Centerra Gold Inc (CGAU) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to Centerra Gold first-quarter results conference call. During this 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 on Monday, April 30, 2007.

It is my pleasure to turn the conference over to Mr. John Pearson, Director of Investor Relations at Centerra Gold. Please go ahead, sir.

Thank you, Pima. Good morning everyone and welcome to Centerra Gold's first-quarter 2007 conference call. My name is a John Pearson and I'm Director of Investor Relations for Centerra Gold. Today our President and CEO, Len Homeniuk, is joining us by phone and present with me are David Petroff, Executive Vice President and CFO; George Burns, Vice President and Chief Operating Officer; and Ian Atkinson, Vice President Exploration.

On the call today Len will start with a review of the quarter and an update on political events. George will then proceed to review the operations followed by Ian with an update on the exploration in the quarter and David will follow with a review of the financial results.

Today's conference call is open to all members of the investment community and media in listen-only mode. After the formal remarks, we will then open the phone to questions. Please note that all figures are in U.S. dollars unless otherwise noted.

Before we begin, I'd like to caution you that certain statements made on 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 risk factors and uncertainties associated with Centerra's business and industry, please refer to our Security filings on the SEDAR website and to our news release issued on Friday, April 27.

And now I'll turn the call over to Len.

Thanks, John, and good morning everyone. Our results for the first quarter at both operations are somewhat better than we had expected. At Kumtor as you know, we continued to work at gaining access to the high grade SB Zone and we are beginning to see the light at the end of the tunnel, staying on schedule for access later this year.

Boroo had a strong quarter, exceeding our expectations both on production and on cash costs. Total consolidated gold production of over 133,000 ounces exceeded our plans at both sites. At the same time, our total cash cost remained high at $410 per ounce reflecting the lower grade we are currently processing at Kumtor.

As our first-quarter release noted, net earnings were $0.03 per share or $5.9 million; cash generated by operations amounted to $8 million; capital expenditures of $33 million; and Centerra ended the quarter with about $150 million of cash on hand. We continued to grow the Company through exploration. Our exploration expenditures in the quarter were $5.3 million, $3.8 million of that was at Kumtor as we continued to test the high grade underground SB Zone and the Northeast extension of the deposit.

Now I'd like to take a few minutes and address the general environment and government relations in our host countries. In the Kyrgyz Republic, the political situation continues to evolve. Recently the opposition staged public demonstrations calling for the resignation of the President and for immediate amendments to the Constitution. However, the President appears to have consolidated his authority at pointing a new and rather dynamic Prime Minister. This could lead to a period of relative political stability in the country which would give us a better opportunity to resolve a number of outstanding issues regarding Kumtor.

As we reported back in February, the previous government invited Cameco and Centerra to engage in discussions. Now the new Prime Minister has also reiterated the government's commitment to a constructive dialog with the Company. As previously, we expect that any differences that may exist will be resolved through good faith negotiations.

At the same time on March 26, the Parliament accepted the first reading and returned to committee for further deliberation draft legislation. This legislation challenges the legal validity of the Kumtor agreements with the Kyrgyz Republic proposes a recovery of additional taxes and amounts relating to past activities and calls for the transfer of all gold deposits to a newly created state controlled entity. The bill is currently on the parliamentary agenda for second reading during this May session which begins May 21.

In response, many of Kumtor's stakeholders including local communities have demonstrated strong support for the company and strong disagreement with this parliamentary action. In our view, this bill has no popular or governmental support and is being used as a negotiating tactic. Currently this action has no legislative effect and does not interfere with the company's operations in the country. It is interesting to note that the parliamentary deputy who sponsored the draft bill was quoted in the local press on April 25h, as stating that the law calls for amendments in the existing general agreement or the signing of a new agreement. It cannot be said that this law involves the nationalization of gold production assets.

As I have already mentioned, the Prime Minister has made a strong public statement supporting a constructive dialog with the company and has invited Cameco and the company to continue discussions to resolve all issues concerning Kumtor in an amicable way. We believe that the positive resolution of these issues would help to provide a stable and favorable operational environment and an improved investment climate in the Kyrgyz Republic.

Now a few words about Mongolia. As you know, the government of Mongolia, Ivanhoe, and their partner Rio Tinto, have made a recent announcement that they have come to terms regarding the Oyu Tolgoi project investment agreement. This is very positive news indeed for all of us. We also have just received an invitation from the Minister of Finance to expediently conclude our ongoing negotiations regarding our projects.

Also in his letter he acknowledged that all significant outstanding tax issues have been properly addressed by the company. As always, we continue to monitor and manage all the developments in our host countries with great attention and work diligently with the governments at resolving all outstanding issues on a fair and equitable basis.

I will now turn the call over to George for a review of the operations. George?

Thanks, Len, and good morning everyone. Let me provide an overview of our operations performance in the first quarter. Kumtor produced over 66,000 ounces of gold; total cash costs are higher in the quarter compared to the first quarter 2006 due to lower production resulting from lower grades and recoveries but this quarter's cash costs are improved over fourth quarter 2006.

Production and grade are still low as a result of processing low grade stockpile material as we work to gain access to the higher grade SB Zone. On a per ounce basis, the cash costs were $639 reflecting the low grade ore mill and thus fewer ounces produced. We still expect 2007 gold production at Kumtor to be 450,000 to 460,000 ounces of gold with total cash cost of $440 to $450 per ounce.

Recently though, minor soiled movement has been detected in the waste dump above the central pit SB Zone high wall. The waste dump slope is currently designed at a 33 degree angle. (inaudible) technical drilling and analysis is underway to find out whether a lower designed slope angle is necessary or to determine what other remedial action may be required to stabilize the waste dump and to determine what effect it could have on future production.

Boroo had a great first quarter producing about 67,000 ounces of gold at a total cash cost of $184 per ounce compared to 65,000 ounces of gold produced at an average total cash cost of 215 per ounce in the same period in 2006. The higher production reflects higher mill throughput of 616,000 tons compared to 571,000 tons and a higher mill head grade of 3.91 gram per ton compared to 3.87 gram per ton partially offset by lower recovery of 88.2% this quarter.

Lower costs resulted from lower labor costs and capitalization of pre-stipping costs from Pit 6. Mining from Pit 3 is being decreased and replaced with Pit 6 ore in 2007. This enables metallurgical BIOX tests to be completed on refractory Boroo ore in order to optimize Boroo gold recovery by utilizing the BIOX plant planned for the gasser processing.

However, the company's expectation of Boroo on a 100% basis remains unchanged with production at 250,000 to 260,000 ounces of gold in 2007 with total cash costs between $250 and $260 per ounce. Boroo [heat fleets] permitting, engineering and procurement is progressing and the project is on schedule for gold production late in 2007.

Ian Atkinson will now give you a review of exploration results. Ian?

Great, thank you, George. As a Len has mentioned, exploration expenditures for the first quarter were $5.3 million with most of it, $3.8 million, being spent at Kumtor. We're drilling activities focused on the Kumtor Pit in the nearby Sarytor deposit. We continued drilling to test the SB Zone and we completed one drill hole which intercepted the SB Zone at the 34.90 meter elevation and returned an intercept of 8.5 grams over 31.5 meters which includes an intercept of 11.4 grams of gold over 19.6 meters.

Unfortunately the inclusion in this intercept was stated incorrectly in the news release that we issued on Friday. Instead of the correct value of 11.4 grams of gold over 19.6 meters. The detailed acid results for the Kumtor drilling were posted on our website on Friday where the intercept and inclusions are reported correctly. This hole has extended the SB underground resource down dip on this section and SB Zone remains open both along strike and in the down dip direction.

Drilling has also continued to test the northeast extension of the deposit. One hole was drilled approximately 1000 meters to the north of the Kumtor Pit and it intersected the Kumtor structure and returned a number of intercepts with assays ranging from 8.7 grams per ton over a meter; 2.4 grams over 5.6 meters; 2.1 grams over 17.4 meters; 5.5 grams over 5.9 meters; and 3.8 grams over 6 meters. This hole has confirmed that the Kumtor mineralized structure extends over 1000 meters along strike in the northeast direction beyond the last continuous zone of mineralization at the north end of the Kumtor Pit. Drilling in the second quarter this year will further test the northeast strike extension of the Kumtor structure with widened spaced holes at different elevations.

At the nearby Sarytor deposit, three holes were completed on the northwest end of the deposit to follow up on a new mineralized zone that we intersected in the fourth quarter of 2006 where one hole returned an intercept of 6.9 grams of gold per ton, over 23.5 meters. This zone is on is on the northwest corner of the Sarytor deposit outside the planned open pit. Two of the three holes completed in the first quarter intersected a steeply dipping mineralized structure that returned assays of 4.3 grams over 68.8 meters and 2 grams over 14.2 meters.

Further drilling in this area will be conducted in the near future to determine the extent and controls on the mineralization and to determine the true widths of the mineralized zone.

In the first quarter, we also completed one hole in the southwest area to test the target to the northeast of the southwest deposit in an area of the planned underground portal. The whole intercepted mineralized zone that returned assays of 6.2 to grams over 9.2 meters including 15 grams over 3 meters with the style of the alteration and mineralization in this zone being very similar to the high grade SB Zone.

The different strikes of the mineralized zone have not been defined and so the true width of the intercept cannot be determined. Further drilling is planned to test the mineralization along strike and down dip.

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

Thanks, Ian. Let me start with the Mongolian segment. The financial results at Boroo were excellent, notwithstanding that it became cash taxable March 1. The quarterly comparison, first quarter 2007 to first quarter 2006 shows a significant increase in revenue from 10% higher sales volume and 21% higher average realized price.

Cost of goods sold were impacted by higher input costs but overall decreased modestly reflecting lower labor costs and reduced mining costs due to the capitalization of Pit 6 prestripping. For our Mongolian segment, net earnings were significantly better at $20.4 million in the first quarter of 2007.

For our Kyrgyz Republic segment, earnings in the first quarter of 2007 showed a loss of $10.3 million. We did though have higher realized gold prices and a $2 million tax recovery. But this was overshadowed by the anticipated consequences of the mine planned to focus on accessing the SB Zone, that is, we had reduced production at Kumtor, lower recoveries and lower [ore] rates as George pointed out.

The first-quarter 2007 results are better than the fourth quarter 2006. So quarter to quarter sequentially, we had an increase in poured ounces and a reduction in unit cash costs and we anticipate this trend at Kumtor to continue as the year progresses.

On a consolidated basis and looking at the income statement, 2007 first-quarter revenue at $82 million was down 12% reflecting 26% lower sales volumes and realized gold prices that were 19% higher than in the first quarter of 2006. The 2006 first-quarter revenues included additional ounces sold in the period due to the timing of gold shipments.

Cost of sales in the first quarter of 2007 decreased to $51.5 million, primarily reflecting lower volumes at Kumtor. The lower labor costs at Boroo were offset by the higher wages for mine site personnel at Kumtor including the increased high altitude premium.

Net earnings for the first quarter of 2007 were $5.9 million or $0.03 per share and this was lower than the $0.08 per share reported in the first quarter of 2006, again, strongly affected by Kumtor's lower production and higher operating costs.

Looking at our cash, cash provided by operations is down quarter over quarter again mainly because of the lower production at Kumtor and increased working capital levels. Cash used in investing for the current quarter is higher than the comparative quarter mainly due to the mine expansion of Kumtor for which some of the mobile equipment arrived this year.

Total capital expenditures for 2007 are anticipated now to be $131 million which includes $27 million of maintenance capital. Growth capital is expected to be $104 million. It includes at Kumtor $20 million for equipment originally scheduled for delivery last year but received in the first quarter of this year. It includes $17 million for the development of the SB decline and it includes $12 million to prestrip the SB Zone in the Central Pit. The $104 million of growth capital also includes at Boroo $19 million for heat fleets and $25 million for the development of Gatsuurt. The cash balance at the end of this quarter, first quarter of 2007, was $150 million which was down from $186 million at the end of 2006.

And finally, our sensitivity to changes in the gold spot price for the balance of the year assuming about 575,000 ounces of gold if sold is as follows. For every $25 change in the spot price of gold, there would be an approximate change of $12 million plus or minus in both earnings and cash flow.

And with that, let me turn the call back to Len.

Thanks, David. Looking forward, our 2007 forecast of consolidated gold production on 100% basis is unchanged at 700,000 ounces to 720,000 ounces with a total cash cost between $375 and $385 per ounce. We are continuing to work on growth opportunities through selective acquisitions. We hope to have positive resolution to the issues in the Kyrgyz Republic and a successful conclusion to our negotiation in Mongolia to ensure a stable future in our host countries.

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

(OPERATOR INSTRUCTIONS) Victor Flores, HSBC.

Thank you. Good morning. I have a couple of questions. First of all related to the procedure, if you can explain it to us for how the Parliament works in the Kyrgyz Republic and sort of what the milestones might be once this bill comes back for discussion in May? Can you give us a sense of what the procedure is going forward and when we might know what resolution there is one way or the other?

Victor, Len here. The procedure is that the parliamentary -- any parliamentarian can introduce the bill and this was a bill introduced by an independent parliamentarian. It received first reading which has no legal effect and what happens upon first reading is it is referred to committee. And then it comes back automatically onto the agenda for the next session. So that is what has happened here.

Now several things can happen here. The Parliament can refuse to discuss it any further and just let it stay or they can refer it back to the committee for further deliberation to be reintroduced at the following session for our third reading or they can vote to pass it. If they do vote to pass it, it is then sent to the Prime Minister -- or sorry -- to the President, and the President can veto the bill if he wishes. If he does veto it, it is returned to Parliament and if the bill is passed by two-thirds of the parliamentary members after the presidential veto, then it becomes law. And the law would then be drafted and promulgated.

Now, just let me ask you a follow-up. I assume that throughout these various processes when it goes back to committee and is reintroduced, it could be modified?

Quite substantially, yes, correct.

So, unfortunately because they have a parliamentary system, this could go any number of directions just I suppose as any other country?

Right. You are quite correct and of course all that we can tell you is what the Prime Minister has been saying and what the -- that there will be not being any nationalization and indeed even the sponsor of the bill as I mentioned in my report to you earlier, have said that he didn't intend it to mean nationalization but rather more control of the gold deposits by the government.

Okay, great. Thank you. And if I could just ask a follow-up on the exploration side. Ian, on this hole that you have to the northeast of Kumtor, does that -- do those intercepts and the mineralization of those intercepts give you a fair amount of confidence that this really is the extension of Kumtor at South or could this be another independent zone that you didn't know that exists to the northwest just like you have Sarytor and the Southwest Zone?

No, Victor, it is Ian. No, I think we are fairly confident that yes, this is the main Kumtor structure as we chased it out to the north. Between the north end of the pit and this intercept, we've not got a total length -- this is the sixth hole we've completed in there and we are managing to pick up the structure in all -- or most of the holes. So we have a good sense of where it is going now.

And this follow-up drilling that you said would be relatively wide-spaced, by when will that be done and how much spacing will you have across that 1000 meters of strike?

We are hoping to get a lot of this done over the next two quarters and our current plans are to space this out roughly 80 to 100 meters along strike in the order of 120 meters down dip.

And that will give you a fairly good idea of what the geometry is say by the end of the year then?

It should give us reasonable coverage on that gap between the north end of the pit and this drill hole that is 1000 meters to the north. We probably will be able to cover about 50% to 60% of the spatial (technical difficulty) if you look at it on a long section.

Great. And if I could just indulge one last question on Sarytor. What do you think is happening with those holes that you've identified? Does it look like it is the same structure and you are just chasing it or does this seem to be some kind of an extension or perhaps an independent area that isn't necessarily connected to Sarytor?

We indicated in the news release and I said a little earlier I think we are looking at a steeply dipping structure in this area and it is off the north edge of the Sarytor deposit; whether the two are related right now we are not -- or how we are related, I should say -- we are not 100% insure. But certainly there is another mineralized structure in this area. But unlike the Sarytor deposit, which is relatively gently dipping, this one seems to be very steep. And we do need to get two or three inclined holes across it so we can work out just what is going on.

Great, thank you very much.

Terrence Ortslan, TSO Associates.

Good morning, it's Terry Ortslan. Len, and just on the Mongolian itself, do I understand that except a two-month adjustment in the taxation issue there is nothing else to discuss on Boroo?

Terry, right. The issue that you refer to is a debate we're having with the government in when commercial production starts. And right now we are two months difference so I don't believe a major issue and we did indicate the effect of it in our press release. Right now that is the only significant outstanding issue in compliance with the current agreements.

Of course we are trying to negotiate a stability agreement or an investment as they are called now on Gatsuurt. And that negotiation hasn't progressed any since the fall. Clearly the government wished to deal with the Ivanhoe project. So as I mentioned, we are optimistic that we will be back at the table and discussing things with them by the mid to the end of the month of May.

Okay. Just coming to Boroo, just want to finish that off. So the existing stability agreement will be adjusted and will have the same expiry dates as the original stability agreement for Boroo?

We are not -- we haven't been asked and we are not considering any change in the expiry date. What we have said to the government is that if they wish we are willing to negotiate an all-encompassing agreement that would include both the Boroo and the Gatsuurt operations. And that is the basis upon which our negotiations have been conducted.

And the Gatsuurt CapEx number is not subject to the conclusion or are you going to spend the money anyway?

Oh it is definitely subject to the conclusion. Right now we have Gatsuurt on standby doing just the basic engineering provided and we won't develop it unless we can achieve a satisfactory investment agreement for all our shareholders.

David, your $90 million on Gatsuurt, it is not going to happen -- it ain't going to happen this year?

That is right, Terry. Our spending is subject to how we resolve the issues on the negotiations with the Mongolian government.

Okay. Incidentally I'm very impressed with the staff you have there, Mr. [Corpy] and his leadership and he has done a great job. I just want to that insertion into this conference call.

Thank you, Terry.

Just another thing, Len, now that you are on. Can you comment further -- I missed the beginning of the conference call on the corporate issues involving one of your competitors that you declined to comment that it is nothing happening there?

Terry, I would prefer maybe not to discuss that. Thank you.

Okay. But this -- I mean I remember the information came from a disclosure by you or a news wire services. But I don't remember exact wording what it meant but you basically declined saying that nothing was happening or nothing will continue to happen or sort of has happened. Does that mean that you are doing other activities with respect to Centerra hopefully so which will involve Cameco's ownership?

Well, Terry, Cameco has indicated that they are committed to the gold business but in the long term they don't consider it to be strategic and are looking for some way to rationalize their divestiture in Centerra and we of course are working hand in hand with them trying to find a way to do that. And the logical way would be through a rational accretive acquisition. And that is what we have been looking at and we still continue to march down that path.

Fair enough. Thank you, guys.

Thank you, Terry.

Steven Butler, Canaccord Adams.

Good morning, gentlemen. A question I guess, George, for you. With respect to Kumtor, where it was certainly a quarter as you say -- it met your plans. I guess, we didn't really have quarterly guidance specifically, guys. But 66,000 odd ounces, you have a heck of a lot of catching up to do to meet your full-year. So I guess have grades been improving into the second quarter? And will we see a bit more of a major impact in the third and fourth quarter as you may hopefully at that time -- I'm not sure whether you will be in the SB Zone or not by that time, George?

George here, Steve. Yes, in fact we are expecting production in the second half to nearly double the first half and it will be the result of uncovering and accessing higher grade ore coming out of the SB Zone.

Okay. And is the mine plan being reviewed? As you say, it sort of infers that it is given the minor -- how would you characterize the waste up movement that has occurred in the last little bit of time? As a grave issue or not too big a deal?

At this point, Steve, it's not too big a deal. Obviously with the slope issues we've had at Kumtor, we take slope issues very seriously. The movement is very minor. It is waste dump that is moving and we've got a technical analysis underway including drilling some holes, taking samples, checking densities, measuring water pressures -- all those sort of typical things you do when you monitor slope movement. So at this point, we are still looking into it but I'd characterize it as minor movement, something we are going to follow up on.

Yes. Would you characterize -- will Q2 production at Kumtor be much the same then as Q1 or a slight improvement?

It's going to be in the same range as Q1 and then the second half, a significant increase in production.

Okay. And, Len, just coming back to the Mongolian situation, as you said, you were happy and pleased to see the investment agreement that Ivanhoe was -- although we are still waiting to see I think some of the details unless I'm mistaken, we are still missing some details as to the nature of that agreement. I mean is the windfall profits tax still something that is being -- do you know of that was also part of that deal or have you seen any aspects of that agreement yet?

Steven, no, we only know what is in the public record from Ivanhoe and they haven't released any of the details nor have the government. But our understanding is -- well, I don't think anybody would be developing anything in Mongolia with the windfall profit tax. So I expect there is some accommodation there. And certainly we would be looking for something there.

Okay. Thanks, guys.

Thank you. (OPERATOR INSTRUCTIONS) Barry Cooper, CIBC.

Good day. George, a question on Kumtor there. If we look at just the year-over-year stats that you show in your tables there, the great differential between Q1 of '06 and Q1 of '07 is about 10% but the cost differential is about 50%. Now clearly that delta is not probably representative from the standpoint that I guess you're processing stockpile ore which is a bit oxidized and not getting in proper recoveries and what not. But if I could kind of put you on the spot, what do you think your costs would have been in Q1 if the grade would have been the same as it was a year ago? In other words, 10% higher. What I'm trying to ascertain is just how much of the -- have the cost curve moved for you guys on a like-for-like basis?

Costs generally are higher, Barry. As you know we have the high-altitude change that has affected us beginning in January of this year. It is the most significant change in our cost structure. In addition to that, our strip ratio in our expansion is driving our mining costs up. That though is required in order for us to access and develop the new reserves in the SB Zone. So you know, we are on track with the expansion and all the equipment is now on-site. We have a few trucks still to put together and as a result our mining costs have risen.

Would you say 10% or 15% or any idea of what kind of a number?

I could maybe give you an idea if we were mining about 80,000 BCMs a day a year ago and we are headed to 140,000 BCMs a day by midyear. So a big increase in our mining costs. That along with the high-altitude premium are the reason for our higher costs.

Okay. And then when do you actually expect to be in SB ore Zone -- the ore zone there? Is that sometime in June or is it July or when do you think you'll actually be pulling ore out of there?

Q3 we'll be recovering higher grade material out of the SB Zone.

That is a three-month period; is it July or is it September?

I think I will just stick with Q3 for now, Barry.

Okay. Then aquestion for Ian. Barricks pulled out of REN. Obviously they don't see much there in the way of I guess a mine. What is your thoughts and what are you going to do with this project now?

Can't speak for Barrick but I think it may be more of a priority issue for them than anything. They want to come to grips with Banshee to the south first. And then from our perspective, since Barrick has elected not to contribute at least for this year to the exploration program, we are looking at what our options are and what targets and how that prioritizes in the scheme of things for us as well. And we will be coming to grips with that in the near future.

What is the dilution base that their dilution will be base off of?

They currently -- it's the order of $1 million of expenditures for a percent.

Okay. Good enough. Do you have a planned program for the rest of 2007 or is it all on hold?

It's on hold right now. We've said, we had a program proposed and to the joint venture. Barrick elected not to participate so we are reviewing that and deciding on what we are going to do with it next.

Right. Okay, thanks.

Thank you, sir. Gentlemen, it appears there are no further questions from the audience. We will return the presentation to you to continue or for your concluding remarks.

Thank you for joining us today and for your interest in Centerra Gold. We will see you next quarter. Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your attendance and ask that you please disconnect. Thank you once again and have a wonderful day.