Turquoise Hill reports income of 204.4 million USD

Turquoise Hill Resources reported income of 204.4 million USD in the second quarter of 2018, a significant turnaround for the company compared to its loss of 0.4 million USD in Q2’17.

The increase in income was primarily due to 116.8 million USD in additional deferred tax assets, which refers to an asset on a company's balance sheet that may be used to reduce its taxable income, in the second quarter of this year compared to the same period in 2017.

Higher sales revenue by Oyu Tolgoi was also a major factor in the surge in income. Oyu Tolgoi turned in revenue of 341.7 million USD in the second quarter of this year, a dramatic 67.7 percent increase compared to the second quarter of 2017. The company pointed to higher copper prices and increased concentrate sales volumes, driven by enhanced border logistics as the main factors in the significant surge in revenue.

In terms of cash generated from operating activities, Turquoise turned in 48.4 million USD compared to the 44 million USD used in operating activities in Q2’17. This increase was primarily driven by higher sales revenue due to higher copper prices and increased sales volumes. Capital expenditure on property, plant and equipment was 318 million USD on a cash basis in Q2’18 compared to 205.2 million USD in Q2’17. The majority of capital expenditure was on underground development, 291.2 million USD, with the remainder related to open-pit activities. Turquoise Hill’s cash and cash equivalents at June 30, 2018 were approximately 1.5 billion USD.

During Q2’18, Oyu Tolgoi produced 39,400 tons of copper and 50,000 ounces of gold, showcasing an increase of 1.5 percent and 19 percent respectively over Q1’18. Mill throughput for 2018 is now expected to be approximately 40 million tons, compared to the original expectation of 37 million tons, due to the positive impact of high intensity blasting.

Underground expansion capital for the first half of 2018 was 561.7 million USD compared to 321.1 million USD in the first half of 2017, resulting in total project spend since January 1, 2016 of approximately 1.6 billion USD. Since the restart of development, a total of 12.7 equivalent kilometers of lateral development has been completed.

Oyu Tolgoi’s cost of sales in the second quarter was 2.36 per pound of copper sold, net direct cash costs were 1.72 USD per pound of copper producer and all-in sustaining costs were 2.42 USD per pound of copper produced. Operating cash costs of 201.7 million USD in Q2’18 increased 23.3 percent over Q2’17 mainly due to higher royalty and freight costs as well as increased open-pit costs.

Cost of sales for Q2’18 was 239.6 million USD compared to 188.9 million USD in Q2’17 primarily reflecting higher volumes of concentrates sold and an increased cost of sales per pound of copper sold due to lower average mill head grades for copper in Q2’18 compared to Q2’17.

Oyu Tolgoi is expected to produce 125,000 to 155,000 tons of copper and 240,000 to 280,000 ounces of gold in concentrates in 2018.

SAILINGSTONE: NEW CEO ENCOURAGING BUT CONCERNS STILL PERSIST

In response to the appointment of new Turquoise Hill CEO Ulf Quellmann, the company’s second biggest shareholder, SailingStone said it welcomes the improvements that have been made but said it still holds concerns over management issues.

SailingStone Capital Partners, an employee-owned US based investment group, which holds an 11.3 percent stake in Turquoise Hill, has been critical of the majority owner Rio Tinto for exerting too much influence on the Oyu Tolgoi mine. The minority shareholder called on the company to appoint a truly independent chief executive that is not a seconded Rio Tinto executive.

Despite calls by SailingStone to not appoint a seconded Rio Tinto executive, Quellmann, who most recently served as vice president of Strategic Projects of Rio Tinto’s Copper and Diamonds product group, was ultimately chosen. But SailingStone did note that it welcomes the significant improvements that have been made to both the CEO’s contract structure and the associated compensation package.

“SailingStone remains concerned that the announcement does not fully address the legitimate issues raised in its prior communications with the Turquoise Hill board of directors,” the company said.

Turquoise announced the retirement of its former CEO Jeff Tygesen in May. The board of directors divulged that it was in the process of considering suitable candidates, including those from Rio Tinto. SailingStone had been calling for the appointment of a “truly independent” CEO and management.

“The recent retirement of Turquoise Hill’s CEO, Jeff Tygesen, provides you with an opportunity to accelerate the transition towards a governance structure which is more consistent with a standalone, publicly traded company,” SailingStone said in a US regulatory filing.

With the appointment of Quellmann, Turquoise Hill made sure to underline that the aforementioned terms and conditions are designed to further align the management’s interest with the interests of all Turquoise Hill shareholders.

SailingStone has held concerns by the lack of alignment between the Turquoise Hill board, its executives and minority shareholders and continues to believe that corporate governance issues are a headwind for the stock.

“Today’s announcement is an acknowledgment by the entire board that an independent CEO whose long-term compensation is based solely on the performance of Turquoise Hill‘s shares is an enhancement to the previous arrangement. For the first time since the board and management transition in 2012, Turquoise Hill will be led by a chief executive officer whose primary incentive is a sustainably higher Turquoise Hill stock price,” SailingStone said in a statement.

At the same time, two of the three recommendations outlined in SailingStone’s June 12 letter to the board have yet to be enacted, or at best their status is ambiguous, the company said.

SailingStone underlined how it isn’t clear what Quellmann ongoing relationship with Rio Tinto will be, making it difficult to assess his future independence. In addition, a commitment to “engage independent technical advisors” to assist the board is not the same as a specific mandate to create a non-Rio Tinto technical team within Turquoise Hill. This remains an important issue, as currently all of the Oyu Tolgoi board positions not occupied by government of Mongolia appointees, as well as the entirety of the technical and operating committee are comprised of Rio Tinto employees or secondees.

“As a result, the announcement today does not appear to fully address the issues raised by SailingStone,” the company said.

“Turquoise Hill owns a majority stake in one of the few truly world class mining assets. The Oyu Tolgoi open pit continues to operate smoothly, while the underground development seems to be making steady progress towards first production, at which point the mine will be one of the largest, most profitable operations in the industry. We believe that today’s announcement further improves the alignment between management and Turquoise Hill shareholders, and we thank the board for their engagement on this matter. However, the work is not complete. We look forward to continued constructive dialogue with all stakeholders to address our remaining corporate governance deficiencies, which we expect will be part of a broad effort to close the significant gap that we believe exists between Turquoise Hill’s asset value and its stock price,” added MacKenzie Davis, a managing partner at SailingStone.