Kinross Gold Corp (KGC) 2011 Q1 法說會逐字稿

Hello. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation's first-quarter 2011 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 would like to turn the conference over to Mr. Erwyn Naidoo, Vice President of Investor Relations. Please go ahead, Mr. Naidoo.

Thank you, and good morning, ladies and gentlemen. Welcome to the Kinross Gold conference call to discuss first-quarter financial and operating results. With us this morning, we have Tye Burt, our President and Chief Executive Officer; Paul Barry, our Chief Financial Officer; Brant Hinze, our Chief Operational Officer; Ken Thomas, our Senior Vice President of Projects; and Glen Masterman, our Senior Vice President of Exploration.

Before we begin, I'd like to draw your attention to the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions that may lead actual results to differ from estimates contained in our forward-looking information, please refer to the news release from May 3, and Management discussion and analysis for the same period, as well as our most recently filed AIF, which is available on our website. Now, I'll turn the call over to Tye.

Thanks for joining us today, folks. First, I'd like to welcome Paul Barry, our new CFO, to the call. Paul joined Kinross on April 4, and we are pleased to add his wealth of experience, strong leadership skills, and dynamic approach to our senior leadership team. Turning now to our results. The first quarter was an excellent start to the year for Kinross, as solid performances from our portfolio of operating mines benefited from strong metal prices. This drove record quarterly revenue up 42%, increased adjusted operating cash flow up by 67%, and increased adjusted net earnings up by 81% from the prior year's first quarter.

Despite FX pressures, high royalties, and oil prices, our production cost for the quarter was $543 per gold equivalent ounce on a co-product basis, the result of strong mine performance and good cost control at our operations. This contributed to a 29% increase in margins, to a record-high $784 per gold ounce. We remain on our 2011 production cost target of $565 to $610 per ounce on a co-product basis. Overall, combined performance of our operations contributed to an 18% increase in attributable production year-over-year; and Brant will walk you through operational highlights in a minute.

Speaking briefly to our growth projects, we continue to make steady progress advancing the Tasiast expansion and other projects. At Tasiast, our aggressive exploration and engineering drill program continues, with 26 rigs turning around the clock. While the majority of drilling taking place right now is infill, engineering and definition drilling in support of the project's feasibility study, we are continuing with that effort. Reconnaissance drilling has encountered encouraging gold results along the trend outside of the main Tasiast deposit, reinforcing our view that Tasiast has the potential to develop into an entire gold-producing district.

At Fruta del Norte in Ecuador, we started construction of the portal high wall for the underground exploration decline in Q1, and are restarting reconnaissance work in the reconcessions outside of the FDN project area shortly. We will be completing systematic exploration of a number of encouraging targets, concentrating along the prospective Las Penas fault to the north and to the south of FDN itself. We have also started negotiations with the Ecuadorian government on an exploitation agreement for FDN.

We're maintaining an open and constructive dialogue with the government, and we are pleased with their support for the project. At Lobo-Marte in Chile, the 20,000-meter drill campaign is expected to be approximately 70% complete by the end of this month. Recent exploration drilling on the Valy prospect, located just 3 kilometers from the Lobo deposit, has produced some encouraging new gold results, with initial geological results identifying two new mineralized zones.

This is one of seven prospects within the Lobo-Marte district, and we are encouraged by the exploration potential of our 30,000-hectare land package. The feasibility study at Lobo-Marte is expected to be complete in the fourth quarter of 2011, which has been rescheduled from the previous target of mid '11, in order to incorporate the results of recent infill drilling. The project remains on target for commissioning in 2014.

At Dvoinoye in Russia, we are proceeding with the exploration and engineering drilling in support of the feasibility study, and to further define reserve and resources, where we have three rigs operating and a fourth en route to the site. Development of the exploration decline is ahead of schedule, as we have completed construction of the portal and now developed the first 100 meters of the new decline. This project, which is expected to be a 900 ton-per-day underground mining operation, with ore being processed at the nearby Kupol mill, is targeted for commissioning in 2013.

We have continued to consolidate our interest in the Chukotka region of Russia by increasing our ownership at Kupol to 100%. For total consideration of $350 million, the transaction was approved by the State Commission for the Control of Foreign Investments in Russia, and was completed on April 27. This provided Kinross with full ownership of a world-class gold mine, low-cost production, and strong cash flows, as well as consolidating 100% ownership of the East-West Kupol exploration licenses.

Combined with our ownership of the Dvoinoye deposit and the Vodo exploration property, Kinross is well-positioned in this highly prospective, new epithermal gold district. As a result of that transaction, we are increasing our 2011 production guidance; and now expect to produce 2.6 million to 2.7 million gold equivalent ounces for 2011, as we realize the benefit of 100% of Kupol production for the remainder of this year.

Also this quarter, we sold our 8.5% equity interest in Harry Winston, for a total consideration of $100 million. Combined with the sale in 2010 of our previous equity interest in Harry Winston, and the Diavik diamond mine joint venture, Kinross has realized total proceeds and dividends of approximately $428 million on the original net $150 million investment. The cash proceeds from this equity sale were used, along with anticipated $200 million nonrecourse debt financing, to fund the purchase of the remaining 25% of Kupol.

At the quarter-end, the Company had approximately $1.6 billion in cash on hand; and combined with our strong cash flows, we are well-positioned to fund our pipeline of projects without issuing equity. To sum up Q1, overall, Kinross had a strong first quarter, with significant year-over-year increases in revenue and record high margins. We delivered a 3% increase in adjusted operating cash flow per share, and a 14% increase in adjusted net earnings per share, while we continued to make steady progress on our development projects.

And with that, I'd like to turn it over to -- turn the call over to Paul Barry for a review of our financial results.

Thank you, Tye. I am delighted to join Kinross, as we embark on our next phase of production growth. This is a very exciting time for the Company, and a great opportunity for me, as the new Chief Financial Officer. Since joining, I've been impressed by the quality of the people and the strong balance sheet, as well as the financial systems and controls that Kinross has in place. I have joined a great team.

Looking forward with a significant liquidity position, strong cash flows from operations, and access to global debt and credit markets, the Company is extremely well-positioned to finance its mine development and production plans. Financing growth, controlling operating costs, improving efficiency, and mitigating risks will continue to be major areas of focus. Now let me get to the business at hand -- the first quarter 2011 results. Q1 is our first quarter reporting under IFRS, and we have recast our 2010 comparative numbers into IFRS in the current period financial statements.

I draw your attention to note 3 to the financial statements, which provides a full description of our IFRS accounting policies. In addition, note 20 to the financial statements contains detailed disclosure and reconciliations of the impacts of IFRS on our previously reported results. First-quarter revenue was $937 million, driven by consolidated ounces of 719,000 gold equivalent ounces, sold at an average gold price of $1,327 per ounce.

First-quarter attributable production was 643,000 gold equivalent ounces, an 18% increase from the first quarter of 2010. First-quarter attributable production cost per ounce was $543 on a co-product basis. By-product costs were $471 per ounce. Q1 attributable margin increased to a record $784 per ounce, up 29% from the same quarter last year, while the average gold price increased 25%. First-quarter adjusted operating cash flow increased by 67% quarter-over-quarter to $398 million, or $0.35 per share.

Reported net earnings were $256 million, or $0.23 per share, compared to $181 million, or $0.26 per share, in the same quarter last year. First-quarter adjusted net earnings were $180 million, or $0.16 per share, compared to $100 million, or $0.14 per share, in the first quarter of 2010. Kinross continues to maintain a strong balance sheet, providing a solid platform to finance our growth program. Cash and cash equivalents at March 31 were approximately $1.6 billion before purchasing the remaining 25% of Kupol, for gross consideration of approximately $350 million.

In the first quarter, we doubled our unsecured revolving credit facility, increasing available credit from $600 million to $1.2 billion, consistent with the significant growth of the Company over the past year. Between existing cash balances, cash flow from operations, and available debt capacity, we are well-positioned to build out our growth profile. To reflect the benefit of increasing our ownership into Kupol to 100%, we are updating our production guidance for the year.

On a regional basis, we now expect Russia to produce about -- between 535,000 to 555,000 gold equivalent ounces, at an expected production cost of $395 to $435 per ounce. On a consolidated basis, we now expect to produce approximately 2.6 million to 2.7 million gold equivalent ounces, up from our previous guidance of 2.5 million to 2.6 million ounces. The forecast for the full-year production costs remain unchanged, at $565 to $610 per ounce. With that, I'll now turn the call over to Brant for a review of our operations.

Thank you, Paul. The final page of our press release contains a review of operations and a mine-by-mine summary with key metrics. I'll give a brief review of the operational highlights for the quarter. Kupol had a solid quarter, with a slight production increase from the fourth quarter of 2010. Production benefited from an increase in gold/silver ratio, due to higher silver prices, as well as from better than expected recovery levels for silver. Silver accounted for approximately 23% of Kupol gold equivalent production for the quarter.

At Paracatu in Brazil, gold equivalent production was lower, and costs were higher than the fourth quarter of 2010, as a result of lower grades and fewer tons ore mined and processed, due to mine sequencing and some unplanned maintenance. The performance of Plant 2 remains strong, with gold recovery improving by 2.5 percentage points, compared to the fourth quarter of 2010. Throughput is expected to increase in the second half of the year, as the third ball mill starts up at Plant 2.

Mine performance at Maricunga was solid, reflecting a significantly improved performance of the heap leach, which resulted in a 78% increase in production and strong cost performance over Q4. The Fort Knox mine in Alaska had a good quarter, as Phase 6 mining was completed. Tons of ore mined were ahead of plan, and the production from the heap leach was also strong.

In 2011, as planned, most of the mining activity at Fort Knox will be focused on capitalized stripping. As a result, about 80% of ore processed at both the mill and heap leach will be sourced from low-grade stockpiles, which is expected to result in lower production and higher costs than 2010. In 2012, we expect to return to milling direct feed from the mine, with grades similar to 2010.

At our newly acquired Tasiast mine in Mauritania, production in the first quarter was negatively impacted by mine planning sequencing and a failure of the Aleutian column in late January. This impact was minimized by the expediting and deployment of a replacement column, which was fully operational by mid-February. At Toronto, production was slightly lower and costs were higher than the fourth quarter of 2010, as underground mine development in the first quarter resulted in fewer tones mined and processed.

Overall, our operating facilities are in good shape, and we continue to look forward to the opportunities to extend mine lives through exploration. And with that, I'd like to turn the call over to Ken Thomas, our Senior Vice President of Projects, who will provide a review of our development projects.

Thank you, Brant. In the first quarter, Kinross continued to make steady progress on our projects in Paracatu, Tasiast, Dvoinoye, Lobo-Marte, and Fruta del Norte. And our project capital spending remains on track for the year. Installation of the Paracatu third ball mill is proceeding on schedule and on budget, with construction 98% complete. Pre-commissioning commenced in April, with commissioning to continue through the second quarter.

We expect to put first oil through the mill in the next few weeks. Engineering on the fourth ball mill is well advanced, at 45%. We expect mill components to be delivered mid-year to the site. Construction activities remain on schedule to commence in mid-2011, and the project is on schedule to be operational in the first half of 2012. This will sustain Plant 2 throughput at 41 million tons per annum.

Our aggressive drilling program at Tasiast continues, with 17 core and 9 reverse circulation rigs in operation on the 24-hour basis. As of the end of March, infill drilling at West Branch was approximately 95% complete, and geotechnical drilling was approximately 80% complete. A total of 135,000 meters have been drilled since the beginning of the year, with 65,000 meters completed at West Branch since the last of the drill holes in our 2010 year-end mineral reserve and mineral resource estimate. The feasibility study for the expansion is approximately 62% complete, and remains on schedule for completion in mid-2011.

As mentioned in our March 28 news release, we have made $204 million in procurement commitments for the expanded mine fleet and plant equipment. An expansion of the existing camp is currently underway, to accommodate the increasing number of operations personnel required to support the expansion project. And the 500-bed camp for the initial phase of the expansion construction is now out to tender. The new ADR plant and dump leach facility to treat oxide ore from the Piment and West Branch are under construction, and are expected to be operational in the third quarter.

Procurement commitments for the expanded mine fleet, including 17 Caterpillar haul trucks, two Bucyrus hydraulic shovels, four Caterpillar track dozers, and two Caterpillar wheel dozers, have been made. Additional equipment orders for 22 Caterpillar trucks, seven drilling machines, three hydraulic shovels, and two dozers are now pending. Generators with 16 megawatts of capacity have been purchased for Phase 1 of the project, to provide additional power to the site during construction. The expansion project remains on schedule to commence operation in early 2014.

At Fruta del Norte in Ecuador, preparatory work for the construction of the underground exploration decline has commenced ahead of schedule, with the construction of a high wall for the portal. Construction of the portal and associated earth works is expected to continue until mid year, followed by development of the decline, with completion targeted for the first quarter of 2013. We expect to develop approximately 600 meters of the 1,700-meter decline by year-end.

The terms of reference for the EIA for building and operating the FDN mine and processing plant were approved by the government authorities in February, and we remain on schedule to submit the EIAs by mid-2011. We are on track to complete the feasibility study in the second half of this year, with startup of the project expected in late 2014.

At Dvoinoye in far-east Russia, we have elected to proceed directly to a feasibility study, as the scoping study completed at year-end was technically at a pre-feasibility study level. The feasibility study is expected to be completed in the first quarter of 2012. Exploration and engineering drilling continued, with the aim of further defining mineral reserves and resources, and assisting with engineering on the hydrology studies, in support of feasibility study.

Condemnation drilling has been completed, 6,000 meters of a current 24,000-meter program to further define the Dvoinoye ore body, in support of the feasibility study, has been completed ahead of schedule. Three project development milestones for 2011 include construction of the mine access portal, exploration decline development, and construction of select surface facilities and infrastructure. Development of the exploration decline advanced 100 meters during the quarter, ahead of schedule.

Engineering and procurement activities advanced, with orders placed for the power generation equipment, permanent camp, fuel storage tanks, and mine shop building. Processing of Dvoinoye ore at Kupol is targeted to commence in the second half of 2013. At Lobo-Marte in Chile, approximately 70% of the 20,000-meter drill program will have been completed by the end of May. Geotechnical drilling is now complete, and geotechnical and mine block models in support over feasibility study are expected to be completed in the third quarter.

We have rescheduled the completion of the Lobo-Marte feasibility study to the fourth quarter of 2011, from the previous target of mid-2011, in order to incorporate the results of the recent infill drilling. The project remains on track for commissioning in 2014. And with that, I will turn the call back over to Tye for some final comments.

Thanks, Ken. Two comments I'd like to make in closing. To summarize, our first quarter was a solid start to the year, with strong operational performance, and new gold production from the African operations. Higher gold prices contributed to year-over-year increases in revenue, in margins, cash flow, and earnings. We increased our ownership of Kupol and the East-West exploration licenses in Russia to 100%, adding some new low-cost production and cash flow, while providing us with the full benefit of the Kupol Dvoinoye synergies and exploration upside in that region.

In summary, we are making good progress in advancing both our at site and our new development growth projects. We have spent the last few years consolidating interests in excellent mines in promising districts. The focus now is on building our new projects and optimizing existing operations, to deliver the growth from 2.6 million to 2.7 million ounces this year, to 4.5 million to 4.9 million ounces in 2015. Thank you for joining us this morning. I'd like to open the line up for questions now, Operator.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Your first question is from John Bridges of JPMorgan. Please go ahead, sir.

Good morning, Tye, everybody. Thanks for the question. Just wanted to -- maybe for Ken -- how much of the cost do you mange in a lock-in now with these purchases? So, if broadly -- what sort of percentage of the cost do you have, what's a lock-in, even before you can do the feasibility study? And then, I have a follow up.

Okay. With regards with to the feasibility study on Tasiast, we've already committed for this year approximately $300 million to $400 million worth of equipment. The actual cash purchases are running at approximately $200 million at this point in time.

So, that's $400 million, John, out of the total $1.8 [billion] plus $400 million contingency that we talked about in the scoping study. We feel that the infrastructure piece here is about another $500 million; so, that means we have locked-in up roughly $400 million out of $1.1 billion non-infrastructure spend, if I can say it that way.

Okay, that's a great start. And then, the -- your quarter of Cerro Casale, when should we expect the capital from that to kick in?

Yes, look. Barrick, of course, is the 75% owner and the operator at Casale. We own a minority interest there. We have gotten notice from the operator that we'll get some final numbers at Q2, when Barrick is expected to give an update to the market. There are indications of permitting delay, as that EIA approval is going to take a little longer than planned, which will push out the spending on the project start.

We also have indications of project costs up more than the -- 20% or more than 25% here. And net bottom line on that, we'd expect an update at Q2. But our share of spending here we'd expect in '11 to be roughly $60 million; '12, maybe double that, at roughly $120 million. And then, a currently estimated timetable for the project go-ahead would follow -- would be in Q1 of 2013. So, bottom line from our perspective, the project is looking like it's sliding out in time, which would slide our capital commitments out, as well. And capital not going lower from here; certainly, the pressure is in the opposite direction.

Okay, that's helpful. Many thanks, Tye. Good luck.

Thanks, John.

Next question is from George Topping with Stifel Nicolaus. Please go ahead.

Hi, everyone. On Kupol and Maricunga, I see the -- both operations' mine grades well above the reserve grades during the quarter. Can you give us an indication of whether we can expect that to continue into Q2 and Q3?

Brant, do you want to tackle that one?

Certainly, in Kupol, we had a very -- a very strong quarter. We did see good grades; but as Kupol continues to age, we do see the grades continue to go down. And we will see our grades decline, quarter after quarter, through the remainder of the year there. And at Maricunga, our grades do fluctuate, depending upon which pit that we are in. We are currently in the Pancho pit, which we do typically see higher grades. We will remain primarily in Pancho for the rest of the year.

Okay, good. And just moving on to Tasiast, on the Satellite deposit, Charlize and C67, could you lay out a plan for the exploration time line of those, when we can expect more news from those two?

I'll ask Glen Masterman, our Head of Exploration, to speak to that one, George.

Thanks.

George, we're -- in the month of May, we'll be moving a drill -- one drill, at least, down to the southern portion of the exploration concessions, which covers Charlize and C69. So, we expect the drilling to commence this month, and your results will start to flow back towards the end of Q2, with preliminary results.

Okay. And how much drilling do you expect to come back with?

We have a plan of around about 15,000 meters initially, on -- between those southern targets. And depending on the results, as they start to come back, we'll either continue the drilling or move on to some of the other targets.

Great, thank you.

Thanks.

(Operator Instructions) The next question is from Steven Butler of Canaccord Genuity. Please go ahead.

Couple questions here. It was a great quarter at Maricunga, in terms of Q4 to Q1, on cash cost reduction, from over $1,000 to $482. Can you characterize that? Is it mostly just the leach kinetics? Or, I know it's obviously difficult for us to reconcile quarter-to-quarter fluctuations in production and cash costs, but maybe you can just suggest a few things of why Maricunga was such a spectacular decline in cash costs, guys.

Brant?

Yes, I can address that. Certainly -- number one, I would like to commend the team there at Maricunga. I think with our new management there, we continue to build a strong team at Maricunga, and strong teams in Chile. And so, I'd like to commend them for a good quarter. Quarter four 2010 to quarter one -- obviously, we've had a significant increase in production. So, that denominator will certainly have a big positive effect on our cash costs, on a unit basis.

Other things that are -- that have improved our cash costs on a unit basis at Maricunga for the first quarter would be related to better mine performance, as well. So, what has happened is, we've taken a lot more material to the heap leach than we did in quarter four of last year, which gives us a pretty good inventory benefit there on our costs.

Okay, thanks. And Ken, you mentioned here at the sustainable long-term throughput rate of Paracatu to be 41 million tons per year, or about a -- call it about 110,000, 112,000 tons per day. Will you be better than that on a peak throughput year in 2013, 2014? Perhaps because of maybe overall softer ore versus a life-of-mine plan. Is that your thought, that you'll be over that level of throughput, at least for a couple of years, with the expanded fourth ball mill?

No, the fourth ball mill will be capped at 41 million tons per annum; that's our environmental license for the property. So, the reason for the fourth ball mill is in anticipation of [haudo] ore coming from the pit. We've designed that fourth ball mill to treat -- obviously, with the three other ball mills, a average work index of somewhere around 12 kilowatt hours per ton. And the work done to date by the operations people indicate that we will, on a yearly basis, average between 11 to 12 kilowatt hours per ton. So, we anticipate to be at our permit limit at the Plant 2, at 41 million tons per annum.

Okay. And lastly, Tye, could you maybe characterize the negotiations with the Ecuadorian government as early or middle or advanced stage, on the completion of stability agreement? Thanks.

Yes. Thanks, Steve. I would characterize them as early right now. There are two other companies in discussions that are a little further -- started a little ahead of us, and work in progress right now. We've had, I think, two sessions, which have shown basic parameters -- positive and relationship positive. I'd say this is going to still take a few months yet, before we're going to see this through. But early vibrations, quite positive. Don't want to predict the outcome at this point. I wouldn't expect an end to negotiations in sort of the May timetable. We'd look beyond -- well beyond that.

Great, okay. Thanks, Tye.

Okay, thanks.

The next question comes from Greg Barnes of TD Securities. Please go ahead.

Question for Glen. It sounds like the drilling at Tasiast is getting close to being done on the West Branch. You have 26 drills there. What do you plan to do with those drills? Do you send them back, or do you start drilling aggressively further along the trend?

Greg, we are re-deploying the drills, as we speak, along the trend, and there are number of targets adjacent to the West Branch area we've been drilling the last six months. But we are currently active on them. And the first targets we have a number of core drills testing under the [Piment] pits along strike to the north. In addition to that, we'll also redeploy the RC drills onto some of the outlying targets along the trend.

So, as I mentioned earlier, a drill will be heading down -- heading towards Charlize C69, on the southern end of the concessions this month. We also have an RC drill currently looking to extend the resource of prolongation. So, at the north end of the mine trend. And once that drilling is -- once the first phase of drilling there is completed, we'll put the drill onto the target at C67. So, the drills are gradually evolving away from the big definition drilling program. We're constantly assessing our drilling [mates] as we go, and we'll make decisions accordingly. And the influencing factors there are any ongoing feasibility requirements, and also how these additional targets progress in terms of results [SART flowing].

I think, Glen, when we were on the trip, you suggested that Piment zone drilling at depth, you wouldn't expect to see -- or be able to provide us much in the way of guidance until Q3 results. So, October, November kind of time frame. Is that still what you are thinking?

That's -- yes, that's correct, Greg. We'll -- the result, we just started drilling. So, in terms of tangible results and our understanding on the targets developing, at Piment, especially, we'll be in a better place to report on those results in the third quarter.

Thanks a lot.

Thanks.

The next question comes from Anita Soni of Credit Suisse. Please go ahead.

Hi. Just with regards to the process for Cerro Casale. Could you just run down, again, I'm sorry, the permitting? What steps have to take place next?

Yes. In middle of this year -- again, we are getting this information from our partner who is managing it, Barrick. We would expect the EIA submission to go in, call it July, August of this year. Which, based on current permitting timetables in Chile, which of course we're pretty familiar with these days, that would be late in '12, we'd probably get approval. That's kind of middle of the range for a typical EIA permitting timetable. That would mean early in '13. It would go back to the project board of directors management for recommendation whether to proceed or not, and would obviously flow up to the boards of the two partners. Things to be sorted in the EIA include the overall permitting and water access -- water use permits. That would -- all of that would push a timetable estimated, again, for start of production in 2016 or 2017.

Okay, thank you very much.

Thanks.

There are no more questions at this time. I would like to turn the conference back over to Mr. Burt.

Thanks, folks. Thanks, Operator. Just briefly, in closing, as I mentioned, the first quarter was an excellent start to the year, with strong performance from the operations. And along with the financial successes, we are very pleased at the progress we're making on the projects, and particularly, at Tasiast. Again, this gives Kinross the best growth profile among the senior gold producers, as we look ahead to a full year of production from those four big development projects in 2015. Thanks for your comments and questions and attention this morning. Thanks, Operator.

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