Centerra Gold Inc (CGAU) 2009 Q1 法說會逐字稿

Welcome to the Centerra Gold first quarter 2009 results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded Thursday, April 30, 2009.

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

Thank you, Shawn. Today with me in Toronto are Steve Lang, Chief Executive Officer, Jeff Parr, Chief Financial Officer, Ronald Colquhoun, 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 various filings on the SEDAR website. And now I'll turn the call over to Steve.

Thanks, John, and good afternoon, everyone. Today we will address the new Kumtor agreement, comments on first quarter results, our 2009 outlook, and expand on our exploration focus going forward. As you have all probably seen our Press Release this morning I'm very pleased to announce that the Krygyz parliament has approved the Kumtor agreement. This is the first time the Kumtor agreements have been voted on, or approved by parliament. The parties have agreed to apply reasonable efforts to close the transaction on or before May 25, 2009. The new agreement between the Krygyz government, Centerra and Cameco resolves all of the existing disputes between the government and Centerra, with respect to the Kumtor project including settlement of all outstanding claims, both those in Kyrgyzstan and those that have been the subject of international arbitration.

For Centerra and our shareholders, the agreement provides a stable and economically attractive business and operational environment in the Krygyz Republic for the Kumtor project. As well, it provides the government's full committment and support for Centerra's continuing long term development of Kumtor. The highlights of the new agreement include a stable and simplified tax regime, an expanded mining concession, support for future opportunities in the Krygyz Republic for Centerra by the government. Centerra will issue the Krygyz government 18.2 million Treasury shares, an up front payment of $22.4 million. Jeff will describe this payment later, an independent, an additional independent Director nominated by the Krygyz government to the Centerra Board of Directors, and Cameco to transfer up to 25.3 million shares of Centerra to the government upon satisfaction of certain conditions.

In addition, we issued our first quarter results last night. Our gold production for the quarter was less than most were expecting, and this is a result of lower ore production at Kumtor, as we accelerated mining of waste and the removal of ice around the central pit above the SB zone, combined with the shut down of the sag mill gear repair. Ron will describe these later. The lower production, gold production impacted our Q1 cash cost. We are, however, maintaining our gold production guidance for the year, as we will be mining higher grade material at Kumtor in the third and fourth quarters. Now I will ask Jeff to discuss some of the financial details of the new agreement and comments on our Q1 results.

Thanks, Steve. As indicated, the agreement in the Krygyz Republic has now received all levels of approval. The Company and the government have agreed to replace the current tax regime with a new simplified one effective January 1, 2008. Under the new tax regime, gross revenue will be taxed at a rate of 14%, which includes a 1% monthly contribution to the Issyk-Kul Oblast Development Fund. There are several other taxes that we will continue to pay such as local taxes on goods purchased, annual pollution tax, and a sales tax, all of which add the equivalent of approximately $2 an ounce to our total taxes at $900 gold.

This new tax regime replaces the 10% income tax, the mineral resource tax of 5% of revenue, emergency fund tax, 1.5% of revenue, road tax, 0.8% of revenue, withholding taxes of 10% to 42% depending on the nature of the payment, and the Issyk-Kul Social Fund at 2% to 4% of taxable income. In addition, all customs, duties and certain other taxes are eliminated. The agreement also provides for an annual land use payment of 4% of gross revenue. Note, however, that all Kumtor's annual capital and exploration expenditures in the Krygyz Republic are fully credited against this tax. Expenditures not applied for credit in any given year are carried forward for credit in future years.

As indicated, by Steve, the Company has also agreed to make a payment to the government of approximately $22.4 million. This is made up of $11 million representing the difference between taxes we paid under the existing regime, and the taxes that would be payable under the new tax regime for 2008. It also includes a $1.75 million payment to satisfy all liabilities or claims of any governmental authority against Kumtor, or any of its affiliates in respect of any matter arising before the closing of the transactions contemplated by the agreements. There is also approximately $9.65 million for taxes related to 2009. The agreement is tax neutral between the existing and new regime at about $950 gold, and doesn't materially impact our net asset value at gold prices above or below this level.

Now turning to the first quarter results. Looking at the income statement on a consolidated basis, the first quarter revenue at $98 million reflects the lower volumes of gold produced and sold and the slightly higher realized gold prices. Results were also impacted by certain increased operating expenses that Ron will go over later. The first quarter net loss of about $20 million or $0.09 a share, includes an income tax provision of $11.2 million, most of which relates to the weakening of the Mongolian tugrik, compared to the US dollar, resulting in an unrealized taxable gain on Boroo's local currency denominated financial statements. Boroo files its tax returns in local currency, and the related tax liability would only become payable upon realization of the gain. With respect to cash and cash flow during the quarter, the operations generated almost $11 million and we have $155 million in cash and short-term investments at March 31. There is no debt. We continue to fund our exploration and capital projects out of cash flow and we currently have no financing requirements.

During the quarter we spent and accrued $17 million on sustaining capital, and $5 million on growth projects. With regard to our outlook for 2009, we have lowered our total cash cost per ounce guidance by $20.00 an ounce to between $465 and $505. This reflects the lower cost of fuel and grinding media, and the expected beneficial impact of the strengthening US dollar against local currencies on the costs of locally purchased supplies, services and power. This more than offset some of the cost increases Ron will describe. The unit cost guidance, and that contained in our quarterly filings, reflect the existing tax regime, with Parliamentary approval in hand, and applying the new tax regime going forward, we will exclude the revenue-based taxes from total cash costs. Therefore, total cash costs per ounce will be further reduced from the current updated guidance by $75 for Kumtor and $58 for Centerra on a consolidated basis to reflect the new tax regime. I'll now turn the call over to Ron Colquhoun to discuss the operations.

Thanks, Jeff. As Steve mentioned, we did have lower ore production from the pit during the quarter at Kumtor, but we did continue to mill at full capacity by feeding low grade stockpile material to the mill. During the quarter, production was impacted by increased mining of ice, and the removal of waste in the vicinity of the SB zone, which took mining equipment away from the efforts to expose ore. We always have some movement of ice and waste material at Kumtor, but in late February, we experienced an acceleration of a small portion above the pits which we addressed right away. This decision delayed the delivery of ore into the second quarter, but we remain on target with our annual production goal.

Additionally, we had the SAG mill shut down for seven days in February to replace the damaged SAG mill ring gear. This damaged old ring gear has been sent for repair and will become our spare SAG mill gear. We are achieving what we wanted to with the increased mining of waste program -- of the waste program. We completed an internal forecast mid-March, which does not include any mining from Sarytor in 2009, and we remain confident in our 2009 guidance on gold production at Kumtor. The production profile will be similar to 2008 except that we are expecting more gold production in the third quarter. We are seeing a positive impact from our dewatering and depressurizing programs. These results will allow us to steepen a portion of the pit walls, reducing the total amount of waste to be mined, and exposing more ore in the SB zone. However our outlook for 2009 does not reflect this potential improvement. Mine operating costs were higher during the third quarter -- first quarter, primarily affected by lower ounce production, higher maintenance supply cost. Lower than planned fuel costs were observed during the quarter as well.

At Boroo, the operations performed well. The heap leach operation ran successfully throughout this first winter, and continues to meet all our expectation for pressure throughput, leaching capacity, grade, and recovery. The government's technical committee responsible for the heap leach approval program has approved the permit, but we are still waiting for the paperwork. Also in Mongolia, the negotiations continue with the government's working group with respect to the Gatsuurt investment agreement. We have completed almost all of the engineering work regarding the road to Gatsuurt, and will start construction in the second quarter. The road construction should take about 14 months, and we expect some initial oxide ores to be processed at the Boroo mill by mid 2010.

Now with the agreement in place at Kumtor, we will be able to advance on the underground more aggressively. We have $12 million of capital approved for the purchase of long lead items, but because of the market conditions have changed, some of these items no longer need to be ordered now. We are going to quickly assess if the money might not be better spent on advancing the possible development of a second access point, which will allow access to exploration opportunities, as well as access to known inferred resources for further delineation drilling. In view of some of the interesting preliminary drilling results, we are getting in the underground Stockwork zone which Ian will be discussing later. This is definitely an attractive option for us. Additionally, we will be reviewing the mine operating plan to bring Sarytor back into production timeline, reviewing the underground development options of the SB zone, and we will provide a new three year production plan for Kumtor in the third quarter. I'll pass this conference on to Ian Atkinson.

Okay, thanks, Ron. During the quarter, we continued to receive encouraging results from our exploration drilling at Kumtor. The drilling is focusing on testing the downdip and strike Extensions of the Kumtor structure to the Northeast, and particularly the Extensions of the stockwork zone. Results from the stockwork zone continue to be very encouraging. In particular, two of the deeper holes that we've drilled to date in this area have returned significant intercepts. Hole D1322 intercepted 11 grams over 20 meters including 16.2 grams over 13.4 meters. And hole D1320 returned almost 21 grams over 22 meters, including 32.6 grams over 13.2 meters. Both of the holes are higher grade than we normally see in the Stockworks zone.

The zone in this area is open along strike to the Northeast and downdip, so it continues to expand our target in the Stockwork Zone area, and these grades easily support the potential for the underground deposit we anticipate. We will continue to step up, we will continue to step out of drilling in this area in the second quarter. Another target that we'll be drilling in the Second Quarter at Kumtor will be an Extension of the SB zone to the Southwest. This would be in an area that could be accessed from the pit, if we can steepen the pit slopes, as Ron has mentioned. If not, it will fall into the underground category.

The geotech hole we completed in this area earlier this year returned a number of significant intercepts. This hole lies 60 meters to the Southwest of the nearest drill hole in the SB zone, and right in an area we've been unable to access for drilling in the past. Now that mining activities are progressing, we will have access to allow us to complete some shallow drill holes to test the Extension of the SB zone to the Southwest in this area. I'd just like to point out that the section that shows this hole is posted on our website, is at a different azimuth than the normal sections that we put up there.

So with now the mining and exploration license issue clarified at Kumtor, we'll get back to drilling the other prospects this year. This will include drilling the Northeast prospect where we had some encouraging results from drilling last year and the Sarytor pit. As well, we'll carry out the first round of drilling on the Petrov prospect which lies up on the Northeast corner of the property. We also expect to begin drilling from the underground decline in the second quarter. The initial holes will be approximately one kilometer from the current drilling of the SB zone, testing the strike Extension of the Kumtor structure to the Southwest of the SB zone beneath the [Davidoff] glacier. In Mongolia, our toll season is just starting. Our objective there is to identify and maintain 10 years of feed for the Boroo mill from Gatsuurt and other satellite deposits in the region. Our initial targets this year include drilling on the Khuder prospect and the Yerogool target, where drilling is already outlined gold mineralization in flat lying structures similar to the geological setting of Boroo. We'll also start drilling at Gatsuurt this year to test the number of targets in the immediate vicinity of the Gatsuurt deposit. The target definition work is already under way, and we expect to start drilling in the third quarter of this year. In Russia, the initial drilling of a number of shallow holes at the Kara Beldyr project in the Tyva Republic was completed in the first quarter. All the assays are pending right now, but this work will help us define the targets for a program of deeper core holes, that we hope to get under way in the second quarter. I'll now turn it back to Steve for some summary remarks.

Okay, thanks, Ian. Just to summarize, now that we have an agreement in the Krygyz Republic which should be wrapped up at the end of May, that allows us to reinvigorate our exploration and development efforts at Kumtor. Similarly in Mongolia, we are making progress on the Gatsuurt investment agreement, and in anticipation of successfully completing that, we are starting the road construction to Gatsuurt in the second quarter. As Ian mentioned, we are stepping up our exploration of satellite deposits around Boroo to get a 10 year feed in front of our process facilities there. Operationally, despite the slower first quarter, we are confident about our production guidance at both properties and the improved cash cost guidance. From a business development standpoint, we have been on the sidelines until we resolved the issue in the Kyrgyz Republic. And now with that behind us, we can begin to look more aggressively at other opportunities outside of our organic growth potential. So with that, I will now open the call for questions. Operator?

(Operator Instructions)

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

Thank you. Hi, Steve. I have three very simple questions. Starting with the production at Kumtor, I guess before you had to move all the waste you did during the first quarter, you had indicated that maybe 15% of the production would come from Kumtor in the first quarter, and then would be sort of ramping up throughout the year. Could you give us a sense of how production will ramp up throughout the remaining three quarters?

Yes, Victor. It's Ron.

Hi, Ron.

We see the, it's on a steady growth all the way up, and in each quarter we see an improvement. The numbers are increasing on each quarter and we'll be seeing very similar production levels that we achieved in the fourth quarter, if not slightly more.

Sorry, we'll see production similar to the fourth quarter of '08?

Of 2008. As of 2008, we hope to see a similar profile.

Okay.

It continues to grow in the second, third and fourth quarters of 2009. The maximum flow of production ounces remains in the fourth quarter very similar to the profile of 2008.

I think, Victor, another way of saying that, if we look at last year's second, third and fourth quarters, we're fairly similar there, except the third quarter is stronger than last year's third quarter.

Okay, that's what I was after, thank you. Second question is for Ian, on some of the drilling that's been done. I'm sitting here looking at the long section, and it looks like your higher grade material is plunging to the Southwest. And my question is what implications does that have for the exploration that you're doing in that Northeast Extension?

Victor, you mean the high grade in the Stockworks zone or the SB zone?

Well, both.

Both. I think actually the high grade and the Stockworks zone, if you actually got into the details, the plunge is either very steep or to the Northeast. And certainly again, actually the detail on the SB zone, then again, tends to suggest either a vertical or northeasterly plunge, but we've actually got less drilling there, as you're well aware. I think both of them are open, I mean the issue -- not the issue, the thing is both of those zones are open, both down bit and down plunge, and then certainly in the case of the SB zone, it's open along strike, in both directions as well.

Okay, I mean listen, I guess where I'm going with my question, is that some of the drill results on the Northeast Extension seem to be perhaps less encouraging than originally, perhaps expected and I'm wondering if you have an idea why.

Oh, okay, Now -- alright, yes, I thought you were -- sorry, go ahead Victor.

So are you drilling, in the right place, or do these drill results tell you that maybe the model need to be modified?

No, okay, no. As you're coming off the Northeast, getting away from the Stockwork and the SB zones, certainly with the exception of the one hole we drilled like almost two years ago and now the results have been a little bit disappointing. What we're seeing there is just the North zone and the South zone, the two principal parts of the Kumtor structure are digressing. They've got to come back together which is when you start getting the better grades developed. The geological level I can sort of draw it out to you the next time we meet --

(multiple speakers) buy you a drink.

But basically the North zone and the South zone, the closer they come together the better the structural preparation, the mineralization; as they digress from each other, you're just getting the dilution of the mineralization across a broader zone that unfortunately, in this area, just doesn't make it economic.

Okay, fair enough and then my final question goes to some of the other exploration that you're doing elsewhere outside of Mongolia and the Krygyz Republic. Could you perhaps maybe touch on one or two projects that you think are looking pretty good?

Well, we mentioned the Kara Beldyr project in the Tyva Republic, and Turkey in the news release. And we've actually done a series of shallow holes there. And we haven't got the assays back, but certainly the work we did there last year has got some very good value on the surface, that we actually I think have published. Don't want to quote them from memory, I'll probably get them wrong, but certainly be happy to follow-up with you later. But that one certainly is an old Russian surface prospect, water trenching on it, some small, some short, shallow holes that we have resampled and confirmed that are getting us three and four gram material across 30-meter widths. We've got good expectations we can follow that downdip fairly easily, and hopefully build that into something. And in addition to that, we've I think as you're well aware, we acquired two exploration joint ventures in Turkey late last year. We've done some initial drilling on the KEFI project and the Artvin project up in northeast Turkey, and it has given us some very short good grade intercepts. We've only got five holes drilled before we got snowed out of that area, and we hope to get drilling there again in the second quarter probably late May, early June. And the EMX projects in northwest Turkey, we are actually doing fieldwork there right now and expect again that we hope to get drilling started probably late June. In addition to that, the Tonopah Divide project in south central Nevada, we did have a fairly extensive drilling program there in the third and fourth quarters of last year, that did out of the holes we drilled, I think we drilled 15 and 12 of them had good gold grades in, and that was the first assay drilling we had done on the property and again we'll be starting drilling on that again probably early June of this year.

Great. Thank you so much Ian.

No problem.

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

Good morning, gentlemen. How are you?

Good morning.

Just a couple quick questions. Let's start with the agreement I guess on Gatsuurt. I know you've indicated that negotiations with the government have resumed. How frequent are those negotiations? What are we really seeing in terms of meetings and negotiations there?

Let me turn that over to Jeff. You know, while we've been meeting with the Krygyz, Jeff has also been meeting with the Mongolians on this one, so he's been taking the lead there so I'll defer the question to him.

Well, the Mongolians have established the working group that to deal with us on the Gatsuurt agreement. And Steve and I actually met with them recently in Toronto, and we are at the point where we will be exchanging documents. Some of the recent developments in Mongolia, despite the fact that nothings been approved on the OT project is the Mongolian government has I think realized the importance of some of the smaller prospects in Mongolia. And they've developed a, call it a working group that the government's using to look at some of the smaller prospects and to try to move them along. So we see this as quite a positive development in Mongolia, and we continue to hear that the windfall profit tax will be repealed. It's in Parliament right now, so we're just waiting for that to happen, but all in all, it looks very good.

Okay, next question I guess we'll stay on Mongolia a second, and talk about Boroo. There's a mention of a binding collective agreement in place which the labor union has threatened a work interruption because they aren't happy with the terms. What's your comments on that?

We're in the discussions with our union and they're represented also by the Federal Labor Commission. The discussions have been ongoing for a while. It's progressing. We're making head way. There has been no demonstrations at the mine, or work stop issues. There have been peaceful demonstrations which are typical to the region. We continue to have discussions, I think also they are trying to bring in other aspects, like the -- and set some ground rules for the OT project, but from the Federation's perspective, but we're making head way. We want to and will deal with all our union employees fairly and responsibly.

And Haytham, I might add this kind of started as an issue where the union was looking for, if you will, a severance program outside of the current contract. And part of it is it is outside the contract, but also our focus has been more on developing Gatsuurt and extending all these jobs rather than rushing towards any closure plan.

Fair enough. Maybe one or two more questions, the first would be with regards to what's happening now in the Krygyz with the resolution and I commend you for that, now you turned your attention back to operations I guess it never really turned away from operations but you can refocus on the exploration in the region. Have you also I guess going back, is there specifically an area outside of Mongolia, or the Krygyz in which you could focus some of your corporate development efforts on? I guess I'm asking are you staying in Asia, or would you like to look elsewhere?

Well, I think I would describe it more that our focus would be and will remain in Asia, but we will look at opportunities outside of Asia, such as what we're doing in Nevada.

Okay, that's fair and maybe one last question, simple one. Your exploration expense that is going to hit your Income Statement in 2009?

$25 million currently is what we're planning.

And all that will be expensed; is that correct?

That's correct, yes.

Thank you very much.

Thank you.

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

Yes, good day, everyone. First off, clarification on Jeff's comments, and the introductory remarks there. You indicated that the deal was tax neutral at $950, but then I think you also stated that above and below that there was no effect which doesn't seem to jive with my understanding of what tax neutral would be. Presumably, there's a barometer one way in the upside, and a barometer the other way in the downside. Could you just clarify what exactly you said again?

Barry, what I said was that at $950 gold, if you compare the old regime and the new one, where they effectively result in the same amount of tax. If your gold price is above $950, then we are slightly better off, and below $950, we're slightly worse off. But we've run, I can't tell you how many models we've run on this, and above and below that, when you look at the Company's total NAV, there's no real material impact, above and below the $950 goal.

Okay, I just thought in your introductory remarks that it sounded like it was neutral at $950 but it almost implied it was neutral above and below, and so that didn't make sense with me. Just one other thing and I'm not sure whether it was a typo error on Page 19, you might be familiar with this. I will read you the statement. It says, "On a per unit basis depreciation, and amortization for the first quarter 2009 was $202 an ounce", yet in the tables it looks like it's $232. Any idea of which one is correct?

Barry, let me check into that and I'll get back to you on it.

Okay. Then I'm going to try and extract something further out of Ron. You talk about Q4, and I think we've got a vague but understanding of how the production evolves over 2009. What happens in 2010? Are we going to be at a run rate similar to Q4? Or is it going to be, because quite frankly the production has been awfully lumpy.

Well, I agree it's been lumpy, Barry, and it's not, certainly our wish, is that the ore body is telling us what we have to do. We would certainly like to do it differently, but unfortunately, that's the nature of the beast. 2010, we are looking at the plans in detail as we are improving our pit walls and our dewatering and depressurizing program is giving us very positive results. Our confidence level is certainly going up. That will allow us to flatten some of those ups and downs.

I think Ron mentioned we're shooting for the third quarter to have a three year guidance out there for Kumtor. Part of that is not just these geotechnical, but also we pulled Sarytor out of the guidance, here this year and we've got to figure out the best way to sequence it back in now.

Okay, let me ask you a question slightly different then. What kind of grades would you anticipate for 2010? Kind of the 4-gram?

I think it's slightly less than 4 gram.

Okay, that gives me an idea.

Thanks Barry.

There are no further questions at this time. I'll turn the call back to you, gentlemen. Please continue with your presentation or closing remarks.

Well, with that we will end our conference call. If there are further questions, we will all be available today, and next week we will be having our Annual Meeting on May 5th, at 2:00 at the Hockey Hall of Fame. Thank you very much for your attention and goodbye.

Ladies and Gentlemen, that does conclude today's Conference Call. We thank you for your participation and ask that you please disconnect your lines.