Centerra Gold Inc (CGAU) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by and welcome to the Centerra Gold Third Quarter 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 4, 2011.

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

Thank you, Jennifer. Welcome to Centerra Gold's Third Quarter 2011 Conference Call. Today's call is open to all members of the investment community and the media and is in listen-only mode starting out. After the formal remarks, we will open the phone to questions and the operator will give the instructions for asking a question.

Please note that all figures are in US dollars unless otherwise noted.

Joining me on today's call is Steve Lang, our President and CEO, Jeff Parr, CFO, 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 are implied. For a detailed discussion of the key assumptions, risk factors, and uncertainties, please refer to our news release issued last night and the MD&A and the unaudited financial statements and notes, and our other filings that are on the SEDAR website and our Company website.

Now I'll turn the call over to Steve.

Thanks, John, and good morning, everyone. I have a few very brief comments and overview and then I'll turn it over to the rest of the group for a bit of detail.

The third quarter was another strong quarter for Centerra, operationally and financially, and we are on track with everything from a cash flow production and financial standpoint. With the strong performances at all sites, we are narrowing our overall gold production guidance for the year to between 640,000 and 660,000 ounces. And as part of our evolving corporate responsibility efforts, I am pleased to announce Centerra's first corporate responsibility report is now available on our website.

The report follows the global reporting initiatives guidelines for a level C report and details some of the programs and efforts we are actively involved in. These include Boroo's $8 million contribution to fund the construction of a new maternity hospital in Ulan Bator�and Kumtor's recent contribution of $10 million during the third quarter for the construction and repair of 27 schools throughout the Kyrgyz Republic.

I will now turn the call over to Ron to provide some comments on operations.

Thank you, Steve. As Steve mentioned we are on track at the operations. At Kumtor with the expanded mining fleet, we are now achieving a continuous mining rate of 500,000 tons per day which is a notable milestone and achievement. During the quarter, the majority of the mill feed came from cutback 12B and the mill stockpiles, resulting in a blended head grade producing 141,000 ounces. While we had higher gold production at Kumtor compared to the same quarter last year we, like most of our competitors, have seen operating cost increases as a result of an increase in labor costs and higher consumable costs in particular increasing fuel, diesel fuel costs, and the related freight costs. Jeff will speak in more detail about the cost side of things.

The underground development rates at Kumtor continued to increase. In the quarter our total advance was 503 metres which brings our year to date advance total to almost 1,400 metres. Decline number one, the SB Zone decline, is now 1.7 kilometres long, advancing 260 metres in the third quarter. This leaves us with about 900 metres more to develop.

Decline number two advanced 157 metres in the third quarter towards the SB Zone and now totals 964 metres in length out of a total plan development of 1,800 metres. The Stockwork Drive is to access the Stockwork Zone has now advanced a total length of 515 metres, 86 metres in the third quarter, enabling us to continue with the delineation drilling.

At Boroo, we had close to 14,000 ounces of gold production in the quarter as we processed a slightly higher grade ore originally intended for the heap leach facility. The mill ore grade averaged 0.95 grams per ton and we achieved higher recoveries than planned at 73%. For the balance of the year, Boroo mill is expected to process similar materials with grades between 0.79 and 0.83 grams per ton gold.

If we were to receive a heap leach operating permit, we continue to process the higher grade material through the mill while placing a lower grade ore on the heap leach pad. This would result in adding approximately 2,000 to 2,500 ounces per month to Boroo's gold production.

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

Thanks, Ron. And good morning, everyone. On the quarter, consolidated revenue of $278 million reflects the higher average realized gold price of $1,705 an ounce. This is a 38% improvement over last year. Earnings of $84 million or $0.35 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 last year. Our EPS for the quarter includes a $10 million or $0.04 a share contribution by Kumtor for the construction and repair of 27 schools throughout the Kyrgyz Republic. It also includes $8.3 million or $0.04 a share related to a settlement regarding the Kyrgyz Social Fund.

I'll give you a little more information on this to clarify the impact going forward. You can see from our outlook that we expect the fourth quarter costs to be about $2.6 million higher as a result of this. About 35% of that is the amount the employee would normally be responsible for. Normally, the employer's portion is around 65% of the total amount. So, if you're looking for the non-recurring amount in the third quarter, I would calculate it as $8.3 million less about the $1.7 million I just talked about or 65% of the $2.6 million.

The quarter's earnings were also impacted by higher operating costs at Kumtor mainly associated with increased labor costs resulting from inflation adjustments as a result of the labor agreements signed last year and higher costs for consumables -- most notably diesel. Also impacting our earnings was higher depreciation amounts at Kumtor as its expanded capital became fully utilized and we began amortizing previously capitalized pre-stripping [from cut] 12.

Our operations generated cash of $106 million and Centerra ended the quarter at $537 million in cash and short-term investments. Cash flow per share was a healthy $0.45. We believe that economic uncertainties in Europe and the US will continue to support higher gold prices but anticipate volatility.

During the quarter we spent and accrued $10 million on sustaining capital and $27 million on growth projects, including $11 million for ongoing work at Kumtor underground and $9 million on capitalized pre-strip at Kumtor and $3 million on equipment purchases at Kumtor. As Steve mentioned, we have tightened our gold production guidance and increased the upper end of the range. Along with that change we have revised our cash cost guidance to a range of $480 to $500 an ounce.

At Kumtor we expect cash costs to be between $460 and $480 an ounce produced up from our prior guidance $430 to $460 an ounce. This increase in operating costs as I described briefly before was mainly due to higher costs for labor, reagents, and power that were impacted by weaker a US dollar against major currencies in which the Company operates. Other factors include higher diesel costs due to increased fuel consumption and higher costs for blasting materials and lubricants due to higher purchase prices.

One more thing on the Social Fund, the settlement on this is not included in total cash cost per ounce for the first quarter -- sorry, for the first nine months of 2011. Going forward, however, the incremental costs of the Social Fund contribution will simply be expensed as operating costs and therefore are included as normal cash operating costs. The $2.6 million included in our guidance for the fourth quarter has been taken up in our cash cost outlook.

Now, Ian will give us an update on exploration.

Thanks, Jeff. First I'd like to talk briefly about our drilling at Kumtor where we're continuing to have success testing the Southwest extension of the SB Zone and the down dip extension of both the SB Zone and the Saddle Zone. We completed two holes to test the Southwest extension in the SB Zone which should've returned intercepts of 5.6 grams over 29.8 metres and 8.2 grams over 20.9 metres.

These intercepts are immediately below the current pit design and they're also in the footwall of the SB Zone mineralization and outside of the current resource model. And so indicate an opportunity for resource expansion in this area. We also completed a deep hole to test the down dip extension of the SB Zone which intersected the Zone at the 3,000 metre elevation.

The hole intersected the contour structures and 500 metres down dip from the closest drill hole and returned an intercept of 4.1 grams of gold over 24 metres which includes 12.9 grams over 3 metres. This hole is about 120 metres from one other hole that we completed at the same elevation. But it shows significantly better grades and indicates the potential for the continuation of the SB Zone at depth.

We also completed one deeper hole to test the down dip extension, the Saddle Zone at the 3,300 metre elevation. The hole intersected mineralization with intercepts of 5.8 grams over 22.8 metres which includes 11.9 grams over 5.7 metres. Again, indicating the potential for higher grade mineralization at depth in the Saddle Zone.

So, moving on to Mongolia, the ATO prospect, we drilled an additional 26 holes in the third quarter to complete the delineation drilling necessary for initial resource estimates. This resource estimate will form the basis of the compilation of data for the Mongolian Reserve and Resource Report that we will submit to the Mongolian mineral authorities as part of the license conversion requirements.

Now the initial phase of resource definition drilling is complete, our exploration efforts have now changes to evaluation of the area surrounding the ATO discovery. Significant trenching, mapping, sampling, geochemical and geophysical surveys were carried out during the summer and the targets -- and targets are being developed on a large land pocket surrounding the ATO. Drilling to test the targets identified this summer is already underway in this quarter.

We're also continuing to work on our other projects such as Kara Beldyr which continues to give encouraging results that we published along with our news release. During the quarter, we also entered into a new joint venture agreement in Russia, covering the Dvoinoy project in the Amur region of Eastern Russia. As well, we're having success on two of our joint ventures in Turkey and our partners have been releasing some of the results from those projects.

So, with that, I'll turn it back to Steve to wrap things up.

Thanks, Ian. A few comments in summary. I guess first looking at the operations area, it was a good quarter for in production and cost performance and this has led us to fine-tuning our production and cash cost guidance for the year. We reached the milestone of a 0.5 million tons per day mining rate at Kumtor. We had good underground development, over 500 metres of advance.

In exploration we had good results at Kumtor and Kara Beldyr and did what we wanted to do this quarter at ATO to allow us to move into the initial resource calculation. Financial, good earnings good cash flow and continued to see the balance sheet strengthen. And then finally in governance, we released our initial CSR report and we've become a supporting Company of the Extractive Industries Transparency Initiative.

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

(Operator Instructions) Our first question is from the line of Haytham�Hodaly�from RBC. Please, go ahead.

Good morning, gentlemen. How are you? Just I'll ask a couple of easy questions and then probably a slightly harder question. The first easy question is probably to Jeff with regards to the Kyrgyz Social Fund. You gave us guidance of $2.6 million in Q4. What's the calculation for that fund tax I guess on an ongoing basis? Or is it a flat number?

Based on a percentage of how much we pay to the employees related to the high-altitude work -- so, the high-altitude coefficient. And it works out to about -- specifically it's 17.25% of the premium paid is the employer's portion and 10% is the employee's portion. So, of that $2.6 million, about 65% of that is the employer's and 35% is the employee's.

Sure. Actually what I was trying to figure out is how you get to the $2.6 million. Not the breakout of the $2.6 million is but what is the calculation that arrives at $2.6 million rather than $3 million or $2 million?

Sorry, Haytham. It's basically what we expect to pay employees for the high-altitude portion of their salary times -- it's an ongoing amount times the 17.25% plus for the rest of this year we're going to pay the employee's portion of 10%.

So, generally speaking is that number pretty constant over the next couple years?

It would vary depending on the number of employees but to the extent that we're not hiring a lot of people or having a major impact in salaries, yes, it would be fairly constant.

So, that $2.6 million is a reasonable number to use going forward per quarter?

Yes. But remember part of that's the employee's portion. It's -- the fourth quarter we're paying the whole thing but going forward we would pay about 65% of that.

Okay. So, fourth quarter you're just giving them a bit of bonus by paying the whole thing? Is that how it's working?

Yes. I mean, it came on pretty quick. It would be hard to suddenly just spring it on them. Yes.

Okay. So, 65% of $2.6 million in the future. Perfect. Next question I guess would be with regards to the Kumtor. Obviously with the amortizing, the pre-stripping costs, now expensing the pre-stripping costs, you've seen DD&A increase dramatically. Will that higher level of DD&A be just for the specific zone? How does that work? I mean, I think we've gone to DD&A of over $300 an ounce just based on this zone. How long will that last? And what's a reasonable number to use going forward?

To answer the first part of the question, yes, it relates specifically to that zone. So, the costs we incur for getting at a specific zone that are capitalized or meet the definition of capitalized would be amortized over that zone's production. And in this case it's 12B that's primarily there. As far as how long going forward or the magnitude, I don't have that in front of me, Haytham.

I'm just curious because it's a big number on depreciation which would hit your earnings if we maintain that on a consistent basis for the life of the mines. I was just curious. If you could get back to me, Jeff, with that, that would be great.

Sure. I'll get back to you on that.

Last question I guess just with regards to Boroo, obviously there's a plan if the oxide ore from Gatsuurt, you have the heap leach approval, et cetera, what happens if that does not come through? What happens to Boroo in 2012?

Haytham, this is Steve. I was curious if I was the one who got the tough question or not. So, thank you. It's not that tough of a question really for Boroo. At the current gold prices and given the grade of stockpiles that we have there and the recovery we are seeing I think we'll continue to run the Boroo mill off of stockpiles which could go either more to the heap leach. We could maintain the status we have for at least two more years.

When you're talking the stockpiled material, is that the -- what you've got classified in your reserve category right now the 12.6 million tons? Roughly 400,000 ounces?

Yes. In addition to that there is some material left in pit six that could either go through the mill in the oxide configuration or we could get a little bit higher recovery waiting until the bio-ox and floatation circuit was built. And that's an option for us to go either way. Certainly at the current prices, that would be cash positive to take it through just as the current circuit.

And then just with regards to your processing costs at this point in time what's your milling costs these days? Just at Boroo, sorry.

At Boroo it's approximately $9 a ton.

Okay. Perfect. Thank you.

Our next question is from the line of Barry Cooper from CIBC.

Just finishing up on Boroo, based on the guidance that you have it kind of looks like costs for the fourth quarter will be a bit over $1,000 an ounce. That makes sense from the standpoint that the grade is coming down, but I just wanted a confirmation that that is in fact what you're probably expecting there?

It's in that neighborhood, Barry, but again we're seeing better recovery from the material that we're seeing so we're recovering a few more ounces and the milling costs, again, are being impacted by some of the supply side of things -- power and some of the consumables. But you're in the ballpark.

I think a couple of things in that regard, Barry, first off, the production is estimated to be fairly low and it's very recovery dependent. It's not a lot of ounces for us right now. I guess we don't put quite the scrub on those numbers that we do the Kumtor numbers. But as the production drops -- particularly here in the fourth quarter -- we'll see some higher costs on a unit basis.

And then you're good enough to give us a pretty detailed mine plan there. I can't remember when we got it. It was earlier in the year. Anything to suggest that 2012 grades at Kumtor of around 4.2 are going to be impacted? Is that basically what you're still anticipating?

We haven't issued our 2012 specific guidance yet. But I think our mine plan we put out at the first of the year is a pretty good guideline for next year right now.

Okay. Fair enough. And then to get Ian involved on things, Ian, the grades at ATO there, they're quite a bit all over the map with respect to some of them being high-grade gold, some being low-grade gold, sometimes the grade of gold is associated with high-grade base metal. Sometimes it's totally absent the base metal component even though you've got high-grade gold. What kind of changes in the mineralogy and what are you seeing if indeed you're seeing different facets within the individual pipes themselves?

Hi, Barry. There's a general zonation from pipe two to pipe one to pipe four. Pipe two is generally -- it's the one that's sending up the better lead zinc mineralization, more continuous, some silver and it's erratic but less gold and more variable gold. As you're moving to pipe one, so as you're coming down to the Southeast, pipe one lead zinc drops off at the level, the gold goes up significantly, as does the silver. And they're more consistent in pipe one, both the gold and the silver and as you move into pipe four, the silver increases yet again. It's got higher silver, good gold, and the lead zinc drops off a little further.

So, there is a zonation through the pipes that we've identified and of course pipe three that sits off actually to the Northwest of pipe two has got very little base metal or precious metal mineralization in it. It's got some but it's much weaker. It's got a reasonable amount of sulfide. In terms of the actual mineralogy, there's not a radical change between them. The most notable one actually is the change in zinc and that occurs vertically rather than laterally, you go from a green sort of iron ore down through a brown -- honey brown more iron rich one as you get deeper in the system.

And have you tested any other pipe targets there that you had? Because I think there were a dozen or so there that were left -- some were between 10 and 12 that were left [untouched]?

No. Not that started now in the fourth quarter. We've finished this delineation drilling in the middle of August and we've had to go off and do some geotech drilling, hydrological drilling inside these pipes so that we can complete this resource estimate. We've now got all that -- not all of it, the majority of that work behind us. We've still got some net test holes we need to complete. After that we can dedicate the two drills to testing these targets. We've got one drill out there doing that now and as I said, we hope to get the second one out pretty soon so we can get at that this quarter and next quarter.

And then, so, the original four pipes are three that are mineralized, are pretty much maybe not totally drilled out but well in hand. Have you then basically delineated the bottom of mineralization or have you lobbed in any long-distance holes there that might have gone done 500 or 600 metres?

We've done the work down quite deliberately to a depth of about 200 metres vertically so that we can look at potential pit resource. We have let four or five holes go down. We have published them. There's a couple that go down to just beyond the 500 metres and I think the majority of those were actually done in the second quarter and so they came out with the update late July and there was certainly one in pipe one -- actually all three pipes -- pipe one, two, and four we let a couple of holes go down them.

We certainly got lead zinc mineralization to depth in pipe two. There's gold mineralization at depth as well in pipe four and I can't recall the results in pipe one right now. I'd have to go back and flick through them but we do plan on again as part of the exploration effort now taking a look at what we can do chasing these, the current mineralization to depth on all three pipes.

Any idea of the depth of where the source of a lot of this coming where it might -- where those pipes might coalesce?

At this point, no. What we think it is, is some sort of intermediate sulfidation system which generally speaking, as you know certainly from, say, examples in Mexico, not Penasquito but the other ones, they generally can have a fairly large vertical extend. So, we're going to be look at to say over the next couple of quarters.

Thanks. That's all my questions.

Great.

(Operator Instructions) I am showing that there are no questions on the phone lines at this time.

If there's no further questions, then we will sign off. Thanks, everyone, for joining us on the call. If you do think of any further questions, please get a hold of us here in the office in Toronto. Thank you.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and we ask that you please disconnect your lines. Thank you, everyone, and have a good day.