Centerra Gold Inc (CGAU) 2008 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 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, July 31, 2008.

I would now like to turn the conference over to Mr. John Pearson, Director of Investor Relations. Please go ahead sir.

Thank you Jessie, welcome everyone to Centerra Gold second quarter conference call. Today I have with me, Steve Lang, President and Chief Executive Officer; Geoff Parr, Vice President and Chief Financial Officer; Ron Calhoun, our newly appointed Vice President and Chief Operating Officer and Ian Atkinson, Vice President Exploration. Today's conference call is open to all members of the investment community and the media in listen only mode. After the formal remarks, we will open the phone to questions and the operator will give the instructions for asking a question. Please note that all figures are in US dollars unless otherwise noted. Today, Steve will start with review, Ron will comment on the operations, followed by Geoff, with a review of the financial results. Before we begin, I would like to caution everyone 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 industry, please refer to our news release issued today, July 31, and our various filings on the SEDAR web site. And now, I will turn the call over to Steve.

Thanks, John and good afternoon. First, I'm sure that everyone would like an update on the situation in the Kyrgyz republic. As you are all aware, on June 2, the company reported this previously-announced frameworks agreements had not been ratified by the parliament of the Kyrgyz republic within the time frame agreed and has therefore expired. Recently, I traveled with Bruce Walter, our Vice Chair, to Bishkek, where we met with various government officials and had discussions with government working group responsible for Kumtor. We have mutually agreed with the Kyrgyz government to postpone the next International arbitration hearing which had been scheduled for today, until September 29. In our meetings, one of the first things we discussed and agreed upon was the confidentiality of our discussion. Consequently, although I'm certain this is one of the main areas for potential questions, I will not address it further at this time.

Looking at the second quarter operating results, Kumtor gold production is increasing as we have anticipated, as we access the higher grade material in the SP zone. Boroo's mill grade and recovery is as expected. Late in the quarter, we began applying solution to the (inaudible) pad at Boroo and expect (inaudible) production to become significant in the second half of the year. On the financial front, the second quarter was impacted by the higher cost of sales, primarily due to higher cost (inaudible) which were in inventory in the first quarter, flowing through the sales in the second quarter as well as increased operating costs at both sites. Higher gold price and higher sales volumes generated net earnings, before unusual items, of $0.06 per share or $13.8 million. In the quarter, we recorded an unusual item, a gain of $42.2 million which represents the revaluation as of May 30 which was the last trading day before the framework agreements expired, of the incremental value associated with the contingently issuable treasury shares. After reflecting this unusual item, our net earnings were $56 million or $0.26 per share.

Just a few words about Mongolia. On June 29, Mongolia held parliamentary elections. According to the general election commission, Mongolian peoples' revolutionary party, or MPRP, won a slight majority in the -- which held a slight majority in the parliament, obtained 38 of the 78 -- of the 76 seats and the Mongolian democratic party obtained 25 with 10 seats remaining in dispute. We expect a new government will be formed shortly and are hopeful that the new government will resume negotiations with respect to an investment agreement for the Gatsuurt project. As John mentioned in the introduction, Ron Calhoun has been appointed as our new COO. Ron has been with Centerra Gold for three years and is quite familiar with our operations and our people. I have known and worked with Ron going back more than seven years now and I'm pleased that we have someone of his caliber in this role. I will now turn it over to Ron, to discuss the operations.

Thank you, Steve. And good afternoon, everyone. I will now briefly review the operations. Kumtor produced 111,000 ounces of gold this quarter as expected, as we started mining the higher grade SP zone. On the cost side, things, while $631 per ounce is still relatively high, our cash cost decreased $135 an ounce from the first quarter. We should see a continuing improvement in this as our production ramps up in the third and fourth quarters. The increase in cash costs in the quarter over last year's comparable quarter is primarily due to higher mining costs. Resulting from the increase in mining expenses, we've concluded increased maintenance costs, higher fuel costs, higher milling costs due to the higher cost of consumables and higher labor and royalties and taxes unrelated to income. Despite the current cost pressures, we are not revising our previous guidance for costs other than adjustments reflecting the impact on the costs from production, taxes and royalties, as Geoff will describe later on. Working is continuing on the SP underground decline which advanced 53 meters by quarter end. We have currently exited the permafrost zone of influence and continue to advance this work. It is slow going right now as we advance through the Kumtor fault zone which would take another couple of months but our forward events will pick up as we get into the hanging wall. We are still targeting underground productions to commence in 2010. At Boroo, production was lower than expected at 47,000 ounces due to the lower grades compared to 2007. With the temporary six-month permit to start (inaudible) production, we have started applying processed solutions to the pads and expect to see production in the second half to increase as a result. At Boroo, we see many of the same cost pressures as we have experienced at Kumtor, however, we are maintaining our initial 2008 guidance on both production and cash costs at Boroo. At this point in time, I would like to turn the call over to Geoff , to provide the review of our financial

Thanks, Ron. I'll start with our Mongolian segment and the financial results of Boroo. The quarterly comparison of Q2 in 2008 to 2007 shows lower revenues at $40 million which reflects 32% lower sales volumes, offset somewhat by the higher realized gold price of $889 versus $667. As Ron mentioned, the cash costs were 47,000 ounces of gold produced, were adversely affected compared to 2007 by the higher costs for major consumables such as diesel and explosives and higher national salaries and royalties. In Mongolia, net earnings for the quarter were lower than this year at $23 million versus $31 million in 2007, reflecting the lower sales and increasing costs. In our Kyrgyz Republic segment, revenue in the second quarter of 2008 was significantly higher, reflecting increased gold prices and 30% more ounces sold. Gold production was up 34% to 111,000 ounces in comparison to 2007, due to higher mill feed grade and improved recovery. In the Kyrgyz Republic, despite a 72% increase in revenues, net earnings for the quarter of $3 million was only up slightly from the same quarter of 2007 due to the significant increase in cost of sales resulting from higher ounces and increased costs, notably maintenance, materials and supplies, consumables, including diesel fuel and labor. [Appreciation] is higher due to increased ounces sold.

Looking at the income statement on a consolidated basis, 2008 second quarter revenue at $143 million, reflects the 33% higher realized gold prices but results were impacted by the significantly higher cost of sales and higher depreciation depletion and amortization. The second quarter results included an unusual gain of $42 million, resulting in a net income of about $56 million or $0.26 per share, $13.8 million or $0.06 per share before unusual items compared to net earnings of $19 million or $0.09 per share in 2007. The unusual item is a gain resulting from an adjustment to the value of treasury shares, which we believe are likely to be issued in connection with any potential settlement with the Kyrgyz government. We use May 30 as the share value date which was just prior to the expiree of the prior framework agreement. We reclassified the amount recorded for the contingent common shares issuable from equity to long-term liabilities as we have no agreement in place regarding Kumtor which would be required in order to hold the amount in equity. The amount is recorded as long-term due to the fact that we do not anticipate it will be settled with current assets. Rather with shares. Not due to the speculation of length of time it will take to settle. With respect to the flow of funds, almost $11 million of cash was generated by the operations in the quarter. Cash used in investing activities of $18.7 million for the current quarter is lower than the comparative quarter. Mainly due to decreased growth capital spending. Growth spending was $11 million and sustaining or maintenance capital was about the same at $11 million. This includes accruals and non-cash amounts.

With regard to our outlook for the year, we are changing our total cost, cash cost guidance to reflect the revenue-based taxes and royalties we're incurring at Kumtor under our existing 2003 investment agreement during 2008. These amounts, about 7.5% of revenue, were previously excluded as it was our assumption that a new agreement for the Kumtor project would be implemented retroactive to January 1, 2008. The revenue-based tax under the proposed new agreement was excluded from total cash costs in our prior guidance because it was not considered to be a royalty or a production tax. The impact of including the revenue-based taxes and royalties from the existing 2003 investment agreement in total cash costs results in an increase of about $49 per ounce. Total capital expenditures for 2008 are anticipated to be $88 million, which includes $45 million maintenance capital. Growth capital is expected to be $43 million, which includes $24 million at Kumtor, made up of $13 million for the underground development of the SP zone decline, $4 million for additional hall trucks, $2 million for replacement of the ball mill ring gear and $3 million for additional dewatering equipment. $19 million at Boroo will primarily be spent on pre-stripping of pit three. And $12 million and $5 million -- sorry, up $12 million for pre-stripping of pit three and $5 million to complete the (inaudible). The cash balance at the end of the quarter was $108 million, compared to $105 million at the year end in 2007. Finally, our sensitivity to changes in the spot gold price for the year is about $12 million in earnings and cash flow or approximately $0.07 per share for every $25 change in the spot price of gold. With that, let me turn the call back to Steve.

Ok, thanks, Geoff. We are reaffirming our gold production guidance for the year on a consolidated basis, and it's projected to be 770,000 to 830,000 ounces. We are also updating our total cash cost guidance to reflect change, total cash cost of $49 per ounce for the inclusion of revenue-based taxes and royalties at Kumtor as described by Geoff. Therefore, on a consolidated basis, total cash costs per ounce is expected to be between $409 and $449 up slightly from the previous guidance of $360 to $400. Absent the change in the tax and royalty cost component at Kumtor, we remain on track to achieve our initial guidance for both production and cash costs. Finally, as I had mentioned, we have agreed to maintain confidentiality regarding the discussions with the Kyrgyz government. With that, let's open the call up for questions. Operator, please give instructions (inaudible) for the process for the question and answer session.

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

Yes, thanks. Hi, Steve. Forgive me for, you know, chuckling when you said that you weren't going to talk more about the situation in the Kyrgyz Republic but you can well imagine that we do have a few questions. Just, you know, without putting you in a bind, because I realize you're trying to negotiate, could you just walk us through what has changed with respect to the situation since the last press release or since the last time that I had one of my long chats with John Pearson. It seems, if I'm correct, that the only thing that's happened is that you've sort of put the arbitration on hold for a bit. You have apparently agreed to some confidentiality. And that there has been some motions back and forth including what you say here is an application for interim relief in the arbitration. Requesting that all parties maintain the status quo. Is that correct?

I think all of those statements are correct. Maybe just to put them in correct order. We had previously made the application for interim relief, we have had initial hearings. There was a follow-up on that hearing scheduled for today. With the changes in management after taking a bit of time to, if you will, really get reoriented to the new position and where we were in the process, Bruce and I went over to Bishkek and we met over the course of two days, several meetings with the members of the working group, and other representatives of the government. One of the first things that was brought up and mutually agreed to was the confidentiality and then one of the last items there was given the discussion and the nature of the discussions we had, we both felt it was appropriate to postpone the hearing that had been scheduled for today.

Ok, now this confidentiality and what not is with the working group. That doesn't really apply to the court cases that are ongoing.

I would say that is correct, yes.

Okay. And at this point in time, the best that you know is that the lower court might rule on the other issues that they passed on the other day, sometime during August.

Right. I think we go through, you know, there is a lot of detail there in the press release about the court proceedings. They have not yet ruled on the validity of the principal agreement, thats the concession agreements and the investment agreements. I guess, I really don't want to speculate on when they might rule, what those rulings might be and what the impacts might be, if and when they do make any ruling. I think it's also important to realize that all of the rulings to date, both the lower court and the Supreme Court, have not resulted in any interruption for the gulf production. I think really, our focus is to try and resolve all of the outstanding matters through the negotiation and if we succeed in reaching the settlement with the government, we believe the court proceedings will be resolved as a result of any settlement.

Right, no, that's fair enough. And thank you. As I said, I don't mean to put you on the spot although it seems over the years, I do it all the time to you.

Habit, I think. It's hard to break.

I guess so. Second question goes to a comment that Geoffrey was just making on the royalty and the cash costs. And I must say you lost me a bit there. There is no agreement, so therefore, there's no royalty base or adjusted royalty into the cash costs, so what exactly are you doing or not doing?

I may turn it over to Geoff but I think the important part in this, we began the year -- our guidance, we presume that there would be an agreement in place during the year and that it would be retroactive to the first of the year so our initial guidance presumed that and the more recent update, we have to reflect the current agreement in place rather than what we were anticipating maybe, have Geoff talk about that a little further.

Right, yes, Victor, we continued to incur royalty-based taxes under our current investment agreement from 2003. So, and normal industry practice would be to include those in cash costs per ounce which we have been doing. So, we're basically saying that continuing to do that for the balance of the year would add about $49 to cash costs whereas when we issued our initial guidance, we had anticipated, as Steve said, the new agreement would be in place at the beginning of the year and the -- because of the level and the -- what it's made up of, those revenue-based taxes were not considered to be part of cash costs.

Oh, I see. Okay. Very good. Thank you so much.

Thanks, Victor.

Our next question comes from the line of Haytham Hodaly from Salman Partners, please go ahead sir.

Good afternoon, gentlemen, how are you?

Good, thank you.

Just a quick question, we don't really talk much about Mongolia as much given what we're seeing in the Kyrgyz these days what's happening with regards to Gatsuurt? Where are you in terms of an agreement on that at this point?

You know, we do not have an investment agreement yet at Gatsuurt. As we got closer to the election, we didn't think that that was likely to happen, felt that more than likely that would come after the election and after the new government is formed. So, I think we look for that process to perhaps restart later this fall.

Okay. So, let's turn to a big picture a little bit here. Is there -- given all of the political exposure you've had over the last little while, in terms of growth outside of the Kyrgyz and outside of Mongolia, is that something that's contemplated? What areas appear attractive to you? Do you want to stay in the same general vicinity or do you want to completely diversify your political risk at this point?

Well, first off, I think we do have some additional interest in Nevada which would be a bit of a different focus area for us as well but I think our initial focus here is to secure the current assets that we have. And that would be through the work with the Kyrgyz government in particular as kind of the high priority on that. Looking forward, I think that's really part of the role and a good part for the appointment of Bruce Walter as the Vice Chair is specifically to assist in guidance in addressing the growth issue going forward.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And ur next question comes from the line of Brian MacArthur from UBS Securities. Please proceed with your question.

Good morning. I just want to go back to what Victor -- just to make sure I have this very clear, too. At Kumtor, we have been paying, you know, the 7.5% royalty if you -- revenue royalty, and then 10% income tax effectively through this whole process, even though we -- in a sense, started to account for that new regime which would have been, you know, a different revenue royalty going forward. Is that right? What we're effectively doing on a cash basis for the last six months?

That's correct. Although the income tax isn't included in cash costs.

Right. But just from a cash in, cash out of the company, that would be the way it's actually been working. Never mind how all of the accounting and where we counted it before.

Right. You're correct.

Okay. So, my next question then goes to -- I find it interesting that the accountants -- it's just decided that you, you know, you keep these 10 million treasury shares still there even though there's no agreement it could be five, it could be 10, it should be 50. Is that just because you know, you obviously think you have to give them something. Then you value it on May 30, which is before the date of when everybody found out it wasn't going to work so the shares went down, so its at a higher level. I guess I'm a little confused at the logic of what actually goes on there and what would be the offsetting entry on the balance sheet for that $89 million contingent liability right now, I mean if you were to just take it right out?

Well, I guess I'll address the second part of your question first. Obviously, if we took that liability off the balance sheet, the offsetting entry would be income. Which is what we've been reflecting quarter over quarter as the shares have changed value.

Value, right.

Okay. So, I mean the reason that we're still referring to it as the 10 million shares is, you know, it's the closest we have to a methodology for trying to value the liability. And really there's no other reason. And we do anticipate that there will be a shared component to any ultimate settlement.

Okay, great. So, just my final question then, of the cash, the $107, $108 million, that you have right now, where does the cash and the working capital sit all this time? Does it sit in a Kyrgyz bank account? Is it in an offshore account somewhere else? Where does the cash actually sit? Or I guess what I'm getting at, as you go through the process, you're still operating the mine. And is the cash still coming out of Kyrgyzstan?

Yes. There's no issues with cash flowing in and out of the country. We currently maintain our cash balances primarily in the US, we have -- we take cash into the countries as necessary.

Right. So, that cash is free to do anything you want with going forward?

Correct. I mean, it does belong to certain corporate entities, but yes, it's free to use as we need.

Right. Well, I guess obviously where I am going with this is the whole negotiation (inaudible), it just can't be frozen within the country and you lose that, too.

No, there are no issues with that.

Ok, great. Thank you very much. That's very helpful.

Mr. Pearson, it seems that there are no other questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks, sir.

Ok, I don't know that we have any further remarks. Thank you for joining us today and thank you for your continued interest in Centerra Gold.

Ladies and gentleman, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.