Centerra Gold Inc (CGAU) 2008 Q1 法說會逐字稿

Thank you for standing by and welcome to the Centerra Gold First Quarter 2008 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 Thursday, May 1st, 2008. I would like to turn the conference over to Mr. John Pearson, Director of Investor Relations with Centerra Gold. Please go ahead, sir.

Thank you, Dominique. Good morning, everyone and welcome to Centerra Gold's First Quarter Conference Call. Today, I have Len Homeniuk, President and CEO; David Petroff, Executive Vice President and Chief Financial Officer; Steve Lang, our Vice President and Chief Operating Officer and Ian Atkinson, our Vice President of Exploration with me here in Toronto.

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 open the phone to questions. Please note that all of the figures we are going to discuss are in U.S. dollars, unless otherwise noted.

Today, Len will start with a review and an update on political events, Steve will comment on the operations, followed by David with a review of our financial results.

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 the key assumptions, risk factors and uncertainties associated with Centerra's business and the industries that we operate in; please refer to our news release issued today, May 1st, and refer to our various filings on the SEDAR website.

And now, I will turn the call over to Len.

Thanks John, and good morning, everyone. Looking at the first quarter operating results, they were in line with the fourth quarter, as we had indicated they would be in our year-end conference call. We are on track to access the higher grade material in the SB Zone in Kumtor, and at Boroo we recently received a temporary permit for the heap leach operation. So we can expect production this quarter from the heap leach.

On the financial front, first quarter was much better than a year earlier. The higher gold price helped us as we generated net earnings before unusual items of $0.11 per share or $23.7 million. During the quarter, there was one unusual item of $4.5 million which is the incremental value associated with the 10 million treasury shares contingently issueable, pursuant to the framework agreement regarding Kumtor. After reflecting this unusual item, our net earnings were $19.3 million or at $0.09 per share.

Just a brief comment on the progress of our discussions with our Kyrgyz partners; as you all know, we again agreed to extend from April 30th to June 1st, the deadline for completion of the transactions contemplated by the framework agreement between Centerra and Cameco and the government. This very short extension is required to allow the government to complete its very extensive report to the Parliament.

To give you a little background on this, the Kyrgyz Parliament is being asked to approve our agreement. We requested that the government provide them with additional information prior to consideration of the framework agreements. Subsequently, the Prime Minister formed a new inter-governmental working group to review all issues concerning Kumtor and recently members of the working group and Deputies of the Parliament visited Centerra's operations in Mongolia and Nevada. So things are advancing there.

In fact, just last week Centerra management met with the working group to ensure that the government's expectations, with respect to the terms of the agreement, remain in line with our expectations. Whereas we believe the government will seek some changes to the terms, both sides believe that these changes will not be material for Centerra. Therefore, the government has asked for another much shorter extension to June 1st 2008.

The Prime Minister informed Centerra's management that he expects Parliament will convene on May 29th 2008 and will consider agreements governing this project. We plan to have a final round of discussions with the government in mid May and be in a position for parliamentary ratification shortly thereafter.

Now a few words about Mongolia; after the Mongolian government's approval of the feasibility study for the Gatsuurt project, we commenced negotiations regarding an investment agreement for Gatsuurt. I am please to say that those negotiations are advancing and both sides have adopted a pragmatic and constructive approach.

A good example of this is our recent temporary approval to proceed with the Boroo heap bleach. I will now turn it over to Steve Lang to discuss operations. Steve--?

Thanks, Len and good morning, everyone. I'll briefly review the operations. Kumtor produced almost 75,000 ounces of gold this quarter, as expected, which was about the same as the fourth quarter of 2007. During the quarter, throughput decreased due to the shutdown of the ball mill for the month of March, for repairs. During that time, the mill was reconfigured to run at a reduced rate.

As we reported, the ball mill restart occurred earlier than expected due to the successful replacement of the ball mill shell ahead of schedule, and it has returned to normal operation. The mill is achieving its anticipated throughput and our 2008 guidance for gold production and cash costs at Kumtor will not be affected.

On the cost side of things, while $766 per ounce is high, our cash costs were actually lower than the fourth quarter. We should see a dramatic improvement in this as our production ramps up in the third and fourth quarters of this year.

Work is continuing on the SB underground decline and we will continue to advance this work as quickly as possible, with underground production targeted to commence in 2010.

At Boroo, production was lower than expected at 46,000 ounces, due to the delay in the start up of the heap leach facility. During the first quarter, we crushed and stacked more onto the leach pads and the good news is now that we have the temporary six-month permit to start the heap leach production, we will start to see a few ounces from heap leach this quarter.

The total cash cost at Boroo was in line with where it was at the fourth quarter, but it also should come down as a result of the additional production from the heap leach.

At this point, I'll turn it over to David for a review of our financial performance.

Thanks, Steve. I'm going to start with our Mongolian segment and the financial results at Boroo. The quarterly comparison of first quarter 2008 to first quarter of 2007 shows higher revenue at $51 million, which reflects the dramatically higher realized gold price of $900 per ounce versus $645 last year; and even though there was lower sales volume.

The cash costs for the 46,000 ounces of gold produced were adversely affected by the higher mine-fleet maintenance costs, consumables, national salaries and royalties. In Mongolia, pre-tax net earnings for the quarter were about the same as last year, about $28 million actually in both quarters.

There was a real turnaround in our Kyrgyz Republic segment. In the first quarter of 2008, revenue was significantly better from higher gold prices and more ounces sold. Gold production of 74,000 ounces in comparison to the 66,000 ounces in the first quarter of 2007, [the effect of] better mill feed grade and better recovery.

The Kyrgyz Republic pre-tax net earnings for the quarter were $9.8 million, which is considerably better than the loss we were showing in the first quarter of 2007.

Looking at the income statement on a consolidated basis, 2008 first quarter revenue at $113 million reflects the 41% higher realized gold prices.

First quarter results included a $4.5 million unusual item resulting in net income of $19 million or $0.09 per share, which compares to $0.03 per share in 2007 first quarter. This is considerably higher, reflecting again the higher realized gold price for the year.

With respect to the flow of funds, $28 million of cash was generated by operations, which was up significantly quarter over quarter; and this reflects the increased earnings offset by higher working capital levels.

Cash used in investing activities for the current quarter is lower than the comparative quarter, mainly due to decreased growth in capital spending. Growth spending for the quarter was $10 million, of those about $5-6 million of sustaining capital. And total capital expenditures for the year of 2008, are anticipated to be $78 million, which includes $38 million in growth capital.

Of that $38 million of growth capital, it includes $23 million at Kumtor, primarily $16 million for the underground development of the SB decline and $4 million for additional haul trucks; $14 million of growth spending at Boroo, primarily it relates to the pre-stripping of pit three and some spending to complete the heap leach- $5 million there.

Cash balance at the end of the quarter was $116 million, which compares favorably to where it was at the end of the year. And in the quarter, administrative costs were $6.5 million, which was up from last year due to an increase primarily in the stock-based compensation expense. And for the year of 2008, we expect administration costs to be around $38 million.

And finally, our sensitivity to changes in the spot prices of gold for the year is as follows. For every $25 change in the spot price of gold, there would be an approximate change in net earnings of $17 million or $0.07 per share. So with that, let me turn the call back to Len.

Thanks, David. In summary, first we are reaffirming our production and cost guidance for the year. On a consolidated basis, it will be between 770,000 ounces to 830,000 ounces at a cash cost per ounce of $350 to $390.

Second, the first gold production from the Boroo heap leach is expected this quarter. And lastly, we hope to advance on negotiations on the Gatsuurt investment agreement and finalize things in the Kyrgyz Republic. With that, let's open up the call for questions. Operator, please lay out the process for the question-and-answer session.

Thank you. (Operator Instructions). And our first question comes from the line of Barry Cooper, CIBC World Markets. Please proceed with your question, sir.

Len, I'm just wondering-- can you hear me okay, Len?

Yes, I can hear you, Barry.

Okay. I was just wondering, given all of the shenanigans that have gone around the world as of late with respect to jurisdictional changes in Ecuador and Venezuela in terms of what were initially delays wound up being some pretty disappointing actions by the government that were quite often at odds with what they had been saying prior to this; what really makes you so sure that some of the delays that we're seeing with Kumtor are not going to end up sort of with the same result?

Good question, Barry. First of all, the extension that they've asked for is very short; only approximately a month. And the government asked for this extension so that they could complete the process of providing the due diligence material they did do when they visited our sites to the Parliamentarians. And the Prime Minister, as I mentioned, has set May 29th as the date for the Parliament to look at ratification of the agreements.

Having said that, we did-- I was there last week and we did discuss the agreement and we were left with a--I think reaching agreement that there were not going to be any substantive changes to the agreements. I think we see eye-to-eye on that. And I guess in the next 30 days we'll be meeting with the government again to ensure that, but I'm fairly confident that there will be some changes to the agreements, but I don't expect that they're going to be substantive in any way.

And ironically, when I did meet with the Prime Minister last Friday, he pointed out and emphasized the point that the Kyrgyz Republic is not like Venezuela. So I think that probably says something.

Right. Just the-- is the Parliament in-- sitting right now?

Barry, it's not.

Okay, so-- I don't know. I just look at human nature and that they're going to reconvene on the 29th. That is a Thursday and I have to assume that they come back and have their usual kind of-- well, we've got to get back to work-- sort of ethics there and well, we'll get at it tomorrow, that's Friday. Then you've got Saturday and Sunday is your deadline. Is that really a realistic expectation that -- Kumtor really has to be the number-one thing that they talk about or else it's not going to get done. Is that not correct?

I believe you're correct, Barry. And in fact, I asked the Prime Minister that very same question-- that if the Parliament is reconvening in and around the 29th, how do they expect to deal with the Kumtor issues? And he emphatically assured me that they would and that's why the extension is only to June 1st. So I had the same kind of feeling that you have; that once Parliament gets together, there probably are other priorities or could be other priorities that they need to deal with on an emergency basis; but the Prime Minister assured me that they would do it with dispatch.

Okay, well hopefully there are not too many actions in the Kyrgyz Republic in the next 30 days that changes their priorities.

If we look at your guidance for Kumtor in particular, you basically with what you produced in Q1, as well as the cost, it suggests that your costs for the remaining nine months of the year are going have to be averaging around $320 an ounce. And I'm assuming that's an apples-to-apples comparison; the $766 versus your guidance of I think it's $350 to $390, so I took the mid range of that and called in $370. But if it's $370, then you have to knock it down to $320 in order to get the average for the year. Do you really think that that's going to be achievable, given where you're starting from?

Well Gary, we're going to have a good third and fourth quarter for sure, but Steve- do you want to address that? I know we've discussed this several times.

Okay, I think first off David had a point here just on the--

Barry, let me say that the $766 for Q1 is based on the old basis of the existing tax regime. So it's not directly comparable with the guidance that we're giving on Kumtor for the outlook. So you have to--

So it is a bit of apples and oranges, then; any idea of what those costs would have been under the new proposal, Len?

Yes. I think that if you take about 8.5% of the gold price which we achieved off of the $766; that would give you a good approximation of what it would have been.

Okay. Good enough.

Barry, I think the other part of that, the real driver is the production volume there in the third and fourth quarters. And as we've said, we're still looking at no change in the outlook for the year. And that's really the driver on the cost per ounce. In fact, we have about 70% of that is in the second half of the year.

Right. And then so just so we get our numbers right; would you anticipate that assuming the ratification takes place on June 1st, is that going to be the effective date or would they turn around and basically make that retroactive to January 1st, for example?

Barry, we have talked in the past about making it retroactive, but I don't believe-- my own opinion is that it will probably be the effective date nearer or about the time they do the ratification. But that's a matter of negotiation yet.

Right. Okay, thanks a lot. That's all my questions.

Thanks Barry.

And our next question comes from the line of Victor Flores from HSBC. Please proceed with your question.

Thank you. Good morning. My question; first of all Len, goes to a comment you made in your opening remarks with respect to the final negotiations. And I think you said that the government you believe will seek some changes to the agreement. Could you share with us, if you know; what some of those changes are?

Victor, good morning. No, I don't really know what they are, but I know that human nature-- again, it's a new working group and a new group of Parliamentarians so I think they're bound to ask for some at least language changes and there are a number of other points that we didn't nail them down or we're waiting for the definitive agreement, so they may choose to deal with those. But I don't expect any big changes or significant changes to the main parts of the framework agreement.

Okay, great. Thank you. And I have a follow up for Steve. Now that we're sort of towards the end of April, can you give us a sense of how things are evolving in the Kumtor pit?

Well, I think that the mine production and the volume of material there is we think within 1% of what we had budgeted for the first quarter and don't really see a big change in that performance in April. (Inaudible) is to look at that phase by phase; are we accessing the SB Zone? So we're a little behind, particularly on cutback nine which is the 2008-- our forecast shows that by the end of May we're essentially at plan.

And then finally, as far as the performance of the block model; it is performing very well versus what we're actually encountering in the pit; so that all seems on track. That's about it.

Great. Thank you very much, Steve. Thanks.

And our next question comes from the line of Mike Jalonen from Merrill Lynch. Please proceed with your question.

Hi there; I have a question for Dave on the taxes (inaudible) booked in the first quarter. Dave, I was just wondering; does that include the new royalty to the Kyrgyz government, as it's being booked already?

Mike, no. We are doing our accounting based on the current tax regime until it gets ratified by Parliament.

Okay. Because I guess your tax rate; I haven't seen you guys have a tax rate this high before; in the 30s now, and a high proportion of cash taxes so I'm just wondering-- I noticed you gave lots of great guidance for other items. I was just wondering what kind of guidance you give for taxes.

In Mongolia, we are paying the 25% marginal income tax rate and that's the bulk of our cash taxes. The marginal rate under the existing regime in the Kyrgyz Republic is 10% of income. And we had some losses last year which we're carrying forward. So on a cash basis, there's a little bit of benefit from that.

Okay. Thank you.

(Operator Instructions). And our next question comes from the line of Greg Barnes from TD Newcrest. Please proceed.

Thanks. Steve, I'm just a bit curious on gold production from Kumtor; if you work through the tons, mill grade and recoveries; you get about 64,000 ounces versus the reported gold produced of close to 75,000. And the same thing happened in Q4 of '07. I was just wondering what the difference is there.

Okay, I think I can start out by answering this-- the way Centerra reports gold production is gold poured (inaudible) and I think the number that you're calculating there is what was recovered onto carbon. So we did have a drawdown of that in-circuit inventory in the first quarter. There are two reasons for that.

One is that we started the year with a little bit higher than usual in-circuit inventory and we moved a fair amount of that out in January. And secondly, I think the general level of that in-circuit inventory would be set by the rate of production and with the ball mill shutdown in March, the production rate was a bit lower, so I think that would naturally tend to reduce the in-circuit inventory.

I think your 64,000-65,000 ounces onto carbon would be roughly correct. But then the balance would have come out of reduction of the in-circuit inventory.

And the same thing would have happened in Q4 last year?

Do you know what? I haven't looked at Q4 but I expect that's very possible.

Okay. So going forward from here, should we expect that gold produced should more or less closely match milled and recovered, less the head grade?

I think generally on an annual basis, there are very minor differences. There can be a fluctuation a little bit quarterly, just depending on the timing of that final gold pour relative to the end of the month. But I think there isn't any large difference that I would see in the second quarter. And for the year, I think there may be a slight build of that inventory, simply because the high grade that comes out in the fourth quarter probably would equate to a little bit of a rebuild of the inventory we pulled down in the first quarter.

Great. Thanks a lot.

Gentlemen, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you very much, Operator. Thank you, everyone for joining us today and your interest in Centerra and we look forward to speaking with you again in the next quarter. Thanks, and have a good day. Bye.

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