Centerra Gold Inc (CGAU) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Centerra Gold Third Quarter Conference Call. I would now like to turn the meeting over to Sharon Loung, Director of Investor Relations of Centerra Gold. Ms. Long, please go ahead.

Thank you operator. Good afternoon everyone. Welcome to Centerra Gold's Third Quarter Conference Call. My name is Sharon Loung and I'm the Director of Investor Relations at Centerra Gold. On the call today we have Leonard Homeniuk, President and CEO; David Petroff, Executive VP and CFO; George Burns, Vice President and COO and Rob Chapman, Vice President of Explorations.

Len will start the call off today with a review of the quarter and then an update on exploration programs. David will then review the financial results and we will open the call for questions after that. Today's conference call is open to all members of the investment community with the media in listen-only mode.

During the slide presentation that is part of the review today, and it is available on our website, www.centerragold.com under third quarter conference call. Please note that those figures are in U.S. Dollars unless noted otherwise. Before we begin, I would like to caution you that certain statements made in this call 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.

For a more detailed discussion of the important risk factors associated with Centerra's business and industry, please refer to our security filing on the PR website and more specifically to our prospectus dated June 22, 2004 on pages 126 to 132. And now I'll turn the call over to Len.

Thanks Sharon, good afternoon everyone. As you saw in our press releases earlier today, Centerra reported earnings of $28.7 million or $0.40 per share for the quarter. We are very pleased with these strong results and the significant increase in revenue earnings and cash from operations, Kumtor and Boroo continued to exceed expectations.

At Kumtor, notable safety performance was achieved during the quarter with the completion of 2.9 million man hours of work without loss time injury. Kumtor has not reported a loss time injury in 2004.

On the production front, poured gold of 166,805 ounces was 6% above expectations for the quarter. This brings the nine month goal to 518,627 ounces or 13% above budget.

Operating costs, using the gold institute standard was a very competitive U.S. $192 per ounce for the quarter and $185 year-to-date. At the Boroo mine, where we are now operating above nameplate capacity, we have now worked 750,000 man hours without a loss time injury. Ounces poured for the quarter was 68,000, 734,000 over budget by 13%.

For the seven months of commercial operations, production totaled 151,000, 426,000 ounces, 29% above expectations. Unit cash operating costs are a remarkable $135 an ounce for both the quarter and year-to-date. Now I'm going to take a few minutes to update you on some Centerra exploration activities for the third quarter.

It was a busy quarter for Centerra and we continue to ramp up our exploration program. At the Kumtor site, we were encouraged enough to accelerate the program with the addition of three extra drill rigs in mid-October bringing the total to eight currently on site. At Boroo, 18 holes totaling 22,417 meters were drilled as part of the program to further delineate the mineralization in the mine site area.

At Gatsuurt, drilling results from the deep holes beneath the existing drill pattern, which tested the deposit only to 70 meters has confirmed the continuity of mineralization to depth. Also, based on these results and the recent metallurgical test work, we have implemented plans for a pre-feasibility study on development of this property as a stand-alone mining operation rather than the option of trucking the offsite ore to the Boroo facility.

Finally, at the REN project in Nevada, the $2.5 million phase II program was approved by the joint venture partner and we started the drill program in August. Overall, I'd say that we are very encouraged with the preliminary results of our program and I think they will play a significant role in our growth strategy to increase our reserve base and extend the line length of our current operation. Now I'll turn the call over to David to review the financial results. David?

Thanks Len. Now before I get into the results, I thought it would be useful to summarize the ownership interests in the comparative third quarters. In 2003, our operations results reported on a one-third interest in the Kumtor mine. In the third quarter of 2004 though, following the acquisition of the remaining two-thirds interest in Kumtor and the start up of Boroo, our financial results reflect a 100% interest in the Kumtor mine and a 95% interest in the Boroo mine.

Now onto the income statement. Revenue at $87 million is $66 million higher than in 2003 as a result of three things. One, higher interest in Kumtor, 100% versus 33%, two, the March 1st start-up of commercial production at the Boroo mine and three, higher realized gold prices due to higher spot prices and the removal of the remaining hedges.

In the quarter, our average realized price was $398 per ounce and the average market price was $401. In the third quarter of last year, our average realized price was 312 ounces and the market price was 363. So you can understand with the closure of the hedging program, we moved our realized prices significantly closer to that of the market.

And going forward, we will be realizing full market prices on our production. Currently we have no hedges in place and we have no intention of entering into new hedges. There will however be a lingering income statement impact from the historical position of the hedges. And in our third quarter report to shareholders, we quantify this amount by quarter going forward.

The cost of production in the third quarter was $40 million. It includes cost of goods sold and the non-cash charges of depreciation, depletion and amortization. It was higher than last year's quarter because of the increased ownership at Kumtor and startup of commercial production at Boroo.

Now we have no long-term debt, so there was no interest expense, what we did have was a $5 million foreign exchange gain on the Canadian dollar denominated cash balances. We have the equivalent of $60 million in Canadian dollars, the U.S. $60 million equivalent in Canadian dollars.

Administration costs were $3.5 million for the third quarter, reflecting the cost of starting up Centerra on a stand-alone basis. And bottom line earnings, as you heard Len say, were $29 million, which was significantly higher than last year.

For the nine months ending September 30th, net earnings this year were $40 million compared to $2 million last year. And again, the same reason applied to the variances; increased ownership at Kumtor, start up of commercial operations at Boroo and higher realized gold prices. Year-to-date the gold price realized was $380 per ounce compared to $315 per ounce last year.

My next topic is the balance sheet. Cash at the end of the period stood at $131 million, which was up from $10 million at year-end 2003. And the contributing factors were, of course, our profitability as well as proceeds from the IPO. We have $273 million invested in property, plant and equipment, of which $161 million is for Kumtor and $112 million is for Boroo.

And the balance sheet impact of the closure of the hedging program resulted in an $8 million deferred charge in the accounts payable and accrued liabilities category. And as I mentioned, this will be amortized over the next 10 quarters.

Centerra Gold is debt free. The $19 million provision for reclamation is comprised of $60 million providing for the Kumtor site and $3 million for Boroo.

And now onto the topic of cash flow. Our cash generated by our operations totaled $29 million for the quarter and $63.5 million for the nine months.

I would like to draw your attention to the line item called other operating items, because in the third quarter of 2004, we're showing $18 million used for other operating items and this is comprised primarily of $13 million related to the settlement of hedges and the balance of $5 million relates to the increase of supplies, inventories and accounts receivable.

Cash flow from investment activities totaled approximately $3.6 million during the quarter. That would be $1 million for Kumtor and $2.7 million for Boroo. And under financing activities, the exercise of the over-allotment by our underwriters provided the equivalent of $20 million U.S. in cash. And so all told, cash increased $46 million during the quarter to its ending balance of $131 million.

My last topic is on Centerra's sensitivity to changes in the gold price, which has been further enhanced with the closure of the hedging program. For every $10 change in the price, our earnings and cash flow for the fourth quarter will change by $1.89 million and $1.9 million respectively.

So as a summary comment, I would say that the third quarter results are very good. It is the first clear look at the new Centerra Gold that demonstrates our ability to generate earnings and cash flow in order to fund our growth strategy by aggressively increasing our reserve base and expanding our current portfolio of gold mining operations.

Combined with Centerra's debt free position, I believe we are well positioned to take advantage of future opportunities. And with that, I would like to hand the call back to Leonard.

Thank you, David. Before we open the line for questions, let me comment on our forecast for the fourth quarter. Our current estimate is for mine production of 136,000 ounces at Kumtor and 66,000 ounces at Boroo. Total cash cost is expected to remain at a very competitive $218 per ounce. These production levels would put the total mine output at the 900,000 ounce mark. A significant milestone for Centerra. Now operator, could you please give the polling instructions, we would like to start the question period.

To place yourself in the question queue, please press star one on your touch tone phone. And if you are using a speakerphone, please pick up your handset and then press star one. To withdraw your request, press star two. Please go ahead if you have any questions. Your first question from Mike Dureau (ph) from Scotia (ph), please go ahead.

Yeah, thank you, good afternoon and congratulations on your strong result. Really just a quick question on Kumtor, you are sort of indicating that in the fourth quarter costs are going to rise on the back of, I believe, lower grades process. Is that going to continue into 2005 and maybe could you give us some sort of sense as to where you think your production levels and costs will be in 2005? Thank you.

Thanks Mike for that question and yes we accepted that our third quarter has been exceptional and we're very pleased with those results. Fourth quarter, yes, grade drops and will continue to drop or maintain that level in 2004 and both figures are spelled out in the prospectus so I won't take the time to go over them now. But I think if you have a look at that you'll get a good feeling for 2005, we haven't changed much.

OK, thanks.

Your next question comes from Hasam Hodaily (ph) from Salman Prince (ph), please go ahead.

Hasam Hodaily, Salman Prince, guys. Len, David, great quarter again, a few quick questions here. G&A, David you mentioned, this last quarter, obviously you had some of the restructuring costs, what do you see as a reasonable G&A to use on a quarterly or annual basis going forward?

Well, the $3.5 million for the third quarter is representative of our costs going forward. We have not yet completed building our staff though at head office and we're just working through our budget now. So you can expect a little bit of drift upwards but I would use that in the absence of the guidance which we'll give at the end of the fourth quarter.

OK, and with regards to taxes, I saw that your taxes are effectively non-existent, $147,000, I think the number was. What's your view on taxes going forward?

Well, you might remember that Boroo is in a tax-free period for three years. And Kumtor we have 20% profit tax but we have loss carried forward which should take us for three years as well. So we have those two both in a substantially non paying tax position. And of course in Canada we don't have revenue, we just have the expenses.

So there won't even be a deferred tax component there, is that what you're saying?

I think the tax profile on a cash basis is going to look pretty good. Deferred taxes, I don't expect much of that either.

OK, one last question I guess here, interest income and other came in at $5.1 million. Just curious, there must have been something in the other because there's no way you could have earned that much interest in a quarter on the cash you had.

Well, there was the foreign exchange gain of $5.1 million in the quarter.

Oh, so that's in there then?

That's in there, that's because we have, we have about $75 million of Canadian cash or $60 million U.S. equivalent and the Canadian dollar strengthened to the U.S. dollar so that generated $5 million.

That's purely an accounting, is that realized prices or is it purely accounting?

It's a reevaluation of ..

OK, fair enough. Thank you very much.

OK.

Your next question comes from Terrance Ortland (ph) from DSN and Associates (ph), please go ahead.

It's Terry Ortland from DSN. thanks. David, I thought you said that third quarter had a special charge due to the incorporation, going public and everything else in the $2.5 million. You said that number will change, so what did I hear?

Perhaps I misspoke, got our wires crossed. The $3.5 million G&A represents the cost for the quarter for Centerra. The restructuring stuff was booked in the second quarter.

OK, OK. If you mind, what was that number again, if you mind, please?

Which number was that?

Second quarter restructuring costs.

I think the restructuring costs were about $7 million.

OK, thanks David. Just going into 2005 budgeting time for CapEx and also for the exploration and your definition of exploration for 2005 Len, thanks.

Terry, are you asking for dollars or for ...?

Both, both. Dollars and where and also CapEx for next year.

OK, well, seeing that our exploration for this year is going to be just shy of $15 million and I'm sure you've heard us on the road show saying that it's going to increase in the coming years and it will. And again, in terms of specifics I'll just, we'll defer that canal, we'll be giving in the direction of 2005 with our fourth quarter results.

Now in terms of our capital expenditure, I'm going to say the same thing. That for now, I think you'll look back to the prospectus for sustaining capital and that's the amount that we're sticking to. But again, we're just going through our budgeting process. We have some ideas for improving our production and our facilities so we'll be adding I think some good payback, good capital that will pay back fairly quickly.

And we'll discuss beyond what is in the prospectus in the fourth quarter?

Yes.

OK, I'm done. Thanks David.

Thanks Terry.

Your next question comes from Steve Butler from Canaccord, please go ahead.

Yes, guys, good afternoon David and Leonard. Question relating to Boroo, positive reconciliation or at least could you comment on that Leonard, it was a spectacular 5.25 grams and I don't know whether that's again, more of the same cause of reconciliation and I believe it was Pit two. And do you think that's going to settle down and indeed will we have any particular write-up of grade of reserves at the end of the year for this factor. I don't believe we were, as for the prospectus.

Steve, I'm going to ask George Burns, our Chief Operating Officer to respond to your question.

Yeah.

Go ahead George.

Hi Steve.

Hi.

If in fact the grade of Boroo was up during the quarter, much of that was a result of our planning. As you recall, most of the oil production early this year came out of Pit two. Our mining sequence called for us to move up to Pit five, we began stripping there early this year and in fact got into the ore body during the third quarter.

So our grades in Pit five are much higher than Pit two. We are seeing continuing, higher grades in Pit two than the model predicted and Pit five is coming in closer to the model, although we are seeing variability due to the high grade net effect in that particular bit. Overall, during the quarter, our grades were better than the model slightly. But again, the bulk of that's coming out of Pit two and the higher grade ores are coming out of Pit five.

Sorry, what would have been your model grade instead of 5.25, George maybe to ask it that way?

5.25 was the average, in Pit five, the ore grades approach half an ounce in some of the zones and our modeling is coming out pretty close in that pit overall but we're seeing is a good deal of variability with those high grades.

Yeah. OK. OK, fine. And then the other question is just Q4, David, maybe back under expiration expense. Q3 $3.8 billion. Do you have an estimate for the fourth quarter, expiration?

Where we're going to - our estimate is to be at 14.5 for the year.

OK, under the expense expiration.

Under total expiration.

OK. Do you have a split of capital versus...

We're expensing it all.

You're expensing it all. So in other words Q4 will be about $7 million?

Yeah. And so...

If you had $7.6 million at the end of September. OK. Fine.

Steve, we've added 5 drills in the quarter here, so...

Great, that's true. OK. That's it for now. Thanks guys.

OK.

You next question comes from Geoff Stanley at BMO Nesbitt Burns. Please go ahead.

Thank you and congratulations also on a great quarter. I have a couple of questions. First perhaps for David. The $5 million FX gain on the Canadian dollar balances there. If you go to the sig(ph) metal information there appears to be a gain of $9.2 million in North America. I'm just wondering if you can reconcile that versus the $5 million you say is an FX gain and how that washes out and reconciles.

Yeah, Geoff, each of the sites owes money to the head office and this was part of the restructuring...

So that's just an elimination on consolidation?

Right, so you have the interest being shown as being paid by the site and it's flowing to the head office, so that's how the 5 grows to 9.

Oh, OK, a fixed model. Exploration spending, obviously a lot of people are going to be interested in the likely outcome and timing of the increases. Very positive implications for reserve increases associated with those higher exploration levels. I'm wondering if you could give us a feel for your objectives and timing with respect to reserve increases. Are you likely to be able to do enough drilling in the remainder of this year for it to have a meaningful impact on reserves, your reserves statement, at year end?

Yes.

OK. Very good. Do you expect your exploration success to be consistent with the industry? You know you're talking about an exploration to discovery cost of, say, $15 an ounce. Would that be reasonable to assume?

Well, Geoff, you have us there. We've never done the calculation and - ask us next quarter and we'll have you.

OK. I was trying to be smart and figure out what your reserves are going to be at the end of the year.

Perhaps one final question from me. A timeline on assessment of Gatsuurt as a standalone development. Could you give us some - or tell exactly when you expect a pre-feasibility study to be completed, how the new drilling factors into that and what a potential timeline might be. Obviously we must understand that there's - we're dealing with mother nature and there's lots of uncertainties associated with these things.

Sure. In fact, I'll ask George Burns to respond to your question.

Hi, Geoff.

Hi, George.

We're obviously accelerating exploration activities and with those results moving forward and entering the first quarter we'll be pushing forward on the pre-feasibility study for standalone. We have done some sculpting work this year that led us to the positive implications we have thus far and so next year we will be having a feasibility study expected during the year.

OK. Do you have a feel for how the nature and scale of development might be there and try and give us some sort of feel for what kind of impact it may have on the company?

We're envisioning an open pit operating. We've done preliminary leach test work this year that pushed us towards looking towards bioleach. The preliminary test results we have are very positive. We have done some scoping-type economic evaluation and all of that work has led us to this decision to accelerate exploration and then to press forward with the pre-feasibility study.

So Geoff, Len here, I think we would be looking at something like Boroo if the added costs are what the buyoff(ph) circuit would be.

OK. Excellent. Very good. That would be a great result. Well, thank you very much.

Your next question comes from Barry Cooper with CIBC World Markets. Please go ahead.

Good morning, or good afternoon gentlemen. Delayed getting on the line there partly because of all the interest following the good results, but just a couple questions that quickly haven't been addressed there. David, just wondering, in Q2 you indicated depreciation rates at Boroo at $125 an ounce and at Kumtor of $85 an ounce in the second half and you're well below that. Can you give us a revised estimate for depreciation on a per ounce basis now?

Yeah. Who remembers Q2, Barry? I guess you do. The depreciation at Kumtor is running about $70 an ounce and -- $69 an ounce, actually, and Boroo is $94 per ounce.

OK. How is that so different from what you gave us the indication for?

I was anticipating a different outcome from the adjustments related to the purchase price excesses.

Right. OK.

So that's what's revised then.

But both are reasonable numbers on a go forward basis until we see reserve adjustments at year end, I guess?

Yeah, and Barry, just to give you a bird's eye view of that, if you look at our prospectus ounces that we're going to produce over the life minus what we've done for the nine months you'd still have about 3 million ounces to go other than reserve increases and we have a $237 million of TP&E. So you divide one by the other and you get $92 an ounce on average over the ounces as reported at the end of '03. So that's going to vary depending on the relative production of Kumtor versus Boroo but that would be the average number based on the existing statement of reserves.

OK. Then just another question here on timing. Kumtor you had almost 20,000 ounces of extra production versus sales. Can we assume that that 20,000 ounces is then carried over into Q4 and indeed the production level that you have indicated for Q4 excludes that 20,000 ounces and literally(ph) there may be a carry over again at the end of Q4 but is that maybe something that could be an added boost in there?

Well, I think the 20,000 is sales. I think the production that we're looking for in Q4 is all going to come through the income statement in Q4. Whether or not we get the timing of the shipments so it's in there and the 20,000 is cut up I don't know at this point in time.

Right. OK. And then one kind of clarification question - in Q2 again you indicated your share of production was going to be 627,000 ounces for the year. You've increased the expectation but lowered your share of it. What I am assuming is happening is that for the first half of the year you're taking a different percentage ownership on Boroo and now you're quoting the 53.4% for the first half of the year. Is that's what happened there?

Well, you'll see on page 16 of our release that we've laid it out by quarter by percentage so you can track from the 100% production number to our share and that's how we're doing it now and I don't have a reconciliation with me compared to what we did in the second quarter. I apologize for that, Barry.

OK. Good enough. I think you were accounting for it on an equity basis of 76 percent or something like that and so the attributable production would have been actually higher?

We could have been referring to our economic interest at the time.

Right, I think that's what it was. OK. That's all my questions. Thanks.

Thanks Barry.

If there are any further questions please press star 1 on your touch tone phone. There are no further questions in the queue.

Thanks, operator and thank you, everyone for participating in our third quarter conference call. We look forward to talking to you again next quarter if not before. Bye.

Ladies and gentlemen, this does conclude your conference call for today. Thank you for your participation and please disconnect your lines.