Q1 2016 Centerra Gold Inc Earnings Call

May 04, 2016 AM EDT
CG.TO - Centerra Gold Inc
Q1 2016 Centerra Gold Inc Earnings Call
May 04, 2016 / 02:00PM GMT 

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Corporate Participants
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   *  John Pearson
      Centerra Gold, Inc. - VP of IR
   *  Scott Perry
      Centerra Gold, Inc. - CEO
   *  Frank Herbert
      Centerra Gold, Inc. - President
   *  Darren Millman
      Centerra Gold, Inc. - CFO
   *  Gordon Reid
      Centerra Gold, Inc. - COO

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Conference Call Participants
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   *  Alex Watt
      ScotiaBank - Analyst
   *  Richard Gray
      Cormac - 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 2016 first 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, May 4, 2016. I would now like to turn the conference over to John Pearson, vice president of investor relations. Please go ahead.

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 John Pearson,  Centerra Gold, Inc. - VP of IR   [2]
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 Thank you, Operator. Good morning, everyone. I would like to welcome you all to Centerra Gold first quarter conference call. Today, the conference call is open to all members of the investment community and to media in listen-only mode. As well, there are summary slides available on Centerra's website under the upcoming events webcast tab, which is on our homepage, if people would like to follow along. And these summarize and illustrate some of the following remarks that we'll be making.

 After our formal remarks, the operator will give the instructions 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, Mr. Scott Perry, Chief Executive Officer, Frank Herbert, President, Darren Millman, Chief Financial Officer, and Gordon Reid, our Chief Operating Officer.

 Also, I would like to caution everyone that certain statements on this call maybe forward-looking statement, and as such, are subject to known and unknown risks and uncertainties, which may actually cause results to differ from those expressed or implied. Also, certain measures that we'll be discussing today are non-GAAP measures, and I refer you to our description of the non-GAAP in the news release in the MD&A. For more detailed discussion of the material risks, material assumptions and uncertainty, please refer to our news release issued last night, the MD&A, along with the unaudited financial statements into our other filings, which all can be found on CDAR and the company's website.

 And now, I'll turn the call over to Scott.

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 Scott Perry,  Centerra Gold, Inc. - CEO   [3]
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 Thank you, John, and good morning, ladies and gentlemen, and thank you for attending our Q1 financial results earnings conference call. As John mentioned, I'm just using the presentation deck that's available on our website; I'm just starting off on slide number five, which is entitled: Q1 Corporate Update.

 We began this year with some tragic news. We had a safety incident at Kumtor, which resulted in the loss of life of one of our employees and we updated everyone on that as part of our year-end annual results. One of the commitments that we made and we've been rolling out company-wide is a doubling down on our commitment to safety. We've been really retooling all of our safety leadership programs company-wide and this is something where we've been involving each of our general managers and our in-country management teams on.

 We continue to roll this out through the company, and I think we're making some very good progress. Again, the bottom line objective should be ensuring that we really are creating leaders in safety at every level of the organization. And I think we're having making some good inroads there.

 Moving onto the operating results here; during the quarter, first quarter, we produced in term of our gold output profile around 86,000 ounces of gold at Kumtor. As we mentioned in our press release, this level of production was exactly in-line with our plan.

 If you look at the third bullet point there in terms of the corresponding operating cost structure, all-in sustaining costs company-wide was around $1,015 per ounces. The drilling down of the actual operation level at Kumtor, we had a favorable result of $916 per ounce at Kumtor in terms of its all-in sustaining cost profile.

 Again, I use the adjective that this was favorable. This is actually an outperformance relative to our plan, and again, we continue to see some favorable tailwinds that are really benefiting us in terms of our cost structure. That would mainly be at the lower oil price environment, which is definitely resonating in terms of our diesel fuel costs, and likewise, in terms of the exchange rate environment and the local in-country [kyrgyz som]. In terms of the exchange rate, we've been realizing it's been lower than planned, which is favorable. And we're continuing to this resonate in terms of our cost structure.

 As we move forward into the second half of this year, we expect our gold output profile to continue to increase on the back of that growing denominator. We should see, again, a corresponding favorable impact in terms of our cost structure being driven down. And again, that obviously positions us very well in terms of our full year guidance.

 Moving into more of the financial results, and Darren will touch on this, but I think one of the items to note, in terms of our Q1 financial results, in the month of March, we were impacted in terms of our ability to monetize the gold. There's some good narrative there in the financial statements, but it essentially comes down to the delay in our counter-party finalizing their offtake agreement. This situation was resolved in early April, and since then, we have been routinely and periodically monetizing our goals.

 When you look at the face of our financial statements, the impact was significant, obviously, from an accounting perspective. A lot of the profitability was tied up in inventory. And likewise, in terms of the cash flow impact, it was quite material; it was around $35 million U.S. that we can probably effectively put toward that out-cash flow result was understated by. Obviously, you'll see these being captured in Q2, which obviously positions us well in terms of earnings and cash flow profiles moving forward in Q2.

 Those are the headline results, net earnings result was just over $18 million U.S., which is around $0.08 per share. In terms of the cash flow from operations results, this was around $9.4 million, or correspondingly, $0.04 per share. And again, I just, again remark that that's after allowing for the delayed gold sales impact that I mentioned earlier.

 In terms of the balance sheet, we continue to advocate that Centerra has a peer-leading net cash position for the quarter. We finished with net cash of $426 million U.S.; that puts us on a very strong liquidity footprint, if you will, and together with the recently announced $150 million U.S. project financing facility that was established for our [Oksut] project in Turkey, we think we have a very good treasury position, very good financial foundation. And in terms of the business model moving forward, it's certainly something that we would advocate is fully funded.

 Just on Mongolia, in the quarter, we also announced that we've finalized the ownership position of the Mongolian government on the Gatsuurt project. Our team right now is heavily involved in developing and negotiating our investment development agreement. We're cautiously optimistic that we should have positive news flow on this in the short-term.

 Just the last item here on slide five; we mentioned in our press release, we're very focused on maximizing productivity at our operations and doing everything we can in the most efficient and effective manner possible. And we've seen the results of that. The results of that at the operation. Likewise, in terms of our corporate office, we've also been taking a very disciplined review of our cost structure. You can see that today's press release was announced that we've actually reduced that corporate office man-count by approximately 20%. We think this positions us very well in terms of being a leaner, stronger enterprise moving forward.

 With that, I'm going to transition on the next slide, which is slide six. Just a couple of charts here that just really illustrates the strong, financial position that Centerra is in. I guess, starting in the top-left quadrant, this chart is just a - it's really just an illustrative snapshot of our cash flow statements that's been broken down into a [water four] chart if you will. As you can see, we commenced the year with $542 million in cash. And you can see the various [decriments] there. We ended the quarter with $502 million in cash. Again, the one thing I want have to reiterate is that when you look at the Kumtor cash flow portion, it was negative cash flow of $10 million. But again, I'd advocate you'd want to normalize that, so the, the delayed gold sales and the impact there, too, which was approximately $35 million U.S.

 So if we were to normalize that, we could potentially advocate Kumtor made positive cash flow of $25 million. Nonetheless, as you move clockwise in the top-right quadrant in terms of the balance sheet, we're in a very strong financial position. As you can see, we've got cash reserves of some $502 million U.S.; a very modest debt, which results in the net cash position of $426 million. The chart at the bottom-left shows the share count. Obviously, Centerra has always been very focused on minimizing its share counts and really maximizing the intrinsic value behind every share. And as you can see, we've continued to put forward a very stable share count over the last six to seven years.

 Lastly, the chart at the bottom-right, just in terms of the retained earnings profile, and obviously, with today's release and our financial statements, you know, generally speaking, year-over-year, Centerra continues to build out it's retained their earnings profile, which as illustrated in this chart, referencing the red line chart, which is the gold price, even in a declining gold [crux] environment, Centerra has continued to demonstrate what I would purport is peer-leading profitability as well as an ability to grow its retained earnings, which I think really speaks to the quality of the operations and their margins there, too.

 With that, I'm now going to pass it over to Gordon Reid, our Chief Operating Officer.

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 Gordon Reid,  Centerra Gold, Inc. - COO   [4]
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 As Scott mentioned, Kumtor's (inaudible - microphone inaccessible) 6,444 ounces of gold in the first quarter at an all [insist] cost of $916 per ounce sold. Kumtor continued to implement and foster productivity improvements, including completing modifications to the mill, which improved overall recovery and increased throughput and improved ore blending techniques to better manage the prey [grobbing] characteristics within the ore body.

 In the quarter, Kumtor continued to benefit from low (inaudible - microphone inaccessible) oil prices that resulted in lower cost of diesel fuel, and from the weakening of the Kyrgyz som against the U.S. dollar, which favorably impacted the cost for labor and other consumables.

 25% of Kumtor operating costs are denominated Kyrgyz Som, whereas diesel fuel accounts for 17% of operating costs. Quarter-over-quarter, operating costs at Kumtor decreased by $19 million, reflecting lower mining, milling and site support costs. Mining costs were lowered by 14%, billing costs lowered 3%, and site support costs lowered by 6%. Our unit mining costs in the quarter were $1.22 per ton mine and our milling costs were $10.07 per ton milled.

 I will now turn it over to Darren to talk about financials.

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 Darren Millman,  Centerra Gold, Inc. - CFO   [5]
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 Good morning, everyone. I will be initially talking to slide 10 for those following the slide deck. For the first quarter, revenue was $73 million from the sale of 61,744 ounces, reflecting 65% reduction in ounces sold compared to the prior March quarter.

 Average realized gold cost was $1,186, down 2% from the prior year. This resulting in $8 million net earnings, or $0.08 per share; generating $9.4 million of operating cash flow, or $0.04 per share. We produced 86,744 ounces, down 49% from last year. However, we are tracking the plant.

 Kumtor ended the quarter with 33,165 ounces of gold (inaudible) due to the delay in the March gold shipment to the Kyrgyz Som refinery.

 Shipments resumed in April, as Scott mentioned, and also gold [imagery] was subsequently sold in April. If we had have sold that gold in March, the impact would have been an additional $35 million in revenue and in our treasury. For those, once again, following the slide deck, you can refer to slide 11 for the following points.

 Other financial highlights in the quarter were the establishment of a new $150 million five-year revolving credit facility with EBRD, and a $150 million project finance facility for the Oksut project. These new facilities, along with the company's strong cash position, financially enable Centerra to execute our project growth pipeline.

 In relation to our Oksut project, Centerra has now eliminated all third-party royalty agreements with the recent issuance of shares to Tech Resources Limited, and you may recall a similar transaction was executed with Stradach International Plc. in Q4 of 2015.

 We continue to look at ways to drive our costs down and to reduce our G&A costs. We reduced our headcount at corporate office by approximately 20%, and are implementing other cost reduction programs.

 Our key costs, such as diesel and our local Kyrgyz supply costs, represent approximately 40% of our operating costs and is trending down below our guidance. The Kyrgyz Som is currently trading at approximately SOM70 to one $1; this compared to our forecast assumption of SOM65 to $1 per gold purposes. Our forecast assumption for diesel was set at $0.55 a liter at Kumtor, whilst during the quarter, we achieved $0.43 per liter.

 As you all know, in the sensitivity slide on slide 18 of the pack, both cost assumptions have significant impact on our cash flow and costs. And it continues to trend down at these levels.

 Finally, all physical and financial metrics indicate we are on track to meet our guidance.

 I will not turn it back to Scott.

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 Scott Perry,  Centerra Gold, Inc. - CEO   [6]
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 We just have one final slide before we open up the call to Q&A. So just referencing slide number 13.

 Before talking of slide 13, just quickly in terms of an update on our development projects; when I look at what are probably some of the key highlights coming out of this morning's financial results and MD&A and news releases. Firstly, in terms of our Turkish project, which is called Oksut, as Darren has mentioned, as I mentioned at the outset, we've put in place a very attractive project financing facility there. Really, we're just waiting on the approvals of our land-use permits. Once we have these in hand, we're very well positioned in terms of our ability to commence construction, and we're pretty excited about being in a position to do that very shortly.

 Moving on over to Mongolia; our Gatsuurt project, we're currently drilling with two rigs. As I mentioned at the outset, we're also actively negotiating with the government right now on putting in place definitive agreements covering a deposit development agreement and our investment agreement. Things are progressing well, and again, cautiously optimistic that we should have positive news on that here in the short-term.

 In terms of our third advanced development project, and that would be the Greenstone Joint Venture project; this is a joint venture with Premier Gold. With our partners, we continue to finalize and advance feasibility study, and we believe that we will be in a position here to be reporting on that at the mid-year mark of this year.

 Referencing the slide on slide 13; as Darren mentioned, one of the first point I'd make is that we're definitely on track to meet our production and cost guidance. In addition to today's financial results, we've also announced that we have maintained our dividend at CAD0.04 per share for the quarter, which had sort of the prevailing share price represents a peer-leading annualized yield of approximately 2.3%. Again, referencing slide 13, really, three key themes; obviously, you can see the chart in the top right-hand corner, this is our flagship asset Kumtor. We continue to expect in this kind of business for Kumtor to be a strong, consistent contributor profitable production.

 Together with our balance sheet, which is one of the middle bullet points here on the left, we have a peer leading net cash position of $426 million. As Darren mentioned, we put in place financing facilities on Oksut as well as re-extending our EBRD revolving facility. We think we're great treasury positioned to really build out our future growth profile, which is illustrated in the chart in the bottom-right.

 As we move each of these projects forward we have a conceptual sort of scenario here; we could be doubling our company-wide goal output profile over the five to six years as we move these development projects forward. Centerra is in a unique position given that we have all the resources and bandwidth available to do that, especially from a funding point of view.

 With that, that sort of wraps up our prepared remarks and we will now pass proceedings over to the operator to take any questions-and-answers, please.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Alex Watt with ScotiaBank.

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 Alex Watt,  ScotiaBank - Analyst   [2]
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 Can you give a breakdown of the milled ore; what portion came from stockpiles and what came from mine during the quarter?

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 Frank Herbert,  Centerra Gold, Inc. - President   [3]
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 I don't have the exact number in front of me, but a majority of the ore did come from stockpiles. We are not mining large amounts of ore at this time. We get into that early in the third quarter.

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 Alex Watt,  ScotiaBank - Analyst   [4]
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 I'm guessing, then, you don't have a sense of what's in the stockpile right now as far as tonnage and grade?

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 Frank Herbert,  Centerra Gold, Inc. - President   [5]
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 No, I do have a sense. We have a significant number of tons, well over a year's worth of milling, but the average grade is below 2 grams.

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Operator   [6]
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 (Operator Instructions) Richard Gray with Cormac.

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 Richard Gray,  Cormac - Analyst   [7]
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 Is there any way to provide guidance as to how the quarterly output is going to look like to get to your guidance for the year?

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 Scott Perry,  Centerra Gold, Inc. - CEO   [8]
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 I think, generally, speaking what we put forward in terms of our sort of gold output profile in the context of the full-year guidance, we would expect around 40% of the gold production to be generated in the first half of this year. The corresponding 60% would be produced in the second half.

 [Looking at more to compare], I would see second quarter gold output being slightly higher than Q1 results, and then make your way into the second half of the year where the grade profile definitely picks up quite a bit as we start moving into the higher-grade ventures in terms of our sequencing and, yes, second half would be a lot stronger in terms of gold output.

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Operator   [9]
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 (Operator Instructions) And there appears to be no further questions on the phone lines at this time.

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 Scott Perry,  Centerra Gold, Inc. - CEO   [10]
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 Okay, well thank you, Operator. We will end the call there. Thank you, everyone, for joining us today and thanks for your interest in Centerra Gold.

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Operator   [11]
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 Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.




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