MONTREAL, Mar 21, 2020 (Canada NewsWire via COMTEX) -- Turquoise Hill Resources today announced its financial results for the year ended December 31, 2019. All figures are in U.S. dollars unless otherwise stated.
"For 2019, the Oyu Tolgoi mine recorded another year of excellent operational results, and record industry-leading safety performance," stated Ulf Quellmann, Turquoise Hill's Chief Executive Officer. "Our team at Oyu Tolgoi continues to maximize our production efficiencies, which resulted in our full year copper production to fall within our original guidance, and our gold production exceeding our original targets. In addition, the mill throughput achieved its fourth year in a row of operating at above name-plate capacity."
"2019 was also a pivotal year for the underground development with the completion of the above-ground infrastructure and Shaft 2. Shaft 2 is a critical piece of infrastructure that allows the team to accelerate the underground development. Productivity gains in the underground development over the last five months of 2019 have shown steady improvements with December achieving a new record of over 1,800 meters of lateral equivalent meters."
"Today, COVID-19 presents a pandemic on a global scale that is affecting everyone and certainly also our business. We have got measures in place including a business resilience team at Oyu Tolgoi to monitor, manage and mitigate the effects of COVID-19. At this stage, the situation is very fluid and hence we are not in a position to specify the impact on cost and schedule. In the meantime, we continue to work closely with our customers, our suppliers and the Government of Mongolia".
Full Year 2019
-- Safety is a top priority and is critical to our continued success. The Oyu Tolgoi mine achieved another strong AIFR of 0.16 per 200,000 hours worked for the year ended December 31, 2019. AIFR steadily declined since 2013, dropping 64% from 2013 through 2019. -- Full year copper production of 146,346 tonnes vs original guidance range of 125,000 - 155,000 tonnes. -- Full year gold production of 241,840 ounces vs original guidance range of 180,000 - 220,000 ounces. -- Full year mill throughput of 40,777,225 tonnes, an increase of 5% over 2018. -- Revenue of $1.2 billion in 2019 decreased 1.2% over 2018, impacted by lower copper production partly offset by higher gold revenue driven by a higher average annual gold price in 2019. -- Cash used in operating activities before interest and taxes was $341.7 million, a decrease from $363.0 million generated in 2018, primarily reflecting the impact of reduced revenue. -- For 2019, Oyu Tolgoi's cost of sales was $2.25 per pound of copper sold (2018: $2.25), C1 cash costs(1) were $1.37 per pound of copper produced (2018: $1.59) and all-in sustaining costs(1) were $2.08 per pound of copper produced (2018: $2.20). -- Total operating cash costs(1) of $774.5 million for 2019 came in under the Company's revised guidance and decreased 5.2% over 2018. This decrease was due to lower freight and royalty costs driven by lower volumes of concentrate sold and lower sales revenue respectively, and lower milling costs due to lower maintenance costs. These were partly offset by higher power study costs in 2019 compared to 2018. -- Underground expansion capital for 2019 was $1.2 billion, meeting the upper-end of the Company's revised guidance. -- At the end of December 2019, Turquoise Hill had approximately $2.2 billion of available liquidity, split between remaining project finance proceeds of $0.5 billion and $1.7 billion of cash and cash equivalents. We currently expect to have enough liquidity to fund our operations and underground development into Q2 2021. -- Shaft 2 construction was completed in October 2019, and was fully commissioned in February 2020. The service hoist allows for the movement of 300 people per cage cycle, adding to the maximum of 60 people per cage cycle through Shaft 1, while the production hoist has the ability to lift 35,000 tonnes of material to surface daily. -- Construction is progressing on Shafts 3 and 4 with both collars now installed. Final preparations are now underway to enable commencement of main sinking operations for both shafts during the second quarter of 2020. -- Since the restart of underground development in June 2016, 32.9 total equivalent kilometres and 155.3 cubic kilometres of mass excavation has been completed. Mining of the primary crusher 1 excavation which is over 30,000 cubic metres in volume was completed in June 2019 and handed over for civil construction work to commence. -- Detailed analysis work on the final mine design is still anticipated to be completed during the first half of 2020, and the Definitive Estimate, which will include the estimate of cost and schedule for the underground project based on the updated design of Panel 0, is still expected to be delivered in the second half of 2020. -- In May 2019, the Parliamentary Working Group (PWG) concluded and submitted its report to the Economic Standing Committee. From the report, a Resolution was put forward by the PWG and passed unanimously in a plenary session of the Parliament of Mongolia on November 21, 2019 and published on December 6, 2019. -- The Tavan Tolgoi Power Plant (TTPP) Feasibility Study was submitted to the Government of Mongolia on February 17, 2020 by Oyu Tolgoi LLC. The study is based on a 300 MW coal fired power plant to be located at the Tavan Tolgoi coal fields approximately 150 kilometres from Oyu Tolgoi. -- In February 2020, the Company announced that Oyu Tolgoi LLC has been unable to reach a resolution of its dispute with the Mongolian Tax Authority with respect to its tax assessment, and will be proceeding with the initiation of a formal international arbitration proceeding in accordance with the dispute resolution provisions of the Investment Agreement and the Underground Plan. -- In March 2020, the Company announced that following the first positive test for COVID-19 in Mongolia, the Government of Mongolia increased its restrictions on flights in and out of the country and on the movement of goods and people within and across its borders. The Company announced there would be a slowdown on the underground project, the full impact of which is unknown at this time. The Company will update the market once more information is available.
_______________ (1) Please refer to Section - NON-GAAP MEASURES - on page 18 of this press release for further information.
Fourth quarter 2019
-- Copper production in Q4'19 of 32,906 tonnes was lower compared to Q4'18 due to decreased head grade driven by the transition from Phases 4A and 6A, to Phase 4B, Phase 6B and lower grade stockpiles. As anticipated gold production in Q4'19 of 24,344 ounces was significantly lower compared to Q4'18 due to the planned transition from Phase 4A to the lower grade sources of Phase 4B and stockpiles. -- In Q4'19, mill throughput was higher than the same quarter of 2018 due to overall feed hardness being lower as a result of increased Phase 4B ore and Phase 6B ore, as well as lower grade stockpiles material feed in blending. Mill availability and equipment utilization were higher in Q4'19 than the same period of 2018. -- Shaft 2 construction was completed in October 2019 and the fully certified state commissioning certificate for Shaft 2 being received on February 19, 2020. -- Work advanced at Shaft 4 with the sinking stage installed into the shaft barrel and headframe modules installed. Work on the commissioning of the headframe and winder buildings is well advanced ahead of the commencement of sinking in the second quarter of 2020. At Shaft 3, we completed the construction of the sinking gantry and it was placed into the shaft during the first week of January 2020. Headframe module placement has commenced. -- A decision was made in Q4 to retain a mid-access drive only on the apex level of the mine design of Panel 0 (P0). This is one of a number of integral decision points in narrowing options to complete the final P0 mine design, however it is too early to accurately determine the potential impact on the overall cost or schedule. Recent work, including the mid-access drive decision, indicates that the schedule delay is within the 16 to 30 months range but is trending away from the lower end. -- Productivity improvements resulted in increased underground lateral development rates during the fourth quarter, with an average rate of 1,607 equivalent metres (eqm) per month compared to 1,214 eqm in the third quarter, with December seeing a record 1,809 eqm. -- Revenue of $221.4 million in Q4'19 decreased 36.0% from $346.2 million in Q4'18, primarily due to both a 79.2% decrease in gold production and a 20.7% decrease in copper production, reflecting the transition from mining Phase 4A to lower grade Phase 4B and stockpiles. -- Cash used in operating activities before interest and taxes was $42.4 million, a decrease from $146.1 million generated in Q4'18, primarily reflecting the impact of reduced revenue. -- Cost of sales was $2.46 per pound of copper sold, C1 cash costs (2) were $2.21 per pound of copper produced, and all-in sustaining costs(2) were $2.97 per pound of copper produced. -- Total operating cash costs(2) of $194.6 million in Q4'19 decreased 19.7% from $242.3 million in Q4'18. This was principally due to lower milling and mining costs due to lower maintenance costs and lower royalty costs due to lower sales revenue. -- During Q4'19 underground development spend was $289.7 million, resulting in total project spend since January 1, 2016 of approximately $3.5 billion.
OPERATIONAL OUTLOOK FOR 2020
Oyu Tolgoi is expected to produce 140,000 to 170,000 tonnes of copper and 120,000 to 150,000 ounces of gold in concentrates in 2020 from both the open pit and the beginning of the underground development material being processed. Although the mid-point copper production range guidance is higher in 2020 versus the 2019 guidance, a lower gold production year is expected for 2020. This is due to the need to mine through lower grade material on the periphery of the South West pit as Phase 4B sinks towards the highest gold and copper grades in the bottom of the pit. It is anticipated that the higher grade ore will be accessed in 2021, resulting in a significant increase in gold production in 2021. Mill throughput for 2020 is expected to be approximately 40 million tonnes.
Operating cash costs(2) for 2020 are expected to be $800 million to $850 million.
Capital expenditure for 2020 on a cash-basis is expected to be approximately $80 million to $120 million for open-pit operations and $1.2 billion to $1.3 billion for the underground development exclusive of any expenditure on power.
Open-pit capital is mainly comprised of deferred stripping, equipment purchases, tailings storage facility construction and maintenance componentization. Underground development capital includes both expansion capital and VAT.
C1 cash costs(2)are expected to be in the range of $1.80 to $2.20 per pound of copper produced, up from 2019 guidance largely reflecting the reduced gold production estimate. Unit cost guidance assumes the midpoint of expected 2020 copper and gold production ranges and commodity assumptions of $2.71 per pound copper and $1,362 per ounce gold.
______________________ (2) Please refer to Section - NON-GAAP MEASURES - on page 18 of this press release for further information
Production in 2021 is expected to increase to a range of 170,000 to 200,000 tonnes of copper, and 450,000 to 500,000 ounces of gold, as we transition to the higher grade ore in the lower benches of the pit and continue to increase the amount of underground development material processed.
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 (Oyu Tolgoi); the remaining 34% interest is held by Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian state-owned entity.
The Oyu Tolgoi mine is located approximately 550 kilometres south of Ulaanbaatar, Mongolia's capital city, and 80 kilometres north of the Mongolia-China border. Mineralization on the property consists of porphyry-style copper, gold, silver and molybdenum contained in a linear structural trend (the Oyu Tolgoi Trend) of deposits distributed over a 12 kilometres interval of a 25 kilometres corridor of mineralization. The first of those (the Oyut deposit) was put into production as an open-pit operation in 2013. A second deposit, Hugo North (Lift One), is under development 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 improved operating practices and gained experience, which has helped achieve a consistent throughput of over 105,000 tonnes per day. 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 ore characteristics.
At the end of Q4'19, Oyu Tolgoi had a total workforce (employees and contractors), including underground project construction, of approximately 13,800, of which 93% were Mongolians.
SELECTED ANNUAL FINANCIAL INFORMATION
($ in millions, except per share information) Year Ended December 31 2019 2018 2017 Revenue $ 1,166.0 $ 1,180.0 $ 939.8 === Income (loss) for the year $ (476.9) $ 394.3 $ 110.9 === Net income (loss) attributable to owners of Turquoise Hill $ (150.5) $ 411.2 $ 181.2 === Basic and diluted income (loss) per share attributable to owners of Turquoise Hill $ (0.07) $ 0.20 $ 0.09 === Total assets $ 12,822.4 $ 13,312.0 $ 12,833.3 Long-term liabilities Borrowings and other financial liabilities $ 4,187.3 $ 4,187.3 $ 4,159.1 Decommissioning obligations $ 104.2 $ 131.6 $ 125.7 Deferred income tax liabilities $ 79.2 $ 47.9 $ 25.8 ===
Note: Annual financial information has been extracted from the audited financial statements of Turquoise Hill, which are prepared in accordance with IFRS.
SELECTED FINANCIAL METRICS ((1))
(4Q 4Q Change 12 months 12 months Change 2019 2018 2019 2018 === Revenue 221.4 346.2 -36.0% 1,166.0 1,180.0 -1.2% Income (loss) for the period 109.5 95.0 (476.9) 394.3 Income (loss) attributable to owners of Turquoise Hill 113.1 101.0 (150.5) 411.2 Basic and diluted income (loss) per share attributable to owners of 0.06 0.05 (0.07) 0.20 Turquoise Hill Revenue by metals in concentrates Copper 178.1 210.3 -15.3% 787.8 866.5 -9.1% Gold 40.1 132.7 -69.8% 365.0 300.4 21.5% Silver 3.2 3.0 6.7% 13.2 13.1 0.8% Cost of sales 175.0 187.7 -6.8% 743.0 777.2 -4.4% Production and delivery costs 125.2 143.3 -12.6% 559.1 568.0 -1.6% Depreciation and depletion 49.8 44.6 11.7% 183.9 209.5 -12.2% Capital expenditure on cash basis 318.6 371.8 -14.3% 1,308.1 1,304.3 0.3% Underground 289.7 347.3 -16.6% 1,174.9 1,213.8 -3.2% Open pit (2) 28.9 24.5 18.0% 133.2 90.5 47.2% Royalties 12.5 20.1 -37.8% 64.0 70.8 -9.6% Operating cash costs (3) 194.6 242.3 -19.7% 774.5 817.0 -5.2% Unit costs ($) Cost of sales (per pound of copper sold) 2.46 2.12 16.0% 2.25 2.25 0.0% C1 (per pound of copper produced) (3) 2.21 1.24 78.2% 1.37 1.59 -13.8% All-in sustaining (per pound of copper produced) (3) 2.97 2.01 47.8% 2.08 2.20 -5.5% Mining costs (per tonne of material mined) (3) 1.55 2.28 -31.9% 1.88 2.13 -11.7% Milling costs (per tonne of ore treated) (3) 5.01 6.82 -26.6% 6.48 7.11 -8.9% G&A costs (per tonne of ore treated) 3.49 4.55 -23.2% 3.30 3.03 9.1% Cash generated from (used in) operating activities (153.6) 36.0 -526.7% (11.7) 180.0 -106.5% Cash generated from operating activities before interest and tax 42.4 146.1 -71.0% 341.7 363.0 -5.9% Interest paid 206.6 130.5 58.3% 427.5 261.4 63.5% Total assets 12,822 13,312 -3.7% 12,822 13,312 -3.7% Total non-current financial liabilities 4,371 4,367 0.1% 4,371 4,367 0.1% )((1) Any financial information in this MD&A should be reviewed in conjunction with the Company's consolidated financial statements or condensed interim consolidated financial statements for the reporting periods indicated. (2) Open-pit capital expenditure includes both sustaining and non-underground development activities. (3) Please refer to NON-GAAP MEASURES - on page 18 of this press release for further information. )
2019 versus 2018
-- Revenue of $1,166.0 million in 2019 decreased 1.2% compared to $1,180.0 million in 2018, primarily due to the 9.1% decrease in copper revenue, driven by the 8% decrease in copper production, reflecting the transition from mining Phase 4A to lower grade Phase 4B and stockpiles. This was partly offset by higher gold revenue driven by a 9.9% increase in average annual gold price from 2018 to 2019. -- Loss for 2019 was $476.9 million compared with income of $394.3 million in 2018. This $0.9 billion differential was primarily due to the $0.6 billion impairment charge recorded in Q2'19 together with $0.3 billion of additional deferred tax assets that were recognized in 2018 compared to 2019. Both items were impacted by the Company's update on the Oyu Tolgoi underground project on July 15, 2019, wherein the Company disclosed a projected increase in underground development capital ranging between $1.2 billion and $1.9 billion over the $5.3 billion previously disclosed in addition to a range of possible further delays to sustainable first production (now expected between May 2022 and June 2023). Recent work, including the mid-access drive decision, indicates that the schedule delay is within the 16 to 30 months range but is trending away from the lower end. -- Cost of sales in 2019 was $743.0 million compared to $777.2 million in 2018, reflecting a 2.9% decrease in the volumes of concentrates sold together with the impact of reduced depreciation and depletion due to certain long-lived assets reaching the end of their depreciable lives during 2018. This was partly offset by a higher unit cost of production due to lower head grades and recoveries. -- Capital expenditure on a cash basis for 2019 was $1,308.1 million compared to $1,304.3 million in 2018, comprising amounts attributed to the underground project and open-pit activities of $1,174.9 million and $133.2 million, respectively. Open-pit capital expenditure includes deferred stripping of $48.0 million and tailings storage facility spending of $24.9 million. -- Total operating cash costs(3) of $774.5 million for 2019 decreased 5.2% over 2018 due to lower freight and royalty costs driven by lower volumes of concentrate sold and lower sales revenue respectively, and lower milling costs due to lower maintenance costs. These were partly offset by higher power study costs in 2019 compared to 2018. -- Cost of sales were $2.25 per pound of copper sold in 2019, consistent with $2.25 per pound of copper sold in 2018 reflecting lower volumes of metals in concentrate sold offset by higher unit cost of production due to lower head grades and recoveries. -- Oyu Tolgoi's C1 cash costs(3) in 2019 were $1.37 per pound of copper produced, a decrease from $1.59 per pound of copper produced in 2018, and are presented net of revenues from gold and silver sales. The decrease was mainly due to higher gold and silver credits driven by the 21.5% increase in gold sales revenue from 2018. This also led to the 2019 C1 cash costs(3) of $1.37 per pound of copper produced coming in under the previous guidance range of $1.50 to $1.70 per pound of copper produced. -- All-in sustaining costs(3) in 2019 were $2.08 per pound of copper produced, compared with $2.20 per pound of copper produced in 2018. The decrease was impacted by the same factors that led to the lower C1 cash costs. This was partly offset by higher major parts costs and higher other sustaining open pit capital resulting mainly from capitalized deferred stripping in 2019 driven by an increase in the proportion of waste removed. -- Mining costs(3) in 2019 were $1.88 per tonne of material mined compared with $2.13 per tonne of material mined in 2018. The decrease was mainly due to increased material mined as well as lower maintenance costs and fuel costs. -- Milling costs(3) in 2019 were $6.48 per tonne of ore treated compared with $7.11 per tonne of ore treated in 2018. The decrease was mainly due to increased milled ore, lower maintenance cost due to savings in major shutdown and lower consumables costs due to lower power costs. -- G&A costs in 2019 were $3.30 per tonne of ore treated compared with $3.03 per tonne of ore treated in 2018. The increase was due to increased power plant study costs. -- Cash used in operating activities of $11.7 million decreased from cash generated of $180.0 million in 2018. This was principally due to $166.0 additional interest paid in 2019 compared to 2018 resulting mainly from the difference in timing of payment of the completion support fee to Rio Tinto. In addition, the decrease was impacted by lower sales revenue and negative movements in working capital.
___________ (3) Please refer to Section - NON- GAAP MEASURES - on page 18 of this press release for further information.
Q4'19 vs Q4'18
-- Revenue of $221.4 million decreased 36.0% from $346.2 million primarily due to a 79.2% decrease in gold production and the 20.7% decrease in copper production. The decreased production and a 3.9% decrease in copper price was partly offset by a 17.1% increase in the average gold price in the period. -- Income for the period was $109.5 million compared with income of $95.0 million in Q4'18. This was primarily due to $112.0 million higher deferred tax assets recognized in Q4'19 compared to Q4'18 partly offset by lower gross margin driven by the reduced revenue. Income attributable to owners of Turquoise Hill in Q4'19 was $113.1 million or $0.06 per share, compared with income of $101.0 million or $0.05 per share in Q4'18. -- Cost of sales of $175.0 million decreased 6.8% from $187.7 million in Q4'18 reflecting 17.7% lower volumes of concentrates sold partly offset by the impact of increased unit cost of sales per pound of copper sold due to decreased head grades. -- Unit cost of sales of $2.46 per pound of copper sold increased 16.0% from $2.12 reflecting lower average mill head grades and recoveries impacted by transitioning to the lower grade Phase 4B ore. -- Capital expenditure on a cash basis of $318.6 million compared to $371.8 million in Q4'18, comprised of $289.7 million attributed to the underground project and $28.9 million to open-pit activities. -- Total operating cash costs of $194.6 million in Q4'19 decreased 19.7% from $242.3 million in Q4'18. This was principally due to lower milling and mining costs due to lower maintenance costs and lower royalty costs due to lower sales revenue. -- Oyu Tolgoi's C1 cash costs(4) of $2.21 per pound of copper produced increased from $1.24 primarily reflecting the impact of the 69.8% lower gold sales revenue credits in Q4'19 compared to Q4'18. -- All-in sustaining costs(4) of $2.97 increased 47.8% from $2.01 in Q4'18. Similar to the C1 cash costs, the increase was primarily due to a reduction in gold revenue credits, partly offset by lower royalty costs resulting from the lower sales revenue in Q4'19 compared to Q4'18. -- Mining costs(4) of $1.55 per tonne of material mined decreased 31.9% from $2.28 per tonne of material mined in Q4'18. The decrease was due to higher material mined resulting in lower cycle time and lower fuel costs as a result of mining in higher benches. -- Milling costs(4) of $5.01 per tonne of ore treated decreased 26.6% from $6.82 of ore treated in Q4'18 mainly due to lower maintenance service costs and cost savings in major plant shutdowns. -- G&A costs per tonne of ore treated of $3.49 per tonne of ore treated decreased 23.2% from $4.55 per tonne of ore treated due to lower administrative expenses partly offset by increased power study costs. -- Cash used in operating activities of $153.6 million decreased from cash generated of $36.0 million in Q4'18. This was principally due to $76.1 million higher interest paid in 2019 compared to 2018 resulting mainly from the difference in timing of payment of the completion support fee to Rio Tinto. In addition, the decrease was impacted by the 36.0% decrease in sales revenue.
___________________ 4 Please refer to Section - NON-GAAP MEASURES - on page 18 of this press release for further information.
Underground development by its nature increases specific levels of safety risk and reinforces why safety is Oyu Tolgoi's main priority. The mine's management is committed to reducing risk and injury. Overall, in 2019 Oyu Tolgoi achieved an industry leading AIFR of 0.16 per 200,000 hours worked against a target of 0.21. Oyu Tolgoi Operations ended the year of 2019 with AIFR of 0.09 against target of 0.15, which represents the best safety performance to date. Oyu Tolgoi Underground ended the year of 2019 with AIFR of 0.21 against a target of 0.26. In addition, there are other safety metrics that are common in the mining industry, utilized by Oyu Tolgoi to continuously monitor safety performance.
The Company is closely monitoring the impact of the COVID-19 virus on its business and operations. The Oyu Tolgoi Business Resilience Team is meeting on a daily basis and taking a considered and risk-based approach to managing our response and actions for the prevention of COVID-19. As part of a range of broader measures, we have temperature and health screenings in place, and a dedicated hotline for employees who are on or off site to call in for advice or information sharing. To assist with the battle against COVID-19, Oyu Tolgoi LLC has donated MNT100 million to the Government of Mongolia, and through the Oyu Tolgoi-sponsored Gobi Oyu Development Support Fund, we further committed MNT200 million to the Umnugobi emergency committee, and MNT10 million to the Khanbogd Emergency Commission for prevention support. We are also sharing our prevention and hygiene controls we have in place with local companies as they prepare to resume their operations and border crossings.
Key operational metrics for 2019 and Q4'19 are as follows:
Oyu Tolgoi Production DataAll data represents full production and sales on a 100% basis
4Q 4Q Change Full Year Full Year Change 2019 2018 2019 2018 Open pit material mined ('000 tonnes) 28,122 22,863 23.0% 101,316 91,310 11.0% Ore treated ('000 tonnes) 11,088 9,361 18.4% 40,777 38,738 5.3% Average mill head grades: Copper (%) 0.42 0.55 -23.6% 0.45 0.51 -11.8% Gold (g/t) 0.15 0.56 -73.2% 0.29 0.36 -19.4% Silver (g/t) 1.06 1.22 -13.1% 1.13 1.22 -7.4% Concentrates produced ('000 tonnes) 152.6 189 -19.3% 674.6 724.9 -6.9% Average concentrate grade (% Cu) 21.6 21.9 -1.4% 21.7 21.9 -0.9% Production of metals in concentrates: Copper ('000 tonnes) 32.9 41.5 -20.7% 146.3 159.1 -8.0% Gold ('000 ounces) 24.3 117 -79.2% 241.8 285 -15.2% Silver ('000 ounces) 190 238 -20.2% 866.6 914 -5.2% Concentrate sold ('000 tonnes) 157.5 191.4 -17.7% 724.7 746.4 -2.9% Sales of metals in concentrates: Copper ('000 tonnes) 32.3 40.2 -19.7% 149.9 156.7 -4.3% Gold ('000 ounces) 24.7 111 -77.7% 273.6 248 10.3% Silver ('000 ounces) 243.6 216 12.8% 895.9 873 2.6% Metal recovery (%) Copper 74.2 84.8 -12.5% 78.7 81.4 -3.3% Gold 48.2 71.7 -32.8% 63.6 65.2 -2.5% Silver 53.5 67.1 -20.3% 58.1 60.9 -4.6%
As previously announced on July 15, 2019, improved information with respect to rock mass and geotechnical data modelling has confirmed that there are stability risks associated with components of the Feasibility Study 2016 mine design.
To address these risks, a number of refinements are under review to determine the final mine design, and the first of the key decisions that has been made is to retain a mid-access drive only on the apex level of the mine design of Panel 0. A mid-access drive is essentially a horizontal tunnel that cuts transversely across the mine footprint and allows development both to the north and south within the orebody and accelerates the time to first sustainable production.
Current estimates indicate that sustainable first production could be delayed by 16 to 30 months compared with the Q1'21 estimate in the original feasibility study guidance in 2016, and the development capital spend for the project may increase by $1.2 billion to $1.9 billion over the $5.3 billion previously disclosed. The range of project durations under consideration influence the differences in capital costs estimated to complete the project and the increase includes Shaft 2 delay related costs. These ranges incorporate a range of productivity assumptions. A new program of work is underway to optimize performance, while technical reviews are ongoing to guide the final inputs into an updated detailed cost estimate for the Hugo North Lift 1 development. Recent work, including the mid-access drive decision, indicates that the schedule delay is within the 16 to 30 months range but is trending away from the lower end.
Decisions regarding the sequencing of the first panel of mining, Panel 0, productivity inputs and ore pass locations continue and are expected to be completed by the first half of 2020. These will take into consideration the consequential impacts on cost, schedule and other key variables such as Mineral Reserves, project ramp-up profile and peak production together with improvements in productivity. The resulting Pre-Feasibility Study designs are being detailed to Feasibility Study standard, then scheduled and costed to form the Definitive Estimate are due in the second half of 2020. In the interim, underground development continues and we look forward to providing the market with any updates to the schedule and development capital spend.
Shaft 2 has now been successfully commissioned and the operational passport documentation has been accepted by General Agency for Specialized Inspection (GASI) as complete. First full load and full speed testing of the Production Hoist has been witnessed by GASI, and the full system has been operated to move material from the Shaft 2 jaw crusher to the surface. The first large-scale personnel movements using the Shaft 2 service cage commenced during the fourth quarter.
On December 13, 2019, the Mongolian Minister of Mining and Heavy Industry and company executives attended a celebration for the opening of Shaft 2 on site. A full trial of the Shaft 2 Production Hoist system to the Coarse Ore Stockpile was completed in December and successfully delivered approximately 20,000 tonnes of ore to the concentrator.
Shaft 2 is a 10-metre diameter shaft sunk to approximately 1.3 kilometres below the surface. The shaft uses the world's largest production hoist motor able to lift 60 tonnes and can carry 300 people in the service hoist. When operating at maximum capacity, the production hoist has the ability to lift 35,000 tonnes of material to the surface daily.
The Load out conveyor and Shaft 2 integrated materials handling system is fully commissioned. The Shaft 2 production and logistics capability is a key enabler of increased underground development and construction of critical underground infrastructure such as the Primary Crusher 1 and the material handling systems that support the start of production ramp-up.
Primary Crusher 1 civil works are ongoing, and the team has successfully poured the sixth level crusher wall and installed steel for preparation of pour seven. The Surge Bin chute and Spile Bar chute were both installed. Additional resources have been mobilised to assist with contractor management and training.
Work advanced at Shaft 4 with the sinking stage installed into the shaft barrel and headframe modules installed. Work on the commissioning of the headframe and winder buildings is well advanced ahead of the commencement of sinking in the second quarter of 2020. At Shaft 3, we completed the construction of the sinking gantry and it was placed into the shaft during the first week of January 2020. Headframe module placement has commenced.
Underground development in Q4'19 has accelerated. Focus on productivity gains on the most critical development areas over the past five months has reaped substantial improvements. Underground development progressed 4.8 total equivalent kilometres and completed 9 cubic kilometres of mass excavation during the quarter. Since the restart of underground development, 32.9 total equivalent kilometres and 155.3 cubic kilometres of mass excavation have been completed. The following table provides a breakdown of the various components of completed development (excluding conveyor declines) since project restart:
Oyu Tolgoi Underground Project Development Progress Excluding Conveyor Declines --- Year Total Equivalent Lateral Development Mass Excavation Development (Km) ('000' m(3)) (Km) --- 2016 1.6 1.5 3.0 --- Q1'17 1.0 0.8 5.2 --- Q2'17 1.4 0.9 9.2 --- Q3'17 1.4 1.2 8.3 --- Q4'17 2.2 1.9 8.9 --- 2017 6.1 4.8 31.6 --- Q1'18 2.6 2.1 11.6 --- Q2'18 2.4 2.1 8.6 --- Q3'18 3.0 2.1* 23.3* --- Q4'18 2.3 1.6 16.0 --- 2018 10.3 7.9 59.5 --- Q1'19 3.2 2.3 21.4 --- Q2'19 3.2 2.4 19.3 --- Q3'19 3.6 3.2 11.4 --- Q4'19 4.8 4.5 9.0 --- 2019 14.9 12.4 61.1 --- Total 32.9 26.7 155.3 ---
Notes: Totals may not match due to rounding. *Lateral development and mass excavation amount for Q3'18 have been updated to reflect revised results.
Oyu Tolgoi Conveyor Decline Project Development Progress --- Year Total Equivalent Lateral Development Mass Excavation Development (Km) ('000' m(3)) (Km) --- 2016 0.0 0.0 0.0 --- Q1'17 0.1 0.1 0.0 --- Q2'17 0.4 0.4 0.2 --- Q3'17 0.9 0.9 0.5 --- Q4'17 0.9 0.8 0.5 --- 2017 2.3 2.3 1.2 --- Q1'18 0.8 0.8 0.1 --- Q2'18 0.8 0.8 0.1 --- Q3'18 0.8 0.8 0.3 --- Q4'18 0.6 0.6 0.1 --- 2018 3.0 3.0 0.6 --- Q1'19 0.8 0.8 0.8 --- Q2'19 0.9 0.9 0.8 --- Q3'19 0.9 0.7 4.9 --- Q4'19 1.1 0.7 8.3 --- 2019 3.7 3.1 14.7 --- Total 9.0 8.3 16.5 ---
Note: Totals may not match due to rounding.
Oyu Tolgoi spent $289.7 million on underground development during Q4'19. Total underground project spend from January 1, 2016 to December 31, 2019 was approximately $3.5 billion. Underground project spend on a cash basis includes expansion capital, VAT and capitalized management services payment and excludes capitalized interest. In addition, Oyu Tolgoi had further capital commitments(5) of $0.8 billion as of December 31, 2019. Since the restart of project development, Oyu Tolgoi has committed over $3.0 billion to Mongolian vendors and contractors.
FUNDING OF OYU TOLGOI LLC BY TURQUOISE HILL
In accordance with the Amended and Restated Shareholders' Agreement dated June 8, 2011 (ARSHA), Turquoise Hill has funded Oyu Tolgoi LLC's cash requirements beyond internally generated cash flows by a combination of equity investment and shareholder debt.
For amounts funded by debt, Oyu Tolgoi LLC must repay such amounts, including accrued interest, before it can pay common share dividends. As of December 31, 2019, the aggregate outstanding balance of shareholder loans extended by subsidiaries of the Company to Oyu Tolgoi LLC was $6.2 billion, including accrued interest of $1.2 billion. These loans bear interest at an effective annual rate of LIBOR plus 6.5%.
In accordance with the ARSHA, a subsidiary of the Company has funded the common share investments in Oyu Tolgoi LLC on behalf of state-owned Erdenes. These funded amounts earn interest at an effective annual rate of LIBOR plus 6.5% and are repayable, by Erdenes to a subsidiary of the Company, via a pledge over Erdenes' share of Oyu Tolgoi LLC common share dividends. Erdenes also has the right to reduce the outstanding balance by making cash payments at any time. As of December 31, 2019, the cumulative amount of such funding was $1.2 billion, representing 34% of invested common share equity, with unrecognized interest on the funding amounting to $0.7 billion.
At the end of December 2019, Turquoise Hill has approximately $2.2 billion of available liquidity, split between remaining project finance proceeds of $0.5 billion, which are drawn and currently deposited with Rio Tinto, and $1.7 billion of cash and cash equivalents. In addition, we expect to generate free cash flow at our existing open pit operations, which will also be available to help fund the underground development.
Turquoise Hill currently expects to have enough liquidity to fund its operations and underground development, including progression of the proposed Tavan Tolgoi-based power plant, into Q2 2021. Taking into consideration the estimated impacts of the announced increases to underground development capital, as well as delays to first sustainable production, the Company expects to need significant incremental financing to sustain its underground development as well as construction of the proposed Tavan Tolgoi-based power plant beyond this timeframe. The Company will have greater clarity on this incremental funding requirement as the Definitive Estimate progresses and as discussions progress with the Government of Mongolia to conclude a mutually acceptable basis on which to proceed with securing long term domestic power supply for Oyu Tolgoi; nevertheless, current estimates indicate an incremental funding requirement, over and above the $2.2 billion in liquidity currently available, of at least $4.5 billion.
Turquoise Hill and Oyu Tolgoi LLC have the option to raise additional external financing, subject to required approvals, to assist in funding development going forward, including during underground commissioning and ramp up. This additional external funding, as well as any possible re-profiling of the principal repayments relating to the existing project financing facility, have not been assumed in estimating the incremental funding requirement. Further, important variables impacting the estimated incremental funding requirement include:
-- The amount of incremental underground development capital required; -- Whether a Tavan Tolgoi-based power plant is ultimately selected as the long-term domestic power solution for Oyu Tolgoi; -- The timing of sustainable first production and its resulting cash flows. Recent work, including the mid-access drive decision, indicates that the schedule delay range is within the 16 to 30 months previously disclosed but is trending away from the lower end of this range; -- The timing of principal repayments on amounts currently drawn under the project finance facility (for additional information see the CONTRACTUAL OBLIGATIONS section of this MD&A) as well as on-going debt service costs; -- The amount of cash flow that can be generated from open-pit operations; and -- The impact of COVID-19 on Oyu Tolgoi's open-pit operations and underground development.
As the work to complete the Definitive Estimate and to secure a long-term domestic power solution progress, Turquoise Hill continues to evaluate the impact of the estimated increases to underground capital expenditure, as well as delays to sustainable first production and the other important variables discussed above, on its cash flows, liquidity and financing projections and will update the market in due course. While the Company's funding requirements will be clarified by the ongoing work on the Definitive Estimate, which is still expected to be delivered in the second half of 2020, and by the power discussions, Turquoise Hill is well progressed in its discussions with Rio Tinto regarding its proposal for sourcing incremental interim funding to ensure the Company can progress the underground development over and above its $2.2 billion of available liquidity.
___________ 5 Please refer to Section - NON- GAAP MEASURES - on page 18 of this press release for further information.
Turquoise Hill's ownership of the Oyu Tolgoi mine is held through a 66% interest in Oyu Tolgoi LLC. The remaining 34% interest in Oyu Tolgoi LLC is held by Erdenes Oyu Tolgoi LLC (Erdenes), a Mongolian state-owned entity. Turquoise Hill is obliged to fund Erdenes' share of the capital costs under the ARSHA.
Underground construction recommenced in May 2016 when Oyu Tolgoi LLC received the final requirement for the re-start of underground development: formal notice to proceed approval by the boards of Turquoise Hill, Rio Tinto (as project manager) and Oyu Tolgoi LLC. Approval followed the signing of the Oyu Tolgoi Underground Mine Development and Financing Plan (Underground Plan) in May 2015 and the signing of a $4.4 billion project finance facility in December 2015. Development had been suspended in August 2013 pending resolution of matters with the Government of Mongolia.
Turquoise Hill's investment in the Oyu Tolgoi mine is governed by a 2009 Investment Agreement (Investment Agreement). The Investment Agreement framework was authorized by the Mongolian Parliament and was concluded after 16 months of negotiations. It was reviewed by numerous constituencies within the Government. Turquoise Hill has been operating in good faith under the terms of the Investment Agreement since 2009, and we believe not only that it is a valid and binding agreement, but that it has proven to be beneficial for all parties.
Adherence to the principles of the Investment Agreement, the ARSHA and the Underground Plan has allowed for the development of the Oyu Tolgoi mine in a manner that has given rise to significant long-term benefits to Mongolia. Benefits from the Oyu Tolgoi mine open-pit operations and underground development include, but are not limited to, employment, royalties and taxes, local procurement, economic development and sustainability investments.
Oyu Tolgoi Mine Power Supply
Oyu Tolgoi currently sources power from China's Inner Mongolian Western Grid via overhead power lines, via a back-to-back power purchase agreement with National Power Transmission Grid JSC (NPTG), the power importing entity, and the Inner Mongolian Power Company (IMPC).