Centerra Gold Inc (CGAU) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Centerra Gold third-quarter 2009 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 today, Friday, October 30, 2009.

It is now my pleasure to introduce John Pearson, Vice President Investor Relations. You may go ahead, sir.

Thank you. Today with me are Steve Lang, Chief Executive Officer; Jeff Parr, Chief Financial Officer; Ron Colquhoun, Chief Operating Officer; and Ian Atkinson, our Vice President of Exploration.

Today's conference call is open to all members of the investment community and the media in listen-only mode. After our 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 on the call 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 from those expressed or implied. For a more detailed discussion of our key assumptions, risk factors, and uncertainties associated with our business and the industry, please refer to our various filings on the SEDAR website.

Now I will turn the call over to Steve.

Thanks, John, and good morning everyone. Today we will comment on the third-quarter results, give an operations update, but mainly focus on our exploration results.

During the quarter operations generated $63 million in cash; and after all capital programs, our cash balance grew by about $42 million to about $163 million. We had net earnings of more than $20 million or $0.09 a share, and we remain debt-free.

With the higher prices and a significant gold production at Kumtor this quarter, our cash balances will grow substantially by year-end. Companywide gold production of 166,000 ounces at the quarter was at a cash cost of $424 per ounce.

Results included the impact from the license suspicion at Boroo for about one month and minimal heap leach production. The heap leach at Boroo remains shut down, and we are working with the Mongolian authorities to get the final operating permit for the heap leach, which will allow these operations to resume as quickly as possible. As well we continue to work with the Mongolian authorities to fully resolve all of the issues which led to the suspension of the main mine and mill operating licenses.

As we noted in our press release, we have very recently received a letter from the SSIA on a claim related to the alluvial deposits. We do not fully understand the claim, but continue to believe that any resolution would not be material.

At Kumtor we continue work on all fronts -- regional exploration, further stabilizing the ice and waste movement, underground development, in-pit drilling, and now mining is getting back into the higher-grade material in the SB Zone. During the quarter drilling returned the highest grade mineralization ever intersected by Centerra at Kumtor. The intercept was in the extension of the SB Zone on section minus-26 and was 84 grams per tonne over 26 meters, which included uncut grades of the 324 grams per tonne over 6.2 meters.

So at this time will turn the call over to Ian to go into more detail.

Thank you, Steve. Steve mentioned we continue to get very encouraging results from our exploration drilling in the SB Zone at Kumtor. We completed six holes to test the Southwest extension of the SB Zone in the third quarter. Most of the holes intersected significant widths and grades of mineralization. These are all listed in the table of results posted on our website.

This drilling and that completed in the second quarter extended the SB Zone 350 meters along strike to the Southwest of the previous exploration drilling. These holes will extend the resource model. A number of the intercepts lie within the current plan pit design, and so they will add to the current reserves.

Steve mentioned the best intercept was in hole D1352, which returned an intercept with uncut grades of 84 grams over 26.4 meters, including 327.4 grams over 6.2 meters. If the higher-grade gold values are cut to 60 grams per tonne it is an intercept of 19.4 grams over 26.4 meters, including 52.2 grams over 6.2 meters.

As we progress the decline it will pass by this drill hole intercept at about the same elevation. The decline is currently 600 meters away, and so we are looking forward to getting down to this area to follow up on these results.

We also continued exploration drilling from the underground decline. We have one drill active and three holes were completed in the quarter. All the holes intersected the Kumtor structure and mineralization, with hole UD1370 returning the best intercept, which was 7.6 grams over 4.8 meters including 12.2 grams over 2.8 meters -- grades that are certainly intriguing and approachable for underground mining.

Also in the quarter we completed additional holes to test the downdip continuity and depth extension of the high-grade mineralization intersected in the Stockwork Zone. Results continue to be very encouraging, with hole D1339 returning an intercept of 4.2 grams over 33 meters, including 11.8 grams over 3.5 meters.

These results, along with those from previous drilling in the Stockwork Zone, have now outlined a high-grade mineralized zone over a strike length of more than 400 meters and downdip for up to 400 meters from the bottom of the planned KS9 design pit. The results are confirming the excellent potential for a high-grade underground deposit that is both along strike and downplunge to the Northeast.

We also completed drilling on a number of the regional exploration prospects around Kumtor. The results from this drilling are shown in the material posted on our website.

So moving on to Mongolia, we continued exploration work there in the third quarter on our large land holdings along the Yeroogol Trend. The work completed has defined targets on the Khuder and the Gatsuurt properties that we will be drill testing in the fourth quarter. As we have stated, it's our objective to identifying and maintain 10 years of feed for the Boroo mill from Gatsuurt and other satellite deposits in the region.

During the quarter we also entered into two new exploration joint ventures. In Turkey we signed an option agreement with Stratex International covering the Oksut property in the Central Anatolia platform, which is about 250 kilometers Southeast of Ankara. The property covers a series of structural and lithologically controlled high-sulphidation silicified zones and associated alteration that extend over an area of at least 8 square kilometers. We have currently got ground geophysical surveys, trenching, and diamond drilling underway.

In Russia we entered into a new joint venture agreement with Amur Gold covering the Illichy Gold prospect -- project located in Eastern Russia, in the Amur Oblast. Field work including trenching and IP surveys were started in late September to define targets for drilling.

These two new joint ventures continue to add a pipeline of exploration projects that we are developing in Asia. So with that I will now turn it over to Ron.

Thanks, Ian. As Steve mentioned, during the quarter with the continued movement of the waste and ice from the South East high wall, we focused on the mining of the ice and waste in this area. This unplanned activity reduced the production of ore by delaying the access to the high-grade component of the SB Zone. We have developed a plan which includes added mine capacity to deal with the issue, to further stabilize this advanced creep, and to manage the accelerated ice and waste movement.

At Kumtor during the quarter, recovery was impacted by lower grades that were slightly more refractory than anticipated and by maintenance requirements and operational challenges in the grinding and floatation circuits. For the fourth quarter, high-grade ores recoveries are anticipated to be in the same range as the Q4 2008; that is, in the high 80s. The grinding and floatation circuits are in excellent mechanical conditions and are ready to process these ores for this fourth-quarter period.

Total cash cost per ounce at Kumtor decreased 13% to $427 in the quarter due to lower operating costs. In the quarter, mining costs were $9 million or 23% lower than the same quarter last year due to lower expenditures on fuel. Also our milling costs were slightly lower than 2008, primarily due to the lower spending on electricity, partially offset by the increased cost of reagents.

We continue to see positive impacts from the dewatering and depressurization programs, which will allow us to better stabilize portions of the pit walls, reducing the total amount of waste to be mined and, at the same time, expose more ore in the SB Zone.

Work on the underground access drift of the SB Zone continued in the quarter, and we have completed a total of the 665 meters of development. Work has begun on the second access portal to the underground. This is located within the central pit, closer to the Stockwork Zone. J.S. Redpath Ltd. has been contracted to manage this development and has mobilized.

The second access will allow early access to the Stockwork Zone and provide a platform for exploration and delineation drilling activities, which will be undertaken to help define this inferred resource. The two drifts are scheduled to join up in the second quarter of 2011 in the SB Zone.

At our Boroo operation, the operation performed well during the quarter, producing just a little over 32,000 ounces. Let me mention, if the mill and heap leech had been in full production during the quarter we would have produced an additional 21,000 ounces, which would have been similar to last year's third-quarter production.

We are continuing to work with the Mongolian authorities to obtain a final operating permit for the heap leach. Once the permit is obtained and we get the heap leach operational again, it will add about 3,000 ounces of production per month.

Also in Mongolia we are continuing to work on the Gatsuurt road and the Gatsuurt mine site development, all of which are on track for mid-2010 completion.

Now I will turn the discussion over to Jeff to discuss the financial reporting.

Thanks, Ron. Well, I'm pleased to report that we had no unusual items for me to talk about this quarter, and the results were generally in line with our expectations. Looking at the income statement on a consolidated basis, the third-quarter revenue at $159 million reflects higher average realized gold prices of roughly $960 an ounce. More or less in line with the average spot price. Net earnings of $20 million or $0.09 a share reflect our efforts to lower operating costs, which Ron mentioned earlier, along with the impact of higher realized gold prices.

With respect to cash and cash flow during the quarter, as mentioned by Steve, the operations generated $63 million; and after all capital programs we added $42 million to our cash balances, closing at the quarter at $163 million in cash and short-term investments.

Increased production in the fourth quarter, along with our continued focus on cost control, will 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 still have no requirement for any. Our exploration and capital projects will be funded out of our cash flow.

During the quarter we spent and accrued $6 million on sustaining capital and $15 million on growth projects, mostly related to ongoing work on the SB underground project and the Gatsuurt road construction.

With regard to our outlook for 2009, our total cash cost per ounce is expected to be between $465 and $485, which now excludes the revenue-based taxes at Kumtor and reflects consolidated gold production of 620,000 to 630,000 ounces.

In Mongolia discussions continue with the government working group with respect to the Gatsuurt investment agreement. We are encouraged by the recent changes to the country's tax regime whereby the windfall profit tax has been repealed effective January 2011. We believe that this is a positive change to the fiscal regime and bodes well for the Gatsuurt investment agreement.

I will now turn it back to Steve for the wrap up.

Okay, thanks, Jeff. Just to summarize, we expect a significant increase in production at Kumtor for the balance of the year and are on track for our guidance. In Mongolia we are working to get the final operating permit for the heap leach and looking to make progress on the Gatsuurt investment agreement.

Finally, we have been emphasizing the underground at Kumtor for some time. The exploration and development efforts there are accelerating with the start of the second underground access point. And we continue to drill from the current underground decline and from surface to expand the size of the resource. This quarter's results are very exciting and highlight the potential of this work.

So with that I will it open it up for questions. Operator?

(Operator Instructions) Haytham Hodaly, Salman Partners.

Good morning, gentlemen. Great quarter. A couple of questions. I guess I'll start with a simple one.

Given the exploration success you have seen so far, are you looking at revamping your exploration budget for this year, and have you considered one for next year yet?

I think that I might ask Ian. I think the main thing here is that we are pretty late in the quarter. But --

We actually have increased the budget for this year a little from $11.25 million up to 12 million; and currently we are looking at spending about the same amount again next year, which would be about $12 million.

But that is just the Kumtor.

Yes, that is just the Kumtor portion. I think that is what you were referring to, Haytham.

Yes. How about total, do you have a number for that?

Yes. The total this year will be about $12 million and our current plan for next year is $12 million. But total exploration budget, for this year it will be about $25 million. The plan for next year we will still be finalizing; we will get that done probably early December.

Out of that $25 million is that all going to be expensed at this point?

Yes.

Okay. Then I guess just another question with regards to the shutdown that you experienced earlier this year. Are you finding any longer term residual effects? It looks like your operation actually ramped up again fairly quickly.

Haytham, it is Ron. We ramped up very quickly once the suspension on the milling and mining operations was complete. Unfortunately the heap leach was thought to be needed -- required more testing and scrutiny by the authorities. We have passed all the aspects of that and we are awaiting their final decision to authorize the final permit.

Haytham, one thing I think you look at to ascertain the attitude of your workforce is the safety performance. So Boroo went back into operation this quarter, and we went the entire quarter there without a single reportable injury.

That is great. Thank you, gentlemen.

Stephen Walker, RBC Capital Markets.

Great, thank you, operator. Good morning. Just two questions. First of all, in the release there is a comment that you made about Kumtor's gold production in the quarter, estimated to be in the range of 225,000 to 235,000 ounces. Then you go on to say -- and assumes access and release of higher grade ores from the SB Zone in the quarter, particularly in November and December.

Can you just elaborate on that qualification or that statement and what it is qualifying? I guess my question is, where are you in the process of getting back into the pit and the SB Zone? And what is your level of confidence in getting into this material as planned?

We are very on track, Steve. The issue with the SB Zone is that we obviously have to strip back the waste. And with the delay that we saw during the year, that delayed some of that activities to get us to the bottom.

But we are on track. We are entering the high-grade zones as we speak. And these are considerable values, and we do have a target of 200,000, 235,000 ounces during that period of time. It is based on the capacity of the milling facility and the plant recovery.

Just as a follow-up to that, you will also be stockpiling material into the first quarter. Can you give us an estimate of what -- just roughly maybe -- the tonnage or what sort of ounces that could be stockpiled and then processed into the first quarter or two quarters of 2010?

It will determine on how we finish the year. Obviously we are certainly challenged to continue our production rate through to the end of the year. But I think we are in -- another 100,000 ounces of material can be moved into stockpile and be out of the pit. That is certainly our goal.

For 2010? Okay, thank you. Just one more question if I --

The stockpile, that would be in and be extracted out of the fourth quarter, and then be available for feed in the first quarter of 2010.

Okay, great. Just maybe another track here, another question if I might on a different tack. If you would, could you, Stephen, maybe elaborate on -- given the grades in underground and the Stockwork and the SB Zone, certainly it looks robustly economic to be developed. Can you give us a sense on mining methods, potential cost per tonne?

And maybe even a sort of -- in the timeline that was laid out earlier in the call, the capital that you might expect, ballpark, in looking at development costs and again potential operating costs underground in those two zones, looking forward?

You know, Steve, let me start out real quick on the capital portion of that. I think as we get into early next year we will announce a capital program for Kumtor that will include 2010. I think with that we will try and give a bit of a look forward longer term on the capital.

We are still dealing with an inferred resource, so there's limits on how much we can talk about operating costs, etc. But I think Ron might give you a sense of the mining methods that we are considering in the different zones.

Again, Steve, it is early days and our challenge is to get underground and do the delineation drilling that will outline the ore body. But our preliminary feeling is that the SB Zone will probably be an underhand drift and fill methodology unfortunately. We would hopefully with time be able to move away from that particular method; but the ground and the geotechnical conditions will drive that.

In the Stockwork Zone, again it is very early on, but we feel that we can probably use a bulk method of mining there that will facilitate a larger tonnage and possibly a lower cut-off grade, and capture more of the ounces that are in that zone. Those are our preliminary thoughts.

Great. Thank you very much for that, Ron. Thanks, Steve.

Barry Cooper, CIBC.

Good day, everyone. Ron, just wondering. There is a pretty good correlation between grades and recoveries, and you had a pretty good bump in the grades but recoveries didn't come about. You indicated there that it was more refractory than you thought.

I am assuming that is ore from the SB Zone that is more refractory than you thought. What is your view now that you are into that? Is that going to be perhaps a lingering issue with respect to low recoveries, even though you are getting better grades?

Well, it's important to note that Kumtor has a very challenging refractory ore body, both refractory and preg-robbing, and it varies significantly. But the metallurgical work that we have done on the SB Zone high-grade zone has been very successful and shows good results.

I think what we are stating is that the lower grade recovery is really -- the feed that has gotten predominantly fed in the third quarter has been stockpile. Stockpile material. And that it had some of the more refractory material from the Southwest zone that had tellurides in that particular ground. The only way to recover a telluride is by roasting.

So we had some of that in our feed. But the lower grades were also historically more refractory from a Kumtor historical metallurgical effect.

I think one of Ron's earlier comments also -- I think for Q4, and we would look back to Q4 of last year as being pretty indicative of what we would expect from a recovery standpoint.

Okay. So I am assuming then what you have told me is you had probably stockpile material that was in maybe as low as the 50s or the 60s. And then you would have had SB Zone material, which I'm guessing it must have been in the plus 4 gram range in order to get you to the 3.5 gram. That would have been a close to your typical 80 then; is that correct?

I think, Barry, are you referring to the third quarter?

Right.

There was very little ore coming out of the SB Zone because we are in waste. We have some minor tonnages coming out of that area.

So how did you get 3.5 grams then?

Let's check that one for you, Barry.

Okay. Ron, while you are thinking -- and you may have to get back to me by phone or whatever. But the $30 million run rate of the quarter was a big drop there. Is that a realistic expectation for what we might look at going forward? Or did -- your strip ratio was down in the 20 range; how much of that was an influence on that $30 million?

The strip ratio is predominantly the same. We are moving -- obviously we have to tackle a certain amount of that material, the material waste and ice that comes into play. But the strip ratio is in the order of, I believe it is 22-to-1 as a historical number. Our mine plant from time to time deviates from that.

But I think some of our capacity is that we are dealing with ice. So it uses up the tonnage capacity, so it is more volume that we are dealing with.

Right, okay. Then finally for Ian, will these recent drill holes that you have released make it into 2009 year-end resources?

And what is the drill spacing there? Are they likely to be inferred or do they get into M&I?

Actually the results all will get pulled into the year-end resource model. Certainly anything that we will look at as an underground potential will still go into the inferred category, because the drill spacing just isn't close enough to do any better.

The material in the pit, some of that will come into reserves, because the pit outline is already well defined. The drills, the ones on the edge of the pit, some of that will actually go into measured and indicated, because there is an opportunity from the work we have been doing to potentially steepen the pit walls and then bring a little bit more of that into the open pit reserve. So that will be classed as an open pit resource, and that will be in measured and indicated.

Okay, so, just so that I fully understand then, a couple of these holes, 1349, 1340, 1352 which was a zinger, those being what I would assume are underground, are likely be inferred or [arc]. Can you pull that pit down to include those?

No. It is highly unlikely because if you look at the long section, as we have said I think historically as well, the pit limits now are pretty well defined because of the glacier.

Right.

The only opportunity to increase pit reserves and resources is steepening the walls. The work that we have been doing over the last year, year and a half with the dewatering, depressurization that Ron has described in the past actually is working. And that does give us an opportunity to improve things there.

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

Steven Butler, Canaccord Adams.

Good morning, guys. Kumtor, so good-looking in the fourth quarter. Or you're still expecting a good fourth quarter. Could you say or comment where grades have averaged quarter or October to date, one day before Halloween?

I don't think we get into those specifics ever on a current, to the minute (multiple speakers).

Right, okay.

I think as Ron said we are on track. The third quarter came out, as Jeff mentioned, where we expected to be; and our mining and progress so far this quarter is still there.

Right, okay. So I guess clearly what is implied is about -- I guess if you're going to do 1.5 million tonnes in the fourth quarter the grades should be in the range of 5.5 grams per tonne. But we will see how it all shakes out.

Boroo, your guidance for the year seems perhaps slightly conservative. But maybe that is the way you will show that 120,000, 130,000 ounces. I say that because of course Q3 you were shut down still for almost one month in the quarter.

Or will it be it lower grades that go through the mill in the fourth quarter that maintain or constrain of the production for the year at that 120,000 to 130,000 level? Thanks.

I guess it is not bad to be a little conservative occasionally.

Okay. But no material change in grade in the fourth quarter on the milling side, milling grade side?

Not at Boroo. The grade is on track there as well for the year. I think we will be in our -- very close to our forecast guidance.

Thanks, guys. Ian, can you give us roughly the dimensions of the strike width depth, if you will, of the SB Zone in last year's underground inferred resource? If you can recall the rough dimensions. Because I know you talk about 350 meters of potential strike extension to the Southwest. But maybe the context around how big the blob was last year, if you know what I mean.

Last year the higher grade inferred underground resource has got a strike length of about 250 meters max, down to the extent of -- my recollection is 250 to 300 meters. And the average width, that one I'm struggling with; but it is the order of 15 to 18 I think from my recollection.

Okay.

I will have to go back to the AIF and look that one up.

Okay.

I think one important thing there you can see in the cross-section, although we have added quite a bit to the strike length, it is not all downdip as far as what we had done last year with SB.

Sure. I see that on the long section, guys, there is a bit of a maybe apparent gap in terms of the lack of drill hole pierce points between -- on that stylized they're actually a pretty nice-looking long section between the SB Zone itself and then the nice new purple high-grade horizon around hole D1352.

Is there a lack of drilling in that intervening area? Or it needs to be done obviously?

Yes, Steve, it is just a lack of drilling. That long section shows all of the holes we have in there and I think you can probably see between the edge of the original high-grade portion of the SB Zone and then this hole 1352, there is actually just two of the pierce points. So very little data between the two of them, particularly along the level of the decline.

Right, okay. All right. That is all I have, guys. Thank you.

(Operator Instructions) Trevor Turnbull, Scotia Capital.

Yes, good morning. I just was curious. You were talking about the material that will get mined in the fourth quarter that will be put into a stockpile for next year. I was wondering, is there any significant stockpiles already existing, left over from earlier mining this year?

Yes, there are low-grade stockpiles and sub-grade stockpiles, but nothing of any higher significant grade. But the mining will exceed the milling capacity in the fourth quarter with the amount of high-grade material available.

Right. Can you give a sense of what kind of grade in the low-grade stockpiles?

Order of magnitude it is 1.5 grams up to 1.8. The sub-grade if we have -- we put material of 0.85 grams and up to 1.5.

So material certainly in the low-grade stockpiles that would be suitable for blending with the higher grade material.

That is right.

And as far as 2010 guidance, obviously you are not ready to give that. But when do you usually come out with your 2010 guidance?

January.

We will probably have it first part of the year, January time frame, Trevor.

Okay. In terms of resource and reserve updates, is that January or is that a bit deeper into the new year?

Normally late January or early February is when we do that, yes.

Okay, thank you very much.

Speakers, we have no further questions at this time. You may resume with your presentation or closing remarks.

Okay, well, no closing remarks other than to thank you for participating on the call, and we appreciate your support and interest in Centerra Gold.

Thank you. Ladies and gentlemen, this does conclude our conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Have a great weekend, everyone.