Centerra Gold Inc (CGAU) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the Centerra Gold Reports 2010 results conference call. During this presentation, all participants are in listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded on Thursday, February 24, 2011.

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

Thank you very much.

Welcome to Centerra Gold's fourth quarter and year end conference call. Today's conference call is open to all members of the investment community and the media in listen-only mode. After the formal remarks, we will open the phone to questions, and the operator will give 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, Chief Executive Officer; Jeff Parr, Chief Financial Officer; Ron Colquhoun, Chief Operating Officer, and Ian Atkinson, Senior Vice President, 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, please refer to our news release issued this morning and the 2010 MD&A and audited financial statements and notes, and our other filings that are on SEDAR's website.

And now, I'll turn the call over to Steve.

Thanks, John, and good afternoon.

For 2010, our consolidated gold production was 679,000 ounces as we have previously announced, which is up slightly from the year before. Our total cash costs for 2010 was $444 per ounce, which was lower than our guidance for the year. With the solid operating results, the operations generated $271 million, or $1.15 per share of cash flow for the year and resulted in net earnings of about $323 million, or $1.37 per share, which includes the $34.9 million gain from the sale of the REN property. Centerra ended the year with a balance sheet that included $414 million in cash and short-term investments and no debt.

During 2010, reserve increases at Kumtor and Gatsuurt resulted in our proven and probable reserves, increasing by 1.7 million ounces to 8.2 million contained ounces at year end. This represents an increase of 28% before accounting for production of 885,000 contained ounces.

I will now turn it over to Ian Atkinson to discuss the reserve increases in more detail.

Thanks, Steve, and good afternoon, everyone.

Once again, in 2010, we replaced reserves mined and added to proven and probable reserves and increased resources. This is a result of our successful exploration drilling, in conjunction with an expansion of the open pit at Kumtor, and the updated gold price used for estimating reserves and resources. As Steve mentioned, at the end of 2010, our proven and probably reserves totaled 88.2 million ounces of contained gold. We have replaced everything that we mined in 2010 and then added more. Measured and indicated resources totaled 4.9 million ounces of contained gold, and inferred resources totaled 3.5 million ounces of contained gold.

The majority of inferred resources are at Kumtor, the high-grade underground SB Zone, which has a total of 1.4 million contained ounces of gold, with an average grade of 15.3 grams per tonne. And also, in the high-grade inferred resource at the Stockwork Zone, which now totals 638,000 contained ounces of gold with an average grade of 12.1 grams per tonne.

Our reserve and resources were calculated at December 31, 2010, using the gold price of $1,000 per ounce, up from the $825 per ounce used at the end of 2009. At Kumtor, 1.5 million contained ounces of reserves were added before accounting for mining of 723,000 contained ounces in 2010. The increase in the central pit reserves is due to an expansion of the pit towards the southwest. As a result of our successful exploration drilling, in conjunction with updating and optimizing the pit to a greater depth and using a higher gold price -- using a high gold price assumption. The expansion of the pit has converted both measured and indicated resources and a portion of the high-grade SB Zone underground inferred resource into open pit reserves.

As a result of the reserve increase in the expanded central pit, Kumtor's life-of-mine plan's been revised and extended until 2021. The mine plan is based only on the open pit reserves. No provisions have been made for production from the underground development activities or from the open pit resources. The revised life-of-mine plan shows an increase of approximately 500,000 ounces of gold production over the next five years and helps maximize the cash flow. Measured and indicated resources at Kumtor also increased significantly, by approximately 1.9 million ounces to a total of 4.1 million contained ounces.

The increase in resources at Kumtor is a result of successful exploration drilling, in conjunction with an increase in the size of the resource shell that is used to constrain the resource estimation. Kumtor's inferred resources increased by 73,000 ounces, with increases in the high-grade Stockwork Zone, central pit, and the addition of the northeast prospect. The inferred resources in the high-grade underground SB Zone decreased by 384,000 ounces to 1.4 million contained ounces of gold with an average grade of 15.3 grams per tonne. This reduction is a result of the expansion of the central pit, which captured 773,000 ounces of contained gold that were previously classified as part of the high-grade underground inferred resource. These inferred resources are now within the new open pit design and are therefore included in the Kumtor central pit as probable reserves.

This reduction in the inferred resource has been partially offset by the positive exploration results, which has extended the SB Zone to the northeast and has added 389,000 contained ounces of gold to high-grade underground SB Zone inferred resource. The SB Zone still remains open, both along its strike and depth. Inferred open-pit resources increased by 322,000 contained ounces of gold in the central pit. In addition, drilling in 2010 of the northeast prospect identified new mineralization, resulting in the addition of 128,000 contained ounces of gold to the inferred resources at Kumtor.

At Boroo, after accounting for the processing of 162,000 contained ounces of gold during the year, proven and probable reserves now stand at 392,000 ounces of contained gold. The reserves consist of all mill and heap leach ore in stockpile inventory at the end of the year. At the reserve gold price assumption of $1000 per ounce, the thorough operation could potentially continue to feed the mill for a further two years using the existing low-grade stockpiles.

At Gatsuurt, reserves increased by 209,000 ounces, or 16%, to 1.5 million contained ounces of gold. This is a result of the successful exploration drilling on the south slope area, which has added oxide transition and sulfide material to the reserves. The increase in the oxide and transition material will extend the oxide mining and processing phase of the Gatsuurt project, thus delaying the immediate need for the construction of the bio-oxidation facility.

During 2010, we spent a total of $31 million in exploration, and we plan on spending $34 million in exploration in 2011.

So on that note, I will now turn you over to Ron Colquhoun to discuss the operations.

Thank you, Ian. I will now briefly review the operations.

Kumtor produced a little over 228,000 ounces of gold in the fourth quarter, bringing the full-year production to almost 586,000 ounces of gold as we mined the higher-grade SB Zone in the fourth quarter. During the fourth quarter, the average mill feed grade was 7.1 grams per tonne, and the average recovery was 84.1%. On the cost side, cash cost decreased to $262 per ounce from the $880 -- $887 per ounce incurred in the third quarter. This is due to the significant increase in gold production in the fourth quarter when compared to the third-quarter production. For the year, Kumtor's cash cost was $411 per ounce, well below our 2010 guidance due to the higher production and lower mining costs in 2010.

Work is continuing in the SB underground and Stockwork declines. The SB underground decline, Decline Number 1, has now advanced a total of 1080 meters. With the new open pit life-of-mine plan at Kumtor, the open pit is expanded and deepens the final open pit by 24 meters. It resulted in us having to re-orient Decline Number 1, resulting in a nine to 12 month delay to access the SB Zone ores, which is now scheduled to be in the second half of 2013.

Delineation and exploration drilling in both the SB and Stockwork Zones will continue during 2011 and 2012 as we approach the mineralized structures. Overall, it is estimated that 600 meters is being added to the required development of Decline Number 1 -- 215 meters for the realignment and 315 meters to achieve the greater depth to reach the ore horizon. An added advantage to the new decline design will allow better access to explore the untested section of the down-dip section of the Kumtor structure from the hanging wall side. Exploration and geotechnical drilling will continue in the first quarter of 2011.

The Stockwork Zone underground decline, Decline Number 2, has advanced a total of 744 meters, which includes a second heading. The second heading in Decline Number 2 established for the exploration and delineation drilling program for the Stockwork Zone has advanced 200 meters towards the north. Drilling bays have been established along the path -- the planned 400-meter access strip. We have encountered poor ground conditions in the headings, limiting the advance rate to the latter portion of the fourth quarter 2010. Exploration and delineation drilling of the Stockwork Zone resource commenced in the fourth quarter of 2010 as planned and will continue into 2011.

At Boroo, in the fourth quarter, mining of the oxide ores in Pit 3 was completed. The labor force was reduced in the mining equipment parked and ready for the Gatsuurt mining effort. Gold production was 21,000 ounces due to the lower mill head grade of 1.5 grams per tonne and lower recoveries at 69%. For the year, Boroo produced just over 111,000 ounces, within our 2010 guidance, but lower than the 2009 production due to the lower contribution from the heap leach operation, which remains idle pending issuance of the final operating permit.

Looking forward to 2011, we anticipate Kumtor gold production to be between 550,000 to 600,000 ounces, at an expended total cash cost of $430 to $460 per ounce. The 2011 gold production profile is expected to be consistent on a quarterly basis since we are able to build up stockpiles of high-grade material in 2010.

At Boroo, 2011 production is forecast to be above 50,000 ounces and assumes no mining activity at Boroo, no heap leach production or Gatsuurt production. Total cash cost at Boroo is expected to be $865 an ounce. Receipt of the final heap leach operating permit would add approximately 3500 to 4000 ounces of gold per month. At Gatsuurt, the project is ready to begin production of the oxide ore on receipt of the final approvals and regulatory commissions.

At this point, I would like to take -- turn the call over to Jeff to provide review of our financial performance.

Thanks, Ron; good afternoon, everyone.

I'll start with a review of our quarterly results. On a consolidated basis, fourth-quarter revenue at $323 million reflects the higher average-realized gold price of $1375 per ounce in the quarter. The higher realized gold price, which was better than the average spot price, was the result of the timing of gold sales primarily from Kumtor.

Net earnings of $153 million or $0.65 per share in the quarter reflects the increased average gold prices as well as lower operating costs for the quarter. The operations generated cash of $137 million, and as Steve mentioned, Centerra ended the year with over $400 million in cash and short-term investments. Cash flow per share was a healthy $0.58.

During November, we entered into a $150 million three-year revolving credit facility with the EBRD. The interest payable on amounts drawn is LIBOR plus 2.9%. The credit facility gives the Company added flexibility on the financial front and is intended for general corporate purposes, including capital expenditures to finance the development of the company's existing properties in the Kyrgyz Republic in Mongolia, and for future investments and acquisitions. Currently, we have not drawn on the facility.

During the quarter, we spent an accrued $9 million on sustaining capital and $46 million on growth projects, including almost $10 million for ongoing work on the Kumtor underground project, $19 million on equipment purchases at Kumtor, and $15 million on capitalized pre-strip, also at Kumtor.

Looking at the full year, 2010 revenue increased by 23%, or $161 million, to $847 million, compared to 2009, due to a 22% increase in the realized gold price and an increase of about 9000 ounces sold. Net earnings for the full year was $323 million or $1.37 a share, after reflecting the $35 million gain on the sale of the REN property in Nevada. By comparison, net earnings for 2009 were $60 million, or $0.27 a share after reflecting the unusual charge of $49 million related to the Kyrgyz ship settlement.

Cash provided from operations was $271 million for the year, representing $1.15 a share and exceeding the prior year's cash from operations of $246 million, or $1.08 per share. As I mentioned before, our cash and short-term investments totaled $414 million at the end of the year, and this is after investing $212 million in our properties and $31 million in exploration.

As a point of clarity, our current presentation of general administration costs includes the regional office administration from both sites and our corporate office administration. In 2010, general and admin totaled $76 million, which includes $23.4 million of regional administration costs, which were unchanged year-over-year. The increase in corporate administration in 2010, excluding the regional offices, is primarily due to the impact of stock-based compensation which reflects a higher number of vested units and an increase in the share price of 84% during 2010.

In 2011, our outlook for capital expenditures is $213 million, which includes $38 million of sustaining capital. Growth capital is expected to be $175 million, which is made up of $170 million for expanding and renewing segments of the Kumtor mining fleet, pre-stripping costs related to the development of the open pit, and $52 million for the underground development of the declines for the SB and Stockwork Zones.

At Boroo, 2011 sustaining capital expenditures are expected to be about $1 million, and growth capital is forecast at $5 million, primarily for the tailings dam construction to expand the capacity of the Boroo tailings facility. No capital for the development of the deeper sulfide ores at Gatsuurt has been forecast, and will only be invested following successful regulatory commissioning of the Gatsuurt project. The engineering and construction of the bio-oxidation facility to be located at the Boroo mill, which is needed to treat the Gatsuurt sulfide ores, will be restarted only after the approval to begin mining at Gatsuurt has been received from the government of Mongolia.

We began this year with a very healthy cash balance and no debt. Our 2011 exploration and capital projects will be funded out of cash flow.

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

Okay. Thanks, Jeff.

Just a few comments really on the last 12 months here. We had another good year in exploration. We added 1.7 million ounces, and that's addition at both of our current sites -- a good solid production from both operations. We hit our production targets, and we came in a little bit below on the cash costs we had indicated, strong earnings for the year at $1.37 per share, and we paid in inaugural dividends. We were able to start that in 2010.

The corporate revolver, as Jeff mentioned, has been put in place, which adds to our financial flexibility going forward. And we've got a new life-of-mine plan at Kumtor that extends the open pit life to 2021. That revised mine plan increased cash flow every year for the open pit when we do the evaluation at the reserve price of $1,000 an ounce.

Now, looking forward to see how we can continue to unlock value, I think we see several keys. The first is to resolve the outstanding issues in Mongolia. Secondly, we look for continued success in exploration, and success there would be both at our current operating sites, as well as some of our broader efforts that are quite removed from the current operations. And then finally, to bring the Kumtor underground into production. And if we're able to execute on these items, we believe we could see an increase of 30% to 60%, compared to our production profile for 2011.

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

Absolutely, sir. Ladies and gentlemen, we'll now proceed to the question and answer session.

(Operator Instructions)

Our first question comes from the line of Haytham Hodaly from RBC Capital Markets. Please proceed with your question.

Thank you, operator. Good morning, everybody.

Good morning, Keith.

Just a couple of simple questions. Your cash costs at Kumtor obviously were down because of the higher production. What were -- what did the cost per tonne look like at Kumtor throughout the quarter? The breakdown mining (inaudible)?

The mining costs were in order -- in the order of $0.95 a tonne. The milling costs were under $10 a tonne. The balance of the G&A costs were in line with our quarter -- quarterly results, in the order of -- I think it's $15 an ounce.

Okay. So pretty decent still. Costs are coming down.

Are you feeling any of the cost escalation we're seeing globally, Ron?

We certainly did see it to some degree with our negotiations with our labor force, but I think we're offsetting that with trying to reduce our efficiency -- improve our efficiencies of our equipment. And our diesel costs have been -- the cost that we're getting is very competitive, and we're getting our supplies out of Russia.

Haytham, I might add there -- our costs there at Kumtor includes the surcharge that the Russians place on the Kyrgyz fuel supply. Now, that applies to all the fuel going into the Kyrgyz Republic.

And even with that surcharge, I think that cost per tonne is a bit lower than what we would've seen two or three years ago. And part of that is -- we've made quite an effort here of really improving our maintenance, as well as investing in more efficient equipment, and I think that's one of the things that you're seeing reflected in those unit costs. At the same time, I think our processing costs per tonne -- we've managed to keep that fairly flat over the last few years.

Good answer. Maybe just another question, Steve, since I've got you.

Strong cash flows, obviously, assuming you don't find an accretive acquisition given where you share (inaudible) trades, it's going to be kind of tough. Would you consider increasing your dividend, or paying any kind of special dividend, here going forward?

I think just as a matter of philosophy, there's only one direction for dividends to move, if at all, and that's up.

Great. Thank you.

Thank you, sir. Continuing on. Our next question comes from the line of Trevor Turnbull from Scotia Capital. Please proceed with your question.

Hi, guys. I just had a question with respect to some of the changes you needed to do make on the decline, getting down to the SB Zone. Is there any chance with further resource additions and potential modifications to the open pit in the future, that you would have to make further concessions or modifications to the decline, or do you think with the adjustments and realignment you're doing this time that you shouldn't have any further issues?

We, at this point in time, feel that the changes that we made on the realignment is adequate for any future concerns. The resources is nearby, and we will then be driving a decline down, so I think we'll be out of the influence of the pit wall. The initial realignment has been -- that is taking care of that concern.

I might ask Ian if there's any comments there in terms of some of the exploration or infield targets, whether -- if there may be some impacts, but would it affect the decline, I guess is the question.

No, I wouldn't think it would affect the decline. The reorientation actually puts us in a better position. It gets us further out into the hanging wall and allows us to drill deeper on the SB Zone. So it gives us -- gets us a much better platform to potentially expand the inferred resource to depth. So, there are some positives that'll come out of this. The same with Decline 2. It's moved out a little bit further into the hanging wall, and, again gives us a better position to start drilling the Saddle Zone at depth to see whether we can turn that into something.

I guess, Trevor, I want to make sure you understand that this isn't at all a reflection of any concern with the underground. I think, first off, there was an opportunity here. We see it adding significant cash flow to the Company every year going forward.

And it's also, if anything, probably a bit of a vote of confidence in how the open pit has progressed. We think the dewatering systems have come along very well, and our system for the ice management is in very good shape. That gives us the confidence, in part, to make that kind of a switch. And that also gets reflected in the fact that, as we have indicated, unlike previous years, we've got a very consistent quarterly production coming out of Kumtor as a result of all of that. So, still very excited about the underground potential, but see this as a quite positive move overall.

Yes. My concern wasn't geotechnical at all. But with respect to the pit -- actually extending the open pit mine life, just to remind me, that was more because of discoveries you had made in the process of the decline as opposed to, say, higher metal prices pulling the pit down deeper, is that correct?

Yes. Actually, it's primarily the result of the drilling we did in 2009 and 2010 on the southwest extension of the SB Zone.

If you recall, Trevor, we expended -- we extended the SB Zone in 2009 by about 350 meters. Drilling was still fairly coarse, so we actually did a lot of infill drilling in 2010. That brought that from an inferred resource, giving us a lot more confidence. If you couple that with the improved -- well, with the results of the dewatering, the improved slopes we've been able to use. At Kumtor, we've been able to expand that pit to the southwest and let it go a bit deeper, and it's taken in some of that inferred resource that we'd identified in the SB Zone and some of the measured and indicated resources that were around the pit.

One of the things with the higher gold prices -- it did, in the central pit, lead us to dropping the cutoff grade from 1 gram to .85 gram now. I think we put that in the news release on reserves. That was a fairly small piece of the addition. Something on a range of 120,000 ounces.

Okay, great. Sounds good, guys. Thank you.

Thank you, Mr. Turnbull. (Operator Instructions) Your questions and comments are highly valued.

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

Yes, thank you.

Steve, the (inaudible) production at Kumtor for 2011. Can we simply divide the forecast by four now, or is there going to be some variation?

Well, I think that would be the best quarterly guidance I could give you, is just divide it by four. I think that's a great way to estimate it. It could bounce around a percent or two, but that's a very accurate way of looking at it.

Okay. Is this due to the fact that you've had some -- or you've managed to build up some high-grade stockpiles that you'll blend in and just keep things on a more consistent basis? Is that the root of this?

There are two pieces. One, obviously, is there are some stockpiles. But the way the operations group was able to resequence some part of the pit, rather than a single release of ore, we've got more than one this year.

Okay. And just on the underground, you said at the end of your statement that that's one of the initiatives where you see you can unlock value for the company. And you have done a number of technical studies, but we haven't got a lot of detail on it. And with this reengineering of the pit, are you having to do another look at the underground, and how it's going to be sequenced, and when it is going to come in, and the size of it?

Okay. I think there's a couple things to say there.

Obviously, the biggest reason we haven't been able to put out a lot of information on the underground -- it's a regulatory issue that it's an inferred resource at an operating facility. So there's limits on what we are able to disclose off that.

I think one of the things that we will try and do is put a little bit more detail regarding the underground in the new 43-101. Again, I think it's not going to be all the information everybody is looking for, but it's as complete as we can do under the rules.

Okay. And just a question -- follow-up question to that.

In the quarter, you had some ground control issues on both declines, which slowed you down a bit. How are you seeing the ground control, or the ground issues, when you get into the actual area where you are going to be mining? You must've done some geotech work now that gives you some idea h ow that's going to react?

The ore is in a -- in the faulted zone. So it will be difficult, but we are going to be -- we have been investigating mining methods. And we are hoping to be able to apply a couple mining methods. But the predominant mining method at the SB Zone is going to have to be underhand drift and fill, which is working under a -- once you have established your primary cut, it's working under a good sound back, which allows you to then mine at a faster rate and a prescribed rate.

I think in part there, we would expect then the top cuts to be through some difficult ground and then work underneath that engineered fill on subsequent cuts.

Okay. Well, we'll look forward to the additional details on something like that.

Thank you, Mr. Barnes. Gentlemen, there appears to be no further question at this time. I'll turn it back to you, Mr. Pearson, for your concluding remarks.

Okay.

We want to thank everyone for joining us today. If people do have questions, we're all around the office, so give us a shout. So, thank you very much, and we'll look forward to hearing from you.

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