Kinross Gold Corp (KGC) 2014 Q3 法說會逐字稿

Welcome to the Kinross Gold Corporation Q3 2014 financial results conference call. As a reminder, all participants are in listen-only mode on the conference 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. Tom Elliott, whys President, Investor Relations. Please go ahead.

Thank you. And good morning. With us today we have Paul Rollinson, Chief Executive Officer, Tony Giardini, Chief Financial Officer, and Warwick Morley-Jepson, Chief Operating Officer.

Before we begin, I'd like to bring 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 which may lead to actual financial results and performance being different from estimates contained in our forward-looking information, please return refer to page two of this presentation, our news release dated November 5, 2014, the MD&A for 2013 and the period ended September 30, 2014, and our most recently filed AIF, all of which are available on our website. I will now turn the call over to Paul.

Thank you, Tom. And thank you for joining us today. From an operational standpoint, this is the best quarter we've had in recent memory. And that is significant, considering we have met or outperformed our guidance for the past nine quarters in a row. And yet we have seen our share price decline to levels we frankly never thought possible, considering we produce upwards of 2.6 million ounces of gold a year at competitive costs. Much of the decline in our share price has to do with the volatile price of gold, which has affected the industry as a whole. But there are also certain issues specific to the Company that, regardless of our strong operational performance, are weighing down market sentiment. I'll speak to those issues momentarily, but first I want to take a few moments to highlight what has been an outstanding quarter.

Kinross has consistently emphasized operational excellence and financial discipline, and that focus continues to pay off. Q3 has checked the box on all key metrics -- an excellent safety record, strong production, lower costs, disciplined capital allocation, and robust cash flow. As a result of this strong performance, we are positively adjusting our guidance ranges for production, cost of sales, and capital expenditure. And importantly, we are also narrowing downward our guidance range for all-in sustaining costs to $950 to $990 per gold equivalent ounce.

This quarter, Kinross's all-in sustaining costs on a gold equivalent basis was $919 per ounce, which represents a 15% decline year-over-year. We've been able to achieve these lower costs due to a number of factors. First, consistent progress in reducing operating costs at a number of our sites through continuous improvement initiatives, such as the move to self-perform mining at Chirano, and the blending of ores at Paracatu, which Warwick will elaborate on further in his remarks. Second, a disciplined approach to capital spending, whereby we have significantly reduced CapEx without having any adverse impact on our operations, and, third, the addition of low cost, high grade ounces from Dvoinoye, which continues to be a strong performer.

At the same time, production remains strong. We had record production this quarter at both Maricunga and at Paracatu for the second time in 12 months. We also continue to generate cash flow and strengthen the balance sheet despite a price in the gold price compared to last year. So when it comes to operational performance and our balance sheet, Kinross has delivered on its strategy and is firing on all cylinders.

This, however, is not reflected in our share price. In recent days and weeks, Kinross, like many of our peers, has hit 52-week and multiyear lows. This is due in a large part to the dramatic drop in the gold price in recent days. Understandably, the market is concerned about the ability of gold miners to be profitable should gold dip to $1100. In Kinross' case, I believe we have demonstrated our ability to get out in front of gold price volatility. It's been demonstrated with our Q3 results and our ability to drive down costs through continuous improvement initiatives and disciplined capital expenditure. We've successfully turned around high cost mines, starting with Paracatu, and lately Maricunga. We have shown we are willing to make tough decision, such as when we suspended La Coipa. But let me assure you that $1100 gold, all of our mines are forecast to be cash flow positive, with the exception of Tasiast. In fact, the same is true for $1,000 gold when the current oil price and foreign currency exchange is factored in.

Gold price is just one variable. And it's important to remember that at a lower gold price, you can have -- you can also have several beneficial offsets. Currently a lower oil price and weaker foreign currencies relative to the US dollar are particularly beneficial to us given our global footprint. Nevertheless we will continue to look for ways to further optimize our operations and reduce costs. As we begin our 2015 budgeting process, there are a number of discretionary options we will focus on in order to reduce spending without impacting operations, all while we continue to focus on cash generation and cash preservation.

I would like to turn to another topic that has also had an impact on our share price, Russia, and the concerns that political tensions with the Ukraine could negatively impact our operations. By some estimates, the entire value of our Russian assets has been discounted from our share price, and in my view this doesn't make a lot of sense. While I can't speculate on what will happen in the future, I think it is important to take into account what has happened until now. Since the situation first began nine months ago, our operations in Russia have remained completely unaffected. I've also personally traveled to Russia three times in recent months, most recently in October, and on every occasion, the Russian leadership has underscored its strong report for Kinross' operations. These factors, taken together, give us a high level of comfort regarding our operations in Russia.

I'd like to now address another important question, namely, whether we will proceed with the expansion of Tasiast. The first point I want to emphasize is that we have not made a decision yet, and that decision will be made in 2015, and we are targeting the end of the first quarter to provide an update. There are many factors to be considered, but starting with the strength of our balance sheet. When we set the Company on a new direction more than two years ago, we identified balance sheet strengths as a priority and one of the four pillars of our strategy. That remains the case today, and maintaining a strong balance sheet will be the overriding consideration guiding our decision. More plainly put, we will not move forward with Tasiast or any project if it puts the strength of our balance sheet at risk.

So, while I want to underscore that a decision will not be made until next year, I also want to be clear that if today's gold price were to persist, it's difficult to see how we could proceed with a positive decision. The other side of that is, if we do not proceed, at current gold price levels, we would expect our cash balance to increase and our balance sheet to become even stronger. All that being said, it's important to remember that an expanded Tasiast is expected to be a great project. It would offer a rare combination of significant low cost production and low execution risk.

Now I'd like to conclude my remarks by welcoming Warwick Morley-Jepson to the call. Warwick took the reins as Chief Operating Officer on October 1. And all of us here at Kinross are looking forward to working with Warwick in his new role. As you may know, Warwick is a long-term veteran of the gold industry, and for the past five years was Kinross' regional Vice President for Russia, a region that has performed extremely well. Warwick built a solid team from the ground up in one of most geographically challenging areas of the world to operate, and oversaw the building and commissioning of Dvoinoye in an impressively short three-year period. We believe Warwick is ideally suited to continue Kinross' strong operational track record. Warwick will be walking through Kinross' operational results for the quarter in a few moments, but first I'll the call over to Tony for a review of our financial results.

Thank you, Paul. Our strong operating performance underpins the strength of our balance sheet. As Paul emphasized, during his remarks, our focus on disciplined capital management and the strength of our balance sheet are, and will continue to be, priorities going forward.

At the end of the quarter, Kinross had a liquidity position of approximately $2.4 billion. This consists of $879 million in cash, cash equivalents, and restricted cash, and $1.5 billion of available undrawn credit facilities. As you can see, our balance sheet improved during the first nine months of the year. We increased our cash position by $100 million and we repaid $60 million of debt. We also reduced our net debt position to $1.2 billion. As a result, our net debt to EBITDA ratio at September 30 decreased quarter over quarter to 1.28 to one, which is well within our debt covenant of 3.5 to one.

As a reminder, we also took action earlier in the year to increase our financial flexibility by terming out a portion of our term loan. As a result, our only debt maturity prior to 2018 is the $250 million senior notes due in 2016 and regular amortization payment on the Kupol loan. Overall, we are in a strong financial position, which was reaffirmed in October when both Standard & Poor's and Fitch reiterated their investment grade credit ratings on Kinross.

Turning now to our financial performance, we delivered strong production of approximately 694,000 attributable gold equivalent ounces at a cost of sales of $698 per ounce and an all-in sustaining cost of $919 per ounce. Adjusted operating cash flow was $312 million, or $0.27 per share, 22% higher compared to Q3 2013. Third quarter adjusted net earnings were $70 million, or $0.06 per share, compared to $54 million, or $0.05 per share in the same quarter last year.

During the third quarter, we recorded a tax expense of $92 million, compared with $55 million in the same quarter last year. This includes a $36 million expense due to the remeasurement of non-cash deferred tax assets as a result of income tax reform enacted in Chile. As a result of our continued focus on financial discipline and reduced spending, capital expenditures in the third quarter were $154 million, down almost 50% from the same quarter last year.

As Paul mentioned, we have revised our 2014 guidance as a result of our strong performance year-to-date. We now expect to come in at the high end of at narrowed production guidance range of 2.6 million to 2.7 million gold equivalent ounces. We lowered our production cost of sales guidance to say $720 to $750 per gold equivalent ounce, down from our original guidance range of $730 to $780 per ounce. We narrowed our all-in sustaining cost guidance to $950 to $990 per gold equivalent ounce. We lowered our full year capital expenditures, which includes approximately $60 million of capitalized interest, to $630 million to $650 million, down from our original forecast of $675 million. And we expect to end the year below our guidance for overhead of $205 million.

I'll now turn the call over to Warwick for a review of operations.

Thank you, Tony. As I've transitioned into my new role, I've been impressed with the commitment to operational excellence from our global operations. And I'm pleased to share with you another strong quarter of operating results. Let me walk you through some of the highlights.

Our Americas region performed well in the third quarter, producing 387,000 gold equivalent ounces at a cash -- cost of sales of $794 per ounce. The region is on track to reach the high end of its production guidance and achieve the low end of its cost of sales guidance for the year.

At Fort Knox, production increased when compared with second quarter as a result of the expected seasonal increase of heap-leach processing. Cost of sales was higher year on year due to lower mill grades and access to a high-grade area of the pit was restricted due to a localized failure in the temporary interim wall. We regained access to the section of the pit near the end of September and expect mill grades to improve in the fourth quarter.

As we announced last month, mill operations at Round Mountain were suspended at the beginning of October as a result of a fire in the mill building. We have commenced repairs to the mill, which we expect to recommission in March of next year. Production at the mine's heap leach facility which accounts for approximately 75% of production continues uninterrupted. We do not expect this incident to result in any material impact to our 2014 regional guidance.

Paracatu had an excellent quarter, achieving record core peak production of 136,000, also reducing cost of sales for the third consecutive quarter to $776 per ounce. Production has been the result of higher grades, recovery as we continue to process a blend of B1 and B2 ores to both plants. As we reported last quarter, we began processing a blend of B1 and B2 ores to both plants, a result of one of our more significant continuous improvements initiatives. Q3 was the first full quarter with this in place, and it has resulted in the higher grades and better recovery.

Maricunga had a record quarter as well, producing 69,000 ounces, which is an 82% increase when compared to the same quarter last year. You will recall that we replaced the new team in Maricunga in Q3 of 2013 to address performance. The efforts are clearly evident in the results that have been achieved. This is particularly notable as operations in Maricunga during the third quarter are historically challenged by harsher weather conditions. Maricunga's record production was driven by our ongoing improvements to the crusher plant, as well as enhanced management of the heap leach, the ADR and [sort] plants, and as a result unit costs declined 36% compared to Q3 of 2013.

Our operations in Russia continue their strong performance in the third quarter, producing over 180,000 gold equivalent ounces at $493 per ounce. Gold grade increased 17% year on year as the higher grade ore from Dvoinoye was partially offset by an expected decline in the Kupol grade. As a results of strong performance from our Russian operations in the first nine months of the year, we have increased our production guidance and lowered our cost of sales guidance for the region. For the full year we now expect Russia to produce between 710,000 and 750,000 gold equivalent ounces at a cost of sales of $520 to $550 per ounce.

Our West African operations produced 126,000 attributable ounces at a cost of sales of $751 per ounce during the third quarter. At Tasiast, production was down slightly from the previous quarter due to lower mill throughput as a result of increased ratio of harder, higher grade Greenschist material that is now being autopsied mined from the West Branch pit. However, production was up 18% year on year due to these higher grades. Third quarter cost of sales improved by $46 per ounce from Q2 as a result of lower tons mined, higher grades, and ongoing continuous improvement initiatives.

Production at Chirano improved quarter on quarter as more throughput increased, following the repairs that were completed in June of this year. Cost performance at Chirano continues to be strong. With cost of sales per ounce declining 29% year on year as a result of the transition to self-performed mining in both the open pit and the underground mining operations. Our West African region remains on track to meet its full year production guidance of 480,000 to 540,000 gold equivalent ounces. We have lowered our cost of sales guidance for the region to $790 to $830 per ounce.

Overall, it was a great quarter, and an excellent nine months of operating performance that has resulted in a favorable revision to our cost of sales and all-in sustaining cost guidance ranges. We are focused on continuing to deliver strong results for the remainder of this year.

I will now turn the call back to Paul.

Thanks, Warwick. As you've heard from both Tony and Warwick, this has been another strong quarter for Kinross, both operationally and in terms of the balance sheet. We are continuing to deliver on our strategy, which we clearly set out a little over two years ago. That strategy focusing on operational excellence, the pursuit of quality, disciplined capital allocation, and balance sheet strength, has positioned us well in the current gold price environment. Going forward, we believe the financial flexibility and strong operational foundation that our strategy has established will continue to serve us well.

With that, operator, I'd now like to open up the call for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question is from Jorge Beristain of Deutsche Bank. Please go ahead.

Hey, good morning, Paul. It's Jorge with DB. I guess my question is, one about SG&A and just kind of corporate overhead of managing a shrinking gold portfolio if Tasiast ultimately does not get built. I've done some research, I've sent it to you guys, I think you're running at about an $82 per ounce of gold sold in terms of corporate SG&A which seems quite high relative to the sector average that we calculate at $52. So my question is, how much more latitude do you guys think that you have in terms of cutting corporate overhead? Or is that going to be sort of dependent on shrinking your mine footprint further? And secondly, how amenable are you, as a company in this environment, to look for strategic partnerships and/or even mergers with other mining companies as it would seem the gold price may pressure that outcome? Thank you.

Things. Jorge. On the G&A front, we do a lot of benchmarking ourselves. We should compare notes with you. We don't see it that way. We don't see our G&A as being out of line with our gold peers, so we should talk about that on a separate matter. But just getting to the point, I made the point that all of our mines are cash flow positive at $1100, and that's after sustaining capital. That's after everything at the mine. As we look to lower gold prices or challenges in the industry, once it leaves the mine it all becomes discretionary. G&A is certainly a bucket that we would look at. It's one of those items where we would look to continue to cut. We have cut significantly in the last year, and clearly that's an area where we'd continue to look to save dollars.

On the strategic partnership side, look, I think we're in a situation here where we're being very cautious and we're being very disciplined. In a higher gold price environment I think Tasiast is a fantastic low risk expansion opportunity. To the extent we're not going ahead and perhaps a lower gold price environment, our balance sheet gets stronger and stronger, and our cash flow will continue to build. And from my perspective, we'd look to -- look at whatever opportunities might arise, hopefully from a position of strength, operationally and financially.

Maybe, Jorge -- Tony Giardini. I will just add a couple of comments. As Paul pointed out, we do look at bench marking vis-a-vis G&A. I think one of the factors you have to look at is the regional -- how regionally dispersed our operations are. But I would point out that last year we made the decision exactly looking at our structure to combine the Americas and one example of looking at cost reduction. So what we did was, we essentially reduced our Santiago office and amalgamated it with our US operations and set up an office in Denver, so we'll start to see some of the benefits of lower G&A costs associated with that. But it's something that will continue to be focused on and we're in the budget process now and we'll be looking at that as we look at 2015.

Thanks, guys.

Our next question is from Stephen Walker of RBC Capital Markets. Please go ahead.

Great. Thank you. And just a couple questions on Tasiast for Warwick. Warwick, I believe -- and again I missed the exact context of your comment, but I believe you said you were in the West Branch or at Tasiast. Can you give us a sense of two things in that comment, what grades can you expect going forward? I know in the early years of the original mine plan you could get up to 3g material, you were currently mining 2.27. What percentage of the ore going to the plant is coming from the West Branch and, going forward, what sort of range of grades could we expect from the West Branch ore?

Thank you, Stephen, thanks very much for the question. I think the first thing that I'll point you to is the technical report that was produced and submitted, put into the marketplace earlier this year. A great deal of detail was contained in that report, and I'm very sure that those questions that you just raised, the answers to which are contained in that report.

Just giving you some guidance on the -- of our mining activities right now -- the majority of those are in fact in the main pits of which we call it West Branch. As we've indicated, we have -- we are currently moving through the oxide material. We are currently in the transition and experiencing more and more of the Greenschist as we go deeper, which are is higher grade. The higher grade certainly are in the range of which you mentioned, the 2.2g/ton to 2.4g/ton, and we see that being pretty consistent in the forthcoming year or two.

Okay. Thank you, Warwick. And maybe just a follow-up question on the capital at Tasiast. In your release you talked about a decision whether to proceed with the mill expansion in 2015. Is there any -- at this stage are there any plans to go ahead with any of the infrastructure spend, whether it be power or water or other components of the infrastructure, Paul? At Tasiast?

Stephen, I think most of the infrastructure is in place already. If you were to go with the expansion, we would have to expand the power plant. You'll recall we did put in a 20 meg plant a year or so ago, which got us off a number of small generators. But the rest of the infrastructure, other than the sea water pipeline, is in place. And as you'll recall, in the sea water pipeline, as we've continued to study the aquifer, our draw is not -- has come down quite a bit with conservation efforts, and we wouldn't need that sea water pipeline for several years. So there's -- there isn't a lot to be spent until we decide to go ahead.

Great. Thank you for that, Paul. And congratulations on a strong operating quarter.

Thanks, Steven.

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

Yes, this is a question for Paul or Warwick, I guess. You say in the press release the optimization of the project scope, and this is related to Tasiast, is largely completed in the quarter, with no material changes compared to the feasibility study. What does that really mean?

Warwick, do you want to tackle that?

Greg, the issues that -- the process we've been through for the last number of months is what we call a de-risking program as well as the early works. And through that process, we've continuously looked at areas in which we can enhance the project's financial viability as well as the execution risks. And through that process, we've defined a number of opportunities on the cost side, methodology of execution, and the cost profiles that we defined in the feasibility study versus that which is now more specific to the marketplace. That work has not shown any -- there are obviously variances, but certainly the variances are in many ways a wash of one area to the other.

As far as material changes, there's nothing being of material consequence. We have seen an opportunity to increase the slope angles of our pits, which enhances things. We also obviously see a change in the exchange rates as they are being experienced across the globe. So those are the kind of things that are changing, but not material.

Okay. And I understand that you haven't completed the final go through of the CapEx, but are you seeing any success in bringing that CapEx down with lower construction activity globally and better equipment available -- availability and things like that helping you out?

I would suggest that there's more positive than negative. We haven't completed the work and that work would be completed towards the end of this year in preparation for the first quarter of next year. I would suggest that if there's a change, it would be downward, but I'd be hesitant to commit to you a number right now, rather maintain our current position until the work is finished.

Okay. Great. Thank you.

The next question is from David Haughton of Bank of Montreal. Please go ahead.

Yes. Good morning, Paul, Tony, and Warwick. Thank you very much for the update. Pretty impressive numbers coming out of Kupol/Dvoinoye. When we're having a look at your current guidance for the year, it suggests a reduction in the fourth quarter compared to the kind of run rate that we've seen recently. Are you anticipate go a further decline in the Kupol grade or is there just a little bit of conservatism in that guidance number?

I'll turn it over to Warwick, David. Look, I think inherently we are a little bit on the -- on the conservative side of the ledger, but Warwick, can you maybe expand on that?

Thank you, David. We're getting closer and closer, as you're aware, to the overall average grade of the resource. We've come from very high grades, as you'd believe, over the last three or four years, to where we are now. That is going to be pretty consistent going forward. We've not defined any new resources within the immediate area of the mining operations that would suggest it's going to increase or decrease. So I would suggest it's going to be pretty consistent.

Okay. All right. Thank you for that. And I guess into next year, to your point with the Kupol grade in particular moving closer to that reserve number, so lower expectation from the Kupol part of the equation in 2015, I presume, than 2014.

Yes, that's consistent with our -- our guidance as well as with the work that we -- we made public earlier on in the life of the mine, actually. I would say the similar situation goes for Dvoinoye. We have had very good grades in the beginning, which is all originally part of our plan. However, our commitment of the 250,000 to 300,000 ounces from Dvoinoye in the first three years which is something again we've disclosed, is still our commitment, and we don't see that changing.

Okay. With very prospective to exploration around all of those regions, have you put much into looking at mine life extension there or you just feel you're a little bit overweight pressure at the moment?

No, it's a work in process and you're right, it's very prospective, and we've had some very interesting results, particularly at Moroshka, which was a terrific technical success in that it's a blind deposit, it doesn't come to surface. The team figured out the structure and drilled and has hit similar style mineralization as Kupol, as well as over at Dvoinoye. It's early days, but September Northeast is looking very interesting to us.

One last point, if I may, a different topic possibly for Tony. You speak about the work that you've done on the project finance for Tasiast. You've obviously invested a lot of effort in this. Can you just talk to the kind of appetite that you've seen for the project financing there and the kind of players that we might see as backers for this endeavor?

Sure, David. I think that we've been working on this for a while, in fact, it goes back several years, and when the gold price came off in 2013, we actually went on that point on moving forward with a PF but have reconstituted our effort. And we've had a site visit with potential lenders in September, so we spent approximately four days together going through the project, sort of talked about them from all of the aspects that we would be interested in seeing, and then taking them out to Tasiast. And it would be fair to say that I think they were very impressed with the work that we've done there and the infrastructure that's already in place.

The three main lenders that are looking at the project right now are EDC, Export Development Canada, US Ex-Im, which is the export development arm of the US government, and then a number of development financial institutions in Europe which are working under PROPARCO, which is a French development agency. So those are the three main agencies. We also see scope for other lenders to come into the project, and that's going to be explored as we move forward in terms of next steps. The next steps in the process are to meet with the lenders to review the detailed term sheet and that's going to happen later this month. So I think we're well positioned to continue to advance this forward, and I would say that the tone has generally been positive.

I think as Paul reiterated we haven't made a decision on Tasiast and project finance is one of those considerations that we'll be looking at as is gold price and appetite for taking on financial risk and strength of balance sheet. And those are all going to be strong considerations in terms of looking at the [pre-app]. But I would say that all of the parties that are at the table are very engaged in terms of moving the project forward. There's not a lot of project finance activity happening in the metals and mining space, and we think that we've got a very strong project here, but we're only going to move forward under the parameters that Paul set out in his opening remarks.

Thanks a lot. Thank you, Tony.

Next question is from Anita Soni of Credit Suisse. Please go ahead.

Hi. Just a question with regard to Tasiast. If you don't move forward, have you started to think about optimization of the asset itself without an expansion?

Yes, again, that's -- I would characterize it as typically pretty routine. We're always thinking about those scenarios. We've done a lot of work. We do think that 38 is the optimal scenario. To the extent we don't continue, we'd -- at this point in time, we'd think about what else might make sense.

All right. And then just a question in terms of the Round Mountain. It's a restart in March. How much do you expect -- I think you said 75% of the ore is heap leach, but is it just one mill that's affected or both parts of the milling operation that are affected right now?

Anita, I'll answer that question for you. The answer is that it's affected the entire mill facility, and so milling for the period between now and March would not take place at Round Mountain. As far as that implication to the Company, we don't regard it as material. However, it does constitute between 3000 and 4000 ounces to Kinross on a monthly basis.

Okay. And then lastly, on Paracatu, the blending of the B1, B2 ore, there was more B2 this quarter. Is that going to persist or is it still along the same lines as the mine plan as for the technical report?

Very much along the lines of the technical report. You do appreciate that B1 ores do start to diminish in quantity as we move into forthcoming years. It was always an understanding, and the oxide or softer material does come to an end. And so as that happens, the B2 ores increase. And that's really the benefit of this initiative that is being driven by the region, is our ability not to close down plant one but rather make use of it to process B2 materials. So a huge benefit going forward.

I just thought it was going to start to transition a little bit more in 2016 rather than at the end of 2014. So are these the kinds of grades and throughputs well see for the next five quarters or so?

Yes, I would say so. Yes.

Okay. Thank you very much.

This concludes the question-and-answer session.

Thanks. Thanks, everyone. We'll see you on the next quarter. Thank you very much. Thanks, operator.

This concludes today's conference call. You may now disconnect your line. Thank you for participating and have a pleasant day.