Centerra Gold Inc (CGAU) 2020 Q1 法說會逐字稿

Greetings, and welcome to the first quarter results conference call. (Operator Instructions) As a reminder, this conference is being recorded, Friday, May 1, 2020. I would now like to turn the conference over to Mr. John Pearson, Vice President, Investor Relations. Please go ahead.

Thank you, operator. I would like to welcome everyone to Centerra Gold's 2020 First Quarter Conference Call. We have summary slides available on our website to accompany each speaker's remarks. Today's call is open to all members of the investment community and media.

Following the formal remarks, the operator will give the instructions for asking a question, and then we'll open the phone line to questions. Please note that all figures are in U.S. dollars unless otherwise noted.

Today, joining me remotely on the call is Scott Perry, President and Chief Executive Officer; Darren Millman, Chief Financial Officer; Dan Desjardins, Chief Operating Officer; and Yousef Rehman, General Counsel.

I would like to caution everyone that certain statements made on this call today may be forward-looking statements, and as such, are subject to known and unknown risks, which may cause actual results to differ 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 MD&A. For a more detailed discussion of the material assumptions, risk and uncertainties, please refer to our news release and MD&A issued this morning, along with the unaudited financial statements and notes and to our other filings, which can all be found on SEDAR and the company's website.

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

Thanks, John, and good morning, everyone. Thanks for dialing into our call. I'm just on Slide 5 of our accompanying earnings call presentation deck. Just firstly, in terms of safety, you would have noted that one of the key highlights this year -- sorry, recent key highlights this quarter was our Öksüt mine, which just recently transitioned operations. We actually just recently celebrated 1 year of operations without a single lost time incident. This is fantastic. It's a commendable, and I just want to recognize that in terms of our management team at Öksüt.

We believe, from a safety perspective, our continued commitment to Work Safe-Home Safe is a driving force behind achieving such milestones. Our focus moving forward has to be absolutely relentless in terms of us achieving our goals of 0 harm and eliminating fatalities from within the business.

The second bullet point, just on COVID-19 in terms of the coronavirus. Centerra continues to prioritize the health, safety and well-being of our employees, contractors, communities and other stakeholders during the current outbreak of COVID-19. We're taking steps to minimize the effect of the pandemic on our business. To date, the COVID-19 pandemic has not resulted in any material impact on Centerra's operations, and the company currently does not expect it will impact 2020 production. However, the potential effects of COVID-19 are unpredictable, and the company continues to monitor the situation at each of its sites, and we continue to take the steps, necessary steps to prevent or minimize any effects the pandemic may have. As you would have noted, there's no change to our 2020 guidance. Just on the third bullet point here, just in terms of Öksüt, this is quickly transitioning to operations, and this is going to be our third operating gold mine within our portfolio. On January 31, we achieved first gold pour at Öksüt. And as at the end of the quarter, in terms of the construction of this project, we are now approximately 95% complete. During the quarter, Öksüt contributed 4,486 ounces of gold production. It's going to be an important third asset within our portfolio and it's going to make for increased diversity moving forward.

As we move forward here over the course of the calendar year in terms of 2020, we're expecting progressive increases in terms of Öksüt's gold output profile.

Just in terms of some of the key quarterly highlights, you've seen the 6 bullet point there. It was another robust quarter in terms of our production levels, particularly good operating momentum at Kumtor, facilitated a company-wide gold production result of 190,000 ounces of gold. This high level of gold output in terms of the corresponding all-in sustaining costs, you can see we achieved a very low, very competitive $712 per ounce sold. Given the prevailing gold price environment and that strong level of gold output, and obviously, the competitive sort of all-in sustaining cost, you can see that really -- you can see that generated meaningful free cash flow on a company-wide basis. Centerra during the quarter generated free cash flow company-wide of $77 million, which includes $96 million of positive free cash flow from Kumtor and $22 million of positive free cash flow from Mount Milligan. The strong level of free cash flow saw the balance sheet transition into a positive net cash position at the end of the quarter. As we move forward here over the course of 2020, we are no -- Öksüt is no longer in construction mode. So I would expect if we continue to deliver, we continue to execute, we should see the balance sheet continuing to grow over the course of this year.

As I mentioned earlier, under COVID-19, with today's release, we are maintaining our guidance for 2020. The second last bullet point here, just based on the company's financial position, our recent strong operating results and cash flows, the Board yesterday approved a dividend of CAD 0.04 per share. Just lastly, just want to note in terms of the prevailing macro environment on -- in terms of the current economic conditions, gold prices are strong right now, but also what we're noting is in terms of our sort of exchange rate environment and in terms of the jurisdictions where we operate, in terms of the oil environment and its impact on diesel fuel pricings, we're seeing particularly robust margins across all of our operating assets. So if this is to sustain, it does bode well for Centerra's profitability and then cash flow generation moving forward.

Just on Slide 6 of the presentation. The chart here on the top left, we're just looking to graphically illustrate the quarterly cash flow during the quarter. You can see the green columns here. The first green column is just the aggregate of the positive free cash flow that was generated by Kumtor and Mount Milligan during the quarter, so $118 million. We drew -- there was a drawdown on our revolving line of credit facility of $82 million. And then the red columns just illustrate how and where the cash was deployed during the quarter. As you can see, as the chart illustrates, it was a meaningful quarter in terms of positive free cash flow generation. Just reference the chart in the bottom right-hand corner on Slide 6. What we're illustrating here is our consolidated adjusted free cash flow. And so what we've removed from these columns back in 2019 was the settlement expense associated with the strategic agreement that we entered into with the government of Kyrgyzstan. But I think what the chart illustrates is, if you look at Q1, our realized gold price was $1,487, but also now that Öksüt is transitioning into operations, now that we're not funding significant construction expenditures, you can see just the level of free cash flow that the business is generating within the quarter.

As I mentioned, gold prices here today are stronger than what we were realizing in Q1, and we're seeing a very favorable diesel fuel price environment, a very favorable exchange rate environment. So again, I think that just bodes well when you think about our future profitability and free cash flow generation potential.

Just lastly on this slide, the chart on the bottom left is just a continuum of our net debt to net cash profile. And you can see the columns on the right of that chart, just given a strong profitability, a strong cash flow generation during the quarter. You can see the balance sheet has now transitioned into a positive net cash position.

Just on Slide 7, just in terms of our environmental, social governance profile. Just in terms of these bullet points. Obviously, our continued focus on safety is absolutely paramount, and I spoke to that earlier. Second bullet point here just in terms of our license to operate. We've now achieved 81 consecutive months of no business interruptions, so a fantastic achievement. Third bullet point, as it should be, there's been no reportable incidents during -- no reportable environmental incidents during the quarter. In terms of the fourth bullet point here, we're continuing to work and focus on our commitment for -- to -- for Centerra to be a diverse and inclusive organization. I have a number of initiatives here that are underway. Second last bullet point, we are now working on a corporate-wide climate change strategy, hoping to have that finalized by the end of this year. And then just the last bullet point here. We have implement -- we are in the process of implementing the World Gold Council's Responsible Gold Mining Principles. Centerra is a member of the World Gold Council, and we are a signatory to these principles. We're now looking to establish conformity and compliance with all these principles, and that's another key initiative that's being rolled out across our operations this year.

With that, I'm now going to turn the presentation over to our Chief Operating Officer, Mr. Dan Desjardins. So Dan, please?

Thanks, Scott. Good morning, everyone. I'll start on Slide 9. Our quarter 1 safety and operational performance was terribly overshadowed by the activities following our tragic event in Kumtor in December, and then a terrible accident that took place at Kumtor and took the life of one our operators in February. We've done a lot of investigations and analysis to understand what we are doing wrong. And we've taken and will take even further action to greatly improve our safety throughout the company. We did have a number of positive milestones that Scott referred to. At Thompson Creek, we did achieve 5 years without a LTI. And just recently, at Öksüt, very commendable to go through construction and commissioning on April 19, they achieved 1 year without a lost time injury. On the production front, we had a strong quarter with producing 190,474 ounces of gold, and we produced 20.1 million pounds of copper, our all-in sustaining cost was $712 per ounce sold.

For Q1 2020, at Kumtor, Kumtor continues to produce at a steady rate. We are feeding ore from our stockpile. The performance remains similar to quarter 1 -- sorry, quarter 4 of last year, with Q1 producing 152,307 ounces of poured gold at an all-in sustaining cost of $644 an ounce. We restarted mining operations in the last week of January after getting all the necessary permits and approvals and continued to strip cut-back 20 in the central pit. We are working with experts and the government to return to the waste dump development of the Lysii Valley, which will help us increase our tonnes per day mined going forward in the second half of the year.

Kumtor worked closely with the government officials, and to date has been successful in managing the negative effects of COVID-19. Specifically, we reduced turnover at our camp, at our mine site and postponed any nonessential work, but it did not overly affect our activities. Kumtor did generate $96 million of free cash flow in Q1. At Mount Milligan, we achieved a solid mill throughput average of 53,527 tonnes per calendar day as we did have ample water to run at full capacity. We had some difficulties the quarter we with wet ore, which at times slowed the throughput. But in the quarter, we produced 33,681 ounces of gold at an all-in sustaining cost of $901. And copper production was 20.1 million pounds produced.

Our Q1 higher mill throughput was offset by lower grades, partly due to sequencing of the ore and subsequent lower recoveries that came with the lower grade ore. We had very good success accessing a nearby aquifer water, and we continue to build our water reserves in the TSF.

Milligan did take a 2-week mill maintenance shutdown at the beginning of April, which helped to give us the ability to do some social distancing at our camp and accommodate employees and contractors who were self quarantining. The plant is back up and running at planned rates, and the team is working to bring the mining back up to full activity. Overall in the quarter, Milligan did generate $22 million free cash flow. At Öksüt, as Scott indicated, construction was 95% complete at the end of the quarter. First gold was poured at the end of January and their gold production of 4,486 ounces for the quarter, and we are on track for commercial production in Q2 of 2020.

If we go to slide 10 to our operational key focus. So for 2020, we'll continue to work on improving our safety performance with a special focus on reducing fatality risks at Kumtor and throughout our operations. We will also further develop our critical controls, improvement plan and controls over critical risk.

At Öksüt, we are ramping up the commercial production in mine tonnes, crushed ore placed on the heap and our ADR plant running as designed. We are now near 100% of the planned construction. By the end of Q1, we did have 386,000 tons under irrigation and a very large stockpile of ore waiting for crushing and placement. But due to a COVID-19, we did voluntarily stop mining activities on March 31, up until April 15, but we kept progress of putting ore on the heap and the ADR running during that downtime.

At Mount Milligan, the spring melt commenced getting -- we're getting robust water flow, and it's all being collected into the TSF. For 2020, the Milligan team is focused on achieving consistent and improved mill throughput and recovery and getting a stronger handle on our mechanical availability of the plant. The operating team is also taking steps to improve our cost performance throughout the company. We are taking advantage of some of the lower commodity prices to build our inventories. At Milligan, we are flattening the organizational structure, scrutinizing rentals and all contracts as well as improving mine productivity.

Kumtor is on track to deliver an updated 43-101 in the second half of 2020, converting measured and indicated resources into reserves and showcasing an extended mine life.

Finally, we continue brownfield exploration plan to $32 million company-wide and that Kumtor specifically $20 million for 2020.

If you go to the next slide, Slide 11. These are photos again of Öksüt last fall, of the heap leach pad and facilities. Due to COVID-19, we voluntarily took a 2-week shutdown at Öksüt, as indicated. We'll continue to stack ore and irrigate it and running the ADR plant. But on April 15, we did ramp back up to full mining production to our normal activities. Now I'll turn the call over to Darren.

Thanks, Dan. Good morning, everyone. For those following on the slide deck, I'll be speaking initially to Slide 13. During the quarter, Centerra recorded $374 million in revenue. This consisted of $299 million in gold sales, $33 million in copper sales and $42 million from the molybdenum business unit.

In the quarter, we sold 203 (sic) [203,258] ounces of gold, 160,000 ounces attributable to the Kumtor mine and approximately 40,000 ounces from the Mount Milligan mine. An overall 3% increase in gold sales compared to the prior year quarter. It should be highlighted, though, whilst gold production was slightly up at Mount Milligan compared to the prior year quarter, we were processing material with a 40% lower gold head grade at 0.37 grams per tonne.

We also sell 20.4 million pounds of copper, the increase in copper production compared to the prior year quarter, driven by mill availability. Our net earnings of $20 million was recorded in the quarter this included a $26.4 million noncash adjustment to our closed site asset retirement obligation. The expense is associated with the movement in the underlying discount rate with a reference to U.S. treasury bonds. There was no change to the underlying activity required to remediate the properties. The adjusted earnings after factoring in the noncash asset retirement obligation expense was $46.4 million. The adjusted earnings per share for the quarter was $0.16.

Just move to Slide 14. From a consolidated cost perspective, Centerra in the quarter recorded an all-in sustaining cost of $712 per ounce. At an asset level, Kumtor recorded an all-in sustaining cost of $644 per ounce, whilst Mount Milligan recorded an all-in sustaining cost of $901 per ounce for the quarter.

Once Öksüt achieved commercial production, targeted in late Q2 2020, the company will commence reporting its all-in sustaining cost metric. For the quarter, Centerra generated $121 million in cash from operations, and $77 million in free cash flow. As noted in the bottom left-hand table, Centerra transitioned during the quarter to a cash net of debt position of $58 million, with $558 million in liquidity. In the quarter, the company paid off its higher cost project financing facility associated with the Öksüt mine.

Centerra at the end of Q1 elected to utilize the corporate facility as a precautionary measure to COVID 19, ending the quarter with total cash of $194 million. We expect to repay a significant amount, if not all, of the outstanding corporate facility in Q2. On Slide 14, I would also refer you to the bottom right-hand chart. Some key cash flow commodity drivers of our business, gold, obviously, and with copper down but only representing 10% of our consolidated revenue.

Diesel and ULSD and Brent index are a good proxy for our diesel price movement. The other important cash flow drivers, not noted here, are the Canadian dollar and the Kyrgyz som. They are favorably lower by 9% and 16%, respectively. These overall key positive commodity and FX movements to our business are expected to be realized in subsequent quarters. Finally, we remain well positioned as we enter Q2 with a significant value on surface, notably at Kumtor, where we finished the quarter with 932,000 contained ounces of gold on surface in stockpiles. Whilst at Mount Milligan, ending the quarter, we're just under 2 concentrate shipments in inventory. The concentrate on hand containing approximately 85,000 ounces of gold and 18.6 million pounds of copper. Given the financial strength of the company and current and projected performance from our 3 mines, the Centerra Board elected to declare a CAD 0.04 dividend for the quarter.

With that, I'll pass it back to Scott to close out.

Thanks, Darren. Just on Slide 16. So just to wrap up, I think as we've reported, it was a notable quarter just in terms of the company-wide gold output profile and the low competitive all-in sustaining cost profile. In terms of the first bullet point here, you would note that we're maintaining our guidance for the year and guiding for gold production of up to 820,000 ounces of gold and all-in sustaining costs as low as $820 per ounce. I think the other key highlight this year is we're hoping to be increasingly showcasing our third operating gold mine Öksüt in Turkey. And again, as we move forward over the course of this year, we'd be expecting to see progressive increases in terms of gold and in terms of Öksüt's gold output profile. I just want to highlight the second last bullet point. We're continuing to invest significantly in terms of our brownfield exploration programs. You would have seen earlier this year, we've had a lot of success at Kumtor, specifically so where we reported that we have delineated an additional 3.2 million ounces of measured and indicated resources. One of the key objectives for this year that we're now working on is looking to prepare a new 43-101 technical life of mine plan for Kumtor. And with that initiative, we'll be looking to bring a significant amount of this measured indicated resource into reserve category. I'm hopeful that, that's going to allow us to demonstrate and showcase an expanded open-pit reserve mine life at Kumtor, which will be fantastic. The chart on the top right, I spoke to this earlier, we're in a good gold price environment, as Darren and I mentioned, we're seeing a very favorable economic environment just in terms of some of the devaluations that we've seen in the exchange rates, in terms of the jurisdictions where we operate or likewise, in terms of the diesel fuel price environment. I think that positions us well in terms of our free -- company-wide free cash flow profile as well as our profitability moving forward.

With that, I'll look to wrap up the call there and move it into Q&A. So if I can pass the call over to Maria, our operator, please.

(Operator Instructions)

We do have a question from the line of Daniel McConvey from Rossport Investments.

Just so you know, I think a lot of people got booted off the webcast for about 15 minutes into it. Two questions. Maybe, I guess, first one, mainly for Dan. Dan, at Kumtor, just can you give some more detail just what the situation is with COVID in the country and at the mine site? And for new people coming in, can you go with the quarantine system, et cetera, right now.

Certainly, Daniel. Actually, this country has done very well. They did go into a state of emergency in 3 of their cities, where we have 1 of our head office. But in the region, where our mine is, there was no cases of COVID and there -- in the regional city there, it only hit a peak of about 6 cases. So we did lock down employees for 4 weeks, minimum, some stayed a little longer. And then we've started doing shift changes by bringing people into quarantine and then bringing them up to the mine site after a period of time. But all of those were coming from areas where there was no virus. So we've been very fortunate at the Kumtor mine to operate substantially normally. We did reduce some activity just so we wouldn't have to bring in full complement to people. But we did stop all expats' travel in and out and -- but that was back in early February. And we continue to monitor it very closely. We're just now starting to look at testing people that are from the city of Bishkek because we have a number of technical experts. And we're looking at utilizing the government tests that take about 3 days to get the results back. And if people test negative, then we would put them into quarantine for 1 week and then let them go to the mine site.

Where do you quarantine them, Dan? Do you quarantining them in the city or the mine site? Where do you do it?

Well, when -- well, both. For the ones that we were quarantining early on in the first, say, 6 weeks of the epidemic, the -- we were doing it down at the lake. It's about 100 -- an hour and 20 minutes from the mine site and just at resorts and putting people in groups of about 20 to 30 in different resorts. Now that we're doing testing from the city...

Okay. That's great. Second question, Scott, for the technical report coming out at Kumtor, it should add reserves, et cetera, for new resources. Is it -- could it significantly change the mine plan over, say, the next 5 years? 2 and 3 years? Or is it mainly going to be beyond the current mine plan?

Yes. Thanks for that question, Daniel. Dan, do you want to take that question?

I certainly can. Daniel, the current 43-101 that we're running on sees us mining at full activity until 2023 and then feeding stockpile or dropping down until 2026. With the addition of ore, the goal is to run at the state we are now and add additional life to the mine. So it would affect the next 5 years because of those latter years and 2023 onwards.

Okay. But not necessarily the next 3 years much?

Our goal is to stay at our current level or thereabouts.

There are no further questions at this time.

Okay. Thank you, operator. Thank you, everyone, for joining the call. I know it's a busy day, lots of other results coming out, and we have our Annual General Meeting later this morning.

So we wish to thank you for participating. And if you have further questions, we are all available by e-mail to answer those questions. Thank you.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.