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Turquoise Hill Resources Ltd (TRQ) Q4 2020 Earnings Call Transcript

By Motley Fool Transcribers - Mar 9, 2021 at 4:00PM

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TRQ earnings call for the period ending December 31, 2020.

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Turquoise Hill Resources Ltd (TRQ 5.24%)
Q4 2020 Earnings Call
Mar 9, 2021, 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 Fourth Quarter 2020 Results. [Operator Instructions] Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Wednesday, March 9, 2020 [Phonetic].

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 fourth quarter and year-end 2020 financial results conference call.

On Monday, we released our fourth quarter and year-end 2020 results press release, MD&A and financial statements. These items are available on our website and SEDAR. With me today on the call are Steve Thibeault, our Interim 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 the Annual Information Form dated March 8, 2021, as supplemented by our MD&A for the 12 months ended December 31, 2020.

Before I hand over the call, I would like to formally to introduce Steve Thibeault, who was appointed Interim CEO at Turquoise Hill last Thursday. Many of you on the call know Steve from his tenure as a CFO at Turquoise Hill from 2014 to 2017. In addition to being TRQ's CFO, Steve is also in the Oyu Tolgoi Board and has been to site in Mongolia multiple times, and was instrumental in securing the $4.4 billion project finance facility in 2015. You can find our presentation on our website in the financial technical report section and now I'd like to turn the call over to Steve.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Roy. And good morning, everyone. Before going any further, I would like to take a moment to thank Ulf Quellmann, who served as CEO of Turquoise Hill for nearly three years. We thank Ulf for his service and wish him well. As you know, I returned to Turquoise Hill just five days ago. And although it will take me a few weeks to fully get up to speed, my story with TRQ has enabled me to hit the ground running and immerse myself in the key strategic objectives.

First, securing funding to complete the underground development. Second, to work with the Government of Mongolia and Rio Tinto to finalize a long-term power supply for Oyu Tolgoi. And third, to update or replace the existing UDP in a manner that is mutually beneficial to all parties. I'm sure, as you were aware, all of these discussions are in advanced stages and I'm joining a strong team that has continued to move these issues forward, while prioritizing the interest of Turquoise Hill shareholders. I will now walk through the year-end update as efficiently as possible and then we'll open the call for Q&A.

Please note, on slide 2 and 3, they contain our cautionary statements and I would encourage you to read -- to read them. On slide 4, you will see 2020 was a very busy year that saw the key milestone of a new mind design for panel zero and updated Oyu Tolgoi technical report and, finally, the definitive estimate that reconfirm the compelling value proposition that Oyu Tolgoi provides investors.

On slide 5, you will see Oyu Tolgoi 2020 operating performance, which once again has met or outperformed the original production guidance we set in the beginning of the year. Of note, you saw Q4 was a very strong quarter for gold production. And now looking at our 2021 gold forecast of 500,000 ounces to 550,000 ounces, you can appreciate how this will contribute to our 2021 estimated Q1 copper cash cost of negative $0.50 to $0.80 per pound of copper produced. 2021 is set to be a great year for Oyu Tolgoi.

Slide 6 highlight Oyu Tolgoi's safety records and the continued above nameplate capacity performance of the mill. The all injury frequency rate has fallen to a new record of 0.15. And although we encounter more harder ore with higher grade gold in 2020, on average, we continue to operate the mill at above nameplate capacity.

On slide 7. Slide 7 is extremely important as it demonstrates Oyu Tolgoi commitment to operate in an ESG compliant manner. Operating in the Gobi Desert provides the additional challenge of water scarcity. And you will see from this slide that our operation use only approximately one-third of the global average of cubic meters of water per ton of ore processed.

In 2020, Oyu Tolgoi was awarded The Copper Mark. Created in 2019, The Copper Mark is the first and only program for responsible production in the copper industry. The Copper Mark took the United Nations Sustainable Development goals as its framework for responsible production and created a set of 32 environmental, social and governance issue area associated with sourcing minerals and metal. By meeting these criteria, Oyu Tolgoi has again proven its continued commitment to environmental standards.

With that, I will now hand the call over to Jo-Anne Dudley, our Chief Operating Officer.

Jo-Anne Dudley -- Chief Operating Officer

Thank you very much, Steve. On slide 8, you can see the Oyut open pit on the left hand side and the Hugo North with one underground development on the right hand side. Combined, these two ore bodies have an estimated 31 year life of mine and is the basis of the 2020 reserves update in the annual information form.

The definitive estimate completed in December 2020 includes finalized pillar locations on the Panel 0 boundary and an optimized drawpoint layout to minimize exposure to the lower fault. This resulted in a non-material increase in the Hugo North mineral reserves of 10 million tons of ore, 0.18 million tons contained copper and 0.07 million ounces contained gold. The underground ore reserve has an average copper grade of 1.52%, which is more than three times higher than the open pit or reserve and contains 0.31 grams of gold per ton.

The Oyut proven and probable mineral reserves are estimated at 3.3 million tons of contained copper and 7.2 million ounces of contained gold. The end-of-the-year reserves update incorporates a decrease of 41 million tons of ore from 2019, which includes depletion from mining, change due to new metal price assumptions, and change due to new slope design criteria. The largest positive change in the 2020 Oyut open pit mineral reserve was the inclusion of new slope design criteria. Although positive, it was not enough to displace depletion from mining.

If we turn to slide 9, Materials Handling System 1 progress continues with civil work complete on Primary Crusher 1 and steel and cable installation continuing. This sustainable production to Panel 0 in October 2022 is on track, but continues to be monitored. Overall, the underground lateral development has now reached 53,000 equivalent meters with development required before first drawbell substantially complete. All surface infrastructure required for sustainable first production is also now complete.

With the assistance of vendor representatives on site, installation and commissioning of sinking-related equipment continued in Shaft 3. In Q4 2020, activities at Shaft 4 focused on completing all construction and commissioning activities for load testing and verification in preparation for shaft sinking, which commenced in early February 2021. However, progress is being monitored, particularly for Panel 1 and Panel 2 ramp up, which shaft reinforced support and will communicate any implications at an appropriate time.

The commencement of the undercut in 2021 is a key milestone, and it is critical to ensure that once commenced, the undercut and drawpoint construction continued unimpeded. This will require both technical support, such as confidence in commissioning dates and materials handling systems, as well as the achievement of non-technical criteria. We're working with Oyu Tolgoi and other stakeholders to ensure that critical supporting aspects for a successful project are in place prior to commencing the undercut.

Several mining studies are in progress and are focused on the evaluation of different design and sequencing options for Panel 1 and 2. These studies are underpinned by additional geology and geotechnical data that has been collected from underground and surface drilling. A design update for a subset of Panel 2 is expected in H2 2021.

With that, I'll now hand the call over to Luke Colton, our Chief Financial Officer.

Luke Colton -- Chief Financial Officer

Thanks, Jo-Anne. And good morning, everyone.

If I could ask you to please turn to slide 10 and I'll provide a summary of our key financial metrics for Q4 and full-year 2020. Revenue for Q4 2020 increased 83% from Q4 2019, and that's driven by increases in both copper and gold production and price. For full-year 2020, revenue decreased 7.5% versus 2019, reflecting overall lower gold production, partially offset by 27% higher average gold prices and marginal increases in both copper production and our average copper prices by 2% and 3% respectively.

The lower gold production was caused from mining lower grade gold areas of the open pit through the majority of 2020. 2020 cash generated from operating activities before interest and tax was 9% higher than in 2019, and that's due to favorable working capital movements, partially offset by the decrease in revenue.

Lower gold credits in 2020 was the main reason for the increases -- for the increase in the unit cost basis for C1 cash costs. The unit cost basis for all-in sustaining cost was also impacted by the lower gold credits. However, this was more than offset by lower open pit sustaining capital expenditure.

If I could ask you to please turn to slide 11, you'll see that Turquoise Hill had liquidity of $1.1 billion as of 31 of December, 2020, which is expected to be sufficient to meet our requirements, including continued underground development into Q3 of 2022. This is improved from our previous estimate of Q2 2022, and that's driven largely by improved commodity price assumptions.

The base case incremental funding requirement at the 31 of December, 2020 is estimated to be $2.3 billion, and that's down from the $3 billion reported previously. This improvement is driven primarily by improved commodity price assumptions over the peak funding period. The incremental funding requirement includes the current project finance, debt service and related costs, as well as principal repayments and, therefore, is estimated before any additional supplemental senior debt or reprofiling of existing debt is considered.

As for the MOU signed between Turquoise Hill and Rio Tinto in September 2020, both parties support the pursuit of reprofiling OT's existing debt, as well as securing an additional $500 million of supplemental senior debt. Reprofiling of the existing principal repayments would decrease the company's incremental funding requirement by up to $1.4 billion.

Our liquidity outlook and estimated incremental funding requirement will continue to be impacted, either positively or negatively by various factors, many of which are outside the company's control. The Company continues to advance financing options to minimize its incremental funding requirements. As announced on the 22 of December 2020. Turquoise Hill completed the first phase of its comprehensive funding review process, and we continue discussions with Rio on these options in the context of the company's funding strategy.

Any of the options, if implemented, would have the effect of reducing the Company's incremental funding requirements. Successful implementation of such options may require us to achieve alignment and agreement with the relevant stakeholders, including Rio, existing lenders, potential new lenders, as well as the Government of Mongolia.

Finally, in Q1 2021, the company purchased copper and gold put options to establish a synthetic copper and gold price floor. This was done to provide increased certainty around the Company's liquidity horizon.

Thank you very much. I'll now turn the presentation back to Steve.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Luke. I'm going to use the key milestone outline on slide 12 to provide an overview of what we are working through in 2021 to keep us on track for the first sustainable production in October 2022. The first milestone I will address is power. As you know, we had the first power milestone, the extension of the IMPIC supply agreement due on March 1, 2021. And the second milestone, the signing of a power purchase agreement due March 31.

On March 25, the Government of Mongolia formally noticed Oyu Tolgoi that the Tavan Tolgoi power station project will be implemented and have requested the milestone date under the PSFA agreement be extended. Oyu Tolgoi are currently engaged with the government of Mongolia to agree to a standstill period following the lapse of the March 1 milestone, and we'll continue to work with GoM to ensure a secure, stable and reliable long-term power solution is implemented.

The second milestone we are focused on is the arbitration with Rio Tinto and resolving the forecast funding gap. As we stated on previous calls, the arbitration proceedings have commenced in British Columbia, and we are bound by confidentiality agreements that prohibit us to comment on the arbitration proceedings until a binding decision is reached. At this time, we expect the arbitration proceedings to conclude in May.

On the funding front, as Luke outlined earlier, our base case funding gap as at 31st December, 2020 is $2.3 billion. We have evaluated and presented financing option to Rio Tinto and Erdenes and are currently in discussion to finalize a funding solution that takes into consideration the forecast requirements of the underground project, with the objective of maximizing depth and minimizing a rights offering.

The Oyu Tolgoi independent review of the costs and scheduled delays continue to advance and, as with the arbitration, we will not be in a position to comment on the findings until after the review is completed. As most of you on the call are aware, the key milestone of 2021 is the undercut blasting, currently scheduled for June 2021. Once commenced, the undercut and drawpoint construction continues unimpeded. Turquoise Hill is engaged with Rio Tinto and Erdenes to address and agree on the undercut milestone, with the joint objective of preserving the timeline for the project completion.

I would like to thank you all for taking the time to join our conference call. And I would now like to turn the call back to the operator for any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions]. First question comes from Orest Wowkodaw at Scotiabank. One moment please.

Orest Wowkodaw -- Scotiabank -- Analyst

[Technical Issues] liquidity gap estimation, that $2.3 billion, that's down from $3 billion in the third quarter. Can you talk about how much of that $700 million decrease is strictly attributable to higher commodity pricing? And then secondly, what's the assumed minimum cash balance in this assumption?

Steve Thibeault -- Interim Chief Executive Officer

Luke, can you handle that question, please?

Luke Colton -- Chief Financial Officer

Yes of course. Thank you for the question. In terms of our funding gap, our remaining funding gap, you're correct. It's reduced from the $3 billion, down to $2.3 billion as per our year-end estimates. I think you probably have also -- you've already answered the question in asking it, but the majority -- the vast majority of that decrease is actually related to improved commodity price assumptions for both copper and gold. In terms of the way that $2.3 billion works in terms of any minimum buffer amount at the end, that $2.3 billion is the full amount until we run out of cash. So, that is the full amount of the requirement.

Orest Wowkodaw -- Scotiabank -- Analyst

Oh I see. So, there's no minimum cash balance assumed in that. Okay. And then, Steve, with the change here in terms of Ulf leaving and you entering, is there any change in the way you're approaching the arbitration? Like, do you plan to follow that through in terms of getting an arbitration decision?

Steve Thibeault -- Interim Chief Executive Officer

The arbitration is continuing, OK. Like I mentioned previously, the objective is really to clarify the rules of each. That was mentioned previously. And so, I think that's important that we are proceeding. And I'm confident -- not confident, I know that that will help both parties, Rio Tinto and TRQ, to have a better understanding of the rules. And so, we're proceeding.

Orest Wowkodaw -- Scotiabank -- Analyst

You're proceeding, OK. Finally, coming back to the financing again, is a non-dilutive streaming transaction still an option that's being considered? Or is that now off the table?

Steve Thibeault -- Interim Chief Executive Officer

Luke, you want to provide the detail?

Luke Colton -- Chief Financial Officer

Yeah, no, of course. Listen, it's a good question. And let me just start by, I guess, reiterating our funding strategy. The fact that it is based, obviously, on some basic principles, and that's really finding the best cost of capital balanced with the need to ensure efficiency and stability and how we fund, careful and thorough consideration by the Board and the special committee of the relevant merits of the various sources of debt and equity, and finding alignment with the relevant stakeholders once the Board and special committee are happy.

We have made significant progress on stabilizing and enhancing our financial situation this quarter. And as I've already talked about, that's driven by an extension of our liquidity and our hedging program. And management, we are obviously working under the supervision of the special committee and we remain committed to ensuring that the relevant negotiations continue with a view to arriving at a funding plan that is in the best interest of the company.

And in terms of the options that have been looked at, there really isn't any change from what we've communicated in prior quarters. So, we've looked at, obviously, the options that are summarized in the MoU, which include reprofiling, additional supplemental senior debt, a global medium term note program, and of course, we've done a lot of work around the streaming as well, as you indicated.

Orest Wowkodaw -- Scotiabank -- Analyst

Thank you very much.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Orest.

Operator

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

Dalton Baretto -- Canaccord -- Analyst

Hi, thank you. Good morning guys. Couple more questions on the funding side of things. First question, $2.3 billion funding gap, that's based on the $6.75 billion as far as I can see. Are you going to seek incremental liquidity to cover a potential overrun up to your 15% sensitivity?

Steve Thibeault -- Interim Chief Executive Officer

Guys, you will understand, after five days, I'm not around all the questions around funding and that detail. So, Luke will answer all those one. And Luke, you want to proceed?

Luke Colton -- Chief Financial Officer

Yeah, thanks Steve. Happy to try and answer that question. I'm not 100% sure what 15% is being referred to. But obviously, the focus of management and the special committee is to secure funding that is sufficient to meet the company's reasonable requirements and to make sure that we can continue to do that into the future. And for that, that's the reason why we've investigated the various options that we have investigated.

In terms of that $2.3 billion number and some of this has been stated previously, if we're successful in achieving our reprofiling objectives, that will, of course, reduce that funding gap from the $2.3 billion by $1.4 billion. So, it'll reduce it down to $900 million. We also, in the MoU that was signed in September, there was alignment that we should be taking supplemental senior debt of $500 million. If we're able to do that, that reduces the funding gap from the $900 million down to $400 million.

And from there, we've looked at various different options, and I've kind of summarized what those options are already. And those options, if implemented, would put us in a position where we could fill that that remaining funding gap of $400 million or potentially more than that $400 million. And, of course, as a final backstop, we can't completely discount the possibility of an equity offering, but from our perspective, the objective continues to be to maximize the sort of low cost debt financing and minimize the quantum of any equity offering as much as possible.

Dalton Baretto -- Canaccord -- Analyst

Okay great. So Luke, just to clarify, though, that 15% comes from the sensitivity that Rio put out around their tentative estimate? So, maybe another question, the tax payments that you made in February, I think was just over $200 million, is that coming out of your current liquidity?

Luke Colton -- Chief Financial Officer

Yeah so the tax payments have already been made. So, the liquidity forecasts that I think I just discussed into Q3 2022 incorporates the payment of those two tax invoices, which the two together were about $230 million.

Dalton Baretto -- Canaccord -- Analyst

But your disclosure -- your liquidity positions as of December 31, and these payments were made in February, but you're saying the Q3 numbers assume these payments made?

Luke Colton -- Chief Financial Officer

No, I'm saying that, on the 31st of December, we had liquidity of $1.1 billion. Obviously, there's been activity since then. But what I'm saying is, in terms of the number that we just put out for year-end, in terms of our liquidity forecast, which is that we have liquidity into Q3 of 2022, that forecast incorporates the payments of those two tax invoices.

Dalton Baretto -- Canaccord -- Analyst

Right, OK. And then just maybe switching to the undercut, and again, this is a bit of a funding question here. But the targeted date is in June. The Mongolian election is in June. On the off chance that you guys don't wrap everything up to a level that is sufficient to initiate the undercut, what are your costs associated with every month delay? Let's say it gets delayed by three months. What's that going to cost you?

Steve Thibeault -- Interim Chief Executive Officer

Luke, you want to -- do you have anything on that one? Dalton, I'll be honest. Yeah OK go ahead.

Luke Colton -- Chief Financial Officer

Listen, I don't think that's information -- unfortunately, I don't think that's information that's in the public domain. What I probably can refer you to is some sensitivities that we've done in prior period financial statements that indicated the impact of delay to first sustainable production would have a -- we did a sort of sensitivity around that, and I believe the sensitivity was, for every one month of delay, that had an impact on value or on NPV of about $100 million. So, hopefully, that helps to answer your question a bit.

Dalton Baretto -- Canaccord -- Analyst

No, that's great. That actually puts some context. And maybe just one --

Steve Thibeault -- Interim Chief Executive Officer

And Dalton, sorry to interrupt. I would say that we are all aware at the company, at OT and Erdenes that this is a key milestone. And I can tell you, we have a Board Meeting coming in pretty soon at the OT level. And definitely, this is a hot topic to make sure that we're all aligned to make that decision. And there are different things that are being done at the moment to align our result to move ahead with that June undercut. Okay.

Dalton Baretto -- Canaccord -- Analyst

Of course. And then maybe just one last one for me. Are you in a position to tell us what you've purchased in terms of the puts, this notional amount strike prices, that sort of thing?

Steve Thibeault -- Interim Chief Executive Officer

Luke, you want to -- yeah go ahead.

Luke Colton -- Chief Financial Officer

Yeah. Again, that's unfortunately not information that we've put in the public domain. But obviously, the intent of these sort of plain vanilla put options that we've put in place for a period of about 12 months, the intention of that is obviously to preserve our liquidity position on the downside. So, effectively, protect us from sort of downside pricing, maintain that liquidity position for as long as possible, so that we can obviously have the time that we need to continue these other important work streams that are under way.

And what, obviously, the hedging program doesn't do is cap the upside. So, if prices continue to improve for copper or if gold bounces back, then we're not -- that doesn't put -- what we've done doesn't put us in a negative position in terms of being able to capture that upside.

Dalton Baretto -- Canaccord -- Analyst

Got it. Thank you guys.

Steve Thibeault -- Interim Chief Executive Officer

Okay thanks.

Operator

The next question comes from Craig Hutchison at TD Securities.

Craig Hutchison -- TD Securities -- Analyst

Hi, good morning, Steve. Good to hear your voice again.

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Craig.

Craig Hutchison -- TD Securities -- Analyst

Just so you guys touch on the financing, quite a lot of detail this morning. But just in terms of the sequence of events, can you walk us through how you sort of see the sequence of events unfolding? Do you have to wait until the arbitration is complete before you can work on the debt reprofiling in terms of locking up the supplemental debt with Rio Tinto? Can you maybe kind of give us some ballpark milestones into how you kind of see that playing out?

Steve Thibeault -- Interim Chief Executive Officer

I'll take that one, Craig. I think that definitely the work has been done to understand the [Technical Issues] in a couple of initial contacts, where definitely we are working the next couple of weeks and months, I mean that's we're talking short term here, that's when we will engage pretty heavily or more heavier. And definitely, the arbitration will help us to redefine that we're expecting to be completed in May. We're following that. Definitely, the rules will be clearer and we'll move ahead. Okay. So, I would say, in your timeframe, you should count, between now and June see a lot of activities here.

Craig Hutchison -- TD Securities -- Analyst

Okay. And debt reprofiling discussions going well?

Steve Thibeault -- Interim Chief Executive Officer

Like I said, Craig, there was some discussion. And, yeah, I would say that the estimate we have of $1.4 billion, we're quite confident.

Craig Hutchison -- TD Securities -- Analyst

Is your expectation that the new CEO, if it's not yourself, will be independent and the new four member will also be independent as well?

Steve Thibeault -- Interim Chief Executive Officer

I'm not going to be able to comment on that one. But I can tell you that the Board has started the process of replacing or having a new CEO, and that they're definitely looking external and internal. So, all the options are open. But that's a decision for the Board, Craig. I will not put myself in the middle of it. That's for them to decide, but they're looking at all options.

Craig Hutchison -- TD Securities -- Analyst

Okay. And then just an operations question, you guys, when you provided your 2021 guidance, there was some issues around your technical concerns in Phase 4B, the open pit, that changed the mine design in 2021-2022. Are there any updates on how that status is going? And I think you guys were anticipating providing 2022 outlook once some of that work was done. Any update there would be appreciated.

Steve Thibeault -- Interim Chief Executive Officer

Craig, Jo-Anne will answer will answer that question for you.

Jo-Anne Dudley -- Chief Operating Officer

Yeah thank very much. Thanks, Steve and thanks, Craig. Yes so with respect to that geotechnical event, it was really not anything outside of business as usual situation. Those things have happened at the Oyut open pit in the past. And it's something that OT has dealt with a number of times. There's a sophisticated monitoring system in place as well as the sound ratings control. The team is managing the area well, with minor alterations to the mine design to deal with the structures of concern that led to that multi-bench failure in a small section of the piece. And the areas will be mined in the next phase.

In terms of what we're seeing in terms of updated guidance beyond 2021, the sequence and design is under review. Given the timing of the failure in December, it means that we needed to rework the 2022 plan and also include the usual business improvement kind of opportunities that are being considered. And that work is in process. We'll come back to the market as soon as we can once the work is complete.

Craig Hutchison -- TD Securities -- Analyst

Okay, thanks guys for taking my questions.

Steve Thibeault -- Interim Chief Executive Officer

Thanks a lot, Craig.

Operator

Thank you. The next question comes from Hayden Bairstow at Macquarie. Please go ahead.

Hayden Bairstow -- Macquarie -- Analyst

Good morning all. [indecipherable]. A couple of questions from me. Just firstly on -- maybe just follow-on on this deferred tax asset that keeps sort of boosting the earnings every quarter. How do we think about that going forward? It's now up to what over $800 million? Does that cover you for similar credits this year? Or how do we sort of model that through?

Steve Thibeault -- Interim Chief Executive Officer

Go ahead, Luke.

Luke Colton -- Chief Financial Officer

Yeah, no, thanks, Steve and good question. So listen, deferred tax credits is an area, as you can appreciate, of estimation [Technical Issues] judgment. And it's impacted by many variables, such as commodity price estimates, etc., reserves and resource estimates, development capital estimates, mine planning, scheduling, etc.

Broadly speaking, while the underground development continues until the achievement of peak production, we would anticipate additional losses to be incurred by OT, and those additional losses would be resulting in further deferred tax credits. So up until that period of time where OT has delivered the underground and they're no longer running losses, we would expect those additional deferred tax credits to continue to accrue.

Hayden Bairstow -- Macquarie -- Analyst

Okay and the same goes to your capitalizing interest, is that right, through to sustainable production or peak production?

Luke Colton -- Chief Financial Officer

Yeah, so under our accounting policy, it gets a little bit technical, right? But under our accounting policy, borrowing costs related to construction or development of the underground are capitalized until the point at which substantially all the activities that are necessary to make the asset ready for its intended purpose are complete. So, there's a degree of judgment there, obviously, but we estimate that, at this point in time, that would be approximately equivalent to sustainable first production.

Hayden Bairstow -- Macquarie -- Analyst

Okay great. And just on the sustainable target, I'm just interested to know, the commentary in the quarterly basically implies that everything could be ready to go underground. Jo-Anne, what work has to be done from here to get to first drawbell? Or are you basically ready to do first drawbell? And as a result, what is the underground team actually doing between now and when you get approved to kick it off?

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne, do you want to take it?

Jo-Anne Dudley -- Chief Operating Officer

Yes sure, thank you, Steve. Thanks Hayden for the question. Well needless to say, people have been very busy working hard underground at the mine. And we're continuing to complete construction of the Materials Handling System, which is on track. So, there's still work to be done. There is remaining development required to support Panel 0. So, that work is still ongoing. As you know, as noted in the documents that we've just released, a lot of the on-footprint development of the levels -- the three levels -- extraction, undercut [indecipherable] largely complete.

And so that development on footprint is largely complete the pieces that are required for first drawbell. And so, we continue to work on the materials handling system and we will continue the actual development work to support the ongoing development of the mine, essentially. And obviously, there's other work going on as well that supports us getting beyond the Panel 0 production rate, and that includes mining of the conveyor to surface decline, which is progressing well this year. And then also, Shaft 3 and 4, that work continues as well.

Hayden Bairstow -- Macquarie -- Analyst

Okay. Just want to follow-up on that, Jo-Anne, just on the Shaft 3 and 4, just looking at the diagram in the presentation, the late delivery of those, does that impact the mining rate of Panel 0? Or is it more an impact on how fast you could ramp-up Panel 2 or 1, whichever one comes next?

Jo-Anne Dudley -- Chief Operating Officer

Yeah, so I mean it's a good question. Panel 0 production can ramp up without Shaft 3 and 4. As we've noted, we continue to see COVID travel restrictions impact travel, which means it's been challenging to get some specialists to site. And I acknowledge all of the hard work of the teams in Mongolia and offshore teams to try to get people back into site. And we're making good headway on resuming regular flights where we can get the specialist numbers up further to support that thinking.

So, we probably should note that the panels can be mined independently. So, there's not necessarily a technical need, the continuous mining from Panel 0 to the other panel. And the sustainable production at Panel 0 is on track. We are continuing to monitor progress, as you would expect. And we will communicate any implications, particularly to Panel 1 and 2 ramp up which shafts are in full support at an appropriate time as the information materializes.

Hayden Bairstow -- Macquarie -- Analyst

Okay, great. Thanks for that. Just one final one. Probably for Luke, I guess. Just on the capex guidance for this year, I noticed in the quarterly sort of broken out the underground capex into sustaining. Just sort of understand what that actually -- the difference between the two is and how should we break up the sort of $1 billion for this year?

Luke Colton -- Chief Financial Officer

Steve, do you want me to handle that one?

Steve Thibeault -- Interim Chief Executive Officer

Yeah go ahead.

Luke Colton -- Chief Financial Officer

Yeah. So the sustaining capital guidance that's sort of separately noted in the guidance is for the open pit. The underground guidance that was issued for 2021 includes an amount related to development capital. So, this goes back to the work that's needed, that needs to be done to deliver the safe sustainable first production on the underground for Panel 0. And then, there's also some work, and it's more of a sort of, we call it, underground sustaining capital, which a lot of it relates to the progression of Panels 1 and 2.

Hayden Bairstow -- Macquarie -- Analyst

Is it a material part of the $1 billion, given the breakout that we've got in that quarter? Or how do we think of that?

Luke Colton -- Chief Financial Officer

No the majority -- the large majority of it -- sorry, Hayden, I don't have the exact number off the top of my head, but the large majority of that number relates to underground development capital, which is the capital that's needed to deliver Panel 0 sustainable first production.

Hayden Bairstow -- Macquarie -- Analyst

Okay, terrific. Thanks so much. I'll leave you there.

Steve Thibeault -- Interim Chief Executive Officer

Thank you, Hayden.

Operator

The next question is a follow-up from Orest Wowkodaw with Scotiabank. Please go ahead.

Orest Wowkodaw -- Scotiabank -- Analyst

Yes, hi thanks for taking the follow-up. Just curious again on first drawbell expectations. What is the current expectation there? It does sound like you're getting fairly close with respect to the actual physical work required to be able to do first drawbell. But are we still expected that this could get put on hold waiting, essentially, for some of the non-technical aspects to get sorted out before first drawbell will happen here?

Steve Thibeault -- Interim Chief Executive Officer

Yeah, Orest, that's good question. But I can reassure you that we are all focused to make sure that the non-technical -- I agree, the technical aspect, that's easier, if I can say this way. But on the non-technical aspect, we are definitely working hard every shareholders or every stakeholders to make it happen. And I don't see -- we are on target. We're working on these issues and I don't see, definitely, at the moment, anything that would divide or change that date.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay. And that date is what right now in terms of best estimate?

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne, would you remind me that date for the first drawbell?

Jo-Anne Dudley -- Chief Operating Officer

Yes, no problem. We haven't disclosed the first drawbell date in the current piece of work. But what we do talk about is quite meaningful, which is sustainable first production in October 2022, which is when we really start drawing the cave and undercut blasting is planned for June 2021.

Orest Wowkodaw -- Scotiabank -- Analyst

I see, OK. And then just on the power, certainly, it seems like the power plant is being pushed back a little bit here. But is it your expectations that the costs for power are going to be roughly similar to what they currently are in terms of imported power? And have the costs of purchasing power domestically, is that already included in the definitive study cost estimates released last year?

Steve Thibeault -- Interim Chief Executive Officer

Yeah, on this, Luke, has a detail on that one. I must say that, Orest, I don't have the detail on that one at the moment, what would be the cost between the different alternatives. Didn't get time to do it on the last five days. But, Luke, do you have more detail on that or --?

Luke Colton -- Chief Financial Officer

Yeah I can try to provide a bit more detail.

Steve Thibeault -- Interim Chief Executive Officer

Okay go ahead.

Luke Colton -- Chief Financial Officer

As people on the call would know, we signed an amendment to the power sector framework agreement back in June of 2020. And under that amended agreement, the agreement was to prioritize a state-owned, state-funded power plant. So, the estimate that -- I've just sort of summarized around funding gap, liquidity etc., they assume a state-owned, state-funded power plant. The amended PSFA also has some fallback options.

So, in an event that the state-owned, state-funded power plant, for whatever reason, if it weren't to not happen, there are fallback options in that amended PSFA documents that include grid supply, include a renewables option, and also a coal-based -- an OT-based cold-fired power plant. But those alternative options don't form part of the sort of base case estimates for funding gap and liquidity that I talked about earlier.

There are some milestones in the PSFA. The first of those milestones was related to an extension of the current IMPIC contract. And that milestone was actually the March 1. So, we just passed it. The Government of Mongolia did formally notify OT and Rio late February that the Tavan Tolgoi, this state-owned, state-funded power station project will be implemented, connected to the central energy system and operated under a unified low dispatch control. So, there's still some work to be done, obviously, and the Government of Mongolia suggested that all the milestone dates under the PSFA amendment agreement should be reconsidered and extended.

OT is engaging with the Government of Mongolia in relation to that, and hopefully, to agree at a standstill period following the lapse of that March 1 milestone. During the standstill period, OT would -- we wouldn't exercise its right to select and proceed with an alternative power solution, but also would not be waiving its right to do so in the future. And as you can appreciate, there are discussions that are under way in relation to all of that to work out the reasonable pathway forward on power. So, that's kind of the update on power that I'm able to provide. I hope that's helpful.

Orest Wowkodaw -- Scotiabank -- Analyst

I'm not sure -- I appreciate the color, but I'm not sure you actually answered my question. What is assumed in the definitive estimate that was put out December? Does it assume imported power? Does it assume the purchase power from Tavan Tolgoi? What is assumed in the cost estimates, operating cost estimates, life of mine?

Luke Colton -- Chief Financial Officer

We may have to go back and double check that actually. I believe that those estimates assume sourcing of power from within Mongolia under the options and the PSFA. But we may have to take that question away. Jo-Anne, unless you happen to remember off the top of your head. That's my recollection, at least. But we may have to take that question away.

Jo-Anne Dudley -- Chief Operating Officer

Yes, I can help, Luke. There certainly was a consideration of the current agreements to supply. And as I understand it, a switch to an in-country solution. So, I can't exactly say when that changeover was in the modeling, but as I understand it, they're both considered in that estimate and there was a change over time between the two.

Steve Thibeault -- Interim Chief Executive Officer

So I guess on that one, we'll have to get back to you and probably give you a bit more guidance in terms of timing of the current contract, when it expires and what is assumed. We'll do a follow up on that.

Orest Wowkodaw -- Scotiabank -- Analyst

Okay, thank you.

Operator

The next question comes from Ralph Profiti at Eight Capital. Please go ahead.

Ralph Profiti -- Eight Capital -- Analyst

Good morning, everyone. Thanks for taking my question and welcome back.

Steve Thibeault -- Interim Chief Executive Officer

Good morning, Ralph. Yeah thank you.

Ralph Profiti -- Eight Capital -- Analyst

Luke, maybe this is a question for you on potential tax assessment risk going forward. And basically, when do you file the 2019 taxes? When do you file the 2020 taxes? Are these sort of based on North American corporate standards? And do you have an estimate based on the Mongolian tax authority methodology on what those tax assessments could look like? And is the intention to partially pay those down? And could we see those before the third quarter of 2022?

Steve Thibeault -- Interim Chief Executive Officer

Luke, you want to go ahead?

Luke Colton -- Chief Financial Officer

Yes, yes. Let me try and answer the second part of that question first. In terms of the timing of our tax filings in Canada, that would just be as per the sort of normal course stuff. It would be similar in Mongolia as well. In terms of the actual tax assessments in Mongolia, we've received tax assessments for period 2013 through 2015 and period 2016 through 2018. So, you could expect the next audit to start in due course over subsequent periods, so 2019 and 2020. I'm not sure of the exact timing of when that would start. But you would expect, obviously, those periods to be looked at in normal course as well.

So in terms of the actual payment of tax, OT pays in the normal course all of the tax that it believes it owes. And then, there are obviously the outstanding assessments that are the subject of the current international arbitration. In relation to the 2016 to 2018 tax assessment, we have paid the amounts. So, those are the payments that have been recently made, the $230 million that was discussed previously. Those invoices were received by OT and have been paid by OT now.

In terms of the overall international arbitration process, that process still continues. It will continue over the course of 2021 and into 2022. We still are quite confident in the company and OT's position around the outcome of those international arbitration proceedings. And so, we do continue to feel quite positive about a favorable outcome in due course.

Steve Thibeault -- Interim Chief Executive Officer

So Ralph, I would just summarize that we're paying our tax, as we pay the amount that we are -- based on the understanding that we have of this tax law in Mongolia. And like Luke mentioned, I mean the amounts are in arbitration at the moment. The law forces us to -- force us, that's the wrong word. By law, we have to pay these amounts right away. So, there's no delay because we're in disagreement.

So, when they make an assessment, we have to pay right away and then we go to arbitration or we debate it. And that's why, from my point of view, we're in arbitration, we believe we have paid the right amount of tax, and we'll see. So, that's why in any calculation, you have to be careful to make assumption that we will have these changes. From our point of view, we're paying what we're supposed to.

Ralph Profiti -- Eight Capital -- Analyst

Okay, thank you, Steve. Thanks, Luke.

Steve Thibeault -- Interim Chief Executive Officer

Thanks as well, Ralph. Nice to hear you by the way. Nice talking to you.

Operator

The next question comes from Myles Allsop from UBS. Please go ahead.

Myles Allsop -- UBS -- Analyst

Great, thank you. A couple of things I wanted to clarify. First of all, with the undercut in June, is there any flex to that to get to first sustainable production in October? Or now every month the undercut is delayed, if it does get delayed, would result in a month's delay to first sustainable production, is the first question.

Steve Thibeault -- Interim Chief Executive Officer

Myles, probably -- Jo-Anne can you handle that question please?

Jo-Anne Dudley -- Chief Operating Officer

Yeah, sure. Thanks, Steve and thanks Myles. In terms of what will happen between the undercut blasting, the commencement of the undercut and first sustainable production, there's a sequence of events, if you like, that need to happen. So, we need to progress the undercut and create a shadow for drawbells to be constructed underneath and we need to get then enough drawbells constructed to reach critical hydraulic radius, at which point we say we've got to sustainable first production. And so, there is a sequence of events that needs to happen.

There may be some sort of flex between how much is done depending on the timing, but in general, it is a sequence of things. So, it is important to consider that when we're thinking about what happens in between those two dates, if that makes sense.

Myles Allsop -- UBS -- Analyst

Okay that's helpful. I mean who makes the decision about the undercard? Is that the OT Board or how much influence does Rio have in terms of the timing of that deal is concerned?

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne, on that one?

Jo-Anne Dudley -- Chief Operating Officer

Yeah sure. The intent is that the OT Board would ultimately approve the start of undercutting and that TRQ would also follow its own governance processes we've explored prior to that. And so, it is a decision taken at the highest levels of the organization.

Myles Allsop -- UBS -- Analyst

Okay --

Steve Thibeault -- Interim Chief Executive Officer

Ultimately, Myles, this is a decision of OT Board.

Myles Allsop -- UBS -- Analyst

Yeah. And then, with the $2.3 billion funding gap, could you give us a sense -- you mentioned you've assumed higher copper and gold prices. How much higher are those copper and gold prices versus the put option and support level? Are they meaningfully higher close to spot or how much risk is there around $2.3 billion with a very volatile commodity price environment?

Steve Thibeault -- Interim Chief Executive Officer

Luke, I think you can answer that one.

Luke Colton -- Chief Financial Officer

I'll do my best. So, the prices assumed in our base case $2.3 billion, they're based on kind of consensus pricing approximate to the reporting date. So, 31st of December. Obviously, the current spot price for copper is higher than what consensus price would have been on the 31st of December. So, if you assume spot pricing, as a sensitivity, you may have -- that would improve the liquidity position, it would improve from that perspective.

The hedging program, we haven't provided a lot of details around what the floor is. And I don't think I can get overly specific, but to answer your question, if I remember correctly, I believe the floor is -- it provides downside price risk protection of basically 10%. I think it's about 10% of the base case. So, from that perspective, we're shielded from any sort of downside pricing reps for copper and gold, more than 10% from that base case, if that makes any sense at all.

Myles Allsop -- UBS -- Analyst

Okay, that helps. Then one other question, changing the Mongolian tax law at the beginning of January and then there's been some talk about thin cap rules and debt to equity 3 to 1. Is that a concern for yourselves and why would that be a concern?

Steve Thibeault -- Interim Chief Executive Officer

Ralph, I cannot get exactly. Are you talking about changing the tax?

Myles Allsop -- UBS -- Analyst

Yeah. So, the change in Mongolian tax regulations. Are thin cap rules are an issue potentially? I really have no idea. But obviously, tax in here?

Steve Thibeault -- Interim Chief Executive Officer

Yeah Luke, you would have a comment on that.

Luke Colton -- Chief Financial Officer

So, the 3:1 debt to equity, we've already been operating under that assumption. So, I'm not sure specifically what changes to Mongolian tax law you're referring to. We do have a very strong tax team at the OT level that will obviously be all over that and will make sure that we maintain compliance from a tax perspective and we continue to pay the amount of tax that we owe as we always strive to do in Mongolia and all of the jurisdictions in which we operate.

Around that thin cap point, I don't believe it's an issue at this stage. And we're always operating under the sort of 3:1 debt to equity ratio anyway. So, I think hopefully that helps to answer the question. We can follow it up with more detail if we need to. But no issues have been highlighted to me.

Operator

Thank you, ladies and gentlemen. We have reached the end of our Q&A session. I will now turn the call back over for closing comments.

Steve Thibeault -- Interim Chief Executive Officer

So Roy, are you making any comments. Sorry guys, that's my first one. So Roy, do you have any comments additional or should I just make one?

Roy McDowall -- Head of Investor Relations and Communications

No, we're good to end the call, Steve.

Steve Thibeault -- Interim Chief Executive Officer

Yeah OK. But I would say -- can I just make a comment? Thank you very much, guys, for the call. And I'm sure, in the next couple of weeks, we'll have time to discuss and have a call -- into a call with you guys. Okay, thank you very much for the call.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Roy McDowall -- Head of Investor Relations and Communications

Steve Thibeault -- Interim Chief Executive Officer

Jo-Anne Dudley -- Chief Operating Officer

Luke Colton -- Chief Financial Officer

Orest Wowkodaw -- Scotiabank -- Analyst

Dalton Baretto -- Canaccord -- Analyst

Craig Hutchison -- TD Securities -- Analyst

Hayden Bairstow -- Macquarie -- Analyst

Ralph Profiti -- Eight Capital -- Analyst

Myles Allsop -- UBS -- Analyst

More TRQ analysis

All earnings call transcripts

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