Centerra Gold Inc (CGAU) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold report 2011 first-quarter results conference call. (Operator Instructions). As a reminder, this conference is being recorded Monday, May 2, 2011.

It is now my pleasure 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 2011 first-quarter conference call. Today's conference call is open to all members of the investment community and the media, first in listen-only mode, and then we will open the line up for questions. After the formal remarks, the operator will give the instructions for asking those questions.

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, and Jeff Parr, Chief Financial Officer.

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 Friday afternoon and then reissued this morning, Management's Discussion & Analysis, and the audited financial statements -- unaudited financial statements and notes, and our other filings on the SEDAR website.

And now I will turn the call over to Steve.

Thanks, John, and good morning, everyone. Ron and Ian who are usually on the call could not join us today due to their travel schedules, so Jeff will review the financial side, and I will focus my comments on the quarter in general, and then we will answer as best we can any questions on operations or exploration.

We have had a good start to the year coming off a strong finish last year as the operation continue to perform in line. In fact, both mines did a little bit better than we had anticipated in the first quarter. We are on track with everything from a cash flow, production and financial standpoint. We continue to enjoy the benefits of the rise in gold price, and this led to the decision of Centerra's board to declare a dividend on Friday of CAD0.40 or approximately $100 million. This is comprised of a CAD0.30 special dividend and a CAD0.10 annual dividend.

I would like to take a few moments to provide some background on this decision. First, we are continuing to fund our capital programs and exploration spending from our cash flow, and with the increasing gold price, we continue to generate cash. We have heard from many investors regarding the view that goal companies need to improve their dividends.

Additionally, in the last few months, I have been to the Kyrgyz Republic several times to meet with Kyrgyzaltyn, with representatives of the Kyrgyz Republic government and with the IMF, the World Bank and EBRD to understand the current economic situation there. We believe this dividend is supportive of Kyrgyzaltyn and the Kyrgyz Republic, addresses the points raised by the broader group of investors and allows Centerra to continue to execute on our growth plans.

Switching to Mongolia, regarding the final operating permit for the Boroo heap leach facility, we continue to be in discussions with the government, but the process is moving very slowly. As for Gatsuurt, we continue to work with the Mongolian authority as the government is resolving the implementation of the Water and Forest Law.

We also understand that a group of parliamentarians have proposed amendments to the Water and Forest Law to reduce its impact on environmentally sound mining operations. These amendments are expected to be discussed in the Spring 2011 session of the Mongolian parliament.

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

Thanks, Steve, and good morning, everyone. First off, I would like to remind everyone that we are now reporting under IFRS. The financial impact of converting to IFRS was not significant to Centerra.

On a consolidated basis, our first-quarter revenue at $250 million reflects the higher average realized gold price of $1385 an ounce in the quarter. This is a 25% improvement over last year's realized gold price. Earnings of $137 million or $0.58 a share in the quarter reflects the average increased gold prices. I realize this exceeds consensus earnings per share for the quarter by a significant margin. Most of this results from higher production.

Note also that a high number of ounces remained in inventory at the end of last year. These ounces were associated with high-grade ore and carried lower cost through the first-quarter cost of sales. This had quite a positive impact on earnings. The operations generated cash of $143 million, and Centerra ended the quarter at $495 million in cash and short-term investments. Cash flow per share was a healthy $0.60.

We continue to be bullish on gold price and expect that the current levels will continue for some time. As Steve indicated, a review of the Company's cash requirements and expectations with regard to our ability to continue to generate cash even after all capital programs led to our conclusion to pay the special dividend. We believe that it is time for shareholders to participate in some of the cash generation that gold companies are realizing.

At the end of the quarter on April 15, we satisfied certain conditions on our $150 million three-year revolving credit facility with EBRD, which is currently un-drawn. The facility in is now fully available to us and gives the Company additional flexibility on the financial front. Between our cash balances, expectations for regarding future cash flow and the credit facility, the Company continues to be in a good position for growth initiatives.

During the quarter, we spent and accrued $7 million on sustaining capital and $65 million on growth projects, including almost $11 million for ongoing work on the Kumtor underground project, $30 million on equipment purchases at Kumtor, and $21 million on capitalized prestrip also at Kumtor.

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 mining fleet at Kumtor, prestripping costs related to the development of the open pit, and $52 million for continued underground development of the deep lines for the SB and Stockwork Zone.

At Boroo 2011 sustaining capital expenditures are expected to be $1 million, and growth capital is forecast at $5 million for tailings dam construction to expand the capacity of the 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 in 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.

As Steve indicated, although we have put most capital programs on hold in Mongolia pending resolution of our issues there, we continue to believe that the country is a good place for Centerra to invest and that these issues will be resolved. All of our capital expenditures, as well as the $34 million forecast for exploration, will be paid for from operating cash flow, and our cash balances will continue to grow. We have maintained our prior outlook on gold production and cash costs.

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

Okay. Thanks, Jeff, and just a few comments in summary. A good strong quarter for production and good cost performance. We are maintaining our outlook for production and cost for the year. Underground development was good with nearly 400 m of advance. We reported some good exploration results, particularly at the Northeast end of the SB Zone at Kumtor and the Kara Beldyr in the Tyva Republic, and the balance sheet continues to strengthen.

With that, let's open up the call for questions. Operator, please give the instructions on the process for the question and answer session.

(Operator Instructions). Haytham Hodaly, RBC Capital Markets.

Great quarter for starters. Congratulations. A question, I guess, comes back to why the stockpiles ore was processed. I guess what prompted the decision to process all the stockpiled ore in Q1? Was it all completed in the quarter, and does this mean that we can expect the grades in the next three quarters to be less as this ore would have been blended in initially?

I think part of that, let's keep in mind 12,000 ounces of production came off, just the draw down of the in-process inventory. So it is a lesser impact than just all out of that stockpile. We count as ounces produced when it is poured as array as opposed to recovered on carbon. There was about 12,000 ounces that just withdrawn from the higher carbon inventory in the first quarter.

I think we pretty much were on plan with what we had anticipated doing in the quarter otherwise. I don't see that it really comes at the expense of the coming quarters. I guess as much as anything we got off to a good start here in the year. It is awfully early to -- unless you have really messed something up, I don't think you should be revising your guidance after one quarter. We are pretty much on track, I guess, as much as anything.

There is still ore in stockpile certainly, and one thing that is a little different this year is we have more than one release of ore coming out of the Kumtor pit. So I would expect production to be fairly consistent the next three quarters.

Okay. Was the entire inventory drawn down by the end of the quarter?

No, there is still a bit more in circuit than we would have, let's say, at the start of the fourth quarter last year.

Okay. And it would be still of the higher grade material associated with the lower costs?

No, the higher grade that we had, if I understand stockpile certainly, is -- I think being around the grain we have been here in the last couple months would be typical going forward.

Okay. Perfect. I did not see anywhere -- was there a cost per tonne breakdown provided this quarter at Kumtor?

No, I don't think we typically -- we don't typically provide that detail.

Okay. Well, I was not sure. I could not remember. Your declined development progress, are you still encountering challenging ground conditions? It looks like you made some good headway that has lasted throughout the quarter.

Yes, it is still difficult ground. I think the crews are obviously getting more adept at handling it, and our procedures are becoming more routine. Some of the equipment challenges that we had, we seem to be working through those as well. So the cycle is going better certainly.

Steven Butler, Canaccord.

Congratulations on an excellent quarter. A question for you on the dividend policies. It is a nice very special dividend and is obviously a big number here, and your annual dividend went from about $0.06 to $0.10, which itself is fairly nominal, but not a bad start, Steve. So maybe some context, if you can, for us on the decision to pay the special. Was it in light of the Q1 superlative outperformance versus consensus, or what is your thought process there? Because obviously you may be able to afford to pay a bit more unless, of course, you're looking to use your balance sheet for other purposes, i.e. cash M&A, Steve.

Look, I think let's back up. We started the dividend last year. We started that in the summer. That was done at a point where we had no Kyrgyz representation on the board just for a very brief period there. I think one of the things we wanted to do this year with the regular dividend was to move it into a more normal cycle.

But part of the thing we obviously have done is move the announcement from July to May, and I think that would be more typical going forward. Also, I think when we came into the year, normally over the course of looking at a dividend, there is one direction you like to have your regular dividend move, and that is either you can be steady or you can move up, and you want to be fairly conservative how you continue to move that.

I think when we look at the special dividend we wanted to consider a few things. One, the operations are really running well, and we feel pretty good about our ability to deliver on our 2011 plan.

Secondly, the gold price has taken a big jump up here. We were barely over $1300 at 1 February, and we are up about $250 an ounce since then. So the cash flow generation is much stronger.

And, as you are aware, a lot of investors are looking for gold companies to do something more in dividends than they have historically done. And I think on top of that we would layer obviously the concerns that we see, and what we can do to be supportive of Kyrgyzaltyn and Kyrgyz Republic are important. And I think you put all of those together it is something that makes sense, and it is something that we can afford. So a little bit different background on the full rationale there.

As far as could you put the same portion of that into M&A? I think we could still do M&A. It is just a matter of finding a deal that makes sense.

Great. Okay, Steve. Thanks. And Jeff, you mentioned the 12,000 or so ounces in process inventory that came out and produced this earlier comments made per you and Steve. The costs you said were lower. Can you remind us again the cost base of those, and/or the earnings impact? I assume that about $0.06 a share of inventory gain, if you will, for lack of a better term. Is that about the right number?

I have not figured out what it would be on a share basis, but it was about $16 million was the inventory adjustment in the first quarter.

Okay. Jeff, thanks.

(multiple speakers) About $0.06 from the guy with the calculator.

Sorry, $16 million. Okay. Thanks very much guys. That is it.

Barry Cooper, CIBC.

I was just wondering if you can flush out a couple of things that are somewhat hypothetical and somewhat nebulous. One of the comments that you make is that for the Water and Forest Law, that basically it's going to take until in November 2012 to fully implement. I assume that means then there is virtually no chance for Gatsuurt approval until 2013. First of all, is that correct?

No, I think what we were quoting there is the government has announced a schedule on the implementation of the law. Separate from that, the Parliament is taking up proposed amendments we understand in the spring session. If they proceed with some of the drafts we have seen, that would enable the Gatsuurt to move ahead this summer.

Okay. So I guess to make it a little clearer for me, so if they are in the process of doing these things, what I found in most certain rules is that typically nothing gets resolved until everything is resolved. If they are still in the process of implementing this law, why would they approve Gatsuurt, which in part is affected by the law?

No, I think to be specific there, the amendments that they have considered would apply to all mining projects in Mongolia. The implementation I think has been very deliberate on the government's part in that they see some of the difficulties and costs associated with implementing the law. So that they have started a process that would have taken -- they announced that last fall -- that would have taken them that long to fully implement, and in the meantime now you see Parliament considering possible amendments that may make the implementation requirement very different from what it is today.

Okay. And then moving to the royalty fee, which is object up, is that a proposal, or is that in essence fait accompli in your opinion?

That law was actually enacted in the first quarter of this year. So it was actually January 1. So (multiple speakers) that is in place.

So it is a fait accompli on that?

I should point out to you that that does not affect Boroo at all because of the investment agreement, but it would impact Gatsuurt going forward.

Sure, okay. And I guess because there is no stability agreement on Gatsuurt, does that change of plans allow you any leeway with respect to negotiating a tax stability agreement there?

Well, we have done -- we have run a lot of numbers on Gatsuurt, and yeah, as you know, at these current prices and with the new royalty regime, it is still --

-- still okay --

Still a favorable project to us. So we have not explored the possibility of a stability agreement with the government at this point. We would just like to get the thing through first.

Right. Okay. Then moving over to the Kyrgyz Republic there, one of the things you talk about is the social fund contribution that is outstanding. And you indicate that there is a payment there ranging -- and I will use your words -- ranging from zero to $7.4 million. Is that an either/or, or is there a whole range in there, and what would cause it to be zero and what would cause it to be $7.4 million? Because those are pretty specific numbers.

Well, I guess I would, first off, say the $7.4 million would presume a change in the interpretation of the law and the implementation of it in the extreme. The zero would indicate that it has been consistent with the application in prior years. So it is kind of the range we are dealing with now. And also, a lot of times we see certainly in our jurisdiction some claims that come in initially at fairly high amounts and then are resolved ultimately at much lower numbers.

Right. Okay. So hence the range there that you allude to that could be anywhere in between depending on how things are viewed. Okay. That is all my questions. Thanks.

(Operator Instructions). We have no additional questions at this time, gentlemen. I will turn the presentation back to you.

Well, since there are no further questions, we would like to thank you for joining us today on our conference call and your interest in Centerra Gold. If there are other questions, please get a hold of us. We are all in the office today and can follow up with you. Thank you very much.

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