Centerra Gold Inc (CGAU) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold second quarter results call. (Operator Instructions) As a reminder, this conference is being recorded Friday, July 29, 2011.

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

Thank you. Welcome everyone to Centerra Gold's 2011 second quarter 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'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 today 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, 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 from those expressed or are implied. For a more detailed discussion of the key assumptions, risk factors, and uncertainties, please refer to our news release that we issued last night, the MD&A, and the unaudited financial statements and notes, and our other filings on the SEDAR website.

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

Thanks, John, and good morning. I have a few brief overview comments and then I'll have Ron and Jeff recap the operating and financial results. The last few calls we have kept Ian in the background, and since this is our first call since announcing ATO, we will have him spend a bit more time on his update.

The second quarter was another strong quarter for Centerra operationally and financially. We are on track with everything from a cash flow production and financial standpoint and are maintaining our gold production cash cost and capital cost guidance for the year. Earlier this month we announced an important new discovery in Eastern Mongolia on our ATO property and we'll ask Ian to talk about that in a bit of detail.

We continue to enjoy the benefits of a rising gold price and during the quarter we paid $99.3 million in dividend or CAD0.40 per share, which is comprised of a CAD0.30 special dividend and a CAD0.10 annual dividend.

In Mongolia we continue to work with authorities to obtain an operating permit for the Boroo heap leach facility. On Gatsuurt, a Mongolian parliamentary committee considered amendments to the Water and Forest Law, which if adopted in the form proposed would remove the regulatory obstacle to the commissioning of the project. We understand that further discussion of the proposed amendments in parliament will occur in the third and fourth quarter.

We'll now turn the call over to Ron to provide some comments on the operations.

Thank you, Steve. As Steve mentioned, we are on track at the operations. At Kumtor we are mining in cut-back 12B, which uncovered the ore in May. This cut-back will provide most of the ore for the next couple of quarters. While we had higher gold production at Kumtor compared to the same quarter last year, we, like most of our peers, have seen operating costs increase as a result of increase in labor costs, higher consumable costs, and in particular increased diesel fuel and explosives costs. Jeff will speak to more detail about the cost side of things.

Underground development rates at Kumtor continue to increase. In the quarter, our total advance was 490 meters, which brings our year-to-date advance to 891 meters. Decline number 1, the SB zone decline, advanced 193 meters in the second quarter and is now approximately 1.5 kilometers in length.

Decline number 2 advanced 153 meters in the second quarter towards the SB zone and now towards -- and it now totals 807 meters in length.

The Stockwork drive to access the Stockwork Zone has now advanced a total length of 429 meters, 144 meters in the second quarter, which allows us to commence the delineation drilling in the Q2.

At Boroo we had an excellent quarter of gold production, despite the SAG mill being down for 35 days for an unscheduled repair of the motor and the related motor control center. For the balance of the year, the Boroo mill is expected to process mostly stockpile material with grades of 0.76 to 0.87 grams per ton of gold. At our current reserve gold price assumption of $1,000 per ounce, the Boroo operation could potentially continue to feed the mill until the end of 2012 utilizing the existing low-grade stockpiles.

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

Thanks, Ron, and good morning, everyone. On a consolidated basis our second quarter revenue of $244 million reflects the higher average realized gold price of $1,527 an ounce in the quarter. This is a 27% improvement over last year's realized gold price. Earnings of $71 million or $0.30 a share in the quarter reflects the increased average gold prices and higher ounces sold and produced at Kumtor, partially offset by lower volumes at Boroo when compared to the same quarter last year.

Our earnings per share for the quarter was impacted by higher operating costs at Kumtor, mainly associated with increased labor cost due to inflation adjustments resulting from the labor agreement signed last year and higher cost for consumables, most notably diesel.

Also impacting our earnings was higher depreciation amounts at Kumtor as its expanded capital fleet became fully utilized and we began amortizing previously capitalized pre-stripping from cut-back 12 in May, which resulted in a charge to earnings of about $5 million or $0.02 a share.

Additionally in the quarter, our corporate administration increased due to the impact of stock based compensation and taxes at Boroo, which were higher because of higher taxable income and the impact of the movement in the [tow brick].

The operations generated cash of $119 million and Centerra ended the quarter at $465 million in cash in short-term investments after paying a $99 million dividend. Cash flow per share was a healthy $0.50.

We believe that economic uncertainties in the US and Europe will continue to support high gold prices, although we do anticipate a fair bit of volatility. During the quarter we spent and accrued $8 million on sustaining capital and $40 million on growth projects, including $10 million for ongoing work on the Kumtor underground, $11 million on equipment purchases at Kumtor, and $15 million on capitalized pre-strip at Kumtor.

Now Ian will give us an update on exploration and our exciting ATO discovery.

Thanks, Jeff, and good morning, everyone. Before going onto ATO, first I'd like to talk briefly about our drilling at Kumtor. Of course, while we're all excited about the new prospect in Mongolia, we need to remember that Kumtor continues to generate good results. We're continuing to have success at Kumtor, testing the extent and grade of mineralization, both within and below the KS11 open pit design. And particularly the northeast extension of the SB Zone towards the settle zone.

The holes we completed on section and sections 34 and 42 within and immediately below the pit have returned interests of 3.8 grams over 11.1 meters, 8.9 over 31.2 meters, and 8.1 grams over 23.3 meters. These holes will have a very positive impact on the resource model and reserves when we update them at year-end.

We also completed more widely spaced holes in sections 46, 50, and 58 to test the down dip extension of the SB Zone. And again, these holes continue to confirm the continuity of the high-grade mineralization some 300 meters down dip from the bottom of the design pit.

As planned, we've also started the underground delineation drilling in the Stockwork Zone and we expect the data flow from that to increase over the coming quarters as we complete the Stockwork decoying and then add a second drill for delineation work in the third quarter.

In addition, we've also made good progress in defining targets on the Karasay and Koendy licenses and we expect to start drilling those in September of this year and I'll look forward to the results probably in Q4.

Now, switching to Mongolia. As we previously disclosed in our July 11 news release, the Altan Tsagaan Ovoo, or the ATO prospect, was discovered in May of 2010. The property is located in the [Duut Nuur] A bank, which is the eastern most [A mic] in Mongolia, approximately 600 kilometers east-northeast of Ulaanbaatar, the capital.

The ATO prospect is located on the [Tsagaan] gold license, which is subject to a 1.75% royalty Areva. In addition, we hold three additional exploration licenses that are joined to Tsagaan gold license and combined, the four licenses cover an area of approximately 77,000 hectares and (inaudible) is about 35 kilometers north/south and 25 kilometers east/west. This area is located in the steppe regions of Eastern Mongolia, so it is not impacted by the Mongolian law regarding the water basins and forest areas.

The pressures in base metal mineralization we've identified at ATO is in three vertically plunging breccia pipes, pipes 1, 2, and 4 that cut early Jurassic sediments and Permian volcaniclastic rocks. The pipes have been displaced by later faulting and are cross cut by younger (inaudible).

Gold, silver, lead, zinc, and some copper are the main metals making up the mineralization. The results to date have been very encouraging, and so the program has been expanded to include additional drilling, metallurgical test work, baseline environmental, social, hydrological, and engineering studies.

The drilling on pipe 1 has been completed on a 30 by 30 meter grid with 47 holes completed in 2010 and a further 44 in 2011, totaling 91 holes in about 16,000 meters of drilling.

Pipe 1 is an oval shape at surface, approximately 200 by 300 meters, oriented northeast/southwest. It's been drilled to a depth to 200 to 250 meters below surface, which is at an elevation of about 850 meters, where the pipe has a similar length but slightly less width.

Pipe 1 is primarily light mineralization in the upper portion, with light zinc mineralization at depth. The gold distribution is consistent from surface down to the 850-meter elevation.

Drilling has been completed on pipe 2 on a 30 by 60 meter grid, 12 holes in 2010, 22 in 2011, totaling 34 holes for about 5,000 meters of drilling. Pipe 2 is also ovoid in shape, a little smaller than pipe 1, approximately 120 by 270 meters. It's also oriented northeast/southwest and is somewhat narrower at depth with base metal mineralization forming a high-grade plus 5% lead-zinc core at depth.

Pipe 4 was first identified in 2011 when trenching to test the geophysical target located just to the southeast of pipe 1 returned weak base metal and precious metal values. Pipe 4 is being drilled on a 30 by 60 meter grid, with a total of 40 holes completed to date for about 7,400 meters of drilling. Pipe 4 is a similar geometry to pipe 1, but 150 to 250 meters on surface. And work to date indicates that pipe 4 is a strong lateral northwest/southwest [donation]. That's right, northwest to southeast donation with a base metal content decreasing in this direction from above 1% down to the PPM level, but the silver increasing in values with up to -- with value up to several hundred grams per ton.

In general, in all three pipes gold can be traced down to depths of 200 to 250 meters below surface, or the 850-meter elevation, with base metals increased even deeper. The pipes are located for some 50 to 100 meters between each other.

Now looking forward for the rest of the year, our Board of Directors has approved an increase in the 2011 exploration budget to $40 million with most of this increase going to ATO. Drilling there will continue at ATO in the third quarter with two machines. Initially the drilling will focus on completion of the delineation drillings of pipe 2 and pipe 4, and preliminary to a technical drilling.

We will then move to start testing other exploration targets identified in the area surrounding ATO. In our initial (inaudible) released a few weeks ago, we included a description of some of the regional targets within our land package. So we're anxious actually to get out in testing the broader picture on the property.

The expanded program at ATO includes work this year for baseline and baseline environmental, hydrological, metallurgical, and social assessment work on the project, as well as our ongoing exploration program. Our goal is to produce an initial resource statement at the end of this year.

In addition to Kumtor in Mongolia, we're also continuing to work on our other projects, such as Kara Beldyr, which continues to give us encouraging results and we published those along with our current second quarter news release.

During the quarter, we've also entered into three new exploration joint ventures -- one in Russia, one in China, and one in Turkey. As our exploration program expands as we planned, and as we are having success on a number of projects, we've also been building our exploration team. As part of this, I'm pleased to announce the appointment of David Groves as Vice President of Exploration. David comes to us with more than 25 years of gold experience across North America, Africa, and Asia and will be a good addition to our team.

So with that, I'll pass you back to Steve to wrap up.

Thanks, Ian, and a few comments in summary. A good quarter for production and cost performance. We are maintaining our production cash cost and capital outlook for the year. A bit going against trend in industry I guess. Underground development was good and the development rate is increasing with 490 meters of advance in the quarter. And exciting exploration results with the discovery of the new emerging mineral district in Mongolia, and continued success at Kumtor and Kara Beldyr. Our balance sheet continues to strengthen with strong cash flow generation from the operations.

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

(Operator instructions) Haytham Hodaly, RBC Capital Markets.

First of all, good quarter. Looks like you're making some good progress on the ramps. Just with regards to the ramps, are they on track or on schedule call it and on budget at this point?

Yes, Haytham, it's Ron. They are on budget and they are on track. And we are seeing improved ground conditions, which is allowing us the improved advance rate.

And then I guess the comment on the higher depreciation attributable to the amortization stripping from cut-back 12, is this expected? I mean are these -- is this -- it wasn't a one-time event from what I understand. It's a sustainable number going forward, is that correct? It was amortized over the life of the asset?

Haytham, it's Jeff. We're not -- it's not going to go forward for much more than a year. It was kind of an unusual situation. We had cut-back 12B, because of our accounting policies, was a significant betterment. So we to capitalize it. It was a short period of capitalization, it was a big chunk of change. I think it was sort of $45 million range. But 12B where we get most of our production over the next 12 months is pretty much fully -- like we've basically gone through all of the benefit from that cut-back over a 12-month period. So we would expect the amortization to continue for another three quarters or a little bit more maybe. But most of it would be gone.

Yes, so this is a temporary impact that'll -- first quarter or second quarter and then the next three.

Right, and then will we drop back down to the levels we saw, for example, in the first quarter, or was this already in the first quarter numbers as well? No, it wasn't, as I recall.

Because we didn't hit ore until May, so we had the impact of just a couple of months of it in the second quarter.

So in theory this will last till the end of this year or to the end of the -- sorry -- till the end of the middle of next year?

No, it's probably mostly gone by the end of this year.

Okay, and then we flip back to the previous depreciation on a unit's production level.

Correct. But remember, we've got an increased operating fleet at Kumtor, so you're getting the impact of that as well.

It's small compared to this.

Small compared to the cut-back, yes.

And sorry, did I hear you say that the resource on [ATM] would be by year-end of this year?

Yes, if the assay comes in, yes, we expect to be able to publish a resource on ATO with our regular year-end update, which comes out late January, early February usually.

Okay, and I think, to be specific on that, that estimate would really pertain to this initial area we've drilled and wouldn't apply to the broader area that we're only beginning to test.

Sure, and this initial area that you're drilling, what's the drill density there?

Well, it's the three pipes and as I say they're different. Pipe 1 we've done it to 30 by 30 meters, pipe 2 and pipe 4 are on 60-meter sections, 30 meters on section.

Okay, I guess I'm just trying to figure out whether -- what category the [regions] will be in, it sounds like it'll probably be maybe indicated and [inferred]. Does that sound about right?

Yes, certainly the work we've done to date is we've infilled pipe 1, it shows the 30 by 60 is actually pretty good as a way of defining mineralization. So certainly indicated and inferred shouldn't be a problem at all.

Barry Cooper, CIBC.

With the couple of quarters now, or several quarters, under your belt on the SB Zone, how's that reconciliation going on the grade vis-a-vis the original drilling that was done there? I remember I guess probably a year or so ago there was an awful lot of uncertainty first going into there. But how is the reconciliation showing up there now with the experience you have?

Barry, it's Ron. The reconciliation is very good. It's down -- it does fluctuate as any model would fluctuate, but we saw a lower valuation last year and then it came back and we over produced tons and ounces in the latter part of the year. But the model is holding it true. It's -- we're very close to 100%, we go 96% sometimes and we go to 104% at other times, so it's averaging out very well.

It's Ian. We do track the reconciliation on the high-grade core as well, bench-to-bench and that's important to us obviously as we go underground. And that is standing up extremely well. I think we've actually shown some of the bench plans for that in the past. But when we get underground, the bench drilling is showing that the delineation of the zone is extremely good relative to widths and the continuity of grade in that high-grade zone is extremely good as well, relative to the exploration drill holes.

I guess we haven't talked much about it because it's not been -- it's just kind of coming out as expected.

Right, and then what kind of top cutter are you using that for your assays, Ian?

The top of my head, I think we're using 70 grams for the high-grade for the -- anything that falls within the high-grade core. I'd have to flip back to the technical report just to double-check that, but I'm pretty sure that's correct.

And so you were using some stockpiles there in the last quarter because the mine grade was slower than the head grade there. What have you got for backup for stockpiles now that you can kind of use to be flexible, I guess is the best way to describe it? And in Q3 and possibly into Q4.

As you know, Barry, we're mining ore through the balance of the year and the stock -- it all goes to stockpile, so we have a lot of stockpile material that we can blend to. But our average grade is on budget that roughly 3.9, 4 grams material. (Multiple speakers) lower grades in this particular quarter. We hit a larger bench, more ore, lower -- slightly lower grade, but a lot more ounces on this particular bench.

I think also from an operating standpoint one of the things that we wanted to do was to try and provide a more consistent grade to the mill and work on the recovery. And I think we've been fairly successful in that. And we've seen the recovery improve a couple of percentage as we've had a more consistent feed as well.

Yes, right. I guess what I was sort of thinking here, and you'll follow my line of questioning now. You indicate that as far as your cost guidance goes, it's likely going to be at the top end of the range. Well you're already there, so I'm wondering do you have anything in the bank that could protect you vis-a-vis some of these other inflationary cost structures that you've been talking about? And it sounds like the answer to that is no, so if any of those get worse than what you anticipate you'll probably be over that cost guidance. Is that a fair statement?

(Multiple speakers) lower benches that we're going to be mining is a higher grade, wider core to the ore body. So I think --

Okay, so you do have that grade flexibility coming in from the mining then?

Yes, we do.

But I think the one thing that we're facing, as everybody does, is increasing uncertainty on fuel prices. And we started the year with an estimate based I believe on $85 oil. We're well above that at times and that obviously puts some pressure on us. And then the inflation rate, and particularly in the Kyrgyz Republic has been a problem and that seems to be calming down a bit, but we're very sensitive to those two issues. And they -- we don't have a lot of headroom left there is all.

Right, understood. Then Steven, just wondering, could you kind of flesh out how the Mongolian government, and I realize this may be -- you can shorten up the answer as long -- as short as you want, but the Mongolian government, just how do these discussions on the approval process take place? Do they kind of go away in a cubbyhole and then come out and make a decision? Or is there timelines by which they're obligated to respond to you? Or just how does the process work? Because it almost seems like you're stuck in no-man's land and nothing seems to be getting advanced here.

Well, I think part of that is there are no -- two separate issues. Let's talk first the heap leach permit. And there isn't a set timeline for a response from the government. We have a fair amount of back and forth with additional data requests, et cetera, and that uncertainty and the fact that there isn't a specific timeline is why we had started this year just pulling that from our guidance. And I don't know that there's a whole lot I can add to that.

On the parliamentary approach on the amendments to the water and forested area law, I think we've sat back and recognized that there were reasons that they passed the law and reasons that they're considering the amendments to the law. I think generally here we view this as an issue where we make ourselves available and provide information as necessary and as requested.

But really this is something we think we leave the prime minister and his government to have discussions with parliament and have that resolved to both of those -- to their satisfaction. I think we're fairly hopeful with it, but it is again a process that doesn't really have a specific timeline to it.

Right, other than I guess that one November 2012. There's one deadline there, but presumably, and this is on guess, but presumably you're thinking they can make an approval of that ahead of time possibly I guess.

Yes.

Steve Butler, Canaccord Genuity.

Jeff, a question for you on the -- as I read through the MD&A with -- and your mention about labor costs increasing with a new collective agreement, when was that effective? And as I look through the sensitivity or the variances in mining costs year-over-year, you talked about in the quarter itself $4.5 million for mining, $0.7 million for milling, and $1.7 million for site admin on the labor side. Is that also not just percentage increase in the labor rate but is it also volume driven? In other words, you were mining more material in the quarter than you were last year?

No, the -- it's not volume driven. It's driven from the collective agreement, which I think was ratified in November last year. Yes, somewhere in November last year. October, November last year. And it ties increases to Kyrgyz inflation rates, and they've been struggling along with everybody else right now. And it's causing an increase in our labor. And that's at the site, that's administration, so it's across the board.

Sorry, so what percentage are we talking, Jeff?

I think it's 10%. I don't have the details in front of me, but Ron can you --?

Okay, that's fine. The other question I had was, Ian, for you. You referred to in your address I think on the Kumtor side of things, about the -- in particular sections 34 and 42 I think you mentioned both will have a positive impact on the resource model. Last year we saw ounces added to the underground component on the resource statement that were at the expense of maybe recategorizing to underground from open pit, if you will. So is that likely the event here in this case is that you'll be adding more underground ounces? Or will the pit -- is it a trade-off again that will be dynamic with how the pit wants to float at a certain gold price, et cetera, at year-end?

The initial thing I think you look at those intercepts is actually the grade and widths are above the reserve grades. So certainly my expectations would be slight change -- potential change in grade. And then we'll have to rerun the pit shelf. I don't think there's going to be significant changes in that pit design, but there may be a little bit of to-ing and fro-ing between open pit and underground, but not significantly.

But then, if you remember as well, I also said that some of the deeper holes that extended the high-grade portion of the SB Zone at depth assume they should have an impact on the inferred resource for the high-grade SB underground portion of the reserves.

And what is your timing, guys, of I guess feasibility studying, completion, or converting to reserves the underground inferred resource? Is that something that happens in 2012 or 2013?

Well, I think one of the key dates that we still are working towards had been to get into the ore initial production in 2013. And that was where we put the dates with the reconfiguration of decline number 1. So I think that to us is the most important date.

Over the next couple of years with the delineation drilling, we'll be in the process of moving that from inferred into measured and indicated. But I think the moving ahead into production is not going to wait on the feasibility study. I suspect we'll already be in ore before our feasibility study is published.

Okay, maybe into ore, Steve, before you actually publish the reserves.

I think that's very likely to happen.

And I'm showing no further questions from the phone lines at this time.

Well, thank you, Operator and thank you to everyone for joining us and for your interest in Centerra Gold.

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.