Centerra Gold Inc (CGAU) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold Second Quarter 2010 Results 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, Friday, July 30, 2010.

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

Thank you very much. Welcome everyone to Centerra Gold's second quarter conference call. With me today in Toronto is Steve Lang, President and Chief Executive Officer; Ron Colquhoun, Chief Operating Officer; Jeff Parr, our Chief Financial Officer; and Ian Atkinson, 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 for asking a question. Please note that all figures are in U.S. 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 that we operate in, please refer to our news release issued today and our various filings on the SEDAR website.

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

Thank, John, and good morning everyone. Centerra had a strong quarter, both operationally and financially. While overall gold production was lower than the first quarter as forecast, gold production at the mines exceeded our expectations as better grades at Kumtor continued into the second quarter and Boroo continued to achieve higher recoveries.

On the financial side, we had earnings of $0.13 per share. With our strong balance sheet and ongoing operating results, I am pleased to announce that the Board of Directors has declared an inaugural annual dividend. It's our intention to provide a dividend yield, which is consistent with the yield of comparable companies' dividend rates and that the dividend be evaluated annually by the Board and assessed in relationship to our cash balances, operating cash flows, and capital investment requirements of the Company.

Looking at exploration, I'll make a few comments this quarter and Ian is here if people have any further questions. We are continuing to have positive results at Kumtor with drilling returning significant intercepts from the Southwest Extension of the SB Zone. Two of these intercepts lie within the pit design. So it should have a positive impact on the resource model and there was one significant high-grade intercept within the underground resource. This intercept is located at 90 meters up dip and 40 meters along the strike from the very high-grade intercept that we had announced in Q3 of 2009.

In addition, drilling of the Northeast prospects continues to return encouraging results and we will be following up on these results with more detailed drilling in the third quarter.

At Gatsuurt, we have continued testing additional targets on the South Slope of the Central Zone pit with very encouraging results, which continue to indicate the potential to expand the Central Zone pit. Also we are continuing to drill on our joint venture properties in Russia, Turkey, and Nevada.

I'll give a quick update on the political events before turning it over to Ron and Jeff to cover the operations and financial in more depth.

In the Kyrgyz Republic, we continue to monitor the political situation. After the unfortunate violence in early June, a national referendum was held on June 27 to improve both the new constitution and the appointment of Mrs. Roza Otunbayeva as President of the Kyrgyz Republic for a transitional period until December 31, 2011.

The referendum received white spot in the Kyrgyz Republic and following the referendum, Mrs. Otunbayeva was inaugurated as President and a new cabinet council or transitional government was formed. The government has indicated that parliamentary elections will take place in October of this year.

As I mentioned in our April call, we have had no indication from the government about any changes in the way we do business in the Kyrgyz Republic. The President and her government had indicated that they would ensure foreign companies who are able to continue to work in the country without disruptions and that the government would honor commitments and agreements that have been made.

This is in fact what has happened and production at Kumtor has not been impacted. In regards, the final operating permit for the Boroo heap leach facility, we continue to be in discussions with the government. We feel that we have met all regulatory preconditions for issuance of the permit, but it continues to be delayed and as such, we have removed any heap leach production from our guidance this year.

As for Gatsuurt, we have been receiving the various permits and approvals in connection with the road construction and for construction of the surface facilities at the project, but the issues concerning the water and forest law are still unresolved. The whole process is somewhat slower than we like and because of these unresolved regulatory issues, we removed the processing of Gatsuurt oxide ore as well from our 2010 production guidance.

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

Thank you, Steve. While our second-quarter production was better than anticipated, we have not changed our overall gold production outlook for the year. Over the first half of the year at Kumtor, mining of more low-grade ores and plant from the SB Zone, higher-grade stockpiled feed and plant inventory adjustments accounted for the increased gold production.

Kumtor produced a little over 90,000 ounces of gold in the second quarter as a result of processing these higher-grade mill feeds and at the same time achieving higher recoveries than planned. I would like to mention that at the end of the quarter, we successfully completed the plan, change out of the ball mill ring gear to a new ring gear and pinion, completed the SAG mill liner change out. This was successfully planned and completed over a 7-day period.

The third quarter at Kumtor will be the weakest quarter for gold production, but we still are expecting another strong period of high gold production in the fourth quarter with approximately 40% of the ounces for 2010 being produced then. Underground development work is continuing on decline, number one, to the SB Zone and it has now advanced some 724 meters. During the quarter, we continued with the advance and the necessary miscellaneous developments to improve cycle times and to obtain geotechnical data ahead of the development.

Exploration drilling is expected to begin in September. The delineation drilling will begin in the fourth quarter. Decline number 2, the Stockwork underground decline has advanced a total of 312 meters by quarter end. We've established a second heading in the decline for the exploration and delineation-drilling program for the Stockwork Zone.

This work is expected to commence late in the third quarter and continue into 2011. We are still targeting underground production to commence in late 2011 with production ramping up over 2012. At our Mongolian operations, the Boroo mill recoveries improved to about 75% in the quarter, as the mill feed was less refectory in nature than previously planned. Gold production was just over 31,000 ounces, as the better recoveries more than offset the lower grades.

Mining in Pit 3 is continuing, but will be completed in the third quarter. Remaining ores are less refractory in nature than anticipated and we are continuing to mine at Pit 6 for the balance of the year to expose the remaining ores.

As Steve mentioned, the heap leach operation remains on hold pending the issuance of the final operating permit by the Mongolian authorities.

At Gatsuurt, as planed, the access road work to the site and the deposit was completed during the quarter and the site admin and maintenance buildings were 99% complete.

We have also completed much of the site infrastructure such as the [waste path foundations], the fuel farm and the site roads. As Steve indicated, we are still waiting for the resolution of the Water and Forest Law and the required approvals for the commencement of the Gatsuurt project oxide mining phase in a timely manner.

With that, our current production guidance for Boroo does not include any gold production from Gatsuurt as well we have removed any heap leach production. The mining of refractory ores from Pit 3 and Pit 6 will provide mill feed in the fourth quarter of 2010 and into the first quarter of 2011. Mill recovery of this material, though low, allows the ores to be mined and processed and remain profitable.

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

Thanks, Ron and good morning everyone. Our net earnings of $30 million or $0.13 a share in the quarter, reflected higher gold production, primarily at Kumtor during the period of high-gold prices. In fact, we realized $1,200 an ounce in the quarter, which exceeded the average spot price of $1197.

You will see from our filings that cost of sales was quite a bit lower in the second quarter than the comparable quarter in 2009. This was primarily due to low cost inventory at Kumtor that was in process at the end of the first quarter of 2010 and which was sold in this quarter.

During the quarter, we spent and accrued $13 million on sustaining capital and $42 million on growth projects including $18 million on the purchase of haul trucks at Kumtor, $9 million for ongoing work on the underground development at Kumtor, and about $12 million related to Gatsuurt development, primarily for completion of the road.

Of our 2010 growth capital expenditures of $192 million, $113 million relates to the new Kumtor truck fleet, which is being delivered to site over the next two quarters. The price for these trucks is fixed and therefore a very large component of this year's capital program doesn't carry any risk of overruns.

The operations generated cash of $76 million and we added $16 million to our cash and short-term investment balances in the quarter, after all capital programs. Centerra ended the quarter at $400 million in cash and short-term investments with no debt.

As Steve mentioned, the Company has cleared a dividend of CAD0.06 per share. We are pleased with the increasing earnings potential of our operations has lead to the point where the adoption of a dividend policy has been made possible. Centerra has a strong balance sheet, good cash flow, and a positive outlook.

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

Okay. Thanks, Jeff. And just I guess a couple of items and the highlights, again, we are maintaining our production and cost outlook for the year. And the balance sheet continues to strengthen and that combination of a strong balance sheet and good operating results has enabled us to declare and pay a dividend and exploration is advancing at Kumtor, Gatsuurt, and our other joint venture operations.

So with that I'll open the call up for questions. Operator, please give the instructions on the process for the question-and-answer session.

[Audrey], are you there?

Yes, I am. (Operator Instructions). Our first question comes from the line of Trevor Turnbull with Scotia Capital. Please proceed with your question.

Yes, I think you mean me, Trevor Turnbull. Wanted to ask you a quick question about the startup of underground production in 2011 that Ron was referring to. Wondering if you could give us just a general sense of what type of production levels you'd be looking for, not so much as you get going but as you ramp up like 2012. What levels, what you'll be looking for in terms of ounces coming out of there?

Trevor, the fact that we're dealing with inferred resources at this point in time and the whole purpose of getting underground is in fact to continue exploration and delineation. We aren't at this able to release a forecasting of production. We will be entering an ore body or a section of the outlined ore body at the fall of 2011 that will be our primary -- our preliminary work stope and the development will then subsequently fall.

Yes, maybe if I could just ask a different kind of question about what will happen at the end of 2011. Knowing again, obviously, you are looking at inferred resources today, by then the situation hopefully will -- have been clarified in terms of resources reserves, but the production let's say comes out in 2011 and '12, would that be treated by you guys to be development production, in other words just ore that you are encountering as you develop or will you actually be in to -- do you plan -- do you assume you will be into working stopes in terms of the ore body?

At that point in time, we will have designed working stopes and have planned a mine plan going forward and the delineation and the exploration program will continue to expand the resource. So I think we are on very early days.

Okay.

Yes, Trevor, I think I would clarify, I'm not -- I certainly wouldn't commit the 2011, it would be at a commercial production level.

And when do you think you'll be able to start to have a mine plan that you can share with us?

We, Trevor, it's Ian Atkinson, we should be able to get a lot of the delineation drilling done in 2011 that will allow us to move the inferred resource to certainly measure than indicate it and get the test stoping done. We should be able to do a feasibility study together and that will then allow us to start looking to a mine plan.

Okay. So we are talking kind of earliest to be late 2011 probably 2012 before you'll --.

Yes, the year 2012 when we make the conversion to probably -- certainly M&I Resources, hopefully reserves that will allow us to step forward on for the disclosure.

Okay. And then, if I could just follow up with one thing about the development down there, it looks like your development to-date puts you kind of in the fault zones. How is that looking geotechnically? Do you have a sense of -- or can you update us a bit on what are you seeing and what you have to do in terms of ground control?

We have a very defined ground control program and we have had some geotechnical issues from time to time, but I think, we have a very good handle on that. We understand, our staffing has improved with geotechnical, and we have a very experienced contractor, and the interpretation of the challenges in front of them are quickly interpreted and we do geotechnical drilling ahead of ourselves on -- well in advance, so that we have -- understand the structures. There are structures and we have to be aware of, we are coming up on to the Central Valley, that was the Ancient Valley standard line, which we anticipate some faulting.

We will know that in the near future as the geotechnical drilling hasn't gone that far, but we anticipate a slight delay or -- not delay, a challenge on maintaining through that faulted zone, but the ground is challenging and we are proceeding.

Not just in terms of being broken up related to the faults, but do you see increased amounts of water when you cross these structures?

We see very little water relative to the structure zone. We see a sort of an instantaneous drain down in minutes and then it dries up. We haven't had any water problems. The support systems require a rock bolting and screening and shock treating. And we do that as, since these openings are going to be open for quite a long.

Okay. Great. Thank you, guys.

Thanks, Trevor.

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

Good morning, everybody.

Good morning, Haytham.

Just a couple of quick questions. First, just talk a little bit about the heap leach at Boroo. Has there been any additional discussions, have you had communications or are just things just idling by at this point?

No, we're continuing [-- we ended our] discussions with the government there. I think Haytham, we started this year saying, while we had a target date and we recognized the sensitivity and uncertainty of that and would tell you the last two quarters, here's our production. Assuming we get the heap leach and here's our sensitivity if we have to take it out.

It just seemed appropriate, but at this point to be a bit more conservative and to say we've taken it out and the same sensitivity applies if we are able to put it back and just trying to be a little bit more conservative there and we do continue in discussions with government.

I think there, and I suggest, we put a lot of disclosure there around a number of the outstanding issues that arose from the 2009 inspection. And the discussion covers a lot of those things as well.

Okay. So are you any more optimistic that you'll have a resolution before the end of the year?

I think we would be hopeful that we would be able to do it before the end of the year. Yes.

Assuming that, let's say, this carries through into next year, sort of and let's just say it drives on for whatever 12, 18 months worst case let's say. What would you -- I mean, would you expect any other production from Boroo that way?

No. The Boroo would -- the mill would continue to operate for some time, but I guess we're not yet in the position of giving the 2011 guidance. The mill would continue for a bit. Probably, the first impact would come up on the mining fleet.

Okay. Okay, fair. And in terms of looking at costs in the second half of the year, what are your expectations for Kumtor, at least in the third quarter with a weaker production forecast?

I think, generally -- might ask Ron to talk about that, but I think our level of mining and milling in overhead is fairly constant. So, it's generally a constant, if you will, our operating cost just by fewer ounces in Q3. The one thing that has happened as the fuel surcharge that we have in place, that's a bit of an impact. We also see a little bit of an increase in the mining rates in Q3, but it's primarily driven by the ounce, a decrease in Q3 of the number of ounces.

Okay. Fair enough and congratulations on a great quarter.

Thanks.

Our next question comes from the line of Greg Barnes with TD Newcrest. Please proceed with your question.

Yes. Thank you. Just a question, looking forward into 2011 in Kumtor, you're going to have another very lumpy year where the bulk of the production ends up being in fourth quarter again?

We will -- it's unfortunate, we have to change to the SB Zone, as I said in the past, but we see that -- with the exploration results that we've had in 2009 and 2010, that's certainly helped us try to smooth out the production. I think in May, it won't be necessarily a hockey stick type of curve. It might be a smoother curve, but unfortunately we will have a bit of a dip during the year just by the nature of the ore body.

I think if we look this year, it's not quite as severe as last year and we'll perhaps next year show net of the improvement again.

And will that continue to improve or is that just the nature of the mine plan in the ore body that you're just going to have to live with it?

Well, I think it's both. It's part of the nature of the ore body and we certainly would like to see it smoother. So we work at smoothing it out, but it depends on the ore body and the amount of waste that we have to move and the ongoing challenges that we have during the year.

I think one of the things I get a caution, we continue to drill there at the SB Zone and -- we think have the opportunity of adding resources there. So, when we start looking out 6, 8, 10 quarters, I think that's a little difficult to forecast definitively at this point, but those additional drilling results also give us an opportunity for a net smoother profile.

Okay, great. Thank you very much.

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

Good morning, guys. You referred to in a comment about Pit 3, Pit 6 having quite refractory ores, or maybe increasingly refractories going into the fourth quarter. What will be your expected mill recovery, because obviously it's still throwing at these things through non-BIOX through your current mill scenario? What will the recoveries look like there, Steve?

Steven, this is Ron.

Yes.

What we've seen in the bottom of Pit 3 has been an improvement in our recoveries and then fairly metallurgical activities in the plant, more consistent grinding, and a better recovery in the gravity circuits. So these ores what we are anticipating is an improved recovery. They are -- they have been more refractory than -- they are rated as being more refractory than the normal, but we feel that we could probably get a 60% to 65% recovery. That type of range compared to a 75%.

Okay. And is that part of the reason? I mean, your cash cost guidance, guys, seems to quite conservative for Boroo, $590 to $690, obviously it's quite a right range, but call it $640 or so in the middle and you did $550, I think total cash cost at Boroo in the six months. So, is it --it can't be just recovery, is it also incremental operating cost that push the cost higher for Boroo unless your guidance is perhaps a little bit on the high side?

No, I think I would just say, we've had a bit of discussion there and I think we just will maintain the guidance at this point.

Yes.

And not give guidance within the guidance.

Okay, Steve. Thanks very much.

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

Hi, good day, everyone. Ron, just wondering, the mining plan for the underground at Kumtor, obviously you have the SB Zone, you have the Stockwork Zone, what is the kind of the plan at this point in time? You got [twin leach lines] going down there. Are you going to tackle the SB Zone first and get that up and running maybe for a year or so and then move over to the Stockwork or vise versa, which I don't think would be the case or are you going to tackle both of them at once? Just kind of what's the rough general plan there?

Well, Barry, geographically they are separate zones and we can tackle them at the same time, but as I said earlier, we are going underground to define them much more. They are slightly different in character. Our first opportunity it would be to -- that we have a much higher grade zone that we can go to at the SB Zone and which will be passing by. So our plan is to go there initially and then the Stockworks will -- because we are accessing the Stockworks much earlier because of the set number two portal location, we'll be able to get delineation drilling and a better understanding of the Stockwork Zone. So there is a good likelihood that we could develop both sides at the same time, but we're -- that is yet to be determined.

Sure, right, okay. So, but we couldn't think of mining one and then the other, they're probably in all likelihood going to feed the mill both at the same time?

In the future years, yes.

Right, okay. And what was the grade for Kumtor for July?

For July, I think, it was in the order of closer to 1.8 grams per ton.

Right. And that was mostly stockpile probably then?

That's correct.

Yes, okay. And then question for, Ian, I assume it would be him that would answer. When you're using your top cuts of 60 grams for some of the drill interest , is that based off of any statistical data that you have or is that just kind of a number that you say, okay, well let's cap it at 60 grams and but worry about the statistics after we got some practicality of mining there and how it's going to be handled with high grade?

No, Barry, it is actually based on some statistics, because we have been mining that SB Zone in the tip and as you recall probably 4 -- 6 quarters ago, when we first got into it and had some issues there that we addressed and one of the things we did was go back and take a detailed look at the reconciliation. And to be on the conservative side, we actually did lower the top cut just to make sure that we could deliver on plan.

And on an annual basis, we will go back and you know just as a routine review that whole thing, , the production for the year relative to the model and as we get more adaptive, we will take a look again on that top cutting factor for the high grade section in particular to see whether we should adjust that.

That original top cut was it 90 grams as I recall?

I think, it was actually it was 100.

100, okay. Yes, okay. And so the reconciliation now at SB is pretty good then with the 60 gram top-cut?

Yes, at 60, yes we're doing very well this year. I mean the initial quarter where we have the challenges we were at the top of the model, which to me is just a normal and then as it turns out the top-end to that model has to the highest grade holes in the hole deposit in high grade section. So it had an undue influence on it.

Yes, Barry, I saw a Newmont's disclosure about the initial reconciliation at Barrington and I thought well that sure sounds familiar. I think our recent experience is kind of what we expect as we got into it, it certainly seems -- get into the [higher end of] deposit, the predictability and the reconciliation has improved significantly. Had a pretty strong reconciliation relative to the model in the first quarter. And as Ian mentioned then, as normal course of business, we'll examine the statistics at the end of this year as we do the reserve calcs.

Yes, okay, Steve. And then just one other question though, whether you are going to answer it or not, but in the discussion on Mongolia, it says that you provided the government with -- basically a compensation figure that you felt was appropriate, if the license were revoked to what was the size of that claim?

I'm glad you recognized, we may not answer that question.

Okay, good enough.

(Operator Instructions). Our next question comes from the line of Brian MacArthur with UBS. Please proceed with your question.

Hi, my question kind of goes along the same lines of Steve, regarding Boroo, but I just want to follow up with Kumtor again. For your cash cost guidance for the year, you're kind of like $430 -- year-to-date were $416, yes, I realize in the third quarter it's going to be different, as you amortize everything over few ounces. But then in the fourth quarter, we are going to do 40% of the ounces for the year. Is there something different from the first half to second half, just mix of where we are going from the different zone, so is it again kind of the same answer you gave, Steve, that it's just we are not changing our yearly guidance yet.

Kumtor is a little different. This fuel surcharge really has a bigger impact in second half of the year. Our outlook is that that fuel surcharges is maintained. Ron that amount is --?

The surcharge?

Yes.

It's approximately $0.17 a liter.

So it's a pretty significant surcharge, yes.

Okay. So that's really, I mean even if you are at the low end you'll be up to $445 in the back half of the year, it's just all surcharge basically.

Yes.

Okay, great. Thanks very much.

There is also an increase in the mining rate toward here in the second half of the year.

Right, so that's mix of where the ore is coming from. Great, thank you.

And we have no further questions from the audio participants at this time.

All right. If there are no further questions at time, we'll end the call. We thank everyone for calling in and your questions. If there are further questions, management is around, please give us a call. And we'll end the call.

Thank you.

Thank you.

Ladies and gentlemen, this does concludes the conference call for today. We thank you for your participation and I ask that you please disconnect your lines.