Centerra Gold Inc (CGAU) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Centerra Gold First Quarter Results conference call. (Operator Instructions). As a reminder, this conference is being recorded Thursday, April 29th, 2010.

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

Thank you, Cliff. Welcome, everyone, to Centerra Gold's first quarter conference call. Today with me is Steve Lang, President/CEO; Jeff Parr, CFO; Ron Colquhoun, COO; and Ian Atkinson, VP Exploration.

Today's conference call is open to all members of the investment community and 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 -- all figures are in US dollars, unless otherwise noted.

Before we begin, I'd like you to-- I'd 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 -- or issued last night actually -- and our various filings on the SEDAR website.

Now I'll turn the call over to Steve.

Thanks, John. This was a very strong quarter for Centerra operationally and financially. I'll leave those topics for Jeff, Ron and Ian to review and I'll focus on the recent political issues.

In the Kyrgyz Republic, we are observing the recent developments closely as the political situation continues to evolve. An interim government has been formed by Roza Otunbayeva and it appears that this interim government is reestablishing order in the country.

Throughout the unrest, we focused on the safety of our national and ex-pat workforce and the security of the operation itself. Production at Kumtor has not been impacted. We are able to move supplies and people back and forth from the mine and now people are returning to their normal routines.

We have had no indication from the government about any changes in the way we do business in the Kyrgyz Republic. There have been positive statements made by Mrs. Otunbayeva after her meeting with the International Business Council in Bishkek last week.

Kumtor's personnel attended the meeting and she indicated her government would ensure that foreign companies were able to continue to work in the country without disruptions and that the government would honor commitments and agreements that had been made.

Operationally, we have been largely unaffected. There had been some delays on some financial transactions, but these have now been resolved, as Jeff will discuss.

Next, I would like to address some recent news from Mongolia regarding the Mongolian President issuing an order temporarily suspending the issuance and transfer of mineral licenses. The order appears to be aimed at limiting speculation and non-compliance by license holders. Our operations and our existing mining and exploration licenses, including the Boroo and Gatsuurt licenses are not affected by the order.

In regards to the final operating permit for the Boroo heap leach facility, we continue to be in discussions with the government. The process is moving along and we feel it should be resolved in the near term.

As for Gatsuurt, we are continuing to work with the Mongolian authorities concerning the permitting and are making good progress there. The whole process is somewhat slower than we would like, but we are confident we have the-- we will have the necessary approvals in place, enabling us to commence the processing of Gatsuurt oxide ore in the third quarter. During the quarter, we identified additional oxide mineralization at Gatsuurt, which we believe will most likely extend the amount of oxide mining we do there.

I will now turn it over to Ian Atkinson to discuss the exploration highlights for the quarter.

Thanks, Steve, and good morning, everyone. At Kumtor we had encouraging results in the deep hole-- deep drill hole that we completed to test the Kumtor structures from 500 meters below the bottom of the current planned pit. The drill hole intersected low-grade mineralization -- 2.2 grams over 7 meters -- at the 3,000 meter elevation, with alteration over a 300 meter interval from the 3,200 meter elevation down to the bottom of the hole.

We intercepted the Kumtor structural zone where we expected, which is over 800 meters down dip and 500 meters along strike from the nearest drill holes. This demonstrates that the Kumtor structure continues at depth, with untested potential both down dip and along strike of the known mineralized zones.

We'll continue to test the down-dip extensions of the SB and stock work zones in the second quarter. We also-- and we'll also test the southwest extension of the SB zone whenever our mining activity permits.

We're also continuing to have success with the Northeast Prospect, following up on the high-grade mineralization intersected in the drilling we completed there in the fourth quarter. Although we were only able to complete one drill hole, the hole intersected high-grade mineralization, 15.6 grams over 3 meters, and 10.8 grams over 3.5 meters, down dip from the hole that was completed in late 2009 that returned similar grades.

We'll continue to followup on these high-grade intercepts in the second quarter. We will also continue drilling in the near-surface pit-- near-surface open-pit opportunity that we've identified at the Northeast Prospect.

In the second half of 2009, we accelerated our exploration program on our large land-holdings in Mongolia. Work on the Gatsuurt project identified targets closed to the planned central open pit. Drilling of the target-- of one of these targets on the northeast corner of the open pit returned very good results, with holes intersecting broad zones of predominantly oxide mineralization very close to surface.

This mineralization is immediately adjacent to and some of it is within the current planned open pit. This additional oxide mineralization has the potential to extend the oxide operating life of Gatsuurt and so the timing for the bio-oxidation plant is not as critical as it was before.

We have additional drilling planned to complete the delineation of this zone and also to test other, similar targets, along the strike line for the deposit.

All of the drill data and drill sections at both Kumtor and Gatsuurt are available on our website and at SEDAR. So with that now, I'll turn you over to Ron to discuss the operations.

Thank you, Ian. While our first quarter production was better than anticipated, we have not changed our overall gold production outlook for the year. Kumtor produced a little over 180,000 ounces of gold in the first quarter as a result of mining ore exposed in the pit in the SB zone, which was carried over from the fourth quarter of 2009, processing the high-grade stockpile established at the end of 2009, reducing the planned gold inventory that was at its historical high and, in addition, experiencing some positive variance to the block model.

We are still expecting another strong period of high gold production in the fourth quarter from Kumtor, very similar to the previous 2008 and 2009 periods. As planned, the second and third quarters will produce less gold than in the first quarter.

Work is continuing on the SB underground decline. After some additional work to implement the necessary ground support in an area of poor ground, the decline advancement is now on its planned schedule.

Decline number two, the stock work underground decline, has advanced a total of 222 meters by quarter end. This development will facilitate access to both the SB zone and the stock work zone at the same time. Exploration and delineation drilling of the two resources, the SB zone and the stock work zone, is planned for 2010. We are still targeting underground production to commence in late 2011, with production ramping up over 2012.

At our Mongolian operation, the Boroo mill recoveries improved at about 73%-- to about 73% in the quarter as the mill feed consisted of less refractory ore than previously planned. Gold production was just over 30,000 ounces, which has-- which was lower than last year as a result of the heap leach operation remaining idle for the quarter, pending the issuance of the final operating permit by the Mongolian authorities. Mining is continuing in Pit 3 in an area which is less refractory in nature than anticipated.

Regarding the Gatsuurt project, if we do not receive the required approvals for the commencement of the Gatsuurt project oxide mining phase in a timely manner, an alternative plan can be initiated that will allow the Boroo operation to achieve the production within the forecasted range of ounces produced.

The remaining stockpiled oxide ores at Boroo can be processed. Additional, in-pit ores in Pit 3 and Pit 6, though more refractory in nature, can be mined and processed ahead of schedule.

I will now turn the call over to Jeff Parr, our CFO, to provide the review of our financial performance.

Thanks, Ron, and good morning, everyone. With regard to recent developments in the Kyrgyz Republic, I want to reassure everyone that the banking system in the country is operating normally.

During the first few days of unrest, the interim government took certain effective steps to safeguard the banking system. We have not had any issues regarding moving money in and out of the country and we have continued to pay wages, expenses and our taxes to the government.

As we mentioned in our release, Kyrgyzaltyn, the state-owned entity that purchases Kumtor's gold, had notified us of a temporary moratorium on certain transactions that had been imposed on it by governmental authorities. The impact of this on Kumtor was that Kyrgyzaltyn had been forced to defer the sale of gold to its off-take bank, which, in turn, delayed payment to Kumtor.

This restriction on the sale of gold by Kyrgyzaltyn to its off-take bank has now been lifted and refining and sale of our gold is functioning normally. At the end of the quarter, we had a large receivable from Kyrgyzaltyn and this has subsequently been paid in full.

Turning to our results for the quarter, net earnings of $122 million, or $0.51 a share, reflects the higher gold production during a period of continuing high gold prices and lower operating costs. The operations generated cash of $82 million and we had $61 million to our cash and short-term investment balances after all capital programs. Centerra ended the quarter with $384 million in cash and short-term investments and no debt.

During the quarter we spent and accrued $7 million on sustaining capital and $22 million on growth projects, including $9 million for ongoing work on the underground development at Kumtor and about $6 million related to Gatsuurt development. As discussed previously, we have reduced our capital estimate for the year by about $31 million. This is primarily due to the timing of expenditures for growth capital at Gatsuurt, where a decision has been made to delay the engineering and construction of the Boroo bio-oxidation facility for processing Gatsuurt and other sulfide ores.

This decision was made due to the drilling rests at Gatsuurt mentioned by Steve and Ian, which has identified additional oxide mineralization that we expect will extend the oxide operating lift at Gatsuurt. This delays the nearer-term requirement for the bio-oxidation plant and gives us longer to work on an investment agreement with the Mongolian government, which the Company feels is necessary for the larger capital commitment associated with the bio-oxidation facility. As a result of this decision, the capital spending in 2010 for the engineering and construction of the Boroo bio-oxidation facilitation has been scaled down to $5 million from $40 million.

The unit cost of fuel for both operations has increased and this is reflected in our outlook assumptions where we are now assuming $0.74 a liter at Kumtor and $0.85 per liter for our Mongolian operation. I should mention that the increased cost for fuel at Kumtor is mostly due to an excise tax recently imposed on the Kyrgyz Republic by Russia. The current government is attempting to have this tax reversed, however we've included it in our guidance for the year.

I'll now turn it back to Steve to wrap up.

Okay. Thanks, Jeff, and just a few items and kind of recap here. First, obviously, a very strong quarter for production at Kumtor and very good cost performance, as well.

We are maintaining our production and cost outlook for the year. Our balance sheet continues to strengthen. In exploration, very encouraging results as we advance the Northeast Prospect at Kumtor and the oxide results at Gatsuurt give us more flexibility in planning for the bio-ox investment.

And on one final note here, I'd like to acknowledge the efforts of the Kumtor personnel in continuing to operate successfully through this period of uncertainty. You always understand the true character of the organization when it must perform in difficult times and the workforce continues to rise to the occasion.

And with that, let's open the call up for questions. Operator, please give the instruction for the process on the question-and-answer period.

Thank you. (Operator Instructions). Our first question comes from the line of Haytham Hodaly of Salomon Partners.

Thanks, operator. Good morning, everybody.

Good morning, Haytham.

Just a couple questions. Obviously, we talked a little bit about the grades at Kumtor and how they exceeded expectations. I'm wondering -- you did say that the second and third quarters and you've always said that they would be a little bit less, what are you seeing so far as a grade in the second quarter relative to that of the first?

The-- This is Ron, Haytham. The grade in the first quarter was averaging around 4.2, 4.3. We'll probably see a grade closer to the 2.25 range.

In the second quarter? Okay. And the third quarter, something similar or slightly less?

Something very similar. We are running off stockpiles.

Okay, perfect. And then at Boroo, your recoveries were significantly improved, obviously, because of the less refractory material. Are you still in that refractory material? And how long do you expect to be in that material for?

The bottom of the pit is very potty, you might say. It does have zones of what we're picking up as oxide material, transitional material, and we will continue to be in that material for a few more months and then there is-- it transitions into more refractory material. We are studying--

So would you say the second and third quarter should continue to be-- possibly experience higher recoveries because of this less-refractory material?

I think so. I think we will continue to see this improve. We do have our stockpiles that we will be running through, as well, that have been beneficial in our historical recovery plan.

Okay. Then maybe more of a big picture strategy question. You're sitting on a lot of cash, no debt, two operations generating almost 0.75 million ounces or slightly more a year. What's your plans, going forward, in terms of acquisitions? Where would you, in theory, given the political unrest or the political issues you've had to deal with over the last 24 months, where would you like to be using that capital?

Haytham, I think we would love to be using that capital to build a third mine and I think that would be the best use of that. As we look at those opportunities, I think we have to look for things that fit within our general size and jurisdictions. I think they're probably more reasonably priced in Asia. I think the other thing I would kind of note right now is that we do get bounced around in terms of share price with the political uncertainty and at the current share price using that as a currency isn't very attractive for us.

Fair enough. Congratulations on a great quarter.

Thanks.

Our next question comes from the line of [Sarah Heston] of ASA Limited.

Good morning. I was wondering how many more years of oxide reserves you're adding on to Gatsuurt?

I'll just say that we're not really in a position to answer that. We won't, probably, give an update on reserves and resources until the end of the year. I think that's really accurate. Ian, anything to add?

Yes, I think so. Sarah, I mean, we published the results we have to date and, as we've indicated, we're still actually drilling that one zone and there are, actually, a couple of other targets right around the central pit that we will be drilling over the next several months. So we wouldn't really update the reserve picture until we've got all of that work done.

Okay. So what are your plans for the bio-ox plant? When are you kind of now focusing on actually building that and spending that capital, one year, two years?

No, we'll start the process again in eight to 10 months with re-initiating the engineering and then starting from there. Certainly we will be mobilizing the site at the appropriate time to do the construction. That's our plan at this point.

I think one of the things here that's important is pretty harsh winters in Mongolia so hitting the right season for construction is important, but before doing that, we've got also six to eight months more of drilling, looking at these other targets, as well, so that will be subject to review towards the end of this year.

And do you have any concerns about the Mongolian government? And I know there's been some news coming out recently about them limiting exploration licenses and are you-- have your concerns increased about getting the approvals you need?

It has been a slower process than we would like, but we do see progress being made there. I think this recent temporary suspension on the issuance of licenses does not affect us directly, not in terms of the operations or the development of the Gatsuurt project. If we looked longer term and would look to acquire exploration targets from others that hold those licenses, the transfer right now is temporarily suspended. But, as we understand the reasons there, we would expect that to be lifted eventually and don't really see a longer-term impact on our ability to operate there.

The other general issue has been the forestry and watershed law and the reason news there. I would just point out that the government has a preliminary list of over 1,000 licenses that are included there. We gave some description of information that we were requested to provide. That's part of this government review and understanding what the potential financial impacts of listing certain projects are on that list.

We continue to work with the local governors there, who are very supportive of the Gatsuurt project and who have also been asked for input by the national government in choosing, ultimately, what projects go on to that list. We remain optimistic about this and that's why we continue to invest at Gatsuurt.

Great. Thanks.

Our next question comes from the line of Rahul Paul with Canaccord Adams. Please proceed with your question..

Hello, guys. Yes, Steve Butler here with Rahul from Canaccord, guys. Steve, thanks for those comments you just made in the previous question to-- addressing the water and forestry law, which was that letter you received on March 10th. Under what context, Steve, would Gatsuurt potentially be deemed to be a permit that could be subject to being revoked under the water and forestry law? Is it a very broad law? I mean, is there water issues there or a nice forest in place? Or how is Gatsuurt, potentially, on that list?

Well, I think certainly there's a lot more forested area at Gatsuurt than there is at Boroo, so potentially it could fall on the list. We think that that's relatively unlikely.

Okay.

Part of the law there was a compensations for those who have invested and hold those licenses and, obviously, the request from the government was understanding what the financial impact of that would be.

But, again, they have over 1,000 licenses that were on the preliminary list. So I think, although the law is about a year old now, they're still trying to understand and come to terms with all the implications of the law that they passed.

Okay. Steve, any sense of-- I spoke with John yesterday about the timing of either a new referendum on legislation in Kyrgyz Republic or new government elections slated for what time period, if at all, this year? Thanks.

Well, Steve, we've seen, I guess, the same general comments that the interim government has made where they were typically talking about roughly a six-month period in order to organize and hold new elections. I think that that's as good information as we really have.

Okay. Okay, thanks very much, Steve.

Our next question comes from the line of Trevor Turnbull of Scotia Capital. Please proceed with your question.

Yes, good morning. I-- it's probably obvious at Boroo exactly how the production breaks down, but I seem to have gotten a bit lost. If you look at the heap leach production, you're now looking at that coming in the second half of the year and then you obviously have the CIL production, as well.

I guess where I'm confused is, is there any Gatsuurt oxide component to that CIL gold production this year? Or is that still pending the permits next year or later this year?

We're hoping to see the Gatsuurt oxide permit to come out in the-- by the third quarter of this year. We have alternative options in front of us, as I said earlier, that would allow us to meet our-- the forecasts that we've indicated, as well.

Yes, and I guess, Ron, my question is, was the forecast for-- not for the heap leach, but for the CIL production, was that forecast just 50,000 ounces coming from Boroo and then if you get the permit, about an equal amount coming down from Gatsuurt, as well?

That was the plan, yes. And we are sticking to that plan. The-- like I say, we do have alternative options in front of us for increasing the Boroo ore to the plant and we feel strongly that the heap leach operation will add, once we have our permit -- and we feel strongly that it's very near -- that it would help us cross the finish line.

And then once you do get those permits in place for Gatsuurt, you would defer processing further Boroo material at-- in place of just running Gatsuurt essentially 100% through the CIL plant?

That's correct, yes.

Okay. Thanks, Ron.

Our next question comes from the line of Khaled Sultan of CIBC. Please proceed with your question.

Yes, it's actually Barry Cooper. Just one question on-- for Ron here. Normally, there's a pretty good and strong correlation between, at Kumtor, low high, high recoveries, low grade, low recoveries. That seems to have fallen out of bed in this quarter with 4.9 gram head grade and yet only-- a little less than 77% recovery.

Was there something in that positive reconciliation ore there that was metallurgically different and, if so, how does that impact things going forward? If not, should we expect something down around 70% or 72% recovery for Q2 and Q3 when you get into that low grade material?

During the quarter, Barry, we were blending material and in that older stockpile of material, there is some refractory material that doesn't respond as well as the SB zone. The SB zone continued to show 83%, 84% recovery on a per-tonne basis as an isolated metallurgical result, but as we blended this material, we did see a slightly lower recovery. But it was still above what our-- we had anticipated, as well.

So the grade is the effect of the higher-grade components being blended down. And we've-- as you know, Kumtor has a-- is a very challenging metallurgical zone and our future ores that we're mining will always be-- we seem to be getting a better handle on it and improving the recovery. The SB zone is responding as we expect.

Okay. So basically use the old correlations of being-- as good as a guess for going forward, then?

Yes.

Okay. And then for Ian, Ian -- and I don't know whether you can answer this question or not -- but quite often when you're drilling a zone and what-not, and you'll be familiar with this in your Timmins days where quite often a drill intercept will certainly not be representative of an intersection if you have a nuggety effect and what-not. And so this deep drilling at Kumtor, low-grade there, do you-- does that really mean anything with respect to what you think could wind up being there ultimately?

And I say that from the standpoint that, I guess, more or less, do you have enough data, I guess, to question you properly here, do you have enough data that you can actually make a prediction and kind of say, okay, well, when we go into a zone off of drill data, a third of our holes are low grade and one third are high grade and the other could be total busts, but we know it's a definite ore zone?

Well, to put the hole in context first, because, Barry, certainly the grades in it 2.2 in 7 meters, yes, 7 meters, I think. And it's-- I guess the hole-- first off, we didn't get to the bottom of Kumtor structure. We had to stop it for technical reasons before we actually got all the way through the structure. So we're still probably midway through it. So we don't really know the full width and extent of the Kumtor zone.

So how thick would it be there, Ian?

I beg your pardon?

How thick would it be there?

The zone itself, as I said, we got alteration over 300 meters. The (inaudible) fault down to the bottom of the hole is probably another 180 meters. That's down-hole width, so that probably 65% of that is the true width.

So that it's very positive in terms that the structure was where we expected it and we're down over 800 meters from the-- down-dip from the closest hole. In terms of what-- how representative it is, it's very difficult to say, but, again, if you go back to the SB zone and you look at the historical drilling around the SB zone as you-- I think you're familiar with, Barry, those results were fairly low grade.

Admittedly, that was the old Soviet drilling. They did show the zone-- the structure was there, but certainly under-represented the grade significantly. So can you rely on one hold? I think the answer is clearly no.

From my perspective, you would put that one hole down there. It shows the structure is still there. There's all sorts of room to work around it.

When you say you hit the structure where you expected it, what I recall there that moving in that direction you were expecting it to flatten. Is, indeed, that's what happened?

No, I think if you take a look at the section that we put on the website--

Yes, can't find it there, but anyways.

I hope it's there. Here it is. We haven't actually joined up the dots between the hole that's up-dip from it, 1327. As I say, you've got about an 800-meter gap, but I think if you put a ruler on the two it maintains pretty well the dip that we've seen on that structure in that area.

So it hasn't flattened, which, again, in my mind is a positive. It was flattening. You're potentially looking at the sole of the structure.

Right. Okay, good enough. Thanks a lot, then.

All right. Thanks, Barry.

Our next question comes from the line of Terrence Ortslan of TSO & Associates. Please proceed with your question.

Thanks. Good morning. I came a couple of minutes late, but just a quick question on the Mongolian new proposed tax royalties on gold. Have you talked about it or any truth to the rumor that you heard because they want to double the royalties on gold? And how does that affect you, by the way?

Okay, first off, at Boroo, it does not affect us as we continue to operate under our stability agreement there. It is a scaled royalty on gold and, as I understand, there's still some preliminary discussions by the government. But it would apply to Gatsuurt. Now the government has been talking about looking at some half-step, if you will, to have a reflection of replacement or substitution for what they had in the windfall profits. This is, obviously, at a much lower level.

But it's still just draft legislation and I don't know how it might actually come out, if at all.

And remind me again, in the Gatsuurt, you're not (inaudible) the process or are you on that process?

Where are we on the Gatsuurt agreement process? Right now, we had submitted a draft IA with the government. I think our effort really has been to resolve the other issues that we have outstanding, the heap leach permit, et cetera, and once we have those resolved, I think then we would look particularly at the Gatsuurt IA. With the deferral of the bio-ox, that's not as time sensitive an issue for us, though.

Okay, great. Thanks for your attention.

(Operator Instructions). Our next question comes from the line of Andrew Breichmanas of BMO Capital Markets. Please proceed with your question.

Thank you. Good morning. Just to clarify, on the diesel price assumptions that you're now using, do the new numbers include the effect of higher proposed Russian excise duties or does it just bring the assumptions more in line with what you're currently paying?

Andrew, it's Jeff. No, it-- we did include an assumption that that excise tax continues for the balance of the year. I was just trying to point out to everybody that that's potential upside if the government is successful in having that taken away.

Okay.

And that's just Kyrgyzstan. That's not Mongolia.

Right. Okay. Thanks very much.

Our next question comes from the line of Tanya Jakusconek of National Bank Financial. Please proceed with your question.

Great, thanks. I have just a question on depreciation. Perhaps we can get some guidance for the year? I think last year depreciation was over $100 million for the year and it seems as though this quarter we're down to $21 million and so if you annualize it, it's about $80 million. Perhaps just a bit of guidance on both of the mines on a per-ounce basis or however you want to do it?

Well, Tanya, I can't really give it to you on a per-mine basis, but generally speaking, at both operations you recall last year that we had an increase in the reserves. And a large component of our assets are amortized on a units of production basis based on the life of mine.

So to the extent that we increased the reserves, the depreciation amortization will go down and that's-- you're seeing the effect of that.

Okay, so would $80 million be reasonable for this year?

I don't have the budget in front of me, but it's probably order of magnitude pretty close.

Okay.

Again, it's going to depend on production. So the quarters that we have higher production, you'll-- and sales, you'll see higher--

Yes, no, no. I appreciate that. I saw that you had $93 per ounce depreciation in Q1.

Right.

I was just wondering if that sort of level would be reasonable for the rest of the year.

Yes.

Okay.

There are no further questions at this time. I'll turn the conference back to you.

Okay. Thank you, everyone, and thank you for your interest in Centerra Gold.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for joining and ask that you please disconnect your line.