Kinross Gold Corp (KGC) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Kinross Gold Corporation Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference press star 0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded Thursday, November 6, 2003 at 11:00 am Eastern Time. I will now turn the call over to Mr. Robert Buchan, President and Chief Executive Officer.

Good morning, everybody. With me I have a number of the executives with the company, and there are others standing by so we can answer whatever questions may follow out of our initial starting presentation.

First of all welcome to our third quarter report. I'm pleased to report our first quarterly earnings in quite some time. And while it would have been nice to show operating profits, there were issues that needed to be dealt with in the quarter, most notedly Lupin. In the third quarter Lupin accounted for 5.6 million of the 6.1 million operating loss, the bulk of which as I pointed out in the press release, is attributable to the severance cost.

Also our continued commitment to the water treatment plant at the Stratoni mine in Greece, while a permanent solution is being worked out, was a significant contributor to the $1.3 million cost for TVX Gold. We are confident that a permanent solution to this situation will be achieved this quarter.

And lastly our G&A cost have continued high as we work through the key issues of the merger and also the new regime of compliance. These costs will decline going forward.

Overall, our portfolio of operating assets, excluding Lupin, reported cash operating costs of $221, which is only 8 dollars higher than our budget. If you wanted to exclude actually the three operations which are peripheral, being Lupin, New Britannia and Blanket, the operating cost for the core portfolio was 217.

However, the key issue is that, not withstanding there were some operating costs that were higher than expected, the overall budget reflects the value of having a portfolio.

As you can see in our press release the expectations for the fourth quarter are for significantly lower operating costs and Scott will address the components of that in a moment.

Kinross has gone through a huge transformation over the past few years at the end of 2000 the company's obligations net of cash were $259 million U.S. By the end of 2003 cash net of obligations should be close to 200 million.

Over the past two years the company has become stronger by the quarter, this is particularly notable this year and looking into the fourth quarter, with Lupin closed, our convertible debt eliminated, operating cost lower, and metal cost higher, we are fully expecting strong operating earnings, and an excellent quarter in all areas. Currently Kinross Gold has a solid operating asset base and is poised to show production growth from its robust and increasing portfolio of projects. In that regard we expect the Crown Resources acquisition to close by the end of February.

And I will hand over the presentation to Scott.

Thanks a lot, Bob. I am going to talk about the several of the operations, their performance in the quarter, and what they are going to do for the rest of the year.

I am going to start with Fort Knox. Despite milling at 260,000 tons in planned gold production, as you can see from the press release was 3900 ounces below plan. True North ore tonnage process, transport of [INAUDIBLE] process into Fort Knox was as per plan.

Production was below expectations, primarily due to two reasons, the first I'll talk about is head grade. Head grade was below plan. The actual grade was 1.005 grams per ton, or 4.6% below plan. Although mining occurred in planned areas at both Fort Knox and True North pits, grade shortfalls were realized in both pits. This localized short term issue at Fort Knox and True North is a short-term issue like I mentioned. The ore reserve model at both mines have excellent reconciliation over the quarter and the year and for mine life.

Detailed mine plans show that the fourth quarter mill head grade will increase by approximately 12% over the third quarter grades. The average grade, again, at both Fort Knox and True North are higher for the period.

Recovery was below plan due to higher than expected sulfide contact in True North ore and higher than planned mill through-put, I mentioned the 260,000 tons. Overall recovery was off by some 5%. The high sulfide True North ore occurs in the deeper location and deeper pockets of the pit. This material can affect the overall planned recovery both for Fort Knox or/and the True North ore, they're blended, so it can affect the recovery of both ores, both the large tonnage and the lower tonnage from True North. The fourth quarter mine plan not only shows a higher grade, but the mining is more selective, we are mining in an area of the True North pit that doesn't have the sulfide problem, so the recovery should improve back to the expected levels.

Increased mill through-put of course results in slightly lower recovery. But these recovery losses are minimal and are more than offset by the production gains, more ounces at a slightly lower recovery but we will continue to push through put as the year goes on for next quarter.

Fort Knox, looking forward, the detailed mine plans show that a significant improvement in fee grade will occur, about half of this material is already drilled and blasted, so we have blastal assays back on the material. The mill processed 260,000 tons above plan in the third quarter and it will exceed plan tonnage in Q-4 and will meet our recovery expectations. Fort Knox should produce about 116,000-ounces in the quarter, the fourth quarter, at a total cash cost of approximately $205 an ounce.

Moving on to the Lupin mine, sadly operations were suspended at the mine due to economic conditions and poor financial performance. You've seen the numbers. Presently detail engineering work and we're examining the various mining alternatives for extraction of the pillars, both the shaft and crown pillars, and some of the developed remnant ore that exists in the mine. This work will be completed by year's end and when we mine this material it will be integrated with the final reclamation plans and the work that we need to do up there.

New Britannia, obviously New Brit continues to struggle, primarily due to encountering fewer than anticipated tons of ore at depth. The grade is as we expected but we are just seeing far fewer tons, so therefore far fewer ounces. Presently all viable options for the operation are being re-examined by the joint venture partners. We'll continue to look at all the operating alternatives and we will make a decision sometime in the future.

Finally a little bit about Brasilia, which is the joint venture with Rio Pinto as the operator down in Brazil. The mine produced 23,000-ounces to the Kinross account, at a total cash cost of $214 an ounce during the quarter. Production was impacted by low mill through-put which was due to hard ore, as well as lower than expected recoveries which were due to the sulfide content in the ore. The fourth quarter mining is scheduled to take place in areas of the pit that contain softer ore, i.e., the mill through-put will increase substantially and the same material has more favorable conditions for metallurgical recovery. It will allow for production to increase to about 28,000-ounces and cash cost are forecast to be $170 per ounce for the quarter.

Round Mountain had another great quarter, producing 97,000 ounces of total cash cost of $209 an ounce. Round Mountain is on track to have yet another record production year and we are obviously real excited about the performance of the Round Mountain team and the overall asset.

Fourth quarter production declined, primarily due to a draw down that occurred in solution gold inventories in the third quarter, we put new carbon columns on line that will enhance our overall metallurgical performance of the property on the heap leeches. So we drew down that inventory so it's not in the inventory for the fourth quarter.

And the press release mentioned a power problem that the utility down there had and it's creating a situation where we can’t run the mill, we can't run the crusher all simultaneously like we'd like to do and we are seeing a lagging effect of that. We have really pushed material on to the heap-leach pad and now we are going to be running mill as soon as that power situation is corrected. But that affected – that power outage is catching up with us in Q-4. We should be up to normal power loads sometime in this quarter. Again, Round Mountain is on track to have a great year and yet another record production year.

Porcupine, the mine had a good quarter, producing about 57,000 ounces, at a total cash cost of 204, that's the Kinross account, and the JV, really the improvement in the performance there is accredited to the team up there. Plasser is the operator, but they have really improved their performance and they are on track for the fourth quarter to produce about 55,000 ounces of gold at a total cash cost of about $217 an ounce.

A little note on Refugio. The pre-feasibility study is complete. The study shows very favorable economics. The project will be presented to the joint venture board, that's the CMM board, which is [Bema] and Kinross. And then it will be presented to the Bema and Kinross boards respectively and we expect approval by those boards during the quarter. Limited funding has been provided to keep the project on track. Detailed engineering work, some work in the field to keep it on schedule. The project is scheduled to be started up in late 2004 the fourth quarter of 2004.

Finally in conclusion the operating mines and the teams that run those mines out in the field are prepared to meet the guidance that we gave you today and we are excited about having a real strong fourth quarter.

That's all I have, Bob.

Thank you, that's our brief introductory comments. And we will now open for questions.

Thank you, sir. One moment please. Ladies and gentlemen we will now conduct the question and answer session. if you have a question please press star, 1 on your Touch-Tone phone you will are hear a 3 tone prompt acknowledging your request and your questions will be polled in the order they are received if you would like to decline from the polling process, press star 2 and please ensure you lift the handset of your speaker phone before pressing any keys. One moment please for your first question. Your first question is from Victor Flores from HSBC. Go ahead.

A couple questions. First of all on Refugio, I recognize you haven't presented all of this stuff to your respective boards, but can you tell us a sense of whether the numbers have changed a whole lot from what you had indicated previously?

No they haven't.

Thank you. And then on to Crown Resources, can you give us a sense of how you plan to integrate that with what you are doing at Kettle River and Emanuel Creek, in terms of what Crown has presented and how you would do it differently?

Clearly the single biggest difference is that we will be integrated when we own it, as a satellite deposit and the permitting issues relating to that are obviously significantly less relevant. We have in the room, Jerry Danni, who is our head of health and safety and environmental affairs. I'll ask Jerry to give us comments on the situation with Crown.

I can expand on that a little bit. We have completed a thorough, a permanent review of Buckthorn, and most significantly as Bob mentioned, there are synergies with Kettle River and also most significantly, it's underground that is being contemplated versus the previous open pit proposal. There has also been considerable technical and environmental baseline work that has already been completed. As part of that work we have not identified any impediment that it appears to pose any significant problems to us. Preliminary meetings with regulatory agencies and stakeholders at all levels have been very positive. We are also encouraged by the recent legislative changes in the state of Washington, which are encouraging more economic development. So again, we feel very confident that it can be permitted and it does represent some good synergies with Kettle River.

The plan that we would have, Victor is to when it is permitted to bring it into production at around 1,000 tons a day, and hopefully, we would be in a position to also supply from the Kettle River mine further feed, the mill has capacity for 2,000 tons per day.

I know it's a tricky question with permitting, but any sense of timing?

We are estimating the entire permitting process to take 18 months to two years. And it is well underway with Crown submitting their plan of operations, which obviously will be modified to represent the recent changes, but the supplemental environmental impact statement process is already underway, third party contractors have been selected we are confident we can do it within that time frame.

Great just one follow-up. What are the trade offs Crown was obviously thinking of building a mill there, which you won't need, so you will save that capital, but now you have to truck that stuff to Kettle River, what is the capital cost trade off there?

The difference, our preferred alternative, which would be to truck the material we would use a contract trucking like we did with Kettle River, so the difference in capital is probably $40 million building the mill and facilities at Knot. To put it in prospective, Victor, I think the Crown number was $55 million of capital, something like that, 50 to 55 million.

You are assuming what? 10 cents per ton mile or something like that for the haulage?

That's pretty close. And it's about 45 miles.

Excellent thank you very much.

Your next comes from Steve Butler from BMO Nesbitt Burns. Please go ahead.

Good afternoon gentlemen, could you give us a sense, Scott, of Q-4 through-put and recovery at Fort Knox as well as the expected long-term recovery at both True North and Fort Knox mill recovery.

Sure the Fort Knox through-put will be similar to the third quarter which was 39,700 metric tons a day. Recovery will be around 84%, which is a slight increase over the recovery we saw in the third quarter. And similar numbers for next year.

Okay. 84 is a good number for long-term planning?

As long as True North is in production once True North mines out, which will be mid to late 2004, recovery will go back up to the high 80s, 88 to 89%.

And, Scott, if I could ask you a little bit of a Musselwhite unexpected or unplanned contractor cost in Q-3 how much did that contribute to dollars per-ounce at Musselwhite, which again is a little bit higher than I expected.

I'd have to get back to you on that specific number if you give me a call I can look it up for you.

Bob, or anybody else. Kirwin, at LaCoipa, do you expect a resource update there this year?

Can you answer that?

Yeah. On Kirwin. they are working on a feasibility study right now on additional drilling, I don't know if we will get an resource update by year's end, but we are certainly going to try to have that accomplished. Initially, that was the estimate.

Okay thank you very much.

Your next question comes from Michael Fowler from Desjardins Securities.

On the Fort Knox, you solved the – you had a problem with availability I guess of trucks going from True North I believe to Fort Knox. Has that been solved.

The ore haulage issue, True North, the tonnage moved across was as per plan, so we solved the haulage issue despite record rainfall there over the quarter, we slogged it through the mud and got the tons across.

Okay. Second question, any updates, apart from Refugio about some of your projects in the pipeline, for instance, Lupin is on like I guess on standby, I guess, but Ulieu, George and Goose Lake and a whole number of projects that you have in the pipeline, Bob, any updates on those?

Well, we are as far as Kettle is concerned we are on plan to start shipping muck in December. We have all the permits for Berkichan. We would expect to ship muck there in the first quarter. The Brazilia expansion, we are waiting to see the final feasibility study, which should be very soon that will be constructed in '04 or '05 I believe.

So Pamour is feasibility study by Plasser reviewed by the joint venture will be released at the end of the year. And so construction is planned to begin in 2004. The Hoyle Pond Crown Pillar, which is the pillar obviously above the Hoyle Pond mine, we're hoping to begin work on that. The,feasibility studies should be completed shortly, and hopefully we begin work on that in 2004 as well. That's the pipeline.

Aquarius?

Aquarius, we've done some more work on it. It's still robust, it's just not -- it's not a priority. Not a current term priority. Basically we have Refugio, Kettle River, Berkichan. (multiple speakers) We had a lot on our plate right now, and Aquarius was not considered a necessary part of that to meet our production goals but it's like an '06 project. I would think. As is Kerupi -- we are drilling right now, and it looks very interesting.

Thank you very much.

Your next question is from Mike Jalonen from Merrill Lynch. Please go ahead.

I have a couple of questions.

Is this Mike Jalonen?

[Laughter] Thanks. Just soon to be in Australia. Round Mountain I notice the production is down in the forecast for the fourth quarter is that due to the transformer problems?

Partly due to the transformer problems and also in Q-3, in the third quarter, we added additional carbon columns to the system there to help with metallurgical recovery. We drew down the metal inventory in solutions, so that was a one time bump but obviously the inventory is down until we build it back up. I called it a lag affect when I was talking about the power. But you are correct, we were not able to run all of our process streams although we got the ore tons out there. We just won't be able to recover the gold – won’t be able to get as much gold out of it in the fourth quarter.

Will things are back improved in the first quarter of '04?

Absolutely, and quite frankly, if you know anything about Round Mountain, which you know you do they have a habit of exceeding their forecast day in and day out, so I'm optimistic for Q-4.

Maybe a couple questions for Brian if he's there. On New Britannia, your partner High River has, I guess, some sort of a non-recourse loan on the assets? And I guess it's held by you guys. I am just wondering what is going to happen to that if the mine were to close by year end '04, like they say in their press release could happen?

Clearly Mike, we are looking at all the documentation on that loan. We are reviewing the history behind it, understanding it and we'll be dealing with that in the fourth quarter.

What is the exact size of it? And is it on your balance sheet?

We have on our balance sheet about 10 million U.S. and it's in other long-term assets.

I guess talking to them, they say if the mine closes down it's sayonara debt.

Well, that's a point that will be debated.

Okay, can I be there too? [Laughter] I guess just a couple of other questions. You made a a nice pass on Mine Finders, will that be a gain in the fourth quarter?

Yes.

Is there any sort of size to it? What it will be.

10 million Canadian.

How about Endeavor?

2 million Canadian.

And I guess one last question. I was just going through your Capex numbers for the quarter, and came about 6 or 8 million short just going through each of the mines counting up the Capex. I am just wondering, was there extra spend in development projects or something? Can you give me a nice breakdown mine by mine?

A mine by mine breakdown?

No, you gave a nice breakdown, mine by mine of Capex, but adding up the numbers, I get to about 20 million but you spent 27 in the quarter, so I'm just trying to figure out where the rest of the money went.

We bought a plane in the quarter for roughly 6 million.

Oh. Okay, I'll fly away then, thank you.

Your next question comes from Ono Rutton for Scotia Capital. Please go ahead.

First of all on Pamour, the pit feasibility study at the moment, does that include the north complex area, the resources that have been identified there over the past few months?

It does not include that resource area at present.

If it would include that do we have an indication of the resources that could be added potentially or is it too early?

The joint venture, it is just too early. They haven't done enough mine planning work on that but we are certainly excited and would absolutely look at that.

Thank you. Secondly Brasilia, last quarter it was mentioned that the ores are getting harder gradually in the mine plant.

Yes.

That would gradually lower the [INAUDIBLE] if nothing would be done to the milling circuit.

That is correct.

And currently the [INAUDIBLE] shows a 50% increase to 30 million tons. That's based on, let's say, 2002's through-put of roughly 20 million tons. Does that mean that actually the improvement would be more in the order of 60 or 70%, because otherwise you will be dropping your through put?

It would -- what it does for us is because the through put drops you see that similar impact, it's about a 50% improvement when you look out in the future years. The through put goes to say 30 million tons per annum.

But not doing that project would it drop to 15 or --?

Roughly, yes.

Okay. And any parameters for the rest on capital for that project or is that too early?

It's too early, butthere's a pre-feasibility document but it's giving obviously with those kind of impacts, the through-put, it gives us a -- we are excited about the economic parameters and the feasibility study is going to be completed in the fourth quarter. It allows us to lower our cut off grade and substantially increase the ore reserve – increase the ore reserve.

So by end Q-4 we might know more about it than --?

The feasibility study is going to be presented to the joint venture early Q-1, and so we won't hear any more until Q-1.

Okay.

We do have on our website from our presentation in Denver, there was a slide that did give you some kind of bare bones, economic comment, if you want to go over that.

I understand thank you.

Ladies and gentlemen if there are any additional questions at this time press star one as a reminder if you are using a speaker phone lift the handset before pressing any keys. Your next question comes from George Topping from Sprott Securities. Please go ahead.

Bob, could you give us an idea of your capital expenditure program over the next three years depending on your various projects?

That's a situation it's a little hard to do, George. We have got approval processes going on for the Sagnil and Brasilia, for the Porcupine joint venture and for the Refugio. All of them are, there's components of them that are being debated, so it's a little early to do and normally I wouldn't duck this question, but I think I have to right now, but another few weeks we should be in a position to better answer that.

The 300 million is kind of a ballpark even?

No, it's way lower than that.

The things such as, to give an example, in the case of Refugio, do you buy the equipment or do you lease the equipment? That's a 30 million swing. Do you contract mine it? Those are the issues that are still finally being debated so it would not lead you in the right direction if I gave you a number because it might be 30 million high or 30 million low. That is 100 percent obviously. And there are other issues like that related to the Paracataou expansion as well as the Porcupine capital expenditures.

Secondly on the severance cost at Lupin is that final and clear now or is there more to come in the fourth quarter?

That number that we showed you is the final severance number I mean we have a few employees that will be there for three years. So at the end of three years we will see more severance, but a few as in 10 or 20.

And that was paid, physical cash numbers.

It was paid in cash for the quarter. Absolutely.

And just lastly on the grades at Fort Knox, you know the fourth quarter is going to be somewhat stronger than the third, yet you are still mining above reserve grade. I'm just wondering what is your production forecast like for 2004 for Fort Knox?

2004 is relatively flat compared to 2003. In other words we are mining above similar grades, so it's relatively flat, and as the True North mine mines out. When you say average grade the real kicker is the True North component right? That's is what is bringing our grade up. Fort Knox, it is quarter-to-quarter it varies, but we are really kind of mining Fort Knox at average grade. So we are above average for next year, do pretty good in 2005 as well.

Okay have you made any progress to replace the -- replace the True North like when it ends in 2005? I'm thinking of --.

No we haven't been nearly as successful as we had hoped. So no we have not replaced True North at this time.

We are working on Gel and we anticipate Gel will schedule in '05, '06. And we have had some success in the pit on replacing reserves but we haven't found a new deposit of the size of True North to schedule in yet but it will be a factor in the future.

Okay. Thank you.

You have a follow-up question from Michael Fowler from Desjardins Securities.

Bob, it is coming out to the end of the year and you are going to increase your reserves at the company, and presumably resources as well. Can you sort of highlight the major constituents of those?

It's a little early to do that. Some of the issues that are floating around as we -- we initially were told that we were anticipating a reserve number for Perin, and we're still not sure what that is going to be. The biggest change we are looking at in the Americas 2 where the reserves will increase by the multiples of millions, and the timing of that appears to have slipped from the fourth to the first quarter. Not a huge issue but it won’t affect us this year.

I'm very confident we will at the very, very least replace all the reserves that we mine this year. And increase them by some amount I'm just not sure that amount is, and it is a little early tell. Obviously Refugio will be in the fourth quarter and looking into '04, recognizing that Paracataou will be there, Perin will be there, Gold Hill will be there, the reserve increase will be substantial.

Okay and what about in Russia?

It's a timing issue, there will be a small reserve in Russia, at the end of this year and we would hope to see that grow in '04.

Okay. Thanks very much.

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

Great, I'm glad you could all join us for the quarterly report. As I said we are very pleased to have had an earnings result and I'm very confident that the numbers in the fourth quarter, and continuing into '04 will be stronger than we have seen in the last three quarters and I think we passed the worse period for us. The last few years and that we are now looking forward to strong earnings and a strong growing portfolio. Thank you, all.

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