Centerra Gold Inc (CGAU) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2013 Third Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct the question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, October 31, 2013. I would now like to turn the conference over to John Pearson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Tanya. Welcome to Centerra Gold's 2013 third quarter conference call. Today's conference call is open to all members of the investment community and to the media in listen-only mode. After management's 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 U.S. dollars unless otherwise noted.

Joining me on today's call is Ian Atkinson, President and CEO; Gordon Reid, Chief Operating Officer; Jeff Parr, Chief Financial Officer; and David Groves, 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. 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 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 along with the unaudited interim condensed consolidated financial statements for the quarter ended September 30, 2013 which was issued last night and also to our other filings including our annual filings which can be found on SEDAR.

And now I will turn the call over to Ian.

Thank you, John, and good morning everyone. Starting with our negotiations with the government of the Kyrgyz Republic, as you're all aware Kyrgyz Parliament last week issued a decree rejecting the previously announced memorandum of understanding that we signed with the government on the 9th of September.

While the official version of the decree is not yet available, we understand that the decree instructs the government to continue negotiations with Centerra with the view to increasing the Kyrgyz Republic share in the joint venture to 67%.

The decree requires that the government report back to Parliament by the 23 of December this year. Despite the Parliament's actions, the government and the Prime Minister actually continued to support the previously negotiated MOU and we are continuing to work with them regarding the potential restructuring transaction to resolve all outstanding matters.

However, as we said before and continue to say to the government, any transaction must be fair to all Centerra's shareholders. We dispute all of the allegations raised in the decree and continue to believe it comes to our project agreements are legal, valid and enforceable obligations.

As we've said before, to come to our project agreements, we negotiated openly and transparently and were reviewed by the government and the Parliament with the subject but positive decision by the Kyrgyz Republic's Constitutional Court and the legal opinion by the Kyrgyz Republic Ministry of Justice.

In addition to that, since they came into effect, certainly the Kyrgyz Republic has had significant benefit from them in the form of taxes and further investments. In the mean time, maintaining continuous mining operations have come toward remains a government priority. The mine is running very well and we are on track to meet our production targets in the fourth quarter.

So operationally both Kumtor and Boroo performed well in the quarter and the gold production at Boroo for the third quarter was better than expected, which has enabled us to increase our gold production guidance again for the year to 635,000 ounces to 685,000 ounces. We now expect Boroo to produce approximately 85,000 ounces for the year and, as I've already said, Kumtor will have a strong quarter because we are mining in a high grade SB Zone as planned.

On the financial front, as we expected, it was a weak quarter. We reported a net loss for the quarter of $1.8 million or $0.01 per share. Yesterday, we also announced our quarterly dividend of CAD0.04 per common share which is our current share price represents an annualized view of almost 4%.

So with that, I will now turn it over to David Groves to discuss our exploration results.

Thank you, Ian, and good morning everyone. Exploration activity during the quarter focused on our ongoing drilling programs at the Oksut project in Turkey and the ATO project in Mongolia.

At Kumtor, exploration drilling ceased in late July and in mid-September, we completed a program of condemnation and geotechnical drilling. There is no further drilling planned at Kumtor for the balance of the year due to the level of mining activity in the central pit.

At the ATO project in Mongolia, we drilled two holes to test an area in the Northeast corner of Pipe Number Four where a narrow zone of high precious metal values remain open to the nearby Mungu prospect. We also drilled at Mungu itself and the results collectively outlined a high grade gold, silver zone of mineralization, what then [radiated] into sulphide bearing [riley]. Further work, including oriented core drilling, is planned at Mungu in the fourth quarter to ascertain mineral controls and true woods of drill intercepts.

In Turkey at Oksut project, we completed 28 infill drill holes in the Keltepe deposit, formally referred to as Ortacam North. Drilling results from Keltepe continued to support and improve the resource model. Some of the better results received from the infill holes include 2.7 grams per ton gold over a 154 meters, another 2.7 grams per ton gold over 67 meters, 1.5 grams per ton gold over a 108 meters and 1.1 grams of ton gold over a 124 meters.

A full set of upside drilling results for the quarter is available on our website. Results from these infill holes also expand the Keltepe deposit to the south and east where it remains open ended. These results are expected to have a positive impact on year-end resource estimates. Drilling continues certainly with five drill rigs as do metallurgical, environmental and technical studies.

I will now turn it over to Gord Reid to talk about our operations.

Thanks, Dave. Both operations performed well during the quarter with recovered gold and unit cash cost substantially in line with our expectations. At Kumtor in September as planned, mining intersected the high-grade SB Zone ore in cut-back 15. Kumtor is on track to achieve the year-end gold production guidance of 550,000 to 600,000 ounces.

Given that greater than 50% of Kumtor's productions is in the fourth quarter, any interruption to new production could have a significant impact on ounces poured plus the wide range in guidance.

During the third quarter, we received final regulatory approval for our revised 2013 annual mine plan, which includes management of the waste-rock dumps. The revised plan allows for the placement of waste-rock in the Sarytor Valley, the Davidov Valley and the Lysi Valley.

Kumtor was currently working in accordance with the revised plan. Movement of the Central Valley Waste Dump has slowed to levels consistent with the rate of movement stated in the 2012 Kumtor Technical Report. The Company continues to make progress in relocating and reconstructing certain infrastructure at Kumtor, potentially impacted by the waste dump movement and by the KS-13 Pit expansion.

The ball mill ring gear was successfully rotated during the schedule at Kumtor mill shutdown in the August after having identified a number of cracks in the ring gear teeth during an inspection in June. The mill is currently operating at full capacity.

Boroo, as Ian mentioned, performed very well during the quarter, producing over 23,000 ounces of gold. During the quarter, we completed the scheduled maintenance of the heap leach liner and the heap leach facility is back in full operation. The increase in gold production as compared to the third quarter of 2012 was mainly due to the resumption of the activities at the heap leach operation, which contributed almost the 11,000 ounces.

Mill had reached average 1.04 grams per ton with the recovery of 59%. We have increased our gold production guidance for the year at Boroo to 85,000 ounces from the previous guidance of 65,000 to 75,000 ounces. During the last quarter of the year, the Boroo mill is expected to process ore stockpiled with an average grade of 0.7 grams per ton.

Crushing and stacking at Boroo's each operations will be completed by the end of November. The heap leach operation will continue active leaching through to the end of 2014 when the operation will transition to a drain down and closer status.

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

Thanks, Gord, and good morning, everyone. On the consolidated basis, our third quarter revenue of $155 million reflects 181% increase in gold sales for the quarter compared to the same quarter of last year, reflecting increased production along with the 20% lower average realized gold price of $1,337 compared to $1,667 an ounce last year.

During the quarter, we had a loss of $1.8 million or $0.01 per share which was in line with our expectations. In the quarter, we spent and accrued $16 million on sustaining capital, $8 million on growth projects and $56 million on capitalized stripping.

For 2013, our projection for capital expenditures excluding capital stripping is a $101 million down from a $107 million projected last quarter. We are expecting to spend about $203 million in 2013 on capital stripping compared to $196 million in the prior quarter guidance.

The company's cash and investments balance fell from $316 million at the end of the second quarter to about $237 million as we consumed some cash as expected. We've drawn $76 million on our credit facility, so our net tax position at the quarter end was $161 million.

We've got good margins at current gold prices and our cash balances have grown since the end of the quarter. We expect them to continue to grow significantly through to the end of the year. Even in this lower gold price environment, our balance sheet remains strong.

Our unit costs are expected to decrease substantially in the fourth quarter with these significantly higher productions in Kumtor. Our forecast for all in pre-tax cash cost for the full year is reduced to $930 to a $1,000 an ounce compared to our prior guidance of $945 to $1,040 an ounce.

Our all in pre-tax cash cost includes all of our operational costs, capital stripping, sustaining in growth capital and corporate costs which include G&A global exploration and CSR expenditures. As Ian mentioned, we've increased our annual production guidance for Boroo to 85,000 ounces which brings our consolidated production guidance to the 635,000 ounce to 685,000 ounce range.

And I will turn it back to Ian to wrap up.

Thanks, Jeff. And then just a few comments in summary, so we're continuing our discussions and working with the Kyrgyz government to resolve all of the outstanding concerns relating to the Kumtor project and we're working towards December 23 deadline to achieve an agreement that is fair to all the shareholders.

As we said, we started mining the high grade portion of the SB Zone at Kumtor at the end of the third quarter as planned. So we are on track to meet our production guidance for the year. We revised our consolidated all in cost pre-tax for the year to $930 to $1,000 per ounce which is down from our pervious guidance.

And finally, as you've seen in our news release that Dave Groves will be leaving Centerra due to personal reasons. So I just like to thank -- take this opportunity to thank Dave for his contributions to the company and wish him the best.

So with that, let's open up the call for questions. So operator, please give the instructions on the process for the question-and-answer session.

Tanya, can you give the process for answering or for asking question, please?

Yes. Thank you. (Operator Instructions). And our first question comes from the line of Botir Sharipov from HSBC. Please go ahead.

Congratulations actually on a pretty good quarter operationally. I have couple of questions on Kumtor, your average mining grade was about 2.78, I think and the mill grade was 3.04 which pretty much implies that you drew some stockpiles that were pretty high grade, is that a right assumption and because we were thinking that due to the stockpile average grade was about more 2.2, 2.3 grams per ton.

No, actually, the mine is producing far more ore tons than the mill can process, so we're building up stockpiles, so we're selectively putting slightly higher grade to the mill and the lower grade, it was going at the stockpile for future periods.

Okay. And sort of the Q4 is concerned, is that going to be mostly run a mine ore or you're going to fix some stockpiles as well as Kumtor?

No, it's going to come right out of the pit, it should run of mine ore, it will be blended from stockpiles, but that again that's just in mine.

Okay, and as far as the grades that you're currently seeing at SB Zone, can you give us a little bit color on that?

I'm not sure what the question.

I think maybe, I mean, we expect we've always said we would access the high grade portion of the SB Zone, in the fourth quarter, and we have them against the same portion of the ore body that we've actually in our mine for last four years, and unfortunately quite often in the fourth quarter.

So the grades would be very similar to the same production periods that we had last year thinking at 2012. 2011 wasn't too bad, it made fairly flat profile, but certainly '09 and '10 again, were actually backend loaded, so similar grades to what we've seen in the past at the SB Zone.

Okay. Thank you. And if I may, my last question is, we understand that you're engaged in the government in I guess new negotiations now, from a strategic point of view, what's the companies, what's the management view on eventually giving up more than 50% on Kumtor?

So, as I said in my comments, any transaction that we complete is to be fair to what our shareholders and actually that's got be approved by our shareholders, so anything that we look at, that's the benchmark test for it and that's why we -- the MOUs that we signed was a 50-50 joint venture, we think is a applicable to all parties, that's all of our shareholders plus the Kyrgyz Republic.

And I think it is something that we expect that we could our shareholders' approval of it. And clearly moving to numbers that are 67% is indicated would involve other things that we're going to change, but again at the end of the day, the transaction would have to be fair and sustainable and approved by our shareholders.

That's why we signed and put the MOU forward because we think it meets all of the Kyrgyz Government's large number of the Kyrgyz Government's concerns that we raised in the state commission report and it is we think an equitable transaction or a concern and we do believe we'll get the support that we need from our shareholders to move forward on that.

Okay, thank you so much.

Thank you. (Operator Instructions). And the next question comes from the line of Alec Kodatsky from CIBC. Please go ahead.

Thanks, good morning. Just a couple of questions I guess with just to start with Kumtor. I'm curious how you see the negotiation process playing out I think now it appears that both from your perspective and the Kyrgyz government perspective, do you like the deal that you have? So sort of trying to understand how when both sides already like the deal they have, you come back to renegotiate. So I'm just sort of curious what you might be looking at in terms of modifications and sort of the approach that you're taking?

Hi, Alec, this is Ian. I mean, you're right, I mean, the Prime Minister and the current government are supporters of the MOU and that the challenge in front of the government and also ourselves is getting the benefits and the rationale behind the MOU clearly understood and trying to win Parliament over if you like on that approval.

Parliament has raised some issues in four or five days of debate and we are looking at those issues and how we can resolve them going forward and continue negotiations and something developing or detailed agreements. But as I said, the MOU right now from a -- like financial standpoint represents a very equitable transaction for all shareholders and other issues. I think we can through negotiation as we always have find a way forward and that the basic business terms and financial and fairness have to be maintained in anything that we do.

So we will be continuing the discussions with the Prime Minister directly and his working group to help them and also help ourselves fully understand the issues raised by Parliament and try to find constructive solutions to those matters.

Well, thanks, Ian. Good luck.

Thank you, and the next question comes from the line of Trevor Turnbull from Scotia Bank. Please go ahead.

Yes, good morning, guys. I was just wondering about some of the language and the decree about coming up to December 23rd, if you haven't been able to renegotiate that they would recommend or seek to terminate the 2009 agreement. Is that something that would require further legislation or the Prime Minister to ultimate sign off on? Does he have the veto power of Parliament attempts to do that, kind of how would that play itself out?

Trevor, I mean, that language actually is not really different from what has been in the past two decrees, one from February and then the one from June and it leads to -- it asked the governments then to take steps to look at cancelling the agreements et cetera. In terms of what the government would do, then it's incumbent on the government then to respond to Parliament and with respect to that and I think the Prime Minister would have to take those -- take that under consideration, determine what response you would put in front of Parliament and from the government with respect to how we want to handle that.

The government clearly has an understanding of what the 2009 agreements are and their obligations and I think everyone's aware that they have had independent financial and legal advisors working with them during this negotiation period, so they have discussed the options available to them. So I think the Prime Minister would then address Parliament based on that background that he has from the independent experts and advise Parliament appropriately.

And what actions he had to take, at the end of the day, would be really dependent on what he can present to Parliament and then what Parliament actually directs in or instructs him to do finally.

Okay. And then I guess my other question has a little bit to do about kind of that the last resort which would be if you needed to -- you always have the ability to proceed to, like, international arbitration. When you signed the 2009 agreement, I know you went to a lot of trouble to kind of make that as airtight as it could be, including taking the agreement to the constitutional court which no longer exists in the form it did back to then anyway.

What type of things, when you come up with -- when you conclude the negotiations at this time, are there any things that such as taking it to a court that you would plan to do to preclude further so that you won't have to come back and renegotiate it in the future? I know you've always got the International Court of Arbitration kind of as your last resort, but are there any other things you feel you can put in place to kind of protect yourself against the government money to revisit two years hence when there's a new group of legislators?

Trevor, I think there is two or three things that, you know, first, I mean, we've said many times that we are not going to renegotiate the 2009 agreements, that any changes we are considering with this transaction, the 2009 agreements remained intact and that includes the rights for arbitration and the fact that they are -- they were negotiated approved by Parliament et cetera, so that is the first one, first key to it.

The second I think is certainly with the current Prime Minister and government are very aware of the allegations made around previous sets of negotiations 2003, '04, '07 and '09 and the alleged activities around them, all of which we dispute as we clearly stated. So he's been running a very transparent process and he's brought in independent financial and legal advisors to ensure that, again, he is getting the best advice of the government is and Parliament is also receiving that advice so that, again, Parliament cannot say did not know.

He has invited Parliamentary members, members of the advisory council that was appointed and the cabinet and so that -- he has made the process as transparent as he can so that he cannot be challenged going forward because it will be approved by the Parliament and the -- proposed by government then approved by Parliament once completed.

He's trying to do within the new constitution that was put in place after the April 2010 revolutions and to bring in a Parliamentary republic rather than a presidential republic. And so pushing the decree through Parliament getting full approval is probably the best protection he can get for himself and of ourselves under their constitution.

Okay. And then maybe just one last question and that's we've read a lot about the United States cancelling their or not renewing their contract for the big Manas airfield there. Is that a material part contributor to the economy and is that kind of help to sharpen the focus of the government in terms of securing revenues?

It's certainly a fairly significant part of the economy and Kyrgyz Republic, and particularly in Bishkek. I believe they are the second largest employer in the country. I can't recall in terms of the taxes and the fees payable, but they are fairly significant or they're significant contributor to the treasury of the Kyrgyz government, so we'll have an impact.

And, of course, they're well aware now that the U.S. have actually found an alternative place for the air base and they publicly announced that, so they likely will not be continuing negotiations. So they will have to build -- the government will have to build that into the planning for 2014, which, as you say, I think will sharpen the focus, because, again, this year, they obviously [build come to our end] as we are their largest taxpayer in the country and a significant contributor and they felt the impact of the drop in gold price themselves.

So they are learning with that to be very careful when planning for the next year and build in some sensitivities for things, and certainly removing the contribution of the air base will increase the sensitivity of (inaudible) the gold price on their revenue base.

Okay. Well, best of luck with that, Ian. Thank you.

Okay. Thanks, Trevor, yes.

(Operator Instructions). And we have no further questions at this time.

At this time, then, we will thank everyone for joining us on the conference call and we'll sign off here. If there are further questions, the management is around; please give us a call here in Toronto.

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