Toronto Jul 30, 2015 (Thomson StreetEvents) -- Edited Transcript of Centerra Gold Inc earnings conference call or presentation Wednesday, July 29, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * John Pearson Centerra Gold - IR VP * Ian Atkinson Centerra Gold - President, CEO * Gordon Reid Centerra Gold - COO * Jeff Parr Centerra Gold - CFO ================================================================================ Conference Call Participants ================================================================================ * Botir Sharipov HSBC - Analyst * Daniel McConvey Rossport Investments - Analyst * Alex Spot Scotiabank - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2015 Second Quarter Results Conference Call and Webcast. During the presentation, all participants will be in a listen-only mode, afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday, July 29th, 2015. I would now like to turn the conference over to John Pearson, Vice President of Investor Relations. Please go ahead, sir. -------------------------------------------------------------------------------- John Pearson, Centerra Gold - IR VP [2] -------------------------------------------------------------------------------- Thank you, Melanie. Welcome to Welcome to Centerra Gold Second Quarter Conference Call. Today's conference call is open to all members of the investment community and to the media in listen-only mode at first. After our formal remarks, we will open the phone to questions. The operator will give the instructions for asking a question. Please note that all figures are in US dollars unless otherwise noted. Joining me on the call today is Ian Atkinson, President and CEO; Jeff Parr, Chief Financial Officer; and Gordon Reid, Chief Operating Officer. Before we begin, I'd like to point out that we've changed the name of the TransCanada partnership to Greenstone Goldmines and we will refer to the property going forward as the Greenstone gold property in recognition of the location within the municipality of Greenstone. Also, I'd like to caution everyone that certain statements made on this call today may be forward-looking statements and as such are subject to known and unknown risks and uncertainties, which may cause actual results to differ materially from those expressed or implied. Also, certain of the measures we will discuss today are non-GAAP measures and I refer you to our description of non-GAAP measures in the news release and the MD&A. For a more detailed discussion of the material assumptions, risks, and uncertainties, please refer to our news release issued last night, the MD&A along with the unaudited financial statements and notes, and to our other filings, which can all be found on SEDAR and the company's website. And now, I'll turn the call over to Ian. -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [3] -------------------------------------------------------------------------------- Okay. Thank you, John, and good morning everyone. Yesterday, along with our quarterly results, we also announced the positive results of the feasibility study for our 100% owned Oksut Project in Turkey. The feasibility study shows that the project will produces approximately 150,000 ounces of gold a year for the first four years and will produce a total of 895,000 ounces over an eight-year mine life. The all-in cost for the project, including the preproduction expenditures and construction capital and taxes, is estimated to be $777 per ounce of gold produced. The project doesn't have too tight net present values in $242 million, that's using an 8% discount rate and the $1,250 gold price. It gives it an excellent rate of internal rate of return of some 43%. They expect to begin development of the Oksut Project in the first quarter of 2016 and they expect to see the first gold production from the project in the second quarter of 2017. This, of course, is subject to receiving the final approval of the Turkish environmental impact assessment and EIA process is continuing on schedule at present time and we expect approval of the EIA, either late in the third quarter or early in the fourth quarter this year. We will begin detailed engineering and ordering of long lead time items this quarter. In fact, we've already got that underway. The preproduction cost, expenditures and constructions capital for the project are estimated to total of about $221 million. This includes a contingency of some $25 million. And then the payback period on that investment is about two and a half years after production begins. Based on the estimated problem reserve at Oksut is some 1.2 million ounces of contained gold. Feasibility study envisions a conventional open pit which operation with an eight-year mine life. The project is expected to process some 26.1 million tons of ore at an average grade of 1.4 grams within gold. And over the eight years, as I've said, it will produce 895,000 ounces of gold. And the average, all in sustaining cost for that production with $490 per ounce sold. The actual all-in cost including taxes is expected to be $542 per ounce sold from the start of production so that excludes the predevelopment expenditures and construction capital. Of course, there's also further upside on the property. So, we're continuing to follow up on that with greater exploration work in drilling. And with development of the Oksut project is another step in Centerra's strategy with diversifying our portfolio profitable assets. We have a strong balance sheet and we do have a cash available for construction of the project but we also have a number of financing opportunities with lending institutions. Now, just moving to our quarterly results, during the second quarter, we've produced about 125,000 ounces of gold and most of that came from Kumtor. Are all-in sustaining cost for the quarter were $937 per ounce sold and $808 dollars per ounce sold for the first six months of this year. On the financial front, we reported a net earnings for the quarter of $22 million or $0.09 per share and cash provided by operation. So, it was about $115 million. The Kyrgyz Republic Government passed a resolution on the 29th of June to ensure the continued operation of the Kumtor mine. We're continuing to work with the state agency for environmental protection and forestry to obtain the necessary approvals of the - of Kumtor's 2015 annual mine plan. On the 3rd of July, Kumtor did receive extensions to its emissions and waste disposal permits until the end of the year. In addition, we're also continuing our discussions relating to the possible restructuring of the Kumtor project with the government of the Kyrgyz Republic. In Mongolia, the Parliament, so far, has declined to approve the level of state ownership in the Gatsuurt Project. In June of this year, the bill regarding the level of state ownership in the project was returned by Parliament to the government for further consideration. And the company understands that the government intends to submit a revised proposal to Parliament later this year. So, we're continuing discussions with the government on their ownership interest in the Gatsuurt project. So, with that, I'll now turn it over to Gordon, for an update on our operations. -------------------------------------------------------------------------------- Gordon Reid, Centerra Gold - COO [4] -------------------------------------------------------------------------------- Thanks, Ian. During the quarter, Kumtor produced 122,000 ounces at an all-in sustaining cost per ounce sold of $835 per ounce. This brings Kumtor's production for the first six months of 2015 to 286,000 ounces at an all-in sustaining cost per ounce sold of $717 per ounce. Mill feed for the quarter was provided by surface or stockpiles. The 45% decrease in all and sustaining cost per ounce sold as compared to 2014 is due to the increased ounces produced and sold in the second quarter of 2015 and to lower operating costs related to lower diesel cost, lower labor cost had favorable movements in the currency exchange rates. Mining cost during the quarter including capitalized stripping decreased $13.3 million compared to Q2 2014. The reduction and cost is primarily due to a $7.5 million dollar savings in diesel fuel costs. Our fuel cost average $0.56 per liter in the second quarter of this year. We also had $2.5 million savings in blasting cost at a $2 million savings in labor costs due to the favorable currency exchange rate I mentioned earlier and to our reduced employee headcount. Kumtor continues to evaluate every opportunity to further reduce operating cost and improve operating efficiencies. At Boroo, gold production in the second quarter of 2015 was 3,000 ounces which was lower than last year's second quarter and reflects the closure of the Boroo mill in Q4 of 2014 and the transition from primary to secondary leaching in the heat leach facility. During the quarter, Boroo remained cash positive. Gold product in the first six months at Kumtor has been ahead of schedule as we process higher grades. We are maintaining our production guidance. So, in the second half of this year, we will process lower grades, particularly in the third quarter as we continue stripping, cutback 17 to access the SB Zone in the fourth quarter at Kumtor. We will now turn it over to Jeff to talk about our financials. -------------------------------------------------------------------------------- Jeff Parr, Centerra Gold - CFO [5] -------------------------------------------------------------------------------- Thanks, Gordon, and good morning, everyone. On a consolidated basis, our second quarter revenue of $147 million reflects 32% increase in gold sold compared to the same quarter of last year which along with cost reductions resulted in net earnings of $22million or $0.09 a share as Ian indicated. Cash provided by operations was $115 million or $0.49 a share. These results were achieved in spite of a 7% lower average realized gold price of $1,192 compared to $1,285 an ounce in the second quarter of 2014. Our comp for sales decreased by 26% to $81 million compared to the same quarter last year. Our comp for sale benefited from lower operating cost for these all labor and other consumables as well as reduced waste stripping as compared to cut-back 15 ore that was processed in the second quarter of 2014. In addition, cut-back 16 processed this quarter contained more ounces. DD&A associated with production was down $16 billion in the second quarter of 2015 reflecting lower capitalized stripping charge per ounce from cut-back 16 ore. Our cash in short-term investments totaled $582 million at the end of the quarter which includes $76 million dollars outstanding under our revolving credit facility. This is after investing $71 million in our properties, $4 million of pre-development cost at Greenstone Gold and Oksut, $2 million in exploration and business development, and paying about $8 million in dividends. For 2015, we're increasing our outlook for capital expenditures at the operations to $97 million from $76 million. Our new estimate includes $55 million of sustaining capital but excludes capitalized stripping of $162 million. Growth capital is now expected to be $42 million reflecting slightly lower spending at Kumtor but now includes about $18 million for detailed engineering and down payments on long lead items for Oksut. The $5 million increased in our sustaining capital is primarily due to the replacement of our production drill at Kumtor that's been problematic as well as higher cost for maintenance of the heavy duty mine equipment. Our projected cash component of capitalize stripping costs is expected to decrease to $162 million from $185 million reflecting lower labor and diesel costs. Our total capitalized stripping including DD&A for 2015 is forecasted at $212 million which is down from $234 million in our prior guidance. And finally, as the company continues to have a strong balance sheet and good cash balances, we've announced that we're paying other quarterly dividend. I'll turn it back to Ian to wrap up. -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [6] -------------------------------------------------------------------------------- Thank you, Jeff. So just a few comments in summary. Overall, the company has solid financial position with the substantial cash balance and some $505 million net of debt. With this, we can use developed projects and add to our asset base. We're moving ahead with our plans to build out portfolio and profitable assets as we move forward with the development of our Oksut Project in Turkey. And as Jeff mentioned, we've increased our growth capital budget for 2015 to reflect the $18 million we expect to spend in Oksut this year to move the project forward as quickly as possible. Approval of the EIA for the Oksut Project is on track so that we can apply for the required permits to develop the project with production expected at the second quarter of 2017. At the Greenstone Gold Property, the resource model for the Hardrock Project is currently being updated and we expect to have a new resource estimate complete later this quarter. We'll be continuing our discussion with the Kyrgyz government to resolve all of the outstanding concern relating to the Kumtor Project but as I said many times in the agreement we reached with the government, we'll have to be fair to shareholders. And the last item for 2015, our expected consolidated all-in sustaining costs that's been reduced to a range of $865 to $959 per ounce. So with that, let's open up the call for questions. So, operator, if you would, could you please give the instructions on the process for the question and answer session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Thank you. (Operator Instructions). I apologize. Our first question comes from the line of Botir Sharipov with HSBC. Please proceed with your question. -------------------------------------------------------------------------------- Botir Sharipov, HSBC - Analyst [2] -------------------------------------------------------------------------------- Good morning, Ian and the team. Congratulations on that solid quarter and good results from the Oksut feasibility study. Two questions from me. First, with coverage at the Kumtor, this sale from Q1, was that mainly a result of blending in lower grade stock piles and what should we expect I guess in the second half of the year? -------------------------------------------------------------------------------- Gordon Reid, Centerra Gold - COO [3] -------------------------------------------------------------------------------- Yes. This is Gordon. We did have some difficulties with Kumtor with recoveries. We had a maintenance issue with the pre-aeration tank. We also had an issue hydrocyclones but it has since been repaired. There was also some problematic, well, as you noted, there was some finer grain material, you know, and we are managing our cyanide use getting to be - waiting for the next shipment of cyanide to recover but to - to be received. So all those together caused - resulted in that slightly lower than anticipated recovery but we're back to normal now and we expect to be there until the end of the year. -------------------------------------------------------------------------------- Botir Sharipov, HSBC - Analyst [4] -------------------------------------------------------------------------------- Great. Thank you. Switching to Oksut, what is your level of confidence in obtaining the EIA approval and also other permits to start the development of the areas at Q1 of next year? I guess a little more color on the permitting timeline would be helpful as well. -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [5] -------------------------------------------------------------------------------- The -- Botir, it's Ian. We're, you know, very confident that we will get the EIA approved either later this quarter or the end of the fourth quarter this year. We've been now in the EIA process of 12 months and so far, the process has moved along very smoothly and actually everything has been scheduled for us by the government a little ahead of our plan. So far, you know, we made very good progress. The permitting schedule itself, we - the subsequent permits can only be applied for once you received the formal approval of the EIA. So we expect as I said to have that done later this quarter - later in the third quarter, early in the fourth quarter and then we'll apply for the rest of the mining permits and other permits and we would expect to see those all done early in the new year which will again put us in good position to start construction on the project in February-March as planned. -------------------------------------------------------------------------------- Botir Sharipov, HSBC - Analyst [6] -------------------------------------------------------------------------------- Great. Thank you. And I guess lastly on the Gatsuurt with the Mongolian Parliament rejecting both options, are they now seeking a combination maybe of both the participating state and special royalty on the project? What's the latest I guess on that? -------------------------------------------------------------------------------- Jeff Parr, Centerra Gold - CFO [7] -------------------------------------------------------------------------------- Hi, Botir, it's Jeff. You know, we've been in discussion with the government and as you know they did pass an amendment to the mining law which allows the government to negotiate special purpose royalty in exchange for the 34%. So our understanding after having these discussions fairly recently is that they will go back to parliament and, you know, we've had discussions both on the ownership side and the special purpose royalty side. So the only thing we know for sure is that there are options on the special purpose royalty is such that it's - it gives us the same economics as the ownership. So to be frank, we would anticipate we would probably end up with the special purpose royalty. -------------------------------------------------------------------------------- Botir Sharipov, HSBC - Analyst [8] -------------------------------------------------------------------------------- Great. Thank you so much. Thanks for taking my questions. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions). Our next question comes from the line of Daniel McConvey with Rossport Investments. Please proceed with your question. -------------------------------------------------------------------------------- Daniel McConvey, Rossport Investments - Analyst [10] -------------------------------------------------------------------------------- Hi. Good morning, everyone. That was question on the permitting for Oksut but maybe you can describe a little bit why the permitting is so short. I think we talked about this before. There's no force involved. I mean, I've seen a couple of parties take a lot longer than this to get permitted. So I guess this project has less sensitivities to it given - I believe it's grazing land etcetera. What things helped you in achieving this timeline? -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [11] -------------------------------------------------------------------------------- Dan, well, you've got - part of it right. It is, you know, the profit itself, you know, is up about 2,000 meters and, you know, it's not inhabited. It's primarily pasture land, a grazing land for sheep and goat so it's only get summer use. There actually is some white snow up there in the winter and so it's not [pretty] at all. It's, you know, the nearest communities have three small groceries close by and the one of the key issues is that we've maintained excellent relationships with those communities from, you know, from the early stages of exploration and we have a group on the ground with all of our local and permitting and CSR work is done by group of Turkish nationals that some of them have not worked for three or four years that built up as I say excellent communications and relationships with local villages and regional staff. So that it's been a large one I think to the communication exercise so that when we filed the EIA with the initial public hearings which were held last August, we got a very good attendance, very good input that you could, you know, you could probably guess yourself what the three principal questions were so we were ready to address it. That's how you handle cyanide, where you're going to get your water, and what is it for us, i.e., what's the local procurement, local employment opportunities. And again, we were organized for that and particularly the water aspects, a critical in many parts of the world today. We've been very fortunate that we actually again hired a Turkish consultants and experts. We've been able to actually already purchase and drill two wells so we have the water supply for the projects secured. And we actually did again get the local villages involved in that so they've been aware of where we're going to be drawing the water from and it's been clearly demonstrated that it doesn't have any impact from there, the availability of water for them for their agricultural activities. So the other part I guess again we are in an area that, you know, that has been past mining activity so it's known on the property itself but it is a historical mining district. There's still ongoing lead and zinc mine in the region as well as other commodities. -------------------------------------------------------------------------------- Daniel McConvey, Rossport Investments - Analyst [12] -------------------------------------------------------------------------------- Great. That's helpful, Ian. Thank you very much and congrats for the solid quarter. -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [13] -------------------------------------------------------------------------------- Great. Yes. Thanks, Dan. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Our next question comes from the line of [Alex Spot] with Scotiabank. Please proceed with your question. -------------------------------------------------------------------------------- Alex Spot, Scotiabank - Analyst [15] -------------------------------------------------------------------------------- Hi, guys. Thanks for taking my call today. Just to lay the Oksut feasibility results, can you talk to the priorities of your development projects like Oksut, Gatsuurt, Greenstone? If now the prices stay where they are, do you have one that you would focus on or trim spending at another? -------------------------------------------------------------------------------- Ian Atkinson, Centerra Gold - President, CEO [16] -------------------------------------------------------------------------------- Alex, it's Ian. All right. Sorry. Actually, one of the - my summary comments is actually we do have a strong balance sheet control. So we do have resources to move these three projects forward simultaneously but if just look at the natural schedule and efforts. Oksut we're clearly committed too. I mean, it's a very robust project, fairly quick payback and fairly construction period as well, you know, the all-win costs including pre-development capital, et cetera less than $800 an ounce so it's a solid investment. And so we'll proceed with that. Gatsuurt actually does need a lot of capital to keep it up running. Capital - in fact, we've already sunk what we need for the first two years of production. If you recall, the two years of production from Gatsuurt is all oxide material and we actually, you know, own the mill that we're going to process it in. We own the trucking fleet, we bought that sometime ago. It's been mothballed and initially, we'll be doing contract mining. So there's very little addition with cap already required for Gatsuurt until we look at processing the sulphide. So again that's manageable. And then Hardrock, we're, you know, we're expecting to get the feasibility study complete either late this year or early next year. But the key there, time - the critical point, time past for starting production, then it's the permitting activity. So, we have to complete the permitting and the discussions with the first nation. So, you know, that's - in Ontario, it's likely to take a couple of years so that would push any construction on our book out to 2018. So if you look, you know at the sequence, you know, there are - they come along one after the other. I think the other key element is we do have an opportunity to finance this. We've already been in discussions with a number of financial institutions for project financing of both Oksut and Gatsuurt and we've also had some initial discussions going on with Hardrock. So we do have the ability I think from our balance sheet to our - to other debt funding to move all three forward together fairly quickly and, you know, without having to make that decision. -------------------------------------------------------------------------------- Alex Spot, Scotiabank - Analyst [17] -------------------------------------------------------------------------------- Okay. Great. Thanks. That's all for me. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- (Operator Instruction). Mr. Pearson, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks. -------------------------------------------------------------------------------- John Pearson, Centerra Gold - IR VP [19] -------------------------------------------------------------------------------- Okay. Thank you, Melanie. With that, we will -- if there are any other questions, please get a hold of us here and we want to thank you for joining us on our call today. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.
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