Centerra Gold Inc (CGAU) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold third-quarter 2006 financial and operating results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, November 1, 2006. I would now like to turn the conference over to John Pearson, Director of Investor Relations for Centerra Gold. Please go ahead, sir.

Good morning, everyone, and welcome to Centerra Gold's third-quarter 2006 conference call. I have recently joined Centerra Gold, and I look forward to working with all of you in the future. On the call today are Len Homeniuk, President and CEO; George Burns, Vice President and Chief Operating Officer; David Petroff, Executive Vice President and CFO; Ian Atkinson, Vice President of Exploration. Following their formal comments this morning, we will open up the phone lines for your questions.

Today's conference call is open to all members of the investment community with media in listen-only mode. There is a slide presentation that is part of the review today. It is available on our website at www.centerragold.com under Q3 2006 conference call. Please note that all figures are in U.S. dollars.

Before we begin, I would like to remind you that certain statements made on this call and contained in our slides on the website may be forward-looking 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 risks and uncertainties associated with Centerra's business, please refer to our securities filing on the SEDAR website and the press release that was issued yesterday. Now, I will turn the call over to Len.

Thanks, John, and good morning, everyone. Centerra is on schedule with the revised mining plan at Kumtor to access the high-grade SB Zone at the end of the second quarter of next year. George and David will review our operational and financial results in detail later, as well as the results at Boroo, which continued to perform well in the quarter.

Our success story this quarter, however, are the extremely positive, ongoing exploration results at Kumtor. We have expanded the size of the high-grade SB Zone at Kumtor downdip below the ultimate pit bottom, demonstrating significant underground mining potential. More work is being done on quantifying the results at the fast-track underground development. Ian will expand on these activities in a few moments.

Also, discussions are underway with the government of Mongolia regarding the new investment agreement for Gatsuurt and amendments to the existing Boroo Stability Agreement. Clearly, having a mutually beneficial operating regime would be an important milestone to ensure the long-term stability for Centerra's presence and growth in Mongolia and, most importantly, would enable the prompt development of the Gatsuurt deposit.

With that brief introduction, let me pass the call over to George to run through the operational performance. George?

Thanks, Len, and good morning, everyone. First, let me provide an overview of our operations performance in the third quarter. Overall, production and costs were as previously forecast. The cash costs, of course, were higher compared to last year. However as Len has already mentioned, the production in Kumtor was in line with the revised mine plan that focuses on accessing the high-grade SB Zone in the first half of 2007.

Kumtor produced about 53,000 ounces of gold at a total cash cost of $719 per ounce compared to 123,000 ounces of gold at a cash cost of $277 per ounce in the same period in 2005. Average mill grade at Kumtor was as expected in the third quarter, with ore provided from low grade stockpiles in the Southwest pit with an average grade of 1.64 grams per tonne compared to 3.35 grams per tonne in the third quarter of 2005. Recoveries were also lower in the quarter at 64%, reflecting the milling of lower grade ore.

Let me provide a brief update on the revised mining plan and our progress at Kumtor. Under the revised plan, the mine and mill are operating at full capacity, milling low grade ore stockpiles and ore from the Southwest pit. Mining is focused entirely on the SB Zone of the Central pit and the Southwest pit.

The fourth quarter will be similar to the third quarter, and the 2006 production outlook remains unchanged at about 300,000 ounces at a cash cost of $530 per ounce. Within the first quarter of 2007, as we continue stripping to get to the main higher grade core of the SB Zone, we expect to have ore from the upper parts of the SB Zone go to the mill. The second half of 2007 is when the higher grade ore from the SB Zone starts to report to the mill.

You will recall that the pit wall movement does not affect our reserves, as it was entirely within the ultimate pit design. However, as already mentioned, we are on track to meet our guidance for 2006; and in 2007 our production should be in the 440,000 to 475,000 ounce range.

Looking forward, we continue to focus on accelerating mining of the SB Zone and work at Sarytor to complete the resource definition, engineering, and permitting to ready the deposit for potential production in the first half of 2007.

Turning our attention to Mongolia, Boroo produced about 73,000 ounces of gold in the third quarter at a total cash cost of $220 per ounce compared to 71,000 ounces of gold produced at an average total cash cost of $162 per ounce in the same period in 2005. The slightly higher production reflects higher throughput and a higher average mill grade of 4.15 grams per tonne compared to 4.05 grams per tonne in 2005, despite slightly lower recovery of 85% this quarter.

Cash costs were higher due to higher mining cost for rental equipment, higher milling cost due to higher throughput, higher consumable cost, and higher revenue-based royalties due to the higher gold price.

We have investigated the possibility of constructing and operating a heap leach operation at Boroo, based on the low grade materials that are within the current ultimate pit and low grade stockpiles. Metallurgical samples of various ore types were column and crib tested during the year with good recovery rates.

Our internal feasibility study, with assistance from outside consultants, determined that a 3 million tonne per annum facility at a capital cost of about $20 million was a cost-effective project and would add value to the Boroo operation. Further economic analysis and internal review of the reserves at Boroo are scheduled for the fourth quarter of 2006.

At Boroo, on a 100% basis, we continue to expect production for 2006 of 270,000 to 275,000 ounces of gold with expected cash cost of $210 to $215 per ounce. Overall, at Centerra's mines, we continue to expect production in 2006 of 570,000 to 575,000 ounces of gold at overall cash cost of $370 to $380 per ounce in 2006.

At this point, I would like to turn the call over to David to provide a review of our financial performance.

Thanks, George. The long-term outlook for Kumtor is very good. Unfortunately, the financial results of this quarter were lower, as expected. Comparing the third quarter of 2006 to the same period one year ago, revenue was significantly lower and cash costs were higher. Our segmented earnings for the Kyrgyz Republic in the third-quarter 2006 shows a loss $7.2 million.

On the other hand, Boroo's financial results were excellent. Quarterly comparison third-quarter 2006 to 2005 shows a significant increase in revenue. Although costs also increased, segmented net earnings from Mongolia were significantly better at $22.9 million in the third quarter of 2006.

On a consolidated basis and looking at the income statement, 2006 third-quarter revenue at $76 million was essentially the same as a year ago, reflecting a realized gold price that was nearly 45% higher and a sales volume that was about 30% lower than in the third quarter of 2005.

Cost of sales increased 36% to $59 million, primarily due to higher mining, milling, and site administration. Exploration and business development expense in the third quarter of 2006 was $6 million. That is compared to $9 million in the same period in 2005. While exploration expenditures were about the same in both quarters, business development spending was lower, particularly because of the completion of the Gatsuurt feasibility study in 2005.

On our interest and other line, we had a net recovery of $16 million in the third quarter of 2006 compared to a recovery of $4 million in the third quarter of 2005. This quarter, we had a $13.6 million insurance settlement related to the pit wall failure at Kumtor in 2002. Now unfortunately, our current insurance policies do not provide the same coverage for the pit wall movement that occurred this year in July.

Net earnings for the third quarter of 2006 were $12 million or $0.05 per share. That is higher than $9 million dollars or $0.04 per share reported in the third quarter of 2005.

Year-to-date results for the first nine months of 2006 are net earnings of $59 million or $0.27 per share. That compares well to net earnings last year's nine months of $36 million or $0.17 per share.

Looking at cash, we had cash inflow from operations in the quarter of $12 million. We expended about $20 million for capital expenditures, of which $6 million was for sustaining capital and $14 million for growth initiatives, dominated by the expansion of Kumtor. The cash balance at the end of the quarter of $216 million was up from the $202 million balance at the end of 2005.

Our plans through the fourth-quarter lead us to expect spending on exploration and development of about $25 million for the year, as we announced last quarter. This is with the continuing intensity of activity around Kumtor. For administrative costs, including the ongoing cost of maintaining the corporate office in Toronto and the higher cost of implementing regulatory compliance, we expect 2006 expenses of $26 million. With respect to capital expenditures, we now expect to spend about $125 million in aggregate this year.

Finally, based on our 2006 outlook of producing 570,000 to 575,000 ounces of gold and related costs, our sensitivity to change in the spot price of gold for the remainder of the year is the following. For every $25 change in the spot price of gold, there would be an approximate change of $3.4 million in our revenues, $4.3 million in earnings, and $3.2 million in cash flow.

So with that, let me turn the call over to Ian to provide a review of our exploration activities. Ian?

Great. Thank you, David, and good morning. We issued a news release last week providing an update on our exploration activities, which continue to deliver excellent results and indicate potential resource and reserve increases at the end of the year. As Len stated, we are continuing to get very good [grow] results at Kumtor, further expanding the SB Zone and outlining the high-grade core in the SB Zone with potential for underground mining.

We completed four drill holes to further test targets at the SB Zone during the third quarter. All of these holes intersected significant mineralization, returning intercepts that range from 2.2 grams to 27.7 grams per tonne of gold over down hole core lengths that range from 17.3 to 109.7 meters. This recent drilling has extended the SB Zone downdip on a number of sections. The SB Zone has now been delineated over a strike length of 360 meters, and downdip lengths ranging from 70 to 520 meters. It still remains open along strike to the South and in the downdip direction.

As we reported in our news release last week, Hole D1121 intersected the SB Zone at the 3,600-meter elevation and returned an intercept of 6.2 grams per tonne gold over 109.7 meters, which includes an intercept of 22.2 grams per tonne gold over 19.4 meters.

This hole continues to define a high-grade core in the SB Zone which extends downdip from the ultimate pit design and indicates the opportunity for a significant high-grade underground deposit. This is the deepest drill hole completed on the SB Zone to date by Centerra and the widest mineralized intercept. The SB Zone remains open along strike to the South, down (indiscernible) to the Northeast, and in the downdip direction.

The high-grade intercepts below the ultimate pit design are extremely encouraging and demonstrate significant underground mining potential at Kumtor. Further drilling and engineering studies are underway to evaluate this exciting development.

At Sarytor, we continued the infill drilling program in the third quarter, completing a further 30 holes. The aim of the program is to systematically infill between the existing 80-meter drill sections to develop a drill spacing to enable conversion of resource to reserves and to determine the limits of the mineralization. The work has been successful, and we are confirming the continuity of the mineralization, with results ranging from 1.3 grams per tonne to 24.1 grams per tonne gold over downhole widths from 0.8 to 55.2 meters. We have also extended the mineralization downdip on some sections.

The drilling in general has returned results as expected, with a number of intercept being better than expected. Drilling will be completed in the fourth quarter, and resource and reserve estimations completed for year-end reporting.

The detailed drilling results with plans and sections for both Kumtor and Sarytor are posted on our website. With that review of our exploration activities, let me pass you back to Len.

Thanks, Ian. Let me say that I am pleased with the progress we have made and the long-term outlook for Centerra. We look forward to substantially growing reserves at Kumtor and the successful conclusion to our negotiations in Mongolia to enable a stable future there.

With that, let me reiterate that our priorities continue to be, firstly, in the short-term to keep driving the revised program at Kumtor. Secondly, to put in place the Gatsuurt development. Thirdly, continue to focus on accessing the SB Zone as soon as possible and advancing an underground development program. Fourthly, continue our aggressive exploration program to grow and expand our reserves and resource base. And lastly, to continue to look for new growth opportunities through acquisitions.

With that, let's open up the call for questions. Operator, please lay out the process for the question-and-answer session.

(OPERATOR INSTRUCTIONS) Victor Flores from HSBC.

First of all, I have a question about Boroo and the heap leach plan or project that you're thinking of putting in there. I was wondering if you could explain to us whether this is coming from resources at work in the mine plan; or whether you have decided to take some of the reserves that were in the mine plan and process them via heap leach -- I gather, because there is some economic benefit. If that is so, could you explain what those trade-offs are?

Victor, Len here. You're right on both counts. We have justified the project on the low-grade oxide and transition ore reserves within the current pit. However, we expect that with our reserve calculations at the end of the year we will be able to include much more material outside of the pit. So you're right on both counts.

So it's going to be a bit of both. Can you give us a sense at this point in time -- that 3 million tonnes per year would go for how many years?

Well, we expect it to go at least for two to three years, but likely more than that. We are in the final stages of developing the project. We will be back to you in the end of the next quarter with more definitive numbers.

Great, thanks. Just on the issue of Mongolia, you're negotiating now with the government. What is your understanding, if you can tell us, as to where the give and take is going to be? Is there going to be give and take on the windfall profits tax? Have they indicated that they have an interest in participating in the project? What are there going to be the parameters for that investment, if that is the case?

Victor, we are still at the very early stages of our discussions here. But our objective is to come out with a agreement that is fair to both parties and that will probably give something up on Boroo to claw something back on Gatsuurt. That is about all I can say about it right now. But I will say that we do intend on concluding these negotiations, at least on our part, at the end of the year.

Okay, great. Thank you very much.

Mike Jalonen, Merrill Lynch.

I have a question for, I guess, David Petroff. Just wondering on the capital spending, you mention $125 million for the year, and you're capitalized so far only $54 million. So big jump there. In the fourth quarters I notice some trucks are being bought for Kumtor. Maybe you can break that down?

Well, Mike, we have a big program for Kumtor in terms of expanding the pit. We have approximately $100 million that we're going to be spending there over the year, and we have -- on growth capital we have only booked about $39 million. So it is a long list of the equipment and trucks and mobile equipment, shovels as well.

So this will be good till the end of the mine life, which obviously is getting further and further out there, by the sounds of it?

Well, it will be good for some time for sure. The question is how we keep extending the ore body; and that is Ian's job to make sure that maybe we are buying new equipment later in the life.

You certainly hired a good man to do that job, I might add. I guess just on that, maybe for Len or George, I guess I am not confused but just a little -- trying to figure out. You have got your forecast for Kumtor next year. Does that include Sarytor? What where do some of these new zones fit in longer-term?

No, it does not include Sarytor. It includes at this stage rather modest production from Southwest zone. So we are looking to fast-track the Sarytor development such that we could get some production out of it in the first half of next year. But of course, we have to complete the reserve drilling, which we have done; calculate the reserves; and get the government approvals to develop it. Which they have indicated that they will fast-track those, too. So we do have a little upside on Sarytor, and on the Southwest zone.

So that 440,000 to 475,000 estimate for Kumtor is conservative then?

You know, Mike, we are a pretty conservative group here.

Okay, you certainly proved that. All right, well, thank you.

Haytham Hodaly from Salmon Partners.

Most of my questions have actually been answered, but I do have one. I just want some clarification. I understand that the windfall profits tax, the translation is subject to interpretation. So I am wondering -- what do you currently interpret it to be? Is it 68% of the tax on the incremental increase above $500 per ounce? Is that what it is in your eyes?

Yes, it is.

So just on the $500 to $600, let's call $100 margin, you would get taxed at 68%?

Correct.

Okay, thank you.

Stefan Axell from GMP Securities.

Following up on Victor's question, do you guys have any guidance for a grade of the stockpile at the Boroo heap leach and the potential recovery rate?

Steven, Len here. As I said to Victor, we're very optimistic about this project; but we're still in the final definition stages. We'd prefer to answer those questions once we have it a little better defined, which would be at the end of next quarter.

Okay. Also are you still planning on cleaning up the slide towards the end of 2007? Is that a good guess at Kumtor?

Steven, Len here. No, what we intend to do now, the decision we made after looking at the various options we had, and the optimal solution for us is to drive as quickly as possible to get to the high-grade SB Zone. So that is what we are doing. Almost all of the mining equipment right now is focused on removing the waste above the SB Zone and mining that small part of the Southwest zone.

So right now, all our ore is coming primarily from stockpiles and a little bit from Southwest zone. As a result of that, we have been able to move the mining from the high-grade SB Zone up to the first half of next year rather than later in 2007 and early 2008.

Our intent would be, once that mining equipment is freed up from stripping the SB Zone, we would move it to recover the highwall. So it is a couple years out.

A couple years out. Okay, that was great.

(OPERATOR INSTRUCTIONS) Barry Cooper from CIBC World Markets.

A question for George, I guess. George, the grade at Boroo was up at 4.15. A little bit higher than what you had been year-to-date. You indicate that you're using rental equipment and whatnot, and so the production is up.

I guess, is that grade sort of a surprise? Or indeed was that part of the mine plan? Then if you are using this extra rental equipment, is that being done in part to offset the lower production that is coming out of Kumtor?

Regarding the rental equipment, we have got two production shovels at Boroo. We went through some rebuild activities during the quarter. So we backed up our loading capacity with some rental equipment for the quarter.

Because of the fact we are setting ourselves up for a heap leach project and for next year, we are trying to maximize production. So high utilization of the truck fleet is imperative. Therefore we use the rental loading equipment during the quarter.

In terms of the grade, pit 5 is nearing completion, and we are getting some positive reconciliation in the bottom of pit 5 with higher grade ore. That did help us during the quarter.

Can you give me a sense as to what you were expecting? Were you expecting like 3.9? Or what kind of a grade would you have been expecting versus what you got?

I think if you look at our outlook, that was the grade that was expected. I don't have that at the tip of my fingers. But the positive impact was simply we had more high-grade tonnes in the bottom of pit 5 than the model predicted. That pit will be completed in the fourth quarter, so we could get some benefit there as well.

Right, okay. Then a question for David. Maybe you can walk a geologist through your calculation here on the leverage there. I am a little perplexed at how you have less leverage for a $25 move in the gold price on your revenue line than you do on your earnings line.

Well, that is a pretty tall order, but let me take a crack at it. It is a function of the fact that, for the quarter and for next quarter, the cash cost per ounce to produce at Kumtor is going to be higher than the gold price expected. So then when you change what you are going to realize by $25, then you are either dipping more into the kitty to fund it, or you are adjusting your inventory by the $25.

So that is the swing. It is not just the revenue, but you have got that fact that your cost are running right at the price.

Right, but wouldn't still your revenues change by more than your earnings number? Or at worst be the same?

No, if the gold price goes down, you are going to be putting less of what you spend in inventory costs. So that has to come through the income statement.

Okay, good enough, then. Thanks.

Mike Jalonen from Merrill Lynch.

Len, just following up, what is the -- is there a cost forecast for Kumtor in 2007 yet? I didn't see one here.

Sorry, Mike. I didn't catch that.

Is there a cost forecast for Kumtor in 2007?

No, we have not provided any guidance on cost for 2007 yet, Mike.

Okay. Maybe just dipping to Boroo, is there any --? I am sure you guys [came off] before; but is there a production forecast for Boroo in '07? I don't see it mentioned here.

Right now, the outlook that we have out is for both operations. We will be providing a little more detail on that at the end of this quarter. End of next quarter, sorry.

Okay, thank you.

(OPERATOR INSTRUCTIONS) It appears at this time that there are no further questions.

Thank you, operator; and thank you everyone for joining us on our call today. We look forward to speaking with you again at the end of next quarter.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.