Q3 2014 Centerra Gold Inc Earnings Call
Oct 30, 2014 AM EDT
CG.TO - Centerra Gold Inc
Q3 2014 Centerra Gold Inc Earnings Call
Oct 30, 2014 / 03:00PM GMT
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Corporate Participants
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* John Pearson
Centerra Gold - Vice President of Investor Relations
* Gordon Reid
Centerra Gold - Chief Operating Officer
* Jeff Parr
Centerra Gold - Chief Financial Officer
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Conference Call Participants
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* Andrew Breichmanas
BMO Capital Markets - Analyst
* Daniel McConvey
Rossport Investment - Analyst
* Ian Atkinson
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Presentation
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Operator [1]
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Ladies and gentlemen, thank you for standing by. Welcome to the Centerra Gold 2014 Third Quarter Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.
At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded today, Thursday, October 30, 2014.
I would now like to turn the conference over to John Pearson, Vice President of Investor Relations. Please go ahead sir.
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John Pearson, Centerra Gold - Vice President of Investor Relations [2]
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Thank you, Luke.
Welcome to Centerra Gold's third quarter conference call. Today's conference call is open to all members of the investment community and the media in a listen-only mode at first.
After our formal remarks, we will open the phone to questions. The operator will give the instructions for asking a question. Please note that all figures discussed are in U.S. dollars, unless otherwise noted.
Joining me on the call today is Ian Atkinson, President and Chief Executive Officer; Jeff Parr, Chief Financial Officer; Gordon Reid, Chief Operating Officer and Ron Burk, Vice President of Exploration.
Before we begin, I would like to caution everyone that certain statements made on this call may be forward-looking statements and as such are subject to known and unknown risks and uncertainties, which may cause actual results to differ materially from those expressed or implied.
Also certain of the measures we will discuss today are non-GAAP measures and I refer you to our description of non-GAAP measures in the news release in the MD&A. For a more detailed discussion of the material assumptions, risks and uncertainties, please refer to our news release issued last night, the MD&A and unaudited interim financial statements and notes and to our other filings, which can all be found on SEDAR and the company's website.
And now, I'll turn the call over to Ian.
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Ian Atkinson, [3]
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Okay, thank you, John and good morning, everyone.
The operations performed very well in the third quarter. At Kumtor, we got back into the SB Zone in September as planned and Boroo had another solid quarter leading us to increase Boroo's gold production guidance for the year by 5,000 ounces to 50,000 ounces for the year.
Our quarterly product result, we're 110,000 ounces of gold which brings our gold production for the first nine months of the year to almost 320,000 ounces. For 2014, we've increased our production guidance and lowered our overall unit cost forecast and also adjusted our capital expenditure estimate.
On the financial front, we reported a net loss of $3 million or $0.01 cent per share. During the quarter as expected, the operation's used cash is about $14 million. For the first nine months, the operation's provided cash of $159 million or $0.67 per share.
We have a strong balance sheet with $404 million in cash with $328 million net to debt. So looking forward to the fourth quarter as we mind the high grade of SB Zone within Kumtor, we expect to generate additional free cash flow and continue to grow our cash balance through the end of the year.
In the Kyrgyz Republic, we're continuing to work with the Kyrgyz Government, Kyrgyz consultant and their advisors to restructure the Kumtor project in accordance with the Heads of Agreement. We're now in the process of negotiating the definitive agreements.
As you will appreciate, it will take some time to bring this to a conclusion since it's a very complex transaction requiring the number of approvals including the approvals of shareholders, the Kyrgyz parliament and the Canadian courts.
As we've outlined in our new release, the issues raised by the Stans Energy litigation will have to be fully resolved by the Kyrgyz government before any restructuring transaction can be completed.
So moving on to Turkey, the Oksut project is progressing very well going in the quarter focused on testing the extensions of the Keltepe deposit and the drilling has shown that the gold mineralization does extend by 100 meters to the south than what we previously defined.
In early August, we had our first public meeting on the environmental and social impact assessment of the project and that meeting went very well and we are on track with the feasibility study which we expect to have completed in the middle of 2015.
So with that, I will now turn the call over to Gordon for an update on our operations.
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Gordon Reid, Centerra Gold - Chief Operating Officer [4]
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Thank you, Ian.
As Ian mentioned, both operations performed well during the quarter and we are on track to meet our revised production and cost guidance. At Kumtor, gold production for the quarter came primarily from processing ores that have been stockpiled from the fourth quarter of 2013 but also came from current mining as Kumtor accessing mine ore from the SB Zone starting in early September.
Kumtor produced 95,265 ounces in the quarter at an all-in pre-tax cost of $1,274 per ounce. We expect Kumtor to achieve production guidance of 550,000 to 600,000 ounces at all-in pre-tax cost of $835 to $910 per ounce.
At Kumtor, the forecast sustaining capital has been increased by $5 million to $47 million primarily due to one plant component breakdowns in the mines. Forecast growth capital has been increased by $9 million to $52 million primarily due to a cost that regard in the infrastructure relocation projects.
The buttress at the bottom of the Davidov glacier has been affected in reducing the rate of movement to manageable levels and is performing as designed. Due to positioning of the buttress, we are studying whether it would be necessary to reduce the width of the financial cutback for the SB Zone.
This study is ongoing but we don't expect the changes to have a material impact on Kumtor's total reserves. We expect to complete the study and provide an update with our annual reserve statement in February 2015.
Boroo continued to perform well during the quarter with better than expected gold production from both the mill and heap leach operations. Boroo production for the quarter was 15,527 ounces at an all-in pre-tax cost of $924 per ounce. We have revised Boroo's production guidance for the year to 50,000 ounces at an all-in pre-tax cost of $1,050 per ounces.
We're going to continue to process stockpiled ore through the mill until mid December when stockpiled can be depleted. The heap leach facility will continue to operate until 2015 and then transition towards bringing down closure status.
I will turn it over to Jeff to talk about our financials.
Jeff Parr: Thanks, Gordon. Good morning, everyone.
On a consolidated basis, our third quarter revenue of $130 million reflects an average realized gold price of $12.65 and just over 1,700 ounces sold. We recorded a net loss of $3 million or $0.01 per share.
During the quarter, Kumtor reduced the inventory impairment recorded previously by $2.4 million leaving a balance of $12.2 million. The mine rich ore and cutback 16 in early September and added new lower cost ounces to inventory allowing a reversal of a portion of the impairment. As we mined significantly more ounces in the fourth quarter, the balance of the inventory impairment is expected to fully reverse.
As Ian mentioned in quarter, cash used in operations was $14 million which brings cash provided by operations for the year to date to $159 million. Our cash in short-term investments totaled $404 million at the end of the quarter which includes $76 million drawn down under our revolving credit facility.
This is after investing $223 million in our properties, $11.3 million in exploration and paying almost $26 million in dividends over the first nine months of the year. The company continues to have a strong balance sheet and even in this low gold price environment, we expect our cash balance to grow through the end of the year.
For 2014, we revised our guidance on production, cost, and capital expenditures. As Ian and Gordon have indicated, we've increased Boroo's production guidance to 50,000 ounces which brings our consolidated guidance to a range of 600,000 to 650,000 ounces for the year.
Our all-in sustaining cost per ounce sold decreased to a range of $830 to $897 and our all-in cost has been revised downward to $955 to $1,035 per ounce sold. Both measures exclude revenue-based tax at Kumtor and income taxes at Boroo.
The reduction in the cost guidance reflects the increased production forecast at Boroo and an updated forecast for operating and capital cost at both Kumtor and Boroo. Labor and power costs are paid in local currency and the recent strengthening of the U.S. dollar against the Kyrgyz Som and the Mongolian Tugrik have had a positive impact on those costs. Our forecast for tire, fuel and explosive costs have also been reduced primarily due to lower prices.
Looking at our capital expenditures, excluding capitalized stripping, we now expect to spend about $101 million this year which is up $15 million from our prior guidance. Most of the increase is at Kumtor for sustaining capital is expected to increase to $47 million from $42 million for the year due to increase equipment overhaul and repair cost.
Growth capital is expected to increase to $52 million from $43 million due to an increase of $7 million related to the infrastructure relocation projects and $2 million for dewatering projects.
I'll turn it back to Ian to wrap up.
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Ian Atkinson, [5]
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Okay, thank you, Jeff.
And just a few comments in summary before questions. The company has a solid financial position. As we've said, we've revised our guidance and increasing production for the year and lowering the cost.
We're continuing to work with the Kyrgyz Government to implement the Heads of Agreement related to the Kumtor project. And the Oksut project is on track to finalize the feasibility study in the middle of next year.
So with that, operator, could we open up the call for questions? So please give the instructions on the process for the question-and-answer session.
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Questions and Answers
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Operator [1]
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Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge a request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. A moment please for the first question.
And we do have a question now from the line of Andrew Breichmanas with BMO Capital Markets. Please go ahead.
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Andrew Breichmanas, BMO Capital Markets - Analyst [2]
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Thanks and good morning, everyone.
Just a question on the buttress at Kumtor and the potential to impact the mine plan, when would that start impacting your mining activities at the SB Zone?
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Gordon Reid, Centerra Gold - Chief Operating Officer [3]
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The buttress at Kumtor, we're currently reviewing the mine plan to take into account the buttress. That - we expect to have that completed by the end of the year that will identify any potential impact on reserves and then we will report that to the market at that time
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Andrew Breichmanas, BMO Capital Markets - Analyst [4]
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But is that the kind of thing that could impact your operations next year or is it more in the later years of the mine life?
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Gordon Reid, Centerra Gold - Chief Operating Officer [5]
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No. We wouldn't expect it with 2015. It would be later on in the 2018 and '19 period.
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Andrew Breichmanas, BMO Capital Markets - Analyst [6]
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Okay. And I guess there is some mention of processing some carbonaceous ore during the quarter at Kumtor and at the same time, you are evaluating the metallurgical recoveries from last year. I'm just wondering if you could talk a little bit about that and how you expect that to potentially impact the longer term recoveries at Kumtor.
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Gordon Reid, Centerra Gold - Chief Operating Officer [7]
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Yes. Thank you. As we reported that we are -- Kumtor historically has combination material in the ore. It's a relatively complex ore body and hence variable. This ore characteristic is - the combination material that competes - it competes with the activated carbon used to absorb the gold.
There are limited meltage to capture this carbonation material and that's have reports to the tailwinds with the gold that's absorbed. Over the years, Kumtor has used to develop different methods to mitigate the effect of this carbonation material but it has been 100% effective.
We are undertaking significant additional analysis to better understand that distribution in the ore glide to better predict it as it goes into the mill. That -- with the better predictive technology, we can then modify the mill process to maximize the recovery we get from that material.
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Andrew Breichmanas, BMO Capital Markets - Analyst [8]
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Okay. Thanks.
And just turning to Gatsuurt really quickly, can you just talk a little bit about the progress with the government sort of deeming strategic and just remind me if that were to occur, what the next steps were and how soon you might be able to bring that into production?
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Ian Atkinson, [9]
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Hi, Andrew. It's Ian and, you know, with respect to Gatsuurt, again, as we've said actually through the year that we've been working with the Mongolian government and we've had tried to get Gatsuurt declared strategic so it would exempt it from the head of Water and Forest Law and allows us to move forward.
We've, you know, over the last few months, the company reviewed it again with the cabinet, the Prime Minister's office, the President's office and they're all on side with including Gatsuurt on the list of deposits that Parliament should review to having declared strategic.
So that we -- the list is recruit and we've seen the approvals from the level of government and now is to be included or our own understanding is that it would get included on the parliamentary agenda for this session above and that started up on the 1st of October this - 1st of October and the session runs through early January. So we're waiting now to find out when it will be heard or reviewed in Parliament.
And once it does reach Parliament and if it's approved, you know, moving forward, you know, where we're at with Gatsuurt now is minutes, we've done no work neither, you know, exploration or surface work on it since the law was introduced in June 2009. And, you know, the majority of our permits expired and we'll need to refresh it.
So one of the key things then since we get approval will be to start that review and approval of the permits, that process and, again, that's something we simply think the Mongolian government would be motivated to move as quickly as possible but we would expect that it would take some six or more.
And in addition to that, you know, there have been some changes to the rules and regulations. So we do have some additional drilling for hydrogeological purpose that we've had to complete and that sort of worked since it is more to testing.
Clearly, we wouldn't be able to do that during the month - winter months. We have to wait until spring until we could get that started and that's a couple of months work to, again, to - that we need to get the permits - some of the permits approved.
So once we got all done, we then got some, you know, pre-stripping to get organized. We'd want to start by ore and once we have two to three months ore stockpiled on surface, we'd look to starting up that mill again. And we would expect that, you know, probably in the order of 12 months wherein the point where it would be declared strategic, we could look at starting up production at that point in time.
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Andrew Breichmanas, BMO Capital Markets - Analyst [10]
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Okay. Great. Thanks very much.
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Operator [11]
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Ladies and gentlemen, as a reminder, to register a question, please press the one followed by the four on your telephone. And we now have a question from the line of Daniel McConvey from Rossport Investment. Please go ahead.
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Daniel McConvey, Rossport Investment - Analyst [12]
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All right. Good morning and evening, everyone.
I got first of just a followup on the carbonaceous that response sounds a bit like a statement. Is there, you know, in terms of - in a level of concern you have with this carbonaceous material you're running into, would you call it medium or where would you put it in terms of declared amount?
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Gordon Reid, Centerra Gold - Chief Operating Officer [13]
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The carbonaceous material is not new to Kumtor. We've always had it but it's - what we thought is that our models don't predict it well enough. What we know is taking steps to build more stockpiles so we have better gradation.
Our main process to reduce the impact of the carbonaceous material is to blend it to less than 10% [growing] index. So we're going to - we've instituted more stockpiles so we can have a more finite blending and then we also used diesel fuel which tends to blend the carbon.
So it's not a new problem. It's an ongoing problem. We're just continuing to find ways to better improve our recoveries by managing that material.
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Daniel McConvey, Rossport Investment - Analyst [14]
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Right. But you sound like you're running into more of it that you have in the past.
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Gordon Reid, Centerra Gold - Chief Operating Officer [15]
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Well, what happened is that our stockpiles have run down and the current oil - where we access the oil in the SB Zone had high levels of this carbonaceous material.
In the past, we've had more stockpiles on surface that allowed us to blend it down. That's not the case right now because we - our stockpiles are at a low level.
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Daniel McConvey, Rossport Investment - Analyst [16]
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Okay. That's helpful. Thank you.
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Ian Atkinson, [17]
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Dan, can I, this is Ian, just add one other thing to what Gordon said is that we know now we're down into the SB Zone that we are building up our stockpiles actually fairly rapidly. So, again, that's another part of the litigation step that the large stockpiles, the more opportunity we have to blend in this carbonaceous material and also blend it with diesel.
And so it's - just as Gordon said, during the third quarter, we just didn't have as much flexibility as we've had in the past. So it's a new problem. It's - I will say we've had carbonaceous ore. It's, you know, we've had to deal with it since Kumtor started.
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Daniel McConvey, Rossport Investment - Analyst [18]
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Okay. Thank you.
Second question, I understand the power has been, you know, has been a challenge in the country for a while and there's certain pressing points I'm hearing about with the power. What -- if you could just remind us where your power comes from and if there's any concern about power supply through the course of winter?
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Ian Atkinson, [19]
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I'm sorry, go ahead, Gordon.
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Gordon Reid, Centerra Gold - Chief Operating Officer [20]
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Yes. You know, the Kumtor gets its power supply off the national grid. We have an agreement with the government that we get priorities over power. I mean, we'll get power with pretty much no one else in the country except hospitals, et cetera, we'll get power so we're protected in that way.
There is a bit of an issue with that with these rolling blackouts and brownouts that they've announced for this year and it happened in previous years in Kurdistan is that when they make these switches, we sometimes get the power drops which causes us some throughput problems in the mill. But we have this communication with the electrical authority to let us know when these are happening and we mitigate the impacts of those as much as we possibly can.
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Daniel McConvey, Rossport Investment - Analyst [21]
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Okay. So you're not too worried about things being worse (inaudible) they happen in. Maybe give us some flavor which we know locally in the country with the concerns level are for power supply this year outside of the mining versus other units
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Gordon Reid, Centerra Gold - Chief Operating Officer [22]
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Well, also it means -- Kumtor has been in this situation before and we've managed it before. We highlighted it as a risk but we do have a mitigation plan and we believe we will manage through this winter as we had in previous winters.
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Daniel McConvey, Rossport Investment - Analyst [23]
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Okay. Okay. Thank you very much.
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Operator [24]
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There are no further questions at this time.
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John Pearson, Centerra Gold - Vice President of Investor Relations [25]
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Since there's no further questions, we will thank everyone for joining us today ad thank you for your interest in Centerra Gold.
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