Kinross Gold Corp (KGC) 2017 Q3 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Kinross Gold Corporation Q3 2017 Financial Results Conference Call. (Operator Instructions) The conference is being recorded.

At this time, I would like to turn the conference over to Mr. Tom Elliott, Senior Vice President, Investor Relations and Corporate Development. 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; Lauren Roberts, Chief Operating Officer; and Paul Tomory, Chief Technical Officer.

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 November 8, 2017, the MD&A for the periods ended September 30, 2017 and December 31, 2016, 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. I'm pleased to start off by reporting that Kinross is firmly on track to meet both our company-wide and regional guidance for the sixth consecutive year. In fact, with strong production and good cost performance in the first nine months of the year, we are tracking towards the higher end of the range on production and the lower end on costs.

Q3 marked another strong quarter for Kinross. Overall, our operations performed well, including some standout results at Tasiast and our two mines in Nevada. We had a strong quarter financially, generating approximately $320 million of adjusted operating cash flow, and we are making solid progress on several important development projects.

Let me take a few moments to highlight some key achievements in each of these areas. In addition to solid performance by Fort Knox and Kupol, Tasiast, Round Mountain and Bald Mountain, all had a particularly strong third quarter. Round Mountain hit a record high mill grade, and further dropped its cash costs on the back of strong production. Bald Mountain more than doubled its production year-over-year and achieved its highest quarterly production to date, and Tasiast saw a seven-year high in mill grades while cash costs declined to just under $740 per ounce.

Turning now to our Paracatu operation, I'm pleased to report that we restarted mining and processing activities in early November following the production curtailment due to lack of rainfall. Our team at Paracatu has continued to work hard on permanent mitigation solutions for the lack of rainfall. The site is well-prepared to ramp up to normal production levels during the fourth quarter, and Lauren will provide you with more detail on the situation shortly.

With respect to our financial results, which Tony will speak to in greater detail in a moment, I'd like to mention a few highlights. We generated significant operating cash flow in the quarter, and our balance sheet has remained strong, with approximately $1 billion of cash and total liquidity of approximately $2.5 billion. This positions us well to invest in our exciting organic development projects.

In mid-September, we released the results of the Tasiast Phase 2 and the Round Mountain Phase W feasibility studies, and announced that we are moving ahead with both projects. Both of these projects leverage existing infrastructure, benefit from considerable at-site operating experience, strengthen our longer-term production profile, and are expected to generate significant cash flow. The approval of these projects represents an exciting new chapter for Kinross, and, since September, we have ramped up development activities at both projects, advanced engineering, and started procurement activities for long-lead items. Paul Tomory will provide more details, as well as an update on Tasiast Phase 1, which is progressing very well and is on track to achieve full commercial production towards the end of Q2 2018.

In early October, we hosted a mine tour at Tasiast, which was well-attended by both analysts and investors. It was a great opportunity to showcase the excellent progress we are making on the construction of Phase 1 and to highlight the additional benefits of Phase 2.

As for the Vantage complex located in the south area of the Bald Mountain property, engineering continues to advance as planned, and we are on track to commence initial construction activities in the first quarter of 2018. And in Russia, the development of the twin declines at Moroshka is proceeding on schedule, with the construction of surface infrastructure now complete.

So, to summarize, we are on track to meet our guidance for the sixth consecutive year. We are making excellent progress on our projects, and we have the financial strength and flexibility to fund significant investments in our business over the next three years.

With that, I'll now turn the call over to Tony for a review of our financial results.

Thanks, Paul. Q3 was another strong quarter, driven by solid production, with 654,000 gold equivalent ounces and good cost performance, with cost of sales of $662 per ounce. We generated approximately $320 million in adjusted operating cash flow during the quarter, and approximately $200 million in net operating cash flow.

Despite strong cash flow generated during the quarter, our net operating cash flow was impacted by two factors - one, seasonality, particularly in Russia, where we both procure and make deposits for supplies during the third quarter for the winter delivery cycle; and two, unsold inventory produced at Maricunga that we continue to hold and expect to sell throughout 2018.

Operating earnings increased to $80 million, contributing to an increase in reported net earnings. Reported net earnings were $0.05 per share, and adjusted earnings were $0.07 per share. I would like to provide some additional color on three other items in the quarter, namely taxes, other operating costs, and capital expenditures.

First, we recorded a tax recovery for the quarter of $10 million, which was largely a function of a reversal of current tax expense at Paracatu as a result of the curtailment and foreign exchange impacts on deferred tax balances in Brazil and Russia.

Second, other operating costs during Q3 included $15 million related to Paracatu. During the quarter, the site reduced its aggregate spending by 40% compared to normal levels. Of the spending that did occur during the quarter, 25%, or $15 million, was categorized as other operating costs. We now expect our other operating costs for 2017 to be in the range of $140 million to $150 million. This is mainly the result of the Paracatu curtailment, that and other tax-related items, and Kettle River reclamation costs.

Third, capital expenditures in the quarter were $205 million, bringing our spend for the first nine months of the year to $584 million. With the approval of the Tasiast Phase 2 and Round Mountain Phase W [deposit], we expect to incur approximately [$60] million of additional capital expenditures related to these projects over the remainder of 2017. Notwithstanding these additional expenditures, we are maintaining our original guidance for CapEx of $900 million, plus or minus 5% for the year.

Turning now to our balance sheet. Our overall liquidity [remained to about] $2.5 billion. With no debt maturities prior to 2021, we are in a strong position to invest in our future development opportunities.

I'll now turn the call over to Lauren for a review of operating highlights.

Thank you, Tony. With good production and cost performance over the first nine months of the year, all three of our operating regions are on track to meet their production and cost guidance. Our mines in the Americas performed well in the quarter, producing approximately 387,000 ounces. Cost of sales of $691 per ounce declined by approximately $90 per ounce, or 12% year-over-year. This was driven by strong performance at several mines in the region, including Fort Knox, Round Mountain, and Bald Mountain.

At Fort Knox, production benefited from the expected seasonal increase in heap leach processing. Round Mountain increased production by 30% year-over-year, largely driven by the highest mill grade we've seen since becoming the operator back in 2003. Cost of sales at Round Mountain also declined to a five-year low of $626 per ounce, as the operation benefited from lower labor and contractor costs.

Bald Mountain recorded its highest quarterly production since we began operating the mine. The operation also achieved a new record per monthly production, producing over 40,000 ounces in September. Grades are up at Bald, as anticipated, and we are reaping the benefits of the significant amounts of material that has been stacked on the heaps. I'm very pleased to say that Bald is solidly on track to double its production this year as compared with 2016.

Turning to Kettle River, the mill processed the remaining stockpiles from Buckhorn in September. Originally slated for closure in 2015, this operation continued to outperform expectations, producing an additional year and a half while delivering solid production, good costs, and strong cash flow. Reclamation at the mine site is now well underway, and we are continuing to advance exploration activities in the Curlew district.

At Maricunga, we continued to rinse material that was placed on the heaps prior to the suspension of mining activities last year. Production increased quarter-over-quarter, and we expect to see similar production from Maricunga in the fourth quarter. Care and maintenance activities will be the focus starting in 2018, as we expect residual production from Maricunga next year to be minimal.

I'd like to turn now to Paracatu, where we have resumed mining and processing activities after receiving sufficient rainfall in late October. Although Plant 2 operations had been curtailed beginning on July 3rd due to lower-than-average rainfall in the Paracatu region, we were able to increase the reprocessing of tailings from Plant 1 to approximately 50,000 tons per day, which continued until mid-September. Paracatu produced approximately 47,000 ounces during the quarter, which exceeded our expectations. We expect to ramp production back up to normal levels during the fourth quarter as sufficient water becomes available, which the site is well-prepared to do. Our mitigation measures are advancing well, and we expect Paracatu to be more drought-resistant, going forward.

Turning to our West Africa region, [our] 2 mines produced approximately 121,000 attributable ounces for the quarter at a cost of sales of $734 per ounce. Tasiast continued to outperform, with record high grades from West Branch and enhanced mill productivity contributing to strong production, and cost of sales of $738 per ounce.

Moving to Toronto, higher grades from underground operations contributed to strong production and a two-year low in cost of sales of $730 per ounce. As we previously mentioned, we completed surface mining operations earlier in the year. We're now sourcing [ore] exclusively from the underground mines and stockpiles, which provide sufficient ore to keep the mill running at full capacity.

The Russia region produced approximately 146,000 ounces for the quarter at a cost of sales of $524 per ounce. As expected, and consistent with the mine plan, lower mill grades resulted in lower production year-over-year. However, the region remains a strong performer, consistently achieving costs among the lowest in our portfolio.

It is worth noting that September Northeast contributed high-grade material to the mill feed, with grades of approximately 20 grams per ton. We began mining September Northeast in Q2, and we expect to complete operations at this small but very high-grade deposit in the fourth quarter.

In summary, all of our regions performed well. Despite the weather-related curtailment at Paracatu, our operations delivered strong production, with many hitting multi-year lows in terms of costs, and we are on track to meet our guidance targets for the year.

I'll now turn the call over to Paul Tomory for an update on our development projects.

Thanks, Lauren. Over the past three months, we have made significant progress on our suite of Brownfields projects. In particular, since the September decision to proceed with Phase 2 in Round Mountain Phase W, we've made very good progress in a short period of time in establishing the execution teams and awarding engineering procurement contracts.

Let me start first by giving you an update on Tasiast Phase 1 expansion, which is progressing well and remains on budget and on schedule. Plant construction is now 77% complete, with the last three months running at peak staffing and construction activity levels. We've commenced installation of the crusher and the associated chutes, while construction of the two main conveyors from the crusher to the stockpile and into the SAG mill nearing completion. At the SAG mill, the most difficult crane lifts of the entire project are complete, and the gearless motor drive is in place. Work has begun on the stator windings, as well as structure work in the SAG mill area is well advanced.

We've also made significant progress in the downstream area of the plant, including the installation of the cyclone towers, three leach tanks, the (inaudible) [circuit], and various screens and pumps. Additionally, electrical work started ramping up across the project, and the new tailings facility is complete [and ready] (inaudible). Tasiast Phase 2 engineering, which ramped up immediately following the go-ahead decision in mid-September, is now approximately 25% complete. We started procurement for long lead-time items, most notably the power plant, and we finalized the commercial terms for the EPCM contract. We are on track to start construction of Phase 2 in early 2019.

Turning now to Round Mountain Phase W, we expect to begin stripping and initial construction work in early 2018. Over the last couple of months, we've continued to advance detailed engineering on key [scope] elements, including the truck shop, new leach pad, processing infrastructure, and we've begun procurement of long lead-time items and mining equipment. We received the decision record from the BLM in October, and state permitting is continuing on schedule.

Moving to the Bald Mountain Vantage complex project, overall engineering is now approximately 70% completed, and procurement activities have begun. Heap leach construction contract is expected to be awarded in the next month. In addition, permitting is proceeding as planned, and site preparation has begun so that we can begin the initial construction activity on schedule in the first quarter of the new year.

And finally, at Tasiast Sud, we're making good progress on the pre-feasibility study, which contemplates a dump leach (inaudible) located approximately 10 kilometers south of the main Tasiast ore body. The potential project here could combine material from multiple deposits in the area for a dump leach operation, the high-grade portion expected to be transported to the Tasiast mill. The accelerated [infield] drill program has [encountered] encouraging results, and we expect to see mineral resource additions at year-end.

In summary, we are making excellent progress on all of our Brownfields projects, and are focused on key milestones for the next year, which includes startup of commercial production at Tasiast Phase I, and the expected startup of construction of three project - Tasiast Phase 2, Round Mountain Phase W, and the Vantage Complex project.

With that, I'll turn it back to Paul.

Thank you, Paul. In closing, we are very pleased with how our company is performing, both across our existing operations and our development projects. And to reiterate, we are well-positioned to deliver on all of our priorities and guidance targets for the year.

I'd also like to thank all of our employees whose hard work and dedication make our success possible. We had a very good third quarter. Our portfolio of mines continues to deliver. We have a strong balance sheet. And all of our organic development projects are advancing according to plan.

With that, Operator, I'd now like to open up the call to questions. Thank you.

Thank you, sir. (Operator Instructions) Steven Butler of GMP Securities.

In terms of the Paracatu, Lauren, you talked about mitigation efforts to sustain higher levels of water availability at the site. Can you maybe just comment a bit further there? If you had a repeat of this year's drought next year, would you expect to be in better position?

I just want to remind you, firstly, what we initially did very early in the drought cycle, and that was to focus our efforts on conservation and maximizing the onsite capture of water. So those two things were immediately within our control, and that work is now complete. We also went about securing some additional water rights through some land acquisitions, and that work has yielded some positive results, and it is continuing to go forward.

But the other piece of the puzzle, as you're aware, the projects that we are developing to bring groundwater into the site, and we have broken those into three projects called Aqua 1, Aqua 2, and Aqua 3. Aqua 1 is complete, and it has put us in a position that we can tolerate about an 87% of average precipitation rain year. Aqua 2 is nearing completion, and it'll bring us up to about an 80% sustainability rate. And we'll launch Aqua 3 as soon as Aqua 2 is done, and we expect Aqua 3 to put us into a position where we should be able to tolerate about a 65% of annual precipitation year.

And the Aqua 3 project, because it's starting in January, will not deliver the full results inside of the calendar year 2018. So in 2018, we would expect to be able to tolerate about a 70% year.

In essence, what are (inaudible) Aqua 1, 2, 3, what are they represented as?

They are the development of groundwater aquifers and the infrastructure necessary to deliver that water to the site.

Just to reiterate, you said you had a record month, or was it a record quarter at Bald Mountain, or record month in September at over 40,000 ounces? And do you see sustainability of September's numbers into the fourth quarter?

The last part of the question, sir?

Do you expect September numbers to linger into the fourth quarter?

Yes, it was a record production quarter, and September was a record month, we think a life-of-mine record month, actually. So the October results should look similar to September. And as you'll recall, we were heavily back-end weighted on the production for calendar year 2017. The site team's done an extraordinary job of pulling forward ounces, and so we've been able to shift that back-end weighting a little bit more into Q3 and a little less into Q4. So after October, we'll see some reduction in the production levels, but we remain solidly on track to deliver our guidance of at least doubling production.

Tony, on Kettle River reclamation costs, what does it look like there on spending in the fourth quarter and into next year?

At this point, we're putting the budget together for 2018, so we don't have a definitive number for next year. The reference to Kettle River, in terms of other operating costs, was effectively an increase in the reclamation liability, and that really came about because we effectively completed production in the third quarter, although I did notice that there's going to be a few ounces that are going to trickle into quarter four.

But, nonetheless, we, as a result, recorded about a $12 million adjustment for the reclamation liability, but that's not actual cash expenditure. That's really just a truing up of the ARO liability. So as we develop the budget for next year, we'll have a better sense of what the spend will be like, and happy to update you when we have those numbers in February.

So was a Q3 adjustment already reflected?

Yes.

David Haughton of CIBC.

Tony, quite the shortfall of sales compared to production at Bald Mountain. Do you expect for that to be caught up in the fourth quarter?

At Bald Mountain, what ends up happening is we have an agreement with Barrick as part of the original acquisition, and so some of the carbonate actually process through their facilities in Nevada. And so in some cases, what we end up having is a bit of a timing gap between the delivery of carbon, so it will really depend on overall timing of production across the quarter, and we'll have a better sense of it as we move into Q4. But it is possible that some of the production in Q4 will get pushed into the first quarter as far as sales go, and we'll just have to see how things play themselves out. But it's pretty much as we had expected in terms of timing.

So we're targeting, as Lauren said, a doubling of production, hoping that, with pulling some of these (inaudible), we'll have more flexibility on the sales side, but it could be that some of it drags into the first quarter of next year.

In very rough figures, what kind of proportion of the gold is shipped to Barrick in the loaded carbon?

We have a portion that is going to our own facility at Round Mountain, and so we're probably 50-50 right now, and we're slowly looking for opportunities to obviously increase what we process through our own facility. But right now, it's probably running 50-50.

(inaudible) at Bald Mountain, perhaps for Lauren, can you be a little bit more specific about what your expectation is, going forward? The third quarter there was really quite a standout, and I'm just wondering how we should be resetting our expectations going into 2018 and beyond. Should we see the average grade coming closer to reserve grade? And what kind of throughput would you anticipate from this mine?

So we would anticipate the grade to come more in line with the reserve grade, going forward. And consistent with the guidance that we provided at the time of acquisition, we would expect to be next year in the range of 250,000 to 280,000 ounces.

Given the success that you've had, especially in the last quarter and building up through the course of the year, would it be more at the higher end of that, do you think, or should we just take middle of the road conservative view?

We're in the process right now of finalizing mine plans and budgets, so it's a little early for me to say. But I would say we're going to be more mid-pointy.

Midpoint works for me. Going down to Paracatu now, heard the discussion on the water mitigation and the various phases of plans that you've got there. But trying to translate that into how we should see the production in the fourth quarter, could it rebound back to what we had been seeing, for instance, in the throughput in the first and second quarter of 2017? Should it go back up, say, going through the mill, 110,000 tons a day kind of level?

So here's how I suggest we would look at that, David. Paracatu is about a 500,000 ounce a year producer, round numbers. So that, under normal operations, is going to give you about 40,000-ish ounces a month. So October, we actually did receive average rainfall, which October is the first month of the rainy season, but it all came in the last two days of the month. So we got a little bit of a slow start with the rainy season. We are now operating both plants and the tailings reprocessing. We have enough precipitation to allow us to do that, so we're ramping back up to full production. And it's going to be dependent on consistency of rainfall at this point. But assuming that we've got the water, 40,000 ounces a month is probably a reasonable run rate.

Andrew Kaip of BMO.

Lauren, just to follow up on Paracatu, you're ramping up to full production rates at Plant 2. So when do you expect to achieve those full rates?

At Plant 2, I would give it about a week, probably. Takes a little while. It's a big facility, 120,000 tons a day, huge SAG mill, four ball mills. Takes a little while to get everything wound up and operating consistently.

So by mid-November you should be up to that 40,000 per month range, or production range?

Water allowing, yes.

(Operator Instructions) Anita Soni of Credit Suisse.

On that other operating cost increase that happened this quarter, how much of that increase do you expect would be something that would carry over and continue on into 2018?

We call it Other Operating Costs, so I think it's a difficult thing to assess at this point. We'll be coming up with a budget in February, and we're (inaudible) on that number, but it has been a number where we've had some changes in our guidance during the course of the year.

What we have indicated at this point is that, when we look into the fourth quarter, [it would] be a range of 140 to 150, and that's really predicated on expecting some additional curtailment costs for Paracatu for the month of October, more than likely, as Lauren highlighted. We don't see any impact for the rest of the year. And then, we'll see some [holding] care and maintenance costs continue with respect to Maricunga and La Coipa, and then there's some anticipated other costs that we'll be categorizing as Other Operating Costs in the quarter.

So feel pretty good about the 140, 150 number from a guidance point of view. As far as '18 goes, too early to really speculate as to where we might see that, but we will include that with our guidance in February.

Does that also include the VAT? How much of that was the VAT and the royalties?

In the quarter? So what we had was roughly about $8 million was VAT-related, and some of it actually relates to what we would term uncertain tax positions that were set up for non-income tax related items that were put into that account. So that includes that amount, so it's not all VAT. And the VAT adjustments are twofold, partly with respect to Brazil and some of the changes that we've seen of the state and federal legislation on VAT. And some of it relates with respect to accruals that we had for VAT in Mauritania.

Just in terms of Paracatu, sorry if I missed this, but you guys are working on getting additional water sources. But in the meantime, we are looking at curtailments for the foreseeable future, right, in third and fourth quarter?

Yes. Anita, I just wanted to clarify when I gave you the number on that. I just want to include the Paracatu component of it. I was quoting you the amount for (inaudible), which is about $7.5 million, and it's a similar amount to Paracatu. So (inaudible) during the quarter, it was about 15.

And with respect to curtailment, maybe I'll just highlight that. At this point, we expect to pick up a portion of the curtailment costs in the fourth quarter. As far as next year goes, once again, we've got an accounting policy in place that will deal with any curtailment implications, and we'll look at the component of cost that we would transfer into other operating costs at that time.

This is Lauren. We are back up and running now with all the plants. We're ramping them up to full capacity. We should be there in about a week.

I'm just wondering, for next year and the year after, is it going to be typical that you'll be budgeting for curtailments in the third and part of fourth quarter?

It's really a Mother Nature question. We sometimes talk about it as two rainy seasons, but that's only because we bifurcate it with a calendar year-end. The rainy season starts now, and it'll run through the calendar year-end into January-February, and the point here is, usually by the time we give guidance in mid-February, we've got a sense of how much rain we've already received, and that's how we've managed in the last couple years basically to take a bit of a handicap, expecting a curtailment because we started the year with less than average. And we're just going to have to wait and see what Mother Nature delivers as we go through the rainy season here.

Tanya Jakusconek of Scotiabank.

Lauren, on Round Mountain, we had 1.73 grams per ton going through the mill this quarter. What does the grade profile look like for Q4, and then into 2018? That's a really good grade.

Yes, it was an excellent grade, and we're quite happy with it. So Tanya, the way it'll work is we are mining right now in the bottom of the pit in a very high-grade phase of the pit, and in Q3, we were in a particularly high-grade portion of that phase. So Q3 were outstanding mill grades. Q4 will come back down a little bit into a more sort of average for the year range, and then maybe I'll just pass it over to Mr. Tomory, who can talk about Phase W, going forward.

I think we talked about this on the project call. Grades at Round Mountain will be quite variable over the life of the remaining mine. But the rough way to look at it is average grade in the mill will be around .9 for the life of the mine. And obviously on the leach pads, it'll be around .6, and that gives you your blended reserve grade. But as we've talked about, it'll be up and down.

So for Q4, are we going back down to that 1.35 that we saw in Q2, or are we going further down than that?

It'll be going down to around 1.1 in 2018, and it'll be roughly a linear drop to that.

Coming back to Tony, I just wanted to ask about all of these VAT additional costs that we are incurring. Are we looking at running those through the cash costs going into 2018 and so forth? Because sometimes you wonder if these should be running through your operating costs.

At the end of the day, what happens with most of these VAT-related charges, and this is part of the challenge, if they were occurring within the same time period, I think what you're suggesting makes appropriate sense. But unfortunately, what happens is that some of the VAT build-ups occur from actual previous years, and so you're working to recover them on a timely basis, but it doesn't always play out that way.

So if you put them through cash costs, you're effectively overseeing the cash costs during that time period, because doesn't relate to that time period. And as a result, they end up going through other operating costs. Now we would hope that, particularly at Tasiast, where we have a plan in place to reduce the amount of VAT recoverable as a result of having a [VAT] exemption on a good portion of our spend there, that it will reduce some of the [instances] where we have those amounts having to be recovered. But it's not certain at this point.

And I would say that, when we look at our costs, we're probably running 80% [above] that cost -- sorry, we're running a portion of those cash costs through -- those VAT costs through cash costs already, but it is variable things that changes from period to period. So as I said, the cumulative amount was [expensed] during the quarter throughout the [operating] costs, so it's approximately $15 million (inaudible) of what it was, but most of it related to prior period.

There are no more questions at this time. This concludes the question and answer session. I'd like to turn the conference back over to Paul Rollinson for any closing remarks.

Thanks, operator, and thank you, everyone, for joining us today. We'll look forward to catching up with you in person hopefully in the coming weeks. Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.