Centerra Gold Inc (CGAU) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third 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, November 5, 2010.

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

Thank you. Welcome to Centerra Gold's third quarter conference call. 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'll 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.

Joining me on today's call is Steve Lang, President and Chief Executive Officer; Jeff Parr, Chief Financial Officer; Ron Colquhoun, Chief Operating Officer; and Ian Atkinson, our Senior Vice President of Global Exploration.

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'll turn the call over to Steve.

Thanks, John, and good morning. As we mentioned in our news release, we are maintaining our gold production and cost guidance of 640,000 to 670,000 ounces at a cash cost of $460 to $505 per ounce. The third quarter gold production of 96,000 ounces met our expectation and was right in line with what we had been telling the market that our third quarter was going to be our weakest quarter for production as a result of the mining cycle at Kumtor. We are soon going to be entering the higher grade mineralization again at Kumtor, which will cause a significant increase in our gold production for the fourth quarter.

On the financial side, we achieved net earnings of $0.07 a share, which reflects the $34.9 million gain on the sale of the REN property. Looking at exploration, I'll make a few comments and Ian is here if people have any further questions. And for the more observant ones who might have noted Ian's new title, so congratulations there to Ian.

Drilling at Kumtor is going to give significant -- is continuing to give significant intercepts that are extending the SB Zone in both directions along strike and down dip, which will have a positive impact on the resource model. At the northeast prospect, drilling continues to return encouraging results testing the extent of a near surface potential open pit target. And at Gatsuurt we are continuing to drill new mineralization with good results on the south slope of the central pit zone and a long strike to the northeast at the GT-60 prospect.

Give a quick update on the recent political events before letting Ron and Jeff cover the operations and financials in more depth. In the Kyrgyz Republic, we settled the 10-day strike at Kumtor in early October and also the parliamentary elections were held on October 10. Things went very smoothly, and according to reports from independent third-party observers, the elections were carried out according to accepted democratic standards. Five parties have received sufficient votes to be represented in parliament and will split the 120 seats proportionately. Currently, the parties are in talks to form a governing coalition. In the meantime, the interim government continues to function and President Otunbayeva continues to serve until the end of December 2011.

Next, I'd like to talk a little of Mongolia. Mining activates are going to end at Burro at the end of November and we had planned to redeploy the workers from Burro to Gatsuurt. Unfortunately, we have not yet received the required approvals to restart the heap leach. And with the delay in permitting the Gatsuurt project to the uncertain -- due to the uncertain impact of the water basin and forest law, we have announced today that we will be laying off approximately 250 workers at Burro on December 1. We continue to be in discussions and work closely with the government regarding the permits for heap leach and Gatsuurt.

And of course this raises the question of our production in our Mongolian operations for next year. And while I'm not prepared to give guidance at this point, I think we'd say that we have enough stockpiled ore at Burro to take us through at least mid next year. Other options include processing refractory and low grade ore, which we have stockpiled. Our primary interest is the development of Gatsuurt, but we will be looking at other short-term options.

So I'll now turn it over to Ron to talk about the operations.

Thank you, Steve. While our third quarter production was less than last year, Burro in the quarter performed well and we have not changed our overall goal production outlook for the year. Kumtor produced about 69,000 ounces of gold in the third quarter, as we expected. Due to the processing of low grade ore mill feeds, tons of the ore milled were 1.39 million versus 1.5 million or 10% lower compared to last year as a result of our planned mill and crusher shutdown in July, which was a planned maintenance shutdown required to replace the SAG mill ring gear, as well as the lining system.

We mined a total of 30.7 million tons in the third quarter of 2010, which was roughly equivalent to the same period last year. However, due to the increase of volume of waste and ice material moved in this quarter, less tons of ore were mined in the quarter this year compared to the third quarter last year, approximately 0.8 million compared to 0.15 million.

We are expecting another strong period of gold production in this quarter, approximately 40% of Kumtor's annual ounces for 2010 being produced. Underground development work is continuing on decline number 1 to the SB Zone. It now has advanced 854 meters. During the quarter we continued with the advance and the necessary miscellaneous developments to improve cycle times, although poor ground did impact the advance rate in the latter part of the third quarter. Exploration drilling is expected to begin in the quarter, while delineation drilling of the SB Zone will begin in the first quarter next year. By quarter end, decline number 2, the Stockwork underground decline, had advanced a total of 509 meters, which was included -- which included the 110 meters of advance in the second heading towards the north and the Stockwork Zone.

This heading will enable us to do the exploration and delineation drilling program for the Stockwork Zone as we continue to the advance -- as we continue to advance the decline towards the SB Zone. Exploration and delineation drilling of the Stockwork Zone resource is expected to commence in the fourth quarter of 2010 and will continue into 2011. We are still targeting the underground production to begin in 2012 and to further ramp up in 2013 and 2014.

At our Mongolian operations, Burro's average mill head grades and recoveries were down in the quarter resulting in low production. Gold production was just over 27,000 ounces down from 32,000 ounces produced last year, which included 4,322 ounces of heap leach production. As Steve mentioned, the heap leach operation remains on hold pending the issuance of the final operating permit by the Mongolian authorities. Mining in Pit 3 is continuing to the end of November as the ore is depleted and the mining will cease. The Burro mill will continue to operate until mid 2011 processing stockpiled ores. And, as Steve mentioned, we are continuing to review our options with regard to other low grade stockpile ores.

At Gatsuurt, the access road to the site is completed and the site admin and maintenance buildings and other site infrastructure is completed. Minimal capital spending is planned on the Gatsuurt project going forward while we wait for the resolution of the head waters and forest law and the required approvals for the commencement of the Gatsuurt project oxide mining phase.

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

Thanks, Ron, and good morning everyone. Our net earnings of $18 million or $0.07 a share for the quarter reflects the gain we realized from the sale of the REN property and higher gold prices realized in the quarter.

The low gold production during the quarter significantly impacted our total cash cost per ounce produced, which was $798 in the third quarter of 2010 up from $424 in the third quarter last year. Of the $374 increase in unit cost, $306 was due to the 42% reduction in gold produced. Operating cost increased about 9% during the quarter primarily related to higher fuel costs associated with the price of diesel and the larger fleet at Kumtor and an increase in labor costs. This represents about $68 of the increase in unit cost for the period.

During the quarter we spent and accrued $15 million on sustaining capital and $58 million on growth projects, including $32 million on the purchase of haul trucks at Kumtor, $10 million for ongoing work on the underground development in Kumtor, $3 million at Burro primarily on raising the tailing fan, and about $1.3 million related to Gatsuurt development. Total capital expenditures for the year are $157 million, which was funded from internal cash flows.

Our 2010 total capital expenditure estimate has declined $10 million to $231 million. This includes $44 million in sustaining capital, which is $5 million lower than our previous estimate. We have also decreased our outlook on growth capital by about $5 million due to the timing of some of the expenditures and reduction of the amounts to be spent on Gatsuurt.

In the quarter the operations used cash of $24.5 million. We ended the quarter at $335 million in cash and short-term investments with no debt on the balance sheet after spending about $71 million on capital. We expect that in the fourth quarter with the increased gold production and continuing high gold prices, we will generate significant cash from operations, which will add to our cash balances.

I'll now turn the call back to Steve to wrap up.

Thanks, Jeff. I guess just a few points to reiterate. First, we are maintaining our production and cost outlook for the year. Fourth quarter production should show a significant increase in gold production. Exploration is advancing the targets at Kumtor, Gatsuurt and other joint ventures. And unfortunately, with the delay in Mongolia, we have had to announce layoffs, but we are looking to resolve the heap leach permit. And implementation of the river and forest law with a do to rehire the people for Gatsuurt.

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

(Operator Instructions). Our first question comes from the line of Terence Ortslan with TSO Associates. Please go ahead.

Good morning, guys. General question with respect to first on the mission in Mongolia, you appointed a Kyrgyz national to the board. Do you think it will resolve or mitigate some of the issues in Mongolia if you have some Mongolian presence on the board with the company, number 1? (Inaudible -- background noise) then I got a couple of questions on the exploration side. Thanks.

Okay. I guess I'll answer that. It was a little tough to hear you there, Terry. I think, first off, the presence of the Kyrgyz on our board really reflects their equity ownership in the company. They have 33% of the shares. There are two Kyrgyz directors that we appointed in the quarter, Mr. [Breyev] and Mr. [Ruraliev].

I think it's interesting to note when Prime Minister Batbold visited here in Canada last month he spoke -- in September, he spoke of meeting with President Otunbayeva and their discussion about the similarity in the countries, their two political systems, as well as their joint look at developing resources. Also, I know Mr. Breyev recently had a visit to Mongolia.

I think having the presence of even the Kyrgyz directors, the political connection that seems to be forming there, as well as Mr. Breyev coming in with his background on the extractive industry's transparency initiative, are positive developments for us there in terms of the government relations. So I think that's probably the appropriate representation and connection.

There was also a follow-up question that you were going to have on exploration?

Yes, sorry I was on a speakerphone before. But just coming back to the issue, I mean is it a lack of effort on your part that you're still one of the major taxpayers in the country and from what we know and what we see that you're doing a lot of social contribution to the sector of the economy from hospitals and all this because pretty unique from a Mongolian sense.

But how do you see this resolving in the sense of mitigation because, obviously, there's been discussions all this time but yet still you have to take a measure because the -- I think the other party hasn't come to the table.

Well, I think in part some of the discussions that we had with the Prime Minister Batbold and Minister Zorigt I think what they talked about in terms -- particularly of the Watershed and Forested Areas Act, is this is an act of parliament and I think I would draw a lot of similarities there with the experience everyone had with the windfall profits tax in that when that was enacted that was very harmful to all development and exploration in Mongolia.

For us to have attempted to advance a project, and I think you saw the same thing with OT, in a manner that would look for exemptions to that law would be a mistake. So it's really a matter of the government and Mr. Batbold's government needed to present back to parliament the issues they saw with the law as it had been enacted. And that was one of the things Prime Minister Batbold had spoken with us about.

And then there was a report shortly visiting that visit that Minister Zorigt's office had made back to parliament that outlines some of the issues they saw with the implementation law the cost the Mongolian people. And I think that that was part of the process that they would have laid out to come back to parliament and allow parliament to, if you will, make adjustments to what they're trying to accomplish in order to allow reasonable projects still to proceed. So, although the rate of progress isn't what we would like to see, we do see action on their part that we think is supportive.

Okay, got you. Just coming back to the exploration side theme there, what will be the budget by the end of the year on exploration and what the budget is for next year and what the focused areas are for 2011?

I'll turn that one over to Ian.

Terry, the budget for this year will still be what we've been proposing for the year. We'll end up spending the $30 million as planned. And the breakdown of that has changed throughout the year, so for the year a fairly significant piece of it now. In addition to going to come to order, which would end up being the order $11.5 million we will probably be spending about $6.5 million or so in Mongolia. I think it'll be up to $2.5 million to $3 million in Russia and similar amount $3 million plus in Turkey and $2.5 million, $3 million in the US and then the balance China and other generative activities.

As for the outlook for next year, we still have to go through -- finish our planning process. That'll happen in the next month or so and that -- our plans for 2011 will be put out, I guess, with our usual annual forward-looking statement early January.

But I think, Terry, we have stated that it's our intention over the next few years to increase our exploration budget up to $50 million annually. And I think we will view it as a positive sign when we get there.

Okay. And next year, except for Kumtor and the Mongolian component, any new frontiers you'd be looking into, Ian or Steve? You're in Turkey already, we know that, but any other major geographic areas you may change your emphasis on?

No significant change. We are making progress, we think, finally in China so hopefully we'll secure an opportunity there. We are actually looking at a couple more opportunities in Russia currently, again need to get the terms of those agreements finalized and similarly in Turkey. So hopefully we'll be increasing the number of projects we have out there but primarily in the area of [shares] we've always said is going to be our focus of activity.

And I'd also say in Mongolia we're also increasing our efforts a bit further away from the Burro operation.

Okay. Thanks for the details, guys. Thank you.

(Operator Instructions). Our next question comes from the line of Trevor Turnbull with Scotia Capital. Please go ahead.

Good morning, guys. Just a quick question on Mongolia and the permitting situation there. With respect to Gatsuurt, if you were to say receive a green light from the government as of January 1, for example, how long would it take you to kind of mobilize, ramp up and really be prepared to go into production there?

Okay. An issue I just reviewed with Ron, but it's really a very short timeline. I think we would immediate look to rehire the employees. I suspect we could be mining within a week and probably stockpiling ore within two weeks. We'd want to build up a stockpile on both ends before we start processing the ore. But the timeline would be just a few weeks and we would be in production off Gatsuurt.

Right, thanks for that. And then to follow a little bit up on Terry's question with respect to the exploration and your focus in some of the other areas, such as Turkey and Russia. You've got -- it sounds like Ian was indicating the budgets are roughly equivalent in Turkey and in Russia. Can you give us a sense of, I'm not sure prioritization is the best word, but just how advanced say the Turkish initiatives are relative to some of the stuff you're doing in Russia. Which ones do you see kind of as more of a focus for you at this point?

Actually, we're getting -- we had five projects -- started the year with five projects in Turkey and two in Russia and simply one in each of those countries is responding extremely well and the Kara Beldyr property and the Tyva Republic has given us some very good results, as well as the Stratex is -- the early drilling on Stratex has been very encouraging. Actually, Stratex has actually put out some of the drill results in a preliminary resource on the Oksut Zone, as they call it.

In addition, we're actually currently drilling the (inaudible) joint ventures, those are the ones with [Uration] in northwestern Turkey. So through this next quarter we should be seeing a lot more results from that and get a better feel for where it's taking us. The other two in Turkey, the two KEFI ones, unfortunately results have been disappointing so we will exit those and are looking for other new opportunities. So we'll actually still be focusing in say the three that I mentioned, the Stratex, the [2MX] and the Kara Beldyr one next year will be a big part of what we're doing.

And the Russian JVs, Ian?

We are, as I said earlier, the second one in Russia again, the [leaching one]. The results for that, again, were disappointing so we will exit that. But we have, again, another JV that we're working on that are left with intent signs so we're just looking and trying to finalize the agreement and hopefully get to bring that into the pipeline early next year.

Great. Thank you very much.

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

Yes, good day everyone. Just wondering the stockpiles at Burro, what kind of grades are you looking at there that you'll be processing?

Barry, the stockpiles are the previously mined areas and lower grades but it's in the order of 1.3, 1.1 grams per ton.

Right, okay. And then can you kind of just give us at a high level, what's the mine plan for Boroo throughout 2011? What kind of variance should we be expecting and how it'll play out over the course of the year? Are there going to be super lumpy quarters? And if so, when do those occur? And I realize it's probably all grade related, but are you going to be processing stockpile material there or not?

At Burro is that, Barry?

No, that was at Kumtor.

Kumtor, we haven't come out with that yet but certainly one of the goals that we've had the last couple of years is to work at getting out a little bit more consistent quarterly production. I recognize that these up and down quarters make it pretty difficult to explain quarter-on-quarter and a lot of energy goes into those explanations. And I think from our perspective having people understand a consistent quarterly production could be a benefit. So we'll be coming out with that in early part of next year.

How about for Q4 then, what kind of grades are you going to be mining at Kumtor in Q4?

Ron, the grades to the mill, I guess?

Barry, we're going to be grading up from a 3 gram head grade up to as high as 10 grams and holding it at 10 grams for a period of time. This is a direct result of the SB Zone and we're entering the high grade as we speak and it will be mined and processed for the balance of the quarter.

But this is blending it down --

And blending it down to the 10 gram.

Right. So probably what a 7 or 8 gram average for the quarter or will you be something -- because I think you were, if I'm not mistaken, 10 grams up in the fourth quarter last year.

We were at 10 grams in December of last year. We were averaging out approximately 7 to 8 grams for the quarter.

So probably quite similar then, I guess.

Yes, very similar.

Yes, okay. And will that carry through to Q1 at least?

The [interest side] in mining generates a significant amount of higher grade ores and we will be stockpiling quite a bit of material and it will continue and help us throughout the first half of 2011.

The other thing, Barry, that we have to work on before we give that guidance we've talked throughout the year about some of the drill results that are intersections of the SB Zone within the current pit design, and those will have some positive impacts on 2011.

Right, okay. And no more issues with the overburden or the ice in the overburden or anything like that?

We have mobilized our new fleet of trucks and the additional truck shovels. That will be -- that has shown positive effect on the offloading of the high wall that added capacity and we did see a significant reduction in our July, August period of ice movement and the size of the movement. So that was well managed throughout the quarter.

But in rough terms, I think we were looking at compared to last year the peak rate this year was about 40% slower.

Right. Okay, good enough. That's all my questions. Thanks.

Our next question comes from the line of Steve Butler with Canaccord Genuity. Please go ahead, sir.

Hello, guys. Good morning. I just wanted to elaborate on Barry's questioning on Kumtor. If indeed the grades could be up to 10 grams and maybe down around 7, it does imply a very strong Q4. At 7 grams that would imply 290,000 ounces, which would give you well above guidance. So is your guidance perhaps still a bit on the conservative side for the year for Kumtor at 570 at the top end?

Well, I think it's tempting to give guidance within guidance. I think we'll stay away from that. The other thing I think you need to remember is we report production as ounces poured rather than recovered onto carbon. So there can be a bit of a delay there. And when we're into high grade, you would see a buildup in the in process inventory.

Okay. Thanks, Steve. That's it.

(Operator Instructions). We are not seeing any further questions at this time. I would now turn the call back to you, gentlemen, for any closing remarks you may have.

We want to thank everyone for being on the line and listening to the call. And if there are any further questions, management is available to take those. Thank you and good-bye.

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