Copper Mountain Mining Corporation

James O'Rourke - President & CEO Rodney Shier - CFO

Craig Hutchison - TD Securities

Thank you, Christine. After opening remarks by management, in which we will review the business and operational results for the 2017 second quarter, we'll open lines to participants for questions, as noted by Christine.

Please note that comments made today that are not of a historical factual nature may contain forward-looking statements. This information, by its nature, is subject to risks and uncertainties that may cause stated outcomes to differ materially from the actual outcomes.

Please refer to the bottom of our latest news release for more information. For those of you following on the webcast, we will be referring to the page number of the supporting slides.

I'll now turn the call over to our CEO, Jim O'Rourke, for his remarks.

Thank you, Rod. Good morning, everyone, and thank you for joining us.

Today, we'll discuss 2017 second quarter results for the operation at the Copper Mountain Mine and our corporate financials. I will briefly summarize the financial results and provide an update on various operational activities, after which Rod will provide financial details for the 2017 second quarter.

For the three months ending June 30, 2017, the company has enjoyed improved metal prices at the end of the quarter with a strengthened balance sheet. The mine operations continue to focus on cost containment and production efficiencies while maintaining the record mine and mill throughput rates achieved last year.

I'll now refer you to the Page 2 of your graph and the Q2 highlights. During the quarter, the company completed a total of three shipments of copper concentrate.

These sales contained approximately 21.1 million pounds of copper equivalent, which included 17.6 million pounds of copper plus precious metals. These sales generated $67.1 million in revenue, net of treatment and refining charges and price adjustments based on an average realized copper price of US$2.58 per pound.

This compared to revenues of $62.5 million net of pricing adjustments and with an average copper price of US$2.13 per pound for the period ending June 30, 2016. The increase in revenue compared to the same period last year is due to the increase in the sales price of copper.

Precious metal sales accounted for 15.4% of revenue during the quarter. The company's cash and cash equivalent position at the end of the second quarter was $37.1 million compared to $5.1 million at the period ending June 30, 2016.

Production for the 2017 second quarter was 20.1 million pounds of copper equivalent, which included 17.2 million pounds of copper plus 5,900 ounces of gold and 63,200 ounces of silver. Copper production remains on track to our annual guidance and is forecast to increase during the second half.

Now I'll refer you to Slide 3. Mining activities continued in the Pit #2 and Saddle areas plus the Oriole during the quarter.

A total of 18.2 million tons of material was mined, including 6.3 million tons of ore and 11.9 million tons of waste. Pit #2 has been expanded to the west slightly with the incorporation of the additional resources discovered with the 2016 drill program.

Continuations of a large drilling program has been completed this summer. Core splitting announced should be completed later this quarter.

During the quarter, the mine averaged 200,100 tons per day moved, about 11% above our guidance from 180,000 ton per day. Favorable haulage profiles and additional efficiency gains continued to contribute to the above-average mining rates being achieved.

Mining in the Oriole Pit is progressing well and with small amounts of ore being delivered to the mill at this time. It is planned that the larger portion of the higher-grade Oriole ore will be delivered to the mill in the second half of 2017.

Our mining fleet continues to enjoy favorable mechanical availabilities. In 2017, the mobile equipment fleet averaged above 85% mechanical availability.

Total unit mining costs at $1.77 per ton moved were slightly higher than the $1.68 per ton mined during the same quarter last year. The slightly higher unit costs have been the result from additional planned maintenance in the pit and higher diesel fuel cost.

Open pit operating rates are expected to be maintained with cost reductions continuing as a priority. Drill productivity has been a challenge of these higher mining rates but has improved during the quarter with technological changes and added efficiencies.

These improvements have resulted in record increased broken rock inventory in the pit. Moving on then, I'll now refer you to the Page 5.

During the quarter -- sorry, Page 4. During the quarter, the mill processed a total of 3.2 million tons of ore, with the mill throughput averaging 35,674 ton per day.

Mill operating time during the quarter averaged 82.4%, which was on plan, taking into account the scheduled SAG mill bull gear replacement in April. The increased milling rate achieved since April provided confidence that our 2017 guidance of 38,000 ton per day is on track.

The mill feed averaged 0.31% copper, and copper recovery averaged 77.5% while gold recovery averaged 65.7% for the quarter. The lower copper recovery is a product of a coarse grind resulting from maximizing mill throughput.

A milling rate of 43,272 tons per operating day or 15% above design capacity was achieved during the quarter to maximize copper production. And this was at the expense of recovery, which was approximately 5.4% lower.

I'll now refer you to Page 5, the quarterly cash costs. Total unit cash costs for the three months ending June 30, 2017, were US$1.74 per pound sold net of precious metal credits, while site cash costs were US$1.31 per pound of copper produced net of precious metal credits.

This represents a slight decrease from the 2017 first quarter total unit cash costs. Total mine site costs for the quarter were virtually the same as sold in the same period of 2016.

As mentioned last quarter, the mine was awarded the Edward Prior Award for safest midsize mine in the province. We continue our ongoing commitment to safety while continuing to achieve operational efficiencies and production record.

I'll now refer you to Page 6 for those following. Copper production during the first quarter of 2017 was forecast to be below the average for the year, but the company is on track to meet our 2017 guidance level of 75 million to 85 million pounds of copper.

Copper grade to the mill for the year is forecast to average 0.30% copper. The mill throughput is on track to average 38,000 ton per day during the year.

The new gear displayed in the picture was installed in April. Our team and contractors did an excellent job in completing the installation a few days ahead of schedule.

This installation was factored into our 2017 production plan for the first half of the year. This job is behind us now but did affect the mill operating time and mill throughput in the second quarter.

We believe the company is positioned well going forward. An increased copper price and continuing weak Canadian dollar provide a favorable financial outlook for the company.

We have excellent assets and a confident workforce, which provides confidence that the mine will meet our guidance. Our goal is to continue our aggressive cost management plan and efficiency initiatives to maximize our cash flow and further strengthen our balance sheet.

I'll answer specific questions during the period following the details. Rod, will you now review the quarterly?

Thank you, Jim. As noted on Slide 7, the company recognized revenue of $67.1 million for the second quarter ended June 30, 2017, after pricing adjustments and treatment charges.

And this was based on sales of 17.6 million pounds of copper, 6,300 ounces of gold and 62,700 ounces of silver. This brings total sales for the first six months of the 2017 year to $141.2 million based on sales of 36.2 million pounds of copper, 12,300 ounces of gold and 126,900 ounces of silver.

The average realized copper price for the second quarter 2017 was US$2.58 per pound as compared to US$2.13 per pound for the quarter ended June 30, 2016. Comparative revenues for Q2 2016 were $62.5 million after pricing adjustments and smelter charges.

While average realized copper prices increased 21% from Q2 2016, net revenues increased by only 7.4% as a result of lower sales volumes due to our planned mill -- SAG mill replacement, as noted by Jim. As noted on Slide 8, cost of sales for the second quarter ended June 30, 2017, was $58.8 million, which resulted in a gross profit of $8.3 million, as compared to cost of sales of $60.2 million, which resulted in a gross profit of $2.4 million for the second quarter ended June 30, 2016.

The decrease in cost of sales is a direct result of selling less copper during the quarter and the cost savings realized as part of the company's cost savings initiatives. General and administrative expenses, which includes some mine site administrative expenses, were $1.7 million for the second quarter ended June 30, 2017, compared to $1.2 million for the second quarter ended June 30, 2016.

For the quarter ended June 30, 2017, the company recorded finance income of $0.2 million and finance expense of $3.2 million as compared with finance income of $0.1 million and finance expense of $2.8 million for the second quarter ended June 30, 2016. Finance expense primarily consists of interest on loans and the amortization of financing fees.

For the second quarter ended June 30, 2017, the company recognized a noncash unrealized foreign exchange gain of $7.3 million compared with a noncash unrealized foreign exchange gain of $2.8 million for the second quarter ended June 30, 2016, which primarily relates to the company's debt that's denominated in U.S. dollars.

During the second quarter of 2017, the company recognized a noncash unrealized loss on the interest rate swap of $0.4 million as compared with a noncash unrealized loss on the interest rate swap of $0.7 million for the first quarter ended June 30, 2016, which is related to the revaluation of the interest rate swap liability required under the company's loan agreement. It should be noted that these adjustments to income are required under IFRS, are noncash in nature, as outlined in the company's MD&A and statement of cash flows.

For the second quarter ended June 30, 2017, the company recorded a current resource tax expense of $0.1 million as compared with a current resource tax expense of $0.15 million for the second quarter ended June 30, 2016. This all resulted in a net income for the second quarter ended June 30, 2017, of $10 million or $0.05 per share, bringing the first half of 2017 net income to $17.7 million or $0.09 per share.

This compares to a net loss of $2.3 million or $0.02 per share for the second quarter ended June 30, 2016. As you can see on our income statement, foreign exchange gains and losses can swing quarterly and yearly and result in significant changes in some cases.

Therefore, we really need to look at the adjusted earnings and adjusted EBITDA to fully understand the results. So if we take out all the accounting noncash items, the company reported adjusted EBITDA of $19.1 million and adjusted earnings of $4 million or about $0.03 per share for the second quarter ended June 30, 2017, compared with adjusted EBITDA of $13.1 million and an adjusted loss of $5.3 million or $0.02 per share for the second quarter ended June 30, 2016.

As noted on Slide 9, the company had cash flow from operations of $25.9 million during the second quarter of 2017 as compared to $13.7 million for the second quarter ended June 30, 2016. At the end of the quarter, the company had cash on hand of $37.1 million, and this is after making a senior loan principal payment and interest of $14.2 million on June 15, right before quarter-end.

So we are reducing debt and building cash on the balance sheet. In conclusion, we delivered a successful quarter that is on track with our annual guidance numbers.

As noted on Slide 10, our priorities remain focused on continuing to maximize cash flow and minimize costs. With the continued uptrend in the copper price, the company will be able to reinvest in exploration on the property that has historically been very successful.

We look forward to a strong second half of 2017 and remain confident our 2017 production targets will be met. I'd now like to open the lines up for any questions that people may have.

Just a question. When you set your original guidance to 75 million to 85 million pounds for the year, what was kind of the expectation at the higher end of your production in terms of maybe recoveries and grade?

I know you're sort of tracking maybe slightly below year-to-date, but I know grades and throughputs should pick up at the second half. But was your original anticipation to have higher recoveries or higher grades to kind of get to that 85 million pounds for the year?

Excuse me, Craig. It's Jim here.

Yes. We had projected slightly higher recoveries.

And as you saw, our recoveries have suffered because of the higher tonnage. We've been -- we gained about 15% on tonnage, and we lost about 5% on recovery.

And we're working on various alternatives to try and get that recovery up to our plan of about 82%, but it's going to be tough with the coarser grind at the higher tonnages. So our main objective is to push tonnage, suffer in recovery, but gain in copper.

What's sort of the breakpoint for where recoveries should just trail off at the higher throughput? Is it 40,000 tons a day?

Or...

Well, it depends on various areas of the pit. We have -- as you appreciate, the Super Pit is fairly large, and we do have areas where we have finer-grained material -- finer liberation size, sorry.

And it depends where we are in the pit. I mean, at the current rate, we have some areas in the pit where we meet our 82%.

And as it turns out in the Saddle area, the recoveries are a little lower, and we've found a little block of fairly fine-grained material, and the liberation size is very small, very low.

Okay. And just sort of on capitals.

Again, very low for the quarter. Is that something -- similar numbers we expect for the back half of the year?

Yes. Yes.

We don't have any major program scheduled for this year.

And I guess, sort of lastly. Well, you said, I think, earlier in the call, more Oriole Pit in the second half this year.

Should we expect grades to pick up with your Oriole Pit?

They won't. No, I don't think they'll pick up a lot, but in the other parts of the pit, they'll be lower.

But the blending of the Oriole will keep us around the 0.3 range.

Okay. All right, thanks guys.

Well, thank you, everyone, for tuning in to our second quarter 2017 earnings conference call. And as usual, Jim and I are available if you want to call directly with any of your questions.

Thank you very much. Have a good day.

Thank you. Bye.