Centerra Gold Inc (CGAU) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the 2013 Second Quarter Results Conference Call and Webcast. During the presentation participant lines will be in a listen-only mode. Afterwards, we will conduct a question and answer session.

(Operator Instructions)

And please be advised this conference is being recorded, Thursday, August 1st, 2013. It is now my pleasure to turn the conference over to John Pearson, Vice President, Investor Relations. Please go ahead sir.

Thank you, Lindsay. Welcome to Centerra Gold's 2013 Second Quarter Conference Call. Today's conference call is open to all of the investment community and to the media, first in listen-only mode and then after our formal remarks, we will open the phone to questions. 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 the call today is Ian Atkinson, President, CEO, Gordon Reid, COO, Jeff Parr, CFO and David Groves our 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.

Also, certain of the measures we will discuss today are non-GAAP measures and I will refer you to our description of non-GAAP measures in the news release and our MD&A.

For a more detailed discussion of the material assumptions and risks and the uncertainties, please refer to our news release, the MD&A and along with the unaudited interim condensed consolidated financial statements for the quarter ended June 30th, 2013, which were issued last night and filed on SEDAR. And also, please refer to our other filings including our annual filings which can also be found on SEDAR.

Now, I'll turn the call over to Ian.

Okay. Thank you, John and good morning everyone. In view of the recent significant decline in gold price we, like many of our peers, reviewed our plan to annual expenditures and have identified spending reductions of approximately $50 million as compared to our previous forecast.

The reduced spending is primarily related to reductions in global exploration activities, deferring or cancelling various corporate initiatives and through operating efficiencies at the sites. We are continuing to focus on further efficiency improvements and for the cost reductions.

Gold production for the second quarter was better than expected with a strong operating performance at Boroo and this has enabled us to increase our gold production guidance for the year to 615,000 ounces to 675,000 ounces.

In the third quarter, we expect similar productions in the first part of the year with a significantly stronger gold production in the fourth quarter at Kumtor when the operation gets back into the high grade SB Zone.

Our quarterly unit costs as expected were impacted by the lower ounce gold production. However, when you look at our forecast for our all-in costs pre-tax for the full year, it is $945 to $1040 per ounce. We do calculate our all-in pre-tax cash cost slightly differently than to our peers.

As we include all of our capitalized stripping, all of our sustaining capital and all of our gold capital, and also corporate cost, which include G&A -- and all of our corporate cost, I beg your pardon which include G&A, global exploration expenses and CSR costs. In addition to this, Centerra is well positioned in a lower gold price environment as we do not require any significant capital investments to maintain our longer term production plan.

On the financial front, we reported net earnings for the quarter of $1.6 million which includes a $2.2 million write-off for certain infrastructure assets at Kumtor, which were located in the planned expansion for the Central Valley Waste Dump and could not be relocated.

In the Kyrgyz Republic, we're continuing discussions with the government regarding the potential restructuring transaction relating to the Kumtor project. The Kyrgyz government did get an extension from parliament to September 10 to continue holding discussions to resolve the outstanding concerns around Kumtor.

The government has now hired a financial advisor and efficient to the legal advisor are helping them in the continuing discussions with Centerra. Pending the outcome of the discussions, the government's priority continues to be maintaining the continuous mining operations at Kumtor.

In Mongolia, we're encouraged that our Gatsuurt property has been included in the list of mineral deposits of strategic importance that we expect will be reviewed by parliament in the fall. If approved by parliament, it would exempt Gatsuurt from the Water and Forest Law, which is currently preventing development, further exploration of the property.

As you know the Mongolian parliament is out for the summer recess, so we don't expect any progress on this until the fourth quarter at the earliest.

Yesterday, we announced our quarterly dividend of CAD0.04 per common share which our current share price represents an annualized yield of about 3.5%.

And as a final note, the board of directors appointed Mr. Shakirov to the board yesterday. Mr. Shakirov is the deputy chairman of Kyrgyzaltyn, Centerra's largest shareholder. He's also a member of the Kyrgyz Republic government working group that was established to represent the Kyrgyz Republic in negotiations with Centerra.

We believe that Mr. Shakirov's presence on the board will support and reinforce the excellent communications we have both in Kyrgyzaltyn and with the Kyrgyz government and will facilitate future discussions.

So with that, I'll now turn it over to Dave to talk about exploration.

Thank you, Ian and good morning everyone. Exploration activity during the quarter included drilling in the central pit at Kumtor, resource development and exploration drilling at our Oksut project in Turkey and resumption of surface exploration programs on our ATO land position in Mongolia.

We also completed a winter drilling program on the Kara Beldyr joint venture in Russia and elected to cease exploration and examine options for the project with our partner, Orient Mining. Additional exploration details can be found in the news release and on our Web site at centerragold.com.

As Ian indicated, we've reduced the exploration budget for the year to approximately $32 million which is $8 million less than our previous guidance of $40 million. The reductions include fewer meters of drilling at Kumtor where we will have little or no access to drilled platforms for the balance of the year due to mining activity in the central pit.

We have also trimmed spending on a number of our other exploration projects and reduced the amount of unallocated funds reserve for unbudgeted initiatives. Work will continue as planned on the ATO project in Mongolia and at our Oksut project in Turkey.

We have four rigs operating at Oksut doing metallurgical infill and step-out drilling and we have commenced environmental and social impact studies under the direction of SRK. Drilling results from Oksut continue to support and improve the resource model.

I'll now turn it over to Gordon Reid to talk about our operations.

Thanks Dave. At Kumtor, as a result of the increased movement in the Central Valley Waste Dump we reported back in May, we revised our 2013 waste dump management plan and submitted the revised plan to the Kyrgyz authorities for approval. The authorities have agreed that we can work to the revised plan until they complete the formal approval process.

During the quarter, as a result of the implementation of the revised waste dump management plan, the rate of movement of the Central Valley Waste Dump slowed to pre-March rates of movement. There has not, nor is there expected to be any impact on our planned 2013 gold production. Work continues on the infrastructure relocation.

Mining at Kumtor is on track to reach the high grade SB Zone ore in late September as forecast. Movement of the ice in the high movement area is as expected and is not expected to impact forecast 2013 gold production.

During the second quarter, Kumtor produced 72,000 ounces of gold from stock piled material which have been mined from cutback 14B also known as the hockey stick zone in the fourth quarter of last year. The average head grade for the quarter was 2.17 grams per ton with the recovery of 69%.

The recovery was low due to the metallurgical complexity of the ore associated with this zone. We expect similar recovery in the third quarter until we access the SB Zone ore at the end of that quarter, where the ore is higher grade and is expected to have higher recovery. We have a history of successfully processing the SB Zone ore. The SB Zone ore has fewer complications metallurgicaly speaking than the hockey stick zone ore.

Boroo, as Ian mentioned, performed very well during the quarter producing 27,000 ounces of gold. The increase in gold production as compared to second quarter 2012 was mainly due to the resumption of activities at the heap leach operation which contributed 13,000 ounces and the processing of higher grades of ore through the mill which contributed almost 14,000 ounces.

Mill head grades averaged 1.13 grams per ton with a recovery of 61% in 2013 compared to 0.86 grams per ton with the recovery of 69% in the second quarter of 2012. We have increased our gold production guidance for the year at Boroo to the 65,000 to 75,000 ounce range from the previous guidance of 55,000 to 60,000 ounces.

During the second half of the year, the Boroo mill is expected to process ore stock piles with an average grade of 0.7 grams per ton. The heap leach operation will be temporarily suspended in August for planned maintenance which was deferred from May 2013.

I would like to turn the call over to Jeff to provide a review of our financial performance.

Thanks Gordon, good morning everyone. On a consolidated basis, our second quarter revenue of $128 million reflects a 43% increase in gold sales for the quarter along with the 14% lower average realized gold price of 1376 compared to 1597 announced last year.

During the quarter, we had earnings of $1.6 million or $0.01 a share. This reflects increased production at both Kumtor and Boroo and includes $2.2 million for the write-off of certain infrastructure assets in the path of the Central Valley Waste Dump at Kumtor that can't be relocated as Ian mentioned before.

We also had a charge of $2.1 million at Kumtor against cost of sales which represents the write-down of inventory stockpiles to their net realizable value. This occurred because of the lower production at Kumtor, resulting in a higher unit cost.

The company's cash and investment balance reduced from $370 million at the end of the first quarter to about $316 million as expected. At current gold prices, we anticipate consuming some cash during the third quarter but expect cash balances to grow by the end of the year even in this lower gold price environment.

Centerra has a strong balance sheet with a $240 million net cash position and good cash generating ability. During the quarter, we spent and accrued $19 million on sustaining capital, $10 million on growth projects and $77 million on capitalized stripping. For 2013, we're maintaining our outlook for capital expenditures of $107 million, which excludes capitalized stripping.

In light of the recent significant decline in the gold price, the company has performed an assessment of the recoverability of its capitalized assets and determine that no impairment exists at June 30th. Kumtor has low long term unit cost and low capital requirements necessary to maintain current production levels.

And with that I'll turn it back to Ian to wrap up.

Okay. Thank you, Jeff, just a few comments in summary. We're continuing our discussions and working with the Kyrgyz government to resolve all of the outstanding concerns relating to the Kumtor project. We're on track to access the high grade portion of the SB Zone at the end of the third quarter and meeting our production guidance for the year.

We've revised our consolidated all-in cost, pre-tax for the year to $945 to $1040 per ounce, which is down from our previous guidance. And we have a strong balance sheet with a net cash balance at the end of the quarter of $240 million.

So with that, operator, let's open up the call for questions. So operator, please go ahead.

Very good, thank you. (Operator Instructions). And our first question comes from the line of Alec Kodatsky with CIBC. Please go ahead.

Thanks. Good morning everyone. Just a couple of questions, in the release you highlighted just with respect to permitting the waste dumps that the approvals are still outstanding and curious what the process is there and what the timelines could be as far as gaining that approval.

This is Gordon, I'll respond to the question. The process is to annually apply for approvals for your mine plan including your waste dump management. The original 2013 mine plan was -- we needed to revise that because of the unexpected movement. We simply revised the plan and resubmit it. That is currently under review by the State Agency of Environmental Protection and Forestry. The State Agency of Geology has already approved the change.

In the meantime, we're working under letters we've received from the State Agency of Environmental Protection, agreeing that we can work to that plan until they complete the approval the process. Having said that, we are in the process of preparing our 2014 mine plan that will be submitted by the end of the year for approval. I hope that answers your question.

Okay. Just sort of curious as to how things may fall out. And then just a question on the developments in Mongolia where you may be seeing the reclassification of Gatsuurt. More of the question would be related to the potential for the government to gain an interest in the project and just sort of curious, you did note that it would be under discussion with the Mongolian government, and curious what the process there is and you know, sort of what structure might we expect if that was to go forward?

Hi, Alec, it's Ian. If the Mongolian deposit does declare -- so if the Mongolian government does declare the Gatsuurt deposit strategic, they would then have the right to take up to a 34% interest in the deposit and that would be a participating interest and it is subject to negotiation, so we would then have to get into discussions with the government as to actually what size of interest they would take, would they take up to the 34% and just how we would move the project forward.

Okay. And does that -- just in terms of the allocation that would be -- they're participating as far as putting up CapEx for the project or is it a carried interest scenario where you'd be still responsible for 100% of CapEx but get --

Yes, if it is a participating interest they would be responsible for their portion of capital going forward and also the capital that's already sunk. And we probably use something similar, we think to the, at least we -- to the OT model where we may end up providing the capital and then recovering the capital from cash flow going forward before they shared the cash flow on the participating interest basis.

Okay. Thanks very much, Ian.

Our next question comes from the line of Trevor Turnbull with Scotia Bank. Please go right ahead.

Thanks, Ian. Just to follow up on what Alec was saying with the same, I realize it's almost immaterial, but would the same apply to Boroo as well that it would be a participating interest and the government won't be responsible for sunk cost as well?

No. It's currently -- Boroo is a standalone operation and actually Boroo was covered by the stability agreement that expired on the 7th of July and at that point now, the government again can review their interest in the property as to whether it is a strategic deposit, so then at this point in time, they have an opportunity to review a participating interest in the project.

However, as you know Boroo is mined out. We're currently mining, we're -- sorry, currently processing the stock piled ore and we expect that to take us through the end of next year, 2014. And so, there is a little opportunity there for the government on a go forward basis, but clearly just looking at Gatsuurt, Gatsuurt requires Boroo to go forward so we have to look at -- and we'd have to have discussions with the government on what the best way forward is for those projects. Probably not a direct answer to the question but it is not a -- it's an issue for negotiation and discussion that we have not yet started.

Okay. With respect to Gatsuurt, it's been a while since we've talked about getting it up and running. Can you remind us? It seems that I recall, it was a fairly short timeline provided you were able to make a decision to go ahead. It was a fairly short timeline to get it up and running. Can you remind me kind of what that timeline is?

On a go forward basis now, where Gatsuurt is at, let's put it this way, as you know, we completed the road, we completed the shop and other site infrastructure that is needed at Gatsuurt to truck material to Boroo. And we've actually bought the fleet for haulage.

However, to move it forward now, since we had to stop that activity in 2010, the first step we'd have to do is actually renew all or the majority of the permits. And so, that's the first thing we would have to do. And of course, at the timeline, that we are working on, the longer we leave it be to get to that process, that number changes, but we have several months of work ahead of us to get the permits renewed.

As soon as that is done, we can then start looking at, starting the pre-strip stock piling on surface and we currently estimate that would take us probably three months, at which point, we'd be able then to start trucking ore to Boroo for processing. So, there is a pre-production period there of about three months or so, but there is permitting period that is actually more of a number that we can't determine at this point in time.

And of course, we have about two years of oxide material to mine and truck to Boroo, whilst we then work on completing design and construction BIOX plant.

Okay, great. And just a quick question on Kumtor, I assume you're going to see, you would see Kumtor making free cash flow in the fourth quarter. Can you remind us, if you agree with that, what kind of gold price you would assume in saying that and then is it possible to give us a sense of what maybe those Q4 all-in cost would look like?

Hi Trevor, it's Jeff. Our current assumptions for the second half gold price might be somewhat conservative. We are using about 12.50 right now. Yes, we would certainly consider the Kumtor will have free cash flow. I think you just look at our guidance on the unit cost and then make your assumptions on the gold price. So, I'm sorry, what was the second part of your question Trevor?

I was just curious if you, I was thinking specifically Q4 when you start to get into the SB Zone again or the high grade material again, what the all-in cost you would be anticipating?

We haven't given guidance on a quarterly basis but it certainly, I mean if you look at the year, the all-in costs at Kumtor are quite low. So, I mean the quarterly is roughly 50% to 55% of our annual production. So, it would be -- if we can keep that kind of production up all year, so for the year, we are looking at 820 to 895 on a pre-tax basis which is pretty reasonable.

Okay. Yes, we can probably back into that number.

Yes.

Okay. That's all I had. Thank you, Jeff.

Okay.

(Operator Instructions). Our next question comes from the line of Andrew Breichmanas with BMO Capital Markets. Please go ahead.

Thanks. Good morning guys. Just a quick question back on Kumtor. The issues with the Ball Mill ring gear, I guess in 2008 when you had some issues, there was a defect in the shell that contributed to the ring gear failure and I was just wondering if you'd identified any other issues with the Ball Mill at this stage.

Yes, Andrew. This is Gordon Reid. I'll respond to your question. This cracking that we've identified, as you said, the ring gear that we had problems within 2008 was replaced in 2010 by this ring gear, it's three years old. This cracking was identified -- has been identified as increasing overtime, but in particular between April and July non-destructive testing time period, we are currently in an investigation to identify why we've had this premature cracking. I don't want to speculate on that until we've completed our investigation.

In the meantime, we've made plans to rotate the ring gear to put the cracked faces on the loaded side, we're going to rotate the ring gear during the plant shutdown in August within the same timeframe as the plant shutdown, and put the offside -- put the load on the current offside ring gear which is -- it has not seen any cracking. We'll run in that way.

We've ordered a new ring gear which has a delivery time of approximately one year. In the meantime, we still have that spare ring gear that we took off in 2010 when this new ring gear arrived. It is a repaired gear. It won't give us -- it will give us close to, but not the same throughput that this current existing ring gear gives us. But, it is the fallback if we need to replace that gear before the new gear arrives. We also have other mitigation steps if something -- if we need to, but we don't foreseeing any problems.

And how long would it take to replace the ring gear if it came to that?

It's 52-week delivery and then approximately --

Sorry, with the spare, time to switch it?

Okay. How long to switch out the ring gear if we have to replace it with the current spare?

Yes, it would only be three or four days.

Okay. Okay, that's it for me. Thanks.

We are showing no further questions registered at this time. Mr. Pearson, I would turn it back to you to continue with your presentation or closing remarks.

At this point in time, if there are no further questions we'll end the call. We're all here to field any other questions that people might have, but at this point in time, we will end the call. Thank you for joining us on our call today.

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