Centerra Gold Inc (CGAU) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Centerra Gold second quarter results conference call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) as a reminder, today's conference is being recorded on Monday, July 30, 2007. I now have the honor of turning the conference over to Mr. John Pearson, Director of Investor Relations at Centerra Gold.

Thank you, [Pamela]. Good morning, everyone, and welcome to Centerra Gold's second quarter conference call. With me today is Len Homeniuk, our President and CEO, David Petroff, Executive Vice President and CFO, Paul Korpi, Vice President and Chief Operating Officer, and Ian Atkinson, Vice President of Exploration. On the call today, Len will start with a review of our quarter and an update on political events. Paul will then comment on the operations, followed by David 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. Just a reminder, all the figures talked about today will be in U.S. dollars unless otherwise noted.

Before we begin, I would 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 more detailed discussion of these risk factors and uncertainties associated with Centerra's business and industry, please refer to our securities filings on the SEDAR web site and to our news release issued on Friday, July 27.

Now, I will turn the call over to Len.

Thanks, John. Good morning, everyone. The second quarter results include another strong quarter from the Boroo mine, as the Company's total consolidated gold production of over 153,000 ounces exceeded the first quarter production by 20,000 ounces. The total cash costs for Boroo are $180 per ounce for the quarter. At the same time, our consolidated total cash cost decreased to $349 per ounce, down from $410 per ounce in the first quarter.

Our second quarter release noted that we had net earnings of $0.09 per share, or $18.6 million. Cash generated by operations amounted to $7 million, with capital expenditures of $31 million, and Centerra ended the quarter with about $138 million of cash on hand. As you are aware, last week we announced there would be a delay in accessing the high-grade SB Zone ore at Kumtor until the second quarter of 2008. We are disappointed by this delay and this will affect our results for the second half of the year.

However, we are pleased that we now have a realistic technical solution to the issue. To date, we have had to take a very conservative approach in dealing with this challenge and while further technical assessment and additional geotechnical drilling is underway, we anticipate that our year-end results will include a revised life of mine production outlook. We will assess the viability of other more-desirable alternatives to our current approach. We also will conclude an assessment of any impact on reserves and resources.

Now I would like to take a few minutes and address the general environment and government relations in our host countries. Discussions and negotiations for creation of a more-stable operational environment for our projects continued with the Kyrgyz and Mongolian governments. I believe all sides are working diligently in resolving our differences and we will be able to come to an acceptable resolution in the near future.

As you are well aware, there is a lot of speculation in various media on the progress of our negotiations. While our general policy is not to comment on rumors and speculation, I would like to clarify that in the Kyrgyz Republic, the issues that are being discussed are primarily those concerning respective interests of Cameco and the Kyrgyz Republic in Centerra.

At the same time, the political situation in the country continues to evolve. The draft bill concerning the gold industry in Kumtor, which had been accepted in the first reading by the parliament back in March, has not been discussed further. As it stands, it has no legislative effect and does not interfere with the Company's operations in the country. Earlier this month, Centerra, Cameco, and the government held discussions in Bishkek from July 16 through 20. The government working group, chaired by the minister of finance and including members of the government, representatives of the parliament, and civil societies, presented their views of the respective contributions to Centerra by its two founding shareholders and their positions regarding material economic terms for settlement of all disputes.

The parties agreed to report the results of this round of discussions to their respective boards, prime minister, and the president of the republic and consider their proposals from both sides in greater detail. Further discussions are planned for August. In my meeting with the prime minister on July 20, he indicated that he continues to support and is encouraged by the ongoing constructive dialogue, that he believes that all differences can be addressed and resolved in a reasonable, amicable way, as appropriate between two long-term partners.

We believe that the sentiment expressed by the prime minister is genuine. 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. The Company continues to advance its negotiations regarding the Boroo Stability Agreement with the Mongolian government. Although no agreement has been signed yet, we have received indications from the Mongolian side that they would like to expedite the final resolution of these discussions. We are expecting results in the near future.

While the Company has been in discussions with the Mongolian government in 2006 and during the first half of 2007 regarding an investment agreement for Gatsuurt, those discussions have been temporarily deferred pending a resolution on the Company's Boroo Stability Agreement with the government. The Company has received written confirmation dated July 18 from the minister of finance that the government has no objection to concluding an investment agreement regarding the Gatsuurt project based on the current mineral laws of Mongolia.

The ministry of finance has acknowledged receipt of documentation from the Company related to the registration of reserves and the Company expects such registration to be completed this fall. The Company is prepared quickly advance discussions with a government regarding investment agreement for Gatsuurt following, or simultaneously with, a resolution of the outstanding issues concerning the Boroo Stability Agreement.

As always, we continue to monitor and manage all 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 Paul for a review of the operations.

Thanks, Len. Good morning, everyone. Let me provide an overview of our operations performance in the second quarter. Kumtor produced over 83 ounces of gold. Total cash costs are higher this quarter compared to second quarter of 2006 due to lower gold production resulting from lower grade and recoveries. But this quarter's cash costs are much improved over the first quarter.

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. With the recommendation to design our pit wall in the SB Zone area with a flatter design angle, this will delay our access to the high-grade SB Zone until the second quarter of 2008, as Len mentioned. Therefore, we expect 2007 gold production at Kumtor to be about 300,000 ounces of gold with total cash costs for the year of $580 per ounce. With the lower slow slope angle, it requires us to remove more waste than originally planned, but this should stabilize the waste dump above the central pit and the SB Zone high wall.

Boroo had another great quarter, producing over 70,000 ounces of gold at a total cash cost of $180 per ounce compared to 65,000 ounces of gold produced at average total cash cost of $207 per ounce in the same period in 2006. The higher production reflects higher mill throughput of 651,000 tonnes, compared to 570,000 tonnes. Lower costs resulted mainly from the capitalization of prestripping costs of pit six and increase in ounces per pour.

Capitalization of prestripping for pit sixth amounted to $3.5 million in the quarter and $5.7 million in the first six months of 2007. The Boroo heap leach project was initiated in the spring of 2007 with the stripping of topsoils and preparation of the area for the placement of liner. The Company's expectation at Boroo on a 100% basis remains unchanged, with production of 250,000 to 260,000 ounces of gold in 2007, with total cash cost of $250 to $260 per ounce. Heap leach permitting, engineering, and procurement is progressing and the project is on schedule for gold production late in 2007.

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

Thanks, Paul. Let me start with our Mongolian segment and financial results at Boroo. The quarterly comparisons, second quarter of 2007 to the second quarter of 2006, shows an increase in revenue, which is attributable to the higher average realized price. Cost of goods sold decreased reflecting reduced mining costs due to the capitalization of prestripping of pit sixth.

Another important difference is that now we are passed our three-year tax-free period and are paying income tax at a 20% rates. So there were no income taxes last year. In addition, we are disputed with the government whether income taxes commenced January or March this year. So in the second quarter at Boroo we paid, under protest, a $4.1 million tax bill for the January and February 2007 months. In Mongolia, therefore, net earnings were $22 million, about the same as last year.

For our Kyrgyz Republic segments, net earnings in the second quarter of 2007 were $2.4 million. That was significantly lower than $9.3 million for the same period in 2006. The main reasons were lower sales volume and higher cash and non-cash costs. On a consolidated basis, therefore, in looking at the income statement, the second-quarter of 2007, we see revenue was $104 million, which reflected lower sales volume, and realized gold prices that were 5% higher than in the second quarter of 2006.

Cost of sales in the second quarter of 2007 decreased to $55 million, primarily reflecting the lower costs at Boroo. Net earnings for the second quarter of 2007 were $18.6 million, or $0.09 per share, and that was lower than the $0.13 per share reported in the second quarter of 2006, strongly affected by Kumtor's lower production and higher operating costs and Boroo's income taxes.

With respect to the flow of funds, cash provided by operations is down quarter-over-quarter mainly because of the lower production at Kumtor and the increased working capital levels. When it comes to cash used in investing for the current quarter, it is higher than the comparative quarter mainly due to the increased growth capital spending, such as the $8.5 million spent on Kumtor's SB Zone prestripping, $3.5 million prestripping at Boroo's pit six, and $2.9 million buildup of the heap leach inventory amount. Also in the second-quarter of 2007, $10 million was drawn pursuant to a loan for the Gatsuurt project.

Total capital expenditures for 2007 for the full year are anticipated now to be $134 million. That includes $30 million of maintenance capital and $104 million of growth capital. The growth capital splits $71 million for Kumtor and $32 million for Boroo. If we look at the Kumtor spending, $71 million, the major items are $33 million to prestrip the SB Zone in the central pit and $20 million equipment originally scheduled for delivery in 2006 but we received in the first half of 2007. We have got $12 million for the development of the SB decline. In Mongolia, the $32 million of growth spending is split between $17 million of Boroo heap leach, $7 million prestripping pit six, and the permitting at Gatsuurt of $3 million.

Right now at the end of June, the cash balance is $138 million, which is down from $186 million at the end of the year 2006. Finally, let me just address our sensitivity to changes in the spot price of gold for the balance of the year. For every $25 change in the spot price of gold, there would be an approximate $6.6 million change in revenue and $5.5 million change in both earnings and cash flow.

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

Thanks, David. Looking forward, our 2007 forecast of consolidated gold production on a 100% basis is 550,000 to 560,000 ounces, with a total cash cost of between -- $430 per ounce to $440 per ounce, reflecting the lower Kumtor production. We hope to soon have positive resolution to the issues in the Kyrgyz Republican and a successful conclusion to our negotiations in Mongolia to ensure a stable future in our host countries, which will allow us once again to concentrate on the growth of our company.

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

(OPERATOR INSTRUCTIONS) Victor Flores, HSBC.

Good morning to everybody. First question with regards, Len, to one of the comments you made regarding the discussions over Gatsuurt. If I understood you correctly, you said the governments said were happy to entertain discussions on an investment agreement for Gatsuurt as long as it is within the framework of the current law. Is that another way of saying they are saying you have got to comply with the law and there is no way around it, otherwise there is not going to be a development of Gatsuurt?

Right now, what they are saying, Victor, is to develop Gatsuurt with the -- it has be done under the current legal regime, but I believe there is still some room for discussion here on how we folded in with the Boroo. Right now, they have said the current tax situation will apply and what we want to do is advanced that so we can at least get the reserves registered and move on with our discussions.

Great. Thanks. Then just turn to Kumtor. I'm sure there's going to be lots of questions along these lines, but could you give us a sense of what alternatives your are looking at in terms of a new life of mine plan and sort of what are the critical elements are in those choices?

I will attempt to answer that and maybe Paul will add a few things here. What we have done is we have -- because of the unconsolidated till layer underlying the waste rock that we have to remove, we have had to lay the [pit] back. And we were doing this based on just very little information, information that is exposed in the pit wall and one or two drill holes. Right now, we have all our drilling equipment gathering further information on the nature of his till. So our current plans have assumed that this till has a uniform thickness, which we suspect is not correct and the drilling will confirm this.

We also have given it very low coefficients of strength and we expect that this, too, will be proven to be probably conservative, but, again, we need the drilling information to do that. Lastly, there is a lot of water in this till and we are looking at, now, possibilities of even de-watering it further.

So I think those are the three areas that we are focusing on right now and we have also commenced a seismic survey over it to try to get a better thickness -- determination of the thickness of the till. I should say a sonic survey, not a seismic survey. All of these results will take a little time to gather and we are optimistic by year-end, we'll at least understand the situation better. Our guess is it will be no worse than the current situation and there is some likelihood that it could be better.

Okay, perhaps let me just ask the question a slightly different way. What I believe you are saying is that if this till turns out to be somewhat better behaved then perhaps you think, then by the second quarter of next year, you have laid that stuff back and your back into the SB Zone and the life of mine plan carries on more or less as you had thought previously. If not, then you'll have to look at perhaps more drastic action. Is that a fair interpretation?

Victor, that is right on. We feel that next year at this time, with a little luck, we'll be able to steepen and the pit wall slopes and get back to the mining plan that we had originally. In fact, it may even be better. We are optimistic that will be able to steepen in bedrock more, but your analysis is correct.

Great, thank you very much.

Haytham Hodaly, Salman Partners.

Just a couple of quick questions, a couple housekeeping issues. First, for -- could you give us your forecast for exploration and business development for the second half of the year or for the full year, whichever is easier?

David, do you want to respond to that, please?

We're still forecasting $25 million for exploration and $4 million for business development.

So that means the second half of the year is going to be -- these expenses are going to be more heavily weighted towards the second half of the year. Is that correct?

That is our assumption right now.

Do you see that -- at this point, you would say based on what you've spent so far, that that seems aggressive. Is that correct?

I think certainly for exploration, I think that -- we're fairly comfortable with that. With business development, it is less predictable.

Maybe just to follow-up on that with regards to G&A, are you still looking for somewhere in the high 20s?

$30 million.

Okay, so $30 million for the full year. Just to touch -- you touched on Boroo with regards to tax rates at 20% this year beginning in January rather, what was it, March or April. Now, from what I understand based on the previous contract, was that not supposed to escalate further next year to 30 or 40%?

The contract says that you take the tax rate in effect at the time, which was 40% when we signed the agreement. We get three years of zero and then we get three years of 50%, being the 20% rate. So there is a little dispute on when the zero ended, whether it ended at the end of '06 or after February of '07, and so then we have three years at the 20% rate.

Okay, and thereafter?

After that, the agreement calls for going to 40%

All right, then one last question with regards to Boroo. For cash costs to average 250 to 260 based on the production guidance that you've given, I guess would have to see the second half of the year cash costs almost double the first half of the year if you assume similar levels of production to get to that 250 or 260,000 ounces. Can we get a feel for tonnage or grades or what you're looking for in the second half of '07?

Haytham, Len here. Paul Korpi will provide an explanation or some commentary on that.

Yes, what we are seeing during the second half are really three factors that our showing our cash costs to increase during the second half. The first is the fact that we will be seeing lower production out of Boroo as compared to the first half. The next reason is at the end -- we are in the process of prestripping pit number six, and that is coming to an end early in this coming quarter. It will be producing gold out of the pit, so you'll see those prestripping costs move out of capitalization and into cash costs. It then really, finally, we are also seeing an impact from starting up our heap leach operation at Boroo and that we are beginning to load the Boroo heap leach pad during the third and fourth quarters with ore and the recovery of ounces from that is delayed just by the nature of how the heap leach pad works. So it is really a timing factor.

Okay, so if I had to look at it, third quarter would still be okay. Towards the end of the third quarter, we start to see costs to go down, and the fourth quarter, it would be a little worse. Is that correct?

You'll see some, yes, escalation of costs as you come out of the third quarter, into the fourth quarter because of that heap leach factor in particular.

Perfect, maybe just one last question with regards to the CapEx. I know he indicated -- I think it was David that said $104 million. Was it $71 million and $33 million, is that what it was David?

Yes, it $71 million and $32 million.

Okay, so it's $103 million, so it's just rounding at that point. Just with regards to the additional costs for the prestripping, you threw out a number of $30 million for the SB Zone prestripping. Was there -- what is the incremental cost that this geotechnical work has done and this prestripping requires?

Well, there is about $20 million increment from what we were looking at before.

Okay, perfect. Thank you, David.

(OPERATOR INSTRUCTIONS) Barry Cooper, CIBC World Markets.

Just wondering how much gold are you actually anticipating from heap leach, Paul, for this year? Is it basically all building of the pad and everything and still the real gold will not filter through until 2008? How much are you anticipating for this year?

Barry, in our forecast, we have fewer than 10,000 ounces produced from heap leach.

Right, so the rest is all then grade-related in the hard rock, which will be lower at Boroo for the balance of the year, then.

Yes.

David, just wondering how to predict the variability in some of your labor costs? In the press release, you indicated that based on the negotiated new contract and the high-altitude in Q1, that impacted numbers by $2.9 million, but only $1.1 million in Q2. I would have thought something like that would've been fairly steady.

Barry, we forecast that those amounts continued through the year, first of all. In terms of variability, I do not have a quick answer for you on that.

You're right, it should be pretty steady all the way through, so there must have been some delay in the payment.

Okay, and then another one for David. I'm just wondering why did you go ahead with the drawdown of $10 million when, indeed, it looks like you're not going to be spending anywhere near that amount and Gatsuurt, while is not technically on hold, effectively it is on hold and you're only planning on spending $3 million. Why drawdown the $10 million?

Project to date, Barry, we spent almost $20 million, $19 million, so we are really recapturing some of that spending and we are providing a security in the form of a first mortgage on all of the assets there. We think that will be a beneficial thing to do.

I guess, I assume as well that having entered into that agreement with the bank that there was -- they did not want to just have it sitting, waiting for nothing being done. There was sort of the driver there to actually act on it, I suppose.

Yes.

Okay, then finally, you indicated pit and an environmental incident at Kumtor. Could you describe what that was? I am assuming it was fairly minor.

Yes, Barry, we'll let Paul answer that, but you're right. It was fairly minor.

Yes, in May, at the mine site, we were transporting a truckload of ammonium nitrate and the container that the ammonium nitrate was stored in on the truck, during the truck sliding on the road caused a spill on the roadway inside the mine gate and we had the clean up that spill and we have not received any action from the government on it. It was relatively a minor incident.

Right, okay. Thanks a lot than.

Greg Barnes, TD Newcrest.

I just know that you did a lot of drilling, exploration drilling during the quarter in and around Kumtor. You seem to have lost a fair number of the holes. Was that due to problems with the drill itself or does it reflect the tough underground or stability issues in the rock itself?

It's Ian Atkinson. It is the latter, really. The drilling that we've done in second quarter is all the way on the north end. There are long holes that have to go through a fair piece of the Kumtor shear and drilling down through permafrost to start with and then through the background does create difficult drilling conditions.

Does that give you some worries about what the underground advance might look like?

No, that is on the north end. The underground is going to be on the south end of the ore body and the drilling we did on the SB Zone actually when fairly well with the exception of where we had to drill through the waste dumps and get down through the waste dumps into bedrock. It was usually the waste dump on top of the till coming into the bedrock that gives a problem there, not the ground conditions itself. The main worry on the north end or the main problem, actually, really is the permafrost. If you have any drilling interruption that lasts beyond about 30 minutes, the holes are likely to freeze up on you quite quickly.

The advance on the decline, how's that going and how do the rock conditions look?

We have done some work on the decline and we are quite confident we're going to be able to advance that very well once we get started there later on this -- in August.

Okay, great. Thanks very much.

Peter Lam, BMO Capital Markets.

You provided a number for prestripping at Boroo. I was wondering if you could also provide a number for prestripping in the quarter for Kumtor.

For the whole quarter or for Kumtor?

For Kumtor for the quarter.

David?

Prestripping was $8.5 million.

Okay and do you know how much was spent in the first half?

I am thinking $12 million, but let me check that. I'll get back to you.

Great, thank you.

Brian MacArthur, UBS.

Just following up on some of the previous questions, I think you only talked about Victor as you talked about pushing -- assuming it all goes right, we've kind of pushed long-term mine plan back starting the middle of next year, just shifted the whole thing back. Are we still talking about, though, quite awhile ago, you gave a longer-term plan where you got up to sort of 800,000 ounces in 2009 and that shifted, obviously, because of this incident with the delay to the high-grade ore. But we have also been doing a lot of drilling and adding material elsewhere.

Can you just conceptually -- I'm sure you cannot give all the details as you work through that, just where we are and how it kind of looks on a two to three-year period. Are we still expected to get up to a very high-grade year or given all the changes and delays and hard rock underground, you expect that to be somewhat challenging now?

Brian, I think first of all that with regard to Kumtor, once we get into the SB Zone, will be able to make the kind of production numbers that we have forecast for Kumtor in the life of mine that you referred to or very close to it or maybe even exceed it. The worst-case scenario would be that the stripping ratios go up.

With regard to Boroo, by adding the heap leach, we will be maintaining roughly the same production that we have now, over 200,000 ounces and hopefully up to 250,000. So our numbers are not going to change a lot I don't think, so we will need the remainder of the year to confirm those, but we expect that once we get beyond 2008, the numbers will probably differ because of the delay from the figures that you referred to, but nevertheless will be the same order of magnitude.

Right, it's just a shift, then, if you wouldn't say a delay of six or eight months or whatever it is.

That is correct.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) of follow-up from Haytham Hodaly, Salman Partners.

Just a couple more questions. Just to touch on the Boroo heap leach, when in effect we you begin stacking on the pad?

We will begin stacking on the pad during the third quarter of this year.

And from what I recall, it's what, a 60 to 90-day leach cycle, correct?

That is we're looking, yes. And we are reflecting our recoveries based on what we expect to be able to do once we get solution onto the pad.

Okay and will the production, or the contribution from the ounces for the pad be treated as typical part of cash costs or will they be netted out against capital costs? In other words, will they be expensed or will the proceeds be netted out against capitalized costs for the heap leach itself? Is that treated as a separate type of expansion?

The cost for reclaimed and crushing and stacking will be operating costs, so they will go into inventory and come out when they are -- they will be counted as cash costs in the period in terms of gold institue cash costs, but they will come though the income statement under cost of goods sold when those ounces are produced and sold.

Okay, so that is part of the reason that the costs increase in the latter part of the year then?

That is correct.

Okay and just a follow-up on the capital costs for Kumtor, David, since I have got you. The $71 million that you indicated, you said $30 million for SB Zone come a $20 million for equipment, $12 million for development of the SB decline. Where is remaining $9 million going?

Well, there's some more mobile equipment and sundry items there.

Okay and then one last question I get up with regard to Kumtor. Kumtor grades in the second quarter were significantly higher than those of the first. I'm just curious what type of grades are you seeing so far here in the third quarter or I guess, in other words, what are expecting in the third quarter and how do you expect that to change throughout the fourth quarter?

Len here. The grades -- you're right, the grades in the second quarter were higher than in the first quarter. That was planned. It was -- we were mining some higher-grade material out of the southwest zone Kumtor, so that improved the grade. I expect to see more like first quarter grades in the third quarter.

Perfect, thank you.

Gentlemen, there are no further questions from our audience. I return the presentation to you once again to continue or for your concluding remarks.

Well, Peter asked me, Bank of Montreal asked me about the prestripping at Kumtor and it was $4.1 million in the first quarter, $10.2 million in the second quarter, $14.4 million year-to-date. That is the forecast to be $33 million for the year.

Okay. Thank you, everyone, for joining us on our second quarter conference call. We look forward to the third quarter conference call. Thank you and have a good day.

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