Strong quarter for both from both a safety and production perspective, while considering the impact of COVID-nineteen related challenges.

Speaker 2

The health and safety of our workforce is our top priority. Olivier de Gaulle reported an all injury frequency rate Copper 0.14 for the 6 months ended June 30, 2021 and produced 36,700 tons of copper and over 113 ounces of gold. For 2021, We are maintaining our production guidance 250,000 to 180,000 tons of copper and 400,000 to 480,000 ounces of gold. The quarter was not without its challenges As the surge in COVID-nineteen cases in Mongolia and on tight, prompted a series of lockdowns in countries That resulted in Order to Go staffing level operating as low as 25% of plan at certain periods during the quarter. Following the declaration of force measures and notes by the company in March 2021, content with shipments to Chinese customers have recommence And have begun to ramp up from April 15, 2021, with the transport team continually Adapting to the precautionary measures against COVID-nineteen transmission risk.

Speaker 2

Oyu De Goy continue to work closely with Mongolian and Chinese authorities to manage supply chain disruption. The force measure will remain in place Until sustained volume of convoys crossing the border can meet Oyu2Go ongoing commitments to customers And on-site concentrate inventory returns to target levels. We continue to advance the underground development project With overall project construction remaining broadly in line with the definitive estimate and While all project related technical criteria are on track to initiate the underclass, given the cumulative An ongoing impact of COVID-nineteen delayed commitments resulting from the non approval of the definite estimate budget By the OT Board and outstanding non technical issues related to the Undercut decision, The company expects that there will be further impact on overall product costs in schedule. Sustainable production is still targeted for October 2022, and we will continue to monitor the situation and update the market as appropriate. From the financial perspective, our estimated base case incremental funding requirement Has increased by $100,000,000 to $2,400,000,000 at June 30, 2021.

Speaker 2

Taking into consideration the resequencing of the open pit ore phases, the additional 2021 underground development cost impact The known COVID-nineteen issues up to June 30, 2021, as well as improved commodity prices forecast, Our available liquidity of $700,000,000 is expected dollars is expected to be sufficient To fund the company requirements into Q3 2022. Moving to Slide 6. During Q2 2021, Oyu To Goy produced over 36,000 tonnes of copper and 113 ounces of gold with a C1 cash cost of $0.83 per pound. Production was lower than Q1 2021 from Q1 2021 due to slower mining rate In the higher grade Phase 4B, which resulted in an increase in lower grade stockpile material being processed through the mill. Personal number of sites, which at time were below 25% of planned requirement, adversely impacted So both the open pit operation and the underground traffic.

Speaker 2

For the remainder of 2021, it is anticipated That the mill feed will continue to be comprised of higher grade Phase 4B and lower grade stockpile. However, As outlined in the introduction, we remain on track for our updated 2021 production guidance. Mill throughput of 9,400,000 tonnes was above nameplate capacity, was likely lower In Q1 2021, due to COVID-nineteen related lower personnel numbers and planned maintenance activities. Despite the COVID-nineteen challenges, the Ode to Go team has done a great job implementing additional controls And implementing and operating the open pit during Q2 2021 and remain on track to achieve 2021 production guidance of 150,000 to 180,000 tons of copper and 400,000 To 480,000 ounces of gold. With that, I now hand the call over to Luke Colton, our Chief

Speaker 3

Thanks, Steve, and good morning to everyone on the call. Please turn to Slide 7 and I'll provide a summary of our key financial metrics for Q2 2021. Revenue for Q2, 2021 increased 14% from Q2 of 2020. Gold revenue increased by 75,000,000 And that's driven by a 6% increase in average gold prices and 136% increase in the volume of gold and concentrates sold, which reflected the scheduled move to the higher grade areas of Phase 4b. Copper revenue decreased by $34,000,000 from Q2 2020, reflecting a 51% decrease in the volume of copper and concentrates Sold, which was mainly the result of the force majeure, partly offset by the impact of an 83% increase in average copper prices.

Speaker 3

Cash generated from operating activities before interest and tax improved by 261,000,000 In Q2, 2021 compared to Q1, 2021 benefiting primarily from an increase in gross margin as well as favorable movements in deferred revenue, the latter impacted by the timing of ramp up in concentrate shipments during the quarter, Following the declaration of course measure as well as related contingency measures to improve OT's short term liquidity. C1 cash costs and all in sustaining costs both benefited from the $75,000,000 increase in gold revenue credits. For all in sustaining costs, this benefit was partially offset by higher royalty costs due to the increased sales revenue. Capital expenditure in Q1 2021 was $230,000,000 and that comprised of $211,000,000 on the underground $19,000,000 on the open pit. Capital expenditure for the same period last It was $262,000,000 despite lower than expected year to date 2021 capital expenditure, which was due mainly to the impact of COVID-nineteen restrictions and controls.

Speaker 3

TRQ's full year guidance for Openfit Capital of $105,000,000 to $125,000,000 and for underground capital of $900,000,000 to 1,000,000,000 Are still expected to be achieved, though underground capital in particular may come in at the lower end of that range. Turning to Slide 8. Turquoise Hill had liquidity of $700,000,000 at the end of Q2 2021, which is expected to be sufficient to meet the company's requirements into Q3 of 2022. Additionally, TRQ's base case incremental funding requirement increased by $100,000,000 to $2,400,000,000 as of June 30, 20 And this increase is primarily related to the resequencing of ore phases of the Oyu Tolgoi open pit mine. The additional 2021 underground development cost impacts of the known COVID-nineteen issues up to 30th June 2021, which are estimated to be approximately $100,000,000 and these are partially offset by improved commodity price forecasts.

Speaker 3

Our liquidity outlook and estimated incremental funding requirement will continue to be impacted either positively or negatively By various factors, many of which are outside the company's control, the company continues to monitor commodity markets, The ongoing impacts of COVID-nineteen work underway to resolve the non technical undercut and other issues as well as other key factors and assessing its incremental funding requirements and intends to continue its work with Rio Tinto, the Government of Mongolia and other stakeholders to source Approvals for and to implement the funding heads of agreement with Rio Tinto signed in April of 2021. Successful implementation of this heads of agreement is subject to achieving alignment with the relevant stakeholders, which include Rio Tinto, the Government of Mongolia, existing lenders and any potential new lenders. And TRQ will continue to provide updates as appropriate on the implementation's progress. And with that, I'll hand the call over to Joanne Dudley, our Chief Operating Officer.

Speaker 1

Thank you very much, Luke. COVID-nineteen, if we sorry, if we turn to Slide 9, please. COVID-nineteen continued to significantly impact the Otolgo Mine in Q2, 2021 with constraints on-site personnel numbers and domestic and international travel, which adversely impacted both open pit operations and the underground project. The additional 2021 development cost impact, the known COVID-nineteen delays up to June 30, 2021 is estimated to be approximately $100,000,000 This estimate includes incremental travel, Accommodation, quarantine and standby costs, as well as accounting for productivity impacts. As the COVID-nineteen impacts remain ongoing, the company will continue to monitor them and update the market as appropriate.

Speaker 1

Despite these additional COVID-nineteen challenges, overall construction progress on Materials Handling System 1, which while not required to undercut commencement is required for sustainable production remains broadly in line with the definitive estimate and is now over 90% complete. Work also continued on Primary Crasher 1, which is expected to be completed in Q3 of this year. Specialized shaft sinking personnel have arrived in Mongolia to prepare for the recommencement of sinking activities in shafts 34. While shafts reinforce are not required to support the commencement of Panel 0, they are required to support production from Panels 12 during the ramp up to 95,000 tonnes per day. The commencement of the undercut is a key milestone and it is critical to ensure that once commenced, the uncut drill point construction continues unimpeded.

Speaker 1

From a technical perspective, all lateral development and production drilling to initiate the undercut is complete, with supporting infrastructure for Panel 0 production on track for completion under the current site conditions. However, the exact timing of the undercut is under increasing pressure, principally due to the outstanding non technical criteria, which are yet to be met, and also the risks associated with rapidly evolving COVID-nineteen situation. Turquoise Hill, through its wholly owned subsidiaries, Asia Gold Mongolia LLC, Haruga Exploration LLC and SGLS LLC operates an exploration program in Mongolia on 3 licenses that are not part of Ayutolgoi. Current restrictions on people movements in the Omegovi and Duanagovy provinces have resulted in delays to our field work, which we are planning to begin in Q3. Safety remains our first priority and appropriate measures will be maintained to protect our exploration team, contractors and the communities in which we work.

Speaker 1

With that, I'll hand the call back over to Steve.

Speaker 2

Thank you, Ghosn. Turning to Slide 10. I would like to highlight the key underground development milestone we are focused on for the balance of 20 21 and into 2022, taking us to sustainable production for Panel 0. 1st and foremost, The health and safety of our employees and local community remain our top priority. Ordo de Goa will continue to work with the Mongolian Health authorities to best manage the current COVID-nineteen situation.

Speaker 2

The company continued to focus On meeting the necessary criteria to enable undercut commencement. Although we faced significant challenges during Q2 2021, including some COVID related constraints, all project related technical criteria To support the initiation of the undercut are either completed or on track to be achieved. Sir Claude Hill, Rio Tinto and Oyu Tugoy continue to engage with various Mongolian governmental bodies With a view to resolving obtaining non technical undercut criteria and all parties remain committed to moving the project forward in a mutually beneficial manner. However, as we have previously noted, delayed resolution of the nontechnical under cost Decision on the non technical criteria have continued to move forward and TRQ is currently working to return to Mongolia for formal discussions with government officials. As Luke discussed, the company liquidity of $700,000,000 at the end of Q2 2021 is expected to be sufficient to meet its requirement, including funding of underground development on 2Q3 2022, And we intend to continue to work with Rio Tinto, the Government of Mongolia and other stakeholders to source approval for And to implement for and to implement the funding head of agreement.

Speaker 2

The company will continue to work with Rio Tinto, The Government of Mongolia and other stakeholders with a focus on advancing these important priorities and will continue to provide updates as and when appropriate. Before I turn the call to for Q and A, I would like to extend my sincere gratitude to the Oyu Tolgoi team and the government of Mongolia for their coordinated effort To prioritize the health and safety of the Oyu Tolgoi workforce and the local communities. I would like to thank you all for taking the time to join our Q2 2021 conference call, and I would like And I would now like to turn the call back to the operator for any questions.

Operator

Thank you, Mr. Thibault. And your first question will be from Orest Wowkodaw at Scotiabank. Please go ahead.

Speaker 4

Hi, good morning. Steve, can you give us a better sense of where things stand on the discussions With the government, with respect to resolving the non technical criteria, like are we at the beginning stages? Are we close to the end? Any color you can share and whether it's whether you need to split that up by the different issues In terms of the non technical, maybe that would be helpful.

Speaker 2

Yes. Okay. First, Orest, I think it's important to understand that Over the last couple of months, we have a very difficult situation in term of environment, okay? We have the COVID-nineteen that has hit the site in Mongolia. There was a presidential election that I created a focus on the government on that particular thing, and we had that done.

Speaker 2

So there was a difficult environment. In the meantime, what we've done is that during that period of time, we have first progress on the technical criteria, as we mentioned, But we have also continued having discussion with some of the government officials, okay? And we have continued to work Continuously with the government bodies to engage and to move couple of to move the things On the non critical criteria, so work has been done and has continued, okay? Now RS is very important. I mean, Everybody wants to are all committed to the project.

Speaker 2

And what we want to do is to make sure that we're moving as fast as possible. And that's why the TRQ and Ryotintop team will be back in Mongolia in August To start the discussion and continue the discussion on a more formal basis, but you should expect also that the 1st discussion would be really to discuss the aspect related to the under cost criteria, okay, that will be the first one. And we believe that discussion around cost and benefit and Resolution 92 Can be in parallel, but will be could take more time. That's that would be reviewed.

Speaker 4

Okay. And just following up on that, Steve, can you like your disclosure talks about that delays in these in starting to undercut At some point are going to have a material impact on the sustainable first production, capital numbers, etcetera. I realize it's not linear, but at what point does that happen? Is it a 3 month delay, a 5 month delay? When do we need to get concerned that we've reached that materiality threshold of delay?

Speaker 2

Yes. No, Yes, you're right, Orest. It's not linear and it's difficult for me to tell you exactly is that 3 months will give you a significant one Because there's a lot of activity that needs to be undertaken to evaluate what will be the impact and what will be the consequences. So I would say that the only thing I can tell you is that we will definitely work And inform you when these things are when we have better information and when we progress. So the key point is that we're focusing on the negotiation.

Speaker 2

We have the team and we're working as fast as possible to resolve it. And when we'll have better information,

Speaker 4

But if this is not resolved in this quarter, let's say by the end of Q3, Is that material or not material?

Speaker 2

No, I would I mean, it's I don't want to give a number, but I would not say that would be material in terms of it depends on what it depends on the daily, you're right. But this quarter, From my point of view, it would not be material always. Okay. That's helpful. Thank you, Steve.

Speaker 2

Okay.

Operator

Thank you. Next question will be from Ralph Profiti at 8 Capital. Please go ahead.

Speaker 5

Good morning and thanks for taking my questions.

Speaker 2

Hi, Rhett. How are you?

Speaker 5

I'm good, Stephen. Thank you. Steve, I want to delve into specifically the Approval of the definitive estimate and the budget uptake. And I'm trying to understand a little bit better The body of work that the government is doing to get themselves comfortable with The original cost overruns, are these strictly discussions that you're having with them, and sort of at the table? Or Is the government performing things like independent economic evaluations outside of the scope of the technical report Where these go further than just merely discussions of you getting them over the line.

Speaker 5

And I'm trying to understand what exactly is needed to convince them To sign off on those two specific matters.

Speaker 2

Okay. Some work was being done by the Unity Board As commission, an independent consulting group to review these costs and the schedule, Okay. And that report will be deposited shortly. And based on that information, the government that will be a report That will be available for the government as a shareholder as we are in TRQ to understand more clearly The cause and the reason of the delays and also the additional costs. And based on that, there are going to be that's That this inquiry will be information that will be used.

Speaker 2

I know also there are definitely or I'm assuming They would have people that would help them from a financial perspective through models to understand what it is. But firstly, The core of the information would be that report for them.

Speaker 5

Okay, okay. Thanks for that. That's helpful. Yes. My second question is, as it pertains to the debt reprofiling and in the contingency that there are scheduling delays And the potential to roll over into different tranches of project finance is coming due.

Speaker 5

Are you limited only to the $1,400,000,000 in debt reprofiling? Can you go more or does that risk of scheduling and CapEx strictly fall on The potential funding gap from an equity issue perspective.

Speaker 2

Luc, would you like to take that to answer that question?

Speaker 3

Sure. I will do my best to answer that question. So I mean, just generally From a reprofiling perspective, while we do provide the lenders With status updates, etcetera, we haven't been able to formally progress those reprofiling discussions. We're still waiting to source the necessary approvals at the OT Board level and to get our fellow directors comfortable with The commencement of those re profiling efforts, but we are working hard to do that. And That's something that we absolutely want to progress over the next few months.

Speaker 3

In terms of the benefit we think That we can get from reprofiling, we do still think we can get a benefit of up to 1,400,000,000 And that's just a function of the sort of principal repayments that come due over the relevant period of the incremental funding requirement. So if we are able to re profile the debt, And our intention is still to do that. Then over the relevant funding GAAP period, the benefit of that would be up to 1.4 1,000,000,000. So that remains our focus.

Speaker 5

Got it. Understood. Okay. Thanks, Lucas. Thank you, Steve.

Speaker 2

Thank you, Rob.

Operator

And your next question will

Speaker 6

be from Hayden Barlow at Macquarie. Please go ahead.

Speaker 7

Hi, guys. It's Hayden Bestow from Macquarie. Just a couple of questions for me. Firstly, just on The shafts, particularly 34, just interested to understand the timing on that. I mean, you've got Assuming we get Panel 0 underway, I mean, at what point do those shafts need to be finished to start development work?

Speaker 7

I think Panel 2 is coming for Panel 1 from memory To make sure that when you run up Panel 0 into full production, you can then transfer into Panel 2 without slowing down again.

Speaker 2

Okay. Joanne will answer that question for you, Hayden.

Speaker 1

Thank you. Thanks, Hayden, for that question. So just in terms of some shafts 34 and the delays that we're seeing at the moment as a result of the COVID Situation and impact in particular on travel as well as restrictions on people movement. We don't need Shastri for the Panel 0 production to ramp up to approximately 30,000 tonnes a day. We do need it to ramp up post Panel 0.

Speaker 1

And so as you noted, panels 21. So Optimization work has been carried out to date to try to minimize the impact of delays. But there are limits on what we can do with the ventilation that we have and any further significant delays could impact that ramp up post Panel 0 causing a delay to the increase in production beyond about 30,000 tonnes per day. We continue to work on trying to optimize The work that's done with the ventilation we have, however, the schedule impacts Of COVID-nineteen being assessed and they'll continue to be assessed and we'll provide an update as and when we are able to. As you can appreciate, it is a difficult situation at this time.

Speaker 7

So you're comfortable, Joanne, that no matter how much of a delay there is on this, all it means is you just you don't You run Panel 0, which does have a massive amount of reserves in it for at 30,000 tonne a day and you just don't push the expansion through. Is that The main impact here or is there a risk to the slowing of production between the two panels?

Speaker 1

Yes. So I mean, I guess I'd say that the kinds of delays that we might be looking at the moment Not long delays. I think that's something to really think about is that we have personnel on-site And well, in country and some on-site to recommence work. And At the moment, we're planning to recommence in August. There are plans at the moment to remobilize Larger amounts of people to site and all the workforce working on-site is vaccinated.

Speaker 1

So Although we are seeing ongoing impacts of COVID, it is a situation that You know, we are certainly working to try to ramp up personnel. And so the kind of delay that we may see It is something that we certainly will come back with, but we're not in the position at this stage Definitively say, there is a delay. Hopefully, that helps that we are hoping to restart thinking in August.

Speaker 7

Yes, okay. And then on the undercut itself, I'm just interested to know How many people do you actually need on-site to start that up? I mean, how much do these restrictions need to be lifted? And Given we've seen waves 2, 3, 4 and in some countries 5, how comfortable do you need to be that you can run it And have people restrictions come be put back on the business at some point and still be able to manage the operation okay?

Speaker 1

Yes, absolutely. And that's a it's a really good question. And I guess something that we would say is that there is high rates vaccination and certainly all personnel at site are vaccinated right now. We are still adhering to and we always will of course adhere to The government body's requests on how to manage COVID. At the moment, we are seeing ongoing impacts and in terms of roster duration and this requires careful management to ensure that There would be the appropriate amount of personnel and personnel with the right skills available to start the cutting activities.

Speaker 1

And so as you say, there is It is certainly something that needs to be considered prior to starting blasting. And We wouldn't start until we're confident that we can maintain staffing levels to allow us to do so safely and efficiently. So while we've seen some improvement in staffing levels in recent weeks, there has been sporadic and there has varied depending on the COVID situation in country and the flow on restrictions that need to be implemented at the mine site. And so ultimately, we will take a risk based decision on this, but it is something that we will factor into that.

Speaker 7

Okay. Thanks, Joe. And so just one last one on the government negotiations. We had a chat with Yakov and Rio earlier this week. But I'm just It feels to me like it's more of a it's just it's everything or nothing.

Speaker 7

There's not a phased approach here. You need to you have to get agreement on everything and then have to say yes or no. Is that So where it's heading

Speaker 2

to? No, I think definitely We can resolve and move on some area, I mean, shortly, I believe, okay, and that I'll be able to Tell you when we'll be done and finished. But at the moment, I believe that we can resolve and focus on the cut And as I said, I mean, a lot of these discussions are not with the overall government or They're at the governmental body, okay. And we're working very close. I mean, OT is working very close to get these things moving.

Speaker 2

And we see good improvement. We see improvement in that area and movement. And but so personally, I believe that it's not all or There can be we hope I hope that we're going to be able to move on the Discussion necessary for me on the call. And then the cost and benefit and the requirement from the government, We can concurrently move on those things on parallel and resolve them at the right time. But like I said, we'll see.

Speaker 2

I'll be able to tell you when we're done.

Speaker 7

Okay. Maybe just a final comment. I don't I know you won't comment on what Rio are doing, but the discussions I've had and what they've been saying publicly, they're clearly taking A less aggressive approach with ESG and government relations. So whether that expediates the process, I don't know, but Maybe it does result in them foregoing a bit more to the government than what was going to be the case in the previous management.

Speaker 2

Cannot comment on that, are you right?

Speaker 7

Thanks.

Speaker 2

Okay. Thank you.

Operator

Thank you. And your next question will be from Dalton Baretto at Canaccord. Please go ahead.

Speaker 8

Thank you. Good morning, Steve and team. I just want to start out by following up on that last line of questioning there. So from a procedural perspective, On the assumption that the negotiating team from your side as well as the government's negotiating team come to terms, Does that agreement then still that need to get approved by Parliament?

Speaker 2

You know what I'm not certain of, I guess there's some this Dalton, I'll be honest, I'm not quite sure exactly the process. And I apologize. Okay. Because

Speaker 8

Yes. No worries. It's just because it could add substantial time to Process, right now. Yes. No, I'm asking.

Speaker 2

I understand, but we'll check that because I don't want to give you a long answer here, okay?

Speaker 8

Perfect. And then on that kind of same vein, if the undercut is delayed, like Orest was suggesting Materially, do you have a sense for what your holding cost would be as well as the cost associated with demobilizing and then remobilizing your contract, of course?

Speaker 2

Okay. Joanne, do you have an answer on that? Or can you provide some answer on this?

Speaker 1

Thank you, Steve. So in terms of costs, this is something that the projects team continually evaluating. And so it is something that is being worked We would say that in terms of cost incurred, we've obviously disclosed the information we have at hand now. And from that, we can look at the kinds of Costs that are happening at the moment without with the current situation and delays that we're having. And we are seeing slower costs expenditure than planned reflecting the reduced work at the moment.

Speaker 1

In terms of what would happen post the Undercut firing, we continue and certainly the team at OT continues to seek opportunities to try to maintain schedule, but there will be a limit ultimately as to how much schedule can be maintained if we continue to see delays. And there certainly are opportunities that are being looked at to try to maintain that schedule And we'll continue to do that. So that's it may not be the full answer that you'd like, but So that's sort of where we're at on costs at the moment.

Speaker 8

Yes. No, that's fine. I already assumed the schedule is going to slip. I was more concerned around Okay. Maybe a couple of kind of longer term questions here.

Speaker 8

First, there seems to be some new language in the disclosure Around power supply and specifically cautioning that there is a chance you may end up being Connected to the Mongolian grid without Tevaan Tolgoi online. How much of a probability is that?

Speaker 2

Okay. Luc will answer that question, Dalton.

Speaker 3

So the discussions on power with the government of Mongolia Our ongoing discussions, from an OT perspective, as you can appreciate, it's very important for us To mitigate the relevant risks and to make sure that we do have, power Certainty going forward and that will be an important focus, a critical point of focus for us In those discussions with the government of Mongolia, so any solution, whatever the solution ends up being is going to have to Provide the relevant degree of power certainty whether or not that The primary solution in the amended PSFA or if it's one of the alternative solutions including grid Why? Over the relevant period of time, we're going to have to make sure that we have the sort of Right back up the ability to access power while Whatever is being constructed needs to be constructed or upgraded or whatever it is. So that's going to be a focus. It has been and will continue to be a focus in The discussions with government around power, the discussions with government around power are actually in process In the moment, and we are hopeful that we can make good progress around this particular area over the course of the next few months.

Speaker 3

Certainly, from our perspective, that's the intention. And we will get to an answer That makes sure that OT that we put OT in a position where at all points in the process, OT will have Stable, reliable power.

Speaker 8

Got it. Okay. Thanks for that. And then Another kind of longer term question. So Shafts 3 and 4, for all intents and purposes, are now delayed.

Speaker 8

And then Well, with infrastructure moving and so on, which It's very reminiscent of what happened at panel 0. When will we see some sort of Estimate in terms of what that's going to cost you from a capital perspective as well as from a schedule perspective.

Speaker 2

Yes. Shawanda, would you give the answer on this, please?

Speaker 1

Yes. Thanks. Thanks, Steve. So In terms of when what we would see, we're at this stage, As I was saying earlier, we're expecting that shaft sinking should be going to commence in the near future. And once we start to see the progress on work and What's going to happen with the COVID situation that will put us in a better position to be able to understand the overarching impacts to the extent there are some or how large they could be on The overall project cost and schedule.

Speaker 1

At this stage, we've certainly disclosed the information that we have at hand, including where we are on schedule such that we understand it. As I was saying before, the planning team have done their very best to continue to to monitor work that is done to minimize delays. But if we continue to see shafts sinking delayed, Then we will need to review what that looks like. And so we don't have any update beyond what we've provided to date, But it is a piece of work that we are obviously keeping a very close eye on. And we do have Reasonable transparency around that and are working with the IT team on it.

Speaker 8

Understood. Okay. Then maybe just one last one for me, and this is kind of a more definitive answer. The 130 $7,000,000 cash inflow this past quarter that you've attributed to deferred revenue And contingency for OT short term liquidity and funding. Can you very simply explain to me what the source of that funding

Speaker 2

Yes. Luke will handle that question for you, Dalton.

Speaker 3

I don't know. I will try to put it as Simply as I can. The process effectively from a deferred revenue perspective is At the point where the concentrate inventory gets loaded onto a truck and leaves the mine site, A short period of time after that happens, we receive a cash payment from the relevant customer. The revenue isn't recognized until the final sale occurs, title transfers, etcetera. And that actually happens not when the concentrate leaves the mine site, but when the customer picks up the concentrate From the warehouse in China.

Speaker 3

So, over that period of time between when we received that initial cash payment And the customer actually picks up the order from the Chinese warehouse, we recognize deferred revenue. So the reason that you're seeing the increase in deferred revenue over the Q2 period, It really just has to do with the ramp up or we began to ramp up our shipments again In April, following the declaration of force majeure and that there have been ups and downs over the quarter, We just had better ability to get those Shipments across the border towards the end of Q2 of this year and that's effectively what resulted in The higher deferred revenue, new revenue balance this quarter versus last quarter. So in terms of what we might expect going forward, we are hoping obviously that And all of this is subject to COVID, but we are hoping that we're able to bring down our on-site inventory levels Over the second half of this year and hopefully put ourselves in a position where we can lift the force majeure. That's obviously something that we're working Towards at the moment subject to COVID, etcetera. So we are hoping obviously that We can bring those inventory levels down over the course of the next 3 to 6 months and that will obviously realize the cash that's currently locked up in inventory.

Speaker 3

So listen, I don't know. Hopefully, that was

Speaker 8

No, that was fairly clear. And I do understand the deferred revenue side. I was more focused On the contingency funding for OT short term, I was just wondering if you have kind of a separate facility For short term liquidity, that's outside of everything we've seen.

Speaker 3

So the The contingency measures that I mentioned in the script are really around sort of short term working capital

Speaker 7

Related

Speaker 3

measures that were implemented to try and bring some cash forward. So as opposed to something sort of short term facility financing related, OT does have A small revolver that it can draw on and we actually did draw on it, I believe, towards the beginning of this year or around Q1. And that's going to be reflected obviously in our financial statements for the year to date. So it does have a small revolver that it can draw Just for mainly to sort of help to manage working capital. But the Contingency measures that I refer to are more around the short term measures that were implemented over the course of Q2, Just to try and bring some cash forward into Q2.

Speaker 8

Understood. Thank you, guys. That's all for me.

Speaker 2

Thank you, Nathan.

Operator

Thank you. Your next question will be from Craig Hutchison at TD Securities. Please go ahead.

Speaker 2

Good morning, Greg. Good morning, Steve.

Speaker 6

You guys mentioned a plan to resume the sinking of shafts 34 in August. Does it make Sense to invest in the underground work panels 23, I'm sorry panels 2 and 1 ahead of an undercut decision on Panel 0. And I guess at what point you delay future investments in their underground to preserve capital here?

Speaker 2

Okay. Joanne, would you like to answer that question for Craig?

Speaker 1

Yes. Sure. Thanks very much, Craig. It absolutely makes sense to resume thinking of the shafts as soon as we possibly can. There's no doubt that The COVID situation has forced the team outside to really look at what is the most important Components of the schedule to progress given the concerns that we've had around getting people at So, we've been focused on the Materials Handling System 1, which of course supports The Panel 0 production and so that has gone relatively well given the Circumstances, it has been impacted, but they continue to make progress.

Speaker 1

And we understand the rates of progress with the numbers of Personnel, we've been able to maintain its size over the last few months. And shafts thinking for Shaft 34 is behind that Materials Handling System 1 work, which is some of the reason that we haven't been able to progress that. But it also needs a more complex workforce because we do need International experts to provide us with assistance on that shaft thinking work because it is complex work and The safety is complex as well around those shafts and we do need quite a number of people to progress them. However, it is very important because these pieces of infrastructure take some time to complete. There is variability around their completion timing depending on The ground conditions and other factors that are encountered during thinking and they support The ramp up of panels 21, which are required and we require multiple panels to be able to ramp up to the 95,000 tonnes a day.

Speaker 1

And so it is important that we bring those panels on as soon as possible. So that's the reason why that work is absolutely critical at the moment to progress despite the kinds of challenges that you are raising there. I hope that answers the question.

Speaker 6

It does. Thanks. And just maybe one last question for me. Luke talked about the force majeure. What's kind of required to lift that force majeure?

Speaker 6

I think you guys said earlier That 100% of your workforce has now been vaccinated.

Speaker 2

Luke, you want to answer that, please?

Speaker 3

Sure. Craig, obviously, the focus there is getting the concentrate across the border And having enough concentrate in those Chinese warehouses where we have the right level of confidence that we can Meet our ongoing commitments to customers. So, in that regard, obviously, we're focusing on measures to get the concentrate across the border More quickly and to bring down those on-site inventory levels. COVID creating a bit of drama there, but we're doing our best To work through that and we are hopeful that over the course of the second half of this year, hopefully sooner rather than later, We can continue to bring those on-site inventory levels down, get the concentrate across the border. And then when we have the right level of confidence that we've got enough concentrate in the right place to meet our ongoing customer Amit, that would be the point that we would consider, and hopefully we'll be able to look to force majeure.

Speaker 2

Okay. Thanks guys. We got it, Craig.

Operator

Thank you. Ladies and gentlemen, this does conclude our question session for today as well as the conference call. We thank you for attending. And at this time, ask that you please disconnect your lines. Have yourselves a good weekend.

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Earnings Conference Call
Turquoise Hill Resources Q2 2021
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