Centerra Gold Inc (CGAU) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Centerra Gold second quarter conference call. I would now like to turn the meeting over to Mr. Bob Lillie, Director of Investor Relations of Centerra Gold.

Please go ahead, Mr. Lillie.

Good afternoon, everyone. Welcome to Centerra Gold's first quarterly conference call.

My name is Bob Lillie and I'm Director of Centerra's Investor Relations.

We're pleased that with us on the call today are Len Homeniuk, President and CEO; David Petroff, Executive Vice President and CFO; George Burns, Chief Operating Officer; Rob Chapman, Vice President, Exploration; and Shawn Exner (ph), Manager of Financial Planning at Cameco.

David will begin with a review of Centerra's financial performance. And Len will follow with an overview of the highlights of the quarter and an update on exploration activity. Then we'll open the phones to questions.

Today's conference call is open to all members of the investment community, although the media are in listen-only mode. We've set aside 1 hour for the call.

Before we begin, it's important to caution you that certain statements made on this conference call may be forward-looking statements and as such are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied.

For a more detailed discussion of the important risk factors associated with Centerra's business and industry, please refer to our Securities filings on CDAR.com, and more specifically to our prospectus dated June 22, 2004 on pages 126 to 132.

With that, I'll turn things over to David.

Thank you, Bob.

Well Centerra is pleased to host its first quarterly conference call for investors. Our report for the second quarter of 2004 illustrates the significant increases in production due to the startup at the Boroo gold mine in Mongolia and the excellent continued performance of the Kumtor gold mine in the Kyrgyz Republic.

But before I talk specifics, the context needs to be explained.

First, Centerra reports in U.S. dollars so all financial results discussed on the call here today are in U.S. dollars unless specifically stated otherwise.

And second, the year to date results in all material respects reflect a 33% interest in the Kumtor mine and a 53% in the Boroo mine.

On June 22 this year, Centerra did increase its ownership to 100% of Kumtor. And subsequently purchased the minority shareholdings in AGR, which resulted in a 95% ownership of Boroo. So going forward we will have reports that reflect 100% of Kumtor and 95% of Boroo, but this is not the case today, not the case for the first 6 months of the year.

In addition to our 2 operating mines, Boroo and Kumtor, Centerra holds exploration properties, which includes 100% in the Gatsuurt property in Mongolia and a 62% interest in the REN property in Nevada.

There's a table on page 1 of the MDNA release, which you may find helpful which summarizes the ownership of Centerra's assets at different periods of time.

So now, having set the context, let's get on with the results.

Looking at the second quarter results for 2004, reported revenue rose to $46.9 million from $13.9 million in the same period a year ago. Net earnings were $4.1 million or $0.10 per share compared to a loss of $1.7 million or $0.05 per share in Q2 2003.

In the year ago quarter, that's in 2003, Kumtor was unable to access sections of the pit containing higher-grade ore as a consequence of the July 2002 high wall ground movement. This access was re-established in mid 2003 resulting in higher-grade ore being mined during the second quarter of this year compared to the year before.

And in addition to this improvement in Kumtor, the second quarter results include a full quarter of production from Boroo, which a year earlier was still under development.

Now before I turn the floor over to Len Homeniuk, I would like to follow up briefly on 2 factors that we emphasized during the road show for our initial public offering.

The first is our hedge book. It was reduced during the second quarter from 200,000 ounces to 155,000 ounces. So that's a reduction of 45,000 ounces in the 3-month period.

Since the end of the second quarter, our hedge book has been further reduced by 125,000 ounces. So as of July 28, 2 days ago, it stood at only 30,000 ounces.

And all of these numbers in the hedge book relate to production at Boroo, because I'm sure most of you know there is no remaining hedge position at Kumtor.

And importantly, I should say, our current policy is not to hedge forward production and we will continue to reduce the existing hedge positions as opportunities arise. And this will enable us to be more leveraged to the gold price.

The second point is that I would like to highlight Centerra's strong financial position, which will provide a solid base for our business and growth strategy.

At the end of the second quarter, we had cash on hand of $85 million. And this position was further augmented this week when the underwriters exercised the overallotment option granted to them. This involved the sale from Centerra treasury of a further 1.875 million shares at a cost of CAD 15.50 per share and provided proceeds to Centerra of approximately CAD 27 million.

Centerra's strong financial position is also underpinned with a zero long-term debt and the capacity to generate good cash flow from our 2 low cost producing mines.

So with that, I'll pass things to Len. Len?

Thanks, David.

In the next few minutes I'll briefly highlight for you our corporate strategy as Centerra begins its life as a pure play gold company. I'll touch upon our production results and exploration activity in the second quarter before opening up the lines to questions.

Our strong debt pre-balance sheet and solid cash flow in earnings will help us accomplish our objective of becoming an excellent gold company and a senior producer by developing our reserve base and increasing our production capabilities.

To achieve this goal, our plan has 4 components. To develop organically new reserves at our existing mines from in -ath, adjacent, and regional exploration; to further expand the resource area on our REN joint venture project in Nevada; to pursue new gold properties through exploration programs focused on Central Asia, the former Soviet Union, and other emerging markets; and to pursue selective acquisitions with a focus on early to advanced stage exploration and development properties in Central Asia, former Soviet Union, and other emerging markets.

Work has begun in each of these activities. During the quarter, Centerra continued to implement its expanded exploration program in and around Kumtor and Boroo and REN and will begin at Gatsuurt in early July.

At Kumtor, we are testing products beneath the current ultimate pit, along strike extensions to the deposit, and other advance targets in the vicinity of the pit. The main mineralized horizon was successfully extended along strike and down dip.

In the Southwest and Southwest Extension zones, work continued on the new resource estimates and drilling extended the main target horizon, down dip, where it remained open.

In Mongolia, we continued work on Centerra's exploration program at Boroo, Gatsuurt, and into Ulaan Bulag area.

At Boroo, drilling tested for additional mineralization between pits 2 and 3 and pits 3 and 5 and in-filled drilling was undertaken at the north end of pit 5. The results from the between-pit drilling are encouraging and the pit 5 in-field drilling confirmed the resource model. A new resource estimate is in progress.

At Gatsuurt, the drilling program began in July and is focusing on delineating the oxide resources there and completing the deep drilling beneath the existing drill pattern to confirm that the mineralization continues to depth.

Finally, at the REN property in Nevada, the phase 1 exploration program is on track to be substantially completed by the end of July. And pending the approval of the partners, phase 2 drilling is expected to begin shortly.

We had expected to complete a resource estimate at REN as part of the phase 1 program. However, our step out drilling program, which was expected to delimit the mineralization in fact, has extended it. As a result, further step out and in-field drilling is required before a meaningful resource estimate can be made.

By the end of the year, we expect to have new resource estimates for REN, Kumtor, and Boroo.

Now looking at mine production, the second quarter was very good for both our mines. Kumtor production benefited from very good grades. Production totaled almost 179,000 ounces during the quarter at a total cash cost of $177 an ounce as the average grade increased to 4.71 grams per ton from the 3.25 grams a year ago.

The average real life price at Kumtor was $350 an ounce compared to $312 an ounce in Q2 '03 as Kumtor has eliminated its hedge position, improving its exposure to high gold prices.

At Boroo, production drilling the quarter of 63,000 319,000 ounces was higher due to greater than anticipated grades of 3.96 grams per ton. The total cash costs were $135 an ounce with an average realized price of $372 an ounce.

Needless to say, the startup of Boroo has gone very well.

Turning to the outlook for the third quarter, production at Kumtor is expected to decline to about 156,000 ounces due to a lower average grade of mill feed. That will contribute to a higher total cash cost of about $215 an ounce.

At Boroo, production is expected to continue at about 60,000 ounces for the quarter with a cash cost in line with our annual projection of about $150 an ounce.

Finally, I would like to congratulate our employees at both our operations on the fine safety and environmental milestone achievements in the second quarter. Kumtor has now operated for over 2 million man-hours and Boroo for over 500,000 man-hours without a lost time accident.

Now operator, we should open the line to questions.

Thank you. We will now take questions from the telephone lines.

(Operator Instructions.)

Your first question is from Hathen Hodoly (ph), Sam & Partners. Please go ahead.

Good afternoon, gentlemen. How are you?

We're fine. How are you?

Good, thanks. Just a quick question. Can you -- you indicated your third quarter production of 156,000 at Kumtor and 60,000 ounces at Boroo. Could you give us an idea, an indication of the milled tons and the grades please?

Sure. I'll turn that question over to our Chief Operating Officer, George Burns, for a response. George?

OK. Our Kumtor operation and our Boroo operation in real throughputs will be on target with the daily production and what's in our prospectus. The head grade at Boroo is expected to be on plan. And at Kumtor, although the grade will be on plan, it's down from the second quarter, which was resulting in lower production anticipated in the third quarter.

OK. One final question, after the exercise of the overallotment option, I guess we'll call it, how much cash is sitting on your books right now?

Well it'd be the 80 up -- David, you want to answer that? Maybe that'd be best if you'd respond?

Sure. It's 85 plus 27, about $112 million U.S.

Twenty-seven is Canadian, David?

Yes, I'm sorry. It's 20 left. So it's $105 U.S.

Perfect. That's great for now. Thank you, gentlemen.

Thank you.

Thank you. The next question is from Steve Butler, Canaccord Capital. Please go ahead.

Good afternoon, guys. Just a question relating to reconciling the operating results for Boroo. If I do tons times grade times recovery, I didn't quite get to the 63,000 ounces in the quarter. Maybe if you could just reconcile that for me? I missed the first part of the call if you already answered that question.

Steve, Len here. I'm not sure that it shouldn't reconcile. The only thing, maybe, is that in the first -- up to March 1 the production was capitalized. So that could be it. But -- we'll have to get to back to you on that one. I don't think we have an answer.

Yes, Len, it's right if I just do mills -- tons milled times grade times recovery divided by 31, roughly, I get 56,000 ounces and the production number total was 63,000. So it's about a 7,000-ounce gap based on those numbers. But that's fine.

And just a question on the cost of collapsing the hedge book for -- and I assume the cash has gone out the door, if you will?

Yes. The cash cost of collapsing the hedge book for Centerra has been about $22 million U.S.

OK. And these -- this $22 million will be, again, amortized over the life of the original contracts, is that correct? And therefore what amortization should we expect in the going forward quarters?

The -- you are correct that the cost will be amortized. Now, bear in mind that collapsing the hedge book was done in purchasing the gold. If that coincided with the delivery of gold, then it would have already shown up in revenue as a deduction from revenue.

Right.

And you'll see on the financial statements, the statement of cash flow, an add back of $7.1 million for the first half of the year. So that's part of the money going through. It reflects the collapse of the hedge.

It also is going to reflect the opening balance position in terms of deferred revenue and deferred charges. For the balance of the year, for the second half of the year, you can expect actually a $1.9 million add to revenue from the hedge positions.

A net add to revenues? Is that correct?

Yes, for the aggregation of Q3 and Q4.

OK, and how about for '05?

'05 it'll be about $5 million deduction to revenue.

OK, '06?

Well we'll stop at '05 for now.

OK. Thanks very much. I am so forward-looking.

Thank you. The next question is from Barry Cooper, CIBC. Please go ahead.

Yes, Len, or perhaps Rob, I see the drilling at Boroo. You indicate there's some encouraging results between some of the pit areas that we were when, a couple of months back. Just wondering if you can elaborate a little bit more on just what you're finding there?

Len here, Barry. I'll turn it over to Rob.

Barry, work is continuing in that area. And the results are being evaluated in due course. They'll be put into a resource estimate and see what the significance is after that.

We'll have a new resource estimate by the end of the year, Barry.

OK. Good enough. And then your sales volume, particularly at Kumtor versus your production has quite a difference there. Should we expect -- I'm assuming that's just due to timing and what not? Should we expect the sales and the production to be kind of having variance quarter to quarter?

Barry, the -- it's usually a 2-week period. So it depends on when the -- we ship every 2 weeks. So it depends on when the shipping date falls. You're exactly right.

So the highest would be if we just happen to have the full 2 weeks difference. And if we happen to be right on there should be no difference. So you'll just have to judge for yourself as to what number you want to use.

Yes, right. OK, well I think we'll just go with the production and leave it at that.

OK.

OK. Thanks a lot.

Thank you.

(Operator Instructions.)

The next question is from Mike Gallenin (ph), Merrill Lynch. Please go ahead.

Hi, Len. I just have a couple of accounting questions for Dave.

Yes, Mike?

Just wondering, Dave, what's the -- your forecast DDNA for each mine? I see you have the book values at the back of the press release here, which is great, for each mine. Just wondering what you guys are forecasting for that?

OK. The non-cash charges, the depreciation and depletion in the first half of the year for Kumtor was $62 per ounce. And it's going to -- it's looking more like $85 for the second half of the year.

And that's, Mike, that's a function of the fact that when we buy it for more than the book value, when we bought two-thirds of it from the Kyrgyz for more than the book value, there was a bump up in the evaluation.

For Boroo, for the first 6 months of the year, the depreciation was about $102 per ounce. And for Boroo it's, we're estimating right now at about $125 for the second half of the year.

Same reason, I guess?

Yes, same reason.

OK. Thanks. I guess just going back to that $22 million. Was that cash out the door, that $22 million? Or is that how much -- I didn't understand that. So you had buyback the hedges.

The -- it's the mark to market difference, so it's ultimately cash.

OK. I just didn't -- I got on late. Sorry.

And I guess just one question, going back to Kumtor. Some interesting drill news there, which is good to see. The Southwest and Southwest Extension, is that the underground? I am just trying to jog my memory.

No, Mike. Len here. It's about 3.5 kilometers from the Kumtor mine. It's open beddable.

OK. And you mentioned mixed -- maybe I'm misquoting you here, misquoting the press release, just that I guess right here, the hole's returned mixed results, I guess on the North End targets. Just wondering, is the zone sort of getting a little tighter or -- ? Just trying to -- I know the long section or planned section. Just trying to envision this in my mind.

OK. I'll turn that over to Rob for any comment he may want to give on it.

Yes, the holes are fairly wide spaced in that area right now. And it's kind of hard to make any sort of assessment. Work is continuing and the results are being evaluated in due course.

OK. Thank you.

Thank you.

(Operator Instructions.)

There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Homeniuk.

Well, thank you very much for your interest in Centerra and for taking part in our first quarterly conference call. We look forward to talking to you again next quarter, if not before. Have a good weekend. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.