Centerra Gold Inc at Denver Gold European Gold Forum

Apr 04, 2017 AM EDT
CG.TO - Centerra Gold Inc
Centerra Gold Inc at Denver Gold European Gold Forum
Apr 04, 2017 / 09:50AM GMT 

Corporate Participants
   *  Scott Perry
      Centerra Gold Inc. - CEO

Unidentified Participant   [1]
 From Centerra Gold, please welcome Scott Perry, the Company's Chief Executive Officer.

 Scott Perry,  Centerra Gold Inc. - CEO   [2]
 Okay. Good morning, everyone. Thanks for being here to attend this presentation. This slide here is our typical introductory slide. But really what I want you to take away from this slide is, over the last 15 months in terms of our strategy, in terms of all the undertakings that we've been pursuing, we've made a real transformative, strategic push in terms of how we've been repositioning our portfolio.

 When you think about Centerra, we probably have one of the world's best gold mines. That operation is called Kumtor. It's located in Kyrgyzstan. Last year, by way of example, it produced in excesses of 0.5 million ounces of gold at all-in sustaining costs of $640 per ounce. It produced $237 million of positive free cash flow. Unfortunately, the one knock against this asset is, as I said, it's domiciled in Kyrgyzstan, which is not perceived to be a top-tier jurisdiction.

 So when you look at Centerra, and when you look at our valuation multiples, the capital markets tend to be quite punitive in terms of the value that they subscribe to this asset. There's been a strong history of profitable production; we've been operating this asset for 20 years. But at the same time, we are probably the largest enterprise in Kyrgyzstan; and quite often, we find ourselves subject to being politicized, to political rhetoric. And in terms of that uncertainty, that noise, that variability, that creates uncertainty in the capital markets, and that's where you see the punitive valuation coming into play.

 In terms of our strategy, what we've been very focused on is we need to create more diversity. We need to create additional sources of production, additional sources for earnings and cash flow to diversify that geopolitical risk profile.

 The waterfall chart in our bottom right on this slide is really our strategy, moving forward. We've got three development projects that are illustrated by the gold increments. They are located in Turkey, Mongolia, and Canada. And we're going to be looking to keep developing these projects, keep advancing them, keep moving them forward so that they will be future sources of additional profitable production for the Company.

 In mid-2016 last year, though, we made a significant strategic move, whereby we acquired a company called Thompson Creek, and that delivered us the world-class Mount Milligan asset. That's illustrated by the second blue increment in this waterfall chart. This is an asset that this year, by way of example, is going to produce up to 300,000 ounce of gold, at all-in sustaining costs less than $500 per ounce. And it's got significant mine longevity. It's got a 21-year asset life based on the current delineated reserve profile.

 So when you look at that waterfall chart, that's where we're going. This year we're going to produce up to 800,000 ounces of gold, at all-in sustaining costs that truly are lower-cost quartile. It will be a very profitable year; we will produce a lot of cash flow. And we're going to use that cash flow to internally fund those development projects, moving forward.

 The pie chart in the top right just illustrates the transformative impact of the strategic acquisition, as you can see, in terms of our value. And this is consensus analyst net asset value. Half of our value is now domiciled in North America. Kyrgyzstan, in terms of that valuation composition, now represents around one-third. Previously, it was around two-thirds.

 This next slide here just in terms of -- some of the key corporate highlights from 2016. The waterfall chart there in the top left just breaks down our cash flow statement on a Company-wide basis. You can see the green increment there represents the positive free cash flow that we generated at Kumtor. At Mount Milligan, which is the latest addition to the portfolio following that acquisition, we generated $8 million of positive free cash flow, and that's because we only had the asset under our ownership for two months during the calendar year.

 If you look at the pie chart there on the top right, that's our current treasury position. You can see we've got debt of some $475 million. And then in terms of our cash reserves, be it restricted or unrestricted, we have around $408 million of cash.

 The restricted cash is something I should talk about. Last year, we once again found -- we find periodically that we're in political disagreements with our host government. Last year they brought a number of environmental disputes against the Company. In terms of turning up that political pressure dial, they actually, in the lower judiciary court, put in place an interim court order that restricts our ability to dividend cash out of our subsidiary up to the parent entity. All the cash that was generated by the mine is represented by that categorized restricted cash component in the pie chart.

 But where are we today? So we've been heavily engaged with the leadership of Kyrgyzstan. I've now met face-to-face with them four times in the last six months. This is probably the biggest strategic imperative that I am focusing on personally, moving forward. The level of engagement, the level of dialogue, the level of discussions is going very well. I think this is the closest that we have been to resolving this.

 In our most recent meetings, both parties were very constructive on where we stand. And it gives me optimism to say I'm cautiously optimistic that this is something that could be resolved hopefully in the first half of this year. As and when that's resolved, you'll see that restricted cash becoming fully available for use elsewhere in our business model.

 Other symbolic things I could point to: the government recently granted us our full annual year mine operating permits. They granted our permits to develop the Sarytor deposit, which is adjacent to our mine. And they also granted us the permits to expand our tailings storage facility. This is all indicative of an improving dynamic in terms of the relationship moving forward.

 The chart there on the bottom right is just our retained earnings profile. When you look at our assets, be it Kumtor in Kyrgyzstan or Mount Milligan in Canada, these are lower-cost quartile assets. These are assets that are profitable through all phases of the metal price cycle. That is reflected there in the positive retained earnings. You can see, year-over-year, irrespective of the prevailing gold price environment, we've generally been growing our retained earnings profile. So that really speaks to the quality of the underlying asset base.

 This next slide here, in the top left, you can see our cash reserves. It's a similar theme. Generally speaking, year-over-year, irrespective of the prevailing gold price environment, we've been growing our cash reserves; we have been building out our balance sheet. The gold increment on these columns just represents the cumulative dividends that we've distributed to our shareholders, which just further reinforces that theme.

 The pie charts on the right is just our Company-wide positive free cash flow. So it's just a simple illustration of the consolidated cash flow statement. You can see, in both years, our positive cash flow from operations was more than sufficient to fund all of our capital expenditures. So in 2015, Company-wide, it was around $100 million of positive free cash flow. In 2016, it was around $150 million.

 This next slide here really just illustrates, again, the geographical profile. One of the things that I was representing in terms of that transaction is we've really favorably recalibrated that geopolitical risk profile. If you look at net asset value where it's domiciled jurisdictionally, which is the chart on the top left, you can see that just under half of our value is now domiciled in North America.

 In terms of reserves and resources in our overall gold endowment, which is the pie charts on the right, again, likewise, you can see a significant portion of our go-forward inventory is domiciled in North America.

 The next slide here, just looking at where Centerra stands from a valuation perspective. I mentioned in my opening remarks that the market tends to be very punitive in terms of the value that it subscribes to one of our flagship assets. And you see that reflected here in terms of Centerra's -- here we're illustrating our share price to underlying net asset value multiple. So we're currently trading at a multiple of around 0.8. And you can see there's a large number of the peer group that's trading at a multiple considerably higher than us.

 The thing that we like about our strategy is we now have two world-class assets generating profitable production, profitable cash flow, and we're going to be increasingly using that cash flow to redeploy it into our suite of development projects and bringing them forward.

 One of the assets we're going to talk about is Oksut in Turkey. We think that's going to be our next operating gold mine. It's a very short construction timeline cycle. But most importantly, it's going to add a third source of high-quality, low-cost production and very meaningful cash flow, which we think is going to drive a favorable re-rating in terms of our valuation multiples and see us increasingly gravitate towards the left on this slide.

 Just in terms of the operational execution, and doing what you say you're going to do: this is just an illustration of last year's performance at Kumtor. If you look at the chart on the bottom left, which is our gold output guidance, you can see original guidance was 515,000 ounces. Mid-year, we've favorably revised it to 540,000 ounces. And then at year-end, we actually exceeded both sets of guidance favorably.

 Correspondingly, in terms of our all-in sustaining cost, which is in the bottom right, you can see original guidance for the year was around $860. Mid-year, we revised it favorably just based on the favorable productivity efficiencies that we were realizing in our unit cost improvements. And then at year-end, the actual result came in at $640 per ounce.

 Again, this is the all-in sustaining cost. This is clearly lower-cost quartile, and really underpins these expanding margins that we've been seeing in the strong cash flow. Again, for example, $237 million was generated last year by this asset.

 So, the newest addition to our portfolio that's really going to complement our low-cost profile and our gold production base, moving forward, is Mount Milligan. This is domiciled in British Columbia in Canada. This asset is fully constructed, up and running. If you look at our guidance, for example, we don't have any growth capital expenditures this year. The only capital expenditures we have is sustaining capital expenditures of around $30 million.

 So one of the things -- when you take a look at this mine, it's got a very high free cash flow conversion factor because everything's in place. It's an open pit operation. The strip ratio is very low, so there's not a lot of capital intensity at this operation.

 The table here in the top left is our guidance for this year. So if you look at gold output, we're guiding up to 290,000 ounces of gold. It also has a -- this is a copper-gold operation, so we also produce copper here. The copper production this year is up to 65 million pounds of copper. But what I think is a really impressive is the all-in sustaining cost per ounce, which includes the copper byproducts.

 Our guidance this year is for all-in sustaining costs as low as $457 per ounce. As you may realize, that's going to be a very strong margin at this asset. It's going to very favorably complement our existing low-cost Kumtor operation.

 I should touch on the last row in that table there, which is the stream that is owned by Royal Gold over this deposit. When we acquired Thompson Creek, we negotiated with Royal Gold to amend this stream. We, being a gold-mining company, we wanted to maximize our exposure to gold. Previously Royal Gold was entitled to 52.25% of the gold and zero of the copper.

 We said to the CEO at Royal Gold -- we said, look, we are looking to get involved here, but we want to maximize the gold exposure. Where we landed is they agreed to reduce their gold stream from 52.25% down to 35%. And in exchange for that amendment, we granted a new copper stream over 18.75% of the production.

 If you now look at Mount Milligan this year, by way of example, 70% of the revenues from this asset are gold-denominated revenues, so we've definitely turned this into more of a gold weighted asset.

 Key bullet point in the bottom left is the asset life: 20 years of current delineated reserves. We think we've got a significant runway here in terms of exposure to future metal price cycles. When we announced this acquisition, the copper price was $2 per pound. Copper is now trading at around $2.65, so already we're seeing significant upside there. We got lucky with our timing. But there's a significant amount of copper that is produced here at this asset; so again, very beneficial.

 Our second operating asset, as I mentioned, is Kumtor. You can see our guidance here in the table in the top left, the column on the far right. We're guiding for gold production of up to 505,000 ounces of gold per year -- this year, sorry -- at all-in sustaining costs at as low as $836 per ounce. So again, we think this is going to be a very profitable year and another year of strong, positive cash flow generation, just given those margins.

 In terms of the remaining asset life here, it's around nine years of remaining asset life moving forward. The one opportunity we do have is around the underground opportunity at Kumtor. Kumtor is currently an open pit mine, but we do have in excess of 1.5 million ounces of high-grade underground resources that we're currently evaluating as to whether or not we want to bring that into the life of mine plan moving forward. That would most likely supplement existing ore feed from the open pits. So it wouldn't extend the asset life, but it would augment the year-over-year production profile, just given it's of a higher grade profile.

 Moving into our development projects, here on slide 11 is Oksut. This is most likely to be our next operating gold mine. This is located in Central Turkey. This is a very low-risk, high-quality value proposition for the Company. The highlights there in the top left is just from the feasibility. What you're looking at is a very low capital intensive operation. It is $220 million to bring this into operation. The construction time cycle is very short; it's around 15 months in terms of the construction timeline.

 But in terms of the all-in sustaining costs here, this could be one of our next lowest cost producing asset. The all-in sustaining costs here is around $490 per ounce. It's going to be strategically a very important addition to the Company. It's going to be our third source of high-quality, low-cost production, a third source of meaningful cash flow. And it's really going to help in terms of diversifying our profile moving forward.

 A key highlight in terms of the data points there in the bottom left would be our financing facility. So we already have our committed financing facility, which is syndicated with UniCredit and EBRD. That's ready to go. We have our EIA, our environmental impact assessment, in place. We have received all of our regulatory permits. We're just waiting on one more permit and then we're ready to move into construction. And we believe that's going to be taking place here hopefully in the first half of this year.

 The other thing I'd highlight, the chart on the bottom right is just the profile in terms of the gold production, as per the feasibility study. If you look at our reserves, we have around 26 million tonnes in reserve here at Oksut. But in terms of our construction plans and our engineering, we're engineering for 40 million tonnes in terms of our heap leach footprint. So obviously we're very bullish on the potential upside in terms of asset life extension here at Oksut.

 This next slide here, on slide 12, we've now moved into Mongolia. And so, the next potential development project we have is called Gatsuurt. Probably the most important thing on this slide is the image in the bottom right-hand corner. This is all the existing infrastructure and installations that we have in place in Mongolia. And the reason for that is we used to operate a very successful mine called Boroo.

 What I would highlight to underpin the fact that it was successful is the chart on the bottom left. That's the cumulative free cash flow that was repatriated from Mongolia back to our treasury in Canada. And we generated just under $500 million of positive free cash flow.

 The Boroo mine went into care and maintenance in 2015. But in terms of the mill facility, the installations, the infrastructure, that's still there. We've been looking after that, because 55 kilometers from this infrastructure is the Gatsuurt deposit. Gatsuurt outcrops at surface. And the moment you start mining, go straight into ore production. We've got the haulage road constructed and we've also got the haulage equipment fleet.

 Where we currently stand is we are currently putting the finishing touches, hopefully, to the investment agreement with the government of Mongolia; and also with finalizing a refreshed internal version of the feasibility study so that we have all the data points to present to the Board in terms of making a proceed -- a potential proceed decision.

 The next slide here is just on our other key development project which is located in Ontario in Canada. And this is called the Greenstone project. This is a 50-50 joint venture with Premier Gold, which is another fellow Canadian gold-mining company. The title is accurate; this is literally one of Canada's largest undeveloped open pit gold mines. We have a significant endowment here in terms of our open pit reserves, our open pit resources, but also our underground resources at this property. It's a significant land package.

 We finalized a feasibility study on this opportunity in late 2016. You can see a lot of the highlights illustrated there in the bottom left. In terms of the feasibility, though, it only focuses on the open pit opportunity. We did not incorporate the underground opportunity. That's something that we would look to evaluate in the future, most likely as and when we've got all the surface infrastructure in place.

 Our current plan here is we're embarking on the negotiations with the First Nations in terms of the local stakeholders, and looking to put in place and establish impact benefit agreements. And we're also working on our environmental permit for this asset. But again, given the Canadian jurisdiction and given our strategy to create more diversity, this is a very important, strategic asset for Centerra.

 The other interesting business unit within our Company is our molybdenum business unit. When we acquired Thompson Creek, we acquired this molybdenum business unit. We subscribed zero value to this business unit because we were primarily focused on Mount Milligan. But when you look at this business unit, there is a lot of optionality here, which I will try and illustrate.

 On the right side of the slide is the Thompson Creek mine and the Endako mine. These are primary molybdenum operations that are currently on care and maintenance. Molybdenum prices are currently trading at around $9 per pound. These two mines need a moly price of around $13 to $14 per pound to be viable and to come into production.

 In the bottom right is the Langeloth metallurgical facility. This treats third-party concentrate. This is currently operating. This generates around $10 million per year of positive free cash flow. And we use that cash flow to fund all of the holding costs at these two moly mines that are currently on care and maintenance. A lot of optionality here, and where I would highlight that is the chart on the bottom left.

 This is the historical cash flow generation from the two primary moly operations that are currently on care and maintenance. If you look at 2013-2014, they generated in excess of $100 million of cash flow, and that was when moly price was trading at around $15 per pound.

 Today we are trading at around $9 per pound, so as part of our acquisition strategy we thought we should hold onto these assets. There is a lot of deep value here; let's make sure that we're doing everything we can to try and daylight or surface that value in the future, as and when we may find ourselves in a stronger moly price environment.

 I'll wrap it up there. My last slide was just going to show where Centerra compares relative to the comparative peer group. And it was just going to be based on the consensus analysts in terms of the research that they provide on Centerra, as well as our comparative peer group. It was a great chart that showed where is the -- it showed the all-in sustaining cost profile of that comparative peer group. And you look at Centerra, we are positioned as the lowest-cost operator in terms of 2017.

 So just in terms of that margin profile, and I made the statement -- but that our two assets, they're world class. They really will be profitable through all phases of the metal price cycle.

 And then just lastly, in terms of our gold reserve inventory, and we have in excess of 16 million ounces of gold reserves. That's primarily at these two operating assets, so it's quite a significant gold endowment, which makes for significant mine longevity moving forward.

 With that, I was pleased to be here. Thank you. I had to rush, given the limited time, but thank you.

Unidentified Participant   [3]
 Thanks, Scott. (Conference Instructions). Thank you very much, Scott.

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