Kinross Gold Corp (KGC) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Kinross Gold Corporation Fourth Quarter and Year-End Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a Q&A session. Instructions will be provided at that time for you to cue for questions. If anyone has any difficulties hearing the conference, press star zero for operator assistance at any time. I would like to remind everyone this conference call is being recorded. I will turn the conference over to Mr. Robert Buchan, President and Chief Executive Officer. Please go ahead, sir.

Good morning, all. I have to comments and then we will open it up for questions.

First of all there's a few comments I would like to make on the earnings. We had initially anticipated we would have a small profit in the fourth quarter. A number of issues affected that. First of all, in our annual review of our closure obligations, it became clear that we, as an industry and us as company, we're dealing with regulatory inflation, and that to properly reflect that, we should take a charge for a closure cost of a further $7.7 million which went to the income statement.

The second impact was, we had raised, in the early part of the year, some flow-through share funding that was primarily designated for Timmins Aggressive Exploration Program. Once the joint venture was completed, we were, from a tax perspective, unable to use those funds to complete the exploration program that we had planned, it wasn't able to be done through the joint venture. So we had -- we still had an exploration commitment in Timmins and we had then flow-through share funding to spend so we got involved in a number of other projects which resulted in our exploration budget in the fourth quarter being substantially higher than it was planned to be or we would have liked it to be. However we have had some success and we will discuss that later.

The third point was the production Russia was about $14,000 below plan. That was a deliberate change. As you know we went through a fairly difficult period in the fourth quarter. Resulted in all of our exploration efforts in the Birkachan area stopping and the planned underground exploitation of the remnant Kubaka ore was expected to start in the fourth quarter. It did not start in the fourth quarter. We held off until we resolved the issues which as you may know we are now at 92%. We expect by next week to be at 98%, and the hardware for the underground effort is currently on its way to the mine, and we should be starting to do that in the -- by the end of the first quarter.

The fourth impact to the income statement was the performance from the joint venture with Placer and Timmins. We had been told a budget of $190, it came in at $224. We are extremely uncomfortable and unhappy with what has happened there. When we started the joint venture the combined work force was around 728, 730. We closed our mill, which is approximately 30 people, and we're currently right back to where we started from from a staffing perspective. So we've seen no benefits from the synergies. To a large extent the hourlies that were laid-off have been replaced by staff. We are having an ongoing dialogue with Placer. There are some other issues, the maintenance performance in the fourth quarter, the grade in the fourth quarter were also affected by a poor result. So we are very unhappy. We are continuing to express our discomfort to Placer, and hope that we can get this revolved in an expeditious manner.

The next thing I want to talk about is the -- had all those things not been in place, we would have actually shown a profit in the fourth quarter. So I think we are fairly close to getting these issues behind us. Clearly the financial results that we're showing in the fourth quarter are not truly reflective of the new company. Unfortunately, we are in that environment where we have to show the old Kinross independently because the transaction didn't close until the end of January which, obviously, also means that the first quarter results, when they are reported are going to be a mix of two-thirds of a full quarter as opposed to a full quarter, and the change in the Russian ownership and so on. But what I am confident in telling you, is that the second, third and fourth quarters should be at a running rate of about 2 million ounces. When you look at the reserves one of the issues of clear concern is that's about six years -- between six and seven years of reserves, however looking into '04 and '05, about 15% of the production in '04 and '05 will be coming from resources that are not showing in the reserve table, particularly in Russia, the Emanuel Creek and the expansion of the Refugio. So if you take the existing operations with the reserves, it's about eight years. However, it is going to be a key focus of our efforts in 2003.

We have established our ability to maintain 2 million ounces and our focus will be with the financial capabilities we have to substantially increase our reserve. In that regard, we have, in the past, had an expiration review early in January. That wasn't able to be affected this year. But on Thursday, March 27th, we're going to have an exploration roundup, and in that we will do a detailed review of the Russian exploration, Emanuel Creek, the impact of the reserve calculations at Refugio, as well as the exploration opportunities that we have at the main operations in our portfolio. Those were the key focuses I wanted to mention.

The only other point talking about Fort Knox, it was 4,000 ounces below budget on total costs were on budget. The impact was somewhat higher hard ore. We hit a patch of hard ore and it contained the production in the quarter. However, the Holly fleet is in place, the improved pit equipment is in place, and we anticipate no issues in 2003 with the program at Fort Knox and at all the other operations, for that matter. So I just wanted to cover those key issues because they are relevant and, I think, of concern to me. And I think with that opening remark, I leave it open to any and all questions.

Thank you. One moment, please. Ladies and gentlemen, we will now conduct the Q&A session. If you have a question, please press star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be polled in the order they are received. If you would like to decline from the polling process, please press star followed by the 2. Please insure you lift the hand set if using a speaker phone before pressing any keys. One moment, please, for your first question. Your first question comes from Kerry Smith, Haywood Securities. Please go ahead.

Good morning, Bob. How comfortable are you with the $210 cash cost estimate for the Timmins joint venture for this year that you've talked about? And what's the status of the mining relations for Birkachan?

Okay. One thing I should have mentioned in my starting comments is that the resource table that was not included in the press release because we are doing them on the same basis that Newmont has done them at $325 and we'll have them available at the March 27th meeting. Back to your specific questions. I'm not very comfortable with the operating costs. We are having an ongoing dialogue with them to resolve some of these issues, and hopefully they can be resolved. The operations certainly can deliver the operating costs and better that are being presented, and it is our -- our intention to make our views known to the operator. As far as the Birkachan license is concerned, we would expect that in a few weeks. All the paperwork is done. We don't anticipate any issues, everyone seems to be in favor.

Okay. Just sort of a general comment on the Timmins joint venture. How have you found your relationship relative to where it was, say, 9 months ago, I guess? It sounds like, obviously you're finding it somewhat frustrating, but just in general?

The phrase I've used in discussion with them is they are unfailingly polite, but ultimately unresponsive.

Okay. Thanks.

The next question comes from David Merrill with Scotia Capital. Please go ahead.

Thank you very much. I was wondering if I could ask some detailed questions on Fort Knox with regards to how True North is going with regards to grades, tonnages, et cetera and the recovery seemed a bit low this quarter. Any comments on that?

Sure. This is Scott. First I'll answer the True North question. The grades at True North were actually a little bit higher than the ore reserve model. So year-end 2001. They're -- the recovery issue you're referring to, Bob mentioned the hard ore, we slowed down -- consciously slowed down the amount of through-put. To improve recovery we couldn't push it because we weren't getting the grind. We had to slow it down. That's really the cause of the shortfall announces when you talk to our forecast and budgets.

What about recovery?

It's 2 percentage points off but it's right back up when we slow the mill down.

It came in at 84%.

The plan was 86.

Was it 86 now?

Yes.

Any views getting back into the low 90s?

As soon as -- with the True North blend the low 90s is Fort Knox alone. If we were just to run Fort Knox which is all oxide, we would be in the low 90s. True North is oxide with some sulfide component. It lowers our recovery, depending on what blend, but it will lower it into the high 80s.

And what was the grade coming out of True North on the quarter?

'05. .05 ounces per ton.

Okay. And so given that everything was slowed down, that's why the unit costs for money and milling went up, obviously?

Exactly.

I'll let someone else get on. Thanks.

The next question comes from Harry Cooper, CIBC World Markets. Please go ahead.

Good day, gentlemen. Just on Fort Knox, I missed the first part of the call so you may have addressed this. The haulage fleet that you purchased, was that part of the capital you spent in '02 or is that something else?

Brian, want me to take it? First off the haulage fleet there's two sets of equipment. First, the ore haulage fleet that transports the ore from True North to Fort Knox which is operational and working grade, and then we also added additional haul trucks in the Fort Knox pit, okay? The capital for the ore haulage fleet was this year. IE the trucks from '02 -- excuse me from '02 the trucks that haul the ore from True North to Fort Knox was in 2002. The haulage fleet in Fort Knox is in 2003.

Okay. Good. Bob, just wondering, you know, virtually every other company out there reports silver by product credits against their cost whereas you're continuing to use the gold equivalent basis which hurts your cash cost number, but increases your gold production number. Any thoughts of changing that?

Um -- first of all, with Liquiapa (ph) having a significant silver credit going forward, to report it on a net of by product basis is, you know, significantly reduces the cost. And I think the most beneficial way to report that operation is on an equivalency basis, and the rest of our operations, as far as silver equivalent is really not meaningful so it doesn't distort the cost.

I was just wondering whether you had different costs.

Yeah. That's the reason.

Okay. Then just a clarification on your blanket costs. The 9 months number was $272 total costs, Q4 was $268, but somehow the year is $243?

That's a tough one because there are certain credits you get over there with the gold price scheme that, you know, reduces the -- actually increases the Zimbabwian exchange rate. So it's a funny one, and I could explain it to you for about an hour, so why don't we do that offline.

Okay.

Harry, all I suggest is you take the cost at face value. It's bizarrely complicated, and from our perspective, our general manager is doing a hell of a job keeping that thing viable with the difficulties. Actually we got money out of the country last year, which was remarkable.

Right. Given everything else, that is a feat. Bob, did you talk at all about Noah?

No, I didn't, for no reason. What I -- what we did talk about was the fact that we were going to have an exploration review, a detailed one at the end of March. Given the size of the company now, it will be a long one, but there's a lot to talk about, and we would review Noah at that point. We may even have the holes drilled by then.

Oh, yes. Yes. Should.

We expect to have the holes drilled by the of March so we will be able to review them.

Yes.

Thanks a lot. Thanks for the question.

Next question comes from John Bridges J.P. Morgan, please go ahead.

Good morning, Bob, everybody. I just wondered, I'm perhaps a bit ahead of myself again like on the exploration, but the reserve base that Ryan Mountains falling off actually quickly now, I know there's exploration potential there, I just wondered if you had any sort of comment you could make on that?

Actually, John, that's a very good. Thank you for that. That wasn't a planted question. The problem with Ryan Mountain has been that Echo Bay was the manager, was the operator of the property. They had a relationship with Barret which was highly stressed for the prime reason Barret wanted to expand the exploration program aggressively and Echo Bay who had tight financial restraints resisted and were able to resist because they were the operator. I have already had the conversation with Alex Davidson and we have collectively agreed to crank it up and they are working on that program right now. You'll see a much increased exploration budget both to bring Gold Hill to reserves, to look at the lower part of the pit where there's some very exciting exploration potential as well as the ground between Gold Hill and the main pit. There's no question there will be a very substantial increase in the budgets at Ryan Mountain to reflect just the fact that there's a life issue and there's a lot of exploration potential.

Excellent. That's what I wanted to hear. Thanks a lot.

The next question comes from Mike Curan, Merrill Lynch. Please go ahead.

Good morning, gentlemen. Couple quick questions. Can you give us a break down of the $74 million of cap ex forecast for '03 as well as possibly some guidance on the effective tax rate for '03 post consolidation or merging?

People are going to flip the pages here to get to the detail for you, Mike, so just bear with us.

Sure. As far as the tax rate's concerned, you know, we are primarily taxable in three jurisdictions. Russia, Chile on the Laquiapa (ph) property and Brazil on our two joint ventures there. Everything else we have lots of shelter available to shelter taxes up to and through $375 an ounce gold prices over the near foreseeable future. So looking at next year, 2003, you know, our planned taxes are roughly $9 million of which $4 million and change is at Kubaka and the balance is split between Laquiapa (ph), Kreshan (ph) Brazilian .

Great.

Cap Ex.

Cap ex, Fort Knox, you have the number right there, Brian, right?

Yes.

Why don't you read the number and I'll explain it.

As far as capital expenditure the $74 million, $16 million is that Fort Knox?

That's primarily -- we talked about the ore haulage fleet and a loading unit and a tails dam lift.

Porcupine venture is roughly $7 million.

That's replacement capital and some capitalized explorations and drift development at Hoyle Pond.

Refugio $22 million.

Refugio, $22 million that assumes we're working on a feasibility study right now, internal decision document with Bema that will be completed mid year. The $22 million assumes that Refugio would -- a positive decision would be made to restart that as a heap leech mine and that's our share of the capital required mining fleet modifications to the existing plant.

The next two big components are Round Mountain, $7.4.

Round mountain $7.4 is in-pit drilling that Ron will be talking about in a month or so, capitalized or reserve type stuff, as well as equipment.

And Kettle River about $7 million.

Kettle River, that $7 million is development of the Emanuel prospect, or resource that we are driving to get to right now. I'm very close to the K-2 workings, a thousand feet away and that's just development cost, the utilities getting the services there so we can begin mining that in early 2004.

The balance is just automatic all over the place. Kubaka is a mill and a half.

Great. Thank you very much.

The next question comes from Chris Thatcher, President Investor. Please go ahead.

Hello. Good morning, gentlemen. I would like to -- can you hear me?

Yes. Can you speak a little louder, please?

I'd like to -- I don't have the annual report. I just read the news release of last night and I have two, three small questions. Towards the end of the news release there was a mention that you are in the processes of issuing 177 million shares with a fair value of so many million dollars. What is that, secondary issue?

No. That is the -- that was the subsequent event that dealt with the combination, and those shares have been issued to reflect the combination of TVX and Echo Bay.

Oh, they have been?

Yes.

Maybe I didn't read the proper wording. Secondly, since we know that the Canadian dollar in the foreseeable future is going to be stronger, do you all have some options on the currency side?

Yeah, we have roughly between Kinross and Echo Bay, we have roughly $60 million Canadian dollars hedged going forward at an exchange rate of roughly $158. So that represents, basically, 40% of our commitment for the coming year. And obviously in light of the current situation, we are going to assess what to do going forward.

And what is it your company's forecast for the spot price of gold on an average for the next 12 months?

We are budgeting -- we are using a budget of $325 gold.

And do you all have some sort of a gold relation of every $5, or every $1 of spot price to the cash flow situation?

$25 change in the price of gold translates to a 28% change in cash flow. 28% in cash flow. Okay. Thank you very much, gentlemen.

You're welcome.

Ladies and gentlemen, if there are any additional questions at this time, please press star followed by the one. As a reminder, if you are using a speaker phone, please lift the hand set before pressing the keys. The next question comes from Tanya Jackson, National Bank. Please go ahead.

Hi everyone, I think that's me.

I think that's you, Tanya.

I just wanted to ask a question on the 2 million ounces. I can get the 1.7 million ounces, and then obviously Birkachan we had Aquarius coming in in 2004 and Refugio to bring us close to the 2 million ounce mark.

Are you including Kettle River?

No, and that's probably a bit more guidance on Kettle River and where does Aquarius stand at this point?

Aquarius is not in that.

Okay, so Aquarius is not in there.

The prime changes -- the first thing you have to reflect is the change of ownership in Russia.

Mmmm-hmmm.

The 98%.

Yep.

So we have a budget of about 190 thousand ounces for '03 in Russia.

I have.

Going forward that's about 150.

150 and 204. Mmmm-hmmm.

In '04 you can take roughly 100 at -- um -- um -- Kettle River.

Okay.

And 100 to 110 from Refugio.

100 to 110. Okay. Bob, any costs associated with that? Cash costs?

Well, the first two are well below 200 and the third one would be about 220.

220. Okay. Okay. I think that's going to help me a bit. Okay. Thank you.

Okay.

Next question comes from John Tumazos, Prudential Financial. Please go ahead.

I apologize if I'm not familiar or current with this development. Is your gold price basis for your reserves 325 at year-end '02? And you made some reference to Newmont which I think used 300 when they published the other day.

No, what I was saying, John, our reserves are at 300, our resources like Newmont are at 325.

As a matter of business philosophy, do you value the reserves that become economic between 3 or $400 gold, or are you wary of them because the gold price is volatile and they could become low return reserves if price retreats?

Well, I'm not sure I got the question, so if I'm going off on a tangent, stop me. We are in a difficult situation, the industry, where we were constantly reducing the carrying value of our reserves and taking writedowns all the way down as you know, and we are now in arising environment. Now when you've been at a 250 level for as long as we were, you are intellectually reluctant to follow-up it up quickly. We are doing $300 gold, I think is too low but it's what it seems the industry wants to do and we are starting to look at resources a little higher priced than reserves. From a business perspective, John, I'm still fighting the last battle in terms of, you know, the low prices and the impact of that. So I am very reluctant to get aggressive with reserves or resources at this point. I don't know if I'm answering your question.

No. No. The issue of philosophy is, in terms of fighting the last battle is important. I don't think that's a derogatory phrase, Bob, I think what we don't want to do is be like the old Echo Bay company five, ten years ago that ended up with deposits that were good deposits at 400, and not deposits at 300.

Clearly. And what -- the two issues that I believe are important for this company is one, to underline its ability to do 2 million ounces from its existing portfolio, to be able to justify that in an ongoing basis by having a reserve base to support it. Those are the two issues that are most important to me in '03. That would not indicate that you're going to go out looking for resources that are at much higher levels than we're at today.

Thank you, Bob.

You're welcome.

The next question comes from Haven Holderly, Solomon Partners. Please go ahead.

Good morning, Bob. Just a couple of quick questions. Tanya asked most of the questions that I actually had but --

Could you pick the phone up?

Sure. Just a couple quick questions. Tanya actually touched on most of the questions that I had, but with regards to Kubaka and the 150 ounces I guess coming from Birkachan in 2004, how much additional capital costs would you need to get there? You stated $1.5 million in cap ex attributable to Kubaka this year, is there a significant amount attributable that will also be necessary in early 2004?

Actually, it's a huge $2 million.

Okay.

Winter road upgrade.

Okay. So that's primarily --

It's not a big deal.

Okay.

Obviously -- what we would like to do, when we get the license, we will move the iron over to Birkachan.

Mmmm-hmmm.

We will get the permitting issues settled off which are not stressful, they are structural, and be in a position to mine late this year and then on the winter road, move that material over to the -- to the mill. We have some lower grade stockpiled ore that will be blended. We'll produce 150 thousand ounces in '04. Into '05 we have the third component which is Zocol, which would -- we have -- what kind of dollar number do we have for that?

It's about $16 million.

16? To put Zocol into production?

Equipment and development.

Right. There's, right now, about a 200,000 ounce C-1 category reserve on that property.

Resource.

Resource, sorry. That's my conscience talking. And we're drilling that and getting excellent drill results, and we would anticipate that that project would be at a much -- as you'll see at the end of March when we show you the drill results, the -- we only have Birkachan in the plan for '04 and '05 we don't have Zocol in there yet, but the numbers are very powerful at this point because the Zocol property is actually between the Kubaka pit and the Kubaka mill. So we're a little bit at -- in the development stage of what we can likely do in '05, but at the very least it will be 150. Some surface stockpile, some from Birkachan in '04 and '05 and possibly higher in '05 if we decide to put Zocol into production which I think is highly likely.

I guess the last question would be, Bob with regards to Kettle River you mentioned 2004 100,000 ounces at under $200 an ounce. What would it look like in 2003?

Well, at this point, we're saying the same.

No, 2003 he said.

Sorry, nothing. Nothing.

Okay. So no contribution at all this year?

No. Nothing. It's closed down.

Okay. Fair enough. Thank you.

Next question comes from George Tupins, Sprout Securities. Please go ahead.

Hello everyone. Bob, could you talk about the changes in the reserves at the Fort Knox specifically the dropping out of the Ryan Lode into resources, and on the new drilling which added 300,000 ounces and I'm interested in the grade, particularly the overall grade that declined slightly.

Yeah. The -- first off on the Ryan Lode, with our recent experience in haulage costs, we increased the operating costs from Ryan Lode, hence it was moved from an or reserve at $300 down to a resource so it's economic at 325, but at 300 it is not. That's why Ryan Lode was moved. Fort Knox drilling, we mined slightly higher grade at Fort Knox during the course of the year. The ounces that went in were about an average grade, and that average grade is 028 ounces per ton.

No, wait.

Excuse me.

I'm talking grams. .82 grams per ton, I think is the average.

Yeah, .82 grams per ton, sorry, which is about 02 -- well, you do the math.

I see. And the higher grade, how long could that be sustained for?

The higher grade --

At Fort Knox.

That's a combination of as long as True North is in production and you got the numbers there, which is essentially all of 2003 and part of 2004 with what we know today, and Fort Knox we are essentially mining it at average grade from here on out. Good. Thank you.

You have a follow-up question from David Merrill, Scotia Capital. Please go ahead.

Hi, thanks a lot. Two questions. One with regards to Kubaka. Is there an amortized component of the deferred stripping coming into the cash cost now?

We don't defer stripping, so the answer is no.

Okay. Perfect. The second one is, with regards to Hoyle Pond. Given that everything is amalgamated into the joint venture now, any details with regard to how Hoyle Pond is doing?

Hoyle Pond, itself, as you know had a phenomenal first half of the year.

Yep.

Before the merger. And basically on plan, had some issues with some sequencing in stokes in Q3, and part -- just again in sequencing, but the grade is there. Had a very, very outstanding December on a stand alone basis. Part of the difficulty we face on grade, as you can imagine, we now have three ore streams. Hoyle Pond underground, home underground and dome open pit. Difficult to assess, we do the best we can, who's doing better on grade or not but it sure looks like Hoyle had a very, very good year on ounces and therefore total cash cost per ounce.

So it's -- is it difficult to actually, perhaps estimate how it actually did in the last quarter?

No. I mean just that, you know, there is some slop when you have three feeds, but we feel that the Hoyle Pond, actually performed better on grade if you were to compare it to a stand alone basis.

Okay.

Taking the mine samples. The regular sampling we have always done and always will do.

It's always been somewhat challenged with regard to what the actual reserves are given it's an underground mine. Any views to where we can perhaps push it for the next couple years with regards to its underground reserves? And this is a qualitative question.

I think you might be able to double that reserve. Again, Ron Stewart will be talking about the exploration there, and part of the key component is underground at Hoyle.

Mmmm-hmmm. So the feeling is Hoyle underground is carrying more than its fair share of weight right now?

That's my feeling.

Okay. Thanks.

You have a follow-up question from Tanya Jackson, National Bank. Please go ahead.

Did you get married?

Hello, Miss Jackson. Could you please check your mute button.

Hello.

Did you get married or something?

That's what I keep hearing. Are you there?

Yes.

Sorry, Bob just a follow-up I forgot to ask on Kettle River. Are you going to need a permit to basically mine what you're looking at at this point, or do you need an amendment to the permit?

No. No amendments, nothing. We can go into production.

So you have all the permits in place to go ahead?

Yes.

That's great. Thanks.

Mr. Buchan, there are no further questions at this time. Please continue.

I thank you all for attending. Clearly all we've really done is talked about a third of the company. And we're not in a position to talk about Ryan Mountain, or any of the TVX assets at this point. We will clearly be able to do that with the next conference call in the first quarter, and so the process is we are getting there in terms of being able to properly describe the company to you. The first quarter, again, will not be a full first quarter because unfortunately the transaction didn't close until the end of January. I'm very confident the numbers that you're going to see are going to be supportive of the support that we're seeing in the market place. I thank you, and have a good day. Good-bye.

Ladies and gentlemen this concludes the conference call for today. Thank you for participating and please disconnect your lines