Centerra Gold Inc (CGAU) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Centerra Gold second-quarter 2009 conference call. During this 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 is being recorded on Thursday, July 30, 2009.

It's now my pleasure to turn the conference over to John Pearson, Vice President of Investor Relations at Centerra Gold. Please go ahead, sir.

Thank you, operator. Today with me are Steve Lang, our Chief Executive Officer; Jeff Parr, Chief Financial Officer; Ron 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 to the media in listen-only mode. After our formal remarks, we will open the phone to questions, and the operator will give the instructions to participants 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, risks factors, and uncertainties associated with Centerra's business and the industry, please refer to our various filings on the SEDAR website.

And now I will turn the call over to Steve Lang.

Thanks, John, and good morning, everyone. Today we will comment on the second-quarter results, the production outlook for Kumtor, and expand on our exploration focus going forward.

One of the key events which occurred in the second quarter was the closing of the Agreement on New Terms with respect to the Kumtor Project. I won't go into details about the Kumtor agreement since we have discussed these earlier, but I would like to say that we are all very pleased to have the agreement closed. This resolves all the existing disputes between the government and Centerra with respect to the Kumtor Project, including the 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 environment in the Kyrgyz Republic for Centerra, as well as assurance of the government's commitment and support for Centerra's future growth. With the agreement now in place, we have moved up our exploration efforts at Kumtor, including some of the first drilling at the SB in nearly three years. Ian will review these results in a bit and the exciting potential that we have there.

As expected, the production at Kumtor remained low. However, the gold production was within the quarterly guidance; and the outlook for 2009 remains unchanged, as we are now mining the higher grade material. Similarly, cash costs dropped in the second quarter and are expected to fall even further in the second half as production increases. As with production, our cash outlook at Kumtor is unchanged.

Moving to Mongolia, gold production at Boroo had been running ahead of schedule before the work stoppage on May 26. The labor issues were resolved on June 16, but the operation had remained shut down due to the suspension of the mining licenses on June 12. As we announced earlier this week, the suspensions have been lifted for the mine and mill, and these are now back in operation.

The heap leach remains shut down. We continue to work with the Mongolian authorities to fully resolve all of the issues which led to the suspension. As well, we are working with them to get the final operating permit for the heap leach, which will allow the heap leach operations to resume as quickly as possible.

I will now ask Jeff to discuss some of the financial details, the settlement, and to comment on our second-quarter results.

Thanks, Steve. As Steve indicated, the agreement in the Kyrgyz Republic is now closed. This has resulted in an additional expense of $49.3 million which you will see in unusual items. It includes $31.6 million that results from the issuance of $18.2 million of Treasury shares to the Kyrgyz government and a cash settlement payment of $22.1 million.

Turning to the second-quarter results and looking at the income statement on a consolidated basis, the second-quarter revenue at $104 million reflects the lower volumes of gold produced and sold and the slightly higher realized gold prices. The second-quarter net loss of about $80 million or $0.36 per share includes the $49.3 million of unusual items discussed earlier. The loss before unusual items was $30 million or $0.14 a share.

In Mongolia, we recorded in income tax recovery of $2.4 million in the quarter due to the strengthening of the Mongolian tugrik compared to the US dollar.

With respect to cash and cash flow during the quarter, the operations consumed cash of $17 million. This reflects the lower gold sales at both Kumtor and Boroo and the tax settlement payments made by Kumtor on completion of the agreement with the Kyrgyz government.

We have $120 million in cash and short-term investments at June 30. These levels would have been quite a bit higher without the Kumtor settlement and if we had shipped and sold the gold inventory Boroo was holding at the time the licenses were suspended.

Increased production in the second half of the year, along with our continued focus on costs is expected to result in the generation of significant cash flow, and we are expecting to end the year with a very healthy cash balance. We have no debt and no requirement for any. Our exploration and capital projects will be funded out of cash flow.

During the quarter, we spent and accrued $11 million on sustaining capital and $6 million on growth projects.

With regard to our outlook for 2009, our total cash cost per ounce guidance is now between $410 and $450 an ounce. This now excludes the revenue-based taxes at Kumtor and also reflects the lower production at Boroo. Prior guidance of $465 to $505 an ounce included revenue-based taxes that were in effect prior to the agreement.

I will now turn the call over to Ian Atkinson to discuss exploration.

Thank you, Jeff. As Steve has mentioned, after nearly three years we are getting back to drilling in the SB Zone and we continue to get some very encouraging results. In the second quarter, we completed nine drill holes to test the Southwest extension of the SB Zone within and beyond the current planned open pit. All of the holes intersected significant widths and grades of mineralization that you can review in the table of results that is posted on our website.

The drilling has extended the SB Zone a further 270 meters along strike to the Southwest of the previous drilling. These holes will extend the resource model, and three of the new intercepts line within the current planned pit design, and so they will add to current reserves.

These results are very encouraging, indicating the excellent potential for both strike and down-dip extensions at the SB Zone on the Southwest end of the Kumtor pit.

We also started exploration drilling from the underground decline in June of this year. The first hole had a modest intercept of 2.2 grams over 9 meters. The underground drilling will continue in the third quarter to test the Kumtor structure and the footwall of the decline.

Also in the quarter, we completed additional holes to test the down-dip continuity and depth extensions of the high-grade mineralization intersected in the Stockwork Zone. Results continue to be very encouraging. Some of the better intercepts are 6.8 grams over 14.3 meters, including 25.9 grams over 2.8 meters in hole D1332.

These results, along with those from previous drilling, have outlined a high-grade mineralized zone over a strike length of more than 400 meters and down-dip for up to 300 meters from the bottom of the planned pit. The results are confirming the excellent potential for a high-grade underground deposit that is open both along strike and down-plunge to the Northeast.

We also completed two drill holes in the Saddle Zone between the SB and Stockwork Zone. This area is continuing to develop as both holes returned wide intersections of lower grade mineralization, with narrow zones of high-grade mineralization, which indicates there is potential for a higher grade underground deposit. The focus in the third quarter will be wide-spaced step-out drilling to test for higher grade mineralization within this broad mineralized package.

Drilling has also continued in the second quarter to test the area to the Northeast of the highwall of the Central Pit. Hole D1301A intersected 9.1 grams over 11 meters, including 10.8 grams over 8.5 meters. This intersection is the second intersection of higher grade mineralization in this area at this elevation.

Hole D1165 drilled in 2007 returned and intercept of 8.6 grams over 13.9 meters, including 12.7 grams over 7.9 meters at approximately the same elevation. These two holes indicate there is potential for a higher grade underground deposit in this area. The focus in the third quarter will be on 80- to 120-meter step-out drilling to test for the down-dip and along strike extensions of this zone.

With the new agreement in place and the mining and exploration license issues clarified, we resumed regional exploration work on the Kumtor license. Drilling is now underway on the Northeast Prospect, Southwest, and in the Southwest and Sarytor areas.

So moving on to Mongolia, the exploration season resumed in the second quarter, and so field work is underway on our extensive land package along the Yeroogol trend. As we stated before, it's our objective to identify and maintain 10 years of feed for the Boroo mill from Gatsuurt and other satellite deposits in the region. Geological mapping, IP and geochem service are in progress to complete target definition work on prospect areas that are peripheral to the Gatsuurt deposits and also on the Khuder, Yalbag, Shiver, and Khar Mod projects along the Yeroogol trend. Drilling is planned to start later in the third quarter on a number of these prospects.

I'll now turn the call over to Ron to discuss our operations.

Thanks, Ian. As Steve mentioned, Kumtor's production met the quarterly estimate we gave June 12. During the quarter, we executed our plan of mitigating the ice and waste movement in the vicinity of the SB Zone.

The average mill head grade increased in the second quarter to 2.6 grams per tonne, up from 1.92 grams per tonne in the first quarter. Recoveries in the quarter were a factor, as we processed more of the Southwest stockpiled ore which, due to its varying degree of telluride content, brought recoveries down to 66%. As we mine the higher grade SB Zone in the third and fourth quarters, we expect the recoveries to improve.

We remain confident in our 2009 guidance on the gold production at Kumtor of 560,000 to 600,000 ounces and of the detailed quarter profile we had in our news release of June 12. We continue to see positive results from the dewatering and depressurization programs, which will allow us to steepen portions of the pit walls, reduce the total amount of waste to be mined, and expose more of the SB Zone ore.

Total cash costs on a unit basis remained high during the quarter, primarily affected by the lower ounce production. But overall, total operating costs decreased, which represented a savings of $14 per ounce. As both Jeff and Steve have mentioned, our outlook on the cash costs remains the same for Kumtor.

At Boroo, the operation performed well during the quarter until the labor disruption and subsequent license suspension impacted production. The heap leach facility was running well, and we are continuing to work with the Mongolian authorities to obtain the final operating permit. Once we have the permit and approvals, we can expect the heap leach will add about 3,000 ounces of production per month, which is not included in our 120,000 ounces to 130,000 ounce production forecast. With the reinstatement of the mine's operating license on July 27, we are back in operation and expect to be in full mining and milling operations by the end of the month.

Also in Mongolia, the negotiations continued with the Government Working Group with respect to the Gatsuurt Investment Agreement. And we are continuing the work on the road to the Gatsuurt Project.

On the capital front, we have increased our growth capital estimate for Kumtor by $11.3 million to $47.3 million. This increase includes $14.4 million for additional development costs for Phase 2 -- for the development of the second underground portal located in the Central Pit. This will give us additional access to facilitate further underground exploration of both the Stockwork and SB Zones.

In our news release today, we provided a new three-year production estimate for Kumtor for 2010, 2011, and 2012. As you can see, 2010 and 2011 are similar ounce productions as we attempt to smooth out our quarterly production profiles. In 2012, with better expected grades, we will see an increase to the 640,000 ounce level.

I'll now turn the call back over to Steve.

Okay. Thanks, Ron. Just to summarize, now that we have concluded the Kumtor agreement with the Kyrgyz Republic, it is allowing us to reinvigorate our exploration and development efforts there. We expect a significant increase at Kumtor for the balance of the year and are comfortable with our production guidance.

Our new three-year estimate for open pit production at Kumtor provides you with an indication of our production levels going forward, as we continue to drill from the underground decline and test the strike and depth potential. We are also increasing our development effort at Kumtor with the start of the second underground access point.

In Mongolia, we're working to get a final operating permit for the heap leach. As Ian mentioned, we are stepping up our exploration of satellite deposits around Boroo to establish a 10-year feed in front of our process facilities there.

Now, I'll open up the call for questions, so operator?

(Operator Instructions) Victor Flores, HSBC.

Thank you. Good morning. I have a couple questions. The first one with respect to Boroo, can you share with us what it is that the government report said to you when you finally got down to talking about the reasons for suspending the operating license? And could you perhaps share with us what the issues are surrounding the heap leach?

I'll try and answer that, Victor. It's tough to get into a lot of the detail and it gets a bit confusing. In broad terms, one of the major issues dealt with the alluvial licenses that in some cases overlay or precede the hard rock operation there at Boroo.

What we agreed to do with the government there was to coordinate a survey at the site of the past alluvial mining efforts there. Once that was completed, I think that gave the government the information they needed to specifically raise or lift the suspension that had been in place there. There obviously has to be some follow-up discussion with the government about those past licenses and that is ongoing. But I think it gave them the confidence of no impact from the ongoing operation.

With regard to the heap leach, I think the primary issue we see there is we expect to be asked to put in some more monitor wells immediately adjacent to the PLS pond. Right now, that's a matter of having agreements on the location of those wells and the timing of getting them installed.

Okay, great. So it sounds fairly innocuous. Is that a fair assessment?

You know, I think we don't see anything operationally right now that the current operation would be any particular concern. In terms of is there any follow-up from the past mining, I think that has to await further discussion. We really haven't received anything further in feedback from the government other than that we've completed the surveys, and that was sufficient information to lift the suspension.

Great. Thanks. If I could just ask a follow-up question on Mongolia. It sounds like that has not at all upset or changed your plans with respect to Gatsuurt, at least some of the initial work that you're doing there.

No, I think very specifically, we wanted to continue the work on the development of the road. I think one of the things, just to remind people, we've been operating in Mongolia for five years. I think that has been a very successful mine for Centerra. It's also been either the second or third largest taxpayer in Mongolia the last two, three years. So I think in that regard, successful enterprise for the Mongolian government.

Great. Thanks, Steve. Could I just ask another question on Kumtor? Could you perhaps share a bit more detail of what the thought process was in terms of the new operating plan? Clearly you are trying to balance out the movement of ore waste and you're taking into account the geotechnical issues with the ice and the till.

But could you perhaps share with us, like for example, why Sarytor was moved to 2012? I guess that must give you some confidence in what's happening within the Kumtor pit itself in order to defer that mining.

I'll kind of turn that one over to Ron.

Yes, Victor, with the developments in the pit, we've exposed the SB Zone and the higher grade material to the point where we feel that we can rely on it. The larger strip ratio that we have seen, we will continue to have that strip ratio in the order of 22-to-1. But the higher grades will generally persist through that period of time.

The Sarytor Project is related to mine capacity and our fleet capacity. We would prefer to concentrate on the SB Zone. And then as the stripping ratio drops off, we can then plan to do the Sarytor development.

It's not a sign to the end of the project in any way; it's just that we look at optimizing the SB Zone at this point in time.

Just a couple other comments. I think Ian referenced some additional drilling we are continuing to do at Sarytor as well. So fully understanding it and understanding all of the potential there.

Another issue, of course, is there would be a small capital cost associated with the development of Sarytor. I think it's a matter of feeling a bit more confident about the Central Pit and not needing that, plus an opportunity to further develop Sarytor. All of that rolling together.

Great. Thanks, and just one final thing. Can we expect that the production profile at last for next year or maybe the year after is going to be a little bit smoother than what we've seen in the past couple years?

As we've discussed historically, Victor, we certainly want to do that. It is certainly portrayed as being -- our plan is to have it much smoother than what we've seen over the last two years.

Great. Listen. Thank you. I'll let someone else ask questions. Thank you.

(Operator Instructions) Haytham Hodaly, Salman Partners.

Morning, gentlemen. How are you? Just more of a strategic question. Given your advancements I guess in both the Kyrgyz and Mongolia, would you consider expanding further there? Or would you look at potentially increasing exposure in a lower risk jurisdiction longer term?

Well, first off, I guess let's talk about what we're doing in Kumtor. We're going to make a significant investment, obviously. We are investing in the underground as we mentioned, putting in the second portal. We are doing quite a bit of regional exploration.

I think if other opportunities come to us in the Kyrgyz Republic we would certainly look at them. I guess we felt pretty good about the operation there. We've been running there for 12 years uninterrupted.

As I mentioned earlier, in Mongolia this has been a successful mine for Centerra. I think there specifically we are looking at a pretty strong regional play there. I would describe the investment at Gatsuurt as -- the bio-ox circuit is an investment in the district, not just in the Gatsuurt deposit.

And the work Ian described in exploration at these satellites, I hope that that goes on for quite a bit of period of time. I think generally our model there is that we would look at these most likely as satellite deposits to feed into Boroo, as opposed to new ones.

Now that -- I think the other fact is that as we see the cash balancing growing through the year, we have the financial resources not just to build the Gatsuurt Project and the SB underground, but to build a third project as well. And we would look for a third platform beyond the Kumtor Republic or Kyrgyz Republic and Mongolia for that third platform.

Okay. With Gatsuurt, the development of Gatsuurt potentially going forward, in terms of timing on programming, any indication at this point?

No, and I think you can kind of follow what's happened with OT and realize it. I think the Mongolians would be very reluctant to set a precedent on Gatsuurt that they would be obliged to follow with OT. It'd more likely go the other way around.

Okay. Makes sense. Thank you very much.

Thank you for your question, sir. Gentlemen, it appears that there are no further questions at this time. We will turn it back to you once again.

Okay. Well, that will conclude our call here for the second-quarter results. Thank you, everyone, and thank you for following Centerra Gold.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a great day.