Toronto Jul 30, 2015 (Thomson StreetEvents) -- Edited Transcript of Kinross Gold Corp earnings conference call or presentation Thursday, July 30, 2015 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Tom Elliott Kinross Gold Corporation - VP of IR * Paul Rollinson Kinross Gold Corporation - President & CEO * Tony Giardini Kinross Gold Corporation - EVP & CFO * Warwick Morley-Jepson Kinross Gold Corporation - EVP & COO ================================================================================ Conference Call Participants ================================================================================ * Jorge Beristain Deutsche Bank - Analyst * Stephen Walker RBC Capital Markets - Analyst * David Hawkin CIBC - Analyst * Anita Soni Credit Suisse - Analyst * John Bridges JPMorgan - Analyst * Andrew Quail Goldman Sachs - Analyst * Paretosh Misra Morgan Stanley - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to the Kinross Gold Corporation quarter two 2015 financial results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator instructions). At this time I would like to turn the conference over to Mr. Tom Elliott, Vice President, Investor Relations. Please go ahead, Mr. Elliott. -------------------------------------------------------------------------------- Tom Elliott, Kinross Gold Corporation - VP of IR [2] -------------------------------------------------------------------------------- Thank you and good morning. With us today we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; and Warwick Morley-Jepson, Chief Operating Officer. Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties and assumptions which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to page 2 of this presentation, our news release dated July 29, 2015, the MD&A for the period ended June 30, 2015, and our most recently filed AIF, all of which are available on our website. I will now turn the call over to Paul. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Tom. Thank you, everyone, for joining us today. Kinross is a strong operator with an excellent track record of consistently hitting or exceeding our targets. Q2 marks the 12th consecutive quarter of delivering on those targets. As of the first half of the year, we are tracking at the high end of our production guidance and below our forecast for all-in sustaining costs and production cost of sales. This is particularly notable given the heavy rains in late March which led to the 9-week suspension of operations at Maricunga, impacting both production and costs at the site. One of Kinross' strengths in addition to its skill as an operator is the diversity of its asset base. While unavoidable events temporarily affected one site, we saw strong showings at a number of other operations in Q2. Fort Knox production was up significantly year over year while costs declined as a result of an increase in ounces processed from the heap leach, higher grades and lower energy costs. Round Mountain had the best production and cost performance in almost three years, partly as a result of the new continuous improvement initiative to enhance heap leach performance, which Warwick will speak to in greater detail later on our call. And lastly, in Russia the combined Kupol-Dvoinoye operations continued to outperform. As noted in the news release, the region's already very low production cost of sales of $490 an ounce would have benefited even further if not for the timing of gold sales. The timing of Kupol gold sales, the additional costs incurred as a result of the heavy rains in Northern Chile and, above all, the continuing decline in the price of gold impacted earnings this quarter. The average realized gold price declined by about $100 an ounce year over year to just under $1,200 in Q2. What I want to underscore, however, is that Kinross still generated free cash flow in Q2, as well as in the previous quarter. In fact, we ended Q2 with more than $1 billion in cash on our balance sheet and, as a result, we have one of the strongest balance sheets among our peers. We have been able to achieve this because of the very disciplined approach we first undertook three years ago with the Kinross Way Forward to maximizing margins, managing costs and deploying capital. As a result, Kinross is well positioned to weather the current volatility we are seeing in the gold price. The idea that gold producers have little room to maneuver in the current environment is not accurate in our case. We not only continue to benefit from foreign exchange and lower oil prices, but we remain keenly focused on driving down costs. For example, our supply chain team has leveraged current market conditions to drive down costs for key inputs, such as grinding media, tires and reagents. We've also undertaken a sustained company-wide campaign to reduce working capital which has reduced inventory supplies by $37 million in the last year. We also have a number of other levers at our disposal for containing costs, particularly regarding non-operating discretionary spending. Over the course of the past three years we have made significant reductions in this regard and we have the flexibility to further reduce spending in the future. Maintaining liquidity and preserving our balance sheet strength has been a key differentiator for us as a company and will continue to be a priority for us going forward. I'd like to now turn to Tasiast and talk about some opportunities we are advancing for reducing costs and improving margins. As you know, in Q1 we decided to defer the 38,000 ton-per-day mill expansion to preserve balance sheet strength and our decision has proven to be a prudent one. Since then, we have been focused on measures to enhance performance. In addition to a number of continuous improvement initiatives, we are exploring opportunities to optimize mill throughput to address the hardness of the higher-grade ore. One concept which is currently being analyzed involves enhancing the comminution circuit with the installation of additional grinding equipment to improve throughput capacity. In addition to these operational improvements, we are also assessing other options for getting costs down. For example, we have initiated discussions with employee representatives regarding possible cost-saving measures, including a potential workforce reduction. This is the beginning of a process under Mauritanian labor law and we will provide an update when we have further news to share. As I have said many times in the past, Tasiast remains an attractive growth opportunity with significant ounces in the ground. However, our objectives in the near term are clear. We need to reduce cost to make it a sustainable operation and we need to optimize production capacity while preserving future growth potential. Tasiast's future potential is in addition to a number of promising organic production initiatives that Kinross currently has in the pipeline. These include the Paracatu tailings reprocessing project, which is on track to begin production in Q4, the Chirano mine life extension, and the potential restart of La Coipa. These initiatives have a number of common elements. They are all quality brownfield projects, they leverage existing infrastructure and they involve relatively low execution risk. These initiatives are part of Kinross' overall strategy which has focused on building a sustainable business that creates value for shareholders within the context of the gold price environment. We believe that we have the fundamentals in place for creating that value; a strong balance sheet, a focus on operational excellence and a number of organic production opportunities. Those fundamentals underpinned our Q2 results, which marked another strong quarter for Kinross and has us firmly on track to meet our guidance targets for the year. I'll now turn the call over to Tony for a review of our financial results. -------------------------------------------------------------------------------- Tony Giardini, Kinross Gold Corporation - EVP & CFO [4] -------------------------------------------------------------------------------- Thank you, Paul. We continued to strengthen our financial position, despite the challenge of lower gold prices, adding approximately $20 million of cash to our balance sheet in the second quarter. Our results continued to benefit from favorable foreign exchange rates and oil prices. Taken together, foreign exchange and lower oil prices resulted in an estimated benefit of approximately $35 to $40 per ounce to our cost of sales. Year to date we've added approximately $45 million of cash to the balance sheet while also repaying $30 million of debt. This has increased our cash to approximately $1.1 billion and reduced our net debt to $960 million. In July we increased our financial flexibility by extending the maturity date of the $500 million term loan and the $1.5 billion revolving credit facility by one year to 2019 and 2020, respectively. As a result, our only significant debt maturity prior to 2019 is the $250 million of senior notes due in 2016. As part of this extension, there was an amendment to the terms of our debt covenant relating to the definition of debt in our net debt to EBITDA ratio. If we were to take this amendment into account, our net debt to EBITDA ratio as at June 30th, as defined in the credit agreement, would decline by 24 basis points to 1.02 to 1. This is well within our net debt covenant of 3.5 to 1. Overall, as a result of our continued focus on generating cash flow, reducing costs and optimizing our debt portfolio, we are in a solid financial position. Turning now to the financial results. While we continue to deliver on the operational targets, we reported a net loss for the second quarter of $83 million. This is related to three factors. First, our average realized gold price during Q2 was $1,194 per ounce, $91 lower than in Q2 2014. Second, approximately 30,000 ounces were produced but not sold in our Russia region during the quarter due to the timing of transportation in the remote region. These ounces were sold in July and we expect to see the benefit in Q3. And third, there was approximately $40 million of cost associated with the extreme weather event in Chile, including $15 million of other operating costs associated with unusual activity levels and a $25 million inventory writedown. The writedown reflects higher energy costs associated with the use of backup generators and the expected delay in the recovery of ounces from a heap leach over the coming months as a result of fewer ounces placed on the (inaudible). We're in the process of looking at how much of this amount can be recovered through insurance. Overall, we added to our strong financial position in the second quarter and during the first half of the year. Our focus on maintaining the strength of our balance sheet and our financial flexibility will continue to be priorities, particularly given the current low gold price environment. I'll now turn the call over to Warwick. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [5] -------------------------------------------------------------------------------- Thank you, Tony. I'm pleased to share with you the highlights of another quarter of strong operating results, the good production and cost performance during the first half of the year. All three of our operating regions are on track to meet or exceed their regional guidance targets. Our Americas region performed well in the second quarter, producing 352,000 gold equivalent ounces at a cost of sales of $785 per ounce. Fort Knox had a good quarter. Production increased due to higher mill grades and the benefit of warmer weather to the performance of the heap leach. Cost of sales declined to $606 per ounce, mainly due to higher grades and favorable energy prices. The mill at Round Mountain continued very well since its recommissioning during the first quarter. This, along with the higher grades and improved recoveries, has contributed to the increase in production and lower costs compared to the first quarter. As Paul mentioned, we are also realizing the benefits of a continuous improvement initiative at Round Mountain that we initiated in quarter four last year. We identified an opportunity to bring forward a number of ounces at relatively low cost through various improvements to the heap leach, such as the optimizing of flow of loaded solution to the carbon columns, tight slope leaching and other leaching operational improvements, and the building of new heap leach phases to place new ore close to the [liner] in order to recover gold faster. Turning to Paracatu, harder ore processed, reduced throughputs and lower recovers resulted in lower production compared with the first quarter. This largely impacted production during April and May. We have rectified the issue and saw performance in June return according to plan. Although the operation benefited from favorable foreign exchange rates and lower power costs, cost of sales increased compared with the first quarter due to the lower production. While Brazil has been experiencing a length drought, Paracatu did not experience any power rationing during the second quarter and we do not currently expect any power restrictions for the remainder of the year. We recommenced mining and crushing operations at Maricunga in May following the temporary suspension resulting from heavy rains which occurred in late March. We started to see the impact of the nine-week suspension in the second quarter with lower production and higher costs compared to the first quarter of the year. Due to the lack of ore stacked on the heap leach during suspension, we expect the impact to continue during the third quarter with production expected to improve during quarter four. Overall, despite the production challenges resulting from an extreme weather event at Maricunga and the processing issues at Paracatu, the Americas region is on track to meet its production and cost of sales guidance for the year. Our Russia region continues to deliver excellent performance and is expected to be at the high end of its production guidance and at the lower end of its cost of sales guidance for the year. Earlier this year we began to increase the proportion of higher-grade Dvoinoye material going through the mill. We now process the equivalent of approximately 1,200 tonnes of Dvoinoye ore per day, which represent approximately 25% of total throughput, thereby increasing the overall grade to the plant. As a result, production this quarter was slightly higher than quarter one. With the combined Kupol-Dvoinoye operation producing 191,000 ounces at a cost of sales of $490 per ounce. Our West Africa region produced 117,000 ounces at a production cost of sales of $855 per ounce. Production at Tasiast increased compared to the first quarter as a result of higher ore grades and low recoveries. Comparing to same quarter last year, in addition to reduced ounce production, higher maintenance and supply costs resulted in an increase to cost of sales. With Chirano, the operation continues to perform well, the production in line with the first quarter of this year. Cost of sales increased year on year due to higher underground mobile equipment maintenance costs and higher diesel consumption. The West Africa region is on track to be at the high end of its production and lower end of its cost of sales guidance for the year. So to wrap up on operating performance, our operations have delivered a solid first quarter of the year -- first half of the year, excuse me, and we'll remain focused on continuing to deliver on our commitments for the remainder of 2015. We will continue to focus on managing our costs and exercising capital discipline, particularly in this challenging gold price environment. I now turn the call back over to Paul. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [6] -------------------------------------------------------------------------------- Thanks, Warwick. So as you heard from both Tony and Warwick, this has been another solid quarter for Kinross. We continue to deliver on our operational targets and we continue to strengthen our peer-leading balance sheet. Operational skill and financial strength are the keys to running a sustainable business over the longer term, particularly with the volatility we are seeing in the gold price. I am proud to say that at Kinross we possess both of these attributes. As I said at the beginning of the call, Kinross is well positioned to weather the current environment. We have a well-established strategy that is focused on increasing margins and reducing costs, we have the financial flexibility to adapt to changing market conditions, and we have a track record of doing what we say we're going to do. We will continue to closely watch the gold price and are committed to managing the business in a sustainable and disciplined way. With that, operator, I'll now open up the line for questions, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator instructions). Jorge Beristain, Deutsche Bank. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [2] -------------------------------------------------------------------------------- Hi. Good morning, guys. I guess my question is just maybe starting with the operating costs. The guidance was increased from $70 million to $120 million for 2015. Could you break down what the main drivers there were and what you're sort of expecting for 2016? If you could give us at least some direction there? -------------------------------------------------------------------------------- Tony Giardini, Kinross Gold Corporation - EVP & CFO [3] -------------------------------------------------------------------------------- Sure, Jorge. Tony Giardini. Actually, the guidance was increased from $50 million to $120 million, so that's a $70 million change and it breaks down basically into three buckets, the first bucket being legal items which resulted around the number of different small items which aggregated together to be about $25 million. Tax-related provisions, most of them which are non-cash provisions, but nonetheless they totaled in the neighborhood of $30 million. And then the balance was related -- $15 million was related to a Maricunga weather event costs which we broke out as part of the discussion. And as we pointed out, that's in addition to the $25 million inventory provision that we took as a result of higher operating costs due to the weather event. And then, there's a miscellaneous total of $5 million. We've adjusted some of those costs through the adjusted earnings and broken that out specifically. And our expectation is, going forward, we would expect to see these other costs be back in that sort of $40 million to $50 million on a go-forward basis. But as we said, it's something that just a number of events came up over the second quarter and also, looking forward, anticipating where we expect things to be. Some of those costs are effectively accruals that may or may not materialize during the second half of the year, but we wanted to be prudent in updating the guidance. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [4] -------------------------------------------------------------------------------- Perfect. On Tasiast, could you give us any kind of a ballpark as to what the CapEx could be associated with the new grinding equipment and any kind of timeline there? -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [5] -------------------------------------------------------------------------------- Jorge, it's Warwick here. I could answer that question. I think what we're demonstrating as [a thought] to this is that we're not sitting on our hands as a result of our decision that was made earlier this year. And we've really focused on two areas, one of increasing our throughput production and the other one being a means at which we can reduce our costs of the operation. More specifically to your question, the studies that are currently underway, and in fact have just started, is really to focus on putting in more comminution power into the current plant. It is a process that is just underway, it just started, and I would be very happy to answer the question that you just posed later on in this year when we've got a very clear understanding of which option we would like to pursue and to what extent we can improve the throughput of that plant. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [6] -------------------------------------------------------------------------------- Okay, got it. And if I could just squeeze in one more, do you guys have any sensitivity of your reserves to say switching to an $1,100 gold price? Newmont, for example, earlier had put out a pretty useful graph showing a range of gold prices and their reserve sensitivity. Do you guys have a kind of back of the envelop if you were to kind of mark-to-market at $1,100 what the impact of reserves would be? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [7] -------------------------------------------------------------------------------- No, we're not there yet, Jorge. I mean we do have pretty good understandings of our assets and what levers we can pull. We've seen this $1,100 gold price for two weeks now. As we approach year end, if this gold price persists we'll be thinking about that as we go into our year-end reserve resource planning. I will remind you, though, that we are one of the fewer companies that do fully load our reserves, fully load costing, which is akin to like an all-in sustaining cost when we do those reserves. But, we're not there yet. We'll continue to monitor the gold price and we'll look as we approach the back of the year as to what'll happen. Of course, there's not only gold price. As well, there's FX, there's oil, there's a bunch of things that are going to go into that sort of matrix as we decide where the reserves are going to be. -------------------------------------------------------------------------------- Jorge Beristain, Deutsche Bank - Analyst [8] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [9] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Stephen Walker, RBC Capital Markets. -------------------------------------------------------------------------------- Stephen Walker, RBC Capital Markets - Analyst [11] -------------------------------------------------------------------------------- Great, thank you. Good morning. And just, Paul, wanted to follow-up with a question as far as how you can manage costs lower in the current gold price environment. As you point out, obviously it's only been a couple weeks we're at this gold price level. When you're looking at the all-in sustaining costs at $250 to $260 an ounce, if gold were $100 lower on average, $1,100 or even down to $1,000, can you talk a little bit about how much of the costs, or how much you can take out of the cost structure to maintain a cash margin. You've been able to maintain a cash margin as gold prices are going down here, but what levers can be moved here on an operating perspective or an overheard perspective to take another $100 an ounce out of the all-in sustaining costs or reduce the overall operating costs? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [12] -------------------------------------------------------------------------------- Sure. And look, I do -- I think all-in sustaining is a good evolution of transparency. It is directional, though, and we are focused on free cash flow. And I think it starts with -- it's really an across-the-board review of what we can do. I think the most recent example of the kind of thing we can do is Maricunga, where from the back end of 2013 we drove the costs down by $200 an ounce. As you know, we've had record years at Paracatu, Fort Knox, and we've done a great job with our continuous improvement of continuing to get those costs down. But, the other bucket is really in the discretionary spend where we can drive free cash flow and there's a number of broad areas there in discretionary spend. One would be capital. And I'll point out that our capital guidance for the year was $725 million. And again, I'd just remind, if we go back a few years that was over $2 billion and we decisively managed it down. The capital guidance this year was $725 million. But I've said repeatedly a good assumption for our run rate sustaining capital would be something in the neighborhood of $400 million. Now, having said that, it is $500 million this year and we did make that point. It's up this year for the layback work we're doing at Maricunga and Fort Knox, but a normal run rate for us would be about $400 million. So, that gives you a sense of what's discretionary on top of sustaining. We have an expiration budget of $100 million and of course there's overhead. And we have made reductions in all three of those areas over the past few years and we still have levers that we can address if we need to on a go-forward basis in terms of driving free cash flow. -------------------------------------------------------------------------------- Stephen Walker, RBC Capital Markets - Analyst [13] -------------------------------------------------------------------------------- Great. Thank you for that, Paul. Maybe, Warwick, if -- just to follow up on Paracatu here, the comment that mining shifted to other areas of the pit when you encountered metallurgical characteristics of the ore that were unfavorable, is this -- is it just a small part of the pit that -- or the ore body that had sort of a surprise in the metallurgy? Is it something that can be removed as waste or stockpiled? Is it potentially a greater part of the geological component of that material that could result in higher striping or impacts to cost or potentially reserves? I'm just curious what kind of a potential impact there could be from the change in geology metallurgy. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [14] -------------------------------------------------------------------------------- Thanks, Stephen. Maybe I could share a bit of a good story here for you in so far as our understanding the material that we did refine. Really, the problem at the very outset was the extent on which we had these very significant quartzite lenses within a portion of the ore body. What we have done since is understood through a improved approach to metallurgical testing of our short-term drill holes to understand the extent on which that lensing is apparent in that specific area of the pit. Now, what we are doing going forward, first of all, it's not -- we're not talking about a significant area of the pit, but we are also introducing input crushing to support our stemming requirements going forward in the mining process. A stemming supply in the past has come from way outside of the mining operations at a higher cost. And we see ourselves being able to crush that material and actually use it in the mining process; hence, by both addressing the issue that came about during the quarter, as well as improving cost in our mining process going forward. -------------------------------------------------------------------------------- Stephen Walker, RBC Capital Markets - Analyst [15] -------------------------------------------------------------------------------- Okay. Thank you very much for that, Warwick. And thank you, Paul. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [16] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- [David Hawkin], CIBC. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [18] -------------------------------------------------------------------------------- Good morning, Paul, Warwick and Tony. If I could, Warwick, just follow up on the Paracatu commentary. You're looking at doing a tails reprocessing and putting the material through plant one. My recollection was that plant one was about 18 million tonnes per annum capacity. But, if it's a tails retreatment, do you really need to have the front end grinding on it, or are you just utilizing the backend of the plant? -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [19] -------------------------------------------------------------------------------- Thanks, David. If we go back to our blending process, of which we are now putting both B1 and B2 ores through both plant one and plant two, in that process we did reduce the demand placed on plant one and so, to some extent, feed capacity in the plant. However we still have a grinding process that needs to follow as a result of the incoming ores from B1 and B2. What we freed up is our flotation process downstream of comminution and it's the component of the plant that we will be putting to greater use as a result of this reprocessing of the San Antonio tails. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [20] -------------------------------------------------------------------------------- Okay. And for those tails would you be just using hydro mining or how would you present that material to the mill? -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [21] -------------------------------------------------------------------------------- Well, that's exactly what we're doing, David. Hydro mining, as you appreciate, is something that is being used across many mining districts. It's something that we are comfortable in putting to use at Paracatu and we will see the commissioning of that towards the latter end of Q3 and the beginning of Q4. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [22] -------------------------------------------------------------------------------- And just to give us a bit of an insight here, what kind of tonnage and grade and recoveries are you expecting to get to your guidance of output of 34,000 tonnes per annum? 34,000 ounces, sorry. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [23] -------------------------------------------------------------------------------- Yes, David, we did make an announcement with those levels of details in our Q1 report, but just to reflect that we have an average grade of 0.2 grams across the entire tailings reprocessing plant of this life of mine of some nine years and we will be processing it in an order of about $400 an ounce, producing at about $400 an ounce. Giving (inaudible)--. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [24] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [25] -------------------------------------------------------------------------------- Per year and we would expect some 11,000 this year. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [26] -------------------------------------------------------------------------------- Alright. Just touching briefly on Tasiast, with the additional grinding would that be utilizing any of the gear you've already acquired in advance of the green light for the expansion? -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [27] -------------------------------------------------------------------------------- That's a very good question and exactly the point that we are faced with right now in terms of the options and evaluations. As you know, we have a SAG mill which was bought for the (inaudible). We also have a mill purchased for the same purpose. We're not wanting to install those units if they are going to prove to be inefficient, but it's certainly part of the evaluation process. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [28] -------------------------------------------------------------------------------- So relatively speaking, it could have a low CapEx item because you'd really only be looking in the best situation of installation cost rather than equipment cost as well. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [29] -------------------------------------------------------------------------------- Yes. I don't want to suggest that it's a dead certainty that we would use that equipment. It's still very much a work in progress. We need to really get to appreciate the dynamics and profitability of those pieces of equipment and the significantly less throughput. But yes, if we can use them, the restriction would be to installation costs alone, yes. -------------------------------------------------------------------------------- David Hawkin, CIBC - Analyst [30] -------------------------------------------------------------------------------- Excellent. Thank you. Bye for now. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- (Operator instructions). Anita Soni, Credit Suisse. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [32] -------------------------------------------------------------------------------- Hi. Good morning, gentlemen, and thanks for taking my call. My question is just in regards to the budget at Tasiast for the remainder of the year. Could you give us an idea of what you think you're going to be spending there? -------------------------------------------------------------------------------- Tony Giardini, Kinross Gold Corporation - EVP & CFO [33] -------------------------------------------------------------------------------- Sure, Anita. At this point, the biggest component that we're really looking at is the capital spend and it's the remainder of growth capital that we had allocated associated with Tasiast was -- ties back to the stripping. And as Paul indicated when asked a question about expenditures and how we're looking at discretionary factors, the focus that we really have right now is maintaining financial flexibility and liquidity. And so we're going to be revisiting some of the expenditures that we have allocated to growth capital Tasiast that would likely include some of the capitalized stripping that we're looking at. So, it's something that we're in the process of assessing overall. The cumulative budget was about I believe $60 million. $60 million is what remaining. The aggregate spending that we had was $155 million for stripping and budget ramp up. So, those will be the breakdowns that we'll be looking at. But the key point is that we've been cash flow positive for the first half of the year. We're going to look at all of the levers that we can pull to continue to remain cash flow positive. That's not -- it's going to be a challenge given the volatility in the gold price, but we're very focused on maintaining the strong balance sheet that we have right now and that's how we're looking at things from a budget and spend perspective going into the second half. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [34] -------------------------------------------------------------------------------- Great. And then just in terms of the commentary that you guys made with regards to having discussion with the Mauritanian government on reducing the workforce there, could you just talk about why that would be necessary? I mean isn't it -- could you not just reduce workforce without consulting the government? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [35] -------------------------------------------------------------------------------- Well, to be precise, it's really more the employee representatives and it's required as part of the Mauritanian labor law. So, it is a process and that process has started. And that's really all I can say at this point until that discussion comes to an end. We're just following the labor law. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [36] -------------------------------------------------------------------------------- Alright. Thank you very much. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [37] -------------------------------------------------------------------------------- I think maybe just in addition to that, bringing that kind of news to the attention of the authorities is not uncommon in Africa and so we're just doing the prudent thing. -------------------------------------------------------------------------------- Anita Soni, Credit Suisse - Analyst [38] -------------------------------------------------------------------------------- Alright, thank you. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- John Bridges, JPMorgan. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [40] -------------------------------------------------------------------------------- Good morning, everybody. Just following on from David's question, you've got a lot of equipment already, I guess, ahead of the planned plant at Tasiast. Just wondered what sort of cash value that might have and might that be helpful in balancing the books in the next quarter or two in asset sales if you don't phase it into the plant. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [41] -------------------------------------------------------------------------------- Well, John, just to -- going back in time, there were a number of purchases that we did make. They were really long-lead items for the 60K scenario. And we've had those on our books, obviously, with the intent of using as much as we can when we did the assessment of the 38K. We've had -- we've been able to make sales of some of the equipment, only because we were very confident that we did not need it in any further expansion going forward. And I'll be more specific to generating units, which we sold during the course of last year. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [42] -------------------------------------------------------------------------------- But I think the more -- it's a good question, but the 38 remains a viable option. And we're not there yet where we're actually contemplating getting rid of that equipment. We've had the volatility on the gold price. The 38 I think was a -- not to proceed was a prudent decision given where we've ended up in the gold price. In the meantime, as Warwick's indicated, we're not sitting on our hands. We're looking at what we can do working around the existing mill, but we're not at the point yet where we're ready to start selling equipment. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [43] -------------------------------------------------------------------------------- Yes, I understand it's a difficult question, but what sort of quantum would that represent should things get more difficult? -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [44] -------------------------------------------------------------------------------- Well, John, just in round figures, we did purchase a number of trucks, 13 in fact, and we also have three mills, one being SAG and two ball. So, the estimated value is in the order of $65 million to $80 million, thereabouts. -------------------------------------------------------------------------------- John Bridges, JPMorgan - Analyst [45] -------------------------------------------------------------------------------- Okay. Hopefully it doesn't come to that, but thanks for the information. Good luck, guys. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [46] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [48] -------------------------------------------------------------------------------- Good morning, guys. Thanks for taking my question and congrats on another strong operational quarter. Just wondering on Tasiast. You guys are looking at all options. Is there a scenario, Paul, where you see that you might not own 100% if you do undergo the expansion to 38,000 tonnes a day? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [49] -------------------------------------------------------------------------------- Yes, theoretically that's a possibility. I think Tasiast has gotten some scarcity value in the world right now. There aren't very many brownfield opportunities where you can create what I think is a world class production and cost profile with really just building a new mill. So, we've definitely had unsolicited expressions of joint venture interest, but -- and so, yes, that could be a possibility. It's -- we're not there. We're -- it's a tough environment, I think, to maybe get what might be perceived as fair or good value. As we said, in the meantime we're looking at all options, but that theoretically, I suppose, is a possibility. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [50] -------------------------------------------------------------------------------- The second question is on exploration and what you guys are -- a bit -- that $100 million. Do you guys need to -- I mean how much would you be spending in Russia? And you guys -- obviously, there's significant upside around Kupol and Dvoinoye, but how much do you -- what's the upside there and how much is being allocated to Russia of that $100 million? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [51] -------------------------------------------------------------------------------- Yes. Let me just start off and then I'll hand over to Warwick. But I would say, first and foremost, of the $100 million or so -- it's actually $95 million, but 95% of that is brownfields and goes to increasing reserves and resources at existing sites. Russia, we believe, is very prospective. You've seen the results we've had with [Miroshka] and the parallel vein structure. And we continue to have good, interesting mine regional results there. Russia's about 17% of the total budget and we're spending about $50 million a year. And I think that's about where we're comfortable as to what we can spend in a year given the climate and the field season in that part of the world. -------------------------------------------------------------------------------- Warwick Morley-Jepson, Kinross Gold Corporation - EVP & COO [52] -------------------------------------------------------------------------------- Yes, I'll just maybe to add to that. Paul did make mention of the fact that we have very, very prospective ground. We have a lot of ground that is around our existing operations and we get a lot of support in getting further ground from the government as and when we make applications. So, it's a good place to operate, as you've seen in our figures. -------------------------------------------------------------------------------- Andrew Quail, Goldman Sachs - Analyst [53] -------------------------------------------------------------------------------- Thanks, guys -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [54] -------------------------------------------------------------------------------- Thanks. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- Paretosh Misra, Morgan Stanley. -------------------------------------------------------------------------------- Paretosh Misra, Morgan Stanley - Analyst [56] -------------------------------------------------------------------------------- Thank you. Good morning. It seems like there might be some incremental benefits to your operating costs next year due to current low energy prices and strong dollar because you didn't realize them this year due to hedging or timing of purchase. Can you talk about that a little bit, please? -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [57] -------------------------------------------------------------------------------- Maybe I'll lead off and let Tony get into a bit more detail. I mean, just hedging in general, our philosophy over the last couple of years has been to pull back on duration and really keep the hedging timeline tighter rather than longer, and also to reduce in total the quantum. And again, we're only looking at selective hedging on the cost side. And so in a number of places in the world we've actually had the hedges running off. But maybe, Tony, just to give a couple specifics. -------------------------------------------------------------------------------- Tony Giardini, Kinross Gold Corporation - EVP & CFO [58] -------------------------------------------------------------------------------- Sure. Thanks, Paul. Yes, I think Paul's pretty much summed up where we're going. What we've actually done is we've really been pulling back the duration and we've been doing that for well over a year. So, we've continued to benefit from the low energy prices in the current environment, although we did have some hedges in place that were at levels higher than current prices. But for the remainder of the year, were roughly about 66% hedged for 2015. Going into 2016 there are no fuel hedges whatsoever. Now, I would preface that to add that we do have a number of operations where we actually acquire fuel as a long lead time item. So Russia is one of those jurisdictions and we're in the process of looking at completing our procurement process for fuel in Russia, but we do expect to have reasonable savings as a result of just the market conditions. Secondly, on the currency side, as Paul indicated, where we have hedges currently it's really across the ruble, the Brazilian real and Canadian dollar and Chilean Peso. The cumulative mark-to-market on those positions at the end of the second quarter was around $35 million. We're very lightly hedged for 2016 at levels considerably -- or at or considerably above where we're at. So, we're slowly looking at possibly adding additional hedges on the currency side but, even if we do that, we'll keep those at a maximum to 50% on a rolling 12-month basis. So, I think heading into 2016 we'll be in good shape in terms of currency and how we look at that. And our expectation is that we'll get far more of the benefit of the ruble particularly, and to some extent the [British] real. And just to sort of close off the comment, year to date we've benefited about $32 an ounce on currency moves and oil moves of about $4 an ounce and that's inclusive of the hedge positions that we have in place. So, currencies definitely do make a big difference to the cost structure and that's going to be a key consideration as we look at the strategies that we're looking to implement to maintain the financial flexibility and strong balance sheet that we have. -------------------------------------------------------------------------------- Paretosh Misra, Morgan Stanley - Analyst [59] -------------------------------------------------------------------------------- Great. Thank you very much. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- There are no more questions at this time. -------------------------------------------------------------------------------- Paul Rollinson, Kinross Gold Corporation - President & CEO [61] -------------------------------------------------------------------------------- Okay. Well, thank you, everyone. Thank you, operator, and thanks everyone for dialing in. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day. 1
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