Centerra Gold Inc (CGAU) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2014 First Quarter Results conference call and webcast.

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 Wednesday, May 7th, 2014. I would now like to turn the conference over to Mr. John Pearson, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jeff.

Welcome to Centerra Gold's first quarter conference call. Today's conference call is open to all members of the investment community and to media, in listen-only mode first. 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 is Ian Atkinson, President, Chief Executive Officer, Jeff Parr, Chief Financial Officer, Gordon Reid, Chief Operating Officer, and Ron Burk, Vice President, 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 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, risks and uncertainties please refer to our news release, issued last night, the MD&A, along with our unaudited financial statements and notes, and to our other filings, which can all be found on SEDAR and on the company's website.

And now, I'll turn the call over to Ian.

Thank you, John, and good morning, everyone.

First, I'd like to introduce you to Ron Burk. Ron joined us in mid-March and assumed the role of Vice President of Exploration. I think some of you may know Ron from his days at Silver Standard, or before that, he was at Teck Resources for some time.

Ron is a welcome addition to our team and brings to Centerra a wealth of experiencing in identifying and gold and silver prospects and other high-value mining properties.

During the first quarter, both of our operations performed well, producing 116 ounces of gold. Our all-in sustaining costs for the first quarter were $1,109 per ounce sold.

On the financial front, we reported net earnings of just over $2 million, or $0.01 per share, and cash provided by operations was about $102 million. We have a strong balance sheet, as our cash, cash equivalents and short-term investments grew to over $512 million or, net of debt, that's $436 million.

So regarding our negotiations with the government of the Kyrgyz Republic, as I think all of you are aware, we signed Heads of Agreement, to restructure the Kumtor project in late December, early January and the Kyrgyz Parliament passed a resolution on February 6th on the restructuring.

Since then, there have been a number of developments in the Kyrgyz Republic. In March, a new parliamentary coalition was formed and then, in early April, a new Prime Minister was appointed. This actually has delayed our discussions with the government, but we are now looking forward to making progress to advance the Heads of Agreement.

We continue to face challenges in the Kyrgyz Republic, in terms of new legislation, such as the Glacier Law, and also getting mine plans and permitting approvals. We believe that our existing agreements with the Kyrgyz Republic entitle us to continue our operations with the existing plans and require the Kyrgyz authorities to grant us the permits and give us the various approvals.

While these are serious challenges, we are hopeful that, through our continuing discussions with the government, we can resolve these issues.

In Mongolia, the Parliament is not sitting in its spring session. They are considering further amendments to the mineral law to improve the country's investment climate. We've been in discussions with the government regarding Gatsuurt and we remain optimistic that the project will receive the necessary approvals to allow it to move forward.

So, with that, I'll now turn the call over to Gord for an update on our operations.

Thanks, Ian.

As Ian mentioned, both operations performed well during the quarter and we are on track to meet our production guidance for the year.

And Kumtor, gold production for the quarter came from processing ore that had been mined and stockpiled from the fourth quarter of 2013. The increase in gold production as compared to the first quarter of 2013 was due to drawing down the in-circuit gold inventory.

At Kumtor during the quarter, we started constructing a buttress at the bottom of the Davidov Glacier, on the edge of the ultimate pit design, in response to increased movement of the ice in the south arm of the glacier. The buttress has been effective in reducing the rate of ice movement to within manageable levels. We continue to monitor the effectiveness of the buttress and the rate of ice movement.

No additional costs were incurred as a result of the construction of the buttress, as the buttress was constructed using run-of-mine waste material with a beneficial haulage profile. It is anticipated that the buttress will reduce the amount of ice we will have to mine in the future.

Kumtor is on track to meet its guidance for the year and, similar to 2013, over half of Kumtor's gold production is expected to occur in the fourth quarter. Cutback 16 is on target to reach the high-grade section of the S.B. zone at the end of Q3, as planned.

Boroo continued to perform well during the quarter, producing 13,736 ounces of gold, which has it on track to meet its production guidance of 45,000 ounces. For 2014, Boroo will continue to process stockpiled ore through mill and will continue to operate the heat leach facility.

The mill stockpiles are expected to be fully depleted in November 2014. Active heap leaching will continue into early 2015 and then transition to a drain down/closure status.

Our unit cost guidance for Boroo has been updated to reflect the reduced royalty rate of 2-1/2%, down from a budgeted 10% that is associated with selling Boroo gold production directly to the Mongolian Central Bank. In addition, Boroo's operating costs were favorably impacted by the depreciation of the Mongolian Tugrik.

I will now turn it over to Jeff to talk about our financials.

Thanks, Gordon. Good morning, everyone.

On a consolidated basis, our first quarter revenue of $148 million reflects a 4% decrease in gold sales for the quarter, compared to the same quarter of last year, and a 20% lower average realized gold price of $1,293, compared to $1,619 an ounce realized in the first quarter of 2013. During the first quarter, we posted net earnings of $2 million, or $0.01 basic earnings per share.

As Ian mentioned, cash provided by the operations was $102 million in the first quarter. Our cash and short-term investments total $512 million at the end of the quarter, which includes $76 million outstanding under our revolving credit facility. This is after investing $73 million in our properties, $3 million in exploration, and paying $8 million in dividends.

For 2014, we're maintaining our outlook for capital expenditures at $86 million, which included $43 million of sustaining capital, but excludes capitalized stripping of $191 million. Growth capital is expected to be $43 million, which is all at Kumtor and is primarily for the relocation of certain infrastructure related to the KS-13 life-of-mine expansion. We continue to be in a strong financial position and are maintaining our quarterly dividend.

I'll turn it back to Ian to wrap up.

Okay, thanks, Jeff. Just a few comments in summary.

Overall, a pretty quiet quarter and, as Jeff said, the company has a very solid financial position. We are continuing our discussions and working with the Kyrgyz government to resolve all of the outstanding concerns relating to the Kumtor project and to achieve an agreement that is fair to all shareholders.

For 2014, we've lowered our expected consolidated all-in sustaining costs to a range of $857 to $929 per ounce sold, reflecting the cost reductions at Boroo. This brings our consolidated all-in costs to a range of $971 to $1,053 per ounce sold, which includes all of our sustaining and gold capital, but excludes the revenue based taxes and income taxes.

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

Absolutely. (Operator Instructions)

Our first question comes from the line of Richard Hatch with RBC. Please proceed.

Thanks very much. Morning guys, congratulations on a good set of numbers.

Just two questions from me; firstly, just wonder whether you can give us the next key dates we should be looking for in your discussions with the Kyrgyz government, either Kumtor, just something for our diary.

And then, secondly, perhaps just on the glacial movement, perhaps can you just give us an update on how you'll be sort of monitoring that over the course of the year and how you'll update the market in that regard?

Thank you, Richard. It's Ian Atkinson.

With respect to the key dates going with forward, with the government and our discussions on the Heads of Agreement, the only date out there at this point is that the government [does] have to report back to Parliament on the 12th of May, under the resolution that was passed on the 6th February that, as indicated in my remarks you know we've had some delay because of the change in government and Prime Minister.

So, we are in process of getting the discussion started and will have to move them forward as quickly as possible.

Okay, thank you.

Then, with respect to the glacier movement, we've actually routinely monitored the glaciers; always have at Kumtor. And that will just continue. The increase in movement that we saw in the south arm of the Davidov did cause us to put in the buttress.

That buttress, as Gordon's described, has actually had the impact that we expected; slowing it down to very low rate, which puts us in a position now that we can monitor the glacier, as we will, and then mine it as appropriate and [there will be slower] rates that puts us in much better position.

Okay. Thanks very much.

Our next question comes from the line of Patrick Chidley with HSBC. Please proceed.

Yes, morning, afternoon or morning, gentlemen.

Just a quick question on the changeover in Presidents in Kyrgyzstan and how that has affected the negotiations. I mean have you had to sort of stop negotiations or halt talks while they sort of reformulate the government there or what's the sort of view of the leadership there?

Thanks, Patrick. It's Ian again.

Hi.

With respect to the changeover, actually it's in the Prime Minister, not the President. And with the changeover in the government, we've lost a little time and that's just a parliamentary process.

When the governing coalition did collapse in early March that then led to the resignation of the former Prime Minister, then Parliament had to go through a process of reforming the coalition, which took, I think the order of 10 days is my recollection.

And once the coalition had been reestablished, they then had to go through a process of selecting and naming a Prime Minister and having him approved by Parliament. Then the Prime Minister has to have all of the cabinet reappointed and things like the working groups, particularly the two that we work with, have to be reappointed.

And with all of this necessary bureaucratic process, that during that time, clearly there's no progress on the discussions of the Heads of Agreement. So that actually is now resolved and finished, so we have had contact with the newly appointed -- not newly appointed; the newly appointed working groups and the positive out of this, there's been very little change in the majority of the people involved.

The coalition that was reformed was essentially the same coalition that collapsed in March. The same three parties have reestablished it and the new Prime Minister, Mr. Otorbaev, was the former First Vice Prime Minister under the previous coalition, so he has been involved in our discussions for some time, so he's very familiar with the Heads of Agreement and the negotiations that we've had the last 12 months or so.

And similarly, with the cabinet; the majority of the cabinet members and the working groups are the same. We've probably got two or three new appointees, total, that we'll have to bring up to speed. So I think that speaks well for the process; that we should be able to move things forward fairly quickly now that the government has got itself reestablished.

And then, turning to Mongolia quickly, I saw an article in F.T. yesterday that the country's set to the end the dispute with investors over mining licenses. I take it that is separate than the case at Gatsuurt, but wondering if the news that there are conciliatory noises from the government there, will it positively affect you or not?

I think, Patrick, yes. I mean I think you're seeing a number of things in Mongolia that just indicate that the government is responding to the significant drop in foreign investment that has happened in the country. It's down over 50%, year over year.

Actually, Jeff probably has the correct number and I think it may be higher than that now.

[52%].

52%. And, as we've said, I mean they are working on the new mineral law, they've already changed the foreign investment law. What you're referring to about some of these licenses, again; that's a positive that they're looking at, you know try to reinstate these licenses that have been in dispute.

The other thing that we know they're considering; there's been a moratorium on issuing new licenses now for some, I think it's 3 years, from memory. And they're looking at rescinding that, again; looking at various measures to stimulate further investment in the country, particularly mining.

And that brings us to Gatsuurt and that's why we've been working with them. [Gatsuurt the] rights, a real opportunity for both ourselves and for the government, because, as you know, we've got it ready and we just need now to have the deposit declared strategic, then move back into the discussions to work out the ownership interest of the government in power and get the permitting process established.

And once we've got all the permits in place, we can move Gatsuurt forward fairly quickly after that. This would be the story for them.

Yes. I mean I think you'd sort of indicated that this half, we should get a decision from the government. Is that still the case?

We certainly hope so. I mean, again, we're continuing to talk to them on a routine basis. This parliamentary session now runs through till, I believe it's the first week in July. And every indication we have is that we're certainly working with them. They do intend to try to get the list of potential strategic deposits in front of Parliament for review by Parliament.

(Multiple speakers)

Got it right. And then one quick question on exploration at Oksut; I understand that you did get the permits to start drilling there. And have you done any drilling there yet, between the two deposits? Or is it still yet to come?

We did receive almost all of the permits we'd applied for. Like every mining company in the company last year -- mining and exploration company; there were no permits issued. We were very fortunate that we got the majority of our issued in early March, so we have got drilling started.

We have a couple of our [C] rigs on the property and now I think three core rigs, so we are starting, initially, on our C rigs to do some condemnation drilling and the core rigs, initially, are drilling some additional met sample work.

And then they'll move, as soon as that work's completed, to start doing the exploration work and the first target will be to look at the south end and the north end of the Keltepe deposit, particularly looking at, is there a connection between Keltepe and Guneytepe to the south.

Then, in addition to that, there are a number of other exploration targets, about six of them on the property that we've got defined and in work we did last year. Ron will then have the group move onto that and start testing these other targets to look at expanding the resource.

Thanks, Ian, and I look forward to those results.

Thanks, Patrick.

Our next question comes from the line of Alec Kodatsky with CIBC. Please proceed. CIBC.

Thanks. Good morning, guys. Just had a couple questions, just follow-up. Just on Gatsuurt; if the deposit's declared strategic and everything's sort of moving ahead, is there any idea around the timeline that you know might be required in order to negotiate the ownership structure and start moving things forward?

Hi, Alec; it's Jeff. I think, once they've declared it strategic, they'll be pretty motivated to get it going, because, as Ian was saying, they are very interested in both sort of changing their image and trying to get some positive momentum, particularly in the mining industry.

So we would hope that, over the balance of this year, we could have the agreements negotiated and, depending on how positive the whole environment was, there's probably some stuff we can do to move forward [and] potentially even spend a bit of money, as long as things are looking pretty good, to get things back up and running.

And is there any sense, with the discussions that you've had so far, as to whether they do want to execute their ownership rights or not?

Well, I think the whole concept of having it declared strategic means that they can own up to 34% of it. And we're moving forward with all our modeling and everything on that basis and the project is still pretty robust.

So, I mean they do talk about the level of ownership. It's not clear that it will be 34%, but is seems fairly clear to us that they expect to own some of the project.

Okay. And I guess maybe just a follow-up on the glacier. Is there any sort of insights gained at this point as to sort of what occurred or what precipitated the movement?

Yes, this is Gordon. We back-analyzed the ice movement and we understand or know what the failure mechanism was. I don't think I need to talk about it here, but certainly, by putting this waste rock buttress in place, that replaces the part of the glacier we mined out that was the cause of the ice to move.

Our modeling suggests this buttress will effectively stop the ice, or if not stop, significantly reduce its movement, which is has already. We continue to monitor both the buttress and the ice and we don't anticipate any issues going forward.

Okay, great. That's it for me. Thanks very much.

Our next question comes from the line of Daniel McConvey with Rossport Investments. Please proceed.

Two question, just on the [marring] plan approval for 2014; I know there's things going on and change of government, et cetera, but is this something that has happened before and with time, would it be more of a (inaudible) concern?

Hi, Dan; it's Ian. The mine plan; the normal process that we've gone, actually the last 16 years, is every year you have to have an annual mine plan approved. That mine plan is usually developed and submitted in December and then you go through an approval process that normally is complete in the first quarter.

It has been our experience, we've had, I think 1 year that it's lasted a little longer, maybe 2 in the past. This one, it's the reason we've made the comments in our news releases; it is taking longer than normal and we have received this -- we've indicated, in a letter from [SIETS], one of the state agencies, suggesting that we may want to consider closing the mine plan.

I want to be very clear; we have not received any order at all to stop mining. This is a little unusual for us and so, but as always, we've faced challenged in Kyrgyzstan on a number of issues and, again, by sitting down, having constructive dialog and discussions with the appropriate agencies, we do expect that we'll be able to resolve this issue.

We've been working with the government now, actually since December on answering the questions that they've raised and we've addressed those. We've also, as I said, not only talked with the state agencies; we've had discussions again with the Prime Minister in our regular discussions that we've had on other things.

He's aware of the situation and, as we've said, keeping Kumtor operating has always been a priority for the government. They've stated that many times in the past, so they will be working with us, I think, to rectify this issue and allow us to continue.

The glacier issue; has that been prominent in the news down there this time?

Dan, in fact, I don't think it's received any news coverage. I don't recall seeing any clippings at all with respect to it.

Again, this is something that the movement got to -- the rates increased at ones that we were -- run higher than we were anticipating in our modeling and so in response to that, we know that you've got to be proactive to this sort of thing.

So we looked at options to manage it effectively and that's why we took the decision we did to put the buttress in place, to control movement and slow it down significantly, which as Gordon's described, it has happened.

And now we can look, as this settles, to managing the ice behind the buttress and that, as, again, Gordon's indicated, I think the impact of the buttress will mean we'll have to manage less ice on a go-forward basis, so.

Thanks very much, Ian.

Thanks, Dan.

Our next question comes from the line of Greg Barnes with T.D. Securities. Please proceed.

I just wanted to talk about this buttress a bit more. It sounded like that you may be mined a bit more of the ice that you planned and that caused the acceleration of the ice movement. So you've basically filled in that area that you minded before. Is that what's happened with the buttress?

It's close. We didn't mine more ice than we planned, but when we did our modeling, we assumed a certain resistance force at the sites and there was a change in topography underneath the ice.

The incline was steeper and had less resistivity than we had anticipated. So that's what caused the ice movement to be higher than anticipated. Once we did the back analysis, we identified that by putting this waste rock buttress at the bottom of the ice, it would basically replace the ice we mined out and add that resistance for us to slow the movement. And that's what we've done and it's been very effective to date.

So have you effectively stopped the movement? When you say slow down significantly, from what movement to what movement have you slowed it down?

It's slowed down from over a 100 millimeters per hour to less than 7 millimeters per hour. Our modeling suggests the buttress will stop the ice movement entirely, but in any event, even if it keeps it to these very low rates of movement, we have enough capacity to offload the ice and manage that level of movement.

And stop movement entirely, for good or for now?

No, the buttress is designed to stop the ice movement. It basically is putting a dam in front -- it's not a dam; it's putting a resistance force in front of the ice so the ice can't move past he buttress.

And, Ian, this letter you received from the SIETS; did you receive that this quarter or is that relatively recent? That's the first time I remember seeing this, but maybe I got lost in how many of these letters you actually received.

We received that in April, Greg. I just can't remember the date that --

But around the 10th of April.

Okay, that's it. Thank you.

(Operator Instructions)

Our next question comes from the line of Botir Sharipov with HSBC. Please proceed.

A couple of questions from me. First, if you maybe could provide a little bit of color on Cutback 16 progress and given the sensitivity of the production to the development rates.

And also, I see that you accelerated the waste stripping of Cutback 17; can that possibly change your mine plan a little bit in upcoming years, maybe increase production, since you may get into the ore quicker now?

This is Gordon. I'll touch base first on Cutback 16. Cutback 16 is on plan to reach the high-grade ore zones by the end of the third quarter. It has our top priority. It will not lack for equipment, et cetera, so we're focusing on Cutback 16. There will never be a shortage of equipment. Right now, like I say, we're on track. We anticipate to be on schedule; don't foresee any problems at this point.

With respect to accelerating Cutback 17, I think what we may be referring to is when we mined the buttress, we changed our mine plan slightly, in that we went for the better quality waste rock; more [competent] waste rock, because we need water to flow through the waste rock buttress. So we needed to have course, good quality waste rock that won't break down over time.

So we changed where we were mining in Cutback 17, so we changed the short-term production schedule, but it's in the long-term mine plan over the next 12 months, so the overall mine plan has not changed. [It's just refining] of it; yes.

And my other question is actually on the 2014 mine plan approval. If you continue to operate the mine without that permit, would you be in violation of 2009 agreement at some point?

No. Actually, our 2009 agreement actually is the -- requires basically that the state agencies are reasonable in the consideration of mine plans and approvals and terms for giving those approvals, so that the actual 2009 agreement gives us support that we can continue the discussions with the government to answer their questions so that they can then issue the permits as required.

Thank you so much.

(Operator Instructions)

All right, gentlemen, it appears there are no further questions coming in the queue.

Thank you very much for attending our conference call. If there are any further questions, management is available for any call. Thank you.

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