Kinross Gold Corp (KGC) 2014 Q2 法說會逐字稿

Welcome to the Kinross Gold Corporation second quarter 2014 financial results conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Tom Elliott, Vice President Investor Relations. Please go ahead, Mr. Elliott.

Thank you and good morning. With us today we have Paul Rollinson, Chief Executive Officer; Tony Giardini, Chief Financial Officer; Brant Hinze, President and Chief Operating Officer; and Warwick Morley-Jepson, who will be taking over from Brant as COO in October.

Before we begin, I'd like to bring to your attention the fact that we will be making forward-looking statements during this presentation. For a complete discussion of the risks, uncertainties, and assumptions, which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please refer to page 2 of this presentation, our news release dated July 30, 2014, the MD&A for 2013 and the period ended June 30, 2014 and our most recently filed AIF, all of which are available on our website.

I'll now turn the call over to Paul.

Thanks Tom and thanks to everyone for joining us today. We realize it's sort of a log jam this morning with a number of companies reporting, so we'll attempt to keep our opening remarks brief.

Again, let me start by introducing Warwick, who is with us today and as Tom just indicated, will be taking over from Brant as Chief Operating Officer on October 1st. He is joining us on our investor call for the first time. You'll be getting to know him much better in the months ahead.

Last night we were pleased to announce another quarter of solid operating results. Our operations continue to deliver and to build on our record of consistent and dependable performance across the portfolio.

Let's take a closer look at the Q2 results. Our second quarter production was approximately 680,000 ounces, an increase over the same quarter last year, due mainly to new production from Dvoinoye. We produced approximately 1,345,000 ounces in the first half, which at midyear puts us at the high end of our annual production guidance of 2.5 million to 2.7 million ounces.

Production cost of sales was $742 per ounce for the quarter and $735 per ounce for the first half, which is at the low end of our guidance range of $730 to $780 per ounce. Our all-in sustaining cost declined to $976 per gold equivalent ounce, down from $1,038 per ounce in the same quarter last year and approximately $1,000 per ounce in Q1 of this year. This downward trend reflects our continued strong focus on cost reduction across the company.

Brant will review our mine performance for the quarter in more detail, but let me point out a few highlights. Looking at Maricunga, we brought in a new management team in the third quarter of last year to turn around performance. They have achieved a whole range of operational improvements since then, like better equipment availability, better performance in the ADR plant and better performance in the heap leach. And the results speak for themselves. Production is up 69% and unit costs are down 36% since the new team started.

In West Africa, we continue to see cost improvements at both Tasiast and Chirano. Cost of sales per ounce for the region was down by 12% year-over-year as a result of the move to self-perform at Chirano and our continuous improvement efforts at Tasiast.

In Russia, we continued to see excellent performance from our combined Kupol and Dvoinoye operation, which has been outperforming expectations. Gold production from the Kupol mill increased by more than 60% over the same quarter last year, with an overall grade improvement of 23%. So clearly, Dvoinoye is proving to be a great addition.

We continue to monitor the political situation in Russia and in the Ukraine. While our Russian operations have been unaffected by the economic sanctions announced to date, we are aware of the potential for further sanctions and counter-sanctions. While we can't speculate about how the political situation will evolve, we are taking the necessarily steps to mitigate or minimize potential future impacts on our operations.

For example, we have expedited our shipping process and now have all of our critical supplies in-country for 2015 and into early 2016.

Turning to our development prospects, we continue to make good progress at Tasiast, further evaluating opportunities to enhance project economics and derisk execution. We've engaged BNP Paribas to assist in exploring project financing options. We are considering funding in the range of $700 million to $750 million of the project cost and would expect to fund the remainder from existing cash balances and cash flow.

We are continuing discussions with the Mauritanian government on a range of tax and labor related issues. We have advised the government that the results of this exercise will be an important consideration in our investment decision. That said, we are making progress with the government on these issues.

For example, we recently received a final permit approval to build a seawater pipeline. In addition, legislation granting the mining industry a VAT exemption has been enacted and we are currently working with the government to understand how the exemption will be implemented.

At La Coipa, based on favorable results from a preliminary scoping study, we plan to proceed to a pre-feasibility study. The study will focus on Pompeya, where the average grades we are seeing are better than what we previously processed at La Coipa, as well as oxide and transitional mineral resources at the existing Puren deposit.

The recently completed scoping study has indicated that our flowsheet for Pompeya would be much the same as that for our previous La Coipa operation, so that any changes to processing would be minimal. Meanwhile, we will continue to find future opportunities at the adjacent Catalina discovery and the surrounding district, which we believe have excellent potential.

Finally, we continue to see exciting exploration results at Moroshka near Kupol, as well as at Chirano, where we are exploring a number of targets and believe there is good potential to extend the mine life.

In conclusion, with another successful quarter behind us, we remain firmly focused on the fundamentals of operational excellence, financial discipline and profitable mining. Our portfolio is performing well and we are solidly on track to meet our guidance for the full year.

I'll now turn the call over to Tony for more on our financial results.

Thank you Paul. Our strong operating performance underpinned the strength of our balance sheet. As at June 30, Kinross had a liquidity position of approximately $2.3 billion. This consists of $782 million in cash, cash equivalents and restricted cash, and $1.5 billion of available undrawn credit facilities.

With a net debt position of $1.3 billion, our net debt to EBITDA ratio at June 30th of 1.46 was well within our debt covenant of 2.5 to 1.

In July, we increased our financial flexibility by extending the maturity dates of the $500 million term loan and the $1.5 billion revolving credit facility by one year. With this extension, our only debt maturity prior to 2018 is at $250 million senior notes due in 2016 and regular amortization payments on the Kupol loan.

Turning now to our second quarter performance. We delivered strong second quarter production of approximately 680,000 attributable gold equivalent ounces at a cost of sale of $742 per ounce and an all-in sustaining cost of $976 per ounce. However, lower gold prices continue to have an impact on our financial results. In the second quarter, the average realized gold price was $1,285 per ounce and the average London PM fixed is $1,288 per ounce, both of which are down over $100 per ounce from the same quarter last year.

Adjusted operating cash flow was $228 million or $0.20 per share; 11% lower compared with Q2 2013. Second quarter adjusted net earnings were $33 million or $0.03 per share compared to $120 million or $0.10 a share in the same quarter last year.

As a result of our continuing focus on financial discipline and reducing spending, capital expenditures in the second quarter were $120 million, down over 60% from the same quarter last year. Our focus on disciplined capital management and the strength of our balance sheet will continue to be priorities going forward.

I'll now turn the call over the Brant.

Thanks Tony. I'm very pleased to share with you another quarter of strong operating results. A full site-by-site summary is available on page 17 of yesterday's news release. I'd like to touch on some operational highlights.

Our Americas region performed well in the second quarter, producing 363,000 gold equivalent ounces at a cost of sales of $837 per ounce. At Fort Knox, access to a higher grade portion of the pit has been delayed longer than expected due to a localized failure within a temporary interim wall. As a result, operating costs in the second quarter were impacted by higher operating waste, lower grades, resulting in lower production and longer haul distances, which we expect to continue to the third quarter.

However, the impact on cost is expected to be temporary. We expect to access the higher grade ore by the end of the year and our production and cost targets for the year remain unchanged.

At Maricunga, the positive trend of increasing production and declining unit costs continued in the second quarter. The team there has made a significant impact in improving operations on all fronts, including better equipment availabilities, increased crusher throughput, improved efficiency in the ADR plant, more efficient solution management schedules and enhanced management of heap leach loading schedules.

The result of their efforts can be seen in the operations' second quarter performance, with production increasing by 22% and unit cost declining by 17% compared to the first quarter.

At Paracatu, we processed a higher percentage of B2 ore during the second quarter. B2 ore has typically been processed through Plant II due to its higher work index. After positive results from test work conducted earlier in the year, we began blending the two ore types through both plants. This has a number of benefits for the operation, including higher average grades and recoveries through Plant I.

The combined Kupol Dvoinoye operation continued to perform well in quarter two, producing 195,000 gold equivalent ounces at a cost of sales of $530 per ounce. Approximately 83,000 ounces were produced from processing high-grade Dvoinoye ore during the second quarter, in line with first quarter. The cost of sales per ounce increased slightly compared to quarter one, mainly due to an increase in operating development and high ounces sold from Kupol.

As a result of this strong performance in the first half of the year, our Russia operations are on track to be at the higher end of production and the lower end of cost of sales guidance for the full year.

Our West Africa operations produced 122,000 attributable ounces at a cost of sales of $837 per ounce during the second quarter. At Tasiast, production was down slightly from the previous quarter as a result of lower mill grades.

As anticipated, Chirano production was lower compared to the first quarter, as a result of a trunnion failure in one of the three ball mills, which occurred near the end of the first quarter. The resulting lower throughput was offset by prioritizing higher grade ore through the mill. Repairs were completed in June, ahead of schedule and mill throughput is back at full capacity.

Cost of sales for the region was in line with the first quarter, with slightly higher costs at Chirano due to the lower production and mill repair costs. However, looking year-over-year, costs at Chirano are down 20% due to the cost savings the team has achieved through the transition to self-perform mining.

Overall, we are very pleased with our strong operating results across our portfolio in the first half of the year and we are focused on continuing to deliver strong results for the remainder of the year.

I'd like to take this opportunity to thank our employees for their hard work and performance throughout my time with Kinross. The past four years have been a very rewarding time for me and I will miss the many friends I have made during my time here.

Before turning the call back over to Paul, I'd like to say that I have a superb successor in Warwick. He is extremely well qualified to take over as COO. Warwick has the skills and experience necessary to build upon the company's strong foundation of operational excellence and I wish him the very best in this new role.

Paul, I'll turn it back over to you.

Thanks Brant. As this is Brant's last call, I'd like to thank him once again for his leadership in building a true culture of operational excellence at Kinross, in driving the consistent results we are seeing today and very importantly, in helping us achieve one of the best safety records in the entire mining industry. So Brant, on behalf of the company, please accept our best wishes for a happy and healthy retirement.

Operator, I'd now like to open the line up for questions.

(Operator Instructions) Stephen Walker; RBC Capital Markets.

Just a couple of questions on the operations; can you clarify, first of all at Maricunga, are you continuing with the ongoing pre-strip of the waste material here or are you into a harvesting mode with respect to reducing the sustaining capital and driving costs down that way?

Stephen, I can address that. I think what we have said in past calls is that we were going to put this new team in there and see what they can do for performance before we make a decision on whether we're going to reinitiate stripping. And as we indicated in previous calls, we have enough ore exposed to carry us into 2015.

Obviously, from the results that we've seen, we're very very pleased with the performance of the team and they continue to explore opportunities to continue to drive cost down and drive efficiencies into the operation.

As well as you know we're just starting into the budget season and strategic business planning season, so we haven't made any final decisions, but I would say we're very very encouraged with what we've seen up to this point.

And just maybe a question follow-up, if I may, on Paracatu. The grades obviously improved nicely here and you're starting to work with a blending through both the plants. I guess two things; can we expect to see these higher grades continue over the next three or four quarters or longer? And recoveries, ultimately I think the feasibility recoveries were in the low 80s, high 90s; how much more improvement can we expect to see in the recoveries from the 75% level that we saw here in the second quarter?

Just looking at it historically and I think you'll remember as well too from our technical report, our recoveries were in the mid-70s to high 70s and the grades that we are seeing currently are the result of a couple of things. One is we're in an area of the pit where we do see higher B2 grades and as well too, the blend with B1, B2 on the average then is raising the average grade on throughput both for Plant I and Plant II. So, if we look at the average resource, 2P grade for B2 ores, we're in that 0.42 to 0.43 range. So I would expect to continue to see slightly higher grades and better recoveries.

Thank you very much for that, Brant and again, congratulations on your excellent work with Kinross.

Andrew Quail; Goldman Sachs.

Thank you very much for taking my question and congratulations on another strong quarter operationally. Just a question on cost; you guys have obviously been one of the better companies at controlling operating costs and successfully brought that down over last couple of years. On your all-in sustained, that's fallen too, if we break it down, obviously about $10 million year-on-year has come from corporate and exploration expenditure cuts, the rest probably more so from sustaining CapEx. If we look at Q2, can we sort of get a rate per ounce of sustaining CapEx that's reasonable, to go forward from here, across the operations?

I think if you were to go back and strip out some of the (inaudible) projects and (inaudible) capital (inaudible) budgets, you'd see a fairly consistent sort of runway of about $400 million (inaudible). I would say that the assets are very well maintained. And that's a reasonable assumption on a run rate. Tony, (inaudible) with that?

Andrew, I think that's probably how we would look at it. Right now, as you know our guidance at the beginning of the year was $675 million, which included $70 million of capitalized interest. We broke out growth capital in the current year of 205, so 400 is a current year and we sort of see that as probably a reasonable number to use on a go-forward basis, as Paul indicated.

Our assets are very well capitalized. We've spent a lot of money at Paracatu and Fort Knox, so we feel pretty comfortable with those levels. And as you point out, the all-in sustaining cost has obviously benefited from somewhat lower capital spend that we had in 2014 and it's trending towards a low end of our guidance of 950 to 1050, so we're pretty pleased with the operating performance year to date.

Terrific guys. And this is the last one. Obviously you've said for a while that the decision on the Tasiast expansion being 2015. We're fast approaching that. Can you sort of break it down to first half, second half or give us any more guidance on that?

I would say we're continuing to make good progress. As we indicated previously, we've got a number of areas we're working on. Tony is well underway with the project financing process, which is a bit of a gaiting item. We are making good headway with the government. You would have seen that President Aziz was recently reelected with a very healthy majority and so he's got the election behind him. We can focus on some of the cleanup issues we've been talking to him about; labor and tax related items.

As well, on the engineering project execution, derisking, we're progressing well there. So I think I would say in general we're feeling really good about the progress and my hope would be earlier, rather than later, as we get out into 2015, from where I stand today.

David Haughton; BMO.

Just circling back to Paracatu, if I may; at one stage there was an expectation that Plant I would close as the B1 ore kind of petered out from here and my recollection was about 18 million tons per annum. With the blending that you're talking about, Brant, does that mean that there's a potential that you could keep this kind of throughput level going for longer?

David, I can certainly address that. One of the things that we will see through Plant I, because with the blend, on average it will be a higher work index, so we'll see actually the throughput through Plant I decrease a little bit.

Having said that, on Plant II, with a blend, it will be a lower average work index, so we'll see the increase in mill throughput there. So on net, it will be roughly the same mill throughput would be the expectation here.

But I'd like to maybe highlight on some of the other things too, that we get out as a benefit of this. As we stated in our press release and in our opening comments, we do get the benefit of generally higher average grades and generally average recoveries. But in addition to that, because the way that we're going about this, we're using a single crusher, putting everything through the single SAG mill and then doing a split to Plant I, Plant II after the SAG mill.

So what that has allowed us to do now is shut down our entire 777 fleet that we use to feed Plant I and it allows us to shut down the two-stage crushing circuit at Plant I, so we have the benefit of lower overall costs as well too. So it's a bit of a win win situation for us.

And given the availability of the ore types, for how many years can you anticipate this kind of blending?

Again, we're now in the middle of the SBP process, so I don't have an exact date and time, but if you remember, the technical report had us processing B1 ores through 2017. So, is it into 2018 now? I just really can't say until we go through the SBP process.

But the other thing as well too, with this split that we're doing now, after the SAG mill, the expectation is now that Plant I would run indefinitely and it would run B2 ores.

Thank you Brant and enjoy your retirement.

I will David, thank you.

(Operator Instructions) Adam Graf; Cowen Securities.

Quick question on Fort Knox; can you detail a little bit the geotechnical issues there and perhaps talk a bit about going forward, how much resources and reserves are left, respectively for the mill ore there?

I can certainly give you a little bit of history on the wall movements that we have seen. As I indicated, it's an interim wall, so it's not final wall. We have a very high-tech monitoring system on all of our walls in all of our pits. And we noticed an early indication of some movement on the West wall.

So what we ended up doing is pulling out of the bottom of the pit until we understood what was going on and if there was going to be some geotech movement that we were pulling people out and getting them into a safe area. We did get the movement and we have since then readjusted our plans.

And as I indicated, by the end of the year, we expect to have everything back on our projections, both from a production standpoint and a cost standpoint, although quarter two, quarter three, as I indicated, will continue to see the higher expensed waste movement, longer-hauls and a little bit lower grades than into the mill.

The Fort Knox mine life production is through 2020 and the mill ores we have at this time right now are through 2017.

What's the opportunity to expand or convert any additional resource there?

Well, we see Fort Knox with opportunities there that we're exploring; nothing that we can definitively say at this point or discuss in detail at this point, but we do see some opportunities that we're pretty excited about.

Stephen Walker; RBC Capital Markets.

Just a follow-up for Tony with respect to the project debt for Tasiast, where do you stand on that process and can you give us some guidance on what you expect the potential terms could be? Obviously it's going to be a moving figure as rates change, but what premium on top of LIBOR are you targeting and then what political risk insurance on top of that could you expect?

As far as the process goes, let's talk about that and then I'll come back to some pricing discussion. We had been involved on the project finance side for the past several years and we had gone [pens down] last year when we made the decision to move to the full feasibility study and the further decision on moving forward with the expansion.

So now we've reengaged BMP Paribas to assist us on the project finance and that process is going very well. We recently met with what we would see as a core group of lenders and we've gotten initial feedback in terms of a quantum debt they would be in a position to lend the tenor and indicative initial terms.

We also see some additional upside in terms of more debt capacity in the event that we make certain procurement decisions, which would be driven by the countries where that procurement would be coming from. And that would provide some PRI cover.

And then lastly, if we decide to go the [MEGA] route, there could be an opportunity to provide some cover for a bank tranche. So overall, even though we're targeting $700 million to $750 million of project debt in quantum, with the rest of the financing coming from operating cash flow and our existing cash balances that we have, our expectation is that the capacity should be higher than that, which will give us some flexibility and hopefully drive down costs.

I'm not really in a position to discuss tenor and rates, but what I can do is obviously reference you back to the fact that we did a bond deal earlier this year, where we raised 10-year money at roughly 5.95%. If you look at that in the context of the current market, it's probably 50 basis tighter than that, so probably somewhere around 5.5% if we looked at a similar tenor of 10 years and going out in the public debt market.

In terms of recourse, we expect that it would be recourse to Kinross through the construction period and then would go non-recourse after that, subject to obviously negotiations with the lender group.

Maybe just a general question with respect to the Russian operations and sourcing materials; what percent of materials for the operations, the mines there are only available outside of Russia, that is whether it's materials, parts, equipment, etc. and what is domestically sourced? I'm just curious if worse comes to worst, are there critical items that are only available outside of Russia in the operations?

Maybe I'll just start. Again, just given the remote location, obviously transportation and logistics are a big part of our consideration when we look to the mine. And then because of that remote location, there are some unique characteristics related to the shipping cycle. As you may appreciate, it is an 18-month shipping cycle.

But I think this is an excellent opportunity to give Warwick a chance to comment on how things work there, what the percentage is and what we've done to mitigate risk, maybe Warwick, given what's going on politically.

As far as the spread of where we get our materials across the globe, some 25% of it comes from North America; 50% from Russia itself; about 10% from China and the rest from elsewhere on the globe.

In terms of our attempts to mitigate the risks of sanctions, as of this time, they have not negatively affected us, but in terms of mitigating what might happen going forward, we identified this issue of logistics and supply of materials, equipment reagents as the most critical. And so we've been making contact with our operations. The operations identified what would be critical to their continued operation. That was all identified.

And typically we have a 14-month program which starts with the procurement and leading ultimately to the delivery to mine. We were able to bring that process forward to a point that rather than the shipping of cargo which would typically leave the US waters in and around July, August, September of every year, we brought that one forward. And in fact, ships left in June.

So as we stand right now, all the critical componentry, equipment delivery from North America is in fact in-country, which then puts us in a very strong position or certainly favorable position going forward and allows us to have secure supply until February of 2016.

Jorge Beristain; Deutsche Bank.

That last question did touch a bit on what I wanted to ask about, so from what I understand, you're saying that you've identified already as the shipment or the importation of foreign goods as being the key potential risk due to the rising Russian sanctions? That's the first question.

Again, the site itself runs itself a little bit -- we already had, as Warwick said, a 14 to 18-month shipping cycle, because we use winter roads to get critical components in. So there was a bit of a natural advantage. And what we did is on the back of what's happened politically. We've accelerated that. So as Warwick says, our components are in place, at this point, until right into early 2016.

What we're doing, again, we're trying to look at areas and we felt supply chain was one of the key ones to focus on what we can control versus obviously what we can't control. And as Warwick said, our business is unaffected. Our relationships in the region are situation normal and the site is fully supplied.

So my question is, would the Canadian government be instituting the same kind of financial restrictions in dealings with Russia as the United States is or is Canada following its own policy?

Again, I can't get into the political side of it. We're miners. We're focused on our business and where it goes from here, I can't really speculate. What has been enacted to date has not affected us. Where it goes from here, I just can't speculate.

Alex Kodatsky; CIBC.

I just wanted to follow-up a bit on Tasiast. I guess the plan for this year was to work on the project financing and also try and find some incremental cost savings. It sounds like the financing side is advancing. I'm sort of curious what you're seeing on the cost aspect, both from an industry level and whether anything has sort of popped up for you as you've undertaken that work?

I can address that. I think one of the things that is kind of a telling indicator for us is, as we've mentioned before, our interest in, if we make a positive go decision on this is to have preassembled units. We have now addressed the market on a commercial basis from a standpoint of looking at available yards and those yards that are interested and going out for an early bid on yards. And we have experienced a tremendous amount of interest. So we're seeing that as a very very positive indicator.

We are taking this opportunity while Tony and his team are looking at financing packages, to look at the execution and look at opportunities to derisk execution as well. And that goes to the whole preassembled units, the precast concrete, things like transportation logistics and all of that. We're, at this point right now, looking at it as a real opportunity to continue to refine our costs and continue to reduce risk.

This concludes the time allocated for questions on today's call.

Thank you everyone and thank you operator. We look forward to speaking with you next quarter. Thanks.

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