Centerra Gold Inc (CGAU) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Centerra Gold third quarter 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) And as a reminder, this conference is being recorded Wednesday October 31, 2007. And I would now like to turn the conference over to Mr. John Pearson, Director, Investor Relations. Please go ahead, sir.

Thank you, Jennifer. Good morning, everyone, and welcome to Centerra Gold's third quarter conference call. With me are Len Homeniuk, President and CEO; David Petroff, Executive Vice President and CFO; Ian Atkinson, Vice President, Exploration; and Ron Colquhoun, Vice President, Project Development and Engineering. On the call today, Len will start with a review of the quarter and an update on political events and 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 mode only. After the formal remarks, we will then open the phone to questions. Please note that all figures discussed today are 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 a more detailed discussion of these risks and 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 which we issued yesterday, Tuesday October 30.

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

Thanks, John, and good morning, everyone. I am pleased to report that operationally the third quarter was as expected. More importantly, however, a number of significant milestones were achieved in the quarter including firstly, reaching an agreement in principal with the government of the Kyrgyz Republic regarding Kumtor. Secondly, completing an amended Boroo stability agreement with the Mongolian government. Thirdly, encouraging geotechnical results at Kumtor will result in steeper pit wall slopes and therefore lower stripping ratios. We are on track to access the SB Zone in the second quarter next year. Fourthly, after the quarter end, we completed the purchase of the remaining 5% minority interest in Boroo and lastly, the deadline for completion of the Kumtor transaction has been extended to February 15, 2008 due to the scheduling of Parliamentary elections in the Kyrgyz Republic.

On the financial side, we had net earnings before unusual items of $0.02 per share or $4.8 million, in line with expectations. Unusual items in the quarter totaled $95.3 million which included a $90.3 million non-cash expense representing the value as of September 30 associated with the 10 million treasury shares to be issued pursuant to the agreement regarding Kumtor that we had previously announced on August 30. Cash generated by the operations amounted to $29 million with capital expenditures of $37 million and Centerra entered the quarter with about $134 million of cash on hand.

On the technical side, the most exciting news was that the results from our ongoing technical work at Kumtor are encouraging. The geotechnical drilling, till analysis, dewatering tests, and geophysical surveys now indicated that we were very conservative in our design to stabilize the waste dump slopes. As it turns out, the till layers are approximately 40% thinner than originally assumed from Soviet era data and the till appears to be amendable to dewatering. Therefore, the design pit wall angle may be able to be steepened to near the original design. This will require the removal of much less waste than expected from our assumptions in July which is likely to lower costs in future years.

While we are on track to get into the SB Zone in the second quarter next year, access to the high grade ore in the SB Zone will occur in the second half of 2008. We expect to announce with our year-end results a revised outlook for the life of mine production for Kumtor and including on an assessment of the impact if any on the reserves and resources.

In August as we previously announced, Centerra, Cameco Corporation, and the government of the Kyrgyz Republic entered into agreements in principal regarding the outstanding Kumtor issues resulting in the Kyrgyz government getting an increased shareholding in Centerra which would further align our interests. The government submitted the agreements for Parliamentary approval in early September and the Parliament began to deliberate the issue during the first half of October. On October 8, the Parliament asked the Parliamentary committee on Industry and Trade to review the agreements and give its conclusion. On October 10, the chair of the committee requested additional time for consideration and the Parliament is voting on the issue for October 22. But Parliament was dismissed prior to the voting. Parliamentary elections are now scheduled for December 16. As a result, all parties have agreed to extend a deadline for closing the transaction contemplated by the agreements from October 31 of this year to February 15 next year. And the Kyrgyz government has indicated that it intends to resume its efforts to obtain Parliamentary approval once the new Parliament is in place and to satisfy the other conditions to completion.

Just a brief commentary on the evolving political situation in the Kyrgyz Republic. On October 21, the citizens of the Kyrgyz Republic voted in a referendum on drafts of a new constitution and a new electoral law proposed by the President of the Republic. The President signed both into law on October 23. Under the terms of the new constitution, the number of Parliamentarians will increase to 90 from 75. The new electoral law contemplates party slate nominations of Parliamentary candidates rather than individual mandates. The political party holding the majority of Parliamentary seats form a new government. On October 22, the President dismissed the Parliament effective that day and as already noted, the new Parliamentary elections have been scheduled for December 16. On October 24, the President accepted the resignation of the Prime Minister and Cabinet as is required by the new constitution; however, the President directed them to continue to perform their duties until a new cabinet is formed, following the Parliamentary elections.

Now a few words about Mongolia. As was previously announced on August 3, we ended into an amended Boroo stability agreement with the Mongolian government which reaffirms the Company's right to exploit the Boroo gold deposit under a stable, tax, and operational scheme. This amended agreement paves the way for us to advance and finalize an investment agreement for Gatsuurt. I should mention that we have had very positive settlement discussions with the Gatsuurt Company regarding the dispute over the Gatsuurt license. We now expect Gatsuurt Company to play a constructive role in obtaining the necessary government approvals for the development of this deposit.

As always, we continue to monitor and manage all the developments in our host countries with great attention, we work diligently with the government at resolving our outstanding issues on a fair and equitable basis.

I will now briefly review the operations. Kumtor produced over 77,000 ounces of gold this quarter as expected which was higher than the third quarter of 2006 due to the high grade and better recoveries since the 2006 production was impacted following the pit wall movement in July of that year.

As I discussed earlier, we are encouraged with results of our geotechnical studies to stabilize the waste dumps above the central pit and SB Zone high wall and we are still on track to get into the SB Zone in the second quarter next year and access the high grade ore in the SB Zone in the second half of 2008. Work has commenced on the SB Zone underground project with the initial preparation work to sight the porthole. We will continue to advance this work as quickly as possible.

Boroo production was as expected but lower than the third quarter of 2006's result of lower grades and recoveries. The recovery has been effected by the changing metallurgical nature of the ores in pit three as they are less oxidized at depth. Total cash cost increased to $280 per ounce as a result of the lower production and the completion of pit six pre-stripping. Capitalization of pre-stripping for pit six amounted to $2 million in the quarter and $7.7 million in the first nine months of 2007.

The Boroo heap leach project construction is well underway. The emergency and pregnant solution pads are 100% lined, concrete basis and footing for the recovery plant have been completed and structural steel erection for the building is underway. Two out of four cells of the heap leach pattern are now 100% completed and the cross drainage material is being placed on the pads now. The remaining portion of the cells will be lined next year in the warmer weather. In summer, operationally the quarter was as expected.

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

Thanks, Len. I'm going to start with our Mongolian segment and the financial results at Boroo. The quarterly comparison, third quarter 2007 to third quarter 2006 shows revenue substantially unchanged at $42 million which reflects the higher year over year averaged realized gold price offset by lower sales volumes. The cash costs for the 59,000 ounces of gold produced were adversely effected by lower grade and lower recovery. In the third quarter of 2007, Boroo was fully taxable. The tax rate of 25% was effective from January 1 and therefore Boroo had a tax expense of $9.4 million during the quarter and $24.2 million year to date. In 2006, Boroo was not subject to any profit tax. In Mongolia net earnings for the quarter were down from last year, reflecting the fully taxable status.

For our Kyrgyz Republic segment in the third quarter of 2007, revenue was significantly better from higher gold prices and more ounces sold. Gold production of 77,000 ounces in comparison to 53,000 ounces in the third quarter of 2006 reflected better mill field grade although recovery was lower. 2006 third quarter production was very much challenged because the pit wall movement occurred that July. The cash costs this year were adversely affected by higher maintenance, increased prices and quantities of consumables and reagents, and higher labor costs. In the Kyrgyz Republic there was a net loss for the quarter of similar order of magnitude to the same period in 2006.

Looking at the income statement on a consolidated basis 2007 third quarter revenue at $98 million reflected 17% higher sales volume and 10% higher realized gold prices. Primarily due to the new agreement with the Kyrgyz Republic, we expensed $95 million of unusual items and therefore in the third quarter of 2007 we reported a net loss of $90.3 million or $0.42 per share which was down from net earnings of $11.5 million or $0.05 a share in the same period last year.

With respect to the flow of funds, $29 million of cash was provided by operations. This is up quarter over quarter mainly because of a reduction in working capital levels. Cash used in investing activities for the current quarter is higher than the comparative quarter mainly due to increased growth in capital spending such as $10 million spent on Kumtor's SB Zone pre-stripping and at Boroo $6 million for the heap leach project. Total capital expenditures for 2007 are currently anticipated to be $128 million which includes growth capital of $99 million, $73 million at Kumtor and $26 million at Boroo. The Kumtor spending is anticipated to include $13 million for the development of the SB decline, $31 million to pre-strip the SB Zone in the central pit, and $20 million for equipment originally scheduled for delivery in 2006 which we received this year.

The Mongolian spending is anticipated to include $11 million on the Boroo heap leach, $9 million pre-stripping pit six, and $3 million at Gatsuurt primarily on permitting. The cash balance at the end of the quarter was $134 million, holding some of this in Canadian dollars was an effective natural hedge against depreciation in the U.S. dollar. Currently are Canadian dollar balances are minimal. With regard to the acid backed commercial paper credit crunch, there was no impact to Centerra and we don't hold any of this paper.

And finally, our sensitivity to the changes in the spot gold price for the balance of the year is as follows; for every $25 change in the spot price of gold, there would be an approximately change of $2.7 million is earnings and cash flow, approximately $0.01 per share.

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 remains at 550,000 to 560,000 ounces with a total cash cost between $430 and $440 per ounce. With that, let's open up the call for questions. Jennifer, please lay out the process for the question-and-answer session.

Thank you. (OPERATOR INSTRUCTIONS) And the first question comes from the line of Victor Flores with HSBC. Please proceed with your question.

Yes. Thank you. Good morning, everybody. Question regarding the mine plan for Kumtor is early 2008. On the one hand you've given us some pretty good news regarding the outlook for stripping but on the other hand it seems there's a bit of a veiled indication that we really shouldn't expect much improvement in production until the second half as -- if I understood correctly you'll hit SB in the second quarter but now you're saying high grade in the second half.

Good morning, Victor. Your analysis is quite right. We anticipate that the grades in the second half will improve from 2007. That is the second half of 2008. But certainly the high grade SB Zone won't be accessed till the second -- won't be accessed till the second half of 2008. So we get into it early but we're expecting the apotheoses of the top of the ore zone and that will effect initial production. So second half will be much better than the first half.

Does this represent a change in the plan relative to what you had planned before or is this -- we perhaps misunderstood what was going to happen in the first half of next year?

Victor, I think we've been -- if we review the disclosures, this is what we have said. I don't think there's any surprise there. Maybe more importantly is that we are on track with our mining plan. Nothing has changed since we made our announcement in July. In fact, we're maybe gaining a little bit. So we have no significant change to our plans here.

Okay. Great. Thank you. Second question goes to exploration and I don't if Ian is on the line or not but could we get a bit of color on what the thought process is with respect to the drill results that you got into the north end. Some of them are sort of low-ish grays but you do have that one teaser hit that might connect to that higher grade hole that you had previously to the north.

Yes, Victor, Ian is here. And we'll get him to supply some color into that.

Thank you.

Hi, Victor. That one deep hole that you're referring to, 1165 in the list of holes, the counter that we've published, yes. It's giving us some better grade over [betowitz] as well as the quarterly grade there is 8.6 grams over 15.9 meters. And it's at about the same elevation as the hole reported in the first quarter, hole 1133A. And I think what you're seeing if you -- I don't know you've had the opportunity to look at the long section that we put on the website, the updated one. As we were coming down, as we're getting deeper in the structure in the north end, we are starting to see both better widths and better grade in the drill holes. The ore zones do seem to be pulling together. And again, if you look at the long section overall, you're seeing a similar pattern to what we saw at the SB Zone. You come down the structure where the various ore zones are consolidating, we're getting better grade and better widths. So it certainly augurs very well for some deeper drilling in this area. So our plans for the fourth quarter are to try to complete some holes between this hole and the hole 1133A further to the northeast but at about the same elevation.

So really, I mean, it's very tempting to sort of connect the dots but we can't really do that until --

No. Between those two holes you're looking about 700 meters. That's a long way to connect the dots.

Okay. Excellent. Thank you so much.

Thank you. And the next question comes from the line of Steven Butler from Canaccord. Please proceed with your question.

Good morning, Len, et al. Guys, a question for you with respect to Boroo as to how -- I mean, I know we'll await I guess the '08 guidance, Len, in February but just if you could maybe just comment as to where you are in terms of the pits? It sounds like you substantially were mining from pit three in the quarter, but stripping pit six. So how does the mining progress here in the next, say, couple of quarters? How does it look? It sounds like you may be headed deeper into less -- even less oxidized materials so I assume the recoveries may suffer a bit further here. Then maybe what is the sense of timing for the first gold to be poured off the heap leach? Thanks.

Good morning, Steven. First of all, as of about a week ago, we have accessed pit six and are now putting ore from pit six through the Boroo mill so we expect some improvement in grade and better recoveries and we'll produce in pit six till Q1 of next year and then return back to pit three. The grades, the recoveries are getting lower in pit three but they shouldn't be too much different than what we're experiencing now. So we're reasonably optimistic for next quarter and with regard to the second part of your question, the heap leach, let me just ask Ron for comment on that. Ron, heap leach ore?

Yes. Steven, the heap leach will be stacked very shortly and we expect to start up in December, January and we probably will see because of the depth of the loading will be relatively short, we should see breakout very quickly. So we should see gold being poured in January, February but it will be weather dependent and certainly the commissioning of the plant is challenging at this time of year.

Okay. What is the recovery curve like roughly around on the heap leach material?

You get a very good kick in the first 45 days and we're looking at life of heap of four to one solution tons over a ton. So about 90 days would be a maximum leach time for each ton over the life of the heap. So 30 days is sort of where you would see the maximum peak.

And what's the ultimate recovery expected to be?

Depends on the ore type but we're looking at an average around 65%, 68%.

Okay. Thank you. Last question, Len, you talked about subject to investment agreement being signed for Gatsuurt and resolving the claim to the ownership by Gatsuurt LLC. If you were to say, get satisfactory agreements done on both by the end of the year, how long would it take for you to construct finally at Gatsuurt and get that thing producing?

Thanks for the question, Steven. Let me just turn that over to Ron though.

If we get the permit, Steven, we're looking at fast tracking it would probably be 21 months, 24 months before we can actually get it, the sulfide refractory component processed. We have an oxide cap that would we be able to mine which would provide a year's worth of oxide ore. But in the meantime we would have to do engineering, procurement, and construction which on the fast track would be approximately 21 to 24 months.

Okay. Thanks very much.

Thank you. And the next question comes from the line of Barry Cooper from CIBC. Please proceed with your question.

Yes. Question for either Len or Ron, I guess. Could you just walk me through -- you covered the recovery issues at Boroo well but I'm just wondering about Gatsuurt. Pardon me, not Gatsuurt but Kumtor. The recoveries were up and the grades were down this quarter and normally there's a tails effect there that I would've thought that the recoveries would've suffered when the drop off in grade occurred. Is that related in part to whether you're processing stockpiled or fresh ore? And what should we expect in terms of recoveries when you get into higher grade mineralization from the SB Zone? Are you tapped out at kind of 80% which is traditionally the life of mine number there? Or could it go higher?

Barry, good morning. I'll let Ron answer that.

Yes, Barry. Good morning. The problems historically with the ores that we saw recently have been better grades but the top of these ore buys were oxidized and the Kumtor plant is not an oxidized ore treatment process. It's really designed for refractory and preg-robbing type of ores. So we saw a bit of a problem with recovery there. The grades were getting through that and we're seeing our metallurgical testing has indicated that we're getting -- we should see better results.

To answer you SB challenge in the higher grade, that should be beneficial to us. Our test work that we've seen to date says that like Kumtor it's still challenging on the preg-robbing but with the higher grades we should see higher recoveries. We should see in excess of 80% recovery.

But only a few percentage points would be my guess.

It's still challenging ground, yes. It could be 82%, 83%.

Right. And just so everyone's on the same page, what do you mean when you say "into the high grade"? What grades are we talking about?

Barry, better than four grams per ton.

Okay. Good enough then. Thanks.

Thank you. And the next question comes from the line of Haytham Hodaly from Salman Partners. Please proceed with your question.

Good morning, gentlemen. Just a couple of questions. With regard to the Kyrgyz Parliamentary approval, if the approval is granted when they meet again, I guess mid-February, will the changes -- tax changes to your knowledge, will they be retroactive or will they be likely in effect from the time of the formal approval?

Good morning, Haytham. I think our -- well, our intent is and I believe the Kyrgyz's is as well, is that it would be retroactive to January 1, 2008.

Okay. Just another quick question, just with regards to the resignation of the Chief Operating Officer in the third quarter? Can you comment on that and who's possibly taking his place?

Paul Korpi resigned as Chief Operating Officer for personal reasons. We are right now recruiting for that position and in the interim, both myself and Ron Colquhoun are handling those duties.

Okay. Thank you very much.

I should say, Haytham, I should say that we expect to fill the position very quickly here. We're in the final stages.

Sounds good. Thank you.

(OPERATOR INSTRUCTIONS) And the next question comes from the line of Christian Lamontagne from CDP Capital. Please proceed with your question.

Hi. It's actually [Steven Kidsey]. My first question is on Gatsuurt. I was just wondering, to get the investment agreement, is this somewhat contingent or does it have to follow the investment agreement for [olotoigoi] and actually I'll ask my other question after.

Good morning, Steven. First of all, process for the Gatsuurt investment agreement requires the registration of the Gatsuurt reserves as the initial step of the process and that is underway and the government has commitment -- or at least indicated, I should say, to commence that process on November 15. And once the reserves are registered, we'd then continue on with the actual negotiation of the agreement. And I don't think it is contingent on the [olotoigoi] agreement at all in terms of the terms of those agreements; however, it could be effected by the availability of the negotiators although we expect that ours is relatively straight forward compared to [olotoigoi]. So I don't think it will be much of a factor but there could be some minor influences as a result of it.

Okay. Second question is to do more with costs, U.S. dollars per ounce at Kumtor and Boroo. I know you mentioned that you'll give us more guidance later on but I'm just wondering at this point what could you tell us, just looking at a rough range from in 2008 to 2010 in that area? What sort of costs could you sort of indicate to us for each of those operations?

Steven, I'd rather not respond to that in that we are in the process of completing the Kumtor life of mine and it's still a month and a half away before completion. So it would be a shot in the dark on our part and I'd prefer not to do that. They will be lower than they are now. That's, I think, a fair statement.

Okay. Thank you very much.

Thank you.

Thank you. And the next question comes from the line of Tim McCutcheon from DBM Capital. Please proceed with your question.

Hello. Good morning, guys. It's more of a strategic question, really. You have over $100 million in cash on your books. And you have a situation where it looks an enormous amount of good will, it's been built up and now you're able to capitalize it within Kyrgyzstan and also starting in Mongolia, finally coming to agreements with the governments there. Are we going to see acquisitions or are we going to see the money dividend out? Because clearly you have these two big assets and there's no acquisitions to date so far. And then you've got a whole lot of cash that's sitting there that you think investors would like to see either more exposure to the gold sector or have that cash out so they can get that exposure themselves in other ways. I'm just curious what -- are there plans in Kyrgyzstan, of course, due to your dominant position to work with your partner team to expand your territory there? Or is there a plan to dividend out the excess cash that you have now on the balance sheet?

Good morning, Tim. First of all, right now we have no plans to dividend out any cash. We intend to use the cash for growth purposes, either, as you say, through acquisitions that would make -- sensible acquisitions as well as through the further development of the Gatsuurt project and the SB underground zone. Having said that, with regard to the areas in which we're focused in looking at potential acquisitions, either on a corporate level or on a deposit level, we haven't changed too much since our initial IPO and our focusing in on central Asia, Asia, Eastern Europe, and I guess I would say that these days we'd look at anything that would be a good fit for us and the expertise that we have in the Company. So we are very much interested in making an acquisition and we haven't pulled the trigger yet, that's true. But we haven't found anything that makes a lot of sense for us at this stage.

Okay. Fair enough. Thank you.

Thank you. And Mr. Pearson, we have no further questions.

Okay. Thank you, everyone, for joining us and we look forward to our fourth quarter conference call. Have a good day.

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.