Centerra Gold Inc (CGAU) 2008 Q3 法說會逐字稿

Welcome to the Centerra third quarter results conference call. During the presentation, all participants are in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference call is being recorded Friday, October 31, 2008.

I would now like to turn the conference call over to John Pierson, Director of Investor Relations please proceed, sir

Thank you. Welcome to Centerra Gold's third quarter conference call. Today I have with me Steve Lang, President and Chief Executive Officer, Jeff Parr, Vice President and Chief Financial Officer, Ron Calquhoun, Vice President and Chief Operating Officer, and Ian Atkinson, our 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.

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 the industry, please refer to our news release issued today, October 31st, and our various filings on the SEDAR website.

Now I will turn the call over to Steve.

Thanks, John. Good morning.

First a few comments regarding progress in Mongolia and the Kyrgyz Republic. In Mongolia, a new coalition government has been formed. In recent months, Centerra has met with the Prime Minister, as well as the Minister of Mining and Energy, both of these officials indicated that revisions to the mineral law would be a priority for Parliament, which established a working group in this area. We have also had preliminary discussions with the Minister, regarding resumptions of the negotiations on an investment agreement for Gatsuurt.

I cannot provide any detailed comments on the Kyrgyz situation, in light of our commitment to maintain confidentiality around the negotiations. We continue to have regular consultations with the group that has been designated by the Kyrgyz government. During the quarter, we had been scheduled to be back in international arbitration. However, both sides agreed to suspend the arbitration, in order to fully concentrate on negotiations. Meanwhile as discussions are progressing, we continue to operate within the concession area without interruption, and continue to pay taxes under the current investment agreement.

Quickly looking at the third quarter operating results, Kumtor gold production is increasing, as we access the higher grade material in the SB zone. Boroo's mill grade and recovery were as expected, and the heap leach facility is up and running, contributing 12,800 ounces in the quarter.

On the financial front, the third quarter cash costs were impacted by slightly lower gold production than planned, and higher operating costs at both sites. The higher gold price and higher sales volume generated net earnings of $0.08 per share, or $16.9 million. In the quarter, the operations generated over 24 million in cash, bringing YTD cash flow to a healthy 63 million. We did repay a $10 million revolving credit facility, which is available for future use, leaving us with no debt, and $91.8 million in cash.

I will now turn it over to Ron Calquhoun to discuss the operations.

Thanks, Steve. Good morning everyone. I will now briefly review the operations. Kumtor produced about 134,000 ounces of gold this quarter, as we started mining the higher grade SB Zone. While we are starting to see much higher grades in October as we get deeper into the SB zone, we have revised our guidance to reflect the fact that the grade and recoveries, were lower than we anticipated during September. In October we have had a good month of production with the mill feed grades averaging 6.5 grams per ton, and we expect November and December to be both the same.

On the cost side of things, cash costs decreased from $631 per ounce in the second quarter, to $561 per ounce in the third quarter: We should see continued improvement in the area, as our production ramps up in the fourth quarter. Work is continuing on the SB undergrown decline, which has advanced 102 meters by quarter end. October has been a record month for this advancement, reflecting the anticipated improving rock conditions.

We continue to advance this work to get to the hanging wall, where we will turn, and run parallel to the Kumtor fault zone. Our forward advance is expected to increase with the improved ground conditions in the hanging wall zone. We are still on target for underground production to commence in late 2010.

At Boroo, production came in at 52,000 ounces as the heap leach facility produced 12,800 ounces of gold during the quarter. In the fourth quarter we are expecting an increase in the heap leach production, upwards towards 15,000 ounces. At Boroo we see many of the same cost pressures as we have experienced at Kumtor, however, as we maintain our initial 2008 guidance on both production and cost at Boroo.

In regard to our path forward, we are updating our gold production guidance for the year. On a consolidated basis, we are expecting 740,000 to 790,000 ounces. This compares to our initial production guidance of 770,000 ounces to 830,000 ounces. Reflecting the lower production, our consolidated total cash cost per ounce is expected to be $460 to $495, up slightly from the previous guidance of $409 to $449.

This new consolidated guidance reflects new guidance for Kumtor. We expect Kumtor to produce 550,000 to 580,000 ounces of gold for the year. Primarily as a result of the lower production, Kumtor's total cash cost is expected to be in the $480 to $520 per ounce range. As I mentioned earlier, we are now seeing a much better grades at Kumtor, as we get deeper into the higher grade SB zone. Overall we are expecting a strong fourth quarter of nearly 300,000 ounces of gold production on a consolidated basis.

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

Thanks, Ron. I will start with our Mongolian segment, and the financial results at Boroo.

The quarterly comparison of the third quarter to the same period last year, shows higher revenues at $44 million, reflecting our higher realized gold price of $857 versus $684. As Ron mentioned the cash costs for 52,000 ounces of gold produced, were adversely affected compared to 2007, by the higher cost for major consumables, such as diesel and explosives, higher national salaries, and royalties and the lower production. In Mongolia net earnings for the quarter were lower than last year at 21 million, versus 23 million for the third quarter 2007, reflecting the lower sales and increasing costs.

In our Kyrgyz Republic segment revenue at 96 million in the third quarter 2008, was significantly higher than a year ago, reflecting increased realized gold prices, and 35% more ounces sold. With the 75% increase in revenues, net earnings for the quarter of 12.5 million were up significantly, compared to a loss of 3.7 million in the third quarter of 2007. This is despite an increase in cost of sales resulting from higher ounces sold, and increased costs notably maintenance, materials, and supplies, consumables, including diesel and fuel, and labor. Depreciation is higher due to increased ounces sold.

Looking at the income statement on a consolidated basis, 2008 third quarter revenue at $140 million, reflects the 26% higher realized gold prices, and a 12% increase in ounces sold, but results were impacted by higher cost of sales and higher depreciation, depletion, and amortization. Third quarter net income of about $17 million, or $0.08 per share, compared to net earnings before unusual items of 4.8 million, or $0.02 per share in 2007.

With respect to cash and cash flow, I would like to start by saying the Company is well-positioned, given the current economic uncertainties, we have about $92 million of cash, no debt, and continue to generate more cash. Our capital projects are being funded out of cash flow, and we current have no financing requirements.

Looking at the flow of funds, $24 million of cash was generated by the operations in the quarter. Cash used in investing activities of 30.6 million for the current quarter, is lower than the comparative quarter last year, mainly due to decreased growth capital spending. Growth spending was 14.8 million, and sustaining our maintenance capital was about the same at 14.5 million. With regard to our outlook for the year, our total cash costs guidance, reflects the revenue based taxes and royalties we were in occurring at Kumtor, under our existing 2003 investment agreement.

In 2008, total CapEx are expected to be $97 million, which includes $50 million of maintenance or sustaining capital. Growth capital is expected to be $47 million, which is made up of $16 million for the underground development of the SB zone decline, 4 million for additional haul trucks, 13 million for prestripping of Pit 3 at Boroo, and 9 million to complete the heap leach facility.

As Steve mentioned, the cash balance at the end of the quarter was about $92 million. This is after investing $67 million in our properties, $16 million in exploration, and repaying a $10 million revolving line of credit. This credit line remains available to us in the future.

Now I will turn it back to Steve.

Thanks, Jeff. As you all know, the global credit crunch has caused very serious damage to stock markets, lending rates, and financial institutions. This damage is filtered down and affected all mining companies, in terms of the value of their stock, and in their ability to borrow, in order to invest, and develop new projects.

Looking at our third quarter results, we are in good financial shape. Our cash position is very solid, and should be growing in the fourth quarter. The credit situation has heightened everyone's awareness of the importance of cash, and we look to be particularly prudent in how our cash is managed. I believe the situation will also open new business development opportunities.

Centerra's stock has been affected by all of these global factors, as well as the ongoing political uncertainty we face. However, the fundamentals of our business remain strong. We are closely watching the economic conditions as they develop, and are keeping an eye on our cash to keep it safe.

With that, we will open up the call for questions. Operator, please give the instruction on the process for the question and answer session.

(Operator Instructions). Our first question comes from the line of Haytham Hodaly. Please proceed with your question.

Hey I think that was Haytham Hodaly but I will take that, guys. The question was with regard to big picture scenario, you have got this cash just sitting on the books, you are generating cash flows. Has management considered looking outside of the Kyrgyz and Mongolia at this point?

Yes, and I think a couple of things that were mentioned first off in the press release, has been some of the exploration activities and joint ventures that we have entered into. This includes the Tyva Republic and in Turkey. I think we also would mention some of the items we have done, in terms of continuing to position ourselves for growth, in terms of our organizational changes. During the quarter, we have added Dennis Kwong, has joined us as Vice President of Business Development.

We have also added a Director of Exploration Business Development, specifically around the evaluating these joint venture opportunities.

Maybe just one further question, you said you can't really talk too much about the negotiations, ongoing negotiations, but with regards to the meetings, are a lot of the conversation happening, are you heading that in person, are you sitting down with people, or is it all wait and see what happens, we are waiting for this milestone to happen with regards to the Parliament, et cetera?

No, I would say that this is nearly daily contact, although obviously a lot of that is telephonic, or through teleconference. We have met in person during the quarter, and I suspect if I were timing out the meetings, it has been on a more frequent basis, than as compared to two months ago.

Has Camacho been present in any of these conversations, or are you representing Camacho as well?

Our conversations now include Camacho, although Camacho, the Kyrgyz, and we do not jointly meet all three at the same time. All three parties are engaged in the discussion.

Okay. Thank you.

Our next comes from the line of Victor Flores. Please proceed with your question.

Thank you, good morning. Could you give us a sense of whether the grades that you hit during the third quarter at Kumtor were materially less than you expected? Was there some issue with the block model or the geology, or is this just a timing thing? Or do you think [existing] grades are much better in the fourth quarter?

Yes, let me throw that one to Ron.

Yes, Victor, the mining plan was slightly behind schedule in September, and we got into the SB zone, we are talking weeks, just a couple of weeks late. And we didn't achieve the grade that we were expecting at that point in time. The grade has subsequently come around, and I have to remind you that we are at the very top end of the zone. And we are proceeding through the fourth quarter with a very strong October.

Could you give us a sense of what the grades were in each of the months during the third quarter, just to get a sense of what the ramp up was like?

We were averaging around 3, 3.2 grams in the coming out of the second half, and I believe we, in the third quarter and primarily in August, we started hitting high 3-gram material, and then we got into, in late September we were going into 6-gram material, but we were predominantly hitting around 5.5. And more recently it is in the 6.5-gram material.

So just to make sure I understand this, the revised guidance for '08 and 'production shortfall' had nothing to do with the block model reconciliation, had nothing to do with you got into the SB zone finally in the third quarter, and the grades were lower than you had anticipated. This was just, you didn't get there as quickly as you thought.

That is correct. And the block model is holding up, and it is just a small variance within the model.

Okay. So at this point in time, you have no reason to think that your numbers for '09 would be any different than you said previously?

'09 is still under review, and we are studying that as we go forward.

Okay. And then just one other question. Why did you have such a big difference between what you produced, and what you sold at Kumtor in the third quarter, just a timing thing?

This is a timing thing. It reflects the grade that is hitting the circuit, and it is a very large CIL circuit, and so the inventory goes on the carbon.

Okay. Great. Thank you.

Our next question comes from the line of Steven Butler. Please proceed with your question.

Good morning, guys. A question I guess for you Ron, Boroo in terms of heap leach production. You mentioned 12,800 ounces, can you tell us the grade to the heap leach, and the recovery, and recovery expectations at least for the heap leach? Thanks.

Yes, Steve, the grade going to the heap leach on being placed, is in the order of 0.75 grams per ton, in order as well, the recovery over time because we will leach this material numerous times, but the overall recovery rates vary, but we are anticipating in the order of as high as 72% recovery, and for some of the ore slightly less, closer down to the low 60s, because of the metallurgical characteristics.

So, what on average the 65% life of mine recovery, sort of?

Order of magnitude, yes.

And the leach cycle, remind us, or how quickly does it start to leach out?

Well, we are early days but we require 4 tons of solution to a ton of ore. It is going to take, it is a prolonged period of maximizing the leach. But recovery is online, and we are achieving our target.

Okay. So in terms of costs, guys, I mean does the mill subsidize the heap leach, in terms of cash costs looking at say Q3, maybe of course it is only the initial quarter for heap leach, but I assume the allocated costs for heap leach would be higher than 338, which you averaged for the quarter?

The allocated cost is primarily crushing and rehandling stock piles. There is very little back charge from the milling circuit, just pieces of equipment.

Okay. And then just in terms of Mongolia with respect to negotiations there, Steve, working group, or a new investment agreement obviously working toward that, is the current discussion including potential radical changes to the windfall profits tax, or can you make any comments there?

I think we have seen several proposed amendments, and rewrites of that, so I really don't think we could comment on which one of them might be the most likely outcome. They are looking at revisions to that tax, yes.

Okay. Then lastly, in terms of the lawsuits by the Vice-speaker of the Parliament in Kyrgyz, is there a sense of timing as to the next hearings in this lawsuit or lawsuits, that you are aware of?

I think in general I would say they have been suspended, at this point I don't think that we would expect any action on them, with the ongoing negotiations. I think really the best way to describe the last quarter in that area, it has been very quiet.

Okay. Thanks, Steve.

Our next question comes from the line of Brian MacArthur. Please proceed with your question.

Good morning. I was wondering if you could just elaborate a little bit more about the liquidity? You talked about managing credit risk and you have 39% of your liquid assets with one bank, and now it is down to 20. Can you just tell me exactly what you are considering liquid assets, and is that receivables, or what actually is it that you are managing there? I assume it is not inventory, and things like that.

No, no, we are talking about strictly cash, cash balance.

Strictly cash?

That is correct.

So it is just a diversification of where your cash is distributed amongst the banks, you are moving from this institution to other institutions?

That is correct, we are trying to minimize our counterparty risk. We have all seen some of the gory details of the banks lately.

Right. Okay. I just wanted to make sure. That is all it really is.

Yes.

Okay. Thanks very much.

Our next question comes from the line of Barry Cooper. Please proceed with your question.

Yes, good morning, just a little bit of a follow-up to Victor's question there. I guess when I read the press release, it implied that the grades that you were seeing as you entered into the SB zone were a surprise, but you kind of indicated that it is more of a timing event, as much as anything. And I am just wondering, have you done some reconciliations as of late, as to what you actually expected?

Because obviously if the grades are somewhat in jeopardy there, what impact does that have, in terms of your interpretation for let's say, the SB underground zone, which obviously runs at 20 grams, but is probably done on the wide spaced drilling, and what not. Has anything changed on that, that would modify your views on either where the ores, are of the tenor of the ore?

Barry, no. Our feeling is that it is early days with this. The grades were slightly lower than anticipated. We are at the very, very top of this particular high-grade zone. We expect it to adhere to the model as we go at depth.

I guess the one thing that didn't come through, there was some kind of the what I would call the cost leverage, that I would have expected with the grades coming up there. Are some of those costs likely to be coming down now with fuel prices being turned around, and what not, or are a lot of those cost increases going to be here on a more permanent basis?

Those cost increases are impacted primarily by fuel costs, but they will be coming down slowly, yes.

Okay. And then anything that you have learned so far in the decline, that you want to relate to us?

The decline has been under development to get through the Kumtor fault. We are very, very close of getting through that, and being able to then proceed at a much higher rate, more at a rate, at a rate that were typical to this kind of development. But, yes, we haven't hit anything, any ore, or any structures. We haven't had an opportunity to do any exploration.

And what where does the fault lie, relative to the mineralization that ultimately you will be going after? Are you in close proximity to the faults where you will be mining?

The ore is on the contact of the faults, and we have taken in the design concept of the recovery of that ore, we will be taking that into consideration in the mining method.

Okay.

Maybe I could introduce Ian. Ian may be able to answer your question more specifically, with regards to that.

Hi, Barry. No, I mean the declines coming in from the fault wall were going through the face of the Kumtor fault, and come to a fault zone that is really broad, the mineralization, the bulk of the mineralization from the hanging wall, that come to our structure, which is the South zone, and then there is another zone, the north zone which is on the foot wall of it, and the two of them join together when you get into things like the [stock wall] zone and the SB zone. Does that help you, once we get into the hanging wall, then we are in a position to turn around and start drilling back, to get some exploration done.

I guess I am trying to sense whether what you have seen in tackling the fault so far, whether dilution is going to be an issue, more or less than what you thought when you started out?

No, I don't think the ground conditions are any different than we anticipated. We are seeing it. You don't expose a lot of it at find, but the rock is no different than what we have seen in the pit in the past, and that is all built into our underground model, and the mining method we have chosen to take the SB underground.

Great. Okay. Thanks a lot.

(OPERATOR INSTRUCTIONS). There are no further questions in queue at this time.

Thank you, operator. With that, we will conclude, and thank you for your interest in Centerra Gold.

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