Q3 2015 Centerra Gold Inc Earnings Call

Oct 28, 2015 AM EDT
CG.TO - Centerra Gold Inc
Q3 2015 Centerra Gold Inc Earnings Call
Oct 28, 2015 / 03:00PM GMT 

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Corporate Participants
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   *  John Pearson
      Centerra Gold - IR VP
   *  Ian Atkinson
      Centerra Gold - President, CEO
   *  Jeff Parr
      Centerra Gold - CFO
   *  Gordon Reid
      Centerra Gold - COO

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Conference Call Participants
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   *  Botir Sharipov
      HSBC - Analyst

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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 2015 Third Quarter Results Conference Call and Webcast. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

 (Operator Instructions)

 As a reminder, this conference is being recorded, Wednesday, October 28, 2015.

 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 - IR VP   [2]
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 Thank you, Herman. I'd like to welcome everyone to Centerra Gold's third quarter conference call. Today's conference call is open to all members of the investment community and to media in listen-only mode. After our formal remarks, the operator will give us the instruction for asking a question and we will open the phone lines for questions. Please note, that all figures 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.

 Also, I would like to caution everyone that certain statements made on this call maybe forward-looking statements and as such are subject to known and unknown risks and uncertainties, which may cause actual results to differ 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 and the MD&A. For a more detailed discussion of our material assumptions, risks and uncertainties please refer to our news release which was issued last night, the MD&A, along with the unaudited consolidated financial statements and notes, and to our other filings, which all can be found on SEDAR and the company's website.

 And now I will turn the call over to Ian.

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 Ian Atkinson,  Centerra Gold - President, CEO   [3]
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 Thank you, John and good morning everyone. So just looking at our quarterly results, during the third quarter we produce just over 107,000 ounces of gold with most of this coming to from Kumtor. So this brings our gold production for the first nine months of the year to 403,000 ounces, keeping us on-track to meet our production guidance. Our [sold] and sustaining cost for the third quarter were $1,089 per ounce sold and $881 per ounce sold for the first nine months of the year.

 We averagely revised our guidance, narrowing our estimated production to 505,000 to 535,000 ounces for the year. We've also lowered our all-in sustaining cost guidance for the year, which is now $827 to $875 per ounce sold. And this reflects the lower operating cost that we're seeing at Kumtor from some productivity improvements we got there. Together with the lower diesel fuel prices and the favorable exchange rates for our local currencies, particularly at Kumtor. So, this compares very favorably to our prior production guidance of $865 to $959 per ounce sold.

 On the financial front, we reported a net loss of $18 million or $0.08 per share, and this is a result of an $18.7 million or $0.08 per share non-cash impairment charge to write-off the remaining goodwill at Kumtor, and Jeff will speak to this later.

 Our quarterly results reflect the substantially lower operating cost we're seeing at Kumtor and lower taxes. Now, this is offset somewhat by the lower average realized gold price and the fewer ounces sold in the quarter as we expected. In Turkey, at the ...Oksut Project, things are progressing very well. The EIA process continues with formal approval from the Turkish regulatory authorities expected very shortly. When we receive the EIA and once we got it in hand, we will apply for all the required permits to start construction and development of the project. Meanwhile, we are continuing our work on the detailed engineering to keep us on-schedule for starting development in the first quarter of 2016 with first gold production anticipated in the second quarter of 2017.

 We also did some drilling during the quarter at ...Oksut. This drilling we did there did extend the Guneytepe deposit to the north and identified additional oxide gold mineralization, some of that within the current pit shell, so this should add to the existing resource estimate we have at Guneytepe. We've also started testing the number of the exploration in that profit targets that we have on the property and drilling on the Keltepe northwest prospect which is about 900 meters to the northwest of Keltepe. As intercepted some significant oxide mineralization which suggests there is good potential in this area for additional oxide gold resources to add to the Keltepe and Guneytepe deposits.

 At the Greenstone Gold Property, the resource block model for the Hardrock Project is currently being updated. We expect to have a new resource estimate later this quarter. This will be then used in the feasibility study, which we expect to have completed now in the first half of next year. As well work is progressing well on many fronts, including the EIA, but in particular we are prioritizing a number of exploration targets on the property, which has an excellent exploration potential in my view.

 In the Kyrgyz Republic, in September Kumtor received approval with 2015 mine plan from the State Agency for Environmental Protection and Forestry. In early October, the country held a successful parliamentary elections and the STBK Party gained the largest percentage of votes and elected the most members to Parliament. So, we're now waiting for the parliament to resume so the new coalition government can be formed, and a new prime minister appointed. We expect the new government be formed in the next few weeks.

 Once that's happened, we look forward to continuing our discussions with the government to resolve all of the outstanding matters affecting the Kumtor Project. But as we've said many times, this has to be a transaction that is fair to all shareholders.

 In Mongolia, we are making progress on Gatsuurt; we continued our discussions with the government and have signed an MOU that includes a 3% special royalty in place with the government acquiring a 34% participating ownership interest in the Gatsuurt Project. 3% royalty is in addition to the existing types and royalty regime in the country. It's our understanding that this week the government has submitted a revised proposal regarding its ownership interest in the Gatsuurt project to Parliament for review.

 And finally, we announced earlier this month that Scott Perry will be joining us next week as my replacement in the CEO position. And Frank Herbert, our General Counsel, was appointed president of the company.

 So with that, I'll now turn it over to Gordon for an update on our operations.

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 Gordon Reid,  Centerra Gold - COO   [4]
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 Thanks, Ian. During the quarter, Kumtor produced 104,000 ounces of gold at an all-in sustaining cost per ounce sold of $1,000 per ounce. This brings Kumtor's production for the first nine months to 390,000 ounces at an all-in sustaining cost per ounce sold of $791 per ounce, on-track to meet our revised guidance for the year.

 Mill feed for the quarter was primarily provided by surface ore stockpiles. Mining and cut-back 17 accessed ore in the third quarter as planned, which will be the primary source of mill feed for the fourth quarter. The 34% decrease in all-in sustaining cost per ounce sold to year-to-date compared to 2014 is partially due to more ounces produced and sold, lower diesel fuel costs and to a favorable exchange rate, but also reflects the significant ongoing effort to reduce cost and improve efficiencies including a 20% reduction in ex-pat labor and an 8% reduction in local labor, renegotiation of key contracts with suppliers and relocation of certain jobs offsite amongst other cost reduction initiatives.

 Mining costs during the quarter, including capitalized stripping, decreased $13 million compared to Q3 2014, primarily due to a $10 million savings in diesel fuel costs. Our fuel costs averaged $0.52 per liter in the third quarter as compared to 71% in the comparable quarter of 2014. At Boroo, gold production in the third quarter was 3,800 ounces, which was lower than last year's third quarter and reflects the closure of the Boroo mill in Q4 2014 and the transition from primary to secondary leaching in the Heap Leach Operation. We expect secondary leaching activities at Boroo to be completed by the end of 2015, but we intend to keep the mill on standby awaiting the start-up of the Gatsuurt Project.

 I'll now turn it over to Jeff to talk about the financials.

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 Jeff Parr,  Centerra Gold - CFO   [5]
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 Thanks, Gordon and good morning everyone. As Ian mentioned, our annual goodwill impairment test resulted in a non-cash impairment charge of $18.7 million or $0.08 a share. This reduces the goodwill associated with Kumtor to zero. The impairment reflects the impact of lower gold prices as spot prices continue to decrease until 2015, along with reducing ounces in reserve resulting from normal production. Activity on lowering cash cost is continuing, and as Gordon mentioned, the mine is also benefiting from lower diesel prices and favorable currency movements. Without the goodwill impairment our quarterly results were about breakeven.

 On a consolidated basis, our third quarter revenue of $116 million reflects slightly less gold sold and an 11% decrease in the average realized gold price compared to the same quarter of last year.

 Despite this, the company had earnings from mine operations of $35 million. As well, cash provided by operations was $41 million, or $0.17 a share. Our cost of sales decreased by 24% to $76 million compared to the same quarter last year due to the lower operating costs as well as reduced waste stripping as compared to cut-back 15 ore that was processed in the third quarter of last year. In addition, cut-back 16 contained more ounces. DD&A associated with production was down $4 million in the third quarter reflecting lower capitalized stripping charges per ounce from cut-back 16 ore.

 Our cash and short-term investments totaled $537 million at the end of the quarter, which includes $76 million outstanding under our revolving credit facility. This is after investing $69 million in our properties, making an additional payment of $8.3 million dollars to premier, $3 million of pre-development cost at Greenstone and Oksut, $3 million in exploration and business development and paying about $7 million in dividends in the quarter.

 For 2015, we've reduced outlook for capital expenditures to $85 million, down from $97 million, primarily due to the timing of payments for long lead items at Oksut. Our total capitalized stripping is forecast at $207 million, down from $212 million in our prior guidance, with the cash component down $4 million to $158 million reflecting the cost improvements discussed.

 And finally, the company continues to have a strong balance sheet and good cash balances. And as we've announced, we will be paying another quarterly dividend.

 Now I'll turn back to Ian to wrap up.

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 Ian Atkinson,  Centerra Gold - President, CEO   [6]
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 Thank you, Jeff. So, just a few comments in summary. As Jeff has said, overall the company has a very solid financial position; we have a substantial cash balance that can be used to advance our development assets and also add to our asset base. We're moving ahead with our plans to build our portfolio development projects as we move forward with the development of our robust Oksut project in Turkey. Approval of the EIA for the Oksut project is on-track so that we can apply for the required permits to develop the project with production expected in the second quarter of 2017.

 At the Greenstone Gold Property, the resource spot model for the Hardrock Project is currently being updated, and the new resource estimate is expected later this quarter, which will be used in the feasibility study, which we now expect to have completed in the first half of next year. We expect to continue our discussions with the new Kyrgyz Government to resolve all of the outstanding concerns relating to Kumtor Project. And for 2015 we've revised our production and cost guidance, narrowing our estimated production to 505,000 to 535,000 ounces for the year and lowering our all-in sustaining cost guidance for the year to $827 to $875 per ounce sold.

 So with that let's open up the call for questions. So operator, would you please give the instructions on the process of the Question-and-Answer Session.

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Questions and Answers
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Operator   [1]
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 Certainly, sir. (Operator Instructions) Our first question comes from line of Botir Sharipov from HSBC. Please go ahead.

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 Botir Sharipov,  HSBC - Analyst   [2]
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 Hi, Ian and team, congratulations on solid results again, especially in the context of much lower gold price in Q3. Couple of questions for me. First, on cut-back 16, you mentioned it had more ounce than you guys estimated. Can you maybe elaborate on that a little bit and do you see a possibility of the same with the cut-back 17 that you just exposed?

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 Ian Atkinson,  Centerra Gold - President, CEO   [3]
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 Actually, Jeff's reference to more ounces in cut-back 16 related to it being in comparison to cut-back 15 and how we apply the DD&A to cost of sales as we produce from those stockpiles. So, the statement that there was more ounces and stockpile - cut-back 16 is only related to those in cut-back 15.

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 Botir Sharipov,  HSBC - Analyst   [4]
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 Understood. So it's not about, you know, maybe better grades than you guys expected?

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 Ian Atkinson,  Centerra Gold - President, CEO   [5]
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 That's correct.

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 Botir Sharipov,  HSBC - Analyst   [6]
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 OK, all right, fair enough. As far as, I guess again, on Kumtor it seems that you moved less material maybe than you guys planned in Q3 because of the weather I guess. How does it impact maybe your mining schedule in Q4 in terms of potentially falling behind and also the grades?

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 Ian Atkinson,  Centerra Gold - President, CEO   [7]
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 Actually, our ore zones are right on-track. We expect to produce the ore that we had said we would produce. The warm weather and the wet rainy weather did impact productivities, but we just made adjustments to our mine plan, we are hauling shorter to get the trucks back into production to get more - get to faster cycle times to be able to move the material faster. And we don't see any impact on the cargos.

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 Botir Sharipov,  HSBC - Analyst   [8]
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 Great, thank you. And the last one from me is that, it looks like you hit some really good intercept at Oksut and including some sulfide mineralization, which I think is closer to surface than typically encountered at Guneytepe and Keltepe deposits. Assuming these will be added two resources and may be converted to reserves at some point, how does it maybe factor-in into your mining plan, if at all, and was there any copper in those assays?

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 Ian Atkinson,  Centerra Gold - President, CEO   [9]
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 Botir, the drilling at Guneytepe is primarily oxide, some of it is classed is partially oxidized, which is not uncommon, particularly for Guneytepe. So that's something that won't recoveries with deeper sulfide sections. There is one hole where that simply has some - comes into sulfide at depth, but that's down 150 meters. You got to remember that these holes are actually on the northwest edge of the pit, some of the oxides within the current picture, but the [sulph] line is way deeper. And a little bit of copper at depth, which again, is not uncommon, either at Keltepe or Guneytepe, but they really doesn't get into the sections that where leach show should not impact the leaching at all, could not, should not, will not.

 I think the positive around Guneytepe is that we've drilled what we can of the current permitted drill sites in that northwest corner of Guneytepe. The north corner is still open, we've now just got to get the additional drill permits that we've applied for; approved, that will give us an opportunity then to see if we can chase that mineralization any further to the north.

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 Botir Sharipov,  HSBC - Analyst   [10]
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 And just a quick follow-up on that. When you guys are going to update the resource, I assume it's going to be 2015 year-end resource, right?

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 Ian Atkinson,  Centerra Gold - President, CEO   [11]
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 Yes, the drilling that we've already got done will be pulled into the Guneytepe resource at the end of the year. And if we can get some more holes done, if we get the permits they'd be included as well, yes.

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Presentation
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 Botir Sharipov,  HSBC - Analyst   [1]
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 Thanks, Ian.

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Operator   [2]
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 We have no more questions at this time. (Operator Instructions) We seem to have no more questions at this time.

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 Ian Atkinson,  Centerra Gold - President, CEO   [3]
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 Thank you, Herman. Thank you everyone for attending and listening in on our conference call on the webcast.

 If anyone does think of any further questions, please reach out to us here in the office, we're all here.

 Again, thank you for joining us, and for your interest in Centerra Gold.

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Operator   [4]
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 Ladies and gentlemen, that does conclude the conference call for today. We thank you for you participation




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