Kinross Gold Corp (KGC) 2008 Q2 法說會逐字稿

Hello, this is the Chorus Call operator. Welcome to Kinross Gold Corp.'s second-quarter 2008 results conference call and webcast. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS). At this time I'd like to turn the conference over to Mr. Erwyn Naidoo, Vice President, Investor Relations. Please go ahead, sir.

Thank you and good morning, ladies and gentlemen. I'd like to welcome you to Kinross Gold Corp.'s conference call to discuss the financial results for the second quarter of 2008. With us today we have Tye Burt, President and CEO; Tom Boehlert, CFO; and Tim Baker, our COO. I'll remind you that the news release from last night is available on the Kinross website and has also been filed with SEDAR.

I'll also caution those listening that certain statements may contain forward-looking information and that our actual results could differ materially from exclusions or projections in that forward-looking information. In addition, we tossed in certain -- additional information about risk factors and assumptions are contained in our release from August 12th and the forthcoming MD&A for the same period, as well as other regulatory filings in Canada and the US. Now I'll turn the call over to Tye Burt, President and CEO.

Good morning and thanks for joining us. I'll discuss Q2 highlights while Tom and Tim will give a rundown of financial and operational results. In Q2 our revenues, margins, operating earnings, cash flows before working capital have all increased year over year, reflecting a strong gold price and solid operating performances. At the same time our bottom line has been affected by industry-wide cost pressures including higher taxes and royalties.

Q2 was a quarter for Kinross that saw production increase by 22% over Q1. Costs remained roughly in line with the prior quarter during a time when the industry was impacted by record oil prices, higher currencies and a challenging cost environment for operations generally. This reflects a positive trend for Kinross production and cost that we expect to accelerate as 2008 progresses.

Our production figures in the quarter benefited from the first ounces at Kupol which is just starting up, and although they were sold in the third quarter we'll see their impact in Q3. If we sold those in Q2 our overall cash cost would have been significantly lower.

Cash flow from operating activities before working capital adjustments was $110.8 million versus $98.9 million in the same quarter last year. Adjusted EPS was $0.09 during the quarter and reported earnings were $0.04 after non-cash adjustments and Tom will go into more detail on those financial results shortly.

We've adjusted our full-year production guidance for Kinross slightly to reflect both the impact of the sale of our Julietta mine, which we anticipate will close shortly, as well as a slightly longer commissioning and ramp-up phase at the Paracatu expansion project in Brazil. As a result our production estimate for full year '08 is now 1.8 million to 1.9 million gold equivalent ounces. And for 2009, the first full year for the three projects and considering the sale of those high cost ounces at Julietta, we now expect to produce 2.4 million to 2.5 million ounces.

We've also increased our assumptions used to drive the cost of sales guidance given metal prices, oil prices and FX rates seen in the first half of this year. The change and assumptions combined with higher operating costs that are impacting the entire industry has moved our full-year cost guidance to approximately $425 to $445 per gold equivalent ounce from prior guidance of $385 to $395.

Our key sensitivities we believe are unchanged and we've used conservative forecast prices for our full-year '08 forecast. Calculated on a byproduct accounting basis the cost of sales per gold ounce for the full year '08 is expected to be approximately $365 to $385 based on expected sales of approximately 9.9 million ounces of silver.

A major highlight for the quarter was the successful start of commissioning at the Kupol mine in Chukotka which produced 51,487 gold equivalent ounces attributable to Kinross' account. Our Board and senior management team visited Kupol last month and were impressed with this high-quality mine which was built in challenging and remote conditions. The ramp up to commercial production is going smoothly and is a testament to the skilled people we have working there and our partnership with the government of Chukotka.

The Paracatu expansion in Brazil also began commissioning on time and is scheduled to poor first gold late in Q3 and ramp up to full production in December. The ramp-up schedule is slightly longer than original plan due to some final component delivery delays and a slightly more conservative timetable to full production.

At Buckhorn we finished construction of the surface facilities and expect to start gold production on schedule early in Q4 this year.

In the second quarter we also entered into an agreement to sell the Julietta mine in Russia for $20 million. Julietta is in the late stages of its mine life with low production and costs in Q2 of approximately $751 an ounce. Its sale is in line with our strategy of continually upgrading the portfolio to remain focused on our core long-term assets.

Consistent with Kinross' strategy of delivering disciplined growth to our investors, we identified Aurelian Resources as a good fit for Kinross some time ago. We've been working in Ecuador now for two years and have spent a lot of time learning about the mining and political environment there. We believe that in the long-term Ecuador will become increasingly open to foreign investment and that the government will introduce a fair and workable mining law framework in the future.

We approached management of Aurelian to explore possibilities that ultimately led to Kinross making a friendly stock-based offer that the Board of Directors and Aurelian management endorsed. We believe the offer is a win-win for both sets of shareholders; it's subject to the conditions outlined in our bid circular and expires on September 3, 2008.

They reason that we offered both Kinross stock and Kinross warrants, versus say cash, to the Aurelian shareholders is to offer the option to participate in the potential upside of the FDN deposit in the future through Kinross share appreciation as that project goes through its development and ultimately construction.

We believe the offer shares similarities to our transaction with Bema back in 2006. In that deal Bema's shareholders recognized an immediate premium from the offer and then a subsequent increase in value through the upward re-rating of Kinross shares as we advanced the Kupol project along with our other assets. In sum, it's our goal to ensure that the Aurelian shareholders have a potential for significant future value upside and we'll work hard to deliver it.

In summary, Q2 for Kinross was a solid quarter as we advanced along the development track with all four projects. One is now launched, that's Kupol, and all three of the others -- Paracatu, Buckhorn and Fort Knox -- made strong progress. Our current mines delivered solid operating results and key metrics improved reflecting this performance as well as a strong gold price. This we expect will lead to further improving results as the year moves forward.

Let me now turn the call over to Tom Boehlert, our Chief Financial Officer, and Tim Baker, our Chief Operating Officer, to provide financial and operational results and then I'll make some closing remarks and open the call for questions. Tom?

Thanks very much, Tye. We've produced approximately 406,000 gold equivalent ounces during the quarter and we sold about 331,000 gold equivalent ounces at an average price of $903 an ounce. This generated revenue of $298.7 million, which is an increase of 3% over the prior year's quarter. The increase in revenue quarter-over-quarter is the result of a 36% increase in the average price of gold realized offset by a 25% decline in ounces sold.

Our production significantly exceeded the sales primarily because of the 51,000 ounces of June production from Kupol which was not sold until the third quarter. Cost of sales per ounce was $466, which is about a 2% increase over last quarter's adjusted result. And of course this amount does not include the benefit of the lower-cost Kupol sales which if we had sold the production during the quarter probably would have reduced our cost of sales per ounce by about $30 on a companywide basis.

Exploration and business development costs were $12.5 million in the quarter versus $12.3 million in the prior year's quarter. General and administrative expense was $24.2 million during the second quarter compared to $16.5 million last year. The year-over-year increase is primarily related to higher personnel costs. Full year G&A expenses are expected to increase to approximately $95 million from the prior forecast of $80 million due to higher personnel costs, staffing increases and information technology costs all in support of the Company's growth.

Income and mining tax expense for the quarter was $21.3 million on earnings before tax of $48.3 million, that's an effective tax rate for the quarter of 44.1% and this compares to $17.1 million on earnings before tax of $71.6 million during the first quarter of 2007. Our first-half effective tax rate was 30.8% and we expect our full-year effective tax rate, as we've stated before, to be in the range of 28% to 32%.

At the end of the quarter Kinross' cash and short-term investment balance stood at $714.7 million compared to $889.5 million at the beginning of the quarter. Adjusted net earnings for the second quarter were $55.8 million or $0.09 per share compared to $53 million or $0.09 a share in the first quarter of last year. This adjusted earnings amount does not include foreign currency translation losses on future income and mining tax liabilities or unrealized derivative losses which together totaled $29.8 million during the quarter.

Cash flow from operating activities before changes in working capital was $110.8 million or $0.17 a share in the second quarter compared to $98.9 million or $0.19 a share in the same period last year. Changes in working capital in the second quarter reduced cash flow by $150.5 million.

So as our new projects transition from construction to operations there's a natural build up of supplies inventory and in-process material and finished goods inventory and this working capital requirement is particularly pronounced at Kupol where the results of its remote location -- supplies inventories are purchased a year in advance from the time of production and dore -- from the time of production to sale of dore can range -- can be in the range of 30 plus business days.

So there was a buildup of working capital over the period at Kupol as it transitioned into operations. We expect the working capital requirements will increase a bit further in the third quarter as Paracatu and Buckhorn ramp up and the buying season for Kupol winds down and then flattens out in the fourth quarter.

Capital expenditures were $184.5 million in the quarter compared to $161.3 million in the same period of 2007. The bulk of the CapEx of course related to our Paracatu, Kupol, Fort Knox and Buckhorn projects. Total capital expenditures for 2008 are expected to be approximately $752 million as previously disclosed.

The Kupol project program has successfully concluded on budget and, in the case of Paracatu, we expect we may be over the project budget by 5% to 10% depending on the final cost to complete and final actual exchange rates. And we will provide final costs for Paracatu upon completion.

Turning to the 2008 outlook, as Tye mentioned earlier, we have revised our full-year production forecast to 1.8 million to 1.9 million gold equivalent ounces at a cost of sales of $425 to $445 per ounce. The change in the production is due to the impact of the sale of Julietta as well as the impact of the Paracatu expansion project ramp up and we've also adjusted our 2009 production forecast down by 100,000 ounces to reflect the sale of the Julietta mine.

Roughly half of the increase in cost of sales as forecast is related to incorporating actual gold, oil and foreign exchange rates for the first half of the year as well as updating our price estimates for the second half. The impact on our cost of stronger gold, oil and, to a lesser extent, currencies, is consistent with the sensitivity information that we've given previously as well as the example that we laid out in our first-quarter earnings release and we discussed on the conference call in May.

The updated cost forecast includes a second-half gold price of $920 an ounce, oil price of $125 a barrel and foreign exchange rates of BRL1.7, RUB24, CLP490, and CAD1 to the US$1. I think it's important to keep in mind that while our cost forecast has increased since the beginning of the year, as is generally the case across the entire industry, the new Kupol, Paracatu and Buckhorn operations are expected to have a very positive impact going forward relative to our current unit cost profile.

For the balance of the year we have hedged approximately 40% of our estimated Brazilian reais operating costs at an average exchange rate of 1.10 to the US dollar, 75% of our Chilean peso operating costs at an average exchange rate of 4.80 to the US dollar, 68% of our ruble operating costs at an average exchange rate of RUB24 to the dollar. And as a result of those currency hedges our sensitivity to a 10% change in foreign exchange rates has now decreased from $13 as we had previously stated to $8 per ounce.

And we've also hedged approximately half of our diesel fuel operating cost for the balance of the year at Fort Knox and Round Mountain at an average price of $109 per barrel. So I'll now turn the call over to our Chief Operating Officer, Tim Baker, for a review of the operations and details about exploration.

Thanks, Tom. First I'll discuss our development projects. At Kupol first gold was poured in May and between then and June 30th 68,649 gold equivalent ounces on a 100% basis were produced of which we have a 75% share. Second-quarter production saw gold grades of 36 g per ton gold and 427 g per ton of silver which are higher than the life of mine plan. Mill throughput averaged 2,400 tons per day in June, which is ahead of our plan for the ongoing commissioning phase. Full credit to our excellent team at site and the quality of the construction.

Commissioning at Paracatu expansion began as scheduled in July. Mining equipment is fully operational and the primary crusher and overland conveyor have been commissioned. The site mill has been turned and next week we start full commissioning of the grinding and flotation circuits. We expect to produce first gold from the Paracatu expansion in September; however, we have revised our original expectations of reaching full production by the end of October through December due to a longer commissioning and ramp up period.

As mentioned earlier on the call, we have revised our guidance to reflect that. We now expect the expansion project to increase 2008 gold production at Paracatu to approximately 245,000 to 265,000 ounces at an expected average cost of sales per ounce of $455 to $475. And the December cost should be in the range of $400 per ounce, which we believe will be indicative costs going forward.

At Kettle River Buckhorn the surface facilities at the Buckhorn mine are essentially ready. Construction of the access road to the mine is expected to be finalized by the end of August. Mine development work continues with the focus divided between the upper and main portals. Refurbishment of the Kettle River mill is on track to initiate operations on schedule in October.

At the Fort Knox expansion construction of the heap leach project is approximately 57% complete. We have encountered delays in the placement of the leach pad liner due to unseasonably wet weather. However, we're still working towards a start up of leaching operations in the third quarter of 2009.

Turning to our current operations, solid results were delivered during the quarter. Three of the four mines that experienced slowdowns during Q1 are back on track. Production was up 22% from Q1 2008 and met our expectations. Excluding the ounces from Kupol production was up 7% over Q1.

At Maricunga production was 57,260 ounces which was down 7% from the prior quarter due to more refractory oil. [Plans] are also down quarter-to-quarter due partly to down time on a tertiary crusher and also the loss of four days due to weather, which is an improvement over last year when we lost 11 days during the same period. Cost per ounce was slightly lower than the previous quarter at $545 per ounce as ongoing improvement in activities began to show an impact.

At Round Mountain production was 65,570 ounces, 3% up from the prior quarter. Cost of sales were $458 per ounce, the increasing cost over Q1 being due to an increase in maintenance costs. La Coipa production was 60,376 ounces, similar to Q1. The challenges at La Coipa continue with restricted access to the Coipa Norte pit due to the pit wall failure in grades averaging less than planned. Costs improved slightly to $400 per ounce sold.

Fort Knox production was 85,609 ounces which is up from Q1 production as expected. Recoveries have been impacted by more refractory oil than anticipated, while the grade and throughput have improved. Cost of sales have improved slightly.

Paracatu had a very good quarter, producing 47,338 ounces, 9% higher than Q1, as improvements to recovery continue to be made in the old plant. Costs were in line with Q1 at $456 per ounce.

Overall we are pleased with the performance of our operating mines during what are challenging conditions for the entire industry. We're delighted with the successful startup of Kupol. We look forward to starting the next two projects shortly. With that I'll now turn the call over to Tye for his concluding remarks.

Thanks, Tom and Tim. In summary, Q2 saw Kinross continuing to execute the strategy and key objectives that were set out for our investors at the beginning of the year. Our people at current operating mines navigated challenging industry-wide inflationary conditions and operating costs in CapEx. Despite these headwinds our production was higher and costs were roughly in line with Q1.

Our development teams made major advances on all four construction projects pouring first gold at Kupol and getting ever closer to marking similar milestones at Paracatu, Kettle River, Buckhorn and Fort Knox. Kinross continued to grow and strengthen our asset base. We launched the Board and management endorsed combination with Aurelian. We also continue to make apple seed investments with juniors as well as delivered ongoing drilling and production -- or exploration rather -- at sites like Ixhuatan in Mexico amongst others.

In Q3 we're targeting completion of our Aurelian offer and are working hard to advance our development projects that will drive our production up to 2.4 million to 2.5 million ounces next year. So thanks for joining us on the call today and we'll now take questions.

(OPERATOR INSTRUCTIONS). David Stein, Cormark Securities.

Congratulations on the good start up at Kupol especially. My first question is about that. Do you expect that there's going to be kind of a one-month delay in shipping the product out of there going forward or are we going to kind of catch up in Q3 and then it will be pretty straightforward after that?

We expect this will be a permanent timing impact. We shipped the dore to our refinery in Magadan, it takes several days to be refined, and then it gets shipped to Moscow and then the cash goes in the bank. So that's about a 30 business day time frame which we'll expect to continue going forward. We had a similar dynamic with Kubaka and Julietta.

Okay, that will make it easy going forward then. So my other question was did you -- just to clarify, did you say that the Fort Knox heap leach project is 68% complete?

I said that 57%.

57%, okay. So it seems like you've been progressing quite rapidly there. I guess my question is why does it take another year to get it into production in Q3 of 2009, just out of curiosity?

This year is winter because (technical difficulty) we'll put rock on the pile as soon as we can, but there's no way we can start irrigating before next summer, early next summer. Once it's up and running irrigation will be ongoing and we got lots of practice doing that at Maricunga. But getting inside it is going to be the issue. So we won't start irrigating until next year.

And once you start irrigating will you be able to irritate over the winter? Or is this going to be something where you're only putting (inaudible) on the pad in the summer.

It will be a continuous process, continuous irrigation. And (technical difficulty).

Okay, that is all my questions. Thank you.

Victor Flores, HSBC.

I have a question related to the production cost and achieving commercial production at Kupol. Tye, you mentioned that cash cost would have been lower if that material that you produced at Kupol had been included in the figures, but you don't quote a cost number and I assume you haven't achieved commercial production. So that material that you eventually sold is probably going to be netted against capital until commercial production is declared.

I'll ask Tom to speak -- we can help on that, Victor. I'll ask Tom to answer that one.

We achieved commercial production at Kupol for the month of June. So the 51,000 ounces is actually counted as production and we have now sold those ounces and those ounces will be counted as sales and cost of sales will be attributed to those ounces in Q3. So we did have a small amount of production in May and, as you noted, that small amount of production did go basically against CapEx. We don't see that cost of sales against us.

(multiple speakers) I think it would be fair to say if you wanted to calculate the impact -- what the impact would have been on Q2, we've given a cost forecast for the full year of 235 to 245 for Kupol. And I think you could apply that against the 51,000 and get a ballpark number.

Okay, that's great. Thank you so much.

Anita Soni, Credit Suisse.

Good morning. My question is just on the grades and tonnage at Kupol. Could you give us some guidance going forward in Q3 and Q4 what that expected ramp-up will be and are we expected to see grades in the 36, 37 g per ton level going forward?

No, those grades are coming down. We obviously targeted some high-grade stuff to get going and we are evaluating it. The budget grade is about 21 grams, we'll see it slightly higher than that, but it's too early to say what it will be. Tons were pretty close to 3,000 tons a day at the moment and it's looking as though we'll hit that tonnage going forward. The other thing is recoveries are doing pretty well, we're about slightly over 95% with gold recovery at the moment and we reckon we'll hold that.

And how many days and months do you operate just to do the calculation for tons per day?

Yes, it's 24 hours a day, seven days a week. So it's full operation.

Okay, thank you very much.

Heather Douglas, Thomas Weisel Partners.

Good morning. I have two questions; one is just a simple one about the income statement. You have $8.9 million in other operating income. Can you tell us what that was related to?

Yes, we had a recovery of a [VAT] provision we had made during the quarter of about $11.5 million. So as the VAT loss provision was put on over time it ran through this particular operating expense line. And so when we realized we weren't -- we realized we'd have a recovery there we ran the credit through this line as well. So it relates to Paracatu VAT.

And my second question has to do with Kupol and how -- can we expect any resource extension or conversion this year or will that activity really be concentrated next year?

Heather, we're drilling right now, so early to say what's going to come out of that. But we're halfway through the drilling season and we'll do that reserve or resource calculation as we usually do at year end. But more to say on that later.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Paul Burchell, Dundee Securities.

Good morning. I was wondering if you could provide more color on your discussions with Barrick over the Casale shareholder agreement. Are you looking to revise ownership positions at Cerro Casale or establish project operator? Where are those discussions going? And as well, if you could just give us a quick update on when you hope to complete your feasibility study, the updated feasibility study on the project.

Sure. Obviously we'll make disclosure when we have a signed agreement with Barrick, but I can say the partners are working very professionally and compatibly towards a fully 50-50 joint venture on the project with shared management and shared decision-making through the course of construction and subsequently into operation. So it will be the, as we currently anticipate, the classic 50-50 JV.

In terms of feasibility work, it is proceeding as -- we both allocated more capital to continue with the metallurgical drilling program as we start zeroing in on revised feasibility work by round one year end and round two early in 2009. We have appointed senior management for the joint venture both on a country basis and on the feasibility work. So the agreement is progressing, the work is progressing, the capital is being spent all aiming at a construction decision go or no go and I would say at the end of Q1 next year. So good progress and lots of work happening.

Great, thanks very much.

Barry Cooper, CIBC World Markets.

Sort of a follow-up question on Victor's question but on Paracatu, slightly different situation whereby you are doing the expansion and I'm just wondering how you're going to treat that expansion vis-a-vis declaration of commercial production. Should we perhaps assume that there would be no incremental commercial production from the expansion this year given the delays? Or in fact or are you going to declare some of that production commercial right from the get go?

Our policy is that we declare from an accounting perspective the mine to be producing as soon as it produces more than a di minimis amount of product. So we set that at about 5% of the monthly full load operating rate. So we're currently projecting to produce the first gold toward the end of September. And so my expectation is that it will be characterized as a producing mine in October.

So basically all of Q4 then probably we should account for it then?

Yes.

Okay, thanks a lot.

Anita Soni, Credit Suisse.

Just a little more on Kupol. The silver recoveries -- are they also at 95% or where are they at?

They're about 85%.

85%, okay. And then also on -- when exactly did you reach about the 3,000 tons per day? I'm just trying to get an idea of the tonnage for Q3.

Just virtually in the last week or so.

And at the end you entered the quarter at what tonnage rate?

We did 2,400 tons a day in June.

Okay, thank you very much.

There are now no further questions. I'll turn the call back over to Mr. Burt for any closing comments.

Great. Well, thanks very much for listening this morning, folks. We reiterate that our development teams have made substantial progress and moving closer with those mines. We were thrilled about the startup at Kupol and our operating mines have performed substantially as we expected and significant improvements at three out of those four that we were working on in Q1.

We're hopeful and expectant that our offer for Aurelian will be successful. We think this will be a long-term addition to our portfolio that will create a new mine and a new production opportunity for Kinross in the medium to long term. And we expect that the reaction we've been getting from Aurelian's shareholders will translate into a successful transaction there in September. So thank you for joining us here this morning and we'll talk next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.