Centerra Gold Inc (CGAU) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing. Welcome to the Centerra Gold Second Quarter Results Conference Call.

[Operator Instructions].

As a reminder this conference is being recorded, Friday, July 29, 2005. I would like to turn the conference call over to Ms. Sharon Loung, Director of Investor Relations for Centerra Gold, please go ahead ma'am.

Thank you, Natalie. Good morning everyone and welcome to Centerra Gold's Second Quarter 2005 Conference Call. My name is Sharon Loung and I am the Director of Investor Relations for Centerra. Present with me today are Len Homeniuk, our President and CEO, David Petroff, Executive Vice President and CFO, George Burns, Vice President and Chief Operator Officer and Rob Chapman, Vice President of Exploration and Technical Director of Mergers and Acquisitions, and Marina Stephens our International Legal Advisor.

On the call today, Len will briefly review the quarter and give an update on the Company's growth strategy. George will then review the operations, and David will follow with a summary of the financial results. We will then open the phones for questions. Today's conference call is scheduled to be an hour and is open for all members of the investment community and is muted, in the listen only mode. There is a slide presentation that can be reviewed today and it is available on our website at www.centerragold.com under the investor section. Please note that all figures are in US dollars unless noted otherwise.

Before, we begin I would like to caution to certain statements made in this call may be forward looking statements and as such is 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 description of the important risk factors associated with Centerra's business and industry, please refer to our securities filing and seen (ph) at our website. And more specifically, our annual information form dated March 15, 2005. And with that, I will turn the call over to Len.

Thanks, Sharon and good morning everyone. As you saw in our 2 released this morning, Centerra had an extremely good second quarter. We are building on a track record of good operating performance, solid earning and cash flow. And an outstanding exploration results since inception on June 30, 2004. I am very pleased with the results of the quarter, 6 months of 2005 and our first year as a public company. Today, I will leave it to David and George to review the operating and financial results, and I will focus my attention on the growth initiatives of the Company.

As I hope many of you saw this morning, we issued an update on our entire exploration program, summarizing the results for the 6 months of 2005. It may be a lot to digest at one time, but we felt that the great progress on all of our major exploration programs had to be clearly identified. In future, we will release exploration updates on each property in order to simplify your analysis. However, I hope that you would not overlook the significance of these results, considering the volume of information. Specifically, the results at Kumtor and Gatsuurt confirm our belief that these areas contain the kinds of resources that can substantially extend the mine life of the Kumtor operation and further redefine the economics of the Gatsuurt deposit.

Now with the addition of the main zone, can substantially add to the overall value of the Company. At the southern part of the Kumtor Pit we encountered a significantly thicker and higher grade mineralized zone than we anticipated. Down hole interest have varied from 26 to 68 meters of thickness. With an average grade in the 4 to 13 g/t Au range. This zone remains open at dept and to the south and provides us with tremendous encouragement.

In the north end of the pit, we followed up on our thick mineralized zone discovered last year. And have delineated over more than 200 meter strike length and an additional 120 meters down dip. Down hole intercepts in the new holes vary from 26 to 64 meters thick, with average grades typically in the 3 g/t to 5g/t of gold range. The zones remain open in several directions. Drilling is ongoing in both zones to better define these mineralized areas and to enable the economic valuation of a pit expansion and/or an underground mining scenario. Considering these results, we have increased our exploration budge at Kumtor by adding a further $2 million where we will now spend a total of $13.4 million.

At the Gatsuurt central zone, the feasibility study was started in May with a completion parted by year end. In-fill drilling has confirmed the block model interpretation that was the basis for initiating the study. Good news also comes from the main zone, located just 400 meters from the Central Zone where a high grade mineralization was identified. Early interceptions are very encouraging. Not only in the potential to add to the resources of the Gatsuurt project. But also because the preliminary metallurgical test work has indicated similar gold recoveries for the 2 zones. We are initiating an in-fill drilling program to progress the main zone to the resource estimation stage by the end of this year.

At the REN project in Nevada, the results have confirmed the continuation of high grade mineralization at the JB Zone near the eastern boundary of the resource area. Together with Derek our partner we are extending our drilling program into the fourth quarter of this year. Good intercepts were also conquered at the early stage territory target and we will be following up with more in-fill drilling to better define the results. On mergers and acquisitions Centerra continues serious discussions and expects to be in a position to identify specific initiatives in the near future. It is important to note, however, that Centerra's focus is on adding to shareholder value and investing in assets that will stand the test of price cycle. So, our approach to mergers and acquisitions is very selective.

Before I turn the call to George, I would like to clarify a few issues relating to the perception of the political situation in the Kyrgyz Republic. As you know coming from Cameco's corporate environment, Centerra adopted a very conservative and cautionary approach to disclosure. And since no good deed goes unpunished, the market immediately reacted very negatively to our releases related to the various investigations in the Kyrgyz Republic and our tax audit (ph) . In the post revolutionary Kyrgyz environment, during the presidential election campaign, while the new government is being formed and number of broad and investigative initiatives on the part of the various government agencies, swept across the business and investment community.

Kumtor, together with many other major businesses and investments in a cooperative manner helped the new authorities understand the substance and foundation of its operations. To date, these reviews have had no effect and have caused no interference to our business in the country. Moreover, at this time, we have no reason to believe that this will have happen in the near future. With respect to our annual tax assessment I would like to make it very clear, that we do not see any political motivated actions on the part of the government in its handling of this tax audit.

Our differences are differences of opinion regarding the application of certain taxes and duties, which we expect will be resolved in the course of normal, good-faith negotiations as we have done many, many times in the past. The same goes for our current roadblock situation. As you know, this is not the first roadblock that has happened. They have not had any material impact on our operation and we believe that the government will take appropriate actions to resolve the situation.

Centerra and its current management has worked in this environment for more than a decade and is well equipped to deal with these challenges. Finally, not to detract from the importance of Kumtor. I would like to emphasis, that almost half of our current margins are generated by Boroo with a future addition of Gatsuurt, Mongolia represents a significant geographical political risk mitigation. I will now turn the call over to George, for a review of the operations.

Thanks, Len. The Kumtor Mine turned in another strong operating quarter. Production of almost 138,000 ounces was 2% over our forecast at the end of the first quarter, on account of higher ore grade and mill recovery. Subsequently, the cash cost of production at $253 per ounce was essentially as forecast at $252 per ounce. As expected the average mill head grades of 3.7 g/t were lower than the average grades in the second quarter of 2004, which was 4.7 g/t. Our major profitability improvement projects are all on track. The ultra-fine grinding mill which is expected to improve gold recoveries is due online by the end of the year.

The expansion to the mind fleet for the development of the Southwest pit and the main Kumtor pit is also progressing as planned. Our outlook calls for production of 118,000 ounces at a cash operating cost of $278 per ounce for the first quarter, and the total of 525,000 ounces at a cash cost of $256 per ounce for the year. The Boroo mine reported another good operating quarter. Both productions of almost 75,000 ounces was approximately 2% above forecast due to a slight reduction in plant gold inventory. The higher rate of through put late in the first quarter has continued as forecast in the second quarter, as a result of the smaller grade openings installed in the SAG mill in quarter one.

Second quarter mining rate of 20,000 bcms per day was 7% above of first quarter results, due to continued productivity improvements. The high mining rate which will enable adequate striping for the higher anticipated ore deliveries to the mill. Produced cash cost of operations remains amongst the lowest in the industry at $162 per ounce. The outlook for the third quarter calls gold production of 63,000 ounces at a cash cost of $200 per ounce. We have increased the forecast for the year to just over 275,000 ounces with an average cash cost of $176 per ounce.

Overall Centerra's second quarter was slightly better than forecast, reflecting continued benefits from productivity improvement projects which are offsetting higher cost of fuel, steel and reagents and Sarbanes Oxley implementation. Our production outlook for the second half shows lower gold production compared to the first half, as a result of lower forecast of ore grades at both operations. Now, I will turn the call over to David to review the financial results.

Thank you, George. And once again, as I did on the first quarter report I am going to start my presentation by talking about the ownership interest in each of our mines through the relevant periods. Because it accounts for a meaningful amount of the year over year comparisons. In the second quarter of 2004, our operating results reflect a full -- the one-third proportionate consolidation of the Kumtor mine and a full consolidation of the Boroo mine, which began commercial operations on March 1, 2004. Whereas the second quarter results for 2005 reflect a full consolidation of the 100% interest in the Kumtor mine and a 95% interest in the Boroo mine. So that underlies and underpins the differences between first quarter and second quarter of '04 and first and second quarter of 2005.

So, while we look at the income statement revenue for the second quarter of 2005 at $95 million is 103% or $48 million higher than the second quarter of 2004. This is a result of the higher ownership interest in Kumtor that I just mentioned. It is also a result of an 18% improvement in the realized gold price. We realized on average $423 US dollars per ounce compared to $360 per ounce last year. And this increase was due to the higher spot market price as well as the elimination of the hedge book. The 6 month results was also positively affected by a full period of operations at the Boroo mine which started, as I said, commercial operations March 1, 2004.

The cost of production in the quarter including cost of goods sold and the amount of cash charges of depreciation, depletion and amortization was $66 million. It is higher than $30 million in 2004, mainly because of the increased ownership of Kumtor. And while we are experiencing higher cost for consumable items and labor, along with everybody else in the industry, the productivity improvements are offsetting most of the impact. The $6 million of exploration costs in the quarter and $12 million for the 6 months supports the program that Len summarized earlier. In a year over year comparison, demonstrates just how much we have accelerated our efforts.

As you know, the Company has no debt, therefore, no interest expense. But we did have however in the quarter, was a $1.4 million foreign exchange loss on our Canadian cash balances. The Canadian dollar depreciated in value compared to the US dollar for the quarter. And we also had interest income of almost $1.2 million. Administration costs were $5 million in the quarter for a total of $9 million for the 6 months. And the comparisons over 2004 are impacted by our current status as a stand alone public company as well as costs associated with our business development activities.

Approximately $2 million of taxes were provided for in the quarter of which $1 million was paid in cash and the balance was added to the future income taxes accounts. I would like to remind you here that we do provide for income taxes at Kumtor at an accrued rate of 20%. The bottom line net earnings were $15 million for the quarter and $27 million for the 6 months, as comp to 16 and $20 million for the same periods a year ago.

Moving on to the balance sheet. I will just point out one item and that is our cash position at the end of the quarter at $204 million. This is up $51 million from year end and was all provided by cash flow from operations. This leads me to the cash flow statement. Cash generated by operations totaled $25 million or $0.34 per share for the quarter. Other operating items including working capital, increased by $10 million. And this mostly on account of accounting differences. We invested $6 million in our operations of which $4 million was spent on growth projects. When we look on to the second half of 2005 as George mentioned, we expect our total production to decline by approximately 13% to 372,000 ounces. And this is a function primarily of the ore grades at Kumtor going to be 3.6 g/t level which we are forecasting for the next few years in the current mine plant.

Total operating costs are expected to remain flat therefore, unit costs are expected to increase over the second half. And we are still forecasting our average unit costs to be just below $230 per ounce for the year. We are increasing the exploration budget based on the very good results of the first half of the year. An extra 10% or $2 million will be added to the program over the third and fourth quarters. This is an increase of approximately 50% the amount invested in 2004, and is indicative of our commitment to exploration.

Other business development activities are also the reason for our increasing of our administration budget for the year. Currently, we are estimating a total of $22 million for the year as we conduct due diligence activities for potential acquisitions and complete the majority of the Gatsuurt feasibility study. Our latest estimates for capital investments is $34 million and it is relatively unchanged from the same amount that we reported in the first quarter update.

So, to summarize we are expecting lower production in the second quarter -- pardon me in the second half, and higher costs associated with our growth strategy. However, our operating cash costs is expected to remain among the lowest in the industry providing a very solid financial position for operating and funding our growth initiatives. And with that I would like to hand the call back to Len.

Thank you, David. My closing comment today is to remind you of what Centerra has accomplished in this first year as a stand alone public company. We delivered earnings of $71 million or $0.99 per share and generated cash flows of $116 million and produced over 860,000 ounces of gold. Our team is very proud of these achievements and we look forward to building on them. Now, operator, could you please give the polling instructions as we would like to start the question period?

Thank you.

[Operator Instructions].

Our first question comes from the line of Barry Cooper, from CIBC. Please proceed Mr. Cooper your line is now open.

Yes, good morning Len and others there. Couple of things, on Boroo I noticed that in the second part of the grade dropped almost 20% your recovery was down a bit, your through put on (inaudible) was up a bit, but your costs were in essence flat. How are you managing sort of apply logic that with the 20% drop in grades, I would have thought you would have seen a ballooning of the costs there?

Thanks, Barry for your questions. We will let George answer it here.

Hi, Barry. At Boroo we have been in this year moving forward with our continuous improvement projects and in the mill our through pit is up as you mentioned but our efficiencies improved significantly in that we are only looking at power reagents and grinding media as additional costs against that through put. The mines have basically just finished its first year of operating since commercial production and we are getting a lot of efficiencies out of the training of the workforce. and efficiencies in both the mine and the mill that are helping us control our costs.

Okay, great. That is definitely a change from what have been hearing of late elsewhere. Then on the Kumtor drilling results. I haven't tried to run through everything here, but obviously, things look like they are looking better particularly in that north target. I realize that early stages at this point and time, but is the results that you released here today, tipping the balance towards -- this is going to look like this is going to be part of an expansionary open pit rather than an underground operation? Because 6 months or a year ago, I think it was a toss up.

Barry, Len here. Yes to that question, we feel that these results go along way to providing the kind of resources we will need to bring down the high wall at the north end of the pit to continue the pit to the north. That is our target and that is what we are drilling to accomplish.

Okay. And then just confirming based on the old reports there, I think its somewhere around 1.4, 1.7 million ounces prior to suiting any of this drilling and whatnot, so is it unreasonable to assume that with what we have seen here today, and if you were to go ahead with a lay back on high wall that you could be looking at a 3 to 5 year mine life extension?

I would suggest that if the results fall into place that is entirely possible, yes.

Okay, good. And then, finally, Len more on the broader picture there. How is the knocking on the door been going in central Asia today versus what you saw 5 or maybe even 10 years ago, with respect to when you go in and talk to people about acquisitions and whatnot? Are the demands different, is the competition -- I am assuming the competition is a little bit hotter. But you could you just kind of elaborate sort of at a eye level, what differences you are seeing over the course of time?

I think Barry, you have indicated competition. Yes, there certainly are more competition for these properties. However, what we are seeing I think is that most of the governments anyway that we have been dealing with. Have already in the past, gone through rounds where they have dealt with a number of companies that at the end of the day were not able to deliver. So, I think the government is very much selective in whom they are speaking with and I think that goes generally for companies as well. So, in that sense maybe the competition field has narrowed down.

I think what we are seeing also, over the course the last 5 or 6 years is a very much more sophisticated environment in the way that the governments are approaching this on many of them. And we encourage this get outside advice from either a technical or legal end before entering in to any agreements. So, much more sophisticated environment to deal with (inaudible) on to the whole process. Of course now, with the gold price being what it is, everyone thinks these properties are already in production and producing gold at a $100 an ounce. So, the asking prices are really taking a lot of time to negotiate through too. But we are not discouraged at all. We think we are quite advanced and we try to articulate that in our press release and in making some defining acquisitions here.

So, I assume from that Len, that there is a strong biased toward doing something with the government agency as opposed to an existing corporate that is already there?

I would say, not necessarily a strong biased, but I think some of the options or some of the prospects we have identified our government held. And yes, I guess at the end of the day, we certainly would want to make sure that we have government relations. And we have found over the years the best way to do that is include them in some fashion into the Company.

Okay, and then finally, just the road blockage at Kumtor is that temporary? I am assuming you consider it fairly frivolous in terms of the claims, but is this just someone who is resurrected something new, or is it someone just coming to the trough?

I think that it is just the reaction to the current state of affairs in the Kyrgyz Republic. As we mentioned, the government is in the process of being formed which will bring a lot of stability to region. But right now, a lot of people think that they can do whatever they wish and it is -- this roadblock is along those lines. We don't expect it to last very long and we are quite confident in our position with regard to the issue that they are raising. But they have long ago been settled.

So, we are -- I think it is just a matter of time before the roadblock is down. And of course, I would like to point out that we have been through this before and we have learned from that. And I don't expect that there will be an affect from this roadblock in terms of our operations.

So, these are just old claims that are kind of resurfacing, not anything new with new information?

No, Barry this is -- their main point relates to the cyanide accident in 1998, which was settled and went through international arbitration and determined to be fair and just to all parties in 1999. So, it is a claim that is over from 6 years ago that has been settled and everyone has been satisfied with it, I believe. And this is just an -- I believe an opportunistic type of demonstration that we are seeing.

Right, I just wanted to make sure that there wasn't some new medical evidence that someone was saying, okay, we have got 10% of the population in the town affected and were relating it to that and we can trace it and this is a new thing or something like that?

No, absolutely not. There are -- in fact, I would encourage you if you or anyone else have those concerns that there are a number of reports on various websites, one done by the World Health Organization, one done by a consortium of physicians and technical specialists headed by a Canadian group -- independent Canadian group which are the websites which indicate that potential damage, long-term damage and results of that accident were very minimal.

Okay, thanks. Keep up the good work.

Okay thanks, thank you.

Thank you, our next question comes from the line of Mike Durose from Scotia Capital. Please proceed your line is now open.

Good morning, Len and everybody. Just a couple of quick questions. I was just wondering if you could provide a bit more flavor on this whole sort of interaction that you have with the state auditing chamber? More specifically, how long you expect this process and dialogue to take? And also, maybe just a bit more flavor on the kind of information that they are requesting from you with the respects of the Kumtor restructuring, I guess? That's the first question.

Okay, Mike. I will ask Marina Stephens our international legal advisor to answer that, she has been working closely on those issues.

Good morning, Mike. With respect to the state auditing chamber, they have requested information pertaining to the restructuring of the Kumtor project and it was very basic information they just wanted to have basic agreements which of course the government has anyway. But they asked for a full set of documents and they also inquired as to how the value was negotiated and we referred them to the advisors for the Kyrgyz sides of the government. And safe concerns for development and their advisors were Standard Bank of London.

They have not come back to us after the first initial request for information. We have not heard from them for over a month. So, there were no follow-ups at all on their part. With respect to the state prosecutors office they have also requested information regarding the restructuring. Exactly the same type of information. We have provided it them and we haven't heard anything from them either.

And just recently the President has issued a decree stating basically, that he would like to curtail all of this investigation that are ongoing and consolidate some of them into just one particular agency within the government. So, we are not clear as to whether they are going to proceed with their investigations at all. At any rate, our plan is to try to bring all this to some sort of a closure by the end of the year.

Okay, thank you Marina. And then, just a question on Gatsuurt. You did indicate in your press release that you have discovered some sort of high grade zone or high grade area, I guess within the central zone. I was just wondering if you could give us a bit more flavor as to the nature of that mineralization, is it sulfite or is it surface oxidized material? And also you latest thoughts on the scope of the mining project at Gatsuurt, thanks.

Okay, we will ask Rob Chapman to answer that, Mike.

Actually, that was the main zone and not the central zone there, Mike. What the history there is, historically it has been a fairly low grade resource. It is a grade of about 2 to 2.1 g/t. With this course of drilling that we went through, we identified a zone that is at somewhere around 3 or a bit better than that. And that is getting in line with our main zone -- or our central zone. So that is more or less what we are going to be targeting now, the higher grade zone. And we are going to test the continuity of that. As for the oxide transition sulfite, it is all 3 at this point in time. We are just in the process of better defining that zone.

Okay, and then in terms of your current thinking for the project, are there any changes? As the scope and that sort of thing, scale?

In terms of the feasibility study we've initiated the feasibility study. We'll have it completed by year end and we're currently looking at this drilling as an upside to the resources to support that feasibility study.

Okay that's fair enough. Thank you very much.

Thank you.

[Operator Instructions].

Our next question comes from the line of Steve Butler with Canaccord Capital. Please proceed you line is now open.

Yes good morning, guys and ladies. Just a question on the SV zone and the NV zone. I just wanted to confirm again Len or whoever, that this is indeed fully within the resourced area?

Fully within the resourced area I'm not sure what you mean by that Steve. Unless you mean if this was in the potential expansion of the pits absolutely.

Right okay. In particular I guess Len on the SZ zone rate where significantly thicker and higher grade I just wanted to get a sense from you guys as to how surprised you were why some of these grades -- obviously you've had high grades in the pit in different hits before but selectively of course gave us some pretty good grades here up to the 13 gram per ton range over good widths. You say significantly thicker, I just wanted to get a sense for how much thicker in the particular area as well as how much higher grade is this uptick?

Well I guess to answer the first part of your question Steve we were quite surprised to get this and relieved as I might to get it and certainly the thicknesses are in the range of about double of what we expected and the run of mine Kumtor grade is in the range of above 3.5 grams so the types of intersections that we've been getting are well above that. So obviously, to us it's a very significant discovery and we are assure you drilling it off with a vigor now.

Okay. All right thanks very much.

Thank you.

Thank you.

[Operator Instructions].

Ms. Loung, there seems to be no further questions at this time. Please continue with your presentation.

Okay thank you operator and thank you everyone for participating in our third quarter conference call. We look forward to talking to you again next quarter. Have a good day.

Thank you ladies and gentlemen. That does conclude our call for today. We thank you for participation and ask that you all please disconnect your line. Have a great weekend and thank you for participating again.