Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Turquoise Hill Resources Ltd (NYSE:TRQ)
Q3 2020 Earnings Call
Nov 16, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Turquoise Hill Resources Third Quarter 2020 Results Conference Call. [Operator Instructions] Following the presentation, we will conduct a question-and-answer session. [Operator Instructions].

I'd now like to turn the conference over to Roy McDowall, Head of Investor Relations and Communications. Please go ahead.

Roy McDowall -- Head of Investor Relations and Communications

Thank you, Joanna. Good morning, I'm Roy McDowall, Head of Investor Relations and Communications. Welcome to our third quarter 2020 financial results conference call.

On Friday, we released our third quarter 2020 results press release, MD&A and financial statements. These items are available on our website and SEDAR. With me on the call are Ulf Quellmann, our CEO; Luke Colton, our CFO; and Jo-Anne Dudley, our COO.

This call and presentation includes certain forward-looking statements and information, we refer you to the forward-looking statement section of our MD&A for the three and nine months ended September 30th, 2020,

And now, I'd like to turn the call over to our Chief Executive Officer, Ulf Quellmann.

Ulf Quellmann -- Chief Executive Officer

Thank you, Roy. And good morning to everyone. Thanks for joining us for our third quarter 2020 financial earnings call.

It's been the better part of the year now since the COVID-19 pandemic has entered our lives. We know there's small number of recent community transmission cases in Mongolia. The Government of Mongolia has taken immediate action by implementing an all-out readiness stage through to 1st of December. Oyu Tolgoi has not recorded any cases and we continue to work closely with the Mongolian authorities to prioritize the health and safety of all of our employees and the wider community.

Presenting with me today are Jo-Anne Dudley and Luke Colton, and both of them, of course, will be available for the Q&A following our presentation.

On Friday, we reported our third quarter results, and updated the markets on operational performance, progress with the underground development and Turquoise Hill's liquidity and funding plans. Oyu Tolgoi recorded an all-injury frequency rate of 0.17 for the nine months ending September. And in particular, we commend the Oyu Tolgoi team for recording an outstanding AIFR of 0.03 during the third quarter of 2020.

The open-pit operations continued uninterrupted through the third quarter and our forecast copper production for 2020 remains in a range of 140,000 tonnes to 170,000 tonnes with our forecast gold production trending toward the higher end of the range at 155,000 ounces to 180,000 ounces. We now estimate that Turquoise Hill has enough liquidity to meet its requirements into the second quarter of 2022. Our base case incremental funding requirements has decreased from $3.6 billion to $3 billion.

You will also recall that we've recently announced an MOU with Rio Tinto on the 10th of September, in which Turquoise Hill and Rio Tinto agreed to jointly pursue the reprofiling of Oyu Tolgoi's existing debt and furthermore to seek to secure $500 million of additional debt. In addition, and as contemplated in the MOU, Turquoise Hill is actively advancing its examination and evaluation of financing options for Oyu Tolgoi that could address its incremental funding gap, in whole or in part. Such options include additional debt from banks or international financial institutions, an offering of global medium term notes and a gold streaming transaction.

We expect that details of Turquoise Hill's preferred funding options will be presented to Rio Tinto for consideration in accordance with the MOU prior to the 31st of December this year. We also expect the definitive estimate before year-end, which will factor in an estimate of the impact of COVID-19.

Based on our preliminary view of the definitive estimate, we have brought forward our base case assumption for sustainable first production from February 2023 to October 2022. While our forecast development capital cost remains within the range of $6.6 billion to $7.1 billion with a base case of $6.8 billion.

Slide six showcases both the excellence of the Oyu Tolgoi team and the contribution gold provides to our C1 cash costs. I mentioned earlier, Oyu Tolgoi's third quarter 2020 AIFR of 0.03, which really is a testament to Oyu Tolgoi's safety culture and discipline. In the bottom left chart, you will see Oyu Tolgoi has had another consecutive quarter of its mill operating above nameplate capacity with throughput in this quarter reflecting the processing of harder, higher gold grade ore. Optimization work implemented earlier in the year has resulted in accelerated access to higher grade ore areas of the open-pit with an overall positive impact on cash flow.

2020 is on track to be our sixth year in a row of meeting or beating our production guidance. Focusing on our gold production, you can see the positive impact of the third quarter gold production on our C1 cash costs. We expect a strong fourth quarter for gold production. And, of course, if commodity prices were to remain at current levels through 2021 and with our 2021 outlook of 500,000 ounces to 550,000 ounces of gold, we would expect to see a favorable impact on our C1 cash costs and cash flows.

With that, let me now hand over the call to Luke Colton, our Chief Financial Officer. Luke?

Luke Colton -- Turquoise Hill Resources Ltd.

Thanks, Ulf. And good morning, everyone. For those of you following along, if I can get you to, please turn to slide seven. And I'll provide a summary of our key financial metrics for third quarter.

Revenue increased 26% from Q3 '19, that was driven primarily by the 13% and 17% increases in average copper and gold prices, not together with an increase in copper sales volumes. The increase in revenue contributed to higher cash generated from operating activities, which was also positively impacted by more favorable working capital movements in Q3 2021, compared to Q3 2019. The 28% increase in copper production in Q3 2020 versus Q3 2019 had a positive impact on the unit cost basis for both C1 cash costs and all-in sustaining costs. The period on period decrease in all-in sustaining cost was more significant and the decrease in C1 cash costs. And this was primarily due to the impact of lower open-pit sustaining capital expenditure in Q3 2020 versus Q3 2019.

If I can get you now to turn to slide eight. Turquoise Hill had $1.3 billion of available liquidity at September 30, 2020. And we expect this to be sufficient to meet our requirements, including our operation in underground development into Q2 of 2022. Our estimated base case incremental funding requirements, we've reduced it to $3 billion and that's from $6 billion as reported in our Q2 2020 earnings release. This estimate assumes sustainable first production trending toward the earlier months of our guided range and that's with the target base case of October 2022. It also incorporates commodity prices, as well as assumptions around the impact of COVID-19.

Further, we estimate -- excuse me. Further, the estimate assumes the base case underground development capital cost of $6.8 billion, and it does incorporate principal repayments on the existing project finance debt, as well as interest in similar charges over the assumed period of the funding gap.

If we were successful in reprofiling the existing debt, we estimate this would decrease our funding gap by up to $1.4 billion. Of course, our estimate -- our estimates of remaining liquidity and funding gap will continue to be impacted, either positively or negatively by various factors, many of which are outside our control.

As you would have seen, we recently entered into a nonbinding MOU with Rio Tinto, indicating that Turquoise Hill and Rio Tinto will jointly pursue the reprofiling of OTs existing debt and also seek to raise additional debt. Further, the company is actively -- actively advancing financing options, such as global medium term notes and gold streaming to minimize this incremental funding requirement, and we are currently on track to present proposal to Rio for their consideration before the end of 2020.

Turquoise Hill continues to reprofiling -- we continue to prioritize reprofiling as well as additional debt and other funding options ahead of equity. Any of these options if implemented would have the effect of reducing the company's incremental funding requirement. They're successful implementation may require us to achieve alignment and agreement with the relevant stakeholders, including Rio Tinto, existing lenders, any potential new lenders, and of course, the Government of Mongolia.

While you will all understand that success could be impacted by market conditions and other factors and that many -- many of these may not be completely within our control. We want you to be confident that we are, nonetheless, absolutely determined to continue advancing Turquoise Hill's preferred funding strategy.

And with that, I will hand over to Jo-Anne, our Chief Operating Officer.

Jo-Anne Dudley -- Chief Operating Officer

Thank you, Luke. If we turn to slide nine. Key milestones, the risk in the underground development continue to be achieved. Despite COVID-19 project -- project -- project progress continues to align with the OTTR20 expectations.

Based on the preliminary data received from the definitive estimate, we see sustainable first production in October 2020, which is at the early end of the range we disclosed. And development capital of $6.8 billion, which is near the middle of the disclosed range. The definitive estimate data is currently under review by TRQ and a panel of technical experts with our review anticipated to be completed later in Q4.

Underground lateral development progress continues broadly in line with the OTTR20 expectation. As anticipated last quarter, equipment made us strategically slow in the third quarter as resources were redeployed to focus on critical underground infrastructure to support production from Panel 0. In particular, the underground Material Handling System 1.

Looking forward, we expect to see, subject to our review, blasting of the undercut commenced in mid 2021, this is a key milestone toward sustainable first production. Underground drilling and orebody characterisation work is near completion for Panel 0 and the northern area of Panel 2, which will be the next area to be mined.

Due to the large size of Panel 2, a decision has been made to consider the areas as three mining zones. Drilling, data collection and analysis for the remaining central and southern portions of Panel 2 and Panel 1 is expected to continue through 2021 and into 2022, with significant progress on a design review and update for the north and central areas of Panel 2 expected in 2021.

Turning our focus to development and infrastructure. Please turn to slide 10. Shaft 2 continues to operate normally with preparation works for sinking of Shafts 3 and 4 well advanced and key highly specialized personnel either in or scheduled to return to Mongolia to commence this work, pending resolution of the recently announced private restrictions.

Mitigating the impact of COVID-19 on materials handling infrastructure has been a key focus of the project. And due to the decision to strategically redeploy personal, we've seeing improvements in productivity rates. We've seen an easing of restrictions relating to onsite personnel numbers. And although, ongoing improvements are expected, the recently announced COVID cases in Mongolia may potentially impact timing of any further relaxations and this is something we will need to observe closely.

Underground development progress slowed from 5.5 equivalent kilometers in Q1 and Q2 to 4.7 equivalent kilometers in Q3 due to the redeployment of resources to support materials handling construction. During the third quarter we built our in-house exploration team, employing six skilled personnel to add to our Ulaanbaatar-based technical services team. The new team will be supporting work on our existing licenses and looking for new opportunities within the South Gobi region.

Over the last few years Turquoise Hill's exploration efforts are focused on the 50 kilometer to 100 kilometer zone around the mining leases, we currently hold two exploration leases within this zone. We've also started a geophysical survey on one of our leases, the survey will be completed in Q4 and the results will be processed and interpreted over the following month. Our new exploration team are looking to build enduring relationships with our neighbors who demonstrate mutual respect, active partnership and long-term commitment.

Now I'll turn the presentation back to Ulf.

Ulf Quellmann -- Chief Executive Officer

Thanks very much, Jo-Anne. So before we wrap-up our presentation today, I wanted to just briefly take stock and highlight that, as our work advances and our underground production eventually ramps up Oyu Tolgoi's progression from a Tier 1 resource to a Tier 1 operating asset becomes more and more evident for everyone to see. Oyu Tolgoi is forecast to be the world's fourth largest copper producer when fully ramped up, trailing only Escondida, Grasberg and Collahuasi. And as Oyu Tolgoi continues to capitalize on its scale, significant resource base and higher-grade underground ore, we expect C1 cash cost to decrease to first quarter levels.

Quality of this asset, in combination with our continued focus on operational excellence and an exceptional Mongolian workforce, are expected to establish a competitive and profitable producer that is well-positioned to perform even during the lowest points in a commodity cycle.

Turning to slide 12 and concluding our presentation today, I'll just remind everyone of some of the highlights of the Oyu Tolgoi Technical Report, which we released in August and a consistent track record of operational excellence that Turquoise Hill has demonstrated. We've consistently met our production guidance with best-in-class safety performance, and the ongoing optimization of the open-pit continues to enhance our cash flows, which then, in turn, support our underground development.

We estimate Oyu Tolgoi will generate $12.7 billion in net cash flow after tax before financing costs between 2024 and 2030. In addition to our copper production, Oyu Tolgoi is, of course, a large producer of gold. Our 2021 to 2030 production forecast anticipates that Oyu Tolgoi will average over 370,000 ounces per year, allowing an additional layer of resilience to operations throughout the commodity cycle.

Finally, building upon Luke's comments earlier regarding funding and liquidity, I want to reiterate management's and the special committee's commitment and focus to progress the company's preferred funding strategy. As you've heard from us, we're examining and evaluating several non-equity options, and we're actively engaging with market participants to develop solutions that are in the best interest of the company.

We recognize that challenges remain, and there are still a number of important milestones to be met, including the recently announced decision to go to arbitration with Rio Tinto, the ongoing discussions with the Government of Mongolia on a number of important items, progressing the development of the power solution for Oyu Tolgoi, to name but a few. It's obvious for anyone to see that these are formidable issues to be tackled, and that is exactly what we're going to do.

We have a clear plan for each one of the tasks ahead, and we're absolutely committed to progressing and executing on each one of them. We do so with commitment, but also in the spirit of cooperation with our key stakeholders. And ultimately, of course, with the best interest of our company, Turquoise Hill in mind. And we will update the market on progress as and when appropriate.

Looking ahead to the rest of our 2020 fiscal year, we are focused on continuing to execute our plans safely and deliver the guidance we have provided to the market. We look forward to finalizing this in our estimate, which we expect will further help to solidify Turquoise Hill as one of the premier global copper investments.

So this concludes our prepared remarks. Let me now turn the call back to the operator for any questions. Operator, back to you, please.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Hayden Bairstow of Macquarie. Please go ahead.

Hayden Bairstow -- Macquarie -- Analyst

Good morning all. Just a couple for me to start off with. Just firstly, I might get Luke to answer the first, if I could. Just on the debt reprofiling discussions. I mean, there's obviously not one single debt facility here. Is there anything specific among some of those debt facilities that makes it harder than others to actually just sort out a repayment and then sort of repayment schedule on them? And also, obviously, that new debt you're looking at getting the $500 million, is there any sort of kinks to that that we need to be aware of?

And then just secondly, on -- I mean, operationally, it's all been going really well. I mean the cost performance of mine continues to do a bit better than what I'm assuming, particularly milling rate -- milling costs. Just interested to understand what's really driving that? And once you get more underground ore in, does the work index actually go down, so theoretically built costs might even fall further? Thanks.

Ulf Quellmann -- Chief Executive Officer

Thanks. And Luke, you are happy to take them. Jo-Anne you have to then take the second one.

Jo-Anne Dudley -- Chief Operating Officer

Yes. Sure.

Ulf Quellmann -- Chief Executive Officer

Luke, maybe you can --Yeah. Luke, you're happy to take the first one.

Luke Colton -- Turquoise Hill Resources Ltd.

I'll do my best, Ulf. Thanks. And thanks, Hayden, for the questions. So when you think about reprofiling, you're right that the current syndicate has different types of lenders, right? We have the IFIs, we have commercial banks, we have different tranches. We have ECA-type lending as well. So each one of those categories will have slightly different perspectives, and they'll come at it from a slightly different starting position. From our perspective, we do believe all of that can be managed, and we definitely look forward to the opportunity to engage with each one of those different classes of lenders. But we do think -- we do think all of that can be managed and individual sort of issues can be worked through and can be managed. So we do remain confident in that respect.

Jo-Anne, maybe I can hand it over to you?

Jo-Anne Dudley -- Chief Operating Officer

Yes, no problem. Thanks very much, Luke. And thanks, Hayden. So good questions on the costs. Certainly, Ulf -- sorry, Luke can outlined quite well the impact of -- the general impact on costs -- on cash costs. In terms of the next level of detail for the milling cost, this year we've had one chart and not two, and there'll be another one -- there's another one planned in January. And so that helps the year's overall processing costs. We've also had some good ongoing optimization projects, including good performance from liners at the moment to reduce costs. So that's an ongoing focus.

In terms of the underground, the relative throughput rates at the underground ore, it certainly is -- has got a higher throughput rate than the harder material from the Southwest pit, but lower than the material coming out of the Central pit. So it's not exact straight answer there, unfortunately. But it certainly will have a better throughput rates than the Southwest pit. I hope that goes some way to answering your questions.

Luke Colton -- Turquoise Hill Resources Ltd.

Hayden, listen, I forgot the second part of your first question. So let me back up and answer that quickly. In relation to any additional debt, I mean, obviously, any additional supplemental senior debt, we will be looking to progress those discussions as we progress discussions with the lenders around the reprofiling. And we'll have additional conversations with other lenders, should that be necessary or advisable. But of course, on top of that, we as TRQ are absolutely focused on other forms of debt or hybrid financing as well. So we have been doing a lot of work around a global medium-term note program. And those -- all that work is progressing well into time line. In addition to that, we've had good discussions and good kickoffs with the streamers. So we are looking at a streaming transaction.

Again, the work there is progressing very well and is well supported, and is tracking the time line. So I think you probably would have seen in recent press releases that we are looking to provide a proposals to Rio Tinto for their consideration before the end of this year, and we are still on track to be able to do that. Apologies, that was an important part of your question that I didn't fully answer.

Hayden Bairstow -- Macquarie -- Analyst

So -- and all this debt, the new $500 million in the existing $4.4 billion [Phonetic], is that all going to be equally ranked in terms of credit? Or is there going to be a bit of an order in terms of how this debt gets ranked?

Luke Colton -- Turquoise Hill Resources Ltd.

So, all of that is still under discussion and subject to negotiation, Hayden. So I can't get too far into the detail there. Ultimately, we want to get -- ultimately, where we want to get to is a place where all of the different stakeholders feel comfortable bringing in additional supplemental senior debt. You would expect the supplemental senior debt to be a sort of first ranking security. That's probably going to be the case for bonds as well. The rest of it, there's different ways that you can look at it, right, obviously, and all of that is still subject to negotiation. And we'll just continue to work with the banks, the streamers, stakeholders, etc, to come to the right answer -- the right answer there.

Hayden Bairstow -- Macquarie -- Analyst

Okay, great. Thanks so much.

Operator

Thank you. The next question comes from Dalton Baretto at Canaccord. Please go ahead.

Dalton Baretto -- Canaccord -- Analyst

Thank, guys. Good morning. Ulf, can you help me understand the context around this arbitration? And why you've elected to go to arbitration so soon after announcing a Memorandum of Understanding? And then as a follow-up to that, can you remind us under what conditions Rio can call an event of default?

Ulf Quellmann -- Chief Executive Officer

Thanks, Dalton. So why arbitrate, right? I would -- let me say the following. I caveat that by saying that the arbitration proceedings are under strict confidentiality provisions. But what we can say is the following, Dalton: our funding plan, as Luke mentioned, is really to avoid a potentially highly dilutive rights offering and to finance through additional debt, right, like the bonds and stream. It become apparent in our discussions with Rio Tinto that really their approach to financing is not compatible with our preferred funding approach. And that there is a difference of opinion between the parties as to their respective rights and obligations with respect to the financing process.

And really, the objective of the arbitration is to clarify the provisions of the relevant agreements, and we've got plenty of them concerning Rio Tinto's role and its obligations to support TRQ in seeking additional financing for OT. And we think that additional clarity provided by the arbitration process will ultimately benefit both parties. And to be clear, we don't intend to -- for this arbitration to be seen -- to be adversarial in any form. We think it does provide clarity, which ultimately benefits both parties.

So that's the process, Dalton, that we've embarked upon. I think we said in our press release that we expect this to take three to five months. And once that's run its course, then we'll be able to move forward with the added clarity.

The second question, Dalton, I wasn't 100% sure I fully understood. Can you just repeat the question?

Dalton Baretto -- Canaccord -- Analyst

Sure. But before I go on to the second question, if I can ask a follow-up on what you just said. I think that's the part I'm not understanding. If there is a difference of opinion that's causing you to build arbitration, what's the Memorandum of Understanding or my understanding was that, that implies that you guys are on the same page?

Ulf Quellmann -- Chief Executive Officer

Well, I mean, the Memorandum of Understanding, if you look at it, what it does, it sets out, you could say, what we agree upon, so Rio Tinto and Turquoise Hill. And what we agree upon is that, we both want to pursue the reprofiling of the existing debt and we both agree that we want to seek to raise an additional $500 million debt. We then also say in the Memorandum of Understanding that above and beyond that, TRQ would like to explore other options and Luke covered them, because we believe ultimately that we would like to maximize the level of debt at the asset level, right?

And now I come back to my previous answer a bit, Dalton. So it has become really clear to us over the remaining -- or recently as part of these discussions that our approach and the process to get us there, that we have different views, different interpretations. And because of that, we felt going to arbitration is the most helpful thing to do, because it is a relatively quick process. It is a process that is governed by quite strict confidentiality proceedings. And it allows us to do this in, what we believe, the least adversarial matter, because clearly, we want to continue to work together with Rio Tinto going forward. But to get that clarity, we believe it is important -- it's important for us and for all parties to be able to then ultimately move forward with our financing plan that we would like to put in place.

Dalton Baretto -- Canaccord -- Analyst

Got it. Okay. And then -- so my second question, just to clarify, my understanding is that under Rio's guarantees on all of the financing to-date, there are conditions under which they can call an event of default if it becomes clear that certain payments, whether it be the capital to finish the project or make the lender -- the project financing payments unlikely. And just remind me under what conditions they can call a notice of default?

Luke Colton -- Turquoise Hill Resources Ltd.

Yes. I don't think, Dalton, I would say, can I -- so this is quite complex. Can I suggest -- so there's lots of -- so event of interest default is obviously something normally would be called by the lenders, right? I know that's not what you mean. Look, there's a series of agreements out there, right, Dalton. I mean I'd suggest almost we take it offline, because there's lots of them. It starts off with the 2006 private placement agreement. It goes on to the 2010 Heads of Agreement, the 2012 Memorandum of Agreement, all the way up to the 2015 Financial Support Agreement. They are quite complicated, and of course, the MOU as well. So if you want to have a detailed discussion, we can do that, but they're quite complex. They're all available in the public domain, so people can take a look at that. And they're quite complicated. And in part, that is maybe what explains why arbitration here is helpful because we think that some clarity is required to help govern that process.

Dalton Baretto -- Canaccord -- Analyst

Okay. Yeah, no problem. And then maybe just one last one for me. With regards to the government, it sounds like your team is engaged with them in terms of working through some of the differences and trying to come up with new terms, I guess. What form of those discussions taking? How far advanced are they? And who do you have from TRQ representing your negotiating team?

Ulf Quellmann -- Chief Executive Officer

Sure. Thanks, Dalton. So I think what you're probably referring to is really the Parliamentary Working Group resolution that was passed in late last year in parliament, right? Yeah, exactly. So I'll try to answer this as quickly and specifically as I can, Dalton. So we've had plenty of discussions in the first half of the year that ultimately then culminated in the signing of the amended power agreement, right? The Power Source Framework Agreement that was signed in the summer of this year, and that led to an agreement going forward, focusing on what is called the SOPP, the state-owned and funded power plant as the new base case, the preferred approach. And that's on our website, that agreement, that's there. Then we had an election in Mongolia in the summer. And we've now had since then a new government come in, that's now -- now not so new anymore, because we're now in the middle of November. There is dialogue happening and conversations have happened. It's not helped, if you like, by the travel restrictions for COVID, because we obviously are very limited in our ability to fly into country. But what we have been able to do is to hold discussions remotely, virtually, right, like everyone else. That's what we do.

In terms of who is involved from a TRQ perspective, it's a number of us. I'm certainly involved. Luke tends to be involved, other people too. But as we focus on funding power, some other more strategic matters, Luke and I, probably, I would say, the ones who tend to be -- who have been most involved in those discussions. And there's a working group that we are part of, obviously, Rio Tinto is part of and then various delegates by the government, depending on what the work stream is that we're talking about.

Does that -- I don't want to go into too much, does that kind of answer your question, Dalton?

Dalton Baretto -- Canaccord -- Analyst

Yeah. That's great context. Thank you very much.

Operator

Thank you. The next question comes from Orest Wowkodaw at Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Hi. Good morning. I'm just following up on Dalton's questions. I'm a bit confused. Earlier, you indicated that you expect to submit, I think, streaming -- potential streaming options to Rio Tinto by year-end, but it sounds like the arbitration is not going to be around those funding, it's not going to be settled until sometime in the New Year. So I'm just confused about that. And then I was also curious on how the Government of Mongolia feels with respect to a stream? And whether they're supportive of that type of financing or not? Thank you.

Ulf Quellmann -- Chief Executive Officer

Yes. Thanks, Orest. Luke, are you happy if I maybe take the second question in relation to the Government of Mongolia, and then maybe I'll ask you to deal with the first one, if you're OK with that?

So Orest, on the second one, how does the government feel about that? Look, I mean, the honest answer is, we can't speak for the Government of Mongolia, right? They will speak for themselves. They are a sovereign country, right? But what I would say is that, we are constructively engaged and engaging in a dialogue with them. They are, obviously, an important shareholder. They own 34% of Oyu Tolgoi and they're an important stakeholder, right? We are operating in their country. And as such, we are very keen to have their active engagement, and ultimately, their support.

We also think that the funding plans that we have in mind, so I now speak for Turquoise Hill, should be attractive to the Government of Mongolia or certainly aren't negative for them. But of course, we do need to have the dialogue with the government and the government's entity as a shareholder as we progress the work, as Luke is progressing the work. And we need to make sure that the government has good visibility, good involvement, because ultimately, we want their support, right? We can't decide for them. We can't speak for them. But certainly, our intention, our approach, our attitude is that, we very much and absolutely want to work collaboratively with the government. And we think we'll have a good case to convince them, but what we expect to be able to put forward is also something that will make sense for them, so that we can ultimately get their support.

Luke, are you happy to address Orest's first question?

Luke Colton -- Turquoise Hill Resources Ltd.

Sure, Ulf. I'll definitely do my best. And thanks for the question. So, listen, I think the sort of the key sort of point to get across in relation to that first question is that, independent of the arbitration, we actually think we can continue to advance our funding discussions and TRQ -- sorry, our funding discussions with Rio and TRQ's funding strategy more broadly. So this isn't just in respect of streaming, it would be in respect of GMTN and other things as well. Specifically related to the streaming, and I suppose it's also important to say that ultimately, we'll put -- we're doing the work to get ready to put proposals forward for Rio's consideration. And ultimately, obviously, we'll put those proposals in front of Rio at when we feel is the appropriate time. But we are, at the moment, still on track to be able to do that before the end of the year. We're doing a lot of work to be able to do that. And the intention before the end of the year is to put proposals in front of Rio for their consideration and to start those discussions with Rio.

I don't think there's anything related to the arbitration that -- there isn't anything that I'm aware of that would prevent us from doing that. We do very much think that we can progress these other discussions with Rio sort of in parallel with what needs to be done from the perspective of the arbitration. So hopefully, that's helpful and provides a bit of additional context there.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. And then just as a follow-up, your definitive -- I guess the OT definitive estimate is due shortly here. Is there any reason to think that it's going to be any different than the Technical Report that came out a few months ago?

Ulf Quellmann -- Chief Executive Officer

Thanks, Orest. Jo-Anne, is that something you are happy to address? Yes. Sorry, Orest, could you just say a little bit more? I just want to make sure I get the [Indecipherable]

Orest Wowkodaw -- Scotiabank -- Analyst

Yeah, sure. I mean, there's some lots of disclosure how the definitive cost and schedule estimate for Phase 2 will be released before the end of the year. And my question was, is there any reason to believe or to think that this is going to be different or materially different than the Technical Report on OT that was put out only a few months ago? Or is this basically just a copy of the same report?

Jo-Anne Dudley -- Chief Operating Officer

Right. And it's a great question because they are updates relatively close together. We're still going through our assurance process on this work as it's shared with us, and we go through the results. We're not seeing material differences. But of course, this report does include the effects of COVID that are known to-date. And so there are some differences. But -- yes, so we're not necessarily seeing any major changes at this stage. But I do reiterate that, we're still going through our assurance process at our end.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. But haven't you already disclosed that there's no impact to the capital and schedule from COVID to-date?

Jo-Anne Dudley -- Chief Operating Officer

Not necessarily. We had two sets of results. We've got the Technical Report that was released, and it did not include the impacts of COVID. The definitive estimate does include the impacts, such as we understand them to-date. And just because the headline is very similar, it doesn't necessarily mean that within the details of those -- that the impacts of COVID has had some impact, if you like. And there's certainly been work to try and mitigate those impacts. But nonetheless, some that has been included in this. And we're still reviewing what the detail is within this estimate.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Thank you.

Ulf Quellmann -- Chief Executive Officer

Orest, can I just -- yeah, I mean, just to say slightly differently, maybe the definite estimate is around the corner, right? But we are close to it. And so we've given really preliminary indications as to where we think we are. So there's a little bit of a health warning around that. But at the same time, we're obviously quite well advanced, too. And that's why we felt that it was appropriate and important to give the market some visibility where we are, even though, as Jo-Anne said earlier, we have not completed and finished the full governance process yet. But certainly, we have given the market preliminary indications as to where we, at the moment, see will come out.

Orest Wowkodaw -- Scotiabank -- Analyst

Thank you, Ulf.

Operator

[Operator Instructions]. Next question comes from Craig Hutchison at TD. Please go ahead.

Craig Hutchison -- TD Securities -- Analyst

Hi. Good morning, guys. A follow-up question on the arbitration process. When you exit the arbitration, do you expect to have clarity or is it like a binary outcome, like all equity, zero equity? Or is there a possibility of a negotiated settlement, something between in terms of your funding shortfall?

Ulf Quellmann -- Chief Executive Officer

Yeah. Thanks, Craig. So what I would say is, the -- let me sort of back up maybe for a second here. So we've gone to arbitration under a set of agreements. Under those set of agreements, arbitration is the mechanism that governs to resolve the issue. It is a binding process, a binding outcome at the end of the day. I think we said before, it is expected to take between three to four -- three to five months, something on those lines. That doesn't mean that, of course, we could never get to that stage if we were to agree anything beforehand. But the process as envisaged is that we go to arbitration, it takes about three to five months, and ultimately, the result will be binding on both parties.

Craig Hutchison -- TD Securities -- Analyst

But is there a possibility that it's a mediated, like you guys come to some kind of resolution in the middle? Is there a possibility?

Ulf Quellmann -- Chief Executive Officer

Well, I think that's always possible, Craig, right? That's always possible, right? So -- but I can't predict that or determine necessarily what might happen. All I can say at the moment is, if the process runs as envisaged, this is what it would be three to five months is kind of binding result to give us ultimate clarity.

Craig Hutchison -- TD Securities -- Analyst

And then just a question on hedges. Are you guys contemplating hedges over the next couple of years?

Ulf Quellmann -- Chief Executive Officer

Sure. I might ask Luke to comment on that. Luke, you're happy to take that one?

Luke Colton -- Turquoise Hill Resources Ltd.

Yes. That sounds like one for me, Ulf, no problem. Thanks, Craig, for the question. So listen, we have had a lot of encouragement from you guys, from our shareholders around hedging. And I do want to say to all of you that we are actively looking at it. We're not quite at a position where we can commit to anything at this time, but the work is being done to see if hedging is something that's in the best interest of the company. And we would hope in the near future, possibly even as part of our -- sooner rather than later, we would hope to be able to provide a bit more clarity there. But I can obviously say at the moment that we're interested in it. We're actively looking at it, and it is something that we might be able to do.

Craig Hutchison -- TD Securities -- Analyst

Are there any restrictions in terms of hedging vis-a-vis Rio?

Luke Colton -- Turquoise Hill Resources Ltd.

So there are -- I mean, I don't want to comment specifically on Rio's view on hedging. Obviously, the broader agreements that sort of govern the relationship between TRQ and Rio put limitations generally. But we are looking at options that we believe can be executed even with the sort of -- taking in the broader context into consideration, we are still looking at options that we think could be executed. And that's the stuff that we're actively looking at, at the moment.

Craig Hutchison -- TD Securities -- Analyst

Like purchasing puts?

Luke Colton -- Turquoise Hill Resources Ltd.

Yes. So, Craig, I'm not quite at -- I know you probably want me to be very specific here, but I'm not quite at the stage yet where I can be that specific. But we -- I mean, we do have good support. We are looking at that. We've looked at a variety of different options, including the ones that you just mentioned. And we've tried to narrow it down to ones that we think from a TRQ perspective could be executed. And we're just doing the work now to verify that's the case, to source endorsements, that kind of stuff.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. Makes sense. And maybe just one last question for me. In terms of the guidance next year, it looks like it's a little bit lighter than what the Technical Report is saying for gold and copper production. Is your guidance based solely on the open pit? Or are you including some of the development ore next year in that guidance?

Luke Colton -- Turquoise Hill Resources Ltd.

So are you talking about our -- I don't think we've issued guidance for 2021 yet. Are you talking about our 2021 gold outlook?

Orest Wowkodaw -- Scotiabank -- Analyst

Correct.

Luke Colton -- Turquoise Hill Resources Ltd.

Yes. So that's the 500,000 to 550,000 ounces?

Craig Hutchison -- TD Securities -- Analyst

Yes.

Luke Colton -- Turquoise Hill Resources Ltd.

Yes. So that will -- and obviously, there is still some work that we need to do to firm up the guidance, not just for gold, but for all of the different areas where we issue guidance. There's still a bit of work that we need to do to firm all of that up, and that's something that we tend to kind of do in December and January timeframe. Historically, that's usually about when we do it. The outlook that we've got at the moment, the 500,000 to 550,000 would include -- I mean, we wouldn't be just looking at open pit. We would be taking into consideration anything we might be able to get out of the underground in 2021 as well. But it is just an outlook at this stage, and we are doing the work to firm that up so that we can issue guidance in the next couple of months.

Craig Hutchison -- TD Securities -- Analyst

Okay. Thanks guys.

Operator

Thank you. There are no further questions. You may proceed.

Ulf Quellmann -- Chief Executive Officer

Thank you, operator. So let me just briefly summarize maybe what I think we've been able to tell you this morning. You've seen this quarter another strong operational and safety performance from the team at Oyu Tolgoi. I think you've heard from us that there's good progress toward their delivery of the definitive estimate later this year. And we've highlighted that the current preliminary indications are that first sustainable production is expected to come in at the lower end of the range, i.e., October 2022 as a base case, with capex remaining within the range with $6.8 billion as a base case. We will need to monitor and assess any potential impact of the national lockdown that we are seeing at the moment in Mongolia, and that was just extended over the weekend until the first of December.

We are progressing, as Luke highlighted, the work on a range of non-equity funding options and we expect to have more visibility such that we can have something to update you on before the end of the year. Of course, there's other work that needs to be done in a range of other areas, with our stakeholders, including, of course, Rio Tinto as well as the Government of Mongolia. That is happening, and we will update the markets on any developments in this regard.

And in the meantime, what remains for me to say is extending our best wishes to all of you, stay safe and do please remain vigilant as we've just seen how COVID remains with us for the foreseeable future.

So with that, let me thank you for having joined us on this morning's call, and we'll close up the call with this. Thank you very much, everyone.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Roy McDowall -- Head of Investor Relations and Communications

Ulf Quellmann -- Chief Executive Officer

Luke Colton -- Turquoise Hill Resources Ltd.

Jo-Anne Dudley -- Chief Operating Officer

Hayden Bairstow -- Macquarie -- Analyst

Dalton Baretto -- Canaccord -- Analyst

Orest Wowkodaw -- Scotiabank -- Analyst

Craig Hutchison -- TD Securities -- Analyst

More TRQ analysis

All earnings call transcripts

AlphaStreet Logo

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.